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The Fever Swamps of Ricochet; or, How Not to Talk About Macroeconomics
Ricochet is a great place to discuss all sorts of things. Guns, for example. When it comes to firearms, Ricochetti — in contrast to the left-leaning media — know what they are talking about, can cite relevant facts and figures, and discuss the issues calmly and reasonably.
Unfortunately, when it comes to macroeconomics, all too often the roles are reversed. Which is a shame, because leftist approaches to the macroeconomy are disastrous, and we need conservative policies to turn things around. It helps no one when otherwise excellent Ricochet conversation turn to economic matters and begin to resemble the fever swamps that characterize leftist discussion of firearms.
I see three problematic trends in recent Ricochet threads.
1. Ignorance. When a reporter, pundit, or politician can’t distinguish between automatic and semi-automatic weapons, we rightly consider that ignorance disqualifying. If you haven’t bothered to do your homework on basic questions, why should we trust your policy prescriptions? Similarly on economic matters: If you haven’t bothered to learn some basic mechanics of how, say, an inflation index is constructed, and the tradeoffs involved, your other claims won’t be very persuasive — even if they may be right. I’m not saying you should shut up and listen to the experts, but you should be honest — first and foremost with yourself — about the limits of what you know and be willing to learn more.
2. Non-falsifiable claims. One of the challenging things about discussing guns with a lefty is that the evidence doesn’t seem to matter. Do more guns cause less crime? Impossible — that’s counter to my intuition! And if you happen to get through on that point, you often run up against a wall: So what if it’s true — children are dying! Don’t bother me with data. A number of commenters on Ricochet have, sadly, taken such a non-falsifiable approach to macroeconomic matters, especially in support of the idea that inflation is understated by official figures. And worse, some Ricochetti will tell you that the data must not only be faulty, but indeed manufactured to produce “the government’s” desired outcome. Aside from the fact that there are thousands of individuals and dozens of agencies involved in the dissemination of the data, consider: do you trust government statistics on crime and gun ownership? After all, it’s the same government and it has as much incentive to doctor those statistics as the economic ones.
3. Ends justifying means. After the Newtown school shooting, I remarked to a liberal friend that I found it disgusting how gun control advocates were exploiting the tragedy to push unrelated measures, things that never would have prevented the tragedy in the first place. He took umbrage at that. If we don’t take advantage of the fact that people are emotional about the issue now, these measures will never get passed! These are the right things to do, so there’s nothing wrong with leveraging voter ignorance to achieve them. This kind of pandering comes from the same impulse as Dan Rather’s reliance on fraudulent documents in reporting, and the “fake but accurate” defense. That a narrative is consistent with your prejudices — or voter prejudices — doesn’t make it true. Your personal experience is true for you, but that doesn’t mean you’ve perceived it accurately, or understood it in context, or that it reflects a larger reality. Of course, to win political battles, we need to tell stories of how the economy is affecting people. Of course, to win political battles we need to tap into voter perceptions and voter experience, not rely entirely on voter reasoning. But does that mean we should craft all our stories to exploit voter ignorance? To what extent are we supposed to subordinate the evidence to the narrative? As conservatives, let’s make sure that our narratives reinforce the truth rather than contradict it — whether on gun policy, foreign policy, or economic policy. Otherwise, just as Democrats have failed to persuade voters on guns, we will fail to persuade voters on the disasters of leftist economic policy, and on the promise of conservative approaches to make things better for them and their families.
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MFR, you may not find my answer helpful, but here it is: Macroeconomics is bunk. Nobody knows a damn thing about what makes the overall economy grow or slow. If they did, central planning of the economy would be workable. And, of course, it isn’t.
You mention that you have no formal training in economics. I do, and believe me – it doesn’t help. Krugman has a Nobel Prize, and he doesn’t understand a thing about what makes economies move, which one can easily discern from reading any of his columns.
Certain things can be said to be generally true in macroeconomics, because they are essentially tautologies. Like the fact that debasing the currency causes inflation. True, because “inflation” is just another word for debased currency. But if you’re looking to predict, accurately, how the economy will respond to some policy or another – fugetabodit!
YES!
