Friday, February 26, 2016

More China Weirdness

Lack of transparency is making it very hard to figure out what is going on in China’s economy. Here’s two items for today.


First up is what hedge fund advisors think. I’m not usually one to put much stock in financial advisors’ views of macroeconomic events. But, with China, I have a strong presumption that they know stuff that isn’t being priced efficiently by markets. Here’s Kyle Bass’s investment letter for paying customers via ValueWalk:

… Banking system losses – which could exceed 400% of the US banking losses incurred during the subprime crisis – are starting to accelerate.

Our research suggests that China does not have the financial arsenal to continue on without restructuring many of its banks and undergoing a large devaluation of its currency. It is normal for economies and markets to experience cycles, and a near-term downturn that works to correct the current economic imbalance does not qualitatively change China’s longer-term growth outlook and transition to a service economy. … What we are witnessing is the resetting of the largest macro imbalance the world has ever seen.

His reasoning is that people are too focused on the relatively recent depreciation of China’s currency versus the dollar. What they are missing is that many other large countries depreciated against China first:

… This fixation misses the point that many other manufacturing economies and currencies, including those belonging to Japan, Europe, Russia, and several Southeast Asian countries, have gained significant price advantages at China’s expense.

And he thinks Chinese authorities have done the wrong thing already:

A dramatic devaluation of the renminbi is warranted to regain export competitiveness; however, the Chinese authorities have errantly fought against this so far, spending around $1 trillion to defend their currency.

So, yes, that’s just one investment advisor. But his view is ridiculously pessimistic.

FWIW: No one is quite sure, but there are rumors to the effect that the official Chinese government statement that came out this week suggesting that there would be punishment for media that didn’t support the government’s positions was targeted at outlets that intended to republish Bass’s letter. And there are rumors that a journalist was arrrested Friday for publishing it.


Next up is Balding’s World. He argues that everyone knows that China is running a trade surplus … except for people like him who are looking for it and can’t find it any more.

This is a big deal because trade surpluses add to GDP. China’s reported trade surplus for 2015 was 79% of China’s GDP growth for that year. So, China is reporting both a 7% GDP growth rate (that no one thinks is that big), and that 5.6% of that came from a trade surplus (that Balding can’t find any more).

China has generally had tight capital controls: it’s tough to get investment money in or out. But no one is rationalizing any more that investors have been fleeing China for a while. So how do they get the money out? In particular, how do Chinese citizens who have money get it out of China (to a place that’s safer for a year or a decade)?

Balding argues that they are overpaying people outside the country for imports brought into the country, with some side deal to come pick up the overpayments at a later date.

How can you tell? By the difference in reported flows of funds for exports and imports.

The export data makes sense: customs is reporting them at $2.27T, while the government’s foreign exchnge office (SAFE) is reporting them at $2.14T, and banks are reporting them at $2.37T for the past year. So, there’s some leeway there, but there all within 10% of the same number. Given that everyone, everywhere, has always smuggled a bit, this is probably to be expected.

But the import data no longer makes sense. Those same three sources are reporting them at $1.68T, $1.57T, and $2.55T. Look carefully at the scale of those differences: banks are sending payments out of China for imports that are 50% more than can be accounted for — and to the tune of nearly a trillion dollars. You read that correctly: the discrepancy is $870,000,000,000 to $980,000,000,000.

Subtract those overpayments from the reported trade surplus and you get … a trade deficit … and a reasonable possibility that China’s economy is already contracting.

Keep in mind that China has already spent about $1T out of its $3-4T pile of foreign exchange to defend the renminbi.* This missing trillion is not counted in that other spent trillion.

