12 ms·

Economists don’t understand much about the macroeconomy

55 points by elorant 7y ago

nabla9 7y ago
Macroeconomics is study of object with gradually changing dynamics. Economists started to understand the dynamics of post-war type growing economy and how it behaves better and better. There is gradual shift away from these conditions. * Wage share in OECD countries peaked late 70's early 80's and has started to decline. * The return from increased education is slowing. Marginal return from increasing education is smaller. * Women are now fully in workforce. * Demographic change in OECD countries when people age. The share of working-age population is in decline. Paying for the care of older people dominates the growth of public spending and requires increases in taxation. Now macroeconomists are trying to learn the dynamics of new conditions.
- SiempreViernes 7y ago
  What all this amounts to is that there is no theoretical understanding of the the social interactions that constitute the economy, only fitted relationships to the actions of aggregating entities like companies.
  - nabla9 7y ago
    That would require relatively complete "Theory of human" and also understanding the variety of human behavior. Human are also chancing their behavior. Different generations respond differently to same signal. But all this does not mean that macroeconomics is useless or that it's not getting results. They are just relatively modest.
conjectures 7y ago
Well, he's not wrong. It's a system which is slow to change, nigh on impossible to experiment with, we only have one experimental unit, and it responds to interventions. No wonder it's difficult to science it properly. 'Macroeconomics' by Williamson is my go-to example of the worst textbook I ever had to read (setting aside postmodernism). Overly certain, badly argued, with fishy math. So, a good place to go to for everything wrong with the discipline.
ptah 7y ago
Does it make sense then to limit the impact by de-globalising economic activity to a scale that can be more easily understood?
- pjc50 7y ago
  The cost of that is considerable. No more cheap smartphones means no more app economy. If you want to go even further, the only way to really de-globalise is to stop using oil ...
  - TeMPOraL 7y ago
    OTOH no more gig economy shenanigans, VC dollars destroying industries, less of a race to the bottom everywhere, less centralization, probably healthier competition... I don't have anything close to a belief yet, but the more I hang on HN and read stories from various industries, the more I'm starting to feel that maybe we took globalization a bit too far, or at least we're now learning about bad side effects. Human groups tend to be recursive hierarchies, and to this environment our intuitions about trust and behavior are adapted. Global economy does its best to cut straight through that. Many smart people must have already talked through this to death. If anyone has pointers towards reading material, I'd strongly appreciate it.
    - simonh 7y ago
      Globalisation is fundamentally about individual freedom. It's about removing the barriers between a person in the USA or Europe meeting and doing business with a person in India, China or Africa without governments getting in the way. Fewer trade barriers, fewer regulations, more freedom. When you give people freedoms like that, and there is huge advantage to be gained from it, people quickly find ways to scale it up to benefit the maximum number of people as much as possible. That's what a company is. It's a way to scale up economic activity. This dynamic has raised hundreds of millions of people out of poverty in the last few decades alone. That's a number so big and a transformation in people's lives to dramatic that it's hard to grasp mentally in a meaningful way. That didn't happen because of farmer's markets and buying local produce in Wholefoods, much as it might pain us to admit it. Does globalisation have it's down side? Yes, absolutely. It has increased pollution and accelerated the rate of consumption of resources. But what could we say to those families, those hundreds of millions of people, that could justify denying them their opportunities?
asah 7y ago
weird/crazy idea: using individual transaction data from various sources (credit cards, cash deposits, etc), would it be possible to build up a macro view from 100s of millions of people? Start small (not the US), in a geo where electronic payments dominate, and where privacy isn't as important. If the model proves valuable, build modeling tools and scale up. Counterpoint: there's a very large percentage (by value) of transactions that are invisible e.g. business partnerships, cryptocurrency, etc.
- chaosbutters 7y ago
  agent based modeling where the probability of the agents' actions is dependent on actual economic data... more realistic sim city (city skylines)
  - SiempreViernes 7y ago