Undoubtedly not. Over my lifetime I have viewed inflation as an alternate taxing mechanism for a government habitually engaged in deficit spending. This worked but became more complicated as entitlement spending broadened and was then indexed to inflation since the fiat money printer now must contend with inflation influences going both ways. Surely the numbers are bogus and individuals must make their own adjustments to beat this system and imagining one’s facility with macroeconomics is helpful is a Mad Hatter notion.
I disagree that anyone should shut-up. How else will we (by we I mean ME, who knows nothing about macro economics) learn if we don’t participate in commentary that can be refuted or supported with facts. If I’ve got economic swamp fever, I want someone to help me find the cure.
Isn’t that why we come to Ricochet, to discuss, and spar with civility?
How would the Fed calculate the CPI for Ricochet?
In the 4 years the price has increased a little, serving size and speed have decreased, some ingredients have been substituted but we got new packaging and perhaps, better distribution/delivery.
We all use this product. I continue to consider Ricochet a excellent bargain. But I think my gut RicoInflation rate would easily be twice as high as the rate calculated using the current official methods.
I agree that no one should shut-up. My statement was meant as irony. It’s one thing to yield to experts when they have the data and analysis to support their positions, but another thing to be silent when there are legitimate differences of opinion. As I tried to explain, however poorly, the fact that I’m a lawyer does NOT mean anyone should simply defer to my “better” judgment–especially given that the world is a complicated place and debate and discussion are essential to life just as much (more) than politics, economics, or any other “ics.”
The problem with the OP’s argument is that it sort of assumes that Macroeconomics is a science that is subject to standard tests such as predictability, falsifiability, etc.
The truth is, no one in macroeconomics is developing falsifiable hypotheses, setting up scientific experiments with controls, etc. Or rather, when they do so and their predictions fail, they can always fall back on any number of confounding variables to explain away the lack of a result.
This makes macroeconomics less of a science and more of an applied philosophy wrapped in ‘scientific’ trappings. This is not an argument from ignorance, unless you consider Friedrich Hayek to have been ignorant of economic fundamentals. Hayek called what macroeconomists were engaged in ‘scientism’. – the belief that so long as you can come up with some aggregate variables and subject them to mathematical analysis, you’re doing ‘science’.
The real problem is that the economy is a complex adaptive system, and such systems are notoriously difficult to understand, let alone model and predict. The whole idea of simplifying the economy by studying ‘aggregates’ like aggregate employment, inflation, GDP risks abstracting away the things that truly matter.
(cont’d) The process of modeling is essentially one of simplification – reducing a system down to a number of variables that can then be examined and tested. This is a time-honored method in the physical sciences, where such reductionism makes sense. For example, you can have forces applied to an object from many directions, but for the purposes of a model you may be able to treat them as a single resultant force. A complex series of flextures may be modeled as a simple spring of similar action so that calculations can be done. Even these types of simplifications risk losing critical information, but the problem is generally manageable.
But when it comes to a complex adaptive system, this simply doesn’t work. The underlying complexity can’t be abstracted away because we have a limited understanding of how it all plays into the big picture.
For example, take aggregate demand. If it’s low, macroeconomists like Krugman think that just throwing money at people will increase demand and fix the problem. But aggregate demand is the result of millions of personal decisions, and we really don’t have much visibility into the complexity of all that.
(cont’d)
For an example, imagine a situation where aggregate demand is down because the productive sector is not making what consumers want. Maybe you have a chair-making economy, and people finally have enough chairs. Now they want tables. So aggregate demand drops. Just how much money do you have to give someone before they will buy more chairs than they need?
What if aggregate demand is down because people have a sense of higher systemic risk due to government debt loads, and so choose to save and hunker down? Just how much money should the government borrow and spend to correct that?
When you hear arguments about stimulus to correct demand shortfalls that don’t even consider the reasons for the drop in demand, someone is selling snake oil.
The same goes for employment. The absolute unemployment number may tell us a little, but it can’t hope to show the incredibly complex structure that aligns worker ability and desire with productive work that needs to be done. A government program that increases employment by 2%, but does so by distorting the job market and causing misallocations of skill and need is a terrible thing long-term.
