Beware economic models

By Leith van Onselen

If you get a spare 15 minutes today, make sure that you listen to The Australia Institute’s (TAI) latest Follow The Money podcast, which tackles the issue of economic modelling:

Episode 9 – Economic Models – Follow The Money.mp3

Economic models are like a lot of things in life: What you get out of them depends on what you put in. But therein lies the problem. When reporting focuses on the ‘findings’ without looking at what assumptions underpin politically influential economic models, it leaves us vulnerable to what Richard calls the ‘peak-stupid of econobabble’.

The episode tackles several important topics, including:

  • recent modelling debacles, including BIS Shrapnel’s infamous negative gearing analysis;
  • the dodgy assumptions underpinning most models, which do not match reality; and
  • how vested interests use the ‘findings’ from the modeling to get favourable media coverage and sway public opinion (and politicians).

It’s an important issue in light of the recent debate over immigration, whereby ‘Big Australia’ boosters like CEDA and Jessica Irvine have used superficially favourable modelling results to argue for an increase in Australia’s migrant intake.

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Leith van Onselen
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Comments

  1. That’s a specific form of “lies, damn lies and statistics” adage. Analysis can always be both used and abused. Economics is particularly susceptable to misuse as it tries to model human behaviour, cannot readily be suscepted to formal testing and falsification (at best, only natural experiment) and is regularly used to inform policy/political decisions with sweeping and high value consequences.

    Some do their best, some push an agenda with a veneer of ‘results’. Not sure if there is an answer. The code of conduct mentioned in past seems essentially unenforcable and counterproductive as it would involve economists/modellers adjudicating over eachother and be subjust to the same issues.

  2. Beware even more from climate models.

    Those things are truly worthless, they torture, adjust and ‘correct’ the data until it fits their expected results.

    • Agree. Mind you, TAI is not absolved itself from engaging in the practice it critiques – it is predominantly a politcal entity with its own ideological agenda.

    • If you think climate models are less well understood, and results misinterpreted more than economic models, I have a bridge to sell you.
      If only economic models and their proponents came under the same scrutiny and peer review as climate modelling, we might get some better decision making.
      Do some research before parroting.

      • “Doing the research” seems to me to show grounds for suspicion, not grounds for confidence. I have got into this deep enough to have read IPCC report drafts and reviewer comments, and I have no confidence whatsoever that the final “Summary for Policy Makers” actually represents anything honestly “peer reviewed”. This goes for controversies over the models as much as anything else in the subject. There might be a profession where computer modeling is exemplary but economics and climate science are both far from that.

        Both of them commit serious breaches of method, in constantly re-calibrating to retrospectively replicate reality that did not match earlier modeling, and then claiming (again and again and again) that “we are now 100% certain”. You can NOT make this claim until your extrapolations out into the future HAVE shown to be correct once the future has become the past. There has been far too much premature claiming of certainty, which weakens the credibility of the profession.

    • Likewise Phil, I have done my research also. Nowhere can I find a scientist that uese the terminology of 100% certain w.r.t. climate modelling. Luckily we can make decisions without 100% certainty.

      • For the mentally stoopified above….

        Economic models based on metaphysical assumptions and applied as prescriptive universal facts [such as rational agent models] has absolutely nothing to compare with climatic models which use Newtonian concepts and methodology to collect data and determine its effects.

        Disheveled Marsupial…. physics in the royal science sense deals with matter and how it interacts without agency, theoclassical econnomic models on the other hand attempt to force humanity to respond accordingly to its frameworks dicta by the agency of those applying it…. duh….

      • I put it in inverted commas. You know what I mean. They use certainties that are nonsense anyway, and deliberately high enough that policy makers regard it as a given. Completely unsupported by the actual peer review of the actual drafts.

      • Phil…

        To the contrary, its been bloody conservative in reports and boundaries as good science is, you might inform yourself better with reading “Merchants of Doubt”.

        The U.S. scientific community has long led the world in research on such areas as public health, environmental science, and issues affecting quality of life. Our scientists have produced landmark studies on the dangers of DDT, tobacco smoke, acid rain, and global warming. But at the same time, a small yet potent subset of this community leads the world in vehement denial of these dangers.

