No clue

I have not yet read Philip Tetlock's Superforecasting: The Art and Science of Prediction but the buzz suggests a great read so I have pre-ordered from Amazon. In today's WSJ, Jason Zweig offers amazing praise:

Three-quarters of all U.S. stock mutual funds have failed to beat the market over the past decade. Last year, 98% of economists expected interest rates to rise; they fell instead. Most energy analysts didn’t foresee oil’s collapse from $145 a barrel in 2008 to $38 this summer — or its 15% rebound since.

A new book suggests that amateurs might well be less-hapless forecasters than the experts — so long as they go about it the right way.

I think Philip Tetlock’s “Superforecasting: The Art and Science of Prediction,” co-written with the journalist Dan Gardner, is the most important book on decision making since Daniel Kahneman’s “Thinking, Fast and Slow.”

Humans are understandably eager to identify narratives (in their own lives, in market swings, in the universe, to name a few).  To be sure, most people cheer whenever there is progress by scientists working the "Standard Model" of physics.

It's a little strange. Some forecasting ability is indispensable (it is generally safe to cross the street on a green light) but skepticism is also essential.  Witness Zweig and Tetlock. Hard-to-find wisdom and perspective are essential. What else? Let us not-so-fast "go boldly where no man has gone before." Tetlock and Zweig seemingly say that we usually have no clue where it is that we are going.

Three poles, not two

We owe our prosperity to non-zero sum behavior and the institutions and cultures that encourage it. We get NZSB in markets functioning under the rule of law. (Don Boudreaux points us to James Pethokoukis who points us to Deirdre McCloskey for some explanations.) With Pope Francis here for a few days and political campaigns everywhere heating up, this is all worth recalling.

Binary distinctions get us into trouble. Many critics seemingly (unwittingly?) equate markets with crony capitalism. But try a three-way distinction: markets under the rule of law vs crony capitalism vs collectivism. The third has at long last been discredited but the critics are not able to distinguish between the first two. They see just one type of capitalism and many don't like what they see. That's a serious error.

Is it a tax? Is it a mandate? The Supreme Court says it's whatever the ruling party wants it to be. Not exactly the rule of law.

I am reminded of all this in reading Yuval Noah Harari's excellent Sapiens, A Brief History of Humankind. The author is very smart and an engagingly clear writer. He covers a lot, including history, biology, anthropology and economics -- and much more. He excels at discussions of how we have learned to tell ourselves stories, e.g. "imagined orders" -- all the isms -- to create the grounds for large-group cooperation.

Some of Harari's best chapters link credit, trust and economic growth. He gets it about economic freedom and prosperity. Strangely the book is also riddled with shots at markets. Harari sees ill-gotten gains all around. It's as though crony capitalism were the only kind. And he wants more supervision to fix things.  But supervision by which clan of wise men and wise women? Would not that mean more crony capitalism and a move in the wrong direction?

In one paragraph (page 328), he writes, "But in its extreme form, the belief in the free market is as naive as belief in Santa Claus. There simply is no such thing  as a market free of political bias." And "When kings fail to do their jobs and regulate markets properly, it leads to loss of trust, dwindling credit and economic depression."  I have no idea how he squares that circle. Nevertheless, it's a great book

Imagination needed

Milton Friedman famously argued for immigration -- on economic as well as liberty grounds. "Humanitarian" sounds good too but the essence involves giving people economic opportunity as well as greater political freedom. Friedman did warn, however, that his suggestion is complicated by welfare state policies that can add to the attraction of the destination countries. Receiving country backlash would increase,

But it is also true that large-scale immigration and the welfare state are both here to stay. What can be done? Massive vetting efforts are required.  Marginal Revolution cites a "markets in everything" private vetting service solution.

Expensive? Yes, but so are the alternatives. "Trillions" could be left on the sidewalk. Terror attacks are also expensive and so is homeland security. This may be one of the most important conversations of our day. I would put it ahead of climate change because what we see on Europe's borders right now is, I believe, just the start. Holman Jenkins sees the European status quo as just another Greek-debt approach, e.g.,  "Extend and Pretend."

It's not pretty that the shrillest (and least imaginative) view from the U.S. (somehow build a wall and have Mexico pay for it) is the one getting the most attention.

Big history and big fears

I once (very briefly) thought that the likes of Julian Simon, Bjorn Lomborg and Matt Ridley had delivered knock-out blows to the neo-Malthusians. But that could never be.

Nevertheless, I greatly enjoyed Ronald Bailey's The End of Doom. It is well researched and nicely written. Baily, for example, gives no quarter to the anti-GMOers in his Chapter 5 "The Attack of the Killer Tomatoes."

