Pursuit of Truthiness

my gut tells me I know economics

Archive for the ‘the future’ Category

What Do Markets Predict About Obama’s Second Term?

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While I saw this a Coke vs Pepsi election with no real differences between candidates, it seems that markets do expect some difference. If you believe the Efficient Markets Hypothesis (which I mostly do), then markets will reflect the best guess that can be made about the future by taking all publicly available information into account.

According to prediction markets, there was a 70-80% chance that Obama would win as of Tuesday afternoon; by Wednesday morning after the election this was 100%. So we can try to attribute any change from Tuesday to Wednesday as representing the effect of a ~25% increase in the probability of an Obama presidency. Multiply the effect by 4 to get the total difference between an Obama presidency and a Romney one. (If you believe the prediction markets. I am still kicking myself for not funding accounts in time to arbitrage between them)

The most obvious reaction has been that the US stock market declined about 1.5% from close on Tuesday to opening on Wednesday. This means people think stocks will be about 1.5*4=6% less valuable during an Obama presidency. It is unclear to what extent this should be interpreted as the economy generally doing 6% worse, as opposed to stocks alone being a worse investment as taxes on capital gains and dividends increase / fail to decrease.

Treasury bond yields decreased slightly, meaning that markets think the government is less likely to default under Obama, or alternative assets will perform worse, or both. I’m not used to calculating the TIPS spread, but it looks like nominal 5 year treasury yields decreased by 4 points more than real yields, meaning a 0.04 percentage point decrease in inflation expectations (meaning overall inflation would have been 0.16% higher under Romney? Perhaps people expected him to appoint Mankiw as Fed chair). On the other hand, gold prices increased ~0.5%. No big differences here.

The biggest difference, and in my opinion the best news, seems to be on foreign policy. Intrade has a prediction market on whether Israel or the US will make an overt airstrike on Iran by the end of next year. This declined from 49% to 37% as the election news came in, suggesting the chance of this happening would have been 4*12+49=97% had Romney won. The chance that China will take overt military action against Taiwan also declined from 10% to 3% on Intrade. These markets are thin enough that I don’t claim they are definitely right, but it is still good to see the chance of war declining.

Comparing the changes in these various markets gives a clear demonstration of what economists have often said– the US President has very little influence over the economy, but quite a bit of influence on foreign policy.

Written by James Bailey

November 12, 2012 at 7:42 pm

I time-traveled here from 1987 to say: You future people like weird things

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(Continuing from my previous post, Does the  idea of sustainability survive sustained inquiry?)

Sustainability means preserving good things for future generations.  But as Bob Solow notes, we have no idea what the preferences of future generations are; we are likely to think they are weird.  After all, if someone in 1800 were trying to make people in 2009 better off, what would they do?  Burn less coal?  Would these 2009 people prefer to have more cities, or farms, or picturesque villages, or wilderness (but who likes wilderness? We haven’t had a romantic movement yet, and Thoreau hasn’t even been born)? Certainly we would leave them better off by exterminating dangerous and destructive animals like tigers and wolves.  And we are going a great service to future generations by spreading Christianity and civilization to the backward tribes of the world!

Clearly, it would be pretty hard for a well-meaning person in 1800 to do the right thing from our perspective.  Presumably, the future is also pretty hard for us to figure out.  Solow wisely notes this, then promptly ignores his own advice.

Most blatantly, he says that “control of population growth would probably be the best available policy on behalf of sustainability.”  If he is considering the average utility of the members of future generations then this is at least plausible, although I would not bet on it as the best policy to please weird future people.  But if he is considering the total utility of future people (as I think is proper), then then this is probably nonsense.  A future with 10 billion people will have more happiness than a future with 9 billion people unless those additional people push the world over into famine and resource exhaustion, which seems to me at least highly implausible.  And total utility is the right measure, because considering average utility leads to even more serious moral problems than utilitarianism generally; for instance, it implies that we should euthanize depressed people, or taken to its logical extreme we should euthanize everyone but the happiest person on earth.

But this is an isolated case of Solow being wrong.  Now for the more general theory of his wrongness.  He notes rightly that it is hard to know whether future generations would prefer for us to invest or to preserve the environment, since both are likely to benefit them.   The problem is that he then asserts that both should be categorically superior to present consumption, which can only benefit the current generation.

