Succinct Summation of Week’s Events 11.15.19
Succinct Summations for the week ending November 15th, 2019
Positives:
1. Markets make new all time highs — the most bullish thing they can do!
2. CPI rose 0.4% m/o/m, above the expected increase of 0.3
3. Home refinance apps rose 13.0% w/o/w, above the previous increase of 2.0%.
4. Home mortgage apps rose 5.0% w/o/w, above the previous decrease of 3.0%.
5. Retail sales rose 0.3% m/o/m, above the expected increase of 0.2%.
6. PPI-FD rose 0.4% m/o/m, above the expected increase of 0.3%.
Negatives:
1. Trade uncertainty continues; damning testimony weakens POTUS further.
2. Industrial production fell 0.8% m/o/m, below the expected decrease of 0.4%.
3. Jobless claims rose by 14k w/o/w from 211k to 225k.
4. Business inventories fell 0.2%, below the expected increase of 0.1%.
5. Same store sales rose 5.0% w/o/w, decelerating from the previous increase of 5.5%.
6. Import prices fell 0.5% m/o/m and export prices fell 0.1% m/o/m, both below expectations.
11-17-19 Big Pic: The Economist Who Wants to Ditch Math - Marker
The Economist Who Wants to Ditch Math
Nobel laureate Robert Shiller argues
that gossip, half-baked philosophy, and fake news drive economics — not only
numbers. His peers aren’t exactly thrilled.
Steve LeVine --
11/5/19
Robert Shiller attends the 2019
Forbes 30 Under 30 Summit on October 29, 2019 in Detroit, Michigan. Photo:
Taylor Hill/Getty
Two decades ago, before the dotcom bust, economist Robert
Shiller told peers that the stock market was vastly overpriced. A few years
later, before the financial crash, he warned that housing was fated for a
massive correction, too. Now the rabble-rousing, Nobel laureate professor has a
new message for them:
Put
down your calculators. It’s time to listen.
And
what will his fellow economists hear when they do? An epidemic of chatter, says
Shiller — stories told and retold at home, on social media, at workplaces, and
just about everywhere else people gather. The skinny may be about new money
pouring into Bitcoin, or the Chinese trade deal really about to happen this
time. Before long, collective mobs of people will be moving their money around,
sending the Dow to new highs.
In
short, after four decades of a religious-like fixation with mathematics,
mainstream economists may learn that the gossip, whispers, half-baked
philosophy and “news tips” passed human to human since cave days drive
economics. True, fake, it hasn’t mattered — such talk has spread and commanded
surprising influence over economies. Shiller regards this as no small matter.
In a new book, he argues for a profession-wide, decades-long study of viral
stories as a path to much-needed improvement in utterly flawed economic
forecasting.
“The standard statistical analyses are no longer valid.
They assume that we know the probabilities with which everything will occur. In
reality, we are almost never in that position.”
To
say that the field has been cool to Shiller’s latest big idea is to insult the
walk-in freezer. For almost three years, Shiller has laid out his thinking in
speeches and papers, including to some 900 of the world’s leading economists at the
2017 meeting of the American Economic Association (of which he was president at
the time). At such speeches, there has been polite applause. But outside,
normally voluble economists have treated “narrative economics,” as Shiller
calls his theory, as though it doesn’t exist, and most of those I contacted for
this story either did not respond or said they didn’t know enough to comment.
A
well-connected “Chicago school” economist told me this would happen. “I think
it will be hard for you to get anyone on the record against this for several
reasons,” this person said in an email. “(i) We are indeed storytelling
creatures and there’s wisdom in what Shiller says. (ii) He’s a nice guy and why
pick a fight? (iii) Any skeptical quote would sound foolish and narrow-minded.
‘Economist X at U of Y says, “I’m ignoring narrative economics because it’s not
in my toolkit.’” I see Economist X’s point, but the internet would make
mincemeat of him.” For those very reasons, this economist also
declined to be named. “Stories are important,” he said, “but what makes them
economics?”
Shiller
has an aw-shucks laugh, a slight hesitation, a shock of big hair, and, at 73, a
still-boyish grin. All together, the picture is disarming — and misleading.
Shiller, who teaches at Yale, is not lacking in Type A assurance and ends up
talking a lot because he is a reflexive contrarian — he himself says he agrees
with almost no argument he hears. But he may also be the world’s politest
practitioner of Nobel-level economics, serving up his sometimes-cutting quibbles
with such quiet, smiling courtliness that it’s hard to be offended.