        Merchants of Doubt tells the story of how a loose-knit group of high-level scientists and scientific advisers, with deep connections in politics and industry, ran effective campaigns to mislead the public and deny well-established scientific knowledge over four decades. Remarkably, the same individuals surface repeatedly—some of the same figures who have claimed that the science of global warming is “not settled” denied the truth of studies linking smoking to lung cancer, coal smoke to acid rain, and CFCs to the ozone hole. “Doubt is our product,” wrote one tobacco executive. These “experts” supplied it.

        Naomi Oreskes and Erik M. Conway, historians of science, roll back the rug on this dark corner of the American scientific community, showing how ideology and corporate interests, aided by a too-compliant media, have skewed public understanding of some of the most pressing issues of our era.

        https://www.goodreads.com/book/show/7799004-merchants-of-doubt

        Disheveled Marsupial…. there is a huge difference between reasonable scientific questioning and rank Bernays style propaganda to forward ideological or profit driven motives e.g. pushing freedom and liberty by attaching smoking for women and voting rights i.e. your obviously in the latter camp and your faux reasonableness is putrid..

      • Skippy: I don’t believe for a moment that the peer-reviewer comments on IPCC Report Drafts, that range from total skepticism to low certainty, but are ignored by the Summary writers, are due to some narrow cabal of vested interests. Rather I see in those very numerous peer reviewers and their comments, the true scientific process at work. The whole process is shrouded in secrecy for a reason. The leak of the draft report and reviewer comments blew the cover on the real “cabal” and its hijacking of the scientific process. There are literally thousands of honest scientists who are being misrepresented.

      • Phil…

        How you believe or better put emotively feel about AGW due to your collective environmental biases has zero gravatis, in fact it damages your credibility, because you have nil means to establish its validity.

        Where on the other hand massive amounts of correlated, corroborated, constantly reviewed data spanning epochs can’t just be hand waved away because it does not conform to your – beliefs – that phil is the terrain of the ideological zealot.

        Disheveled Marsupial…. the appropriate term for the process of investigation in this case is _thinking_ its how we expand our species knowlage about everything… including ourselves… try it some time… eh…

  3. “Modeling” has become the modern day equivalent of examining the entrails of chickens. There is no doubt that building models helps understand how systems work, but it does not offer a definitive answer on how a complex system will behave. The more complex the system, the less certain is the answer.

    Most people have this idea that you just work out the rules of the system, plug it into a computer and out pops the answer. Complex nonlinear systems just don’t work that way because you never really know all the rules. One way to explain it is to draw the analogy to fractal patterns – like mandelbrots. If you take two fractal generators and make several patterns with each one, then show them to say, a bright 6th grader, they will be able to group them correctly by doing simple pattern matching – the ones from the same generator will “look” the same. Take the sets and ask which generator made them and you have a problem which probably has no solution. You can’t pattern match backwards – unlike a linear system where you can run the simulatioin backwards and forwards at will. Think of it like public/private key encryption. In a complex system, future states are effectively encrypted and we don’t have either the public key or the matching key to look backwards in time.

    • Agree. Get me going on the subject of urban planners models…!!! As with Climate Science, urban planners and the economists working with them all over the world, are constantly re-calibrating to retrospectively replicate reality to try and make their model fit the city they are working with, when a universal formula should be possible. There are “standard models”, but every city’s planners have wrenched it around trying to make it fit their city. They actually haven’t a clue how the city got to where it “is” and therefore they have even less of a clue what will be its path in response to new policy inputs.

      Their failure to identify different forms of land rent and the extent to which they capture a share of real-economy incomes, is as bad as rocket scientists who don’t recognise gravity. They can’t miss seeing its effect, but would be constantly introducing fudge factors in their calculations and calling them something absurdly incorrect, which is exactly what urban land modelers do with their mathematical models. For example, they put real land value differences between cities down to “amenity value” regardless of the magnitude of those differences or the speed with which the divergence occurred in case after case. The absurdity of this is illustrated by comparing a city like Liverpool with a city like Raleigh; apparently Liverpool’s land prices are 200 times higher because of “amenity value”, not because of its system of rationing supply of land! You might as well claim that people under some systems, who sacrifice 50% of their incomes for a meagre amount of grains and milk and basic foodstuffs, are getting “real value” of a far greater magnitude than developed free-market citizens who consume large quantities of all food groups, including prepared and “luxury” foods, for less than 10% of their incomes.