* Foreign exchange can be confusing. Defending a currency means a government is trying keep its value up. The way you do this is by using foreign exchange you already have to buy more of your own currency. But, what’s foreign exchange? That’s money the government already owns which is denominated in some other currency (or it might be gold too). And how do you “buy more”? You do this by paying a better price (in terms of foreign currency) than others will for your own currency. In short, Limiting the explanation to China and just one trading partner (for simplicity), this means China spent decades sending goods to America and getting paid with dollars, but now people are trying so hard to get renminbi out of China that its exchange rate is falling, and China is buying peoples’ renminbi (and shredding them) with dollars it’s no longer accumulating, and doing so at a rate that can’t be sustained for long.

Saturday, February 20, 2016

Another Round In the Sanders/Economists Catfight

James K. Galbraith* has now made a public response (that link is required reading) to the letter from the 4 former Democratic CEA chairs. On that list of 170 economists that support Sanders, Galbraith is one of those ones I’d heard of before (note that due to the similarity of names, it can be hard to separate this man’s work from his father’s when doing casual searches on the internet).

He makes some good points:

I respond here as a former Executive Director of the Joint Economic Committee – the congressional counterpart to the CEA.

He’s throwing some professional weight around there. Frankly, this sounds good, but is not as impressive as being CEA chair. This position is prestigious, no doubt. But there’s some semantics involved. He was E.D. of the Joint Economic Committee of Congress, which is an office full of economists who report to the Joint Economic Committee in Congress that’s actually made up of senators and representatives from both parties (like any other committee). Typically the chair of that is a senator, always from the party with the majority, and usually the one with the most seniority. That person gets to select their chair, who is usually an economist from their state, or connected to it.

It may be instructive to learn here how I got students who’d been through this class jobs at the JEC back in 2002-4. In 2002, Republicans controlled the Senate, and Utah’s Senator Bennett chaired the committee. Bennett chose a guy with tenuous Utah connections (I think he was LDS but I’m not sure) who lived and worked in Philadelphia. I had known this guy from conferences for several years. He knew I’d moved out to SUU in 2001, and was interested in getting a job here (that window didn’t open for several years, and by then he’d moved on to other opportunities). I have no illusions that he was cultivating that link in his network … so I got him to hire a few of our students first as interns and then one as a staff member because she acquitted herself very well based on this very class. But, let’s be realistic: was she better than all the other recent college graduates that year, and was my connection a better economist? No. It’s all politics. So back to Galbraith: he’s name dropping, and the name he can drop is a big deal, but it’s not as huge a name drop as the 4 CEA chairs, and it’s not even close.

Galbraith then quotes columnist Matt Yglesias:

To them, the 5.3 percent figure was simply absurd on its face, and it was good enough for them to say so, relying on their authority to generate media coverage.

He’s absolutely right. And you know what: this is pretty much the argument I used in class on Friday too. I plead guilty.

In class, I let a student get away with dissing on this next point, and I should have known better. That student was not correct: on a January to January annual basis, we haven’t hit 5.3% real GDP growth since 1984.

Galbraith goes a little further:

So, let's first ask whether an economic growth rate, as projected, of 5.3 percent per year is, as you claim, “grandiose.” There are not many ambitious experiments in economic policy with which to compare it, so let's go back to the Reagan years. What was the actual average real growth rate in 1983, 1984, and 1985, following the enactment of the Reagan tax cuts in 1981? Just under 5.4 percent. That's a point of history, like it or not.

You’ll note that this isn’t very specific. That’s not a bad thing here. He’s right. But there are a lot of variables here, so I’m not sure which quarters or years he measured this over exactly. If you pick the right set of continuous quarters, you can actually show that growth was as high as 6.6% over a period of several quarters that includes at least some of 1983 and 1985, and all of 1984 in between. (This calculation is kind of complex, but if you’re an Excel jock I will send you my spreadsheet where I worked this out).

Galbraith then argues that the CEA chairs are hoisted by their own petard:

You write that “no credible economic research supports economic impacts of these magnitudes.” But how did Professor Friedman make his estimates? The answer is in his paper. What Professor Friedman did, was to use the standard impact assumptions and forecasting methods of the mainstream economists and institutions. For example, Professor Friedman starts with a fiscal multiplier of 1.25, and shades it down to the range of 0.8 by the mid 2020s. Is this “not credible”? If that's your claim, it's an indictment of the methods of (for instance) the CBO, the OMB, and the CEA.