When
I told him that the anonymous peer quoted above had questioned whether he was
describing real economics, he became Robert Shiller testy. “I don’t care what
you call it. Is it right?” he said. He paused, repeated himself, and if he had
stomped his foot, he would have surprised no one. Then he said, more softly,
“It is still relevant to study scarcity and the allocation of resources. But
you can’t separate out a ‘pure’ economics. It’s not like we should do patriotic
economics.”
Coming
from Shiller, Narrative Economics, his highly readable, compelling book,
is a broadside against the Chicago school, the mainstream, rigorously
math-based philosophy that has dominated capitalism since the 1980s. Pioneered
by Milton Friedman, the Chicago school tells us not to
second-guess the market — humanity, disciples argue, is made up of rational,
self-interested individuals whose systematic actions fully explain the larger
economy. Governments should stand back and let the science of economics get on
with its thing.
Ronald Reagan with his top economic
advisers on November 16, 1980 at the Los Angeles Federal Building. The advisory
group had put the finishing touches on a new economic policy for the
then-President-elect’s campaign. Photo: Bettmann/Getty
The
Chicago school's crowning moment arrived with the election of Ronald Reagan and
Margaret Thatcher, moving the unregulated, unfettered market to the center of
economic policy. But just as the Chicago acolytes were taking Washington and
London by storm, a few voices were beginning to sow doubts. Psychologists like
Danny Kahneman and Amos Tversky, and economists like Shiller himself, were
pointing out that emotion seemed to influence economic decisions in ways that
very few people would call mathematically grounded. A few years ago, the Nobel
committee signaled its agreement, awarding the field’s biggest prize to a
string of “behavioralists,” including Shiller, in 2013. A tense peace settled
in between the Chicago and behavioral schools.
Now,
Shiller is upsetting the ceasefire with his new thesis. “We are developing a
new side of economics,” says Dennis Snower, president of the Kiel Institute for
the World Economy in Germany, who collaborates with Shiller. “The standard
statistical analyses are no longer valid. They assume that we know the
probabilities with which everything will occur. In reality, we are almost never
in that position.”
There
is an opening for such a challenge in a field beset by numbingly bad
forecasting. Among the misfires: the unprojected 2008-’09 financial crash, and
the fatefully under-appreciated ferment of people “left behind” by
globalization, in part responsible for Brexit and the election of Donald Trump.
Economics’ miserable record goes back to the beginning of modern forecasting:
Of 469 recessions around the world during the last three decades, the
International Monetary Fund foresaw just four by spring of the prior
year, Bloomberg reported. Private
sector economists did no better: From 1992 through 2014, they projected just
five of 153 recessions. In an op-ed at
the New York Times in September, Shiller argued that the
problem is fundamental. The leading economic indicators on which economists
rely, such as interest rates and GDP growth, have been better at telling us
where we have been than where we are going.
If
the Chicago school is so bad at forecasting, how can it possibly be trusted to
know how best to structure an economy? So it is that, though rational market
advocates may not fully realize it, the times have made them exceedingly
vulnerable. “I think of the current decade as comparable to the 1930s and the
1970s in the sense that a dominant approach to economic policy has come to a
crashing end,” says Binyamin Appelbaum, author of The Economists’ Hour. “In the 1930s, it was the end of
laissez faire; in the 1970s, the end of Keynesianism; in the 2010s, the end of
blind faith in markets.”
Since Copernicus five centuries ago, human advancement
has been all about replicable facts. The tech you use, the food you eat, the
vehicle you drive, your furnishings and clothes — much of the civilization you
know — are trackable to the scientific revolution he set in motion by placing
the Earth in orbit around the Sun. We want to quantify everything, the faster the
better.
But
are we excessively wed to data and numbers? A growing number of experts in
diverse fields — from mountaineers to investors and economists — say we are:
Our math mania has eroded our sense of intuition — Shiller says we are missing
time-worn narrative clues to what’s really going on, while other thinkers say
our primal “mental maps” have atrophied.
In
the French alpine village of Chamonix, below Mont Blanc, I recently attended
the Summit of Minds, a conference organized by former senior executives of the
World Economic Forum, the annual gathering of elites on the other side of the
Alps in Davos. Blaise Agresti, a local climbing guide, stood up at a breakfast
devoted to what a moderator called “navigating an uncertain world when the old
borders no longer exist.” He told the story of a man, a few weeks earlier, who,
carrying a small GPS device, trekked some 9,000 feet up Mont Blanc. Just before
reaching a shelter where climbers spend the night on the way to the summit, the
man, traveling alone, veered onto a little-used fork and up a gradually
steepening and narrowing ridge. There, he fell almost 1,000 feet to his death.