      Ironically, “quotas” and their effect, and “monopolies” of various forms, are meant to be thoroughly “economic” concepts; but conceits obviously can form so readily in a branch of a profession, like “modeling” in the economics profession, that an actual knowledge of the subject matter is very much subsidiary to the ability to devise clever formulas and write code.

      Another glaring example is the “risk models” used by Wall Street in pricing derivatives prior to 2007. There was no risk included, of “house prices falling”.

      • Urban planners judge risk [known knowns like flood plains [hydrology], earth quakes, and a wide scope of other factors. Now that does not preclude that such institutions can not be corrupted [see response about Friedman], yet even under that condition there is usually a modicum of care due to insurance and asset repercussions i.e. excessive fail rates can cause cascades….

        Disheveled Marsupial…. My uncle was a state planer in Arizona, left because of all the industry corruption [short term greed] regardless of what the data actually stated was prudent. Now look at the state of it.

      • The fiscal child abuse enabler changes the subject. Any excuses will do. We were talking about economic modeling. Urban modeling is charlatanism in its current state.

        As for Skippy’s claim about risk mitigation, urban planning today is ideology driven charlatanism to such an extent that most of it ends up increasing, not mitigating, risk. For example, intensification and paving over a greater proportion of a city’s surface, has worsened flooding and storm impacts. How’s Green fundamentalist planning working out for Queensland? You misanthropic tossers are all about DIS-allowing proper flood protection to be done.

        In Christchurch NZ, the Planners blatantly allowed development on known liquefaction-risk land because leapfrogging over it would have been too sprawly. In fact “allowed it” would be too generous to them. They effectively mandated it by creating an artificial scarcity and a racket in land, leaving developers with no choices except bad ones.

        Auckland’s Planners are so damnably incompetent and mulish, that no less than two consecutive proposed Plans, assumed intensification and infill to maximum potential in numerous locations without regard to dangerous slopes and surfaces, and without regard to schools, playing fields, churches etc that actually would probably need to INCREASE in volume due to increased residents, NOT be paved over and built on! And they repeated this “error” in the second Plan AFTER it had been pointed out in an audit of the first one!

        Don’t tell me about how noble and conscientious and wise “urban planners” are. Pack of useful-idiot (if not traitorous) saboteurs of our very civilisation, not least for the economic consequences.

      • Phil….

        If you had not notice neoliberalism runs both the political and economic spheres, since the mid 70s with neoclassical economics at its core – so – if you want to play strawman games knock yourself out, but, the suggestion that planing is the bad guy is absurd…. what do you think neoclassical economics with a side of monetaristism – is – other than a grand vision of a “free market” based reality crammed down on everyone…. duh…

        Disheveled Marsupial…. and in that free market everything is for sale… too include government and citizens….

      • The term “neoliberalism” itself is the epitome of straw man fabrication. I haven’t a clue what it means. I care about “the establishment” being hijacked by gougers. That is Wall Street, crony capitalists, “big property”, the zero-point-one percent. These people are laughing all the way to the bank because of useful idiocy and ignorance on the part of “enablers” who haven’t a clue what they are doing. Exhibit A is idiots who think “developers” competing in median-multiple-3 housing markets are the big rip-off, and the Baptists and Bootleggers racket that creates median-multiple 7 to 12 housing markets, cyclical volatility, the real economy and “main street” strangled to death, the top 0.1% creaming it on zero-sum wealth-transfer gains – none of these people are property “developers” – speculation and gouging on existing urban property is where the real money is, along with lending to the proles and honest developers to enable them to obtain at the extortionate prices, the dirt they need to stay in existence.

        You either 1) are too economically illiterate to even understand what I am talking about, but hold quasi-religious mantra-based political beliefs
        or 2) deliberately trying to confuse the issue because you have your own nose in the trough of vested interests.