That multiplier of 1.25 is smaller than the one the Obama White House used to justify the 2009 stimulus package.

Then Galbraith drops a real bombshell that I can neither confirm nor deny:

… [You} imply that Professor Friedman [the guy who crunched the numbers for Sanders] did his work for an unprofessional motive. But let me point out, in case you missed it, that Professor Friedman is a political supporter of Secretary Clinton. His motives are, on the face of it, not political.

For the record, in case you're curious, I'm [Galbraith] not tied to Professor Friedman in any way. But the powerful – such as Paul [Krugman] and yourselves – should be careful where you step.

Lastly, he makes a broad point, parts of which concur with my blog post which we covered in class on Friday:

Let's turn, finally, to the serious question. What does the Friedman paper really show? The answer is quite simple, and the exercise is – while not perfect – almost entirely ordinary.

What the Friedman paper shows, is that under conventional assumptions, the projected impact of Senator Sanders' proposals stems from their scale and ambition. When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result.

That, by the way, is the lesson of the Reagan era – like it or not. It is a lesson that, among today's political leaders, only Senator Sanders has learned.

This also relates to my in class response on Friday to the question (I think it was from Brandon) about the largest proposals for increasing the minimum wage. All of our evidence on the effects of minimum wage increases is from much smaller increases. We can extrapolate that to large increases, but we’re making a leap of faith that the relationship extends out that far linearly. Sometimes that’s true, and sometimes it’s not (the most famous example is that the launch and disaster of the space shuttle Challenger was based on a linear extrapolation into unknown territory). Maybe Friedman is right: do you feel lucky this year?

* This is not the (John Kenneth) Galbraith that was really famous 40-50 years ago. It’s his son. That Galbraith worked in the Roosevelt, Truman, Kennedy, and Johnson administrations, was a Harvard professor, and mainly wrote non-fiction bestsellers about economics, government, and society. A bunch of them were required readings in various classes of mine when I was an undergraduate. I think it’s fair to say that the economics profession or wider society view them as not improving with age.

Thursday, February 18, 2016

CNNMoney On Sanders’ Proposals

CNN tries to be politically neutral, but it’s a network that’s often accused of libearl bias by Republicans.

And even CNN has come out with this strongly worded piece about Sanders’ proposals. The analysis the Sanders campaign is using claims:

… if Sanders became president -- and was able to push his plan through Congress -- median household income would be $82,200 by 2026, far higher than the $59,300 projected by the Congressional Budget Office.

In addition, poverty would plummet to a record low 6%, as opposed to the CBO's forecast of 13.9%. The U.S. economy would grow by 5.3% per year, instead of 2.1%, and the nation's $1.3 trillion deficit would turn into a large surplus by Sanders' second term.

Claiming that the forecasts of a Congressional office are low by over 25% is not common. All the social programs in the U.S. have not been able to budge the poverty rate below 10% over the last 50 years. Our economy has not grown at 5.3% in decades, but if it did happen I could see the next part — that the deficits will shift to surplus — as reasonable. So the Sanders’ conclusions are … way outside of what we think of as possible.

On the other hand, a credible D.C. think tank has estimated that “…Sanders' plan to pay for health care would fall short by at least $3 trillion”. This is on top of the Sanders assumption that their healthcare plan would cost $10.7 trillion, and that’s assuming they will get $3.1 trillion in savings from it going forward.

Give them credit though. Their position is that pretty much everything is screwed up, so they’re going to change everything. So they’ve put together an ambitious plan that they believe in. If Sanders does get elected, and tries this, it will certainly be the biggest experiment in lurching a developed economy towards socialism since France in the 1980’s. But, we should be fairly realistic too: a good analogy would be the 76ers hiring a new coach tomorrow, who promises a championship next season, and says they’re going to start by knocking off the Warriors when they play next month.

