Macro Economics: Time for a Rethink

You would expect the Economist to support economists. Presumably, several of the writers studied the subject. One day, they might want other economists to give them a job. Yet in the last couple of weeks, the magazine has gone a long way towards decrying their own profession. And I think they are right.

To be fair, one way they have been having a side-swipe at macro economics has been to praise micro economics. For years, the micro cousins did not get much of a look in, as the macro sort held court with politicians, businesses and social sciences. Models were in vogue, and macro economists thrive on models. Meanwhile, the nerdy micro sort, who ponder individual relationships between variables and look at smaller units such as industries or firms, were considered interesting to technical sorts but not likely to change the world.

There is something of a parallel with maths, which was my subject. The micro economist is the pure mathematician. I spent most of a term at college learning to prove that a path between two infinite parallel lines would at some stage have to cross any third parallel line in between the two. Well, duh. Like, er obvious man. Beautiful it may be but so what?

Meanwhile applied mathematicians got to learn how objects behaved in the physical world, and applicable ones could calculate useful probabilities. They actually used the pure maths proofs to do these things, but usually they started from them as premises and moved on.

Now, the pure mathematician is like the micro economist, while the applied one works in macro. So why are micro economists top of the pile right now?

The first part is what micro economists are doing well. They are thriving in the era of big data. Before, behaviour of individual customer groups might have been interesting, but there was no money in it. A firm might employ a macro economist to try to predict how a market would develop, but a micro economist would be an expensive luxury.

But this has changed. Now, firms using the web can understand each of their customers to a valuable extent. When I log onto a travel website, how long do I stay on each page, and which pages do I visit together? That information can be a good guide to how likely I am to buy – am I shopping to buy or just browsing? If I am a buyer, I can be steered towards information and value added products. If I am a browser, I can be sent to advertising screens. All this can happen within fractions of a second. In this way the firm can maximize its chances of a sale from buying me, while using browsing me to make itself more popular with its other paymasters, firms using their site to advertise.

In this way, internet firms large and small are growing their revenues, one customer at a time, and to do this they need micro economists, to work out which connections are relevant, build models, and create algorithms. As a customer, I find it all as rather creepy, as though people are looking over my shoulder all the time. But as someone interested in economics and value creation, I find it fascinating.

So someone coming out of economics school can build a career from their micro economic expertise now. But there is another reason macro economists are floundering. It is because they are doing such a bad job.

The most glaring example of this came with the financial crisis. Barely a single economist predicted this, beyond a few private Frazer’s who cry doom every year. Their models simply and utterly failed. And since the crisis they have been scrambling to try to explain it and to build new models, with a singular lack of success. The whole field seems broken just now. I have some sympathy for people like Christine LaGarde and Janet Yellen, who seem to be doing a great job simply by following gut principles. We should also be careful before condemning politicians like Angela Merkel. Austerity may be wrong-headed, but most of the so-called experts were advocating it until very recently.

I have a couple of bits of advice for macro economists, ideas which might help understand how they got into the mess in the first place.

First, it seems to me that many macro economists have forgotten whom their customers are, or at least become to closely allied to the biases of too small a customer group.

Who are they trying to please? First, their own profession, which has ingrained bias towards established principles even when these have been proven inadequate by events. Next, and more insidious, economists are closely related to businesses and think tanks, often allied to political ideology. So instead of the flow going from analysis to model to policy, it seems to go the other way. Some vested interest wants a policy, comes up with a supportive model and produces selective analysis to back it up.

In this way, macro economics can become like politics itself, in thrall to big money and powerful interests. I am sure there are many economists out there trying to do a good job without such bias, but perhaps they are swimming against a strong tide.

Linked advice is to focus on metrics, including challenging existing metrics. A classic one is GDP, long quoted as almost the first predictor of health of an economy.

Yet GDP is plainly a flawed measure. The Economist pondered how the softer gains from modern technology, such as speed and range of choice, could be measured, since GDP fails. In the same issue, we learn that the British economy is hamstrung by something technical about a gap between performance of British firms overseas and foreign ones in Britain, again missed in GDP.

