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Austerity and the Reinhart-Rogoff Fiasco

April 25, 2013 Leave a comment

You may have heard recently about how an obscure graduate student from UMass debunked a very influential paper from very influential professors at very influential Harvard recently. Indeed, it was a takedown.

Empirical economists Carmen Reinhart and Kenneth Rogoff’s oft-cited paper “showed” that governments reaching or exceeding a debt-to-GDP figure of 90% experience comparatively much lower growth. Turns out the whole thing was riddled with errors. I happen to agree that bad things are coming to countries that over-leverage themselves, but there is simply no way that a study like this was going to be correct, from its very inception.

Put aside for the moment the fact that the word austerity seems to have no useful meaning outside of rigid ideological parameters, meaning those who care more about politics than reality (read: 99% of economists) are talking at cross purposes. The real problem here is methodological. There is simply no way a spreadsheet of math problems based on aggregations of trillions of data points can tell you anything useful about whether a very general fiscal policy, with no set definition anyway, will have particular effects. It is all fantasy.

The most important point, though, is that we learn the right lesson from this. On the one hand, fancy math does not have the ability to tell us whether austerity, as a general matter, is correct. Anyone who thinks so is probably an idiot.

On the other hand, anyone who thinks that errors in fancy math prove the opposite position, is an even bigger idiot.

This is because they make a compounding error – on top of assuming that the methodology could give us useful evidence if it didn’t have its errors, they also assume that the absence of this evidence is evidence of their opposing position. This is a logical fallacy: absence of evidence for position A will never be evidence for position B. (If you’re interested in seeing a prime example of such massive idiocy, feel free to click on this link. I warn you, it isn’t for those with fragile stomachs.)

Ultimately, it is critical not to get caught up in the economic flame war without evaluating first principles. Neither side is right. And neither side seems to know why. In the meantime, I suppose we could just stand back and enjoy the show.

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Complexity, the “Do Something” Instinct, and the Sandy Hook Shooting

December 27, 2012 1 comment

I have as yet avoided writing about the Sandy Hook shooting, partly because I dislike rushing to rash decisions, and partly because I believe the narrative has focused on unimportant ideology as opposed to the important ideas underlying the situation and the reaction to it. Now, however, with the benefit of some distance, I will weigh in.

What happened was horrible. There is simply no way around that. On the other hand, frantic reactions, calls to political action, and statements claiming that what happened was “obvious” do nothing but exacerbate the problem.

In reality, while it is easy to deconstruct the event with the benefit of hindsight, it is simply impossible to claim some sort of valid foresight. It is not enough to say “I knew that something like this would happen,” because that is a statement without verifiability until the proof is at hand. And when the proof is at hand, such a statement is already useless. If you had any real knowledge, you would have stopped it from happening. If you had no ability to stop it, you had had no real knowledge – simply baseless speculation masquerading as knowledge.

One can analogize this “foresight problem” to other occurrences. For example, if someone gets in a car accident, he might say later on “if only I hadn’t slept in and left 20 minutes later than I usually do, I would never have been in this mess.” This is the functional equivalent of claiming foresight about Sandy Hook. If either were valid, the problematic situation would never have obtained.

Nor is it possible to claim that, despite the lack of specific foresight, there was enough knowledge to have stopped the tragedy via preventive action. This kind of claim usually follows the “if only we had this law…” form, and it is the functional equivalent of the above. This also fails to account for the foresight problem, and it suffers from a debilitating case of confirmation bias.

The foresight problem can be extended through thought experiment. Consider a chess game.* The number of possible chess games that can be played is somewhere in the order of 10^120, or many multiples of the number of atoms in the universe. Once the chess game is, say, 50 moves in, and the chesspieces are arrayed just so, it is relatively easy to reconstruct what happened. Before the game began, however, there was an infinitesimal chance of predicting just such an arrangement. And remember, this is chess: as complicated as its game-tree complexity is, it pales in comparison to the complexity of an hour, even a minute, of human action.

We have no useful foresight, but neither does our hindsight yield much when faced with the multitude of competing and interacting causes and effects that a chessboard simplifies but real life makes manifest. After all, if the “obvious” solutions were actually obvious in hindsight, this would not be a recurring problem. We would have corrected it after the last time.

For example, getting rid of guns does not solve the problem, as countries such as Russia continue to see mass violence despite heavy gun control, while Switzerland’s rate of gun violence is comparatively miniscule despite enormous rates of gun ownership. Britain found that gun violence increased 40% after its gun ban in the late 1990s. Unlike poorly-informed pundits, I will not speculate as to why. And indeed, a majority of the mass shootings that have occurred in the United States have occurred in states, localities, and even schools that are “gun-free” or gun-restricted zones. Real life does not cooperate with our strictures. (QED.)