    https://en.wikipedia.org/wiki/Agent-based_computational_economics https://en.wikipedia.org/wiki/Agent-based_computational_econ... I don't know that they've managed to produce the sort of general results that older economic theory.
black6 7y ago
No matter how complicated you think economics is, it's more complicated than that. Just the act of trying to understand and theorize about economics changes economics, like an observer effect.
dandare 7y ago
First: >Gates is right, in a way: Economists don’t understand much about the macroeconomy. No one does. Any responsible economist is the first to admit that. Then: > Economists’ research has contributed to fewer people living in poverty, low predictable inflation, and less risk and uncertainty. How exactly?
- orwin 7y ago
  Because macroeconomy is a large subset of economy, and wereas some subset of macroeconomy are well-understood, how those subsets interact with each other and with human/group psychology, however, is way harder to understand. But also, you can be right for the wrong reason, especially in "soft" sciences.
  - palager 7y ago
    The article presents that economic research was causal in these wins (poverty etc). There is no justification given for that in the article, it is pure dogmatic belief. Said another way, how do we know these macroeconomic improvements are not in-spite-of this research?
    - pessimizer 7y ago
      Are you calling for a debate about the nature of cause and effect, or do you have a specific observation? Do you have some evidence that completely unmanaged economies have performed similarly in those measures?
      - palager 7y ago
        As the GP states, the article accepts the claim: "Economists don’t understand much about the macroeconomy" But then says that in fact economists have e.g. contributed to fewer people living in poverty. I'm simply saying I don't accept that the research of economists has improved e.g the poverty situation without some evidence of that fact. Before the discipline of 'economist' existed human societies experienced rises and falls of poverty, inflation etc. Is that sufficient evidence for you that 'completely unmanaged' (your words, which I don't even really understand your point here -- are you claiming economists 'manage' the economy?) economies have in the past had periods of ups like ours today? The article is bordering on claiming that economists have nfi what they are doing, but the effects of their efforts have been amazing.
imtringued 7y ago
Does the opinion of economists even matter in practice even if they end up being correct? Politicians pass a lot of laws that simply do not make sense economically in the long run. Here is an example: Globalization leads to concentration of economic opportunity in certain locations. If you simply go by the book then workers simply move to where the economic opportunity is and therefore everyone is better off than before globalization. But local politicians of those locations want to avoid displacing their existing residents. Therefore they pass laws that make sense in the short term for their residents. Over the long term however they prevent the mobilization of all those future workers and the vast majority are worse off as a result of globalization.
- NeedMoreTea 7y ago
  When politicians create and force change, as a matter of dogma, and become known for carrying their books or following unproven theory from Hayek or Freedman, yes it probably matters. When those same politicians or economists point at the Chile miracle (that was a disaster), or economists become widely known as the "Berkeley Mafia", yes it probably matters. Globalisation was about externalising costs and impacts. To hell with the local consequences - we got a decade or two of deindustrialisation, with lives and regions ruined for generations. Political fashions tend to stem from economic fashions without regard for the bigger picture. Or environment, citizens and residents.
- bakuninsbart 7y ago
  Economics puts huge focus on material development, less so on health, culture or well-being. Your example is actually quite illustrating. When you do not have local politicians trying their best to keep their region relevant and populated, only those people who cannot leave for better opportunities remain. Within a city this means having ghettos, within a country it means having deep divisions. Globally it means you have a rich centre and a poor periphery. This might maximize productivity in a capitalist society, its certainly does not maximize happiness, and it exacerbates other problems like urban decay, crime, divisive politics and much more.
siempreb 7y ago