For the ultimate example of where this foolishness can take you, consider the Soviet Union’s economy. On paper, it didn’t look too bad from a macro standpoint. The Soviets claimed they were always at or near full employment, maximum production, etc. And looking at the aggregates, it could seem that way.
The problem was that those aggregates hid the fact that the manufacturing sector was constantly over-producing things people didn’t need and under-producing things they did. Full employment didn’t mean effective use of labor – it just meant that everyone was given some task to do, no matter how worthless. All of the goods the state made were ‘sold’, because everyone had worthless money and nothing else to spend it on. People would join lines to buy something without even knowing what was at the end, because it must be valuable to someone or there wouldn’t be a line…
This is what happens when you believe a healthy economy can be created by fiat by simply manipulating a few aggregate variables with government policy. You wind up with a Potemkin economy that looks okay on paper but utterly fails in the real world.
I’m just getting back to Ricochet, and working through comments…. First off, I just want to say that I think this is the nub of the problem. Ordinarily wages rise in line with inflation, but they haven’t. So even though inflation has not accelerated, people can’t afford what they used to.
This isn’t a matter of “technical precision”, it’s a matter of understanding how the economy is really working and where the real problems are. There are many reasons for flat wages, but Obama’s fiscal policies — not Fed monetary policies — bear most of the responsibility. I think the GOP message needs to focus there, not only because “government figures are wrong” is a political loser, but because it’s fundamentally the truth.
Absolutely! Just be aware that not all lines of questioning are equal.
I think the following are examples of useful types of questions, and areas to push back on whether the government is making the right tradeoffs in producing the data:
How are the weights developed? How often should they be updated? How accurate are they?
How are the price surveys conducted? What items are included in the basket?
Why are some items in the basket experiencing different inflation than others?
Following are examples of questions (or assertions) that don’t get us very far:
Why is everyone telling me there’s no inflation? [I have yet to see anyone who says there’s no inflation.]
The government is suppressing data on food and energy inflation because it’s high. [The food and energy numbers are, in fact, reported.]
Why should I trust any numbers produced by the government?
I pay higher prices for groceries; inflation must be higher than the government says.
First, I think you mean “counterfactual” (what might have happened if different decisions had been taken) rather “nonfalsifyable”. By the latter, what I meant was that regarding economics, some Ricochetti maintain that X is true because of Y — but when you demonstrate that in fact Y is false, they still don’t care. To them, X is intuitively true, and can’t be shown to be otherwise.
Second, you appear to conflate support of Fed policy with a willingness to accept the validity of government-compiled economic data. I too have deep concerns about Fed policy, even while I maintain that the government data are not (either intentionally or unintentionally) hiding the true economic situation.
I don’t hold myself out as any sort of expert, just someone who knows enough to address certain common fallacies. I’m not familiar with the Carter-era differences. Can you please elaborate what they are?
My understanding is that the reporting is much more transparent now, so we can see what the assumed weights are, and how each of the categories move, in a way that we couldn’t in the Carter era. Also, it would be reasonable to expect that the basket weights have changed considerably in 35 years — the average American consumer spends a smaller portion of his or her income today on food, energy, and housing than was the case in the Carter era.
Concerns of inflation are not fever-swamp material. I share them. OTOH, accusations that the government must be deliberately skewing the numbers, because I see grocery prices going up and that’s the most straightforward explanation — well, that gets into fever-swamp territory.
First, there are multiple agencies, none of which has any incentive to keep spending down. Congress seems to be happier handing out goodies than keeping spending down. The Obama White House — keeping spending down?
Second, there are technical tradeoffs involved. Learn what they are. Some may be better than others, but it’s a leap to believe that they are all selected to achieve a particular result, and that there are no professionals who take pride in getting the numbers right. When there’s political pressure, I promise you, there will be professionals who resign and make a stink.
And third, the numbers are put together based on all spending, not just what you buy at the supermarket each week. Health care, durable goods, housing — for better or worse, groceries aren’t more than 10% of people’s spending overall.
This is not correct. Wikipedia gets it right:
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. It can be defined as too much money chasing too few goods. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.