Nor is lack of guns an obvious problem, as the just-as-reactive NRA has suggested. What earthly purpose would stationing the equivalent of TSA agents (who, by the way, are not armed) at schools be, when the TSA has shown nothing but incompetence? Why would one expect an armed policeman to stop a shooter when armed policemen are already commonly at schools and haven’t helped? Why would a national guardsman or combat veteran be effective? Remember that one of the worst mass shootings in history took place on a military installation in Texas. No shortage of guns on a military base.

What are we to do with ourselves, then, if there are no solutions to the problem? (And, emphatically, there are none.) We do the best we can to defend ourselves, but we also accept that the real world is a dangerous, messy place and circumstances beyond our control may end our lives abruptly.

Callous? I call it realistic.

Indeed, the possibility of being the victim of a mass shooting is quite similar to the possibility of being in a fatal car accident, except for the fact that the latter occurs with startling regularity by comparison. We seem to have no problem processing the idea that, while our lives might end on the road at any moment, we have balanced the risk and accepted that, dangerous as driving may be, we will carry on. We seem to completely lack the capacity to accept the idea that, while our lives may end in a mass shooting at any moment, we are capable of balancing the risks here too. Apparently, when guns are present, rationality goes out the window. This despite the fact that cars can be at least as lethal as guns.

And capable we are of balancing the risks inherent in life. After all, we do it literally all the time. Short of locking down the entire citizenry in individual padded cells, there is simply no way to prevent the next mass shooting. That may be hard to hear. But think of the risks you take every day that are greater. Driving is a good example, but also note that you are about as likely to be killed by lightning than be killed by a mass shooter. Shall we live our lives entirely indoors?

Or can we accept the fact that there is no solution?

Once we have accepted that the risk is intractable, we can begin to accept that calls to action, proposed laws, gun controls, the “do something” instinct – all are useless in the face of a tragedy like this. We can avoid the rush to judgment. We can avoid the poison of baseless ideology. We can begin the healing process. We can resume our lives.

While the complexity of the world denies us the ability to see into the future, we can see that the fruits of the “do something” instinct, be they legal or otherwise, are poisonous to liberty. We are faced with a choice. We can keep our liberties and our dignity intact, and live with a future where mass shootings are possible. Or we could pass laws taking away fundamental individual liberties, making the people servile and impotent, and thereafter live with a future where mass shootings are possible anyway.

These are our only two choices. We should choose wisely.

 

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*I have previously used the chess example to illustrate complexity here.

The incredible vanishing multiplier, and economics as a science

November 9, 2012 2 comments

Here is a blast from the past. In this .pdf file, economist Robert Barro talks about the Keynesian multiplier in 2009. 2009, as we recall, was the edge of the precipice. This article was published in February of that year, concurrently with the passage of the “American Recovery and Reinvestment Act,” commonly known as the first stimulus, which granted roughly $800 billion of taxpayer money to political cronies.

Here is an excerpt:

If the multiplier is greater than 1.0, as apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the government spending is a good idea even if the bridge goes to nowhere or if government employees are just uselessly filling holes. This free lunch would make Charles Ponzi proud. If the deal is genuine, why stop with only $1 trillion or so of added government purchases?

It seems as though the best way to judge macroeconomic predictions is with the benefit of hindsight. Indeed, when economists using the same data set come up with estimates that vary by the trillions, one must wonder whether foresight per se exists at all.

With the benefit of hindsight, it is clear that the stimulus did not stimulate. Many excuses have been made for the poor performance of ARRA, but the fact remains that it has failed.

In my view this is not surprising. Most economists, whether classical, monetarist, Keynesian, or whatever else, have been consistently missing the point for decades. They have become so caught up with making their math look legitimate that somewhere along the line they forgot that it should have some connection to the real world.

Perhaps when applied to mainstream macro, “voodoo economics” is a tautology.

Lottery tickets and the AIG bailout

September 12, 2012 1 comment

Much ado has been made recently about the AIG bailout, and specifically about whether it has made or lost money for the U.S. Treasury. The latest numbers flying about are from Neil Barofsky, former special inspector general of TARP, and the Treasury Department itself. The New York Times, reporting on the war of words, comes down squarely on the side of Treasury.

The pat explanation is that the bailout of AIG “worked.” It is a cute story, even if it seems to be keyed to the election.

On the other hand, my contention is that is does not matter whose numbers you use, or how you massage the accounting. In point of fact, there is really no way of knowing how much the bailout really cost us; you can add and subtract stock prices and buy-in and sale, but how do you quantify moral hazard for example? Any accounting is bound to be inadequate

But more importantly, the math does not really tell us anything useful. It gives us hindsight bias, and nothing more. Compare the AIG bailout to buying a lottery ticket. (Perhaps an apt comparison, given the level of decisionmaking involved.)

It is a known and accepted fact that buying a lottery ticket is a mistake. The ex ante math tells us that we waste our dollar on the lottery ticket, because the odds are far too long to expect a payoff.