More Democratic Economists Calling Out Sanders

Now there’s a formal letter from Obama’s 3 past chairs of the Council of Economic Advisors, and 1 of Clinton’s chairs, calling out Sanders and his campaign for making misleading economic claims.*

Dear Senator Sanders and Professor Gerald Friedman,

We are former Chairs of the Council of Economic Advisers for Presidents Barack Obama and Bill Clinton. For many years, we have worked to make the Democratic Party the party of evidence-based economic policy. When Republicans have proposed large tax cuts for the wealthy and asserted that those tax cuts would pay for themselves, for example, we have shown that the economic facts do not support these fantastical claims. We have applied the same rigor to proposals by Democrats, and worked to ensure that forecasts of the effects of proposed economic policies, from investment in infrastructure, to education and training, to health care reforms, are grounded in economic evidence.  Largely as a result of efforts like these, the Democratic party has rightfully earned a reputation for responsibly estimating the effects of economic policies.

We are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan—claims that cannot be supported by the economic evidence. Friedman asserts that your plan will have huge beneficial impacts on growth rates, income and employment that exceed even the most grandiose predictions by Republicans about the impact of their tax cut proposals.

As much as we wish it were so, no credible economic research supports economic impacts of these magnitudes. Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic. These claims undermine the credibility of the progressive economic agenda and make it that much more difficult to challenge the unrealistic claims made by Republican candidates.


Alan Krueger, Princeton University

Chair, Council of Economic Advisers, 2011-2013

Austan Goolsbee, University of Chicago Booth School

Chair, Council of Economic Advisers, 2010-2011

Christina Romer, University of California at Berkeley

Chair, Council of Economic Advisers, 2009-2010

Laura D’Andrea Tyson, University of California at Berkeley Haas School of Business

Chair, Council of Economic Advisers, 1993-1995

It’s hard for me to actually see what the motivation is here (other than Sanders’ claims give all economists a bad name). Politically, the numbers game is stacked against Sanders getting nominated, and factually Clinton has gotten delegates at a pace to support that. The poll numbers look weak, but polls are lousy predictors (economists prefer to use betting markets, which show very little shift away from Clinton). I’m not much of a conspiracy theorist, but it makes me wonder if the Democrats know something that we don’t about Clinton’s health or the likely outcome of the ongoing FBI investigation, and they’re worried about getting Sanders as the choice by default. But, it is a fact that this letter is unprecedented.

As I remarked at the beginning of the semester … it can be hard to predict what the macroeconomic current events are going to be as the semester progresses. I didn’t imagine this one.

For perspective, here’s the letter signed supporting Sanders signed by 170 economists. I’ve only heard of 9 of them, and two of those are former colleagues of mine at the Univeristy of Utah so maybe they shouldn’t really be counted. I’m sure most of the 170 haven’t heard of me either, which is fine. My point is that 170 isn’t really that many (when about 10K go to the annual meetings each year), and I’m probably a reasonable resource for evaluating name recognition of professionals in my field.

FWIW: Gerald Friedman is one of Sanders advisors, and is a tenured (full) economics professor at the University of Masschusetts. That department is one of the few that has specialized for the past few decades in Marxist economics. Friedman’s views would not be unusual there, but they would be in most university economics departments. UMass is classified as a top level (R1) school. Professors at those places evaluate each other by the number of citations of their work. Friedman has very few, and would probably have trouble getting tenure at a place like SUU. Having said that, Marxists like to write books (that tend not to get cited the same way) and Friedman has written a few; also, if you’re writing for a small audience to begin with, perhaps the proportion who cite you is more important than the gross number who do. But, for comparison’s sake, Krueger has about 60K, Goolsbee has about 6K, D’Andrea Tyson has about 6K, Romer’s aren’t totalled up but she shows several thousand cites on just her first page of listings

* Clinton had 4 chairs. Of the other three, one can’t sign something public like this (because she’s currently Chair of the Federal Reserve). I wouldn’t be surprised if one of the other two, Joe Stiglitz, agrees with Sanders. And, of course, Obama’s fourth chair is still in office, and can’t sign a public letter like this either.

