Why Is Macro So Hard? Overconfidence

This is related to my earlier post that part of what makes macro so hard is the metacognition deficit of policymakers.
Related to this is an argument set forth by Ram (there’s a primer below the quote):

I'd contend that the main problem in America is that the public, including its highly educated members, is social-scientifically ignorant. Most people I talk to about policy do not even realize that there is anything non-trivial about policy analysis. They want the government to make sure that four phases of rigorously designed RCTs be performed before drugs are made available to the public, for fear of unintended consequences of intervening on a complex system like the human body, yet they think they understand the consequences of highly complex interventions on human societies by introspection alone. Not only do they think they understand the consequences of alternative policy choices, but they're so confident that their understanding is right and that its truth is so obvious that the only explanation for disagreement is evil intentions. When I point out that on virtually every policy issue, at least somewhat compelling arguments for many conflicting points of view have been made by relevant experts, people usually react in disbelief or denial, or immediately retreat to questioning the motives of these experts ("of course they say that, they're on the payroll of Big Business" or whatever). These patterns of speech and behavior are uniformly distributed across the political spectrum, even if intelligence and knowledge of well-established facts is not. Even many experts in particular areas of social science evince no awareness of the lack of expert consensus on almost anything in their field, and give the impression of unanimity to an unknowing public.

My guess is that if you were to convince a supposedly non-utilitarian person that their (e.g.) deontological prescriptions might have terrible consequences, then they would revisit them. Anti-consequentialism is easy to maintain so long as you believe the consequences of your proposals are desirable, but most would fold if convinced otherwise. [the emphasis is not mine]

There’s some highbrow language in here, so let me translate a bit for potential students.

When Ram uses the word “non-trivial” about policy choices, what is meant is that many people think policy choices are trivially easy: this one’s right, that one’s wrong, choose the right one. Does this sound like Donald Trump? When Ram says people don’t recognize that the choices are non-trivial, it means that there are lists of pros and cons that have to be weighed without solid information. It’s not completely guesswork, but some of it might be.

When Ram mentions RCTs, the point is the ridiculous level of testing that for-profit corporations have to go through to “prove” that their medications are safe (even though any yahoo down the road can sell you a poisonous plant and call it a medicinal herb without even having a license).

When Ram mentions introspection, what’s meant is “thinking about it a bit”. For example, Obamacare is an example of multiple “highly complex interventions in human societies”. But how many people do you know that have spent much time thinking about whether Obamacare will work or not, before deciding that they’re for it or against it?

Ram says that many people believe the “truth is so obvious that the only explanations for disagreement is evil intentions.” Is that an argument President Obama has used repeatedly?

Ram writes “if you were to convince a … person that their (e.g.) deontological prescriptions might have terrible consequences, then they would revisit them.” Deontological is college-level word that means that you justify the correctness of your actions because you followed the rules or orders. (You know, that’s the excuse the Germans made about things the Nazis did). The prescriptions are recommended policy actions (just like your doctor might give you recommended medication directions). So, what’s being said here is actually rather hopeful: if you can convince people that the bad policy choice they made was because they were just following orders, they might reconsider it.

Lastly, Ram mentions “anti-consequentialism”. You’ve probably heard the old saw: the ends justify the means. That’s consequentialist: it means that it’s OK to do something bad initially if it ends up good on net. For example, parents call this tough love. To be anti-consequentialist is to think that the means or motivations are all that count: basically, if you think you’re doing good, then you are. Ram is saying that only worrying about motivations rather than consequences (thus, being anti-consequentialist) is an easy viewpoint to stick with if you’re not inclined to ever check the results. At least on Iraq, it’s fair to say the Bush administration was anti-consequentialist. Tie this altogether, and what Ram is saying (and what I’m applying to macroeconomics) is that world is a messy place, with a lot of gray areas, and there are way to many people acting as if the gray areas don’t exist at all.

This appeared in the comments to The Money Illusion, posted by Scott Sumner at EconLog.

First We Screw Up, Then We Have Lunch (On Someone Else’s Tab)

The class spent a lot of Spring 2015 discussing the economic crisis in Greece.

