September 3, 2017

Mistaking Beauty For Truth

A report from the New York Post. “Median home prices across the nation have been increasing with gusto, though perhaps not at levels as staggering as San Jose’s median price tag of $1,183,400. A good many of the nation’s metropolitan locales have experienced record appreciation. Coupled with inventory that is 9 percent lower than it was in 2016 and income that has not kept up with prices, the natural post-recession question arises. One decade after the biggest housing collapse in America’s history led to a global recession, could we be facing another crisis?”

“‘When you talk about a bubble, you think of people being really exhilarated and excited and prices going way up. We don’t see that now,’ says Annie Cion Gruenberger, who has been a New York City broker with Warburg Reality for 28 years. ‘We have a very positive market, but a targeted market of smart buyers.’”

The La Crosse Tribune in Wisconsin. “Not every 11-year-old flips houses for profit. But then again not every 11-year-old has a business mogul grandfather backing her up. Madison Bue of West Salem has been renovating a four-bedroom, two-bath house on La Crosse’s South Side this summer. Grandpa Cliff LeCleir, owner of Central States Warehouse, purchased the property for Madison, who will put any of the profit she makes from flipping the house into a college savings account.”

“The idea to flip a house came during one of her visit to ‘Papa and Nana’s’ house as a way to save for college and embrace her love of shows such as ‘House Hunters’ and other reality programs about people who flip old or run-down houses for profit. ‘I love those shows so much,’ she said. They looked at more than a dozen homes, Madison said. But the 13th home was the charm. ‘I was like ‘bam!’ she said. ‘We gotta get it. It just worked.’”

From CNBC. “As central bankers gather at the annual Jackson Hole symposium, analysts think the death of a major economic concept could dominate discussions. Known as Phillips curve, an economic concept developed by New Zealand economist William Phillips, it shows that inflation and unemployment have a stable and inverse relationship. However, in the recent months with central banks using artificial ways to pump money into the economy, this inverse relationship is seen to be dying.”

“A number of analysts have warned that this could be risky for the global economy and discussions around the death of the Phillips curve could dominate the Jackson Hole symposium. ‘The inverse relationship between unemployment and inflation is dead. The proliferation of low-wage, irregular and insecure jobs means that wage pressures - and therefore spending power - are subdued even as unemployment falls,’ Edward Smythe, an economist at Positive Money, told CNBC via email.”

“Meanwhile, minutes from July’s ECB meeting showed a lengthy discussion of the disconnect between inflation and employment. ‘These included changes in labour markets, work contracts and wage-setting processes, benefiting from the reforms introduced in previous years, which could imply a structural break in the Phillips curve,’ according to the minutes.”

“Alberto Gallo, head of macro strategies and manager of the Algebris Macro Credit Fund, thinks central bankers should still look at removing artificial stimulus, for three reasons. ‘First, it is becoming less useful. Persistent low-interest rates can become deflationary over time, as today’s ageing populations save more, while firms focus on cost savings following a balance sheet recession. The second is QE has side-effects, including the formation of asset bubbles, which may endanger the financial system. The third is to build an adequate policy buffer to face any future risk.’”

From AEON. “Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline. Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories. The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’.”

“Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.”

“Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’. What is the basis of this collective faith, shared by universities, presidents and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?”

“In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy. Ultimately, the problem isn’t with worshipping models of the stars, but rather with uncritical worship of the language used to model them, and nowhere is this more prevalent than in economics.”

“After the Great Recession, the failure of economic science to protect our economy was once again impossible to ignore. In 2009, the Nobel Laureate Paul Krugman tried to explain it in The New York Times with a version of the mathiness diagnosis. ‘As I see it,’ he wrote, ‘the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.’ Krugman named economists’ ‘desire… to show off their mathematical prowess’ as the ‘central cause of the profession’s failure’.”

“If you’ve invested in an armillary sphere, it’s painful to admit that it doesn’t perform as advertised. When confronted with their profession’s lack of predictive accuracy, some economists find it difficult to admit the truth. Easier, instead, to double down, like the economist John H Cochrane at the University of Chicago. The problem isn’t too much mathematics, he writes in response to Krugman’s 2009 post-Great-Recession mea culpa for the field, but rather ‘that we don’t have enough math’. ”

“Economists who rationalise their discipline’s value can be convincing, especially with prestige and mathiness on their side. But there’s no reason to keep believing them. For more than a century, the public has been warned, and the way forward is clear. It’s time to stop wasting our money and recognise the high priests for what they really are: gifted social scientists who excel at producing mathematical explanations of economies, but who fail, like astrologers before them, at prophecy.”