        Which is it?

      • Phil….

        “The term “neoliberalism” itself is the epitome of straw man fabrication.”

        Self inflicted ignorance is not a good methodology to base anything on, especially with an authoritative tone imo…

        It is a well known term to describe the dominate socioeconomic and political paradigm which started post WWII and became dominate in the mid 70s, its well understood in intellectual and academic settings. Just a quick Google search should end your confusion and unfounded accusations about my knowlage level or vested interests.

        As a gesture I will link to a comprehensive site and archive which you can purview at length and is based on more than your obsessions about RE. Hint…. your RE dramas are a result of neoliberal policies and agendas, as such, cracking a fat about an outcome of neoliberalism and then be dismissive or incredulous about the status of neoliberalism is absolutely absurd.

        A summery and link –

        Neoliberalism is a new form of corporatism based on the ideology of market fundamentalism, dominance of finance in the economy (and restoration of the political power of financial oligarchy) and cult of the rich (“greed is good”) instead of ideology based on racial or national superiority typical for classic corporatism. Like many religious doctrines it belongs to the class of Theological Voluntarism (with some pseudo mathematical voodoo attached as a justification; actually even this is not new. Iranian ayatollahs in the past needed to demonstrate proficiency in mathematics) , but unlike most philosophies and religions it does not try to suppress greed. On the contrary it pronounces it to be a virtue (“Greed is good”). It simply profess that all actions of the elite need to be covered under smokescreen of propaganda which is unprecedented in its cynicism, hypocrisy and contempt to the ordinary people. Probably exceeding cynicism of the USSR leadership which promoted the same redistribution of wealth up ( in case of the USSR mainly to military industrial complex and nomenklatura ) using Big Brother style slogans like “The Party cares for the wellbeing of the people”. This is a tailor-made ideology for financial oligarchy and large international corporations who simply want to carve the “economic cake” on the whole globe. They created a political system that is the very opposite of what our leadership, the mass media, opinion leaders, think tanks etc. proclaim to be the world’s foremost, exemplary democracy.

        Being a flavor of corporatism, neoliberalism presumes a strong state, working only for the benefit of the corporations, and as such it has little pretence to neutrality and universality, unlike the classical liberalism. As an ideology it can be aptly characterized as Trotskyism for the rich — it inherits fundamental tenets of Trotskyism with just replacing “proletariat” with the “elite” (as in “Elite of all countries unite!”), or, more precisely, with the financial oligarchy — which is the core of transnational, globalized elite. Like in the USSR upper part of the elite (aka “Masters of the Universe” roughly equivalent to the notion of Soviet nomenklatura) are above the law. Much like Brezhnev’s socialism and feudal societies it shrinks middle class because the repressive power of state is enough to preserve the rule of the elite. Neoliberalism is adamantly anti labor union creed, much like Soviet ideology (although justification were different: neoliberalism profess market individualism for which collective bargaining is anathema, while Soviet ideology claimed that the regime represented interests of workers making labor unions redundant). Both regimes obsessively control and indoctrinate academics, although neoliberalism doe not use witch hunt (like Lysenkoism) — ostracism and deprivation of funding is enough to keep academic scholars on a short leash. In both cases the press is subservant to the ruling oligarchy and is neither independent, not free.

        While neoliberalism (or “corporations uber alles” as we can call it) proved to be a more dynamic social system then stagnant “Brezhnev’s socialism” which it successfully destroyed (with the whole “Socialist camp”), it is one step forward two steps back in comparison with New Deal type of capitalism and, especially, social democracies of Scandinavian countries. Which neoliberalism also successfully destroying. At the same time like communism this is another “universalist ideology” based on false hopes of “salvation” via market mechanisms. Similar to communist expansion( Trotsky idea of “permanent revolution”) the neoliberal world now is preoccupied with the neoliberal expansionism, with the opening of foreign markets for transnational corporations, using military invasions, where necessary and color revolutions utilizing local compradors (fifth column) were appropriate. Like with Communism, imperial ambitions are not only territorial; they are also ideological. This ideology, or is you wish, secular religion (there is nothing scientific in neoliberal doctrine, especially in economic part of it) is now exported to any country via so called color revolutions like socialism was exported by the USSR in some Asian and African countries. Unlike classic colonialism and much like Soviet rule in Eastern Europe, neoliberal occupation is not dependent on direct occupation of the country by military forces. It’s more combination of using local compradors and financial occupation via debt slavery (neocolonialism). It always tries to use as local occupying force the part of local elite closely connected to transnational corporations and storing their financial assets in Western banks and their families in Western capitals. Neoliberalism successfully expanded not only by direct conquest like in Iraq, but via co-optation of a part of the local elites (aka fifth column of globalization) or by staging color revolutions.