But somebody has to win. If you buy a winning lottery ticket, is it fair to declare that you made the correct decision in buying the ticket after the fact? I contend that it is not. Objectively, buying the ticket in the first place was a poor decision, and since there is no way of knowing ex ante whether you hold a winner, the decision must be deemed poor regardless of what you discover ex post.

It is the same with the AIG bailout. Ex ante, there was really no way of knowing whether Treasury would turn a profit, but we were nevertheless playing terrible odds on a tilted roulette wheel. With all of the negative consequences of this particular course of action, it is unwarranted to highlight a gain in stock price that was, ex ante, completely speculative.

Now if you’ll excuse me, I am going to go complain about how the general manager of my favorite baseball team is an idiot because he did not trade his star player before he got injured.

“Bad Smell Blanketing the DC Area.” Hooray for Metaphors!

March 16, 2012 Leave a comment

…No seriously. A bad smell is blanketing the DC area. It’s in the news and everything.

Reports of a really bad odor blanketing the metro area have been reported from downtown D.C. to Fairfax County to Oxon Hill!

You may have smelled it Thursday night or Friday morning – and lots  of people are talking about it.

Sometimes they make it too easy.

The Wall Street Journal reports on the jobs failure of green subsidies

March 9, 2012 Leave a comment

Subsidies are well known to distort economies, to pick winners and losers outside of the context of real people’s real wants, and to entrench bureaucratic graft and corruption. At each turn, however, those same subsidies were justified by their supposed ability to “create jobs.” In fact, much of Frederic Bastiat’s seminal “What is Seen and What is Not Seen” was crafted to counter just such claims.

However, the Wall Street Journal (behind a paywall) has recently reported that even these job claims might be nothing more than a fiction.

On federal applications, companies said they created more than 100,000 direct jobs at 1603-funded projects. But a Wall Street Journal investigation found evidence of far fewer. Some plants laid off workers. Others closed.

…Jobs figures reported by grant recipients were full of errors, the Congressional Research Service said in a report last year: “Thus it is recommended that any job creation estimate be viewed with skepticism…

Somehow, I do not find this surprising.

I’m back from vacation; here are a few interesting posts for your enjoyment

February 27, 2012 Leave a comment

You may have noticed a hiatus on this blog that was somewhat longer than normal.  I was on vacation in lovely Costa Rica with my lovely wife (since my nom de plume is Socrates, I shall refer to her as Xanthippe).  To prove it, I took a picture of a politician that I snapped outside of my hotel in Tamarindo.  I believe her name is Nancy:

For the biologically curious, that’s actually a howler monkey.  Or in Spanish a mono aullador.

Anyway, to kick off my triumphant return, I’m going to give you a three for one deal of posts that I found infuriating, depressing, and silly.  See if you can put them in order!

First, in court case in Colorado, the FDA is claiming jurisdiction over an individual person’s stem cells.

In another outrageous power-grab, FDA says your own stem cells are drugs—and stem cell therapy is interstate commerce because it affects the bottom line of FDA-approved drugs in other states!

…The Centeno-Schultz Medical Clinic takes your blood and bone marrow, puts it into a centrifuge machine that separates the stem cells, and cultures it to get more cells before a doctor puts them back in your body to repair damaged tissue. The FDA states that when the stem cells are cultured, they become FDA-regulated drugs. The clinic has argued numerous times that stem cells aren’t drugs because they are components of the patient’s bone marrow from his or her own body.

How long before the FDA asserts jurisdiction over my white blood cells?

Secondly, and in completely unrelated news, the bell continues tolling the tragic death of the anti-war left.  It seems as though a majority of self-identified liberal Democrats now support keeping Guantanamo open as well as the use of drones for targeted killings.  At the rate they’re going, I give them until 2014 before they re-invade Iraq.

Unless of course “their guy” is no longer in office, in which case they will heartily disapprove. I have spoken of the demise of the anti-war left before: here, here, here, and here.

It is exactly this kind of blatant partisan hackery that makes me say that “partisanship is the first resort of the feeble mind.”  Perhaps I should copyright that…

And finally, in another completely unrelated topic, talentless pop-“artist” Shepard Fairey, the hack behind the ubiquitous Obama-Hope posters, pleaded guilty to criminal charges. But get this, the criminal charges stemmed from fraud and misconduct related to the civil suit that he himself filed against the AP.

Shepard Fairey fails so hard he can’t even sue people right.

Fairey “went to extreme lengths to obtain an unfair and illegal advantage in his civil litigation, creating fake documents and destroying others in an effort to subvert the civil discovery process,” US Attorney [Preet] Bharara said in a statement…

Fairey sued AP in 2009, seeking a ruling that his poster didn’t infringe the copyright because his use of the photograph was protected by “fair use.” The news organisation countersued.

Throw the book at him.

And welcome back to me.

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