GDP itself strikes me as a measure more for businesses than people. If you are an investor or run a business, you want the total economy to grow, since that will create more demand. But as a measure of well-being, worthy of trumpeting by politicians, surely GDP per capita is better. If GDP grows 10% but population grows 10% too, then people are no better off. Look at GDP per capita, and China does not look so smart, Europe and Japan not so hopeless.

Then, it matters where GDP comes from. Does it all go to wealthy investors? At least someone had the smart of idea of measuring median income a few years ago, since that feels a good measure for Joe public. There must be more such innovations available, if only economists were to actively look for them.

Not all GDP supports competitiveness either. We read that the cost of corruption and poor investment choices in autocratic regimes hamper competitiveness. But market economies have “bad GDP” too – look at the massive legal and healthcare costs in the US. Why has no-one tried to understand how GDP could be segmented?

Other well-used metrics seem to be past their sell-by date as well. Unemployment rate is an example. Work has changed: some choose to work less, while others are forced to work multiple part-time jobs. Metrics should be developed to understand this better, and such models could help drive good policy.

To be fair, the Economist does as good a job as anyone in challenging shibboleths. I just wish the profession it represents to follow its lead. That way society could benefit.

Come on macro economists, rise to the challenge! It is a wonderful subject, loaded with uncertainty and potential. It is a regret of mine that I did not divert from maths to economics – I have never really used my college maths. I hope a new generation can lead the dismal science to somewhere less dismal. Escaping the pockets of vested interests and seeking smart new metrics would be good places to start.   

Look back when angry

2014 was not a good year internationally. We have a new cold war on our hands, and let us not pretend that the plummeting oil price is anything but a cynical play against Russia, one that might provoke a desperate response. Across Asia, nationalism and suspicion are on the rise as China flexes its new-found power and others try to react. The Syrian civil war is left to fester by outside forces, despite the immediate tragedy and the likely longer-term consequences. The post-war European consensus is breaking down rapidly and no relief from economic gloom is in sight. Meanwhile, democratic accountability seems weaker than ever in the US, while inequality continues to grow.

At times like these, it is tempting to be angry and to despair. My last blog in 2014 was an angry one, provoked by the horrible cynicism of the congress budget agreement and other erosions of democracy.

One response that I try to follow is the opposite of the advice of John Osborne in the play that took London by storm sixty years ago, Look Back in Anger. I also try to look back, but in attempt to mollify anger. Because, in general, even if things seem terrible now, they were worse in the past. Despite all the setbacks and the apparent unstoppable march towards doom, actually humanity has made remarkable progress. Looking backwards helps to remind us of this. There are examples everywhere we look.

Start with democratic accountability in the US. I had three examples: unaccountable police, CIA torture and congress swallowed by money. Well, the police may have many weaknesses, but the laws they are trying to uphold are much stronger than they were a generation ago. We forget that African Americans did not have a vote until surprisingly recently, while workplace and school discrimination was normal practice. If the CIA erred under Bush, then let’s also remember agent Orange, and the utterly cynical participation in proxy cold wars all over the globe, and the murderous regimes propped up by CIA money and weapons. As for congress, Robin Williams was right when he suggested they all wear sponsorship logos on their jackets, but at least now there is a modicum of diversity in congress, and a lot more openness: they may not be acting in our interests, but at least now we can see that if we care to look.

Over Christmas, my family enjoyed a holiday in Peru. There were things there to get depressed about. In common with other places with Spanish then American colonial history, such as the Philippines, institutions seem weak, while exploitation is apparent, as are the less salubrious consequences of free markets, such as Casinos and brothels. Especially in the mountains, there is something in the economy that didn’t add up. With two thousand visitors paying top dollar every day, Cusco should be a rich city. But outside the centre we saw only deprivation, and a lack of basic services such as rubbish collection. I could only conclude that some mafias were creaming the incomes due to the general public.