        In way neoliberal is a unique social system that mobilized the power of greed (in a very destructive for the 99% of the society way) while most previous social system tried to suppress it. Usury laws are classic example here. They were revoked under neoliberalism (payday loans is plain vanilla usury; credit card debt is often close at 18% or higher). The only criteria of any activity is economic success (which closely relates neoliberalism to Marxism, which similarly viewed as economics as primary force of progress of human civilization and social “superstructure” as secondary element in human societies which automatically reflects the economic base). As an economic doctrine neoliberalism repudiates Keynesian welfare state and promoted the “law of jungle” (homo homini lupus est) principles using bought (on cheap) ideologues like Milton Friedman and dubious fighters for economic freedom like late Friedrich von Hayek. In other words it favor of “dog eats dog” forms of competition which were the hallmark of early capitalism (Austrian aristocrat Friedrich von Hayek probably would have a stoke if he saw the current “dog eats dog” implementation of his ideas).

        Commonly under the term “neoliberalism” we understand a set ideas that include a radically “free”(but nor fair) market, maximized competition and “free trade” (which actually is neither free nor fair) achieved through making the government subservant to the interests of multinationals (“Quite coup”), economic de-regulation which led to systemic instability of the financial sector, elimination of tariffs, a range of monetary and social policies favorable to business and indifferent toward middle, class, unionized workers, and especially poor (some strata of which like single mothers in the USA reminds status of the same groups in classic “banana republics” — see Wall-Mar poor). It adopts explicit and powerful policies redistribution of wealth up via direct tax cuts for the rich and casino properties of stock market (which is the central institution of neoliberal order), cultural decimation of any competing ideology (like Brezhnev socialism), acceleration of Earth resource depletion (see Plato Oil as Hubert Peak in condition of rising oil prices ) and environmental destruction due to the “race to the bottom” and removal previously introduced environmental standards, especially in third world countries. Increasing profits of corporations (aka “increasing shareholder value” which actually means bigger bonuses for corporate brass) and “cult of GDP” became primary goals of economic development.

        http://www.softpanorama.org/Skeptics/Political_skeptic/Neoliberalism/Articles/introduction_to_neoliberalism.shtml

        Contrary to your spurious projections about having a vested interest in your pet peeve, I rent and don’t own any IPs or related market paper, it is purely a matter of intellectual rigor and honesty.

        “are too economically illiterate to even understand what I am talking about, but hold quasi-religious mantra-based political beliefs”

        I can not even begin to phantom how you arrive at such, just saying – economically illiterate – is indicative of what you ascribe to me “hold quasi-religious mantra-based political beliefs” as it denotes some one size ridged belief system which then is comported to universal truism. A. I don’t peg myself to some metaphysical or linear based political belief system [intellectually bereft], as well a quasi religious in nature. If I was pressed to take a stab at your “economic – political’ status [due to the Bob Day man love] it would actuality be religious based and fleshed out with [L]ibertarian / Austrian bent.

        Disheveled Marsupial…. which makes you a useful idiot or fully aware neoliberal apparatchik… so which one is it – ?????

      • Skippy: I don’t disagree with your condemnation of what you understand “neoliberalism” to be, in most of its facets. I am mystified why you read my last comment and don’t find anything in it to agree with, if you are what you claim to be.

        The evil genius of these conspiracies to defraud the general public, is that they capture the support of both “free marketers” and anti-free-marketers. The “free-marketers” have blind spots about when “liberalisation” has been rigged and the result is not a free market; the anti-free-marketers are always convinced that it is “the free market” that is the problem rather than the cunning rigging of the system so that what appears to be a free market is not one. Mostly they support the rigging; such as the urban planning and the central banking.

