Posts filed under “UnGuru”

The Economic Policy Uncertainty Index is Nonsense

Whatever Happened to the Economic Policy Uncertainty Index?
Mike Konczal
Aug 6, 2013



Jim Tankersley has been doing the Lord’s work by following up on questionable arguments people have made about our current economic weakness being something other than a demand crisis. First, he asked Alberto Alesina about how all that expansionary austerity is working out from the vantage point of this year. Now he looks at the Economic Policy Uncertainty (EPU) index (Baker, Bloom, Davis) as it stands halfway into 2013.

And it has collapsed. The EPU index has been falling at rapid speeds, hitting 2008 levels. Yet the recovery doesn’t seem to be speeding up at all. Wasn’t that supposed to happen?

I’ve been meaning to revisit this index from when I looked at it last fall, and this is a good time to do so. It’s worth unpacking what actually drove the increase in EPU during the past five years, and understanding why there was little reason to believe it reflected uncertainty causing a weak economy. If anything, the relationship is clearly the other way around.

Let’s make sure we understand the uncertainty argument: the increase in EPU “slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure.” (To give you a sense, in 2011 the authors argued in editorials that this index showed that the NLRB, Obamacare and “harmful rhetorical attacks on business and millionaires” were the cause of prolongued economic weakness.)

As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well. “There’s uncertainty over whether or not Congress and the Federal Reserve will aggressively fight the downturn” isn’t what the index is trying to measure, but that’s what it seems to be doing.

Let’s take a look at the graph of EPU. When most people discuss this, they argue that the peaks tell them the index is onto something, as it peaks during periods of major confusion (9/11, Lehman bankruptcy, debt ceiling showdown).

But what is worth noting, and what drives the results in a practical way, is the increase in the level during this time period. And that happens immediately in January 2009:

How does economic policy uncertainty jump the first day in 2009? The index has three parts. The first is a newspaper search of people using the phrase “economic policy uncertainty.” I discussed that last fall, arguing that it was mostly capturing Republican talking points and the discipline of the GOP machine rather than actual analysis.

The second is relevant here, and that’s the number of tax provisions set to expire in the near future. (In the first version of the paper this was total number of tax provisions, while in the current version it’s total dollar amount of those provisions.) It’s heavily discounted, so tax cuts that are expiring in a year or two are weighted at a much higher level than those that are further in the future.

What does this look like over the past few years?

So what happened starting in early 2009? The stimulus, of course. And the stimulus was in large part tax provisions that were set to expire in two years. This mechanically increased economic policy uncertainty, even though it was a policy response designed to boost automatic stabilizers. Also, the Bush tax cuts were approaching their endgame, and the algorithm gave a disproportionate weight to them as they entered their last two years.

Then, in late 2010, the Bush tax cuts and some tax provisions from the stimulus were extended to provide additional stimulus to the economy while it was still weak.

Here’s how the creators of the index describe this move: “Congress often decides whether to extend them at the last minute, undermining stability of and certainty about the future path of the tax code… Similarly, the 2010 Payroll Tax Cut was a large tax decrease initially set to expire in 1 year but was twice extended just weeks before its expiration.”

But this decision was not orthogonal to the state of the economy. A major reason the administration waited and then extended the Bush Tax Cuts and the payroll tax cut was the fact that the economy was still weak, and they wanted to boost demand. The only policy uncertainty here was how aggressive and successful the administration would be in securing additional stimulus, which itself was a function of the weakness of the economy. To retroactively argue that the government’s actions in securing additional demand were creating the crisis they are trying to fight requires an additional level of argument not present.

The third part of their index has the same issue. They draw on a literature (e.g. here) that uses disagreements (dispersion of predictions) among professional forecasters as a proxy for uncertainty — disagreements about the predicted growth in inflation, and predictions of both state and federal spending, one year in advance.

The problem comes from trying to push their definition of EPU onto these disagreements. Debates over how much the federal government will spend through stimulus, how rough the austerity will be at the state level, or how well Bernanke will be able to hit his inflation target, which drives this index, are really debates about the reaction to the crisis. The dispersion will increase if people can’t figure out how aggressively the state will respond to a major collapse in spending. But this is a function of a collapsing economy and how well the government responds to it, not the other way around.