But as I was getting angry, I chose to look back, helped in this case by our young guide to Cusco cathedral. He told us that the former Pope had visited Cusco in the 1980’s – but had never made it to the cathedral, because it was not deemed safe. Then I recalled the shining path guerillas, one of many groups fighting the corruption across Latin America at the time with their own indefensible campaigns. The Pope could travel pretty freely around South America now, indeed even President Obama could. Things are not perfect, but they used to be worse.

There were other examples of a half full glass from the trip. Clearly in Lima and in Cusco there is a generation coming through with education, ambition and opportunity. And also consider the holiday itself. I booked it through a web group called Tripmasters.com, whose service was magnificent. Twenty years ago, that would not have been possible except at crazy prices.

Looking back when angry is a reliable tonic. Over Christmas, Jeremy Thorpe died. He was a former leader of the liberal party in the UK, quite successful until his career was derailed when his undercover homosexual life was revealed. Now we have a few openly gay politicians. But what I remember most about Thorpe was the court case that gripped the nation in 1978-79, featuring some heavies reputedly hired by Thorpe to silence a former lover (and his dog). For the trial, the entire establishment rallied behind Thorpe, and a favourable verdict was dutifully delivered – though his career was ended by the disgrace anyway. That was only thirty-five years ago. We easily recall that the place was a stitch up in the era of Suez and before, but this was much more recent. Such anti-democratic behaviour by agents of the state would not be possible now, and we should celebrate that.

One smaller example comes from sport. One evening in Peru, I happened to end up watching a re-run of a Brazil-Argentina soccer match from the 1990’s. It was terrible! The pace of play and level of skill was chronically inferior to today’s games. Greats such as Simeone and Veron were playing, and were indeed slightly less bad than the others on display. When we fall into the trap of complaining about games today and deifying former players, we should look back to remember how much progress has been made.

The greatest progress has come in the social sphere. Older folks, kids and women have much better chances nowadays, and, in our watery eyed nostalgia, we should remember the dysfunction that used to be tolerated in families. Court cases against pedophile priests, and also against former icons like Savile, Harris and Hall can help us to count our modern blessings even as they appall us.

Even in more personal situations, looking back can help. Learning to sing is one of those frustrating journeys in which the goal always seems to be getting further away. The more I sing and the more I know about singing, the more I realize how limited I am as a singer. Especially at my age, such thoughts could be very dispiriting. So every so often, I get out a piece that I learned a couple of years ago. Invariably, I find I can sing the piece more easily and strongly than I ever could at the time I learned it. That way my spirits are restored. Yes, the goal is further away, but I’m heading in the right direction.

So, in my faltering quest for optimism, I resolve to look back this year whenever I get angry. Most of the time, I expect this to help temper the anger. I recommend you try the same.

As with most anger, the goal should not be to remove it completely. We have to be careful to avoid complacency, and anger can help us to do that. Dammit, we should be angry about the bahaviour of congress and the CIA and even the police. If none of us got angry, progress would be even slower. But, especially after a depressing year like 2014, we can also reward ourselves by looking back, and celebrating the progress humanity continues to make.

I wish you a healthy, thoughtful and optimistic 2015.

Democratic Accountability in the US

Three profoundly depressing stories from the USA over the last month seem to me to have a common link, that of the dilution of democratic accountability.

First we have police violence, with Ferguson and Staten Island as examples. This story has generally been labeled a race issue, and indeed it raises profound questions about race relations. But for me the accountability issue is even more significant.

On this one The Economist hit the nail on the head. The police in the USA in some districts appear to have lost sight of their primary purpose, which is to serve their community. To achieve this they have to balance the need to maintain law and order with building a trust and respect.

The scale of police overreaction in the US is disgraceful, and in Europe would be cause for major public debate and for significant change. True, guns on the street require extra vigilance, and there are districts where I would not wish to serve myself as an officer. But surely every life lost at the hands of the police should count as a serious failure?

