Growth forecasting. And other made up stuff.

Economists are never wrong, as the saying goes, but their predictions are sometimes subject to an unexpected asymmetrical shock which causes them to awry. 

I really like economics but ended up majoring in Industrial psychology (because I thought it was interesting) and finance (because I wanted to be a trader). Several years later I decided to have another crack at majoring in economics. But then got distracted by philosophy and political science (and the humanities in general). My enthusiasm for traditional and linear forms of education and the piece of cardboard they give you afterwards has waned somewhat over the years, so I don’t ever see myself progressing past economics 202 on any official platform.  Besides being an economist is a lot like being a horoscope writer, you dwell in a dim twilight realm bereft of light, peddling your own particular brand of bullshit to anyone who will listen to you. Some people even aggrandize their vocation with a prefix. Senior economist, which personally I think is hilarious that something so spurious should have a hierarchy. Still… I have a soft spot for economics, even if the practitioners thereof are mostly kooks and whack-jobs.

We all make predictions. Especially about the economy. We don’t need to be able to chart aggregates on a graph to do this. Just like economists we can make stuff up as we go. Sometimes we will be right. And sometimes we will be wrong. When we are right we get to croon on about it indefinitely. When we are wrong, we casually forget to mention it. (or delete our blog post)

Besides, really, its all Bismark. Which is a fantastic line from Dan Carlin I have decided to love (steal) and casually drop into as many conversations as possible.

James Burke – ‘… we don’t know whats going on. But we think that we do and that we have instruments that tell us we know and we run our systems based on the fact that we have a pretty good handle and more or less we manage to stumble along, the Fed drops the rate and to a certain extent the economy behaves the way it is expected to behave. The instruments we use are extremely crude so on a macro level we see things happening more or less the way we thought they ought to, what we don’t see are the levels, the more subtle levels at which the effects are less immediately visible, less easily understood on the front page of a newspaper, or more likely to have an outcome down the road, in which case, by that time of course we don’t know they are late effects, we see them as something else. I am not a conspiracy freak, but I have long believed that what we think is going on is nothing like what is going on, I’m talking about the way the political institutions work, I believe that Realpolitik has always been whats really happening and the flak, the blah, blah, is what the rest of us believe is going on and I think that’s the way the world works.

Dan Carlin- ‘Its all Bismark’. 

James Burke – ‘Its all Bismark’.

After that lengthy prologue I suppose I can move onto what I originally wanted to blog about. Which is growth forecasting. Which is probably the blandest most boring topic for a blog post in the history of the world. If only it wasn’t so damn important. We will all live or die by this annoying little term. 

Our governments borrow money (if you believe this) to improve our lives by building roads and hospitals and libraries and they assume (because economists tell them) that future growth in the economy will be able to outpace the interest that they need to pay on these loans. Our pension funds extrapolate data from previous decades to surmise how much money we will have when we retire. 

Since world war two, the growth rate in the world economy has, for all tense and purposes been, astronomical. Technological innovation has been the main driver behind this growth. 

What if we’re done growing?

I mean not completely. New technology is still being developed that will drive productivity and therefore growth. But what if the lofty single and double digits of growth are done? As soon as you mention this, people tend to switch off, label you cynical and shuffle off. 

Freakeconomics recently did a podcast on what essentially is the law of diminishing returns. 

The law of diminishing returns refers to a point at which the level of profits or benefits gained is less than the amount of money or energy invested

The example they use (and I’m paraphrasing a bit here because I’m relying on memory) is an acre of crops. Back in the day, the yield on an acre of corn (for example) wasn’t great. But as we’ve progressed (mostly in the last century) and we’ve developed fertilizers and pesticides. We have genetically modified the corn to be drought resistance, disease resistant and to produce as big cob as possible. We’ve almost maxed out the productivity for an acre of corn. Now we can do more R&D and eke out a tiny bit more productivity out of that corn… but that will cost of millions of dollars in research… and really, does that 1% increase in productivity out weigh the cost of research? Probably not.

I think assuming that we can continue to grow exponentially (Chip manufacturers for example are struggling to keep up with Moore law of semi-conductors) is super irresponsible of us as a species. Especially when we are making huge financial decisions based on guess work and extrapolation of past performance. 

What happens if the world economy only grows at 2% for the next three decades? 2% growth in 10BC was twenty times the annual growth rate for an ancient Roman. As I understand it up until the 19th century the world was ticking along at under 1% GDP growth per year. 

With the debt levels being what they are 2% growth would be catastrophic. 

I worry about technology. Especially the tech that is coming in the next couple of decades. Soon we will be able to print anything from houses to complex mechanical spares. What does that do to the building industry? The engineering industry? Self driving trucks, drone deliveries? What if we develop fusion and put all the coal industry out of work? There are hundreds of labor intensive industries staring down a barrel of gun. 

I think optimists will argue that we will muddle along and somehow it will all work out. I worry about all the mouths we will have to feed and the crazy political populism and ideology that comes with that with this drive to optimize.

Poor people eventually snap. Ask a French aristocrat. 

I generally dislike pessimism. But I also dislike continual and buoyant optimism. I suppose everyone is every era feels like they are on the cusp of some sort of disaster, and somehow we’ve gotten through as a species. Technology may save us. IBM couldn’t see the use for personal computer. And that wasn’t that long ago. Edison invented the lightbulb with virtually no R&D funding. There are countless counter arguments to techno-pessimism. 

Studying finance. I only ever learned one thing that I thought was valuable. Hedge your bets. Cover your short positions with long positions. Don’t put all your eggs in one basket and assumption is the mother of all fuck ups.