6 ms·

Economists first underestimated inflation, then consumers and the labor market

34 points by TaurenHunter 3y ago

stuaxo 3y ago
Yes, the mainstream models of economics do not correctly represent those and offer the wrong solutions, I have little hope of the charade ending any time soon.
- nomel 3y ago
  I know little of money. What drives it? I would assume that an accurate model would be beneficial for everyone? Or, is it that there are accurate models, but they're used by private institutions? Who pushes/uses these mainstream models?
  - crazygringo 3y ago
    It's actually quite astonishing how hard it is to get answers to these questions. I spent some time last year trying to understand money "once and for all", and it's astonishing how complicated it is, and how even the general educated public has no inkling whatsoever. (E.g. just basic understandings such as that money is created by banks not governments, and that banks create money out of thin air and not out of deposits.) I gave up after a while because the information is just so non-accessible. My biggest takeaway is just how a modern educated person is relatively easily able to have a working knowledge of domestic politics and foreign affairs, of basic literary and artistic culture, of history and geography, and of basic math and sciences -- but trying to gain a basic working knowledge of how money actually works -- as opposed to the bunch of shockingly oversimplified and misleading models you learn in Econ 101 -- is shockingly difficult. Which is not a great state of affairs in democracies, when things like inflation and interest rates can wind up affecting elections. It's relatively easy to judge whether you think Biden is doing the right or wrong thing on Ukraine or Israel; it's virtually impossible to judge what you think the central bank is doing under him. Ultimately the best starting resource I found was "Where Does Money Come From?": https://www.goodreads.com/book/show/19241338-where-does-money-come-from https://www.goodreads.com/book/show/19241338-where-does-mone...
    - firecall 3y ago
      It seems to be a common misconception that money is created out of thin air! If it was just created as needed in an uncontrolled fashion, then we’d end up with up consequences such as runaway inflation. https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air https://cepr.org/voxeu/columns/banks-do-not-create-money-out...
      - crazygringo 3y ago
        That's a very weird counter argument: > This column explains that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. When a bank makes a loan of $10K to a person, it's not "transformed" out of anything. Saying it's "transformed out of the borrower's ability to repay" is sheer nonsense. It makes as much sense as saying it's transformed out of fairy dust. It's not transformed out of anything. It's simply created, the way any IOU is. But nobody is claiming the creation is money is unconstrained, on the other hand. Just because it's generated out of nothing doesn't mean there aren't rules around it if you want to keep your bank in business.
      - RetroTechie 3y ago
        That is conflating 2 aspects: Money is created out of thin air. But in a controlled fashion (as in: regulated, central bank / government policy).
    - landemva 3y ago
      > what you think the central bank is doing under him. The central bank of USA "Federal Reserve" is not under the President. It is a private bank cartel which answers to Congress, which steadfastly refuses to do a real audit of this contractor. Federal Reserve has no government employees.
  - deleted 3y ago
    [deleted]
  - hitpointdrew 3y ago
    > I would assume that an accurate model would be beneficial for everyone? Beneficial to everyone except for those that print it, which is why is intentionally and needlessly over complex and laden with deceptive jargon.
- paulddraper 3y ago
  It is difficult to get a man to understand something, when his salary depends on his not understanding it. - Upton Sinclair
- huitzitziltzin 3y ago
  I am not a macroeconomist but I’ll defend them. Macro is hard. It’s really, really, really hard. It’s _really easy_ to write down a moderately realistic macro model which you have absolutely no hope of ever solving numerically (an “extremely realistic model” would be even worse). That’s not going to do anyone any good. It would be a totally empty exercise: “here’s something which I bet would be great but we’ll never know!”. It’s impossible to confront such models with data, which is absolutely the bread and butter of any macro paper. It is still hard but somewhat less hard to write down a simplified model which you can solve and which can give you insights. By necessity you lose some realism in this exercise. There is no way around that. It’s not a lack of cleverness or imagination. It is possible to confront such models with data to make the whole exercise empirical, which credible macro is and must be. By necessity these insights might be useful or not depending on how much of the useful machinery of realism you dropped from your model to make it solvable. If you personally want something “better”, you are welcome to try. I encourage you! If you show that your method works - that it involves plausible assumptions, can be solved, and can be made empirical - the macroeconomists of the world will beat a path to your door and gladly study your methods. The exercise not a charade. There are currently no alternatives to mainstream empirical macro bc all of the purported alternatives are (for lack of a better word) complete BS (example: MMT).
