The Mythmaking and Storytelling Of Economics

Noah Smith (@Noahpinion on Twitter) waxes lyrical on the culture of economics (excerpt):

Economics Isn't Science or Literature

…Economists use many of the same tools as scientists and engineers -- matrix algebra, multiple regression, control theory. But they don’t use them in the same way. In economics -- especially macroeconomics -- the goal is often to persuade other people of your point of view. As Federal Reserve economist Kartik Athreya writes in his 2013 book “Big Ideas in Macroeconomics”:

“My view is that a part of what we do is "organized storytelling, in which we use extremely systematic tools of data analysis and reasoning, sometimes along with more extra-economic means, to persuade others of the usefulness of our assumptions and, hence, of our conclusions...This is perhaps not how one might describe "hard sciences[.]”

Trade-Offs, Opportunity Costs and Unintended Consequences; Or There’s No Such Thing as a Free Lunch

I had a long conversation with an old friend of mine this weekend, and although I’m not about to disclose what we were talking about (yet!), it brought to mind how fundamentally different economists think to the way other people think.

Economists are always thinking in terms of trade-offs – you can’t do something without affecting something else. In a proverbial world of scarce resources and unlimited wants, every action has some form of reaction, even if these don’t conform precisely to Newton’s Third Law of motion. In Milton Friedman’s evocative language, “There’s No Such Thing as a Free Lunch”.

This is especially true of the policy-space. Every change in policy has both costs and benefits, though some of those costs or benefits might not be readily apparent. Replacing SST with GST for instance, or going forward with the TPPA – there are pros and cons, winners and losers in each decision, and the cost-benefit analysis is not always as clear as people think. Take for example the ever contentious issue of petrol and diesel subsidies – most people don’t see (or won’t see) the flip side of artificially cheap energy.

So we come to this (excerpt):

Economics for the masses

…are economists actually able to win hearts and change minds? Or is economics merely used to justify and reinforce pre-existing beliefs?

A new paper* from political scientists at Duke University suggests that economists can influence public opinion, but only on technical policy issues. They are less effective when it comes to politically contentious questions….

…So how did the dismal profession stack up? First the bad news. Despite the expert consensus, the majority of respondents, excluding those that were uncertain, disagreed with economists on every issue….Wheras [sic] this distrust was equally spread amongst most demographic groups, the authors found that right-wing respondents were significantly less likely to trust economists.

There were, however, some more positive findings. When they were informed of the consensus position of economists, respondents were more likely to agree with them. However, the size of this effect varied according to the nature of the policy issue. Members of the public were more likely to agree with economists when quizzed on technical issues, such as the gold standard or forecasts for tax revenue. But on politically charged topics, for example trade with China or the merits of immigration, the economists’ consensus was far less likely to sway public opinion. Not only that, but when the respondents were informed that their own views did not match those held by most economists, their level of trust in them decreased markedly. This was not the case with the more technical issues – even when they disagreed with economists their trust was unaffected. It seems that on hot-button issues, the public uses economists to validate prejudices, and loses faith in them when they fail to do so.

Confirmation bias is alive and well. One wonders how many bloggers and social media activists are wasting time and doing nothing more than preaching to the converted, present self included.

Calculating Real Interest Rates

One of the reasons analysts have been quoting as being behind BNM’s increase of the OPR last month was negative real interest rates.

What is that? Essentially, it’s the rate of interest on any particular deposit or debt instrument, less then rate of inflation.

The intuition behind this simple: what you’re trying to get at is a measure of the real purchasing power behind a deposit or investment. If you have a positive real interest rate, you can buy more goods and services when the deposit is withdrawn or the debt matures than you did at the start. If you have negative real interest rates, you can get less. A negative real interest rates means that you could be gaining more money, but the amount of goods and services you can buy could be less than when you started.

July 2014 Consumer Price Index: Nothing To See Here, Move Along

Wednesday’s inflation report saw the CPI rising by 3.2% (log annual and monthly changes; 2000=100):

2Q2014 GDP: Into Orbit

My, oh my, how things have changed (log annual and quarterly SAAR changes; 2005=100):

We ain’t talkin’ bout no base effect no more. T’ain’t bout prices neither. At 6.4% in percentage terms, the economy has put up a pretty solid growth number. If the low level of output in 1Q2013 influenced growth this year, that’s less of a consideration for 2Q2014. And if export and commodity prices trended up in 1Q2014, they’ve been flat or trending down in 2Q2014 (log annual and quarterly SAAR changes; 2005=100):

Perspectives On Development: The Role Of Women

This post is my catching up on various research and articles that I’ve bookmarked over the last few months on gender issues.

