
Economists don’t understand much about the macroeconomy - elorant
https://qz.com/1709972/bill-gates-economists-dont-actually-understand-macroeconomics/
======
d--b
Having worked at a successful macro hedge fund for more than 10 years, I can
tell that:

1\. There is no point in trying to predict macro economy further than 3 months

2\. It's hard to predict which way the economy will go, but it's easier to
foresee that there will be volatility or not.

3\. If you want to make macro bets, you'd better have quant strategies that
work in the case your macro bet goes South.

4\. It's important to read and understand macro economists, not as much
because they know what is going on, but rather because they are influencers,
who participate in risking / de-risking movements

5\. The most important things to understand in macro economics is that it is
very much a people's problem. If you could get in the head of every central
bank people, you'd get a strong edge over the market.

~~~
HSO
> _Having worked at a successful macro hedge fund for more than 10 years_

Do you mind sharing which one? (Ok, stupid question) Or whether it's a "quant"
or global macro fund?

> _There is no point in trying to predict macro economy further than 3 months_

I disagree. Sometimes you can identify systematic factors. I remember Bob
Litterman once telling me at a conference that a lot of their "quant" success
was actually due to factoring in certain central bank policies that the
central banks were willing to accept a certain, let's call it, slippage for in
order to achieve certain goals. That apparently worked for years. Another
example that comes to mind is the Euro convergence trade. Didn't that also go
on for years? Unless you mean specifically GDP. Then yeah, I agree. In fact, I
remember a class in financial econometrics where the teacher drew fancy
equations on the blackboard only to conclude: "But you know, in practice a
simple AR-model will perform just as well. It's just so you've seen it" :D

> _It 's important to read and understand macro economists, not as much
> because they know what is going on, but rather because they are influencers,
> who participate in risking / de-risking movements_

Obligatory quote here:

"""You might suppose that the feud could be settled by testing ri- val claims.
Alas, macroeconomics rarely works this way. Macro- economists cannot run
experiments as laboratory scientists can. Statistical analysis of the world is
muddied by the vast number of variables, many of which are correlated with the
thing whose ef- fect the economist is trying to isolate. _Macroeconomic
arguments tend not to produce winners and losers: only those with more in-
fluence and those with less._ Post-Keynesian ideas were never pro- ven false,
unlike the Ptolemaic model of the solar system. Rather, they declined in
status as mainstream Keynesianism rose."""

[1] The Economist. Free exchange: Magic or logic? page 69, Mar 16 2019.

Which of course leads directly into your

> _The most important things to understand in macro economics is that it is
> very much a people 's problem. If you could get in the head of every central
> bank people, you'd get a strong edge over the market._

I've been saying this for YEARS, mostly to deaf ears. Thank you for confirming
my personal biases/opinions ;) Finally someone else says it. It's why I (used
to) like reading biographies, however shitty, of key people in power. Just to
get a sense of their thinking or psychological makeup.

Very good comment, I'll keep it.

------
kthejoker2
Scott Sumner (an economist) responded, I thought his take was spot on

[https://www.themoneyillusion.com/the-animal-spirits-fudge-
fa...](https://www.themoneyillusion.com/the-animal-spirits-fudge-factor/)

Two quotes

> “Macrophysics” (predicting complex physical systems such as hurricanes and
> earthquakes) does just as poor a job of prediction as macroeconomics.

> The real problem is modeling the policymakers. We don’t know exactly how the
> 12 members of the FOMC will behave.

~~~
mikojan
> “Macrophysics” (predicting complex physical systems such as hurricanes and
> earthquakes) does just as poor a job of prediction as macroeconomics.

Which is why people do not trust the weather men and neither should they trust
economists.

> The real problem is modeling the policymakers. We don’t know exactly how the
> 12 members of the FOMC will behave.

This sounds hard. What about 327 million consumers? The real problem is a
discipline in the social sciences which mistakes itself for hard science. It
is serving today the same purpose "scientific socialism" once served in the
Soviet Union: Taking power away from the people and placing it into the hands
of an enlightended elite. What's called "depoliticisation" today. In which you
remove spheres of public interest from the democratic decision-making process
and cede them to unaccountable power. The exact thing we just haven't had
enough of just yet according to this guy.

Listening to informed opinions is important but economists enjoy a kind of
widespread unquestioned respect that has no basis in reality at all.

~~~
bryanlarsen
> Which is why people do not trust the weather men and neither should they
> trust economists.

People who's livelihood depend on the weather (farmers) _do_ trust weathermen.
They just know the limitations.

1: any forecast more than three days out cannot be counted on. (If you're
close to mountains or other similarly confounding factor, that 3 day number is
a lot smaller)

2: An 80% forecast of rain doesn't mean that it will rain in one specific
place, but that it will rain in a good portion of the forecast area.

The same thing applies to economists. Some of their predictions are very
accurate, but much are wishes and guesses. But due to human nature we
primarily remember the times their guesses were wrong.

------
nabla9
Macroeconomics is study of object with gradually changing dynamics.

Economists started to understand the dynamics of post-war type growing economy
and how it behaves better and better. There is gradual shift away from these
conditions.

* Wage share in OECD countries peaked late 70's early 80's and has started to decline.

* The return from increased education is slowing. Marginal return from increasing education is smaller.

* Women are now fully in workforce.

* Demographic change in OECD countries when people age. The share of working-age population is in decline. Paying for the care of older people dominates the growth of public spending and requires increases in taxation.

Now macroeconomists are trying to learn the dynamics of new conditions.

