Today I add three documents to the content pages of the website:
The 2021 edition of Integra Realty Advisors’ Viewpoint annual, for which I have again served as the principal analyst and writer. (see Industry Publications/IRR Viewpoint)
And two annotated presentations given in January 2020 and again this week (January 12, 2021) to the Miami Chapter of the Commercial Real Estate Women (CREW). These can be found in (Economic Analysis/Trends and Data)
I’d like to offer some background thoughts for your reflection. Not only are we at the start of a new year, but also at the inflection point of a new presidential administration and a new congress being seated in Washington.
While our attention in the past week has been consumed with the invasion of the Capitol on January 6th and the Article of Impeachment passed yesterday indicting President Trump for inciting insurrection and violation of the 14th Amendment, I’d like to keep the focus here on the economy, our expectation, and how those expectations are formed.
That’s the nexus with the documents I’m posting today.
In yesterday’s New York Times, economics reporter Neil Irwin published an extensive article under the heading “Economy/Public Relations” and the headline “What Trump Had Right About Going Against the Grain.” (NYT, 1/13/21, pp. B1, B6). Irwin argues, “[The Trump economy] may not have been the best economy ever, as he has repeatedly claimed, but it was easily the strongest since the late 1990s, and before that you have to go back to the late 1960s to find similar conditions.”
I have many reasons to be critical of Mr. Irwin’s analysis - not on factual grounds; he is an excellent reporter and a keen, careful observer - but on the common tendency to cite presidential traits as economically determinative. This tendency is called out as “the narrative fallacy” in Nassim Nicolas Taleb’s The Black Swan (see, especially Chapter Six). We reduce complex economic patterns to simple stories about causes and effects, far beyond what we can know with confidence.
So the article cites Casey Mulligan of the University of Chicago in support of the thesis that the Trump era tax cuts and deregulation helped the economy outperform forecasts. Mulligan is quoted, “Forecasts systematically overpredicted the Obama economy every year, and throughout the Trump administration, they underpredicted.” Mulligan was, as it happens, the chief economist of the Council of Economic Advisors to Mr. Trump, so in effect he was patting himself on the back.
As a counterpoint to Mulligan, Irwin quotes Lawrence Summer of Harvard as a “left-leaning” economist with ties to Democratic administrations. It makes for an interesting exercise in journalistic controversy, but to me there are at least two objections to make. The first is one of our most serious and symptomatic issues: casting topics immediately into a “tribal” context. (That’s one of my major projects for 2021 - attempting to think about ‘transcending tribalism’.) The second objection is that seeing economics through an ideological lens creates, however unconsciously, an altered perspective. But - and this is a big ‘but’ - for every economic perspective a framework is necessary.
I don’t pretend to have the God’s-eye view that would overcome these objections by moving beyond criticism to a detailed alternative and superior postulate. It is still useful to keep this challenge in mind, though; otherwise, how would our thinking progress?
Why do we fall into conventional ways of thinking? If it is purely ideological, then the diagnosis of tribalism rings very true - and should cause us to be particularly wary, no matter which side of the divide we find ourselves occupying. It was Marx and Engels, in The German Ideology, who noted that economics sometimes “descended from heaven to earth”, in other words, interpreted events and patterns based upon pre-conceived normative expectations and saw economic behaviors at variance with prediction as somehow problematic.
Irwin falls into this trap in discussion how economic rules of thumb (think, for instance, of the Philips Curve and the Taylor Rule) have become shortcuts for setting expectations for professional economists and policy-makers alike. And then we are all surprised when the world turns out differently.
Then, the next time, we do it all over again. Why?
Daniel Kahneman, in Thinking Fast and Slow, devotes a whole chapter to our tendency to fall into comfortable patterns of thought. He forthrightly terms laziness to be a constant temptation in a mind that has an internal propensity for jumping to conclusions. This may seem quite harsh. But it seems to me to be more than just a psychological failing. We are trained, in economics, to see structural relationships and when a familiar configuration appears, to follow the pattern quickly toward its conclusions In a more complicated but isomorphic (that’s a big word that just means ‘changing in a similar way’) configuration, that’s what econometric models do. They become a ‘machine for jumping to conclusions’, to borrow Kahneman’s phrase.
No less a figure than Alan Greenspan reflected on this tendency in “Never Saw It Coming” (Foreign Affairs, November-December 2013). The “maestro” lamented that the most sophisticated models of central banks and of Wall Street failed to anticipate the Global Financial Crisis either in its origins or in its ramifications. The models, by their nature, were dually determined by their structure and by their assumptions about inputs. Both were - and are - imperfect.
So too, today, we see with chagrin that the Coronavirus pandemic which has defined and delimited the US and world economy was not “in” the models. So it was not predicted. And, fatefully, those models will probably not give us a clear guide to the ‘way out’ of our 2021 problems.
That’s because, in my view, the models and indeed neo-classical “equilibrium economics” are excellent in getting linear change and patterns of continuity correct, at least to a high degree of approximation. But they are not good at all in patterns of disruption and discontinuity which are due to endogenous failures - including institutional and market failures such as we saw in the early 1990s and again around 2008. And they are spectacularly poor at treating the economic fallout of so-called exogenous variables such as war, famine, and pestilence.
So those are the concerns you’ll find me wrestling with in the three document posted today. I believe the themes that will be dominating the policy debate in Washington in early 2021, and probably well beyond, will sound familiar: regulation and taxes; spending and jobs; deficits, inflation, and their burdens on future generations; picking up the slack in the post-COVID economy; the policy choices of tweaking around the margin versus going ‘big and bold’. I care about these issues as much as anyone else. But fundamentally I believe we need to think more deeply, more creatively, and with a more open mind (not jumping to conclusions) about them. This post - and the documents added to this website today - are my ‘thinking out loud’ about those topics.
Won’t you join me in sharing YOUR ideas?