This is why we should ultimately be careful with studies that take this index and plop it into, say, a Beveridge Curve analysis. As Tankersley notes, the government decided to fight a major downturn with stimulus, and the subsequent move away from stimulus before full employment hasn’t helped the economy. In other breaking news, if you carry an umbrella because it is raining, and then toss the umbrella, it doesn’t make it stop raining.


Mike Konczal is a fellow with the Roosevelt Institute, and is a blogger at Next New Deal.


Category: Really, really bad calls, Think Tank, UnGuru

Blame the Economists . . .

Lately, I have been spending an inordinate amount of time with economists.

This past month, I have been at several dinners (party of 8) with them, spent time in the woods of Maine chatting them up, listened to their debates on economic policy, even spent time in a canoe fishing with them. Propriety — and Chatham House Rules — prevents me from naming any of the wonks, but it includes Chief Economists at major Wall Street firms, government entities, professors, with a few Nobel laureates thrown in for good measure.

This has led me to an interesting chain of thought about economists in general, and the failure of economics the discipline specifically. Note that I find economists to be intelligent, engaging and often charming. My references here are not to the people who call themselves economists, but rather to their work product that we call “economics.”

Long time readers know this is an an area of interest to me for many years (see the list after the jump). Way back in 2009, I gave 10 reasons Why Economists Missed the Crises. All 10 of the reasons given remain in force today, and may even be stronger.

In the intervening years, I have reached a few conclusions. This is worthy of much deeper study and analysis than the short shrift given here, but until then, I have a few ideas I wanted to jot down. If you have any intelligent thoughts on this subject, be sure to share them in comments.

Based on my time spent with Economists, here are a few anecdotal observations:

Issues of Economists & Economics

1. Economics is a discipline, not a Science. Physics can send a satellite to orbit Jupiter, Economics cannot tell you what happened yesterday. This is an enormous distinction, and has led to a) the “Physics Envy,” and b) an unnecessary emphasis on mathematical complexity.

2. Models are of limited utility. People forget that (as George Box has noted) models are imperfect depictions of reality. If you become overly reliant on them, you encounter a minefield of problems. Several analysts have told me that if the Fed cannot model something, than to them, it does not exist. Think about the absurdity of that viewpoint — and its impact on policy.

3. Contextualizing data often leads to error. This is more complex than it appears. What I mean by this is that everything that economists consider has to be forced into their intellectual framework; since everything is viewed through the imperfect lens of Economic Theory, the output is similarly imperfect — sometimes fatally.

4. Narrative drives most of economics. This is the corollary to the context issue. Everything seems to be part of a story, and how that story is told often leads to critical error. Think about phrases like “stall speed”, “second half rebound”, “muddle through”,  “Minsky moment”, “austerity”, “escape velocity”, etc.  All of these lead to rich tales often filled with emotional resonance.

5. Economists are loathe to admit ‘They Don’t Know.’ This trait is common to many professions, but I suspect the modeling issue may be partly to blame. Whenever I see forecast written out to 2 decimal places, I cannot help but wonder if there is a misunderstanding of the limitations of the data, and an illusion of precision. To paraphrase, “Only the people who understand both the data and its limitations will not get lost in the illusion of precision.”

6. A tendency to confuse correlation with causation.  This is one of the oldest statistical foibles known to mankind, and yet economics remains rife with it at the highest levels. Look no further than the Fed’s obsession with the Wealth Effect for a classic correlation error; I shudder when I think about what other arenas they are fundamentally lost in.

7. The Peril of Predictions. I cannot figure out why economists seem to be so wed to making predictions, given how utterly miserable they are at it. Items 1 and 5 might be a factor.

8. Sturgeon’s Law: Lastly, there is a wide dispersion of talent in Economics, and following Sturgeon’s Law, many of the rank & file are simply mediocre.

One last note: This is not, as Paul Krugman has referenced, a debate as to which subgroup of economists are right or wrong; rather, its a set of observations of the species as a whole.

Perhaps this post is mis-titled; Instead of Blame the Economists it should read Blame Economics.





Read More

Category: Really, really bad calls, UnGuru, UnScience

AEI’s FHA Disinformation Campaign Ignores Basic Finance

How one discredited “mortgage expert” from the American Enterprise Institute launched an ongoing disinformation campaign to destroy a successful government program that helped stabilize the mortgage markets. ~~~ Much of the brouhaha concerning the fate of the Federal Housing Administration can be traced to the actions of one dishonest man, a crackpot who is treated with utmost deference by…Read More

Category: Real Estate, Think Tank, UnGuru

Pundit Suckitude: Its a feature, not a bug.

