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Transaction Costs are the Costs of Engaging in Economic Calculation

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This year marks the 100th anniversary of the publication of Ludwig von Mises’s seminal article, “Economic Calculation in the Socialist Commonwealth,” which marked the first salvo in what later became the socialist calculation debate. Though the contributions of F.A. Hayek to that debate, and to economic science more broadly, have been well recognized, what is somewhat forgotten today is that the fundamental contributions of another economist were also born out of the socialist calculation debate. I am referring to none other than Ronald Coase.

 

As Coase outlines in his Nobel Prize Address, he had been a student of Arnold Plant in the Department of Commerce at the LSE, who introduced him to Adam Smith’s invisible hand, and the role that the price system plays in coordinating the allocation of resources to their most valued uses without central direction. The insights of Coase, like Mises, were both motivated from the attempt by the Bolsheviks to implement central planning in Soviet Russia. As Coase writes, “Lenin had said that the economic system in Russia would be run as one big factory. However, many economists in the West maintained that this was an impossibility,” a claim first put forth by Mises in his 1920 article. “And yet there were factories in the West, and some of them were extremely large. How did one reconcile the views expressed by economists on the role of the pricing system and the impossibility of successful central economic planning with the existence of management and of these apparently planned societies, firms, operating within our own economy?” The answer put forth to this puzzle was what Coase referred to as the “costs of using the price mechanism,” (Coase 1992, 715). This concept, which later came to be known as “transaction costs,” was first expounded in his seminal article, “The Nature of the Firm” (1937) and later developed in subsequent articles, “The Federal Communications Commission” (1959) and “The Problem of Social Cost” (1960). But, it is interesting to note that Coase also states that “a large part of what we think of as economic activity is designed to accomplish what high transaction costs would otherwise prevent or to reduce transaction costs so that individuals can freely negotiate and we can take advantage of that diffused knowledge of which Hayek has told us” (1992: 716).

My point here is not to trace the historical origins of the parallel insights drawn by Mises and Coase, or other economists working in the Austrian tradition and the transaction-cost tradition for that matter. Rather what I wish to suggest here is that what Coase (not just Hayek) had been stressing in his insights learned from the socialist calculation debate cannot be fully appreciated without placing his contributions in the context of what Mises had claimed regarding the problem of economic calculation. Reframed within this context, I would argue that the concept of transaction costs can also be understood as the costs of engaging in economic calculation. However controversial my claim may seem, this reframing of transaction costs as the costs of associated with economic calculation has a precedent that can be found not only in Coase, but also in more recent insights made by economists working in the Austrian tradition (see Baird 2000; Piano and Rouanet 2018).

How do transaction costs relate to the problem of economic calculation? According to Coase, the most “obvious” transaction cost is “that of discovering what the relevant prices are” (1937: 390). The costs of pricing a good (i.e. transaction costs) are based, fundamentally, on the costs of defining and enforcing property rights in order to create the institutional conditions necessary for establishing exchange ratios, hence prices, in the first place. This also entails not only cost of negotiation and drawing up contracts between trading partners, but also discovering who are the relevant traders partners are, as well as discovering what are the actual attributes, such as quality, of the good or service being exchanged.

Carl Dalhman (1979) argues that all such transaction costs can be subsumed under the umbrella of information costs, but the nature of such information is not one that can be obtained only through active search per se, as if all such information is already “out there” and therefore acontextual. Rather, the very nature of such information is not just tacit and dispersed (Hayek 1945), but contextual (see Boettke 1998). The discovery of relevant trading partners, the valuable attributes of a good being exchanged, and the price to which trading partners agree, emerges only within a context of exchangeable and enforceable private property rights. This last point is precisely the argument that Ludwig von Mises had meant in his claim that economic calculation under socialism is impossible! Outside the context of private property, subjectively held knowledge cannot be communicated as publicly held information without first establishing the terms of exchange in money prices to allocate resources to their most valued uses.