No one seems to understand! Macro or micro economy, for me it's just another pyramid game. For some reason most people are completely unable to see that and can only humdrum what they've learned at school; that 'our' economy is a boon. Well, it might be a boon for the rich, but not for us commoners/slaves. And as a side effect this economy(of waste) is destroying not only billions of lives, but also our entire planet and species.. And we are so smart that we have an opinion whether to choose between Trump or Clinton, while neither of them desire to end this idiocy. I would not be surprised if we eventually find out humanity has already multiple times wiped everything from this planet in the last billion years. And IMAO we are stupid enough to do it again and again.. It all comes down to: Greed, Vanity, etc..(you know your sins don't you?). The flesh is weak, so weak we'll probably never learn..
kthejoker2 7y ago
Scott Sumner (an economist) responded, I thought his take was spot on https://www.themoneyillusion.com/the-animal-spirits-fudge-factor/ https://www.themoneyillusion.com/the-animal-spirits-fudge-fa... Two quotes > “Macrophysics” (predicting complex physical systems such as hurricanes and earthquakes) does just as poor a job of prediction as macroeconomics. > The real problem is modeling the policymakers. We don’t know exactly how the 12 members of the FOMC will behave.
- cy6erlion 7y ago
  Just like chess. One can study openings, end-games as deep as possible, try to grasp the dynamics of positions but there is always the human element and that's very hard to study.
- AlexTWithBeard 7y ago
  We don’t know exactly how the 12 members of the FOMC will behave. Oh, if only dim policymakers behaved as economists tell them to! Wouldn't the world be a wonderful place then?
  - kthejoker2 7y ago
    Sumner agrees with your sarcasm, so not sure who you're arguing with ... What he's pointing out is there's a human-driven force to economics so it's not accurate to compare it to a (theoretically) closed system like physics.
- mikojan 7y ago
  > “Macrophysics” (predicting complex physical systems such as hurricanes and earthquakes) does just as poor a job of prediction as macroeconomics. Which is why people do not trust the weather men and neither should they trust economists. > The real problem is modeling the policymakers. We don’t know exactly how the 12 members of the FOMC will behave. This sounds hard. What about 327 million consumers? The real problem is a discipline in the social sciences which mistakes itself for hard science. It is serving today the same purpose "scientific socialism" once served in the Soviet Union: Taking power away from the people and placing it into the hands of an enlightended elite. What's called "depoliticisation" today. In which you remove spheres of public interest from the democratic decision-making process and cede them to unaccountable power. The exact thing we just haven't had enough of just yet according to this guy. Listening to informed opinions is important but economists enjoy a kind of widespread unquestioned respect that has no basis in reality at all.
d--b 7y ago
Having worked at a successful macro hedge fund for more than 10 years, I can tell that: 1. There is no point in trying to predict macro economy further than 3 months 2. It's hard to predict which way the economy will go, but it's easier to foresee that there will be volatility or not. 3. If you want to make macro bets, you'd better have quant strategies that work in the case your macro bet goes South. 4. It's important to read and understand macro economists, not as much because they know what is going on, but rather because they are influencers, who participate in risking / de-risking movements 5. The most important things to understand in macro economics is that it is very much a people's problem. If you could get in the head of every central bank people, you'd get a strong edge over the market.
- marsokod 7y ago
  I would argue that macro-economy is done with the wrong timespan. Much climate and weather forecast, there is a gap that is very hard, if not impossible to fill. Predicting the next semester is done quite alright. There are good economic models for long duration trend (50 years at least), though they are not used much because they are not very useful to invest as they do not have enough granularity. But the middle ground is just chaos.
- HSO 7y ago
  > Having worked at a successful macro hedge fund for more than 10 years Do you mind sharing which one? (Ok, stupid question) Or whether it's a "quant" or global macro fund? > There is no point in trying to predict macro economy further than 3 months I disagree. Sometimes you can identify systematic factors. I remember Bob Litterman once telling me at a conference that a lot of their "quant" success was actually due to factoring in certain central bank policies that the central banks were willing to accept a certain, let's call it, slippage for in order to achieve certain goals. That apparently worked for years. Another example that comes to mind is the Euro convergence trade. Didn't that also go on for years? Unless you mean specifically GDP. Then yeah, I agree. In fact, I remember a class in financial econometrics where the teacher drew fancy equations on the blackboard only