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mostlysignssomeportents · 1 year

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Elizabeth Warren on weaponized budget models

In yesterday’s essay, I broke down the new series from The American Prospect on the hidden ideology and power of budget models, these being complex statistical systems for weighing legislative proposals to determine if they are “economically sound.” The assumptions baked into these models are intensely political, and, like all dirty political actors, the model-makers claim they are “empirical” while their adversaries are “doing politics”:

https://pluralistic.net/2023/04/03/all-models-are-wrong/#some-are-useful

If you’d like an essay-formatted version of this post to read or share, here’s a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2023/04/04/cbo-says-no/#wealth-tax

Today edition of the Prospect continues the series with an essay by Elizabeth Warren, describing how her proposal for universal child care was defeated by the incoherent, deeply political assumptions of the Congressional Budget Office’s model, blocking an important and popular policy simply because “computer says no”:

https://prospect.org/economy/2023-04-04-policymakers-fight-losing-battle-models/

When the Build Back Better bill was first mooted, it included a promise of universal, federally funded childcare. This was excised from the final language of the bill (renamed the Bipartisan Infrastructure Bill), because the CBO said it would cost too much: $381.5b over ten years.

This is a completely nonsensical number, and the way that CBO arrived at it is illuminating, throwing the ideology of CBO modeling into stark relief. You see, the price tag for universal childcare did not include the benefits of childcare!

As Warren points out, this is not how investment works. No business leader assesses their capital expenditures without thinking of the dividends from those investments. No firm decides whether to open a new store by estimating the rent and salaries and ignoring the sales it will generate. Any business that operates on that basis would never invest in anything.

Universal childcare produces enormous dividends. Kids who have access to high-quality childcare grow up to do better in school, have less trouble with the law, and earn more as adults. Mothers who can’t afford childcare, meanwhile, absent themselves from the workforce during their prime earning years. Those mothers are less likely to advance professionally, have lower lifetime earnings, and a higher likelihood of retiring without adequate savings.

What’s more, universal childcare is the only way to guarantee a living wage to childcare workers, who are disproportionately likely to rely on public assistance, including SNAP (AKA food stamps) to make ends meet. These stressors affect childcare workers’ job performance, and also generate public expenditures to keep those workers fed and housed.

But the CBO model does not include any of those benefits. As Warren says, in a CBO assessment, giving every kid in America decent early childhood care and every childcare worker a living wage produces the same upside as putting $381.5 in a wheelbarrow and setting it on fire.

This is by design. Congress has decreed that CBO assessments can’t factor in secondary or indirect benefits from public expenditure. This is bonkers. Public investment is all secondary and indirect benefits — from highways to broadband, from parks to training programs, from education to Medicare. Excluding indirect benefits from assessments of public investments is a literal, obvious, unavoidable recipe for ending the most productive and beneficial forms of public spending.

It means that — for example — a CBO score for Meals on Wheels for seniors is not permitted to factor in the Medicare savings from seniors who can age in their homes with dignity, rather than being warehoused at tremendous public expense in nursing homes.

It means that the salaries of additional IRS enforcers can only be counted as an expense — Congress isn’t allowed to budget for the taxes that those enforcers will recover.

And, of course, it’s why we can’t have Medicare For All. Private health insurers treat care as an expense, with no upside. Denying you care and making you sicker isn’t a bug as far as the health insurance industry is concerned — it’s a feature. You bear the expense of the sickness, after all, and they realize the savings from denying you care.

But public health programs can factor in those health benefits and weigh them against health costs — in theory, at least. However, if the budgeting process refuses to factor in “indirect” benefits — like the fact that treating your chronic illness lets you continue to take care of your kids and frees your spouse from having to quit their job to look after you — then public health care costings become indistinguishable from the private sector’s for-profit death panels.

Child care is an absolute bargain. The US ranks 33d out of 37 rich countries in terms of public child care spending, and in so doing, it kneecaps innumerable mothers’ economic prospects. The upside of providing care is enormous, far outweighing the costs — so the CBO just doesn’t weigh them.

Warren is clear that there’s no way to make public child care compatible with CBO scoring. Even when she whittled away at her bill, excluding millions of families who would have benefited from the program, the CBO still flunked it.

The current budget-scoring system was designed for people who want to “shrink government until it fits in a bathtub, and then drown it.” It is designed so that we can’t have nice things. It is designed so that the computer always says no.

Warren calls for revisions to the CBO model, to factor in those indirect benefits that are central to public spending. She also calls for greater diversity in CBO oversight, currently managed by a board of 20 economists and only two non-economists — and the majority of the economists got their PhDs from the same program and all hew to the same orthodoxy.

For all its pretense of objectivity, modeling is a subjective, interpretive discipline. If all your modelers are steeped in a single school, they will incinerate the uncertainty and caveats that should be integrated into every modeler’s conclusions, the humility that comes from working with irreducible uncertainty.