This disdain for current consumption is at best an oversimplification.  First, we need to distinguish the consumption of non-renewable resources from all other consumption.  In general, this is the consumption that actually makes future generations worse off (by eliminating resources they could have used), and Solow’s idea to count it is a good one (we could subtract the consumption of nonrenewable resources from total GDP to get a measure of “sustainable GDP”, just as economists have sometimes tried to separate out GDP generated from the depreciation of the capital stock).  In some special cases, of course, this consumption could still benefit future generations: the technologies developed for mining are applied more generally, or if today’s resource becomes tomorrow’s nuisance (invasive species?), or if the byproducts of consumption are actually beneficial (say, if future people like a warmer earth then they would appreciate that our consumption lead to CO2 emissions [there is probably a better example of this idea]).

But most consumption does not involve (at least directly) the use of nonrenewable resources.  If I consume a lot of perishable, rival goods like corn or trees, people in the future could simply grow more.  This sort of consumption is something people in 100 years would, in most cases view neutrally.

Most interestingly, there is the consumption of non-rival goods.  Will people in 100 years be worse off because I read too many books, or watched too many movies, saw too many plays, listened to too many concerts?  Not at all.  In fact, to the extent that such consumption encourages the creation and preservation of such non-rival, not-very-perishable goods, it actually benefits future generations! Again of course there are exceptions, many people in the 20th century would have been better off if Lenin et al hadn’t bought Karl Marx’s books, and it is hard to imagine much current music being of any benefit to future generations.  But in general the consumption of art and writing can be of great benefit to future generations.

Back to the general theory.  Think of someone living in Athens in the golden age of Greece.  What could they do to be of most benefit to future generations?  Solow suggests that we would value their environmental protection and their investment.  Well, I certainly don’t mind that they invested; I’m sure they enjoyed operating capital-intensive olive oil businesses.  I suppose it is good that they protected their environment, though I might enjoy Greece more if they had turned more non-renewable marble into buildings and statues.  But what I, weird future-person, value most from average ancient Greeks is their consumption- the fact that there was a market for Plato’s dialogues, Aristophanes’ plays, and Herodotus’ histories.  This same applies to Renaissance patrons of the arts, classical concert-goers, the book-buying public of the Enlightenment and the modern era.

In a way, I suppose this blind spot for the incredible power of ideas, information, and other non-rival goods should be expected from Solow, whose namesake growth model sees technology as exogenous!  But given that the development of ideas and technology really does depend partly on the knowledge that people will pay to consume them, I am glad that people in the past undertook that consumption and left us with the treasure trove of ideas we have.

Written by James Bailey

September 4, 2009 at 8:59 pm

Does the idea of sustainability survive sustained inquiry?

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In Bob Solow’s 1993 “Economist’s Perspective on Sustainability“, it survives as a “necessarily vague, but useful” idea.  He notes that sustainability has been conflated with other moral ideas about environmental protection, but that sustainability itself does not necessarily mean preserving species or wilderness.  Instead it is about “distributional equity” between the present and the future.  This means that we should be comparing general standards of living- how much are we better off because we make future generations worse off- rather than only the status of the environment.

To Solow, this means that future generations will value our investments as well as our preservation of resources, so they would not necessarily want us to preserve resources at the expense of investment; but he does say that both investment and resource preservation should be preferable to consumption.

His best idea is to clarify all this by looking at the sustainability of past generations.  We are talking about doing well by future generations, but to past people we are one of those future generations!  Are we happy with how sustainable our predecessors’ economy was?

Well, they killed off the dodos and mammoths, used up most of the oil in the continental US, and left a lot of toxic chemicals lying around; so in the purely environmental sense, they did not do very well.  But in a broader sense, they did fine by us; in fact, I think we got the much better end of the deal.  We have a vastly higher standard of living than people did 50 or 100 or 10000 years ago; inter-temporal distributional equity would actually entail more past environmental degradation insofar as it allowed our very poor ancestors a higher standard of living.

This same logic implies that we should worry less about developing countries like China raising their living standards though industrial pollution, since future Chinese people (as well as current and future moralizing Westerners) will have better living standards even after resource degradation and pollution has been accounted for.

Certainly, I am happy that past generations built Philadelphia rather than leaving forests, built Paris rather than leaving plains, built Boston rather than leaving us swamps to enjoy.  I would like to have mammoths around to look at in zoos (or hunt?!!), but I am sure that prehistoric hunter-gatherers got a lot more enjoyment from not starving than I would from having a better zoo.

Perhaps there is some inherent moral value to not polluting, or to preserving wilderness, or (most plausibly) to not causing species to go extinct.  But this is a different thing than sustainability for the sake of future generations of humans; it is instead about valuing other species, or the environment generally, inherently and for their own sake.  Which is another discussion entirely!

Through all this I am on board with Solow.  In my next post, I will show how Solow gets things a bit wrong through oversimplification.

Written by James Bailey

September 4, 2009 at 7:34 pm

Democracy is Cool once more

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After the American Revolution, democracy was the new thing that all the cool Americans were doing.