In his Presidential Address to the Society for the Development of Austrian Economics, published in The Review of Austrian Economics as “Alchian and Menger on Money,” Charles Baird (2000) best illustrates the point I’m making here. Carl Menger (1892) and Armen Alchian (1977) had made distinct, though complementary stories as to why money emerges spontaneously, namely to reduce transaction costs. Menger argued that money emerges to avoid the costs associated with the double coincidence of wants between exchange partners. On the other hand, Alchian emphasized that money emerges to reduce the costs of calculating and pricing the value of the various attributes of a good, such as in comparing the quality of different diamonds. Money prices reduce the costs of pricing the quality of diamonds, thereby providing information, discovered by middlemen, to non-specialists about what kind of diamond they are purchasing (i.e. higher quality or lower quality). As Baird writes, “Menger’s story is incomplete. But so, too, is Alchian’s. On the other hand, both stories are complete on their own terms. Clearly what is needed is someone to put these two stories together” (2000: 119). Thus, reframing transaction costs from an Austrian perspective, money, firms and other institutional arrangements emerge to reduce the costs associated with economic calculation.

In a lecture written to honor F.A. Hayek in 1979, later published posthumously in The Review of Austrian Economics, James Buchanan boldly declared the following: “The diverse approaches of the intersecting schools [of economics] must be the bases for conciliation, not conflict. We must marry the property-rights, law-and-economics, public-choice, Austrian subjectivist approaches” (Buchanan 2015: 260). The link that “marries” these distinct schools, including the Austrian School, is the notion of transaction costs. However, this underlying link cannot be understood without first reframing, I would argue, the concept of transaction costs as the costs of engaging in economic calculation. The “marriage” of these intersecting schools, as Buchanan and others have suggested, highlights distinct aspects of the economic forces at work in the market process, as well as the alternative institutional arrangements that emerge to reduce the cost of transacting and thereby exploit the gains from productive specialization and exchange.

 

 


Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Associate Director of Academic and Student Programs  at the Mercatus Center at George Mason University

 

 

References

Alchian, Armen A. 1977. “Why Money?” Journal of Money, Credit and Banking 9(1): 133–140.

 

Boettke, Peter J. 1998. “Economic Calculation: The Austrian Contribution to Political Economy.”  Advances in Austrian Economics 5: 131–158.

Buchanan, James M. 2015. “NOTES ON HAYEK–Miami, 15 February, 1979.” The Review of         Austrian Economics 28(3): 257–260.

Coase, Ronald H. 1937. “The Nature of the Firm.” Economica 4(16): 386–405.

Coase, Ronald H. 1959. “The Federal Communications Commission.” The Journal of Law & Economics 2: 1–40.

Coase, Ronald H. 1960. “The Problem of Social Cost.” The Journal of Law & Economics 3: 1–44

Dahlman, Carl J. 1979. “The Problem of Externality.” The Journal of Law & Economics 22(1): 141–162.

Hayek, F.A. 1945. “The Use of Knowledge in Society.”

Menger, Karl. 1892. “On the Origin of Money.” The Economic Journal 2(6): 239–255.

Mises, Ludwig von. [1920] 1975. “Economic Calculation in the Socialist Commonwealth.” In F.A.     Hayek  (Ed.), Collectivist Economic Planning (pp. 87–130). Clifton, NJ: August M. Kelley.

Piano, Ennio E., and Louis Rouanet. 2018. “Economic Calculation and the Organization of     Markets.” The Review of Austrian Economics, https://doi.org/10.1007/s11138-018-0425-4

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Statistics, lies and the virus: five lessons from a pandemic

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My new book, “How To Make The World Add Up“, is published today in the UK and around the world (except US/Canada).

Will this year be 1954 all over again? Forgive me, I have become obsessed with 1954, not because it offers another example of a pandemic (that was 1957) or an economic disaster (there was a mild US downturn in 1953), but for more parochial reasons. Nineteen fifty-four saw the appearance of two contrasting visions for the world of statistics — visions that have shaped our politics, our media and our health. This year confronts us with a similar choice.

The first of these visions was presented in How to Lie with Statistics, a book by a US journalist named Darrell Huff. Brisk, intelligent and witty, it is a little marvel of numerical communication. The book received rave reviews at the time, has been praised by many statisticians over the years and is said to be the best-selling work on the subject ever published. It is also an exercise in scorn: read it and you may be disinclined to believe a number-based claim ever again.

There are good reasons for scepticism today. David Spiegelhalter, author of last year’s The Art of Statistics, laments some of the UK government’s coronavirus graphs and testing targets as “number theatre”, with “dreadful, awful” deployment of numbers as a political performance.

