Showing all posts tagged: david leonhardt
David Leonhardt, When The Crowd Isn’t Wise via the NY Times
Showing all posts tagged: david leonhardt
Markets are at their best when they can synthesize large amounts of disparate information, as on an election night. Experts are most useful when a system exists to identify the most truly knowledgeable — a system that often resembles a market.
David Leonhardt, When The Crowd Isn’t Wise via the NY Times
David Leonhardt, When the Crowd Isn’t Wise via NYTimes.com
The rise of prediction markets started in the middle of the last decade, brought about by a combination of politics, psychology and technology. The politics came mostly from the aftermath of the Iraq war, when the collective, pro-invasion opinion of Washington experts came to look tragically wrongheaded. The psychology came from a barrage of research, often called behavioral economics, that created a science of human foibles. People were systematically too confident, the research found. They put too much weight on information they liked and too little on data that contradicted their assumptions.
The only good alternative to a few flawed opinions, some researchers argued, was a vast number of flawed opinions. The biases often canceled one another out. The legitimate information rose to the surface. It was the wisdom of crowds, as the writer James Surowiecki called his 2004 book.
The Internet made collecting the wisdom of crowds vastly easier than before. Intrade, Betfair and other British and Irish betting sites became the public face of prediction markets. Google and other companies started their own internal prediction markets to help them make decisions about where to invest. The Pentagon planned one, to track threats, before deciding it did not like the image of American officials making bets about war and famine.
The early successes of prediction markets were notable. To take a small personal example, my wife and I, not exactly frequent moviegoers, twice won money in a large Oscars pool simply by hewing to the British odds. Much more significantly, Intrade was a more reliable guide to the 2006 midterm election than cable networks. On election night, its odds showed that the Democrats had become the favorites to retake the Senate, while television commentators were still telling viewers it was unlikely.
But the crowd was not everywhere wise. For one thing, many of the betting pools on Intrade and Betfair attract relatively few traders, in part because using them legally is cumbersome. (No, I do not know from experience.) The thinness of these markets can cause them to adjust too slowly to new information.
And there is this: If the circle of people who possess information is small enough — as with the selection of a vice president or pope or, arguably, a decision by the Supreme Court — the crowds may not have much wisdom to impart. “There is a class of markets that I think are basically pointless,” says Justin Wolfers, an economist whose research on prediction markets, much of it with Eric Zitzewitz of Dartmouth, has made him mostly a fan of them. “There is no widely available public information.”
These flaws have become fodder for the markets’ critics. On the day of the health care ruling, the widely read financial writers Barry Ritholtz, Felix Salmon and David Wessel all took to Twitter to point out that Intrade looked bad. Tony Fratto, a former aide to President George W. Bush, noted his “real glee” that “Intrade was wrong, again.”
But such schadenfreude raises a question: once you accept that prediction markets are flawed, do you turn back to the inside experts?
ALAS, the experts’ overall record remains as poor as the behavioral economists maintained — and often worse than the markets’ record. Mutual fund managers, as a class, lose their clients’ money because they do not outperform the market and charge fees for their mediocrity. Sports pundits have a dismal record of predicting games relative to the Las Vegas odds, which are just another market price. As imperfect as prediction markets are in forecasting elections, they have at least as good a recent record as polls. Or consider the housing bubble: both the market and most experts missed it.
The answer, I think, is to take the best of what both experts and markets have to offer, realizing that the combination of the two offers a better window onto the future than either alone. Markets are at their best when they can synthesize large amounts of disparate information, as on an election night. Experts are most useful when a system exists to identify the most truly knowledgeable — a system that often resembles a market.
The American Enterprise Institute has head-faked the Brookings Institution into playing along with a so-called ‘post-partisan’ policy paper to increase Federal spending on ‘clean energy innovation.’ David Leonhardt seems to have been mesmerized as well, or else he went along with the savviness of the rhetoric, which is that cap and trade failed because it would cost too much, but now, somehow, we can get Republicans to go along with clean energy research. The fact is that energy companies bought off congress to kill what was originally a Bush proposal to control CO2.
David Leonhardt, A Climate Proposal Beyond Cap and Trade
[…]the death of cap and trade doesn’t have to mean the death of climate policy. The alternative revolves around much more, and much better organized, financing for clean energy research. It’s an idea with a growing list of supporters, a list that even includes conservatives — most of whom opposed cap and trade.
On Wednesday, the reliably conservative American Enterprise Institute and the left-of-center Brookings Institution will release a joint proposal to increase federal spending on clean energy innovation to as much as $25 billion a year, from the currently planned $4 billion a year. The proposal would also toughen rules for such money, so that recipients could continue getting it only if they were reducing the cost of clean energy. Today, many subsidies for wind, solar power and ethanol are more lenient.
Along similar lines, Al Gore is working with Reed Hundt and John Podesta, former Clinton administration officials, on a proposal aimed at “lowering the cost of clean,” as Mr. Hundt recently told the Web site Earth2Tech. The current rock-bottom interest rates would help the government finance the investments.
These proposals reflect the political reality that raising the cost of dirty energy is unpopular, especially when the economy is so weak. Finding the money to make clean energy cheaper, even when government budgets are tight, will probably be an easier sell.
