The View From 1776

The Limitations of Econometric Computer Models

Computer models were the tools employed to inflate the subprime mortgage balloon that precipitated collapse of our financial markets.  And the same sorts of inherently faulty computer models are generating proclamations that President Obama’s near-trillion-dollar stimulus and mortgage protection programs will create millions of new jobs and restore the economy to prosperity.

Posted by .(JavaScript must be enabled to view this email address) on 02/21 at 10:15 PM
  1. The main reasons computer models fail in economics is because there is no way to factor in when human nature will foster a change in thinking.

    We know that human nature runs in cycles about a generation apart but, don't know what those changes will bring about.

    For example currently, we went from a debt driven consumer spending more than he earned to a consumer now starting to save again. The swing from one to the other can be as much as 10-15% of GDP if we just return to the average and if we over correct first, as humans are often inclined to do, it could be worse.

    We can calculate that a certain infrastructure project will create "X" jobs but, not what the workers will spend the money on.

    We have businesses going bankrupt that sell landscaping services, hair salons, restaurants, major retailers, mom and pop stores, and auto dealers. The government may create what seems to be a logical number of jobs needed to stimulate growth but, if the consumer sentiment has changed, all bets are off it will work.

    This also, is a global slow down and while creating jobs here might look good, if we can't export and can't sell basic goods in normal quantities, there is no tax revenue to base the spending on and all we do is add more debt.

    In the Kondratieff "seasons" we are in what is called "Winter" because of how long it lasts due to a change in human sentiment that can last as long as a generation.

    Yet, doing nothing isn't acceptable to the voters who are too dependent on government and aren't prepared to do without a job for an extended period of time due to a lack of savings and often not prepared for the jobs that are available because their skills are too narrow in scope.
    Posted by JanPBurr  on  02/22  at  12:11 AM
  2. It
    Posted by Peggy McGilligan  on  02/22  at  02:40 AM
  3. The blind-eyes smarties still classify and categorize all human beings into groups and load the dice as if it is accurate and intelligent. It is not since they cannot enumerate the varieties from individual person to individual person. There are only individuals!

    Groups are verbal conveniences - not Reality! They create and are hoisted on their own petard!

    The great advantage of a free market in the world is the variable creative individual. That is ethical and insightful for the individual blesses the other individuals.

    As long as their collective model is force-fed the resources of others, it will fail. True leadership and an intelligent followership, with vision, will slam the door on the blind retards.

    "No one is smarter than their criteria." Results prove. THEY PREACH PRAGMATISM AND PRACTICE STUPIDITY. Will we join the? No thanks.
    Posted by Jim Baxter  on  02/22  at  09:56 AM
  4. George Washington's Farewell Address is still applicable today. In it are three sections that were warnings we should have listened if we wanted to avoid much of what has gone on in the last 100 years or so.

    One deals with the dangers of "party affiliation" and how it can undermine what is actually best for the nation.

    Another deals with "credit."

    As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear. The execution of these maxims belongs to your representatives, but it is necessary that public opinion should co-operate. To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.

    And another with dealing with other nations

    The great rule of conduct for us in regard to foreign nations is in extending our commercial relations, to have with them as little political connection as possible. So far as we have already formed engagements, let them be fulfilled with perfect good faith. Here let us stop. Europe has a set of primary interests which to us have none; or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence, therefore, it must be unwise in us to implicate ourselves by artificial ties in the ordinary vicissitudes of her politics, or the ordinary combinations and collisions of her friendships or enmities.

    Almost all of the address has lessons for today in it. Does that mean we shouldn't have evolved and changed and ended slavery and done countless other things that improved the nation? NO!

    It only means that the principles used for making changes was good. It means the principles of keeping debt low and avoiding foreign entanglements for a "new world order" should have remained our principles.

    We forget they created a nation that was correcting the mistakes another "superpower," the British government, had made. They weren't creating a new nation out of "thin air" but on the backs of the mistakes of other nations. They didn't avoid change but, set rule for change that would help avoid the mistakes we now make with every new Congress.
    Posted by JanPBurr  on  02/22  at  10:43 AM
  5. Comment posted for Robert W. Stapler:

    One corollary you could add to this is the similarity between financial models and global climate models being used to predict long term weather patterns, both of which are useful tools in studying extremely complex, poorly understood, highly volatile systems of systems; but neither of which are particularly reliable tools on which to base inflexible governmental policies. This is even more true of the climate models for which the unknowns are larger and number of controllables fewer, but the same caution applies to financial models until or unless they can achieve near absolute reliability and the impacts of any remaining unreliability are rendered small.