  - dataflow 3y ago
    > It’s not a lack of cleverness or imagination. I don't think that's the claim you're arguing against either. Rather, the argument seems to be that there is misplaced confidence in macroeconomic models. i.e. the people displeased by them would rather hear "I don't know" much more often from the modelers than they currently do.
    - huitzitziltzin 3y ago
      I don’t know if you’re going to hear “I don’t know” in a lot of macro seminars - everyone there knows the same material as everyone else and what the limits are. But I think any macro scholar would tell you quite honestly where they think the limits of their models are. It’s like any other scientific endeavor: “this paper on Topic X is our best understanding right now but it’s subject to revisions.” Similar example from outside macro: there are not many finance professors who will make large bets on the prices of specific assets on the basis of their models, including models in which they have high confidence as being on the current research frontier. That certainly doesn’t mean they are idiots or that they aren’t trying or whatever. It just means it’s really hard. Imagine a physical science, but make it harder bc you generally cannot do controlled macro experiments (sometimes there are natural experiments if you are very lucky) you can certainly never repeat them AND when your experimental subjects discover that you are trying to predict or understand their behavior they might change it on purpose bc they don’t want to be understood or predicted! In several ways it’s a lot harder than physics! Murray gell-man said something to that effect once. Something like “imagine how hard physics would be if electrons could think.”
- lithos 3y ago
  The secret of "soft" sciences, is to have so many people writing papers and making statements that at least one of them will be right no matter what happens.
paulddraper 3y ago
Never underestimate the ability to mis-estimate when politics are involved.
cvccvroomvroom 3y ago
It's common knowledge that economists espouse convenient, deceptive falsehoods by lawyering statistics such as inflation and unemployment rate. The rate of price increases in essential items and real estate has been insane. And there are millions of people without employment who aren't counted.
- Supermancho 3y ago
  > there are millions of people without employment who aren't counted. Looks about right: https://www.statista.com/statistics/269959/employment-in-the-united-states/ https://www.statista.com/statistics/269959/employment-in-the... Could someone post up the population against the unemployed? I'd believe the 1/3 of today, is probably a bit high, but not crazy.
prng2021 3y ago
https://archive.ph/Wna6Q https://archive.ph/Wna6Q
rhelz 3y ago
I can kinda understand the bad call on inflation; after all, inflation hasn't been a problem during the professional lives of virtually all policymakers today. But how could anybody could have thought that the economy would tank, once we all got out from the Covid shutdown, plus the fact that the Biden stimulus bills just pumped $3 trillion into areas of the economy (like creating Solar Farms or building Fabs) which would immediately start creating jobs?
- pcthrowaway 3y ago
  > But how could anybody could have thought that the economy would tank, once we all got out from the Covid shutdown, The economy tanked because they started raising interest rates.. That was certainly an expected consequence to some degree What was less expected was for inflation to remain high at the same time the economy was tanking. It's already understood that people spend less in low-inflation environments
  - rhelz 3y ago
    The economy didn't tank because they started raising interest rates, because the economy didn't tank.
  - rybosworld 3y ago
    "The economy tanked because they started raising interest rates." I don't agree. The economy is underperforming compared to pre-covid and it's due to inflation. Raising interest rates is an attempt to stop the inflation. And while higher rates don't seem to actually be helping, they aren't the cause of the slowing economy.
  - pauldenton 3y ago
    Sounds like Stagflation We will really be back in the Carter years when they pull out the Misery index. Inflation + Unemployment and show us those numbers every week
kristianp 3y ago
Most Americans with mortgages are still paying very low rates, given they are fixed for the term of the loan. High interest rates will take a long time to affect what people are paying for their mortgages. In Australia the rates are variable or if fixed only for a couple of years, so interest rates bite consumers harder. Yet the construction industry is still flat out.
- codegrappler 3y ago
  In fact I would expect renovation to accelerate because of high rates. Anecdotally many of our friends are much more interested in renovating the home they’re in rather than give up a low mortgage rate in exchange for a higher one on a more expensive home.