“There is great damage done to the integrity and trustworthiness of statistics when they’re under the control of the spin doctors,” Spiegelhalter says. He is right. But we geeks must be careful — because the damage can come from our own side, too.

For Huff and his followers, the reason to learn statistics is to catch the liars at their tricks. That sceptical mindset took Huff to a very unpleasant place, as we shall see. Once the cynicism sets in, it becomes hard to imagine that statistics could ever serve a useful purpose. 

But they can — and back in 1954, the alternative perspective was embodied in the publication of an academic paper by the British epidemiologists Richard Doll and Austin Bradford Hill. They marshalled some of the first compelling evidence that smoking cigarettes dramatically increases the risk of lung cancer. The data they assembled persuaded both men to quit smoking and helped save tens of millions of lives by prompting others to do likewise. This was no statistical trickery, but a contribution to public health that is almost impossible to exaggerate. 

You can appreciate, I hope, my obsession with these two contrasting accounts of statistics: one as a trick, one as a tool. Doll and Hill’s painstaking approach illuminates the world and saves lives into the bargain. Huff’s alternative seems clever but is the easy path: seductive, addictive and corrosive. Scepticism has its place, but easily curdles into cynicism and can be weaponised into something even more poisonous than that.

The two worldviews soon began to collide. Huff’s How to Lie with Statistics seemed to be the perfect illustration of why ordinary, honest folk shouldn’t pay too much attention to the slippery experts and their dubious data. Such ideas were quickly picked up by the tobacco industry, with its darkly brilliant strategy of manufacturing doubt in the face of evidence such as that provided by Doll and Hill.

As described in books such as Merchants of Doubt by Erik Conway and Naomi Oreskes, this industry perfected the tactics of spreading uncertainty: calling for more research, emphasising doubt and the need to avoid drastic steps, highlighting disagreements between experts and funding alternative lines of inquiry. The same tactics, and sometimes even the same personnel, were later deployed to cast doubt on climate science. These tactics are powerful in part because they echo the ideals of science. It is a short step from the Royal Society’s motto, “nullius in verba” (take nobody’s word for it), to the corrosive nihilism of “nobody knows anything”. 

So will 2020 be another 1954? From the point of view of statistics, we seem to be standing at another fork in the road. The disinformation is still out there, as the public understanding of Covid-19 has been muddied by conspiracy theorists, trolls and government spin doctors.  Yet the information is out there too. The value of gathering and rigorously analysing data has rarely been more evident. Faced with a complete mystery at the start of the year, statisticians, scientists and epidemiologists have been working miracles. I hope that we choose the right fork, because the pandemic has lessons to teach us about statistics — and vice versa — if we are willing to learn.

1: The numbers matter

“One lesson this pandemic has driven home to me is the unbelievable importance of the statistics,” says Spiegelhalter. Without statistical information, we haven’t a hope of grasping what it means to face a new, mysterious, invisible and rapidly spreading virus. Once upon a time, we would have held posies to our noses and prayed to be spared; now, while we hope for advances from medical science, we can also coolly evaluate the risks.

Without good data, for example, we would have no idea that this infection is 10,000 times deadlier for a 90-year-old than it is for a nine-year-old — even though we are far more likely to read about the deaths of young people than the elderly, simply because those deaths are surprising. It takes a statistical perspective to make it clear who is at risk and who is not.

Good statistics, too, can tell us about the prevalence of the virus — and identify hotspots for further activity. Huff may have viewed statistics as a vector for the dark arts of persuasion, but when it comes to understanding an epidemic, they are one of the few tools we possess.

2: Don’t take the numbers for granted

But while we can use statistics to calculate risks and highlight dangers, it is all too easy to fail to ask the question “Where do these numbers come from?” By that, I don’t mean the now-standard request to cite sources, I mean the deeper origin of the data.

For all his faults, Huff did not fail to ask the question. He retells a cautionary tale that has become known as “Stamp’s Law” after the economist Josiah Stamp — warning that no matter how much a government may enjoy amassing statistics, “raise them to the nth power, take the cube root and prepare wonderful diagrams”, it was all too easy to forget that the underlying numbers would always come from a local official, “who just puts down what he damn pleases”.

The cynicism is palpable, but there is insight here too. Statistics are not simply downloaded from an internet database or pasted from a scientific report. Ultimately, they came from somewhere: somebody counted or measured something, ideally systematically and with care. These efforts at systematic counting and measurement require money and expertise — they are not to be taken for granted.