    The other point I would make is these models are biased by agendas. In the case of GCMs the bias is to set policy without regard to honesty, whereas the FMs were developed to anticipate a limited set of short-term changes in the market and exploit them more than predict or manage the whole thing. Therefore, neither of these models was developed with an eye toward the level of accuracy or control necessary for sound policy so much as meeting certain lesser, barely achievable goals.

    Your article stresses the kind of complexity is too great for computers to handle and will be no better than the quality of inputs. The latter will always be true, but the latter is only be true until we have computers sufficiently capable of handling the volume of data and of processing it fast enough to be useful. The point I would make then is not that computers are not capable of this, but that they are not capable of it yet and won
    Posted by .(JavaScript must be enabled to view this email address)  on  02/22  at  02:12 PM
  6. As Jan points out, economics can never be reduced to any real certainty because it relies on human beings' choices--which are unpredictable. Therefore the quality of info put into the model will always be flawed or inadequate to predict outcomes--regardless of the computer's capabilities. As Peggy McM. writes, economics is a "fuzzy" science. These are two of the reasons for distinguishing between "hard-science" and "soft-science" as Thomas Sowell has done. He points out that those individuals incapable of, or unwilling to deal with the hard sciences, usually "gravitate" to the easier sciences.

    Unfortunately, these soft-scientists seek to emulate the physicists and chemists by looking for relative certainty in their efforts to understand or manipulate soft-science subjects--basically peoples' behavior. It is the arrogance of that elite and their love of abstract and complex thinking that leads them astray.

    The genius of ordinary people is that they look to past experience, rely on enduring principles, apply common sense, try to avoid past mistakes, and proceed cautiously. It is a difficult art but much better than betting billions on computer models when dealing with socio-economic issues.

    During the first 300 years of explosive growth in the United States, the ordinary people followed those guidelines. It is only during the last 100 years that new elites have taken over and are abandoning the lessons of the past. The recent economic/mortgage debacle can be lain directly at their feet. And, worse, they have convinced a majority of Americans that they know the answers and can make things better by their central planning and control.
    Posted by bill greene  on  02/22  at  09:52 PM
  7. Human knowledge always finds itself in an oxymoronic state of contradiction - when it forsakes the Principles of Nature and Nature's Creator GOD.

    Since man cannot invent criteria greater than himself, you would think he would learn from such a ragged past. No; they are different persons - individuals. Thus, education's greatest role is to preserve the superior Criteria that man, hobbled in his ego-centric experience, cannot invent. Pass them on to future generations intact and functioning in daily life.

    Since each one is born with a universe-sized ignorance, humans must grow and learn, knowing knowledge alone will not fulfill our needs. Faith in Superiority at the hand of the only living GOD, will be sufficient for a wonderful future.

    Thus, self-imposed ignorance of faith's values will be the critical burden for the human family.

    Criteria? Psalm 119:1-176 would be an excellent beginning...or Psalm 91. selah
    Posted by Jim Baxter  on  02/23  at  10:43 AM
  8. I especially appreciate Bill G. distinguishing between a hard-science, and a soft-science. The differentiation is key. American education is based on the German model, however during the last 60 or so years, all sorts of pseudo disciplines have found their way into the system, until we have Doctors of Sexology. That's fine; just don't give a speech on public policy. Unfortunately, these individuals have found their way into the courtroom, and into government circles. I don't dislike Barack Obama, but the only thing he said during his recent speech, that could be fact checked, was that America is the nation that invented the automobile. The rest was conjecture, theory, and pie in the sky. Now many of us knew that Karl Benz is credited with inventing what has come to be known as the automobile, and that in Germany. This is important, because it's also a widely agreed upon fact. And, Obama got it wrong. If the facts concerning economic recovery are as inaccurate ... well perhaps I found the assertion telling. Anyway, I've seen the "fuzzy" people up close and personal. They may appear stupid, just hang on to your wallet:
    Posted by Peggy McGilligan  on  02/26  at  08:00 PM
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