~~~
SiempreViernes
What all this amounts to is that there is no theoretical understanding of the
the social interactions that constitute the economy, only fitted relationships
to the actions of aggregating entities like companies.

~~~
nabla9
That would require relatively complete "Theory of human" and also
understanding the variety of human behavior. Human are also chancing their
behavior. Different generations respond differently to same signal.

But all this does not mean that macroeconomics is useless or that it's not
getting results. They are just relatively modest.

------
conjectures
Well, he's not wrong.

It's a system which is slow to change, nigh on impossible to experiment with,
we only have one experimental unit, and it responds to interventions. No
wonder it's difficult to science it properly.

'Macroeconomics' by Williamson is my go-to example of the worst textbook I
ever had to read (setting aside postmodernism). Overly certain, badly argued,
with fishy math. So, a good place to go to for everything wrong with the
discipline.

------
noneeeed
I think it was Tim Harford (possibly quoting someone else) who said
"Microeconomics is everything we think we understand, macroeconomics is
everything we don't".

My problem with macro-economics/economists is that so many of them seem so
convinced aboout their own models and beliefs, or at least the conversation is
dominated by those who are. It doesn't matter which view you have, there will
be promonant economists who are convinced that it is the 'one true way" and
the alternatives are bunk. Government policy then seems to swing depending on
who is being listented to at the time.

I wouldn't mind macro-economists so much if they would just admit that a lot
of thier views on the economy are largely faith, backed by cherry-picked data.

------
imtringued
Does the opinion of economists even matter in practice even if they end up
being correct? Politicians pass a lot of laws that simply do not make sense
economically in the long run.

Here is an example: Globalization leads to concentration of economic
opportunity in certain locations. If you simply go by the book then workers
simply move to where the economic opportunity is and therefore everyone is
better off than before globalization.

But local politicians of those locations want to avoid displacing their
existing residents. Therefore they pass laws that make sense in the short term
for their residents. Over the long term however they prevent the mobilization
of all those future workers and the vast majority are worse off as a result of
globalization.

~~~
NeedMoreTea
When politicians create and force change, as a matter of dogma, and become
known for carrying their books or following unproven theory from Hayek or
Freedman, yes it probably matters. When those same politicians or economists
point at the Chile miracle (that was a disaster), or economists become widely
known as the "Berkeley Mafia", yes it probably matters.

Globalisation was about externalising costs and impacts. To hell with the
local consequences - we got a decade or two of deindustrialisation, with lives
and regions ruined for generations. Political fashions tend to stem from
economic fashions without regard for the bigger picture. Or environment,
citizens and residents.

------
soVeryTired
Economic as a discipline has a painfully narrow focus on mathematical
modelling. Anything that doesn't fit into the models tends go get ignored: one
of the reasons few economists spotted the global financial crisis is that
_their models didn 't allow for such a crisis_.

It would be silly to expect a biologist to write down an all-encompassing
equation describing a cat, solve it, and thereby understand the animal. Why
should that approach work on something infinitely more complex, like a whole
economy?

------
Merrill
I think that part of the problem is that macroeconomists think of the economy
as a single system. Therefore, if you change a financial parameter, such as
short interest rates, it will change supply and demand in the business
economy.

It seems that the financial economy, which is the trading of various financial
instruments between a lot of different parties, and the business economy,
which produces, distributes and consumes goods and services, are two loosely
coupled systems. Monetary volumes of financial trading are one or two orders
of magnitude greater than the monetary volumes of good and services. Further,
the financial economy is even more globalized than the business economy. The
financial economy is showing signs of instability as regulators attempt to use
it to control the business economy. Direct control of the business economy by
fiscal measures, subsidies, tariffs and regulations would be more effective
and cause less distortions than continued use of financial measures.

------
Unsimplified
I've always thought that macroeconomics should be studied with a realistic
perspective, and that does somewhat seem to be the direction economists are
going with agent based modeling. Though perhaps too much on the math side and
not enough fundamental thinking.

This is how I've always done my analysis. Start with 1000 people. Group them
into 500 households along an age curve. Give each person a money account and
assets along a wealth curve. Set up 100 businesses and the government. Study
the dynamic system and gradually increase the realism/complexity with central
banking, credit cards, etc. This is the hard unsimplified way but you will
uncover the absolute truth of our system.

------
asah
weird/crazy idea: using individual transaction data from various sources
(credit cards, cash deposits, etc), would it be possible to build up a macro
view from 100s of millions of people?

Start small (not the US), in a geo where electronic payments dominate, and
where privacy isn't as important. If the model proves valuable, build modeling
tools and scale up.