There are simple ways to help to achieve this. Simply counting the bodies would be a great start. In business, a well-known saying is that what gets measured gets done. So how come no-one seems to keep a national count of people killed by police? The lack of a count betrays a lack of true concern.

Body cameras would be cheap and effective. Merging some forces to enable them to train and churn officers to more closely resemble their communities would help as well, and save money, as would the reconfiguration tribunals and other procedures to reduce conflicts of interests.

The second example is even more disgraceful. It refers to the senate report of CIA activities in the years immediately following 9/11. This report should make every American ashamed, and is an affront to human decency and the founding fathers.

I guess the pressures were great and mistakes can happen. What I cannot abide is the rush of people who should know better trying to challenge the report. We have heard exactly the same arguments, from similar people, as came up after the Snowden revelations.

Some say that the report is unrepresentative, did not involve direct interviews, and so on. Yet the CIA obstructed the process at every turn and still insists on major redactions, hiding behind some sort of plainly spurious defence that enemies would stand to gain from such revelations.

Others accept that torture occurred (well, never torture, only Enhanced Interrogation Techniques, we wouldn’t want to be sued now, would we?), but claim it was rare and stopped after a period. Some of these same people even claim EIT was a good idea because it worked, though their evidence is woeful. These arguments are the most disgraceful of all.

The US would surely be better served by leaders who acknowledged any mistakes and put steps in place to minimize the chance of a repeat? Only that way can international credibility be restored, and only that way can the US earn even a modicum of legitimacy is criticizing other countries, a role which the world sorely needs. That can only start by beefing up congressional oversight, rather than undermining it.

The third example is a little different, that of the spending bill recently passed by Congress. I took the time to look up its main provisions – not simple since the press and TV did not seem to care much.

A provision reduced regulatory requirements on banks. Campaign finance restrictions were also reduced. The possibility was raised of reducing pensions for federal staff. The department responsible for immigration control was only given a budget for a short period.

Areas with funding cut included school lunches, common core standards, food banks, parts of Obamacare, environmental protection and the tax collecting service. Regulation was reduced on clean water, lower emission light bulbs and permitted working hours of truckers, and increased on abortion and recreational drugs.

Internationally, Israel, Jordan and Egypt (yes Egypt) got more, while restrictions were placed on funding Palestine, Afghanistan and the UN.

There were small victories for those fighting Ebola and carrying out health research, those seeking to reduce sexual offences in the military, reformers of veterans affairs, and for certain mass transit projects.

At least it is a bill and it came from a process of compromise and the country can continue to operate. Furthermore, we can be relieved that most things that matter in the US happen at state level rather than federally.

But what an extraordinary list this is. There is almost nothing that might benefit the typical US family, despite the challenges facing most and the onward march of inequality. Almost all of the provisions seem to reward large funders and lobbyists. The Democrats could just publish this list and use it as the core of their next campaign – if they were not so in hock to the same interest groups and lobbyists themselves.

In this way democratic accountability is lost. There was recently an election campaign. I did not see any of these items campaigned for by anyone or given any coverage in the media. Because of shameless gerrymandering, most congress people from the house side have no need whatsoever to answer to the general public, only to zealots from their own side and the providers of their campaign cash.

In such a situation, we might hope that other groups might rise up to fill the vacuum. Local politics sometimes does a good job of this, especially in big cities like New York. Despite the Staten Island case, it is no coincidence that the NYPD seem to have a greater sense of their role and their community than other forces.

But where are the media? PBS do an excellent job, but few care to tune in. The rest have been infiltrated by the same virus, and are controlled or otherwise in need of big money interest groups.

The judiciary is at least powerful, and not corrupt. But big money plays a growing role there, as seen by the increased polarization in the Supreme Court.

Saddest of all, where is the Church? In Europe, the Churches can sometimes be seen as behind the times, but at least the leaders are occasionally prepared to speak publicly in favour of things like human rights and executive overreach. The Pope does an excellent job in providing some conscience to lawmakers, but he is rather peripheral in the US. Local Church leaders are shamefully silent, focusing solely on issues like abortion and contraception, and, as far as I can tell, local priests are discouraged from advocating any social message outside of safe areas. Why? I fear the same interest groups and donors are dictating to the Churches as well. Truly, the moneychangers have taken over the temple once again.