to conclude: "But you know, in practice a simple AR-model will perform just as well. It's just so you've seen it" :D > It's important to read and understand macro economists, not as much because they know what is going on, but rather because they are influencers, who participate in risking / de-risking movements Obligatory quote here: """You might suppose that the feud could be settled by testing ri- val claims. Alas, macroeconomics rarely works this way. Macro- economists cannot run experiments as laboratory scientists can. Statistical analysis of the world is muddied by the vast number of variables, many of which are correlated with the thing whose ef- fect the economist is trying to isolate. _Macroeconomic arguments tend not to produce winners and losers: only those with more in- fluence and those with less._ Post-Keynesian ideas were never pro- ven false, unlike the Ptolemaic model of the solar system. Rather, they declined in status as mainstream Keynesianism rose.""" [1] The Economist. Free exchange: Magic or logic? page 69, Mar 16 2019. Which of course leads directly into your > The most important things to understand in macro economics is that it is very much a people's problem. If you could get in the head of every central bank people, you'd get a strong edge over the market. I've been saying this for YEARS, mostly to deaf ears. Thank you for confirming my personal biases/opinions ;) Finally someone else says it. It's why I (used to) like reading biographies, however shitty, of key people in power. Just to get a sense of their thinking or psychological makeup. Very good comment, I'll keep it.
noneeeed 7y ago
I think it was Tim Harford (possibly quoting someone else) who said "Microeconomics is everything we think we understand, macroeconomics is everything we don't". My problem with macro-economics/economists is that so many of them seem so convinced aboout their own models and beliefs, or at least the conversation is dominated by those who are. It doesn't matter which view you have, there will be promonant economists who are convinced that it is the 'one true way" and the alternatives are bunk. Government policy then seems to swing depending on who is being listented to at the time. I wouldn't mind macro-economists so much if they would just admit that a lot of thier views on the economy are largely faith, backed by cherry-picked data.
samirillian 7y ago
> [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus. I think we have a an obvious reason for the lack of consensus here, which is cognitive/regulatory capture. You'll always find someone willing to muddy the waters for a little cash and some sort of career advancement. Economics is the ideological science _par excellence_.
soVeryTired 7y ago
Economic as a discipline has a painfully narrow focus on mathematical modelling. Anything that doesn't fit into the models tends go get ignored: one of the reasons few economists spotted the global financial crisis is that their models didn't allow for such a crisis. It would be silly to expect a biologist to write down an all-encompassing equation describing a cat, solve it, and thereby understand the animal. Why should that approach work on something infinitely more complex, like a whole economy?
Merrill 7y ago
I think that part of the problem is that macroeconomists think of the economy as a single system. Therefore, if you change a financial parameter, such as short interest rates, it will change supply and demand in the business economy. It seems that the financial economy, which is the trading of various financial instruments between a lot of different parties, and the business economy, which produces, distributes and consumes goods and services, are two loosely coupled systems. Monetary volumes of financial trading are one or two orders of magnitude greater than the monetary volumes of good and services. Further, the financial economy is even more globalized than the business economy. The financial economy is showing signs of instability as regulators attempt to use it to control the business economy. Direct control of the business economy by fiscal measures, subsidies, tariffs and regulations would be more effective and cause less distortions than continued use of financial measures.
Unsimplified 7y ago
I've always thought that macroeconomics should be studied with a realistic perspective, and that does somewhat seem to be the direction economists are going with agent based modeling. Though perhaps too much on the math side and not enough fundamental thinking. This is how I've always done my analysis. Start with 1000 people. Group them into 500 households along an age curve. Give each person a money account and assets along a wealth curve. Set up 100 businesses and the government. Study the dynamic system and gradually increase the realism/complexity with central banking, credit cards, etc. This is the hard unsimplified way but you will uncover the absolute truth of our system.