Tuesday, February 16, 2016

Magic Flying Puppies

Part of the appeal of Bernie Sanders may be the promises to spend a lot of other peoples’ money. Whether or not that’s even possible or practical, the promises themselves don’t even add up. The thing is, even left/progressive/Democratic economists already recognize this:

… “The numbers don’t remotely add up,” said Austan Goolsbee, formerly chairman of President Obama’s Council of Economic Advisers, now at the University of Chicago.

Alluding to one progressive analyst’s criticism of the Sanders agenda as “puppies and rainbows,” Mr. Goolsbee said that after his and others’ further study, “they’ve evolved into magic flying puppies with winning Lotto tickets tied to their collars.”

In fairness, the article does point out that some Republican’s plans don’t add up either.

And in Sanders’ defense, much the biggest part of his proposal is complete conversion of the U.S. healthcare system to a single-payer system. In such a system, government spending would go up drastically because it would be replacing private insurance outflows, and government revenues would go up drastically because the inflows to those private insurers would be diverted to the government. This is really just a huge change in who is writing the checks, rather than in increase in spending. Having said that, Vermont tried a similar plan, and had to dismantle it because it was unworkable.*

Read “Left-Leaning Economists Questions Sanders’s Plans”, which appeared in the February 16 issue of The New York Times. The link above is required reading too.

* Many progressives look to the experience of other countries with single payer systems, and think they can be successful here. The difference is that — for all the complaints about how much we spend on healthcare in the U.S. — almost all of it goes for both more quantity and better quality. Expectations that money can be saved from changes to U.S. healthcare are usually overstated because they’re overly optimistic that the quantity and quality are not that high to begin with, and that there’s a lot of waste and inefficiency. Experience with reforms that haven’t delivered past savings tells us there simply isn’t that much waste and inefficiency to begin with. We’d be better off if we started believing that.

Thursday, February 11, 2016

Why Is Macro So Hard? The Parallels Between Cancer Advice and Macroeconomic Policy

People get buggy about cancer. They get the same way about macroeconomics.

It’s bizarre.

Check out Harriet Hall’s review of the book entitled This Book Won’t Cure Your Cancer, by Gideon Burrows. Here’s where she’s going:

Gideon Burrows has an inoperable brain cancer that is slow growing but is inevitably going to kill him. He has written a remarkable book about his experience … The gradually unfolding episodes of his personal story are interwoven with what amounts to a primer on how to think critically about science-based medicine vs. alternative treatments. I can’t recommend this book highly enough.

From there, the similarities to macroeconomics blossom. People are often desparate regarding cancer — it turns out that some of the pathologies described match up pretty well with common but f***ed up views of macroeconomics.

Here’s what Hall says about what Burrows said:

Untrustworthy information

When people are diagnosed with cancer, they are vulnerable and desperate. They look for information and are likely to find cookbooks, miracle stories, alternative medicine, and “forbidden cancer cures.” Their friends bombard them with advice. Most of those sources “offer hope to people when they need it most, but have earned no right to do so.”

… Unwarranted extrapolations from single scientific studies and anecdotes, and he is blaming the victim by trying to establish a lifestyle cause … for which science has found no cause and which is likely due only to bad luck. … Instead of acknowledging that his methods hadn’t worked, he rationalized that he hadn’t followed his own advice carefully enough.

Now draw the parallel to macroeconomics.

I think it’s fair to say this election cycle that both Sanders and Trump are offering policy proposals that are the analog of alternative medicine, and forbidden cures.