In my new book, How to Make the World Add Up, I introduce the idea of “statistical bedrock” — data sources such as the census and the national income accounts that are the results of painstaking data collection and analysis, often by official statisticians who get little thanks for their pains and are all too frequently the target of threats, smears or persecution.

In Argentina, for example, long-serving statistician Graciela Bevacqua was ordered to “round down” inflation figures, then demoted in 2007 for producing a number that was too high. She was later fined $250,000 for false advertising — her crime being to have helped produce an independent estimate of inflation.

In 2011, Andreas Georgiou was brought in to head Greece’s statistical agency at a time when it was regarded as being about as trustworthy as the country’s giant wooden horses. When he started producing estimates of Greece’s deficit that international observers finally found credible, he was prosecuted for his “crimes” and threatened with life imprisonment. Honest statisticians are braver — and more invaluable — than we know. 

In the UK, we don’t habitually threaten our statisticians — but we do underrate them.

“The Office for National Statistics is doing enormously valuable work that frankly nobody has ever taken notice of,” says Spiegelhalter, pointing to weekly death figures as an example. “Now we deeply appreciate it.” 

Quite so. This statistical bedrock is essential, and when it is missing, we find ourselves sinking into a quagmire of confusion.

The foundations of our statistical understanding of the world are often gathered in response to a crisis. For example, nowadays we take it for granted that there is such a thing as an “unemployment rate”, but a hundred years ago nobody could have told you how many people were searching for work. Severe recessions made the question politically pertinent, so governments began to collect the data. More recently, the financial crisis hit. We discovered that our data about the banking system was patchy and slow, and regulators took steps to improve it.

So it is with the Sars-Cov-2 virus. At first, we had little more than a few data points from Wuhan, showing an alarmingly high death rate of 15 per cent — six deaths in 41 cases. Quickly, epidemiologists started sorting through the data, trying to establish how exaggerated that case fatality rate was by the fact that the confirmed cases were mostly people in intensive care.

Quirks of circumstance — such as the Diamond Princess cruise ship, in which almost everyone was tested — provided more insight. Johns Hopkins University in the US launched a dashboard of data resources, as did the Covid Tracking Project, an initiative from the Atlantic magazine. An elusive and mysterious threat became legible through the power of this data.  That is not to say that all is well.

Nature recently reported on “a coronavirus data crisis” in the US, in which “political meddling, disorganization and years of neglect of public-health data management mean the country is flying blind”.  Nor is the US alone. Spain simply stopped reporting certain Covid deaths in early June, making its figures unusable. And while the UK now has an impressively large capacity for viral testing, it was fatally slow to accelerate this in the critical early weeks of the pandemic. Ministers repeatedly deceived the public about the number of tests being carried out by using misleading definitions of what was happening. For weeks during lockdown, the government was unable to say how many people were being tested each day.

Huge improvements have been made since then. The UK’s Office for National Statistics has been impressively flexible during the crisis, for example in organising systematic weekly testing of a representative sample of the population. This allows us to estimate the true prevalence of the virus. Several countries, particularly in east Asia, provide accessible, usable data about recent infections to allow people to avoid hotspots.

These things do not happen by accident: they require us to invest in the infrastructure to collect and analyse the data. On the evidence of this pandemic, such investment is overdue, in the US, the UK and many other places.

3: Even the experts see what they expect to see

Jonas Olofsson, a psychologist who studies our perceptions of smell, once told me of a classic experiment in the field. Researchers gave people a whiff of scent and asked them for their reactions to it. In some cases, the experimental subjects were told: “This is the aroma of a gourmet cheese.” Others were told: “This is the smell of armpits.” In truth, the scent was both: an aromatic molecule present both in runny cheese and in bodily crevices. But the reactions of delight or disgust were shaped dramatically by what people expected.

Statistics should, one would hope, deliver a more objective view of the world than an ambiguous aroma. But while solid data offers us insights we cannot gain in any other way, the numbers never speak for themselves. They, too, are shaped by our emotions, our politics and, perhaps above all, our preconceptions. There is great damage done to the integrity and trustworthiness of statistics when they’re under the control of the spin doctors

A striking example is the decision, on March 23 this year, to introduce a lockdown in the UK. In hindsight, that was too late. “Locking down a week earlier would have saved thousands of lives,” says Kit Yates, author of The Maths of Life and Death — a view now shared by influential epidemiologist Neil Ferguson and by David King, chair of the “Independent Sage” group of scientists.