Finally, Warren reminds us that there are values that are worthy of consideration, beyond a dollars-and-cents assessment. Even though programs like child care pay for themselves, that’s not the only reason to favor them — to demand them. Child care creates “an America in which everyone has opportunities — and ‘everyone’ includes mamas.” Child care is “an investment in care workers, treating them with respect for the hard work they do.”

The CBO’s assassination of universal child care is exceptional only because it was a public knifing. As David Dayen and Rakeen Mabud wrote in their piece yesterday, nearly all of the CBO’s dirty work is done in the dark, before a policy is floated to the public:

https://prospect.org/economy/2023-04-03-hidden-in-plain-sight/

The entire constellation of political possibility has been blotted out by the CBO, so that when we gaze up at the sky, we can only see a few sickly stars — weak economic nudges like pricing pollution, and not the glittering possibilities of banning it. We see the faint hope of “bending the cost-curve” on health care, and not the fierce light of simply providing care.

We can do politics. We have done it before. Every park and every highway, our libraries and our schools, our ports and our public universities — these were created by people no smarter than us. They didn’t rely on a lost art to do their work. We know how they did it. We know what’s stopping us from doing it again. And we know what to do about it.

Have you ever wanted to say thank you for these posts? Here’s how you can: I’m kickstarting the audiobook for my next novel, a post-cyberpunk anti-finance finance thriller about Silicon Valley scams called Red Team Blues. Amazon’s Audible refuses to carry my audiobooks because they’re DRM free, but crowdfunding makes them possible.

[Image ID: A disembodied hand, floating in space. It holds a Univac mainframe computer. The computer is shooting some kind of glowing red rays that are zapping three US Capitol Buildings, suspended on hovering platforms. In the background, the word NO is emblazoned in a retrocomputing magnetic ink font, limned in red.]

#empirical facewash #wealth tax #elizabeth warren #cbo #congressional budget office #penn wharton budget model #budgeting #economics #economism #computer says no #pluralistic #universal childcare #build back better #bipartisan infrastructure bill

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rodgermalcolmmitchell · 6 months

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Ignorance or Lies? The single worst economic scare-mongering bullshit ever encountered.

J.D. Tuccille, the Libertarians, and surprisingly, the highly respected University of Pennsylvania’s Penn Wharton School may have set a world record for utter nonsense and wrongheaded scaremongering. Moving on from the “ticking debt time bomb” that never explodes, we have arrived at “20 Years to Disaster.” Don’t you love predictions of 20 years? They are so safe. You can’t be proved wrong.…

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#Bernanke #Gokhale #Greenspan #monetary sovereignty #Penn Wharton Budget Model #Smetters #Tuccille

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hislop3 · 1 month

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The Politics of Population and Immigration

Followers know that I don’t write much about politics, staying pretty straight-forward on health policy and economics topics. A little diversion occurs today, but honestly, not much. We are after all, in an election cycle and thematically (the title), demographics will be center stage but likely, for the wrong reasons. As I watch the election cycle start to warm, I’m puzzled by the lack of…

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#Aging #Biden #budget model #Congress #deficits #demogrpahics #Economics #Entitlements #Govt. spending #Industry Outlook #Management #Medicaid #Medicare #Penn Wharton #Politics #Social Security #Strategy #Trends #Washington

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cultml · 2 years

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dertaglichedan · 10 months

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Biden student loan bailout plan to cost $475B over next decade, roughly $45B more than rejected plan: study

President Biden’s new income-driven repayment plan for student loans will cost $475 billion over 10 years, according to the Penn Wharton Budget Model, tens of billions of dollars more than an earlier plan that the Supreme Court struck down last month.

The Penn model estimates taxpayers will face $200 billion in costs due to payment reductions in the president’s Saving on a Valuable Education (SAVE) plan, as a little more than half of the $1.64 trillion in outstanding loans will be covered.

Another $275 billion in taxpayer costs will be attributable to payment reductions under the plan for $1.03 trillion in new student loans into the next decade.

According to the model’s estimate range, the cost of the Income-Driven Repayment (IDR) plan could be as low as $390.9 billion or soar as high as $558.8 billion.

“Due to the increased generosity of the newly proposed IDR plan, future student borrowers have the incentive to increase their federal student loan borrowing,” Penn Wharton junior economist Penlei Chen wrote.

The president’s SAVE plan is expected to go into effect July 1, 2024, and would cut monthly income-based student loan payments in half, eliminate monthly payments for minimum-wage earners and forgive all outstanding debt after 10 years of payments for student borrowers who took $12,000 or less.

Most community college students would not have to pay back any debt under the plan, according to the Biden administration.

FULL STORY

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shychilddeer · 1 year

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Biden's new student loan repayment plan would cost billions more than White House projected

A key part of President Biden's student loan debt plan that would cut the monthly bill for certain borrowers could cost up to $361 billion over the next decade, according to new findings from the Penn Wharton Budget Model.

