Microeconomics or macroeconomics – which is more important and relevant? This discussion comes up often in academic circles. This article does not intend to enter into this debate; suffice it to say that both are important and relevant in their own way, and are interdependent.
Generally speaking, microeconomics deals with individuals and firm-level decisions, and is arguably relatively more quantitative and definitive. Compared to this, macroeconomics performs an analysis at the aggregate level of various variables and their relationship, relies on a number of assumptions and factors that may or may not lend themselves to precise quantification, and is more abstruse. Macroeconomics has risen to prominence in the post-Keynesian era and, in a sense, continues to be an evolving field.
Microeconomic issues provide a reality check for individuals and businesses on a day-to-day basis, and they have little choice but to pay attention to these issues. Macroeconomic issues are paramount in nature and set the tone for the overall economic environment. Although macro issues do not immediately affect an individual, by their very nature they capture the attention of all members of society and public discourse on these issues is quite common.
These discussions become more important when the economy is not doing well or going through a difficult phase. It’s a global phenomenon but let’s stick to the Indian scenario.
Lately, discussions on topics such as GDP, inflation, unemployment, budget deficit, current account deficit, etc. have become ubiquitous in public life – whether in print, electronic media, social media or even in living room conversation.
While many of these discussions often turn into heated debates, including international comparisons of all kinds, it is doubtful that the speakers are aware of the assumptions made or the methodology used to calculate the various macro numbers on which they base their arguments. Part of this callousness stems from the feeling that “everybody’s problem is nobody’s problem.”
Listening to certain public debates and discussions, one wonders if there is no longer even a need for an expert opinion on the subject! More on “experts” later.
The case of inflation
Take the example of “inflation”. The prevailing high inflation is a cause for concern around the world. Many commentators compare inflation in India with figures elsewhere – congratulating themselves that inflation here is much lower than in many developed jurisdictions like the US and Europe.
Now, there are different categories of inflation indices, calculated for different purposes, and there are different ways of calculation. The CPI figures used for inflation targeting by RBI, as released monthly by the Ministry of Statistics and Program Implementation, give the percentage change in the CPI that month by compared to the same month last year (for example, January 2022 compared to January 2021).
Other countries may use different types of inflation indices and may calculate them differently. Indices from different countries would have different product baskets, component weightings and structural adjustments.
Compared to the year-on-year (yoy) comparison as used in India, an alternative approach could be a month-on-month (mom) comparison (e.g. January 2022 by compared to December 2021). The first approach may suffer from base effect bias and the second from seasonality factors.
Of course, comparing India’s inflation rate with that of the United States is not an apple-to-apple comparison. Also note that while inflation targeting is statutorily mandated for RBI in India, there is no such statutory mandate for the Fed in the United States. Moreover, given the huge difference between the average per capita incomes in the two countries and the income disparity, the impact of rising inflation on people at the margins in India is much more severe.
Let us now come to the experts working in the field of macroeconomics. There are institutions, including public institutions, that periodically publish figures on various macroeconomic indicators and also make future projections.
Then there are a number of economists/experts who make a living from this activity.
Increasingly, these institutions and experts seem to be using the ambiguities and jargon, so typical of macroeconomics, to their advantage. Their numbers, which many of them even pull out to two decimal places to show their false confidence, keep changing all the time.
Certainly, many exogenous or unpredictable factors such as the geopolitical situation, international oil prices, the actions of the American Fed, the monsoon, etc. are relevant. But then state the “disclaimer” prominently and be hesitant in what you convey rather than telling it as gospel truth. No one has heard of an individual losing his job for making bad projections!
Compare that with company-level financial performance reports and projections for the future. Heads would roll and accountability would be fixed for mistakes. Remember the harsh criticism and regulatory action credit rating agencies faced when they failed to timely predict the default of a large NBFC in 2018. Or take the example of managing the monthly household budget of an average to low-income family – irresponsible assumptions could lead to serious livelihood problems.
Even some of the traditional concepts used in macroeconomics are mystifying and could instead be stated simply and objectively. For example, while expressing the government’s budget deficit as a percentage of GDP is a well-established practice, why not also state the budget deficit as a percentage of the size of the total budget to make the figure easily discernible? Note that a rise in inflation, in addition to increasing tax revenue, also increases nominal GDP, making the budget deficit-to-GDP ratio relatively rosier. Some Benefits of Rising Inflation!
Politicians may have their own reasons and constraints for quoting the macroeconomic figures that suit the situation without necessarily going into the assumptions made to calculate them.
However, it would be totally unethical for institutions or experts to hallucinate or let their imaginations run wild and come out with macro figures without doing a thorough analysis, disclosing the assumptions made and giving a disclaimer. proper disclaimer. After all, there is what is called “reputational risk”!
The author is a retired IAS officer and former president of SEBI
September 18, 2022