55 points by elorant 7y ago

Macroeconomics is study of object with gradually changing dynamics. Economists started to understand the dynamics of post-war type growing economy and how it behaves better and better. There is gradual shift away from these conditions. * Wage share in OECD countries peaked late 70's early 80's and has started to decline. * The return from increased education is slowing. Marginal return from increasing education is smaller. * Women are now fully in workforce. * Demographic change in OECD countries when people age. The share of working-age population is in decline. Paying for the care of older people dominates the growth of public spending and requires increases in taxation. Now macroeconomists are trying to learn the dynamics of new conditions.

SiempreViernes 7y ago
What all this amounts to is that there is no theoretical understanding of the the social interactions that constitute the economy, only fitted relationships to the actions of aggregating entities like companies.
- nabla9 7y ago
  That would require relatively complete "Theory of human" and also understanding the variety of human behavior. Human are also chancing their behavior. Different generations respond differently to same signal. But all this does not mean that macroeconomics is useless or that it's not getting results. They are just relatively modest.

conjectures 7y ago

Well, he's not wrong. It's a system which is slow to change, nigh on impossible to experiment with, we only have one experimental unit, and it responds to interventions. No wonder it's difficult to science it properly. 'Macroeconomics' by Williamson is my go-to example of the worst textbook I ever had to read (setting aside postmodernism). Overly certain, badly argued, with fishy math. So, a good place to go to for everything wrong with the discipline.

ptah 7y ago

Does it make sense then to limit the impact by de-globalising economic activity to a scale that can be more easily understood?

pjc50 7y ago
The cost of that is considerable. No more cheap smartphones means no more app economy. If you want to go even further, the only way to really de-globalise is to stop using oil ...
- TeMPOraL 7y ago
  OTOH no more gig economy shenanigans, VC dollars destroying industries, less of a race to the bottom everywhere, less centralization, probably healthier competition... I don't have anything close to a belief yet, but the more I hang on HN and read stories from various industries, the more I'm starting to feel that maybe we took globalization a bit too far, or at least we're now learning about bad side effects. Human groups tend to be recursive hierarchies, and to this environment our intuitions about trust and behavior are adapted. Global economy does its best to cut straight through that. Many smart people must have already talked through this to death. If anyone has pointers towards reading material, I'd strongly appreciate it.
  - simonh 7y ago
    Globalisation is fundamentally about individual freedom. It's about removing the barriers between a person in the USA or Europe meeting and doing business with a person in India, China or Africa without governments getting in the way. Fewer trade barriers, fewer regulations, more freedom. When you give people freedoms like that, and there is huge advantage to be gained from it, people quickly find ways to scale it up to benefit the maximum number of people as much as possible. That's what a company is. It's a way to scale up economic activity. This dynamic has raised hundreds of millions of people out of poverty in the last few decades alone. That's a number so big and a transformation in people's lives to dramatic that it's hard to grasp mentally in a meaningful way. That didn't happen because of farmer's markets and buying local produce in Wholefoods, much as it might pain us to admit it. Does globalisation have it's down side? Yes, absolutely. It has increased pollution and accelerated the rate of consumption of resources. But what could we say to those families, those hundreds of millions of people, that could justify denying them their opportunities?

asah 7y ago

weird/crazy idea: using individual transaction data from various sources (credit cards, cash deposits, etc), would it be possible to build up a macro view from 100s of millions of people? Start small (not the US), in a geo where electronic payments dominate, and where privacy isn't as important. If the model proves valuable, build modeling tools and scale up. Counterpoint: there's a very large percentage (by value) of transactions that are invisible e.g. business partnerships, cryptocurrency, etc.