“We love plans, algorithms, scenario planning. But you
need full situational awareness. You need to learn cognitive diversity.”
How
it was that the man managed to take the wrong turn weighs on Agresti, a retired
Army officer who formerly ran Chamonix’s mountain rescue office. Every year,
more than 20,000 people use the same path, Agresti said, and if the man was
paying attention, there was no way to miss the shelter. He simply did not look
around. Instead, Agresti suspects, his attention was “only on his GPS,” and it
somehow was wrong, or he misread it. “If you are a mountain guide and you use
only technology, you will die,” Agresti told me. “You don’t see the crevasse.
You can’t adapt to reality.”
Agresti
runs a local firm that, in addition to guiding climbers, promotes high-end
retreats above Chamonix. He invites senior corporate executives to be separated
from their smartphones and forced to think about their surroundings at altitude
— “to rebuild their natural compass” at a time of constantly changing
conditions, Agresti said. “Data is a way to map the world,” he said. “But it’s
perhaps not the right data, or the right map.”
He
told the story of the Norwegian explorer Fridtjof Nansen and a four-year
attempt in the 1890s to be first to the North Pole. At one point, Nansen left
his crew behind and pushed ahead with a single companion, a team of dogs, a
sextant, a theodolite, and two watches, the latter critical to calculating
longitude. Soon after, both watches broke, leaving the men lost in an unmapped
and to them all-but featureless landscape. It took two years, and they never reached
the pole, but they made it out. “Nansen moved on ice floes with nothing,”
Agresti said. “He was able to locate his position himself. We’ve lost a lot of
these abilities.”
One
after another, bankers, investment advisers, and economists responded in unanimity
about a world fast becoming unrecognizable to those relying on the usual
technologies to make sense of it all. They spoke of a “paradigm shift,” “a
movement,” and a “revolution” occurring in response to this disorientation: An
open math rebellion.
“People
can’t get their minds around the fact that we are on an ice floe,” said David
Bowers, an investment adviser with U.K.-based Absolute Strategy. “We love
plans, algorithms, scenario planning. But you need full situational awareness.
You need to learn cognitive diversity.”
Shiller
told me when we spoke later, “There are some economists who think that the
economics profession should be a mathematical discipline. To me economics and
other social sciences are part of a big picture. If we are trying to stay in
the mathematical world, we may become irrelevant.”
Robert Shiller’s fascination with stories goes back to
his undergraduate years at the University of Michigan, where, at 19, he
read Only Yesterday, an oral history of the Great Depression by
journalist Frederick Lewis Allen. The book relates everyday stories of people
living through the period prior to the Depression who, in Shiller’s view,
provide much insight into why it happened. “But economists never took Allen’s
book seriously,” he said, “and the idea of narrative contagion never entered
their mathematical models of the economy.”
That
nagged at Shiller, who notes that, prior to the Depression, no economist
forecast what was about to happen. But the informal story mill was a central
actor at the time and after. In the 1930s, the United States plunged into a
frugality binge, influenced by a narrative that, even if you had the money, it
was almost immoral to spend it on nearly anything beyond bare necessities. As a
result, the Depression was deepened and lengthened, Shiller says. But once the
war was over, a new storyline took over — that of Americans going on expensive
vacations and spending, spending, spending. The country now went on a buying
spree, which put an engine behind the post-war boom.
In
January 2018, Shiller explained his thesis at Davos. Sitting next to him,
Raghuram Rajan, a professor at the University of Chicago but not a
“Chicago school” disciple, said that all economic models begin with a story and
that economists then use data in an attempt to stand them up. Yet, he said,
“when economists hear the word ‘stories,’ they wrinkle their nose
and say, ‘This is below me.’”
Speaking
next, Hua Jingfang, an economist at the China Development Research Foundation
in Shanghai, challenged one of the most broadly accepted narratives of our time
— that of an unprecedented Chinese economic miracle. Rising economic
superpowers typically call themselves unique, Hua said — Germany in the 19th
century, Japan in the early 20th century, and southeast Asia after WWII. All
achieved 10%, year-on-year GDP growth, and all did so according to a formula —
copying the products, tech, and methods of contemporaneous powers.