On climate change, Bailey writes that he had changed his mind and that the balance of research he has seen persuades him that man-made global warming poses a significant problem. The chapter is wide-ranging and (as far as I can tell) well balanced. Long-run forecasts that involve climate as well as economics bring on a range of intellectual challenges that the author manages to introduce us to in just 68 pages. Is there a warming hiatus? How do we (will we) know? What are the costs and benefits of "doing something"? Is there a related severe weather uptick?  How can governments that subsidize waste in farming and water use be expected to make wise climate change policies? Solar energy? Nuclear?

Bailey seems to like the view of the Information Technology Innovation Fund view which he cites on page 234, "The paramount goal of climate change policy should be to make the unsubsidized cost of clean energy cheaper than fossil fuels ..." But I am not sure how policies in this field can remain entirely unsubsidized. At least the research could be subsidized. But will that be sealed off from politics? How?

I bring all this up because today's NY Times includes an essay by Timothy Snyder "The Next Genocide" which is apparently from his new book Black Earth: The Holocaust as History and Warning (which I have not yet read). First, let me say that Snyder's Bloodlands: Europe Between Hitler and Stalin is invaluable as we continue to try and make sense of 20th-century European history. But in today's essay Snyder recounts how an unhinged Adolf Hitler managed to link German nationalism and memories of food shortages to extreme neo-Malthusianism to crackpot euthenasia -- to bring on a world war and a holocaust. The author fears that the "Ecological panic, central to Hitler, could happen again."

Yes, the worst can always happen. But we are in the era of Deirdre McCloskey's Great Fact, the post-Enlightenment-post-1700 unheard of rise in human well-being. Unlike post-WW I Germans, many fewer people now alive harbor memories or fears of hunger or famine. Bailey reminds us that we are in the age of Norman Borlaug and that we can feed the peak population that is not far off. 

Party like it's 1976

It's perhaps pointless to comment on Los Angeles' transportation planning policies. For the last 50 years, they have been "anti-car" and otherwise mostly brain dead.  Even the NY Times' breathless coverage ("A Los Angeles Plan to Reshape the Streetscape Sets Off Fears of Gridlock") includes some head-scratching over the latest plan to divert auto-lanes to bicycle-lanes. Going all out for transit in the hope that diminished (potholed) roads would shift auto users to transit has been a nothing but an expensive failure. So double-down.


LA is not Amsterdam. We are less flat, much bigger, often much hotter and we own many more autos. Trading an auto commute for a bike ride will be on the smallest of scales.


In 1976 (!), then-Governor Jerry Brown (the more things change ....) and his Secretary of Transportation had a similar brainstorm and took a lane from the Santa Monica Freeway for exclusive carpool use. The increased gridlock and outrage were hard and fast. The blunder was quickly apparent and the project was reversed in days. Since then, carpool lanes have been added (at great cost) rather than subtracted from existing lanes. But LA Mayor Garcetti the Council are now groping their way back to 1976.

Light touch

If government is a necessary evil, then let's have small government. By all means. But what about foreign policy? George W. Bush's Big Stick and Barack Obama's efforts to actually earn his Nobel Peace Prize have each foundered. The refugee problem now being experienced in Europe is easily traced to the chaos in the middle east and North Africa. There has not been a big picture (a la George Kennan) assessment of what can be done.

But an intriguing option is discussed by Professor Henry Nau who writes about "How Restraint "Leads to War" in the current Commentary. This is how he concludes (but read the whole thing):

In summary, pursue democracy, but primarily where it counts the most: on the borders of existing free countries. Be willing to use force to make sure the adversary takes negotiations seriously, but also be willing to compromise, because military power is a means and not an end. And advocate democracy, but a democracy of choice and varying traditions that preserves national sovereignty and nurtures global civil society, not centralized international bureaucracies. Above all, recognize that wars result when America is too ambitious and when America is too restrained.

Are the people we elect even capable of exercising a light touch? I do not know. But I wish they would think carefully about Henry Nau's argument. We have seen that large numbers of people die when we err on either side.

Shout it from the rooftops

I am late to the party and had not read William MacAskill's Doing Good Better.  But having just heard him on this week's Econtalk, I am convinced that his message is important. If you enjoy it as much as I did, you may want to Facebook, Twitter, etc. about it.

Mood swings

Referring the recent stock market volatility, the New Yorker's James Surowiecki writes that, "The stock market is not the economy ..." but that "doesn't mean that stock-market crises can't become contagious ..."

There are, of course, many moving parts. These include the expectations of large numbers of investors (in stock markets and beyond in the "real" economy); expectations can turn on a dime and we have no models that helps us with this.

Market data come at us all the time from many sources. We can all observe pretty much the same things but processing and interpretations are all over the place and personal.

When the Great Recession hit it was fashionable to scoff at the idea that markets get prices right. But that's a straw man. The efficient markets idea is actually that prices are always wrong but are always being corrected; they simply reflect the latest available information -- but "latest" changes by the nanosecond. Look at asset price fluctuations. Latest information includes the latest investor mood swings. The notion of mood swings tells us much more than "animal spirits". 

It is not ironic to say that the efficient markets theory has passed the market test; consider the popularity of index funds.