The logic is straightforward enough: at the time, cases were doubling every three to four days. If a lockdown had stopped that process in its tracks a week earlier, it would have prevented two doublings and saved three-quarters of the 65,000 people who died in the first wave of the epidemic, as measured by the excess death toll.

That might be an overestimate of the effect, since people were already voluntarily pulling back from social interactions. Yet there is little doubt that if a lockdown was to happen at all, an earlier one would have been more effective. And, says Yates, since the infection rate took just days to double before lockdown but long weeks to halve once it started, “We would have got out of lockdown so much sooner . . . Every week before lockdown cost us five to eight weeks at the back end of the lockdown.”

Why, then, was the lockdown so late? No doubt there were political dimensions to that decision, but senior scientific advisers to the government seemed to believe that the UK still had plenty of time. On March 12, prime minister Boris Johnson was flanked by Chris Whitty, the government’s chief medical adviser, and Patrick Vallance, chief scientific adviser, in the first big set-piece press conference.

Italy had just suffered its 1,000th Covid death and Vallance noted that the UK was about four weeks behind Italy on the epidemic curve. With hindsight, this was wrong: now that late-registered deaths have been tallied, we know that the UK passed the same landmark on lockdown day, March 23, just 11 days later.  It seems that in early March the government did not realise how little time it had.

As late as March 16, Johnson declared that infections were doubling every five to six days. The trouble, says Yates, is that UK data on cases and deaths suggested that things were moving much faster than that, doubling every three or four days — a huge difference. What exactly went wrong is unclear — but my bet is that it was a cheese-or-armpit problem. Some influential epidemiologists had produced sophisticated models suggesting that a doubling time of five to six days seemed the best estimate, based on data from the early weeks of the epidemic in China.

These models seemed persuasive to the government’s scientific advisers, says Yates: “If anything, they did too good a job.” Yates argues that the epidemiological models that influenced the government’s thinking about doubling times were sufficiently detailed and convincing that when the patchy, ambiguous, early UK data contradicted them, it was hard to readjust. We all see what we expect to see.

The result, in this case, was a delay to lockdown: that led to a much longer lockdown, many thousands of preventable deaths and needless extra damage to people’s livelihoods. The data is invaluable but, unless we can overcome our own cognitive filters, the data is not enough.

4: The best insights come from combining statistics with personal experience

The expert who made the biggest impression on me during this crisis was not the one with the biggest name or the biggest ego. It was Nathalie MacDermott, an infectious-disease specialist at King’s College London, who in mid-February calmly debunked the more lurid public fears about how deadly the new coronavirus was. Then, with equal calm, she explained to me that the virus was very likely to become a pandemic, that barring extraordinary measures we could expect it to infect more than half the world’s population, and that the true fatality rate was uncertain but seemed to be something between 0.5 and 1 per cent. In hindsight, she was broadly right about everything that mattered.

MacDermott’s educated guesses pierced through the fog of complex modelling and data-poor speculation. I was curious as to how she did it, so I asked her.

“People who have spent a lot of their time really closely studying the data sometimes struggle to pull their head out and look at what’s happening around them,” she said. “I trust data as well, but sometimes when we don’t have the data, we need to look around and interpret what’s happening.”

MacDermott worked in Liberia in 2014 on the front line of an Ebola outbreak that killed more than 11,000 people. At the time, international organisations were sanguine about the risks, while the local authorities were in crisis. When she arrived in Liberia, the treatment centres were overwhelmed, with patients lying on the floor, bleeding freely from multiple areas and dying by the hour.

The horrendous experience has shaped her assessment of subsequent risks: on the one hand, Sars-Cov-2 is far less deadly than Ebola; on the other, she has seen the experts move too slowly while waiting for definitive proof of a risk.

“From my background working with Ebola, I’d rather be overprepared than underprepared because I’m in a position of denial,” she said.

There is a broader lesson here. We can try to understand the world through statistics, which at their best provide a broad and representative overview that encompasses far more than we could personally perceive. Or we can try to understand the world up close, through individual experience. Both perspectives have their advantages and disadvantages.