        For example, “privatisation” is seldom a restoration of a “free market”; mostly it is the perpetuation of a monopoly in the hands of a private buyer, so politicians can maximise the sale price of the “public asset”.

        We certainly do not have a “free market” monetary system, which is rigged to grant the owners of the finance industry a fat gouge at everyone else’s expense.

        With all the insight you do seem to have about the general evil of CRONY capitalism, you are nevertheless utterly incoherent and hypocritical to be claiming to be against wealth-transferring rackets in favour of the wealthiest, because you so avidly support urban land racketeering enabled by urban planning. Even the harmful monetary policy would be far less harmful if it were not for this. Look at what low interest rates and easy credit do in local economies where land price is just as static as that of any competitively-supplied resource.

        Until you stop making your absurd and contorted argument that developers competing to supply median-multiple-3 housing is an “evil” and land rentiers gouging off median-multiple 7 to 12 housing “markets” is pure and noble – it is quite clear to intelligent readers of our arguments who is the idiot.

      • Phil….

        Beliving bob day is a shining light is one thing, because he says stuff that conforms to your beliefs [my lovely grandmother thought snakes were creatures of the devil thingy], hand waving away AGW for the same reasons starts to enter the domain of the Darwin Award….. and last but not least…. confusing any regulation off the cuff with racketeering because in your special world it – is – the dominate reason prices are not what you reckon they should be is… special people territory….

        Seems you completely missed the examination of what occurred up to and post GFC Phil and have a very simplistic view of reality from accepting at face value some simplistic deductive explanation of facts.

        If you want to play with numbers try the demand pull created by securitization of RMBS and how it relates to executive bonuses, because of the shareholder meme M. Friedman and Jensen spewed propaganda or do you think around 24 trillion was used to backstop global markets because of urban planing caused the GFC and resulting RE implosion in the USA or half the EU. Which I might offer has resulted in 60% clouded title for vintage RE in the US, was that becuase of urban planing too….

        Here this might help expand your horizon beyond urban planing Phil…

        Why are we in such a financial mess today? There are lots of proximate causes: over-leverage, global imbalances, bad financial technology that lead to widespread underestimation of risk.
        But these are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease. ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.

        Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.

        http://www.goodreads.com/book/show/6966814-econned

        Disheveled Marsupial…. please attempt to make statements of fact or your opinions based on more than conjecture, along with the evidence to support it….

      • Bullshit “regulations have nothing to do with urban land prices” and their movements. You are just wasting time on this forum. We have been over this repeatedly and the consensus of the intelligent people on MB is against you.

        There are disproofs of your bullshit all over the place. Cities with just as loose credit as the rest of the USA, that had no price bubble.

        Historical and current examples of property markets with almost nil credit at all, which are still marked by inequity, injustice, and rentier gouging.

        Not repeating this for you, more for anyone following this argument. You are obviously beyond help.

      • Phil….

        Just saying stuff out of your mental anus is not an evidence based argument…. as noted before credit drives RE prices e.g. supply has been going ballistic for yonks and prices keep going up, as such, other factors must be in play i.e. non of it happens with out credit, so if credit was less available RE price would have to adjust for it to clear…. duh…

        Disheveled Marsupial…. wow like deregulation of the financial sector has not enough fun some wing nuts want to expand the carnage to land regulation…. wheeeeeeeeeee

      • Skippy, you are worse than incoherent. The land planning racket IS in the same league as the financial racket – it is a stitch-up in favour of the gougers. YOU are a useful idiot of those gougers. I am attacking both. You are selectively attacking one and not the other – because ideological blinkers prevent you from seeing it.

        You are now resorting to making stuff up about things you know nothing about. Tell someone living in an illegal shanty in Mumbai that he is priced out of the formal housing market “because of loose credit”. There IS NO mortgage credit to the vast majority of people there!

        Go back in time and tell one of our ancestors that they are condemned to existing in a tenement costing 50% of their income in rent, “because of loose credit”.

        BAH. The MB village idiot.