A leading player in that was the Greek finance minister Yanis Varoufakis. He was widely viewed as obstructionist, and unwilling to negotiate seriously with other countries in Europe. Eventually he was fired by his own government.

… Mr Varoufakis infuriated almost all of his European negotiating partners. "We had countless discussions with him," remembered Pierre Moscovici, the European commissioner for economic affairs.

"These discussions were vain, pointless and academic. He only wanted to play for time, not make concrete proposals."

Now he makes a ton of money on the lecture circuit.

An email from an agent of the London Speaker Bureau, published by Proto Thema, an Athens weekly, said that Mr Varoufakis now charges $60,000 (£40,000) for one speech given “outside of Europe”. The sacked minister has a sliding scale of fees, according to the email. Mr Varoufakis will speak anywhere inside Europe for $5,000 (£3,000) – and he will give a university lecture for $1,500 (£1,000).

“The man who contributed to the Greek economy’s catastrophe by obstructing talks with international creditors and leading the country to capital controls is making a mint,” said Proto Thema.

The email reminds anyone thinking of booking Mr Varoufakis that he would also "require business class travel, accommodation, airport and ground transfers, meals and incidentals".

The next time someone asks you why politicians pursue policies for their countries that don’t make economic sense, ask yourself if they may be making economic sense for the politician.

Lovesong for Satoshi Nakamoto Whitepaper [sic]

Learn a tiny little bit about blockchains (and Bitcoin).

Why should a macroeconomist care? OpenBazaar is the most public manifestation of Darknet markets. People with control issues like to think that Silk Road was the end of the story; I view it as the end of the beginning.

Remember, you heard it here first.

When you hear inequality activists like Piketty advocate global wealth taxes, think about why he would be so concerned about getting at wealth that’s gotten beyond particular national borders. When you hear politicians grouse about profits that are not repatriated, think about how they view the world if taxes are their source of funding. When you hear about inversions (Pfizer is currently in the news about this), think about whether physical location is an important as virtual presence.

The macroeconomic news story for the rest of your life is going to be that governments have made expensive promises based on political borders scratched out over the physical world, without recognizing that their tax base is going virtual. Marc Andreessen’s most famous quote is “software is eating the world”. It ate the market for compact discs in less than 5 years. It’s going to eat discretionary government spending over the next generation.

P.S. Not sure why there’s that other stuff appended to the end of the video.

Horrifying Graphic with Useful Information

This is cringeworthy:it’s what happens when you give people better graphing tools than they know how to handle.*

But, it shows some cool data for macroeconomics. What you’re seeing here is GDP growth last year on a city by city basis. Green is better, red is worse. And, because a color wasn’t good enough, we have spikes to show positive growth (but nothing to show negative growth — go figure). Also, recall that GDP growth has to beat population growth for us to feel good about the world: that’s not just green, but more like green with the two palest shades dropped out: so, forget about the southwest. Also, keep in mind that this is just cities, so the white space means nothing.

So, what can we see here? Well, first off, growth is uneven. This is normal. Secondly, there are some places that are actually getting worse. This is also normal: even in the biggest booms, there’s usually a few places lagging behind. Otherwise, we’ve got lots of good, dark green spikes, across the country. There’s a big swatch running from Houston through Seattle that’s doing great. Florida is doing well too. The midwest also seems OK. But, there’s a big arc running from Iowa, down to the central Gulf coast, and back up through Boston that could be doing better.

* The problem(s) with a figure like this are pretty well known. First, don’t tilt the map: that emphasizes the south at the expense of the north. Second, don’t emphasize just half your story (with the spikes). Third, because of the tilt, the height of the spikes is no longer proportional to the actual changes. Fourth, because they tilted it, and used spikes, the bases of the spikes look fatter in the south, distorting perceptions. Lastly, lots of analysis will miss this point (so I’m not picking on this figure specifically anymore), but there isn’t a sense of anything being proportional to population here. Even in 2015, the northeast (taken as a whole) makes California’s population look minute … and there’s no sense of that at all here.