The World Bank has some new research briefs issued this week:

New Evidence Highlights What Works to Empower Girls and Young Women

Washington, August 11, 2014—Educating, empowering, and employing the largest-ever generation of young people is vital to ending poverty and boosting shared prosperity—the World Bank Group's twin corporate goals. New impact evaluation (IE) briefs by the World Bank Group (WBG), released ahead of International Youth Day 2014, shed new light on what works in development interventions targeting girls and young women, who still account for a disproportionate share of the world’s poor and face persistent inequalities at home, school, and work that help keep them and their families in poverty.

You can access the briefs through the article or through the World Bank’s gender resource site (here).

Abolishing Fuel Subsidies: Lessons From Indonesia

From the East Asia Forum (excerpt):

Time for a new approach to Indonesia’s energy subsidies
Authors: Stephen Howes and Robin Davies, ANU

Indonesia’s new president, Joko Widodo (Jokowi), will face many challenges but none more pressing and immediate than dealing with Indonesia’s energy subsidies, which this year will constitute a quarter of total government spending…They were 20 per cent of expenditure when President Yudhoyono (SBY) came to power, and they will be almost 25 per cent when he leaves office later this year….

…A more radical reform program is needed: instead of one-off increases, a time-bound program with an upfront agreement that the end result would be the elimination of energy subsidies within, say, three or four years….

…Whether Jokowi will deliver remains to be seen….

Inequality Starts At Birth

This isn’t a nature or nurture argument; this is a nature AND nurture argument (excerpt):

Inequality Begins at Birth

Over the past year, the lack of universal pre-kindergarten for American four-year-olds has become a national issue….Even as these efforts are being made, however, new research is making it increasingly clear that educational disparities start much earlier.

The value of universal access to early education has long been recognized: it improves the life chances of disadvantaged children and is crucial to keeping a level playing field for all….

June 2014 Industrial Production: Hold On To Your Hats, Folks!

The rocket has blasted off (log annual and monthly changes; seasonally adjusted; 2000=100):

The Fallacy of Composition and the Monetary System

I was tempted to be snarky about this, but that wouldn’t be fair, on laymen or anybody else.

It’s not easy thinking through economic problems, and monetary problems in particular. Slip ups are common, even among seasoned economists. It doesn’t help that standard texts on money and banking are badly wrong on how banks actually operate and how money is created. It’s no wonder then that people have a hard time figuring out what’s going on, and how changes in policy and customer preferences affect the monetary system.

Example 1 comes from a couple of weeks ago (excerpt):

June 2014 External Trade

The base effect is starting to wear off (log annual and monthly changes; seasonally adjusted):

100 Years Ago Today, WWI Began

It varies depending on which country you’re in (e.g. August 1 in Germany, August 3 in France, August 4 in the UK), but 100 years ago today, World War I began in earnest. The following four years saw a deadly conflict that crossed the globe and took the lives of 16 million people and injured 20 million more, and led directly to the greater conflagration of WWII.

The conflicts of the past sixty years or so, as damaging as they were and taking their own toll of human suffering, have been mild blips by comparison to the wholesale slaughter that took place on the Western and Eastern fronts.

By sheer coincidence, I’ve been listening to a rendition of Barbara Tuchman’s “The Guns of August”, a superbly written and sobering historical account of the build up to the war and its pivotal first month. May we never see anything like this ever again.

Data Releases for July 2014

I’m back from my usual Ramadhan blogging sabbatical. It’s been a bittersweet month – the economy is chugging along better than I ever hoped for and the German demolition of Brazil in the World Cup semifinals was a hoot to watch, but then there was the staggering blow of the MH17 tragedy and the incomprehensible Israeli invasion of the Gaza strip on the very same day. Geo-political risks appear to be increasing, while the global economy remains on a fragile footing, the US recovery notwithstanding.