That
does not mean the Chinese narrative is hollow. The current U.S.-China tension
is a clash of locally viral narratives. President Trump’s storyline — perhaps
his only major policy accepted by both political parties — is that the United
States will no longer be a sucker to China; Xi Jinping’s — equally embraced at
home — is that China is never again going to be prostrate and subordinate to
the West, as it was after the Opium Wars of the 19th century. It is difficult
to see either leader backing down from his story, which helps to explain the
foreboding of the best experts on both sides that the conflict.
Trump
is an epidemic all his own, says Shiller — “a 50-year epidemic.” “He is a very
good observer of human emotions and seeing what works.” Why don’t Trump’s fans
mind his tenuous relationship with the truth? In his book, Shiller cites
a 2018 study in Science showing
that false stories are tweeted six times more often than true ones. This is not
because people prefer falsehoods, but instead that they have “the urge to
titillate and surprise others,” he writes.
Afew economists did speak with me, and when
they did, one question was whether Shiller’s idea is all that original. Joel
Mokyr, a professor at Northwestern, said Shiller is correct about the impact of
stories, but that current models already take into account some of his ideas,
such as the concepts of self-fulfilling expectations, panic, and crises of
expectations. “What he calls ‘narratives’ other people call ‘expectations’ or
‘beliefs,’” Mokyr said. “The word ‘narrative’ puts old wine in new bottles. We
have always known about certain beliefs about the economy, and that people
operate on those beliefs. That is hardly a revolutionary insight.”
Likewise,
there is a question of the order of causality: Does an event create a narrative,
or the other way around? Again, Mokyr: “In the 1920s, the narrative was laissez
faire. Then comes the Great Depression and you have a classic case where events
affect beliefs: ‘We need administrators to regulate. The economy is too big to
leave to the markets.’ Catastrophic events will change narratives.”
Mokyr
says the challenge is not showing that stories matter, but finding out what
makes for a viral narrative — why do some ideas take off in contagions, and
others don’t?
No
one knows the answer with certainty, but Shiller has his ideas. “You have a
natural curiosity and want to expand your mental map,” he says. “You are
seeking community, self-esteem, history.” In addition, we make stories viral
simply because it feels good: Hearing or telling a dramatic story increases
levels of oxytocin, sometimes called the “love hormone.”
But
the field is nervous because none of this is proven as yet scientifically, and
no one knows how to even begin getting there. “Humans think in terms of
narratives. Economists do not have any way to incorporate those narratives and
their spread into our models. That makes us rather inept at trying to
understand a bunch of important things,” said Brad DeLong, a professor at Cal
Berkeley.
One bit of promising news is that a number of other
social sciences have found ways to marry their research to math. In a milestone 1993 book,
sociologists Bryan Jones at the University of Texas and Frank Baumgartner at
the University of North Carolina borrow from evolution and ecology to propose
that, when big ideas break through and become widely influential, they arrive
in a punctuated spurt, all of a sudden, like the mutation of a gene. Rather
than “story,” Jones and Baumgartner use the word “framing” to describe what’s
going on. They conclude that “things move in fits and starts,” said Amber
Boydstun, a professor at the University of California at Davis.
Taking
his own stab at the challenge, Shiller suggests using medicine as a model. In
1927, two Scottish scientists — William Kermack and Anderson McKendrick
— proposed a model for
the spread of disease. They asserted that, for an epidemic to begin, the rate
that people catch a disease must exceed the rate people recover. If it doesn’t,
an epidemic cannot take off. That was simple enough, and with it, Kermack and
McKendrick revolutionized the study of contagion.
Plotting
the eruption of viral stories on the internet, Shiller found that they follow
the same Kermack-McKendrick pattern. “It’s like being an epidemiologist but in
the world of ideas,” he said.
It’s
a start, says Shiller. The field needs to push forward, even if it takes
decades. “If narratives are driving things, I just don’t think that’s what we
should do as a profession — ignore it — because we don’t have precise ways of
researching it,” he says. “I think we can’t forget the human element in
narratives.”
Shiller
knows that with his Nobel on the mantle, he has some latitude, when otherwise
he might be dismissed as “fluffy or flaky.” He is not dissuaded by the
reception thus far. Far from it, he thinks he is onto something new — really
onto something. Eventually his peers will recognize that, too. “Scientific
revolutions are caused by the opening of different sources of information,” he
says. “I don’t want to be grandiose, but it’s in the air.”
Making you smarter about the world
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WRITTEN BY
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I am Editor at Large at Medium with
interests in ferreting out the whys for the turbulence all around us. Ex-Axios,
ex-Quartz, ex-WSJ, ex-NYT, ex-FT.
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