Simple Economic Models: Cars, Water or Real Life

When the economy changes drastically government officials and economists try to tell stories about it. They give us a model like a lesson in high school science class, sometimes they even give draw a diagram. A car is a good model for the economy, it has been used by senators and governors, we have a car but no fuel so we can't go anywhere. This model works great in the US, running out of fuel is a real emotional issue for Americans. There is a model of water, when it stops flowing we need to "prime the pump" (famous quote from depression era economists.) Water model is good, there are pipes and pumps, reservoirs and leaks, all kind of elements in a water system. Do we need simplified models to understand what is going on in the worlds economy? Do we need models for local economies? Why don't we deal with the economy as it is? When a bank collapses we should talk about the risk the bank investment managers took. When the US sub-prime Real Estate fiasco was going on, even Warren Buffet wrote about it in his eloquent yearly report to stock holders.

Models are good for certain things. But making an analogy for the world economy using a car and fuel is an over simplification. So is the use of water in a pump for the flow of money in any economy even a small one. Why don't we have accurate explanations from economists and government leaders on the economic situation? Why do we need to wait for a book to be written a year from now telling us how demand for durable goods (cars, refrigerators, diamond rings) goes down forcing less manufacturing of these goods to stop manufacturing, which means factories have less money for worker's salaries. Or demand for old technology like big cars running on gas goes down but there are still not enough new designs and not enough electric engine production capability to make hybrid and electric cars which would be more in demand if we had them. Or that in the last fifteen years American car companies has not produced a single low cost model so Hyundai a Korean car company or Sang Yang a Chinese company are becoming an attractive alternative? Demand, competition, trade advantages, import tariffs, these are not such hard concepts to grasp.

Israel is a small country with a few specialties. Agricultural goods, electronics and software, tourism, diamond polishing and military equipment are Israel's big economic sectors. For a small economy these are probably better than most. Here we clearly understand how a terrorist attack slows down tourism. We clearly understand how competition from India and China almost wiped out the diamond polishing industry. We clearly see how in agriculture there are trends and opportunities like the organic movement and greater variety helps an old sector in decline. So why do we get simplistic models? Some say it is the "sound bite syndrome": TV news conditioned us to digest facts 10 seconds at a time. YouTube is making the 45 minute documentary into a 20 second clip.

I think it has to do with a gap between academics or economic experts and lay people. Economists, specially the ones we see analyzing situations on TV tend to be highly academic. They built complex computer models and try to figure out where the money goes. They try to figure out how changes in trade and manufacturing affect labor demand and shifts in worker skills changes production and overall working conditions. But academic economists with their complex language and models distance themselves from our daily reality. This problem also applies in the government sector. Politicians and bureaucrats build such complex ideas that we simply don't want to listen. In today's world this gap is dangerous. The US economy has taken a fall because a few financial workers wanted to make more money and somehow bypassed the regulatory controls set up after the great depression. International financial networks have outstripped most government's ability to regulate them by decades. Here in Israel there was simply not enough money to fall into these traps, but still we see some consequences in the Real Estate sector. Israeli companies (BSR, Africe-Israel) invested heavily in large construction project in the US and Europe. Some companies are in such bad shape the projects will have to be sold at a loss (i.e. before completion.) Some Israeli banks (Bank Leumi, Mizrachi-Tfachot) also bought into the sub-prime investment schemes and held investment from American investment institutions (not just Leahman Brothers.) So our great economy like many others is tied to the losses in America and Europe.

Back to the simplified economic models for the common man (and woman.) With an ability to make good documentaries and YouTube that can host one hour videos, there is no excuse to keep explanations down to a minute or less. With all the technology we have in graphics and audio on the Internet there is no excuse to simplify presentations. But somehow the gap from "expert" to "lay man" explanation is not being addressed. The media in Israel is certainly not there. Even business papers do not have multi-page articles on serious economic topics. Once in a while we see a article series on one specific topic. The Globes and Calcalist did cover the global Real Estate bubble in longer than one article at a time fashion. But I can't recall an article which I would cut out because it had good information or in-depth explanation. Maybe it's time for the bloggers to step in? What do you think, let me know in a comment.