chaosbutters 7y ago
agent based modeling where the probability of the agents' actions is dependent on actual economic data... more realistic sim city (city skylines)
- SiempreViernes 7y ago
  https://en.wikipedia.org/wiki/Agent-based_computational_economics https://en.wikipedia.org/wiki/Agent-based_computational_econ... I don't know that they've managed to produce the sort of general results that older economic theory.

black6 7y ago

No matter how complicated you think economics is, it's more complicated than that. Just the act of trying to understand and theorize about economics changes economics, like an observer effect.

dandare 7y ago

First: >Gates is right, in a way: Economists don’t understand much about the macroeconomy. No one does. Any responsible economist is the first to admit that. Then: > Economists’ research has contributed to fewer people living in poverty, low predictable inflation, and less risk and uncertainty. How exactly?

orwin 7y ago
Because macroeconomy is a large subset of economy, and wereas some subset of macroeconomy are well-understood, how those subsets interact with each other and with human/group psychology, however, is way harder to understand. But also, you can be right for the wrong reason, especially in "soft" sciences.
- palager 7y ago
  The article presents that economic research was causal in these wins (poverty etc). There is no justification given for that in the article, it is pure dogmatic belief. Said another way, how do we know these macroeconomic improvements are not in-spite-of this research?
  - pessimizer 7y ago
    Are you calling for a debate about the nature of cause and effect, or do you have a specific observation? Do you have some evidence that completely unmanaged economies have performed similarly in those measures?
    - palager 7y ago
      As the GP states, the article accepts the claim: "Economists don’t understand much about the macroeconomy" But then says that in fact economists have e.g. contributed to fewer people living in poverty. I'm simply saying I don't accept that the research of economists has improved e.g the poverty situation without some evidence of that fact. Before the discipline of 'economist' existed human societies experienced rises and falls of poverty, inflation etc. Is that sufficient evidence for you that 'completely unmanaged' (your words, which I don't even really understand your point here -- are you claiming economists 'manage' the economy?) economies have in the past had periods of ups like ours today? The article is bordering on claiming that economists have nfi what they are doing, but the effects of their efforts have been amazing.

imtringued 7y ago

Does the opinion of economists even matter in practice even if they end up being correct? Politicians pass a lot of laws that simply do not make sense economically in the long run. Here is an example: Globalization leads to concentration of economic opportunity in certain locations. If you simply go by the book then workers simply move to where the economic opportunity is and therefore everyone is better off than before globalization. But local politicians of those locations want to avoid displacing their existing residents. Therefore they pass laws that make sense in the short term for their residents. Over the long term however they prevent the mobilization of all those future workers and the vast majority are worse off as a result of globalization.

NeedMoreTea 7y ago
When politicians create and force change, as a matter of dogma, and become known for carrying their books or following unproven theory from Hayek or Freedman, yes it probably matters. When those same politicians or economists point at the Chile miracle (that was a disaster), or economists become widely known as the "Berkeley Mafia", yes it probably matters. Globalisation was about externalising costs and impacts. To hell with the local consequences - we got a decade or two of deindustrialisation, with lives and regions ruined for generations. Political fashions tend to stem from economic fashions without regard for the bigger picture. Or environment, citizens and residents.
bakuninsbart 7y ago
Economics puts huge focus on material development, less so on health, culture or well-being. Your example is actually quite illustrating. When you do not have local politicians trying their best to keep their region relevant and populated, only those people who cannot leave for better opportunities remain. Within a city this means having ghettos, within a country it means having deep divisions. Globally it means you have a rich centre and a poor periphery. This might maximize productivity in a capitalist society, its certainly does not maximize happiness, and it exacerbates other problems like urban decay, crime, divisive politics and much more.