Money supply is an important factor, but if it stays unchanged during a supply shock (positive or negative), the general price level will move (i.e., there will be inflation or deflation). This has happened during various periods of American history, well before the creation of the Fed, when money was backed by precious metals. CPI is not a proxy for inflation, it is an attempt to measure it directly.
Macroeconomics isn’t a science — it’s a social science. You can’t do experiments. Rather, you rely on observation and analysis. In the OP, I tried to focus on areas where Ricochet has tended to depart from intelligent, thoughtful, honest analysis.
Macroeconomics gives you an analytical toolbox, a framework for understanding certain things. It is by nature abstract, and incomplete. But it is more useful than not to have a framework for understanding the relationships among exchange rates, interest rates, overall production, general price levels, labor supply and demand, etc.
Some economists are sloppy. Some are dishonest. Some are politically motivated or biased. Some have personal vendettas against other economists. Some are simply in error. One of my college professors advised a president (who did not follow the advice). He taught me a critical lessons about the applicability of models — e.g. some describe long-term phenomena, whereas others are appropriate only for short-term phenomena. I routinely see even experienced economists who have not learned this lesson.
“Second, … it’s a leap to believe that they are all selected to achieve a particular result, and that there are no professionals who take pride in getting the numbers right. ”
What numbers are right in a non-science that is only an analytical framework?
“And third, the numbers are put together based on all spending, not just what you buy at the supermarket each week. Health care, durable goods, housing — for better or worse, groceries aren’t more than 10% of people’s spending overall.”
I would beg to differ. So would government estimates, which are a minimum of 10 percent of household income on food alone. And a 15 to 20 percent increase in a number that constitutes 15 to 20 percent of income hurts.
You criticize people for not accepting uncritically claims made by the government, then admit you simply don’t know what we’re talking about?
I suggest you visit shadowstats.com, and at least skim over what Williams is claiming.
The government has changed the way it calculates inflation over the years. I think you agree. Williams makes his own calculation, using the methods in use prior to the revisions- for 1980 and 1990, at least. I think it is generally agreed that those changes have reduced the reported rate of inflation.
The Carter presidency famously had a high rate of inflation. Then the government changed the methodology, on multiple occasions, which supposedly gives us a more accurate but lower measurement now.
So I’m wondering why we don’t owe Carter an apology, if the new methods are more accurate. Presumably if our new, improved methods were in place Carter era inflation would be significantly less.
Yet I’ve never seen anyone claim Carter was laid low by shoddy statistics that reported inflation that wasn’t actually there.
Maybe someone should.
Thanks for the very good (and long set of) comments.
I think the burden of proof is on people who dispute the official figures, not the people who dispute Williams. Nonetheless, I did review Williams’s public commentary. (I can’t look at his numbers because he — unlike the government — appears to charge a subscription fee for them.)
Williams takes issue with four specific things. The only one that I would characterize as a true methodological change is geometric weighting, which has little effect on the numbers. The other three boil down to the fact that the CPI makes routine adjustments over time to reflect changes in how people shop and what people buy. It’s not inappropriate to reflect 1970s buying patterns in 1970s figures, and 2014 buying patterns in 2014 figures — that’s why we don’t owe Carter any apologies. It will require multiple comments for me to address these more specifically.
First is re-weighting of sales outlets. In the 1980s, big box stores were rare and online sales didn’t exist. They have brought down costs by introducing real efficiencies. Williams believes that the CPI should use prices from “Main Street” shops as if people shopped like they did in the 1980s, instead of how people actually shop today.
Second, Williams takes issue with the CPI’s move to 2-year reweightings. Periodic reweightings are essential to reflect changes in how we live. For example, in 1980, about 10% of household spending (on average) went towards health care, and 14% went towards food prepared at home. In 2014, about 17% went towards healthcare, and 8% went towards food prepared at home. The old 10-year readjustment schedule means that by the time you reach 9 years and 11 months, you’re not really reflecting current spending patterns anymore. (How much of people’s incomes went toward cell phone data plans 10 years ago?) You can take different views on how often reweighting is appropriate. But Williams’s approach means that (e.g.) you’re capturing the price change for music CD sales when people are buying music downloads.