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The day after I wrote the above post, The Wall Street Journal published a similar, and better, graphic. But, they must not want to share it, because it took a lot of internet time (at least 5 minutes) to figure out where they’d hidden away this image. And, of course, they’ve hidden the labels.

But you can still pick up the story. It’s showing the unemployment rate by county, with shades of gray being essentially full employment, and shades of blue being places that could still improve a bit.

I can’t even give you a decent link to this. What I can tell you is that it appeared with the title “Uneven Job Market”. But that’s not really an article, so it’s not clear to me that you’d find that title in Google a few months down the road. It appeared on page A8 of the January 4, 2016 edition.

Via Newmark’s Door.

Production and the Black Box

In economics (and other fields) we use the metaphor “black box” to describe a process where we see the inputs and the outputs, but we don’t really understand (or maybe really need to know) what goes on inside.

In the coconut plantation story (or lemonade stand, or apple orchard) we tell to motivate students to think about how production works, we invoke that black box metaphor: labor and capital go in, and output (or real GDP) comes out. When we add a production function, what we’re trying to do is put mathematics on what goes on inside the black box that’s both tractable and economically sensible.

With any luck, this cartoon will make the black box idea stickier for you:

I do want to emphasize that the block box doesn’t necessarily mean better inputs produce better outputs (although most of us believe that to be true most of the time in the real world). In this case, we kept one input the same (labor), changed the other input, and with (what looks like the the exact same) black box produced the same amounts of different outputs. But it could just have easily been different combinations of the same inputs. What’s important is that we don’t need to know more about this to get the point.

Why Is Macro So Hard? The Bridge's Weight Limit Problem

We've all seen signs like this:

There's an old joke about how engineers figure out these limits: they build a bridge, drive successively larger vehicles over it until it collapses, and then they rebuild the bridge and put up the sign.

Of course, in reality, do engineers try to do better than that? Well, of course they do. I'm not implying that they don't, just that we should expect some failures.

Unfortunately, most policy applied at the macroeconomic level is non-experimental. You can't run a controlled experiment to see if it will work or not. Instead, you just do it, and reflect later on whether it worked the way you thought it would. If we're lucky, the decision-makers may even update their thinking. So most of macroeconomic policy is analogous to the bridge's weight limit problem.

This came up when New Orleans was hit by Hurricane Katrina: the levees held ... until they didn't hold any more. Then we cleaned up and pointed fingers. (For readers who have never seen the levees, this was one of the biggest federal infrastructure projects in history).

And yet, Charles Marohn writing at Strong Towns notes that almost the exact same excuse was used by former Federal Reserve Chair Ben Bernanke in describing the policy response to the Great Recession:

My favorite part of that interview was Bernanke reacting to himself from a 2005 MSNB interview where he said housing problems were localized and would not impact the national economy. Here's what he said:

I absolutely – first things you said, by the way, when saying in 2005 and 2006 the economy was going to continue to do well, it did do well.  2007 was not a bad year until the end.  So, the economy was doing OK in a broad sense.  What we missed, what we didn’t anticipate, was that the decline in house prices and the problems in mortgages would generate this huge panic. So that — you know, I can’t, I can’t deny that.  I think that I wouldn’t give us a particularly good grade before the fall of 2007.  After that, when we began to see what was going on, there, we were much more aggressive in responding.

In other words, when he said things were doing well, they were doing well, until everything fell apart, and then they reacted.

Now, let's change direction a bit. Returning to the bridge joke, what do you think get's budgeted for? Building one bridge, or building two? The Katrina case should make it clear to everyone that ultimately we pay twice (or more). But that's not the way we start out. Instead, we budget one version, and then we add to that later on.

So, here's another quote from former San Francisco mayor Willie Brown:

Referring to huge cost overruns during the construction of San Francisco’s four-and-a-half-billion-dollar Transbay Transit Center, Brown wrote, “We always knew the initial estimate was way under the real cost…. If people knew the real cost from the start, nothing would ever be approved. The idea is to get going. Start digging a hole and make it so big, there’s no alternative to coming up with the money to fill it in.” [italics are from the source article]

In terms of macroeconomics, this means that you don't let on how big your policy is going to ultimately be. Instead, you start small, and add to it. Then if there's a failure, you use that to double-down and expand the program.