The approach does have one big disadvantage, of course. It does not leverage the power of the market, the way that a cap-and-trade system (or direct carbon tax) would. If the price of emitting carbon went up, companies would devote more of their own research budgets to finding new energy sources.
But history shows that government-directed research can work. The Defense Department created the Internet, as part of a project to build a communications system safe from nuclear attack. The military helped make possible radar, microchips and modern aviation, too. The National Institutes of Health spawned the biotechnology industry. All those investments have turned into engines of job creation, even without any new tax on the technologies they replaced.
“We didn’t tax typewriters to get the computer. We didn’t tax telegraphs to get telephones,” says Michael Shellenberger, president of the Breakthrough Institute in Oakland, Calif., which is a sponsor of the proposal with A.E.I. and Brookings. “When you look at the history of technological innovation, you find that state investment is everywhere.”
The tone of the piece is so matter-of-fact that you want to scream. Why is cap-and-trade dead? He accepts the GOP story, implicitly branding it as too liberal or progressive. He seems to accept the premise that we can somehow gradually innovate a way out of this mess, when the world’s icecaps are disappearing.
David Roberts shares my concern that moderates are being seduced into lalaland:
David Roberts, Are the politics of public investment really easier?
It’s worth noting that cap-and-trade began its life as an effort by centrist greens to find common ground with conservatives. They worked together, branded the result a new, post-partisan path forward, and sold Bush I on it. Now it’s viewed as wildly, unacceptably liberal. Why is that? It’s not that the policy changed, it’s that the policy became a genuine threat to the status quo. Thus, money and messaging were marshaled to demonize it. Perhaps there’s a lesson to draw from that episode?
Narcissistic post-partisan fantasies aside, the fact remains that the fossil fuel status quo is politically entrenched, wealthy, and ruthless, and at least for now, the Republican Party is its instrument. That means clean energy is a partisan fight. If Americans of good will ever hope to overcome the status quo and drive real change, it won’t be through cleverly framed policy proposals, it will be as its always been done, through the accumulation and deployment of political power.
It’s a power struggle, not an argument. It will be won through political force, not persuasion. It’s the oldest war in the book, progress vs. status quo, and it doesn’t help matters that so many smart people refuse to fight for, or even associate with, their own side.
I agree. This is just another trick, another way to slow-down real action to reduce carbon emissions. These people are rich and have a lot at stake. They aren’t playing bean bag. They will tell any lies to keep the energy machine humming along.
I was arguing with my Dad last night, who seems to have been bitten by the ‘austerity now’ bug, and who had forgotten FDR’s disastrous
David Leonhardt, Betting That Cutting Spending Won’t Derail Recovery
The private sector in many rich countries has continued to grow at a fairly good clip in recent months. In the United States, wages, total hours worked, industrial production and corporate profits have all risen significantly. And unlike in the 1930s, developing countries are now big enough that their growth can lift other countries’ economies.
On the other hand, the most recent economic numbers have offered some reason for worry, and the coming fiscal tightening in this country won’t be much smaller than the 1930s version. From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product.
Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once. From 2009 to 2011, the tightening in the United States will equal 4.6 percent of G.D.P., according to the International Monetary Fund. In Britain, even before taking into account the recently announced budget cuts, it was set to equal 2.5 percent. Worldwide, it will equal a little more than 2 percent of total output.
The policy mistakes of the 1930s stemmed mostly from ignorance. John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood. In the 1932 presidential campaign, Franklin D. Roosevelt vowed to outdo Herbert Hoover by balancing the budget. Much of Europe was also tightening at the time.
If anything, the initial stages of our own recent crisis were more severe than the Great Depression. Global trade, industrial production and stocks all dropped more in 2008-9 than in 1929-30, as a study by Barry Eichengreen and Kevin H. O’Rourke found.
In 2008, though, policy makers in most countries knew to act aggressively. The Federal Reserve and other central banks flooded the world with cheap money. The United States, China, Japan and, to a lesser extent, Europe, increased spending and cut taxes.
It worked. By early last year, within six months of the collapse of Lehman Brothers, economies were starting to recover.
The recovery has continued this year, and it has the potential to create a virtuous cycle. Higher profits and incomes can lead to more spending — and yet higher profits and incomes. Government stimulus, in that case, would no longer be necessary.
As is often the case after a financial crisis, this recovery is turning out to be a choppy one. Companies kept increasing pay and hours last month, for example, but did little new hiring. On Tuesday, the Conference Board reported that consumer confidence fell sharply this month.
And just as households and businesses are becoming skittish, governments are getting ready to let stimulus programs expire, the equivalent of cutting spending and raising taxes. The Senate has so far refused to pass a bill that would extend unemployment insurance or send aid to ailing state governments. Goldman Sachs economists this week described the Senate’s inaction as “an increasingly important risk to growth.”
The parallels to 1937 are not reassuring. From 1933 to 1937, the United States economy expanded more than 40 percent, even surpassing its 1929 high. But the recovery was still not durable enough to survive Roosevelt’s spending cuts and new Social Security tax. In 1938, the economy shrank 3.4 percent, and unemployment spiked.
So why the eagerness to put on the brakes? Greece and others may be forced to do so by (badly thought out) convenants with lenders, like the EU and the IMF. But the US has no such imperative. Why the ‘austerity now’ movement?
The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.