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Thoughts from the Frontline

Assume a Perfect World

April 13, 2013

An engineer, a chemist, and an economist are stranded on a deserted island. They are starving, when miraculously they find a box filled with canned food. What to do? They consider the problem, bringing their collective lifetimes of study and discipline to the task.

Being the practical, straightforward sort, the engineer suggests that they simply find a rock and hit the cans until they break open. “No, no!” cry the chemist and economist, “we would spill too much food and the birds would get it!”

After a bit of thought, the chemist recommends that they start a fire and heat the cans. The pressure in the cans will force them open and the food will conveniently already be heated. But the engineer and economist object, pointing out correctly that the cans would likely explode and splatter the food all over the beach.

The economist, after carefully studying the cans and reading the labels, starts scrawling a series of equations in the sand, which eventually cover the entire beach. After much pondering, he excitedly announces, “I’ve got it! I’ve got it!” as he points to the final equation. They ask him to explain, with their visions of finally getting a meal causing them to regard the economist with a new sense of respect. 

The economist clears his throat and begins, “First, assume a can opener …”

I am not sure how old that joke is, but it dates to about the time when economists discovered mathematics and models, which is to say, about the time when economists developed physics envy and decided they would like to be regarded as scientists rather than philosophers. This week we continue to look at the data and models developed by economists, with a view to understanding both their usefulness and their limitations. The specific data we will examine this week is inspired by the release of the President’s FY 2014 US budget proposal this week. While it and the House and Senate budget proposals may appear to be widely divergent, there are some underlying and quite disturbing similarities among them.

Specifically, all three proposals assume away the real world. It does not matter which version you prefer; they all lack the basic precautions and hedges that those of us involved with preparing family and business budgets make sure to include in our own forecasts. While whole books could be written about the underlying assumptions in these latest budget proposals, we will examine (hopefully briefly) just a few of the more glaringly problematic ones.

Assume a Perfect World

Like our castaways with their abundance of canned food but no can opener, a US budget forecaster is faced with the problem of predicting the fiscal future of a very large, very real economic system, but without a crystal ball. And as we saw last week, economists are not particularly good at telling us what happened in the year that just passed, let alone in the year to…

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Paul Steinmetz

April 16, 2013, 10:13 p.m.

It’s funny how projections on growth, GDP,  debt cycles are so overly optimistic. Now within a few days of the budget projections seeming so rosy Economists at the University of Massachusetts have released a report that attacks the findings of economists Carmen Reinhart and Kenneth Rogoff the writers of “This time it’s Different” Thereby hiding from the public the truth in 600 years of case study’s and over 60 different crises.”  The fact is that when you compare the results head to head, (Reinhart and Rogoff) looks very off,” Krugman said on his New York Times blog of the new research published by the University of Massachusetts. “Something went very wrong, and pointing to your other results isn’t a good defense.” Well Krugman should know!

April 15, 2013, 5:58 p.m.

At a time long long ago when things made partial sense and you could more or less rely on financial statements I worked with an actuary who had formulae that would cover an entire chalk board.  At the end of all of that he would turn to me and ask.    Now we have all of that,
“What to you want the answer to be?”.

What he was saying that if one of those input numbers were changed the whole conclusion and result would be changed.  It is even more so with economists and yet we base our entire forecasting and tax collection on something we know without a doubt is wrong.

April 15, 2013, 5:27 a.m.

@Mauldni re: growth during Nixon Era - I always thought that had something to do with the rape of Indonesia ?

@John Seater, the difference between your average driver and an economist would seem to be that your average driver, when asked to predict the exact location of the car 3 months hence, would look at you in disbelief… rather than preen himself and make a pompous but totally wrong statement, usually to a few significant figures beyond the accuracy of his input data.

April 14, 2013, 1:30 p.m.

I like your use of FRED data.  However, I believe the article quoted real GDP (actual “GDPC1”) while the chart used potential GDP (“GDPPOT”).  The years 1997-2000 were a string of years with greater than 4% annual change in real GDP growth.  This does not, of course, invalidate your point that the forecasts are biased.

April 14, 2013, 7:28 a.m.

Mr. Mauldin,

The US and the world are going down the toilet increasingly faster.  You seem to have a better, and certainly are more articulate, at pointing this out in a manner that is understandable by many.  Is this where you want your obligation to end?  It seems that we are far beyond the Endgame when one starts including into the federal debt-related inevitable occurrences and those other obligations which are most probably to be picked up at the federal level (increased interest rates, student loans, pension obligations, state shortfalls, etc… ).  And the US will undoubtedly be drug into some other unofficial war.