Williams’s third critique relates to quality adjustments. I think Williams is on more solid ground here, but I still think there is sound reason why he is in the minority on the question.
Consider if I sold my $500,000 1-bedroom NYC condo and moved to Omaha. Suddenly, my $500,000 buys a mansion. Now, does that mean that the cost of living is the same, because I spent $500,000 in both cases? Most people would argue not — that the cost of living is lower, because you get more for your money. Measuring the improved quality of living will be subjective, but the concept is real.
(cont.)
(cont. from #85)
Another example to illustrate the concept: Let’s say you buy 1-ply toilet paper for $1 per roll, while 2-ply is $1.50 per roll. If you choose to buy 2-ply, has inflation gone up? Most people would answer “no”. But if the store now only carries 2-ply, has inflation gone up? Williams’s methodology says “yes”, because a customer is involuntarily paying more. But the CPI (and most economists) say “no”, because Williams is no longer measuring a constant standard of living — he is measuring an improved standard of living. The consumer is paying more and getting more — it’s not like when the price of tomatoes goes up and you get the same quality of tomato.
Williams is right that determining such quality adjustments can be somewhat subjective, and IMO he is spot-on in his criticisms of quality adjustments for housing. (Other commenters have highlighted articles by economists who propose ways to improve it.) But taken together, Williams’s complete dismissal of such adjustments means he is no longer measuring price changes for a constant standard of living, but an improving one.
I just got back from a week or so away from my computer, the internet, my cell phone….
I have zero to add here, except to say that this is an excellent thread. I’ve learned a lot about economics here at Ricochet.
And to quibble just a bit with the premise re: inflation — the government has been adjusting the terms for years. They call it “hedonic adjustment,” and it’s supposed to control for improvements in basic items. For example, the gas you put in your car is “better” gas than the gas your father or grandfather put into his — something about octane and no lead or something — so the price index is adjusted to take that extra value into consideration. Of course, you can’t choose the cheaper old kind of gas, so it’s not really fair. But it does help keep the CPI low, despite rising gas prices and soaring college tuition.
Part of the velocity of the recent asset bubbles — stocks, home prices, etc. — has come, in my opinion, by all investors at all levels chasing higher inflation-proof yields. This came at a time of relatively low CP indices. Why did they do this? Because they saw and felt inflation all over the place. They knew college tuition was going up, they knew health care costs were going up, they knew basic fuel costs were going up — so despite what the CPI was at the time, a huge number of Americans behaved as if the dollar was inflated, as if next year’s dollar was going to buy less (which it was) and so they gladly hopped onto the high-yield-highly-leveraged financial bubbles. They poured money into the stock market — as opposed to the old days of T-bills and CDs — and they borrowed big to buy more house than they could afford, because they needed that kind of asset as a savings account.
So yes, maybe they were ignorant. But maybe they were responding to the real economy on the ground, not the one that’s been “hedonically adjusted.”
Whoops. I said I had zero to add. Ignore the above, if you like.
I tried to present the case for hedonic adjustments in comments #85-86. (I was reluctant to introduce new terminology, so I called them “quality adjustments”.) It’s a tough nut, especially regarding COLAs. It makes sense for Social Security to support a constant standard of living — but as a taxpayer, I’m reluctant to support someone in a higher standard of living. OTOH, what do you do if the original standard of living is a relic of the past? Do you support someone in a higher standard of living, because otherwise they’d have to make up the difference themselves?
This is the problem with the “Poverty Line”. It once had an absolute definition, but has now been warped beyond all meaning and redefined in relative terms. If I understand it correctly , “Poverty” has now been defined in such as to be constantly evolving. As long as some make more than others then poverty, as defined now, remains.
Used to be a measure of how much food you could buy, not anymore.
Yes! The US used to be virtually alone in the world in using an absolute measure of poverty (i.e., how much income you need to minimally sustain yourself), as opposed a relative measure (e.g., bottom x% of the population, or y% of the median income). The switch to a relative measure happened under the Obama administration. When you consider the math of what a relative measure is actually measuring, it turns out not to be poverty, but income inequality. Funny that….