34 points by TaurenHunter 3y ago

Yes, the mainstream models of economics do not correctly represent those and offer the wrong solutions, I have little hope of the charade ending any time soon.

nomel 3y ago
I know little of money. What drives it? I would assume that an accurate model would be beneficial for everyone? Or, is it that there are accurate models, but they're used by private institutions? Who pushes/uses these mainstream models?
- crazygringo 3y ago
  It's actually quite astonishing how hard it is to get answers to these questions. I spent some time last year trying to understand money "once and for all", and it's astonishing how complicated it is, and how even the general educated public has no inkling whatsoever. (E.g. just basic understandings such as that money is created by banks not governments, and that banks create money out of thin air and not out of deposits.) I gave up after a while because the information is just so non-accessible. My biggest takeaway is just how a modern educated person is relatively easily able to have a working knowledge of domestic politics and foreign affairs, of basic literary and artistic culture, of history and geography, and of basic math and sciences -- but trying to gain a basic working knowledge of how money actually works -- as opposed to the bunch of shockingly oversimplified and misleading models you learn in Econ 101 -- is shockingly difficult. Which is not a great state of affairs in democracies, when things like inflation and interest rates can wind up affecting elections. It's relatively easy to judge whether you think Biden is doing the right or wrong thing on Ukraine or Israel; it's virtually impossible to judge what you think the central bank is doing under him. Ultimately the best starting resource I found was "Where Does Money Come From?": https://www.goodreads.com/book/show/19241338-where-does-money-come-from https://www.goodreads.com/book/show/19241338-where-does-mone...
  - firecall 3y ago
    It seems to be a common misconception that money is created out of thin air! If it was just created as needed in an uncontrolled fashion, then we’d end up with up consequences such as runaway inflation. https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air https://cepr.org/voxeu/columns/banks-do-not-create-money-out...
    - crazygringo 3y ago
      That's a very weird counter argument: > This column explains that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. When a bank makes a loan of $10K to a person, it's not "transformed" out of anything. Saying it's "transformed out of the borrower's ability to repay" is sheer nonsense. It makes as much sense as saying it's transformed out of fairy dust. It's not transformed out of anything. It's simply created, the way any IOU is. But nobody is claiming the creation is money is unconstrained, on the other hand. Just because it's generated out of nothing doesn't mean there aren't rules around it if you want to keep your bank in business.
    - RetroTechie 3y ago
      That is conflating 2 aspects: Money is created out of thin air. But in a controlled fashion (as in: regulated, central bank / government policy).
  - landemva 3y ago
    > what you think the central bank is doing under him. The central bank of USA "Federal Reserve" is not under the President. It is a private bank cartel which answers to Congress, which steadfastly refuses to do a real audit of this contractor. Federal Reserve has no government employees.
- deleted 3y ago
  [deleted]
- hitpointdrew 3y ago
  > I would assume that an accurate model would be beneficial for everyone? Beneficial to everyone except for those that print it, which is why is intentionally and needlessly over complex and laden with deceptive jargon.
paulddraper 3y ago
It is difficult to get a man to understand something, when his salary depends on his not understanding it. - Upton Sinclair
huitzitziltzin 3y ago
I am not a macroeconomist but I’ll defend them. Macro is hard. It’s really, really, really hard. It’s _really easy_ to write down a moderately realistic macro model which you have absolutely no hope of ever solving numerically (an “extremely realistic model” would be even worse). That’s not going to do anyone any good. It would be a totally empty exercise: “here’s something which I bet would be great but we’ll never know!”. It’s impossible to confront such models with data, which is absolutely the bread and butter of any macro paper. It is still hard but somewhat less hard to write down a simplified model which you can solve and which can give you insights. By necessity you lose some realism in this exercise. There is no way around that. It’s not a lack of cleverness or imagination. It is possible to confront such models with data to make the whole exercise empirical, which credible macro is and must be. By necessity these insights might be useful or not depending on how much of the useful machinery of realism you dropped from your model to make it solvable. If you personally want something “better”, you are welcome to try. I encourage you! If you show that your method works - that it involves plausible assumptions, can be solved, and can be made empirical - the macroeconomists of the world will beat a path to your door and gladly study your methods. The exercise not a charade. There are currently no alternatives to mainstream empirical macro bc all of the purported alternatives are (for lack of a better word) complete BS (example: MMT).
- dataflow 3y ago
  > It’s not a lack of cleverness or imagination. I don't think that's the claim you're arguing against either. Rather, the argument seems to be that there is misplaced confidence in macroeconomic models. i.e. the people displeased by them would rather hear "I don't know" much more often from the modelers than they currently do.
  - huitzitziltzin 3y ago
    I don’t know if you’re going to hear “I don’t know” in a lot of macro seminars - everyone there knows the same material as everyone else and what the limits are. But I think any macro scholar would tell you quite honestly where they think the limits of their models are. It’s like any other scientific endeavor: “this paper on Topic X is our best understanding right now but it’s subject to revisions.” Similar example from outside macro: there are not many finance professors who will make large bets on the prices of specific assets on the basis of their models, including models in which they have high confidence as being on the current research frontier. That certainly doesn’t mean they are idiots or that they aren’t trying or whatever. It just means it’s really hard. Imagine a physical science, but make it harder bc you generally cannot do controlled macro experiments (sometimes there are natural experiments if you are very lucky) you can certainly never repeat them AND when your experimental subjects discover that you are trying to predict or understand their behavior they might change it on purpose bc they don’t want to be understood or predicted! In several ways it’s a lot harder than physics! Murray gell-man said something to that effect once. Something like “imagine how hard physics would be if electrons could think.”
lithos 3y ago
The secret of "soft" sciences, is to have so many people writing papers and making statements that at least one of them will be right no matter what happens.