Muhammad Yunus, a microfinance pioneer and Nobel laureate, has praised the “worm’s eye view” over the “bird’s eye view”, which is a clever sound bite. But birds see a lot too. Ideally, we want both the rich detail of personal experience and the broader, low-resolution view that comes from the spreadsheet. Insight comes when we can combine the two — which is what MacDermott did.

5: Everything can be polarised

Reporting on the numbers behind the Brexit referendum, the vote on Scottish independence, several general elections and the rise of Donald Trump, there was poison in the air: many claims were made in bad faith, indifferent to the truth or even embracing the most palpable lies in an effort to divert attention from the issues. Fact-checking in an environment where people didn’t care about the facts, only whether their side was winning, was a thankless experience.

For a while, one of the consolations of doing data-driven journalism during the pandemic was that it felt blessedly free of such political tribalism. People were eager to hear the facts after all; the truth mattered; data and expertise were seen to be helpful. The virus, after all, could not be distracted by a lie on a bus. 

That did not last. America polarised quickly, with mask-wearing becoming a badge of political identity — and more generally the Democrats seeking to underline the threat posed by the virus, with Republicans following President Trump in dismissing it as overblown. The prominent infectious-disease expert Anthony Fauci does not strike me as a partisan figure — but the US electorate thinks otherwise. He is trusted by 32 per cent of Republicans and 78 per cent of Democrats.

The strangest illustration comes from the Twitter account of the Republican politician Herman Cain, which late in August tweeted: “It looks like the virus is not as deadly as the mainstream media first made it out to be.” Cain, sadly, died of Covid-19 in July — but it seems that political polarisation is a force stronger than death.

Not every issue is politically polarised, but when something is dragged into the political arena, partisans often prioritise tribal belonging over considerations of truth. One can see this clearly, for example, in the way that highly educated Republicans and Democrats are further apart on the risks of climate change than less-educated Republicans and Democrats. Rather than bringing some kind of consensus, more years of education simply seem to provide people with the cognitive tools they require to reach the politically convenient conclusion. From climate change to gun control to certain vaccines, there are questions for which the answer is not a matter of evidence but a matter of group identity.

In this context, the strategy that the tobacco industry pioneered in the 1950s is especially powerful. Emphasise uncertainty, expert disagreement and doubt and you will find a willing audience. If nobody really knows the truth, then people can believe whatever they want.

All of which brings us back to Darrell Huff, statistical sceptic and author of How to Lie with Statistics. While his incisive criticism of statistical trickery has made him a hero to many of my fellow nerds, his career took a darker turn, with scepticism providing the mask for disinformation. Huff worked on a tobacco-funded sequel, How to Lie with Smoking Statistics, casting doubt on the scientific evidence that cigarettes were dangerous. (Mercifully, it was not published.) 

Huff also appeared in front of a US Senate committee that was pondering mandating health warnings on cigarette packaging. He explained to the lawmakers that there was a statistical correlation between babies and storks (which, it turns out, there is) even though the true origin of babies is rather different. The connection between smoking and cancer, he argued, was similarly tenuous. 

Huff’s statistical scepticism turned him into the ancestor of today’s contrarian trolls, spouting bullshit while claiming to be the straight-talking voice of common sense. It should be a warning to us all.

There is a place in anyone’s cognitive toolkit for healthy scepticism, but that scepticism can all too easily turn into a refusal to look at any evidence at all.

This crisis has reminded us of the lure of partisanship, cynicism and manufactured doubt. But surely it has also demonstrated the power of honest statistics. Statisticians, epidemiologists and other scientists have been producing inspiring work in the footsteps of Doll and Hill. I suggest we set aside How to Lie with Statistics and pay attention.

Carefully gathering the data we need, analysing it openly and truthfully, sharing knowledge and unlocking the puzzles that nature throws at us — this is the only chance we have to defeat the virus and, more broadly, an essential tool for understanding a complex and fascinating world.

Written for and published by the FT Magazine on 10 September 2020.

My new book, “How To Make The World Add Up“, is published today in the UK and around the world (except US/Canada).



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Implications of a “No Recovery Package” Outcome

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From Deutsche Bank on Sunday:

In the US, fiscal uncertainty is a major issue. As outlined above, we now assume that significant further support will not be forthcoming until after the election. The resulting drop in income support for households is already beginning to depress activity and we see GDP growth slowing to near zero in Q4 as consumer spending slides. Growth will pick up in Q1 with some post-election fiscal support.