That only leaves micro action. In the end, this will win, as the society of the individual gradually takes over, and the state finds it progressively harder to control the debate. But this will be slow and fitful. In the meantime, there are only mass protests, of such intensity that authorities must sit up and take note. I have never been such a protester, but I think if I was a US citizen and thirty years younger I would be out on the streets now. How else can any sort of democratic accountability be re-established?

There are reasons to hope. The president can be brave, as witnessed this week over Cuba. Local accountability is alive and well in some big cities. At least in the US there is some freedom to debate, and we should remember that this is not the case everywhere. But the US also needs some mass activism. Go (lawful, peaceful) protesters!        

A Letter from Queens

The Guardian weekly publishes an article each week in the form of a letter from a particular place, submitted by a reader. I decided to have a go at getting published, and have just submitted a proposal for them to consider. It would be exciting to have it printed. But in the likely event that the submission does not receive such a wide audience, here I am making it available to a narrow one.

The letter is entitled: "Letter from Queens, NYC: Gateway to the World"

Thirty years ago I lived in Balham, the south London suburb ironically labeled “Gateway to the South” by Tony Hancock. I now find myself in Queens, which could easily be described as the Gateway to the World.

Many people pass through Queens. If you have ever flown to JFK or La Guardia airports, you will have sat in traffic on our crowded highways or ridden on our dirty subways on your way to our glamorous neighbour, Manhattan. You may have noticed suburb after suburb, squeezed together just like in south London.

In addition to the throngs of Long Island commuters and global tourists just passing through, we are home to the most ethnically diverse two million residents on the planet. Many of us are just passing through as well, staying for a few years rather than the few minutes of the visitors. It is a transitory sort of place, but it has its unique charms.

You can discover almost every culture of the world here, established by waves of immigrants creating their home from home. Within a mile of our home, I find Uzbek Jewish, Greek, Colombian and Philippine hamlets, to name just a few. Even south London has left its mark – Queens suburbs include Kew Gardens and Richmond Hill. New arrivals cluster around their own type, but then interact with others to blur the boundaries. Fusion could have been invented here: we can find authentic cuisine and traditions from anywhere, but also a plethora of exotic combinations.

Folks from Queens associate the metropolis on the other side of the East river with different things. It can be a place of work or a destination for abundant culture. But for others it might as well be on the other side of the world – we know people who haven’t visited “the city” in thirty years. Mind you, try asking Manhattan residents to come to your concert in Queens and many will look at you as if you’ve asked them to cross an ocean. 

Sometimes my daily walk takes me through Corona Park. In forty short minutes, I cross two frantic highways, a railway and a subway line, and pass examples of most types of housing, with their associated range of affluence. The park hosts a top quality museum, the massive homes of the US tennis open and baseball’s Mets, and sundry relics from a World Fair of sixty years ago. It is a feast for the senses. I see the Manhattan skyscrapers but also wonderful spring blossoms and games of cricket. I hear screaming jets descending into La Guardia but also birdsong and happy kids. I smell garbage and transport fumes, but also a park full of joyful family barbecues. It is all here if you are alive to it, even peace.

Arriving New Yorkers soon pick up the habits of our city. We’ll readily start a dialogue, loudly tell you what we are thinking, and frequently test the horn in our cars. We also laugh a lot, are generous with help, and celebrate humanity in all its diversity. I feel blessed to be passing through the Gateway to the World.

End of Letter

Meanwhile, I have also started blogging for the company I work part time for, called Synthetron. I'll submit posts once per month or so, on the general theme of situations where Synthetron could offer help. My first post follows up a Time interview with Mary Barra, the new CEO of GM. Here is a link to the post.

http://www.synthetron.com/mary-barras-staff-engagement-challenge/