FORECASTING THE ECONOMY: Keynesian Economics vs. Austrian Economics – [VIDEO]

The 2 videos are designed to convince you that the Austrians’- economic predictions are more accurate for use laser rangefinder -Laser Rangefinder for hunting.

The first video has an intro in French, sorry for that, but the rest of the video is in English (with French subtitles).

Keynesians’- forecasts (featuring Ben Bernanke and Paul Krugman) vs. Austrians’- forecasts (featuring Ron Paul and Peter Schiff):

More Garbage Words: Social Security, A Minor Fiscal Issue

Paul Krugman calls Social Security a minor fiscal issue, citing this report in which Social Security spending as a percent of GDP levels off at around 6% in 2030. For someone whose blogging modus operandi is pointing out disingenuous arguments made on the right, Dr. Krugman is skating on thin ice here. The Trustees Report that he uses as the basis of his numbers shows GDP rising 66% between 2010 and 2020, which would be on par with the rise between 1990 and 2000. Huh? Is that what the &#8220-invisible bond vigilantes&#8221- are telling us? The Trustees Report assumes GDP growth of 160% between 2010 and 2030. If we are becoming Japan as Krugman says, maybe the more relevant comparison is the 66% GDP growth seen in Japan 1990-2010. Changing this assumption has a large effect on Social Security as % of GDP.

Now, Dr. Krugman could argue at least two points:

First, even if you assume Japanese-style growth, Social Security would still account for less than 10% of GDP. This however leaves aside the state and municipal versions of the pension problem, that might eventually take the form of demands at the federal level, and in any case are relevant to state taxpayers. It looks like he is telling half the story, and then with only half the numbers. Not to mention Medicare, which perhaps is only a different issue in a pedantic sense, if not in terms of urgency.

Second, if further stimulus were applied as Krugman recommends, we might have a chance of achieving those GDP targets. If however income is now structurally impaired by demographics or other factors, as some argue, those numbers are out of reach pending some new technology. Maybe you can double down on a bad balance sheet if your cash flow assumptions are good, but in this case they seem to be a product of naive empiricism. This is the same sort of empiricism that got pension funds that had assumed 8% annual returns in trouble. Those numbers seem to be picked from the same fictional future world as the GDP projections that Krugman endorsed, and as usual there is a willful blind spot to reasons why the past might not reflect the future.

To be clear, although it would be largely in my self interest, I am not some right-winger bent on ending social security. In my view, the minimum age must be raised. Dr. Krugman rightly points out that this would put a disproportionate burden on low-income workers, which is why I counter that any age hike must be coupled with means testing, which I prefer to higher taxes. Those on the left that argue that means testing would undermine the popularity of the program are absurd partisans. What is the metaphor? That would be like wearing the wrong color shirt to the wrong neighborhood, getting shot and then freaking out that your shirt is ruined, but not going to the hospital. Neither the right nor left would be thrilled with with an age hike / means testing deal, but that&#8217-s what makes a good compromise.

Mark Thoma, Superficial Blogger

His post, &#8220-The Myth of the Social Security Shortfall&#8221-, here, but if you don&#8217-t want to defer thinking, read Mish Shedlock on pension underfunding instead. Yes, taxes will have to go up, but it&#8217-s not as though sunsetting the Bush cuts and tacking on a couple percent here or there will stem the entitlement spiral, of which social security is a single piece. Thoma is quoting Michael Hiltzik, whose message, when you strip away the authoritative tone is basically, &#8220-don&#8217-t worry so much, it&#8217-s in the future and stuff.&#8221- That strategy hasn&#8217-t worked out so far.

Deferral, abetted by private and public conflicts of interest, is the essence of the problem and is at the root of both the corporate and sovereign credit crises. Now, it&#8217-s one thing when you have an impaired balance sheet propped up by good cash flow, but there are reasons to believe that prospective growth and public income will also be lacking relative to the 20th century. These reasons of course are swept under the rug by at least one liberal economist. Paul Krugman chides someone for rambling on about demographics one day, and tells us we are turning Japanese the next. Why are we turning Japanese? Krugman sees this, but thinks we must defer that issue to deal with unemployment and deflation. To what extent, however, are unemployment, deflation, and the series of booms and busts over the last 30 years symptoms of demographics? If that&#8217-s the case, if pension rate of return assumptions are off for this or other reasons, things could get late early.

– out of your titles if you aren&#8217-t going to have any real discussion. If everything is quoted, the quotes lose their meaning and everything is implicitly endorsed.

Paul Krugman Makes a Boo Boo.

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In Paul Krugman&#8217-s blog entry, Done, at 4:39pm (EDT) on March 21, 2010, he commented: &#8220-OK, nothing is sure in this world. Intrade is still giving Obamacare a 2.2% chance of failing, …&#8221-

He was talking about the InTrade market on Health Care Reform. In theory, the market price in such a derivative market should equal the expectation of the underlying event coming true. However, Paul Krugman (and many others) forgot one of the most basic assumptions of the market model! Transaction costs.

