Known Unkowns


Welcome to Known Unknowns, a newsletter that attempts to promote risk awareness, especially the risks that we needlessly bring on ourselves.


These are dark days for economists. Every day I’m reminded of Alan Blinder’s Murphy’s Law of Economic Policy. It goes like this: “Economists have the least influence on policy that they know the most and agreed upon the most; they have the most influence on policy that they know the least and disagree upon most vehemently.”

Blinder came up with his law decades ago, but it has never felt more true. Economics is a way of reasoning and understanding the world. But where you land on a certain policy issue often comes down to the assumptions you make. This is why economists seem to disagree on many issues—because they don’t always agree on the right assumptions. But there are a few issues that economists (the mainstream ones, anyway) do agree on.

  1. Tariffs are bad

  2. Minimum wages>=median wages are bad

  3. Currency manipulation is bad

  4. There are different causes of unemployment

  5. The Fed needs to consider long-term economic needs

  6. Rent control is bad

  7. Wealth taxes are bad*

  8. Tax cuts don’t pay for themselves

  9. Very high debt levels are dangerous

  10. Central Bank Independence is good

It feels like every single one of these issues is lately being ignored by policymakers, journalists, and the public. It’s true that if you look hard, enough you can find some economists on the fringe who will agree with just about anything. But the same is true for scientists when it comes to climate change and vaccines. But in economics, for some reason, everyone is held up as equally credible—unless, of course, they disagree with the popular consensus. We live in a world where economic expert shopping, even far into the fringes, is considered respectable—sometimes even brave.

I think this is a serious risk. Sure, economists don’t have all the answers, but all those years of studying and crunching data amounted to something. And I see why it’s happening. Monetary policy over the last forty years has been more successful than in any period in history (with economists in charge), and almost everyone experienced remarkable standard of living increases. But structural forces that monetary policy can’t control have led to more inequality, which people see as an economic failure. A rising tide isn’t enough, because some people are raised a lot more than others. There is also more uncertainty as the economy undergoes a major structural change due to new technology. In the past, periods of uncertainty coincided with more populism.

Economics has the tools to help remedy these issues, but turning our back on what we know will only make things worse. I think that the economics profession needs to take a good hard look at how we communicate and interact with the public.

Until then, I think it’s kind of good that lawyers are running central banks. We need help with playing politics, making the case for sound economic policy, and standing up for Central Bank Independence.

Things are changing, but economics still works

To be fair, it appears as if economics is wrong about everything. Neil Irwin in the New York Times argues that because deficits are increasing and interest rates aren’t, the economic orthodoxy is wrong. But I’m not sure that’s the right conclusion.

Making sense of the economy is hard, because it keeps changing. Economics doesn’t offer many hard and fast rules (except the ones listed above), but it does offer a framework for making sense of the world as it changes, and helps us see what the risks are. And when it comes to debt markets, a global demand for safe assets and demographics means that the equilibrium rate is lower.

In the past, more debt has increased rates through several different channels. Issuing more debt increases the supply of treasuries, and more supply normally pushes down prices. But demand for treasuries remained strong, even as yields have remained low. What’s going on with the demand side is interesting, and is still not totally understood. It could be institutional, as pension funds and sovereigns need U.S. bonds for various reasons, and will pay anything for them. It could be that people are more risk-averse and seek safety, which could be driving down risk premiums. The risk of a global slow-down may weigh more on investors’ minds than the risk of a debt default or an eventual rate rise (and a corresponding drop in bond prices).

Just look at Austria. It has already sold a 100-year bond at a 2.1% yield, and is now pondering another issue that is expected to go for 1.2% (!!). People will pay a boat-load for safety, and they really, really want duration. Why? I don’t know, but I’d like to understand it better. I’m curious if you have any ideas?

But no ideas that I’ve heard throw out the economic orthodoxy that prices are driven by supply, demand, and risk. Yields rise with debt under certain conditions, and we need a better understanding of the prevailing conditions before we throw out common sense.

Also, as we’ve learned from history, the risk premium can change, and it can change quickly. And if it shoots up, lots of debt can be a very big problem. So in this environment, I vote for more bonds with longer duration.

And while we’re rethinking economic orthodoxy, Robert Barro is trying to make sense of persistent, low inflation, and he argues there are channels we have not explored there, either.

Sex work is work

I’ve made my first appearance in a New York tabloid! I was in the Daily News, and I’ve never felt more like a New Yorker! I argued that presumed Queens Count District Attorney primary winner Tiffany Caban’s plan to decriminalize sex work is a bad idea. Why? I think that it should be legalized instead. Pile-on ensued from the sex work community, because they prefer decimalization to legalization. And I can see why, as we’d all like to do our jobs freely and openly without any restrictions or taxes. But that’s not how it works in a civilized society, where we have to pay for roads and schools and stuff.

And my point is bigger than sex work. I’m not a fan of the idea that we have a law, but a single, locally-elected politician decides whether or not we ignore it. That invites the worst elements of the sex trade to Queens. It is also just bad policy. We have regulations (and taxes) to protect workers. And if we don’t like a law, it should be changed by a legislative body.

Also, the fact that the primary result may be overturned by only twenty votes illustrates my point—laws are stable and predictable, while willy-nilly decriminalization is not. It creates more uncertainty and instability. And we all deserve better.

In other news

Here is a fun video of me at the Compound debating Efficient Markets; blink and you’ll miss my best Gene Fama impression.

I don’t understand Libra

I get that everyone is searching for yield these days. But this whole “let’s open up private equity to everyone” idea suggests that the asset class has officially jumped the shark. Besides, we’re already exposed to PE through public pension funds, and if those investments don’t pay off, we all pay up.

Until next time, Pension Geeks (and friends)!


* There have been some notable exceptions lately, but even they have not been able to make a convincing case for efficiency.