Known Unknowns

Hello,

Welcome to Known Unknowns, a newsletter that wants more efficiency, less debt, and fewer time zones.


The Tyranny of Experts

I wrote in City Journal about how poorly the public health community communicated risk throughout the pandemic and, most recently, around the vaccine. There is no such thing as safety – risk is always present and something to be managed. Experts can’t eliminate risk from our lives, but they should mitigate it and offer guidance. I am skeptical of the folly of nudging people into the behavior we want. If you want people to take sensible risks it is better to give them clear, meaningful information and let them make their own choices.

We’ve all felt frustrated with the inconsistent and sometimes baffling messaging and policies we’ve endured this year, though it helped me understand why people hate economists so much. Much like the medical/public health community, we also often don’t have clear answers to important problems that have an impact on everyone’s lives. Economists have different and valid opinions, but often it’s the ones who lack any humility or sense who end up on the news.

How can I judge the CDC for telling vaccinated people they still can’t travel, when some economists (the ones who get the most press) would say to an Alabama hardware store owner, who is barely turning a profit because he is competing with Home Depot, “Don’t worry about the federal government doubling the minimum wage. Actually, according to my calculations, you are what is called a ‘monopsonist.’ And it turns out doubling your labor costs will be good for you, because all this time you’ve been wanting to hire new people for more money, but you couldn’t because you’d have to give everyone else on your staff a raise, too. This government-mandated wage increase means you can now offer that higher starting wage, and it will make you more profitable because that guy stocking shelves will be so much more motivated and productive. You won’t even have to increase prices to see those profits – I promise!”

It is a miracle anyone ever listens to us. Honestly, sometimes they shouldn’t. Other than the theory of comparative advantage, I can’t think of any correct economic insights that defy common sense. Economists, or experts in any field, are meant to offer a framework to weigh costs and benefits, help us see risks, and understand how the economy and people respond to shocks and policy. This helps people make choices that are right for them. If someone is pushing something totally counterintuitive, whether in economics or public health, we should be skeptical.

The same goes for debt. I heard someone say MMT has become an accepted theory – that is simply not true. And there is nothing new here. If you look at the history of debt cycles and financial crisis, they often featured some convoluted justification for why taking on tons of leverage isn’t so risky after all because this time was different – we are so much more clever now. Guess what, you might use some big words that tell you otherwise, but debt is always risky. Sure, some of the time it works out and juices higher growth, but when it doesn’t, things get really nasty.

That’s what experts should be saying and many are, but no one cares because their credibility is in short supply. Sometimes we see risks brewing or a lack of preparation to make us vulnerable to a potential calamity. Building that resilience takes a sacrifice people don’t want to make. Our warnings often go unheard before it is too late. Public health experts warned us about the destructive power of an airborne virus for a long time. It seems like we had dozens of near-misses, and nothing bad ever happened. So, we became complacent and dismissive (even some experts) – and here we are.

Which brings me to the $1.9 trillion stimulus. I just don’t get it. I mean, I get the politics but not the economics. There is no economic justification for most of it. By any conservative estimate, the size of the stimulus is multiples larger than the output gap. Not only that, we are poised for a big economic boom, why throw fuel on it? There are costs here – not just the possibility of inflation, we also face the risks of high and variable interest rates, financial instability, and a less dynamic economy.

Not to say there isn’t some scope for fiscal policy. Some people are suffering more than others, and there will be inequities that persist into a recovery. We also can’t spend enough on vaccines. But the parts of the stimulus that addresses those issues, if it does at all, are tiny. Instead, we have new entitlements that have nothing to do with the pandemic and will probably be with us forever.

To be honest, if this were the end of it, I wouldn’t be so concerned. It’s big, expensive, laden with political giveaways, but fine, rates are low (for now). Reopening the economy will unleash growth and that gives us a wide berth for policy error. We’ll ride it out. But what worries me is the parts that commit us to permanent higher spending – and worse, what comes next. We’ve reached a point where we just don’t care how much we spend or what we spend on.

That is what happens when we decide debt has no meaning – everyone gets a check whether they need it or not. True, taking on mountains of debt and spending it unproductively is a risk (with little upside) that sometimes doesn’t end badly. But regular multitrillion-dollar deficits and a perpetual enormous entitlement state for the entire population most certainly does not end well.

What’s really crazy is if it all goes pear-shaped, we are counting on the Fed to fix it. Say all this spending and an overheated economy leads to high inflation or bond yields start to increase. Even if the Fed is willing to clamp down and sell bonds (in a market that already has too many bonds AND it is questionable, it’ll do anything that lowers the Dow on a single day, let alone take us into a recession), they aren’t that powerful. The evidence is weak they can influence longer term rates, and their influence on inflation depends on their credibility.

Yet, this stimulus bill is popular. It has a 75% approval rate. Of course it does. Who doesn’t want another $1400 if you are told you never have to pay it back? That’s why sober expertise is so important. But why listen to experts? They don’t even try to communicate risks, costs, and benefits and are totally tone deaf.

My campaign to end DST

I am not against Daylight Saving. But I am against time changes. The whole point of time is to facilitate coordination, and time changes are confusing and bring chaos. They make even less sense in a pandemic economy, where coordination is at a higher premium, and no one leaves home anyway.

No one likes time changes – and they may not feature in our future. Thirty-four different states, a new bill, and the EU are looking to end them. I anticipate a new battle brewing that will divide this country. Should we have year-round Daylight Saving or Standard Time? Or do you prefer sunny mornings or evenings? I anticipate the divide will depend on where you live and your sleep and work habits –the way the world is going, it could even get political.

Personally, I don’t care. Let’s just pick one time and stick with it.

Until next time, Pension Geeks!

Allison