And seemingly everyone gets macroeconomic advice from friends. As a professional macroeconmist, I can tell you it’s nothing short of astounding the extent to which people will not ask a macroeconomist what’s going on with the macroeconomy. I think they get answers they don’t like — it’s all about mood affiliation, and professionals try not to do that much.

Unwarraneted extrapolations? Near as I can figure that’s pretty much every politicians source for policy recommendations.

Blaming the victim? Isn’t that what Obama has done for the last 7 years to the financial industry … which was hit harder than most other industries during the Great Recession. Sanders is, of course, doubling down on that.

“Instead of acknowledging that his methods hadn’t worked, he rationalized that he hadn’t followed his own advice carefully enough”. In macroeconomics we call these people Keynesians.

Hall then quotes Burrows:

The cancer culture

Cancer is not a brave battle to fight … It is a puzzle to try to solve, something to try to keep at bay using the very best tools we have …

Think about how commonly battlefield metaphors are tossed out by politicians trying to address weak economies.

But the truth is, business cycles are puzzles that macroeconomists haven’t really figured out yet. Each one is different, and we don’t see very many of them.

Next up is the desparate search for conforming opinions:

When to stop looking for other opinions

Three different specialists give him the same prognosis. His cancer is inoperable. … Friends suggested he keep looking for a surgeon who would be willing to operate. What if he searched the world and found five doctors who wouldn’t operate and a sixth who would? Would it be rational to trust the sixth doctor’s opinion more than that of the other five? Of course not. He should trust him less.

… It is not reasonable to “try anything” if there is no evidence that “anything” works. People say it’s worth trying because there is no evidence that it doesn’t work. He spots the fallacy in that reasoning:

There are many millions of things that have not been proven to not cure cancer, but mostly because many millions of things have never been tried. That does not mean they are a potential cure, nor that they are sensible to pursue.

What if he proposed that blowing up 100 red balloons would cure cancer? Is that really any more ridiculous than coffee enemas? When does anything become something we should try …

He doesn’t blame people who go off in pursuit of a promised miracle cure. He understands their desperation and the comfort of having a hope to cling to. Rather, he blames those who offer that anything without a fair, accurate, and accountable foundation. The power and responsibility to advise about cancer treatment “should only be earned by results, proof, and accountability.”

Bryan Caplan of EconLog called this the Activist’s Fallacy.

Lynne Kiesling of Knowledge Problem has noted that it’s best that we “Don’t confuse activity with accomplishment.”

In my classes I discuss this problem in terms of the legacy media. They love to have two pundits with opposing views. But they never tell you if it was easy to find someone to support the one viewpoint (because it is common) and hard to find a crackpot to support the other one. Hall parallels this in another section:

The media … strive for “balance” and give alternative treatments more credit than they deserve. This is wrong-headed … The news serves to confuse rather than to inform

As to trying anything, the best example of this may be the “Cash for Clunkers’' program.

My parallel with Hall’s discussion of diet is more of a stretch:


Diet advice and cancer cookbooks and abound, but:

The most science has shown is that having a generally healthy diet and exercising regularly lowers our risk of getting cancer. It does not prevent cancer. It does not cure it.

Think about that while the economy expands: good policies lower our risk of recessions, the do not prevent recessions, or keep them from ever happening again.

Burrows wonders about our disposition:

Confronting rubbish

Is it rude or cruel to confront people who talk rubbish about cancer? If we don’t, are we allowing potentially more damage to be done just to avoid a personal feeling of discomfort? “How far does our reluctance to criticise mean that energy, passion and grief is channeled away from cancer cure research, not towards it?”

Let me try that on for size: Sanders fans — Bernie advocates wholesale prejudice against the minority working in the financial professions. This reeks of the caste system in India.

In class I note that a lot of what passes for government policy merely passes the we’ve-always-done-it-this-way tests. Here’s Hall quoting Burrows:

Ancient wisdom

Ancient practice is not always ancient wisdom…That something was being done in the earliest days of civilisation to cure illnesses should make us more wary of those treatments, not keener to try them for ourselves…progress means replacement of the old and ineffective …

How did that Rooseveltian stimulus package of 2009 work out for you? Sowell made a similar point about how Obamacare is actually an old-fashioned approach.