paulddraper 3y ago

Never underestimate the ability to mis-estimate when politics are involved.

cvccvroomvroom 3y ago

It's common knowledge that economists espouse convenient, deceptive falsehoods by lawyering statistics such as inflation and unemployment rate. The rate of price increases in essential items and real estate has been insane. And there are millions of people without employment who aren't counted.

Supermancho 3y ago
> there are millions of people without employment who aren't counted. Looks about right: https://www.statista.com/statistics/269959/employment-in-the-united-states/ https://www.statista.com/statistics/269959/employment-in-the... Could someone post up the population against the unemployed? I'd believe the 1/3 of today, is probably a bit high, but not crazy.

prng2021 3y ago

https://archive.ph/Wna6Q https://archive.ph/Wna6Q

rhelz 3y ago

I can kinda understand the bad call on inflation; after all, inflation hasn't been a problem during the professional lives of virtually all policymakers today. But how could anybody could have thought that the economy would tank, once we all got out from the Covid shutdown, plus the fact that the Biden stimulus bills just pumped $3 trillion into areas of the economy (like creating Solar Farms or building Fabs) which would immediately start creating jobs?

pcthrowaway 3y ago
> But how could anybody could have thought that the economy would tank, once we all got out from the Covid shutdown, The economy tanked because they started raising interest rates.. That was certainly an expected consequence to some degree What was less expected was for inflation to remain high at the same time the economy was tanking. It's already understood that people spend less in low-inflation environments
- rhelz 3y ago
  The economy didn't tank because they started raising interest rates, because the economy didn't tank.
- rybosworld 3y ago
  "The economy tanked because they started raising interest rates." I don't agree. The economy is underperforming compared to pre-covid and it's due to inflation. Raising interest rates is an attempt to stop the inflation. And while higher rates don't seem to actually be helping, they aren't the cause of the slowing economy.
- pauldenton 3y ago
  Sounds like Stagflation We will really be back in the Carter years when they pull out the Misery index. Inflation + Unemployment and show us those numbers every week

kristianp 3y ago

Most Americans with mortgages are still paying very low rates, given they are fixed for the term of the loan. High interest rates will take a long time to affect what people are paying for their mortgages. In Australia the rates are variable or if fixed only for a couple of years, so interest rates bite consumers harder. Yet the construction industry is still flat out.

codegrappler 3y ago
In fact I would expect renovation to accelerate because of high rates. Anecdotally many of our friends are much more interested in renovating the home they’re in rather than give up a low mortgage rate in exchange for a higher one on a more expensive home.