  “They’re in the business of flattering the prejudices of their base audience and they’re in the business of entertaining their base audience and accuracy is a side constraint.” -Philip Tetlock   While researching this week’s Washington Post column (Everybody loves a good story), I came across Professor Tetlock’s quote above (we have previously referenced Tetlock…Read More

Category: Investing, UnGuru

More on Munis, Detroit, Bloomberg, Whitney & Wilson

More on Munis, Detroit, Bloomberg, Whitney & Wilson David R. Kotok Cumberland Advisors, July 24, 2013     In our recent commentary on municipal bonds and Detroit, we argued in favor of buying the highest-grade AAA tax-free municipal bond It currently yields more than the corresponding taxable US Treasury obligation. Meredith Whitney, Muni Cassandra emeritus…Read More

Category: Fixed Income/Interest Rates, Think Tank, UnGuru

Discuss: Larry Summers, Front Runner

Last week, I noted my preference for Fed Chief was Anyone But Larry Summers. So you can imagine my disappointment when Ezra Klein posted this today:  Right now, Larry Summers is the front-runner for Fed chair. Oy. This nation faces too very large political problems related to economics: 1. The President of the United States…Read More

Category: Really, really bad calls, UnGuru

Are You A Perma-Bear? Take The Zero Hedge Test

Take The Zero-Hedge Test

Being permanently bearish on equities definitely pays.

Just ask Zero-Hedge. Unfortunately, for wool-dyed pessimists and the other overly-skeptical black sheep of the thundering herd, it pays apocalyptic newsletter writers’ paychecks, and Zero-Hedge/Tyler Durden’s Manhattan bar tabs rather than those who permanently position against market priapism. And it’s worse than zero-sum because those who are optimistically-challenged often pay for the bad advice – whether directly in subscriptions, inflated margins on retail bullion products, or indirectly via page-views and click-throughs AND then they get hosed by the market.

The first step to improving behaviour toxic to one’s own self interest is admit one has a problem. As an aid to help those who have difficulty in distinguishing “a bearish trade” from “the lead boots of anger and pessimism”, I’ve devised a little something I call the Zero-Hedge Test to determine more precisely whether readers objective realities are sufficiently  paranoid, pessimistic, anti-social and rantingly angry to warrant more serious help.

Instructions: Circle the letter that best describes the adjacent image:

a.  a glass of water
b. glass of water, half-empty
c. glass of water, half-full
d. glass of  errrr ummm , Grey Goose vodka? (NB: ed. choice)
e. The US Government must have stolen half of a glass of water.


a. First black elected (and first to be re-elected) President of the USA
b. Barack Hussein Obama
c. A Former Senator from Illinois
d. tall guy who used to like to sneak a cigarette now & then
e. Jezebel, dark Sith Lord Vader Emperor & Chief of the Plunge Protection Team. Odious non-American african muslim responsible for taking away our world-beating healthcare, encouraging the immigrants and foreigners who took our our jobs, and formulating a secret plan to put two-dads in every home .


a.  Something that still buys a 12oz can of Coca-Cola
b.  A greenback, worth a dollar, which, on average, an American is paid each 4 minutes of work
c.  A US Federal Reserve Banknote almost universally accepted in exchange for goods and services the world over
d.  A cocaine hoovering apparatus c.1978
e.  Worthless fiat toiletpaper, so useless that bric-a-brac, watches, baseball cards or bitcoin should be more preferred than this P.o.S. that forms part of the elders of Zion grand plan to steal your labour savings before eating your babies.


a. six would-be wedding bands
b. 1oz novelty of pure gold smelted by JM
c. Au = element #79 on Periodic Table
d. Reward for a 9.59 sec 100m
e. The solution to all our financial problems…changer of men from liberal faggot zionist atheist swine into god-fearing hardworking people of fortitude and rectitude…curer of cancer, balancer of budgets….purifier of all our precious bodily fluids and divinely-given laws….come, my preciousssss…