In the 1960’s and 70’s, a large youth cohort and a constitutional amendment lowering the voting age brought down the age of the median political participant.  Political policies and styles became more in tune with the youngest generation which is the eternal font of cool.

Now the youth cohort is small but technology is multiplying their influence.

Two recent examples deal with symbolic bills rather than policy but demonstrate this so perfectly.

First, the Oklahoma State Legislature decided to choose the Official Rock Song of Oklahoma using an internet poll.  In an upset over many classics and many songs that had more to do with the state, the winner was the Flaming Lips’ “Do You Realize” (which can be found on the video page of the band’s website).

Second, the creators of the gaming webcomic Penny Arcade just got commended by the Washington State Legislature.

This officially ushers in the age of hip techno-democracy!

Written by James Bailey

March 7, 2009 at 7:55 pm

Epistemological Modesty and the Stimulus

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David Brooks’ NYT column introduces a useful framework for evaluating the stimulus and economic policy.  In the short term this a welcome exhortation for less grandiose plans.  In the medium term, the stimulus and bailout packages will provide an excellent test for the potential of government planning.  I hope people will look back two and five years from now at our current economic policies using the lenses provided in the column.  An except:

President Obama has concentrated enormous power on a few aides in the West Wing of the White House. These aides are unrolling a rapid string of plans: to create three million jobs, to redesign the health care system, to save the auto industry, to revive the housing industry, to reinvent the energy sector, to revitalize the banks, to reform the schools — and to do it all while cutting the deficit in half.

If ever this kind of domestic revolution were possible, this is the time and these are the people to do it. The crisis demands a large response. The people around Obama are smart and sober. Their plans are bold but seem supple and chastened by a realistic sensibility.

Yet they set off my Burkean alarm bells. I fear that in trying to do everything at once, they will do nothing well. I fear that we have a group of people who haven’t even learned to use their new phone system trying to redesign half the U.S. economy.

Written by James Bailey

February 25, 2009 at 5:53 am

The Future: Like the Past, but cooler

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Making predictions about the future is a notoriously tricky business.  It is often done by extrapolating from past trends.  As often as this method fails us, its hard to imagine a better heuristic than the belief that the future will be like the past, only more so.

Extrapolating current trends in combinations that should be obvious yield conclusions that are, to me at least, surprising and inspiring. Here are two trends:

Recent scientific history, say of the last 60 years, has been filled with major discoveries that appear to have vast explanatory power and with widespread technological applications.

The average expectancy of an American is 78 and continues to increase.

If the past is any guide to the future, me and my generation are likely to witness discoveries of the magnitude of DNA, events like men landing on the moon, new ubiquitous technologies like computers and cell phones.

On top of the science, new developments in the social sciences, in society, and in world politics will be ever interesting if not so distinctly progressive.

All manner of surprises await us, so many before we even consider the real breaks from the past, the “unknown unknowns” that open up entirely new fields of endeavor and ways of thinking.

Here’s to the future!

Written by James Bailey

July 18, 2008 at 5:18 am

Economics Subfield Interests

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Like all areas of inquiry in the modern era, economics has been broken off into progressively narrower subfields, so that as the sum of human knowledge expands people can still feel as if they have mastered their “field”, however narrowly it has been defined.

With a healthy supply of youthful arrogance and naiveté, I hope I can reach a much broader understanding.

So what is worth studying in economics?

The practical answer is: econometrics. Econometricians are able to use their knowledge of economics, math and statistics to draw inferences from mounds of raw data. In the era of the internet, data is becoming ubiquitous, so its analysis is at a premium; econometricians can go into government, academia, or even the private sector.

The ambitious (power-craving) answer is: Applied macroeconomics. This is the most sure stepping stone to obtaining powerful, unelected government positions in the Federal Reserve, Treasury, or Council of Economic Advisers.

The ambitious (important mystery-solving) answer is: Development, health care, or macroeconomics. These fields each study complicated systems which effect just about everyone in the world. They are each fields into which many highly intelligent and driven people have poured their lives into studying; these people have discovered some simple rules, but the fields remain full of problems that have not been fully solved. These are the fields where the biggest payoff to society at large would accrue if they were to be “figured out”.

Our approach to each of these, especially health care, is likely to undergo sweeping changes in the near future. There is broad agreement of the need to reform health care policy, but very little agreement or understanding of what these reforms could look like. It is extremely possible that the desire for change, the pent-up political will, will be spent making a bad system worse. I hope that when the health care revolution comes, I will be at the policy-wonk barricades fighting for brighter, better-utility future.

Written by James Bailey

June 9, 2008 at 5:27 pm