Oxford business professor Bent Flyvbjerg† dubs this "survival of the un-fittest":

... the least deserving projects get built precisely because their cost-benefit estimates are so misleadingly optimistic. [italics are original]

So now we've got three related issues:

• We don't really know whether some things will work until they fail.
• We don't like to pay enough for something that won't fail, so we start with something cheap and add on to it.
• We fib to ourselves about the cost of doing things right, so we end up choosing what seems cheapest (because we didn't include the opportunity costs of doing it right or doing it twice).

Is there an example of how this works in macroeconomics? Well, how about Social Security, or even better the program that was added to it in 1965: Medicare.

Of course, on the first point, Social Security and/or Medicare haven't failed. But, there have been ominous rumblings for a few decades now.

On the second point, we started with social security in 1935. This offered a government check to former workers, aged 65 and older. Life expectancy for a 65 year old at the time was 2 years. Many things have been added to our government's social security offerings: coverage for spouses and dependent children in 1939, coverage for disabled workers in 1954, early retirement in 1961 (even though people were living longer), coverage for the disabled who weren't workers (SSI) in 1972, and automatic cost-of-living adjustments in 1977. But by far the biggest one is Medicare. Initially, in 1965, this was just two parts (A and B, for hospital stays, and more general insurance). But we got Part C in 1997 (with more broader and more flexible coverage), and Part D in 2006 (with prescription coverage). Now, here's a little secret. "Obamacare" was pitched to the public as being about patient protection and affordable care. But everyone who follows policy knows that a huge part of Obamacare was new fixes to Medicare to rein in costs.

That covers the start small and make additions part of the argument. What about the idea that costs are understated because no one would agree to them?

Well, Medicare is a liability of the federal government (a liability being something that generates cash outflows rather than inflows). The money for those checks needs to come from somewhere. If not, it's called an unfunded liability. Current estimates are that the unfunded liabilities of the Medicare system are about $36T (that's the number that Obamacare reduced, by perhaps $10T). That's twice the size of the "official" national debt. That unfunded liability is not included in the national debt because it hasn't been borrowed ... yet. This sort of like carrying a $1,000 balance on a credit card, and knowing that you're going to have to put a $2,000 car repair on the card, yet still thinking that your debt is only $1,000. Well, technically it is, but this is clearly magical thinking.

Then there's the third point: did we choose to structure the laws this way because we were in denial about some of the costs? I don't know of any direct evidence to support this, but the indirect evidence is how we treat increasing life expectancy. It's no secret that life expectancy has been increasing in the United States for, well, not really decades but in fact a couple of centuries now. And yet 80 years into our era with Social Security, we still do not have any concrete plan for matching up when people can start to collect benefits with how long they can be expected generate costs to the system.

Maybe macro isn't that hard. Maybe what's hard is admitting to this pattern of behavior.

† I swear I did not make that name up.

BTW: Thanks to Cold Spring Shops to pointing me to this source article, from which I'm getting the previous entry in this series too.

Why Is Macro So Hard? Orderly but Dumb or Chaotic but Smart? Choose one.

Here's a quote from Charles Marohn, writing at Strong Towns:

Projects coming from the top down tend to be orderly but dumb while projects coming from the bottom up tend to be chaotic but smart. We all prefer smart to dumb, but we Americans have a really strong preference – and have established systems that enable bureaucrats and elected officials to ensure – that we get orderly over chaotic, even when it means accepting dumb as a result. [emphasis is original]

This goes some way towards explaining things like the "Obama stimulus packages" of 2009. A new government responded in a timely fashion for a representative democracy (over a period of several months), with a large series of nice sounding programs (that roughly match up with the textbook Keynesian prescription for a bad recession), wrapped up in a few large multi-purpose bills.

That's the orderly part.

But mixed in there were some clunkers like ... well ... the "cash for clunkers" program. You know, let's destroy some productive capital because it has relatively larger negative externalities that are still minute when compared to the stream of beneficial services delivered by the capital.

BTW: Thanks to Cold Spring Shops to pointing me to this source article, from which I'm getting the next entry in this series too.