You say that you have faith that our politicians are ultimately going to do the “right thing”.  How can you still believe this as one listens to the bombastic presentation of the 2013 budget by obama and the muted response by the Republicans? Indeed, factions of the Republican Party recoil in horror when any talks of reductions in the percent of spending growth for defense and infrastructure projects are mentioned.  Who is there to carry that torch?  I don’t see anyone. 

Further, the climate of no/low information voters and a complicit media guarantees that nothing is going to be done to stem the tide of spending and regulations that strangle any possible growth.  It seems that so many economists are not interested in doing anything at all about this except profit from it by writing a new book or newsletter available to accredited investors, etc…  (btw – I think that any wealth derived from this practice or otherwise will eventually be seized above a “government allowed savings amount”). Even if the will to change was there, I think we are very close or past the point of changing the inevitable.  I used to think that there was the possibility of a ground-breaking revolution (e.g., the industrial revolution, the technology revolution, etc…) but I am quite sure that anything of the sort would be immediately seized by our politicians and strangled of life. 

Perhaps I am dumb and naïve, but it would seem to me that you and the super smart people that you hang around with would be working to get information out to increase the understanding of the no/low information voter – current media be damned. 

I have never be as pessimistic about the future of the US and the world as I am now – but wait until tomorrow and that will change – for the worse.  I wish there was some country that I could go off to with my family and friends that used to be like the US once was.  Maybe we should buy land in inhospitable places and colonize underground.  Something is going to break and I fear that it is going to break really badly.  Is anyone looking to change what appears to be inevitable or are we all just observers now?  Or do I need to increase my dosage of Prozac and valium?

David Oldham

April 14, 2013, 12:50 a.m.

John, I have enjoyed your recent articles exposing the futility of relying upon the work of economists. My own life’s economics qualification is self taught with basic home economics and a variety of small business developments, very basic stuff which employs pure common sense.

I tend to liken professional economists to career polticians, what they do is to get us into the most monumental mess but I blame the politicians short termism and self interest for creating an impossible job for the economists.

Your interview with Grant Williams seemed to be cut short. I found this very frustrating. I have followed Grant’s articles and the bulls eye service so was interested to see him in the flesh. I was not dissapointed, he promotes a very high degree of confidence. Please re-issue a link for the full recording if you are able to sort the problem. I would like to hear the entire recording.

As for the gold miners call I feel a long entry is premature. I would rather await a half decent technical signal to buy on the way up as apposed to attempt to catch the current falling knife.

Good luck John on your new home which sounds kinda fantastique for your purposes. I just wonder whether a 64yr old, with 7 kids having access to the bank of daddy, should be taking a mortgage. My experience is the demands of my children (having their own children) in this difficult world we reside are a very real unforeseen pressure upon the limited fruits of my life’s work. Hope all goes well for you with no unforeseen bomb shells. Hope your home economics have projections for possible contingencies.

April 13, 2013, 6:50 a.m.

Um, a physicist spends a summer on the Farm.
When ask to summarize her experience she says,
“Assume a spherical cow of uniform density…”
Your fabled economist had capiched; “And the Project was
without form. And darkness was upon the staff…”

Caryl Baron

April 13, 2013, 4:28 a.m.

Isn’t it possible that government spending was less than median household income before 2000 because we weren’t in any wars? Or are we still not counting those trillions?

And isn’t it possible that increased revenues might just help the situation? Our current tax code is designed to encourage wealthy and corporate cheating and avoidance, at enormous cost to our society.

I’m sick of hearing about entitlements, most of which add nothing to the deficit. It’s a 1% myth. Any future imbalance is easily offput by increasing costs to those with higher incomes. After all, these are programs designed to help those who need help. It’s really upsetting to see su much scrooginess in out society.
I’m also tired of the complete lack of initiative for alternative energy, and the absence of increasing energy costs in economic forecasts. When will this nation get real?

David Upp

April 13, 2013, 3:11 a.m.

Totally unbelievable that after months of facing our huge *debt* crisis, President Obama proposes a
*three-point-eight-Trillion-dollar* budget! This is thoughtlessness. Back in First Grade, two-take-away-three yields an “exit and stop”. 30% Entitlements were good enough for JFK, we need to cut them down (yes, in half) as quickly as possible. Since 2010 we’ve been spending “negative income” (budgets beyond all of our income, household by household, as detailed above by John). Basic arithmetic can guide us to a real-world budget.    -David Upp

William Korstad

April 13, 2013, 3 a.m.

John, I suggest to have your team put together a federal budget based on reasonable assumptions based on the differences sited above.  Even throw in a recession or two.  Now that would make for interesting reading!  Better yet, create an interactive application where we can all enter our own assumptions.—Bill

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