Economy can kick a winner

Published in the Courier Mail (Brisbane), 28 January 2008 (PDF)

A touch of sporting optimism could get us through the financial crisis, writes Oliver Hartwich  

AFTER last year’s avalanche of bad news, Australia’s economists probably needed the summer break more than anybody else. Yet it’s unlikely their holiday mood will last long back at work.

Dark clouds are hanging over the economic horizon. Recession is looming, unemployment rising and the Budget heading for its first deficit in years. There are hardly any news stories that could make the economics profession happier, so it seems. Or are there?

Maybe our economists have only been reading the wrong parts of the newspapers. If they skipped the business sections and went straight to the sports news they would look into the future with a bit more optimism. At least that’s what economic research from Germany suggests.

Four researchers from Bonn University have written a fascinating study. Unfortunately, they still managed to give it a terribly dull title: Seemingly Irrelevant Events Affect Economic Perceptions and Expectations. But the idea behind it is so cheeky that it may even cheer up the most pessimistic economic forecaster — that a country’s economic future depends on its sports results. To test this hypothesis they conducted opinion polls among Germans before and during the soccer World Cup in 2006.

Soccer is a big thing in Germany, but the researchers wanted to know, could it also be an economic factor?

So they asked citizens for their assessment of the economic situation and their expectations for the next year. Apart from the World Cup, there was hardly any other news at the time. And yet, the Germans became more and more optimistic about the economy’s future as their team went on a winning streak that no one had thought possible. In the end it finished third.

The researchers looked at the polling data from all angles but the result always was the same: There was no explanation for the sudden boost of economic confidence other than the unexpected performance on the field.

The connection between the two may not be obvious. After all, why should GDP grow faster only because your team has just beaten Argentina in a penalty shootout? But apparently that’s what the Germans believed. In fact, the researchers even managed to put a number to it. They calculated that to receive the same shift in economic optimism you would have had to give them a 23.5 per cent increase in net monthly household income.

As curious as this economic research appears at first, there are some important lessons. And they probably don’t just apply to soccer-obsessed Germans, nor do they only hold during world cups.

The first lesson is this: How we feel about our economic prospects is as much due to our general mood as to hard economic facts. As it turns out, homo economicus is not just a number-cruncher but a human being. If his football team wins, he feels better.

But if this first lesson is true, then a second lesson follows: How bad our current economic crisis will turn out to be for Australia does not only depend on China’s growth, American bank collapses or some fiscal stimulus packages. It will be equally important whether we still manage to see and hear the positive news in the overall noise of the crisis talk.

And there still are surprisingly many things you could feel good about. Petrol is much cheaper than it used to be only half a year ago. When you are buying a new car you can hope for some pretty good bargains, too. First homebuyers not only benefit from higher government grants but also from much reduced mortgage rates. Altogether, if you belong to the more than 95 per cent of employees who will keep their jobs in this crisis, chances are you will actually be able to increase your quality of life because of falling costs of living.

The worst thing that can happen in a downturn is to lose sight of the things you may feel positive about. But to be confronted by bad news day in, day out is hardly a recipe for creating optimism. Perhaps instead of indulging in the doom and gloom that this economic crisis brings, we should all remind ourselves that not everything is lost.

Apart from that, we can only hope for other things to save us: Australia retaining the Ashes or an Australian player winning a Grand Slam title again. And one more thing: economists starting to read the sports news.