Read More

Category: Psychology, Really, really bad calls, UnGuru

Wrongstradamus: The Money Losing Forecasts of Michael Boskin

  “If you chained a thousand Boskins to a thousand keyboards for a thousand years, eventually one of them would make a correct prediction.”   Over the years, I have been critical of economist Michael Boskin: I have critiqued his market forecasts (“Obama’s Radicalism is Killing the Dow“) that were made literally on the day…Read More

Category: Bailouts, Really, really bad calls, UnGuru

The Big Lie Annotated: An AEI History Of The Financial Crisis

The Big Lie Annotated: An AEI History Of The Financial Crisis
David Fiderer
February 26, 2013





“There was never any significant debate about the causes of the 2008 financial crisis,” argues Peter Wallison, who must believe that his stint on  the Financial Crisis Inquiry Commission was a complete waste of time. Two years ago, he blamed the other nine FCIC commissioners, for “ignoring” the research of Edward Pinto, who proclaimed that the crisis was caused by Fannie, Freddie and affordable housing goals.

Now Wallison blames the media.  ”Although there were two narratives about why it happened, only one of them was accepted and propagated by the media,” he says. “And in effect  the necessary competition in ideas never occurred.” For $72 you can read all about it in his new book, Bad History, Worse Policy: How a False Narrative about the Financial Crisis Led to the Dodd-Frank Act.

The irony could not be more rich. Neither Peter Wallison nor Edward Pinto would ever subject themselves to a free and open competition of ideas, because their “research”  cannot withstand a modicum of scrutiny.  FCIC staffers carefully reviewed Pinto’s work, but neither they nor Pinto were ever able to reconcile his risk categories with actual loan performance, which seemed to nullify Pinto’s thesis. So Wallison simply lied to Congress, when he testified that the FCIC never reviewed Pinto’s work.

The schism described by Wallison is not between left and right, between Democrats and Republicans, or between regulation and laissez-faire. It is the divide between capitalists and crackpots. In the world of capitalism, everyone takes risks. Some pay off; some do not. Capitalists study the results in order to ascertain who was lucky and who was smart. Not crackpots like Wallison and Pinto.  They declare that, “28 million mortgages, were subprime or otherwise low-quality,” of which, “three quarters were on the books of government agencies.” But they refuse to examine loan performance over time.

Wallison and Pinto maintain their media platforms because they are protected by a vast conspiracy of silence–an informal agreement among conservative think tanks, Republican politicians, academic shills, and friendly media outlets–which insulates the words of Wallison and Pinto to any kind of fact checking.

<a href=”” ><img src=”” border=”0″ alt=”"></a>

Consequently, there has never been an adequate takedown of the multifarious lies and deceptions embedded within the Wallison/Pinto “narrative.” So, what follows is a description of the elephant in the room, a brief explainer of some of Wallison’s more egregious whoppers. The list is by no means comprehensive. And it merely touches upon Pinto’s new disinformation campaign against FHA, which deserves a separate  debunking. (Spoiler Alert: If you believe Pinto’s claim that, “FHA’s Estimated GAAP Net Worth Equals –$26.27 Billion,” you don’t know much about GAAP or finance.)

A Few Basic Metrics

But first, a few basic metrics.

Best Loan Performance: Over the past few decades, Fannie and Freddie’s loan performance has always been exponentially superior to that of any other segment in the mortgage market. The first chart covers the period of 1998 – 2010, the second from the beginning of the 2008 crisis until now.


by James Lockhart/ Public Domain


$216 Billion versus $888 Billion:  Similarly, the total credit losses incurred by the GSEs are about one-fourth those incurred about by private label mortgage securitizations, which are packaged and sold by Wall Street.

Laurie Goodman of Amherst Securities estimated that losses on private label securitizations issued between 2005 – 2007 total about $714 billion, a number fairly close to Moody’s current estimates. Add in another $133 billion in losses from synthetic subprime CDOs, which never financed a single mortgage, plus another $41 billion from CDOs issued before 2005, and the total approaches $888 billion.

Read More

Category: Bailouts, Real Estate, Really, really bad calls, Think Tank, UnGuru

What’s Wrong with the Financial Services Industry?

If you hang around these parts for any length of time, you will occasionally run across one of my jeremiads complaining about the Financial Services Industry. I’ve been thinking about this more than usual lately. This has led to some correspondence with Helaine Olen, whose book Pound Foolish: Exposing the Dark Side of the Personal…Read More

Category: Bailouts, Investing, UnGuru