I emphasize for my students that macroeconomists are the first people to say we don’t know everything we should. With cancer, this is:


Proponents of alternative medicine love to criticize doctors, and it’s undeniable that there is a lot wrong with conventional medicine. The system is flawed. Individual doctors are not perfect; they miss diagnoses and make mistakes.

But if we exercise scepticism and doubt about medically trained doctors, oncology and conventional medicine, then we should subject alternative medicine to at least the same level of doubt and scrutiny. In fact, I would argue alternative medicine deserves far more doubt because it self-consciously puts itself outside conventional medicine that has been proven by time and experience to, mostly but not always, get it right.

Here I’ll return to Trump on the right, and Sanders on the left. We need more evidence from you two, not less.

A few times each semester, a student will bring me something they’ve found and are trying to muddle through. Almost never do they bring up something from a professional economist. Instead, they’ve found a crackpot. Same thing with cancer:

Who is an expert?

Self-declared “experts” write books. But it only takes two minutes on the Internet to demonstrate that there are experts in that field who question or disagree with them. Failure to reveal the controversy should make readers question whether anything else in the book is true.

I feel like The Amazing Randi sometimes as I try to gently debunk these sources for the students. It’s great that they’re interested, but how do I not kill that interest when what’s piqued their interest is junk? It’s rather sad actually: the kids who bring me nonsense in their 2000 level macroeconomics class almost never show up in the 3000 level macroeconomics elective.

In the end, I’m gobsmacked by the parallels here. But I really don’t know what to do about them.

Wednesday, February 10, 2016

The ‘Chart of Doom’

I have no idea how popular this idea is, but I saw a headline for it on more than one news site this week (they must have a good publicist). The original source is a blog called Market Daily Briefing, it was picked up by Daily Reckoning in a post entitled “The Chart of Doom: When Private Credit Stops Expanding …”, and from there by AOL.

The chart in question is this:


This is the sort of cute piece of data that financial professionals often pass from one to another.

I think the story they’re trying to sell here is that if private credit fails to keep growing there will be a recession.

For my part, I think this fits in with some things I’ve stressed before — false positive and false negatived, hyperbole, and data scaling.

First off, let’s start with the hyperbole. How is the reader supposed to feel when they see “doom”, “three down, two to go”, “rocket ship … returns to Earth”, “bailouts”, and “lousy”. Whoever put this together is pushing your emotional buttons.

Second, note the data scaling. There isn’t any. Even though these should all be logged because they no doubt display compounded growth. Additionally, the “three down, two to go” point doesn’t mention that there are three big numbers (that presumably matter more), and two smaller ones (that presumably matter less).

Then there’s the positives and negatives. Clearly, there’s a (true) positive for the U.S. in 2008 or so. There’s also a small one (well, who knows really, since the data isn’t logged) for the U.K. But there’s nothing for China, which arguably fared worse. And nothing for the Eurozone which definitely did worse. And how to explain Japan, which actually showed more private credit at this time, even though they were in recession  too?

However, there’s clearly a false positive for the U.S. in 2000-1. No sign of a recession at all there.

I also think we should be suspicious of the data. Why is the data for Japan and the Eurozone so choppy, while the data for the U.S. and China is smooth? Something smells fishy about that. Going further, wouldn’t the ups and downs of Japan and the Eurozone be making an awful lot of false signals?

All in all, you should be very careful about reading too much into a chart like that purports to answer macroeconomic questions.

Sunday, February 7, 2016

Should Your Tech Firm Hire an Economist (Not Required)

Economists are trendy in Silicon Valley. This post entitled “Should Your Tech Firm Hire an Economist” by Jed Kolko tells you why, and what economists do for tech firms.