This manifests in zero (0) growth in 2020Q4.

Figure 1: GDP (black), Deutsche Bank (blue), WSJ September consensus (red), all in billion Ch.2012$, SAAR. Source: BEA 2020Q2 2nd release, DB World Outlook Update (Sep 20, 2020), WSJ September survey, author’s calculations.

Today, Bloomberg notes:

After four rounds of U.S. aid totaling nearly $3 trillion, fiscal stimulus is running out: Bloomberg Economics’ analysis shows that under a no-stimulus baseline scenario through year-end, total income flowing to households will transition from unprecedentedly strong for a recession, to just so-so. That in itself would be enough to subtract 5 percentage points from fourth-quarter gross domestic product compared with a counterfactual scenario that includes an extension of stimulus measures. Funding problems for states and small businesses are poised to add to the drag.

This point is illustrated in the figure depicting personal income around recessions:

What do academic economists think? From the latest round of the IGM/FiveThirtyEight Covid-19 panel:

The results also bring into focus how the economists are viewing the election results and  overall political climate. We’ve written many times that they believe an infusion of additional money from Congress — whether in the form of enhanced federal unemployment insurance or another series of stimulus payments — is paramount to stabilize the economy through the recovery. According to our survey results, the biggest economic risk for 2021 is the possibility that no additional stimulus is passed by November 2020. And the economists see Democrats’ control of Congress as having a significant effect on growth potential in 2021, likely because they have been much more willing to pass government spending bills. (Note that even if Joe Biden wins the presidency but the Senate doesn’t flip to the Democrats, 94 percent of our panelists said their outlook for 2021 would remain essentially the same as it is now.)

“I think that failing to pass fiscal stimulus is the biggest downside risk,” said Jonathan Wright, an economist at Johns Hopkins University who has been consulting with FiveThirtyEight on the survey. “And that’s probably made more likely by the RBG fight.”

In other words, no additional fiscal stimulus now is a recipe for flatlining in Q4.



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Quotation of the Day…

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… is from page 128 of the late Hans Rosling’s 2018 book, Factfulness; it’s from a chapter titled “The Size Instinct”:

You tend to get things out of proportion. I do not mean to sound rude. Getting things out of proportion, or misjudging the size of things, is something that we humans do naturally. It is instinctive to look at a lonely number and misjudge its importance. It is also instinctive … to misjudge the importance of a single instance or identifiable victim. These two tendencies are the two key aspects of the size instinct.

The media is this instinct’s friend. It is pretty much a journalist’s professional duty to make any given event, fact, or number sound more important than it is. And journalists know that it feels almost inhuman to look away from an individual in pain.

DBx: In this book, Rosling doesn’t mention Bastiat. But Rosling here describes the distortions in people’s perceptions that many of us classify under the heading “what is seen and what is not seen.” Anyone blind to the unseen focuses only on what is seen. It is what is seen that is addressed. Action is taken on the basis only of what is seen.

But that which is seen is often only a tiny feature of a much larger group, the bulk of which is invisible. And so actions that appear to be admirable and compassionate – because these are aimed at changing for the better that which is seen – are in fact often harmful because these actions are taken without knowledge of the larger group.

Home-country workers who lose their jobs to imports are seen; so tariffs help them. Protectionists are applauded for their intentional humanity. Home-country workers (and foreign workers) who lose jobs because of these tariffs, and consumers whose real incomes are reduced because of higher prices, are unseen. Protectionists are not derided for their unintentional cruelty.

Paid leave required by government is seen; the resulting reductions in other forms of compensation, and the greater difficulty of many workers to get jobs as goods as possible for them, are unseen.

Workers whose wages are pushed up by minimum-wage statutes are seen. Workers rendered unemployed or who suffer worse employment conditions are unseen.

People suffering and dying from covid-19 are seen and easily filmed. And while some of the damage done by the hysteria and lockdowns is seen – for example, shuttered stores and unemployed workers – much of the damage is unseen. The people who suffer and die from other ailments because access to medical care was made unnecessarily difficult by the lockdowns – the new businesses not created – the friendships in school not made – the stream of anti-social consequences that will long haunt us now that so many of us regard other human beings as carriers of death – the inevitable abuse into the future of the malignant eruption of arbitrary state power – all this and much more is unseen.

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