Counterpoint: there's a very large percentage (by value) of transactions that
are invisible e.g. business partnerships, cryptocurrency, etc.

~~~
chaosbutters
agent based modeling where the probability of the agents' actions is dependent
on actual economic data...

more realistic sim city (city skylines)

~~~
SiempreViernes
[https://en.wikipedia.org/wiki/Agent-
based_computational_econ...](https://en.wikipedia.org/wiki/Agent-
based_computational_economics)

I don't know that they've managed to produce the sort of general results that
older economic theory.

------
samirillian
> [Look at] the role of the bond rating agencies in 2008, which is completely
> unreformed. Why would that be? Well, there must be a lack of consensus.

I think we have a an obvious reason for the lack of consensus here, which is
cognitive/regulatory capture. You'll always find someone willing to muddy the
waters for a little cash and some sort of career advancement. Economics is the
ideological science _par excellence_.

------
dandare
First:

>Gates is right, in a way: Economists don’t understand much about the
macroeconomy. No one does. Any responsible economist is the first to admit
that.

Then:

> Economists’ research has contributed to fewer people living in poverty, low
> predictable inflation, and less risk and uncertainty.

How exactly?

~~~
orwin
Because macroeconomy is a large subset of economy, and wereas some subset of
macroeconomy are well-understood, how those subsets interact with each other
and with human/group psychology, however, is way harder to understand.

But also, you can be right for the wrong reason, especially in "soft"
sciences.

~~~
palager
The article presents that economic research was causal in these wins (poverty
etc). There is no justification given for that in the article, it is pure
dogmatic belief.

Said another way, how do we know these macroeconomic improvements are not in-
spite-of this research?

~~~
pessimizer
Are you calling for a debate about the nature of cause and effect, or do you
have a specific observation? Do you have some evidence that completely
unmanaged economies have performed similarly in those measures?

~~~
palager
As the GP states, the article accepts the claim:

"Economists don’t understand much about the macroeconomy"

But then says that in fact economists have e.g. contributed to fewer people
living in poverty. I'm simply saying I don't accept that the research of
economists has improved e.g the poverty situation without some evidence of
that fact.

Before the discipline of 'economist' existed human societies experienced rises
and falls of poverty, inflation etc. Is that sufficient evidence for you that
'completely unmanaged' (your words, which I don't even really understand your
point here -- are you claiming economists 'manage' the economy?) economies
have in the past had periods of ups like ours today?

The article is bordering on claiming that economists have nfi what they are
doing, but the effects of their efforts have been amazing.

------
ptah
Does it make sense then to limit the impact by de-globalising economic
activity to a scale that can be more easily understood?

~~~
simonh
How do you do that without also limiting the up-side? Globalisation has lifted
hundreds of millions of people out of poverty. Localising economic activity
would undo much of that.

~~~
peteradio
Since 1970 the world has added about 4 billion people, I don't think the claim
that "100 million" have been lifted out of poverty can be taken by itself.
What if 100 million have been added to the "not super poor" class while 3.9
billion have been added to the "effectively" slaves class? Not saying that's
what has happened but "lifted hundreds of millions of people out of poverty"
sounds like a focused view that ignores all else.

~~~
simonh
I didn't say 100 million, I said hundreds of millions. That's a very cautious
low ball though. That's probably the rough scale of people added to the middle
class, not just raised out of poverty, in China alone. We don't need to guess
what happened to the global population though, they're out there in the world.
We can ask them.

Just since 1990, the share of the global population living on less than $1.90
a day has fallen from 44% to about 9.5% in 2015[1]. The graphs there are
broken because different studies have used different measures of poverty at
different times, but the trends and absolute numbers are clear. Global poverty
as a proportion of population is about 1/6th what it was in 1960.

[1][https://www.worldvision.org/sponsorship-news-
stories/global-...](https://www.worldvision.org/sponsorship-news-
stories/global-poverty-facts)

~~~
pessimizer
> in China alone.

More like in China almost entirely. Global capitalist structures take a lot of
credit for improving living standards all over the world, but when you look at
the numbers, it's really a very dramatic improvement in China, a country that
deviates from those structures in significant ways (and is demonized for ir.)

------
siempreb
No one seems to understand! Macro or micro economy, for me it's just another
pyramid game. For some reason most people are completely unable to see that
and can only humdrum what they've learned at school; that 'our' economy is a
boon. Well, it might be a boon for the rich, but not for us commoners/slaves.
And as a side effect this economy(of waste) is destroying not only billions of
lives, but also our entire planet and species.. And we are so smart that we
have an opinion whether to choose between Trump or Clinton, while neither of
them desire to end this idiocy.

I would not be surprised if we eventually find out humanity has already
multiple times wiped everything from this planet in the last billion years.
And IMAO we are stupid enough to do it again and again.. It all comes down to:
Greed, Vanity, etc..(you know your sins don't you?). The flesh is weak, so
weak we'll probably never learn..

------
black6
No matter how complicated you think economics is, it's more complicated than
that. Just the act of trying to understand and theorize about economics
changes economics, like an observer effect.