siempreb 7y ago

No one seems to understand! Macro or micro economy, for me it's just another pyramid game. For some reason most people are completely unable to see that and can only humdrum what they've learned at school; that 'our' economy is a boon. Well, it might be a boon for the rich, but not for us commoners/slaves. And as a side effect this economy(of waste) is destroying not only billions of lives, but also our entire planet and species.. And we are so smart that we have an opinion whether to choose between Trump or Clinton, while neither of them desire to end this idiocy. I would not be surprised if we eventually find out humanity has already multiple times wiped everything from this planet in the last billion years. And IMAO we are stupid enough to do it again and again.. It all comes down to: Greed, Vanity, etc..(you know your sins don't you?). The flesh is weak, so weak we'll probably never learn..

kthejoker2 7y ago

Scott Sumner (an economist) responded, I thought his take was spot on https://www.themoneyillusion.com/the-animal-spirits-fudge-factor/ https://www.themoneyillusion.com/the-animal-spirits-fudge-fa... Two quotes > “Macrophysics” (predicting complex physical systems such as hurricanes and earthquakes) does just as poor a job of prediction as macroeconomics. > The real problem is modeling the policymakers. We don’t know exactly how the 12 members of the FOMC will behave.

cy6erlion 7y ago
Just like chess. One can study openings, end-games as deep as possible, try to grasp the dynamics of positions but there is always the human element and that's very hard to study.
AlexTWithBeard 7y ago
We don’t know exactly how the 12 members of the FOMC will behave. Oh, if only dim policymakers behaved as economists tell them to! Wouldn't the world be a wonderful place then?
- kthejoker2 7y ago
  Sumner agrees with your sarcasm, so not sure who you're arguing with ... What he's pointing out is there's a human-driven force to economics so it's not accurate to compare it to a (theoretically) closed system like physics.
mikojan 7y ago
> “Macrophysics” (predicting complex physical systems such as hurricanes and earthquakes) does just as poor a job of prediction as macroeconomics. Which is why people do not trust the weather men and neither should they trust economists. > The real problem is modeling the policymakers. We don’t know exactly how the 12 members of the FOMC will behave. This sounds hard. What about 327 million consumers? The real problem is a discipline in the social sciences which mistakes itself for hard science. It is serving today the same purpose "scientific socialism" once served in the Soviet Union: Taking power away from the people and placing it into the hands of an enlightended elite. What's called "depoliticisation" today. In which you remove spheres of public interest from the democratic decision-making process and cede them to unaccountable power. The exact thing we just haven't had enough of just yet according to this guy. Listening to informed opinions is important but economists enjoy a kind of widespread unquestioned respect that has no basis in reality at all.

d--b 7y ago

Having worked at a successful macro hedge fund for more than 10 years, I can tell that: 1. There is no point in trying to predict macro economy further than 3 months 2. It's hard to predict which way the economy will go, but it's easier to foresee that there will be volatility or not. 3. If you want to make macro bets, you'd better have quant strategies that work in the case your macro bet goes South. 4. It's important to read and understand macro economists, not as much because they know what is going on, but rather because they are influencers, who participate in risking / de-risking movements 5. The most important things to understand in macro economics is that it is very much a people's problem. If you could get in the head of every central bank people, you'd get a strong edge over the market.