When the market price is over 95, InTrade charges a transaction fee of 3 cents per contract (real money). While market prices are quoted in percentages, the payoff for a winning ticket is $10 (real money). Therefore, the transaction fee is 0.3% of the winning payoff. In addition, InTrade charges 10 cents per contract on expiry (if you &#8220-win&#8221-). That&#8217-s another 1.0%.

So, when the market was quoting 97.8% likelihood of the HCR bill passing before June 2010, this didn&#8217-t really mean that there was a 2.2% chance of the bill not passing. A winning ticket would be subject to 1.3% transaction fees. The real likelihood of failure was 0.9% &#8211- approximating the uncertainty that Obama would be &#8220-hit by a bus&#8221- before signing the bill into law.

No rational investor would wish to purchase a share for more than 98.7, given the transaction costs. In a sense, this is the market&#8217-s &#8220-100%&#8221-. Interestingly, at 1:49pm GMT today (March 23), there are 695 bids at 99.1 and 413 asks at 99.2. Clearly, some traders are not subject to the full transaction fees at InTrade. More about that here.

[Cross-posted from Toronto Prediction Market Blog.]

Paul Krugmans excellent definition of the prediction markets

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Paul Krugman:

Betting markets don’t have any mystical power, but they do summarize conventional wisdom pretty well- […]

E-mail confidentially to tell me the names of the economists who over-hype the prediction markets.


No GravatarCass Sunstein:

[&#8230-] Some people are now doubting not only the prediction markets but also the polls, saying that no one knows anything, and that anything is as likely as anything else. Don&#8217-t believe it. To be sure, we are continuing to obtain information about how prediction markets perform and when they do well and poorly. Perhaps they will turn out to be less reliable than they seem &#8212- and in all likelihood, we will obtain a better understanding of when they work. And of course no one has a crystal ball. But the polls are generally pretty good &#8212- and if you want to have a sense of the probabilities, you&#8217-d probably do best to consult Intrade.

Thanks to Stephen Bass for the link.

Previous blog posts by Chris F. Masse:

  • Red Herring’s list of the top 100 North-American high-tech startups includes Inkling Markets —but not NewsFutures, Consensus Point, or Xpree.
  • Professor Koleman Strumpf explains the prediction markets to the countryland people.
  • Professor Koleman Strumpf tells CNN that a prediction market, by essence, can’t predict an upset.
  • Time magazine interview the 2 BetFair-Tradefair co-founders, and not a single time do they pronounce the magic words, “prediction markets”.
  • One Deep Throat told me that this VC firm might have been connected with the Irish prediction exchange, at inception.
  • BetFair Rapid = BetFair’s standalone, local, PC-based, order-entry software for prediction markets
  • Michael Moore tells the Democratic people to go Barack Obama in Pennsylvania (a two-tier state), but the polls and the prediction markets tell us that that won’t do the trick.

Prediction markets = A tool for quantifying the conventional wisdom

No GravatarEric Zitzewitz responded to Paul Krugman:

Almost all of the serious people who study or work with these markets are not in the “markets are magic” camp.

My work in this area (with Justin Wolfers usually and Andrew Leigh and Erik Snowberg occassionally) uses these markets as a way of quantifying the conventional wisdom.

This has more value than may be immediately apparent. It can help you get from “the market rose 0.25% in response to Obama’s Iowa victory” to “the market rose 0.25% in response to Obama’s Iowa victory, which raised his nomination probability by 20% and did not affect the Democrats odds of winning in November” to an estimate of how much more stocks will be worth under Obama than Edwards or Clinton.

In corporate settings, a market can help turn something that “everyone knows” into an objective fact that can then be acted upon. The best example is probably markets on whether software projects will be completed on time– if a market run among the project team members says that the launch will be 2 months late, it becomes harder for the project manager to insist that everything is on track.

Eric Zitzewitz
Assoc. Prof. of Econ
Dartmouth College

Thanks to Jason Ruspini for the link. Jason also posted a comment on Paul Krugman&#8217-s post, and also on Felix Salmon&#8217-s post.

Previous blog posts by Chris F. Masse:

  • NUCLEAR SCANDAL: HubDub allow their traders to bet on celebrities’ death.
  • APRIL FOOL’S DAY: This year, again, CNET makes fun of the wisdom of crowds.
  • Play-money prediction exchange HubDub is a phenomenal success.
  • BetFair Australia’s spin doctor tells all about their payments to the horse race industry.
  • Meet Jeffrey Ma (at right on the photo), the ProTrade co-founder, and whose gambling life is the basis of the upcoming movie, 21.