marsokod 7y ago
I would argue that macro-economy is done with the wrong timespan. Much climate and weather forecast, there is a gap that is very hard, if not impossible to fill. Predicting the next semester is done quite alright. There are good economic models for long duration trend (50 years at least), though they are not used much because they are not very useful to invest as they do not have enough granularity. But the middle ground is just chaos.
HSO 7y ago
> Having worked at a successful macro hedge fund for more than 10 years Do you mind sharing which one? (Ok, stupid question) Or whether it's a "quant" or global macro fund? > There is no point in trying to predict macro economy further than 3 months I disagree. Sometimes you can identify systematic factors. I remember Bob Litterman once telling me at a conference that a lot of their "quant" success was actually due to factoring in certain central bank policies that the central banks were willing to accept a certain, let's call it, slippage for in order to achieve certain goals. That apparently worked for years. Another example that comes to mind is the Euro convergence trade. Didn't that also go on for years? Unless you mean specifically GDP. Then yeah, I agree. In fact, I remember a class in financial econometrics where the teacher drew fancy equations on the blackboard only to conclude: "But you know, in practice a simple AR-model will perform just as well. It's just so you've seen it" :D > It's important to read and understand macro economists, not as much because they know what is going on, but rather because they are influencers, who participate in risking / de-risking movements Obligatory quote here: """You might suppose that the feud could be settled by testing ri- val claims. Alas, macroeconomics rarely works this way. Macro- economists cannot run experiments as laboratory scientists can. Statistical analysis of the world is muddied by the vast number of variables, many of which are correlated with the thing whose ef- fect the economist is trying to isolate. _Macroeconomic arguments tend not to produce winners and losers: only those with more in- fluence and those with less._ Post-Keynesian ideas were never pro- ven false, unlike the Ptolemaic model of the solar system. Rather, they declined in status as mainstream Keynesianism rose.""" [1] The Economist. Free exchange: Magic or logic? page 69, Mar 16 2019. Which of course leads directly into your > The most important things to understand in macro economics is that it is very much a people's problem. If you could get in the head of every central bank people, you'd get a strong edge over the market. I've been saying this for YEARS, mostly to deaf ears. Thank you for confirming my personal biases/opinions ;) Finally someone else says it. It's why I (used to) like reading biographies, however shitty, of key people in power. Just to get a sense of their thinking or psychological makeup. Very good comment, I'll keep it.

noneeeed 7y ago

I think it was Tim Harford (possibly quoting someone else) who said "Microeconomics is everything we think we understand, macroeconomics is everything we don't". My problem with macro-economics/economists is that so many of them seem so convinced aboout their own models and beliefs, or at least the conversation is dominated by those who are. It doesn't matter which view you have, there will be promonant economists who are convinced that it is the 'one true way" and the alternatives are bunk. Government policy then seems to swing depending on who is being listented to at the time. I wouldn't mind macro-economists so much if they would just admit that a lot of thier views on the economy are largely faith, backed by cherry-picked data.

samirillian 7y ago

> [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus. I think we have a an obvious reason for the lack of consensus here, which is cognitive/regulatory capture. You'll always find someone willing to muddy the waters for a little cash and some sort of career advancement. Economics is the ideological science _par excellence_.

soVeryTired 7y ago

Economic as a discipline has a painfully narrow focus on mathematical modelling. Anything that doesn't fit into the models tends go get ignored: one of the reasons few economists spotted the global financial crisis is that their models didn't allow for such a crisis. It would be silly to expect a biologist to write down an all-encompassing equation describing a cat, solve it, and thereby understand the animal. Why should that approach work on something infinitely more complex, like a whole economy?

Merrill 7y ago

I think that part of the problem is that macroeconomists think of the economy as a single system. Therefore, if you change a financial parameter, such as short interest rates, it will change supply and demand in the business economy. It seems that the financial economy, which is the trading of various financial instruments between a lot of different parties, and the business economy, which produces, distributes and consumes goods and services, are two loosely coupled systems. Monetary volumes of financial trading are one or two orders of magnitude greater than the monetary volumes of good and services. Further, the financial economy is even more globalized than the business economy. The financial economy is showing signs of instability as regulators attempt to use it to control the business economy. Direct control of the business economy by fiscal measures, subsidies, tariffs and regulations would be more effective and cause less distortions than continued use of financial measures.

Unsimplified 7y ago

I've always thought that macroeconomics should be studied with a realistic perspective, and that does somewhat seem to be the direction economists are going with agent based modeling. Though perhaps too much on the math side and not enough fundamental thinking. This is how I've always done my analysis. Start with 1000 people. Group them into 500 households along an age curve. Give each person a money account and assets along a wealth curve. Set up 100 businesses and the government. Study the dynamic system and gradually increase the realism/complexity with central banking, credit cards, etc. This is the hard unsimplified way but you will uncover the absolute truth of our system.