#加速主义

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newstfionline · 2 years

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Saturday, August 27, 2022

Dangerous heat predicted to hit 3 times more often in future (AP) What’s considered officially “dangerous heat” in coming decades will likely hit much of the world at least three times more often as climate change worsens, according to a new study. In much of Earth’s wealthy mid-latitudes, spiking temperatures and humidity that feel like 103 degrees (39.4 degrees Celsius) or higher—now an occasional summer shock—statistically should happen 20 to 50 times a year by mid-century, said a study Monday in the journal Communications Earth & Environment. By 2100, that brutal heat index may linger for most of the summer for places like the U.S. Southeast, the study’s author said. And it’s far worse for the sticky tropics. The study said a heat index considered “extremely dangerous” where the feels-like heat index exceeds 124 degrees (51 degrees Celsius)—now something that rarely happens—will likely strike a tropical belt that includes India one to four weeks a year by century’s end.

The politics and economics of student debt relief (Yahoo News) After months of deliberation, President Biden has signed an executive order that will forgive up to $10,000 of student debt for borrowers earning less than $125,000 per year. As a presidential candidate in 2020, Biden supported limited debt relief, in contrast with other Democrats who wanted to write off much or all of the $1.6 trillion in student debt Americans hold. Biden also opposed debt relief by executive order, saying Congress should do it by passing a law that leaves no doubt about the legality of the move. But the votes aren’t there for Congress to pass a debt-relief law, and Democrats need every advantage they can get heading into this year’s midterm elections. So Biden is holding his nose while signing a debt-relief executive order likely to face legal challenges. Forgiving $10,000 of debt will wipe out all money owed for about 12 million borrowers and reduce the balance for about 30 million others. But it will cost the government about $300 billion in foregone revenue, according to the Penn Wharton Budget Model. That will add to budget deficits and more or less zero out the $275 billion in deficit reduction included in the so-called Inflation Reduction Act that President Biden signed less than two weeks ago.

Britain to see 80% spike in energy bills as crisis deepens (AP) Jennifer Jones keeps feeding money into her energy meter, but it never seems to be enough. And when she can’t pay, she feels the impact immediately. The power in her London home has gone off suddenly three times recently, once when her partner was cooking an egg. Like millions of people, Jones, 54, is struggling to cope as energy and food prices skyrocket during Britain’s worst cost-of-living crisis in a generation. The former school supervisor has health problems and relies on government benefits to get by, but her welfare payments are nowhere near enough to cover her sharply rising bills. And things are getting worse. U.K. residents will see an 80% increase in their annual household energy bills, the country’s energy regulator announced Friday, following a record 54% spike in April. That will bring costs for the average customer from 1,971 pounds ($2,332) a year to 3,549 pounds. And bills are expected to rise again in January to 4,000 pounds.

Officials Scramble to Protect Zaporizhzhia (Foreign Policy) As tensions heat up around Ukraine’s Zaporizhzhia nuclear plant, world leaders are in a race against time to inspect the facility and stave off a potential nuclear disaster. Zaporizhzhia has been caught in the crossfire of the Ukraine war since Russia took control of the plant in March and effectively converted it into a military base. As the plant was struck by shelling, global leaders warned of grave consequences. In a worrying development on Thursday, the plant disconnected from Ukraine’s power grid after shelling-induced fires damaged a power line, the Ukrainian firm Energoatom said. The temporary break wiped out electricity in large stretches of southern Ukraine—and reignited calls for emergency action. Many Ukrainians already scarred by Chernobyl’s legacy are bracing for the worst-case scenario. “Now it could all happen to me again—but worse,” Volodymyr Plashihin, a 61-year-old Ukrainian man who suffered health complications linked to Chernobyl, told her. “I can hardly explain the fear to anyone who has never experienced this.”

Putin orders troop replenishment in face of Ukraine losses (AP) Russian President Vladimir Putin ordered a major buildup of his country’s military forces Thursday in an apparent effort to replenish troops that have suffered heavy losses in six months of bloody warfare and prepare for a long, grinding fight ahead in Ukraine. Russia plans to increase the number of troops by 137,000, or 13%, to 1.15 million by the end of the year. The move will boost Russia’s armed forces overall to 2.04 million, including the 1.15 million troops. Western estimates of Russian dead in the Ukraine war have ranged from more than 15,000 to over 20,000—more than the Soviet Union lost during its 10-year war in Afghanistan.

Over 900 killed by Pakistan monsoon rains and floods (CNN) At least 903 people have died in Pakistan from severe rains and flooding this summer, as the country sees its eighth cycle of monsoon rains, Pakistan’s Minister for Climate Change told CNN Wednesday as the country appealed for international assistance. Heavy monsoon rains and floods have affected 2.3 million people in Pakistan since mid-June, according to the United Nations’ Office for the Coordination of Humanitarian Affairs (OCHA). At least 95,350 homes have been destroyed, according to the humanitarian agency. The southeastern province of Sindh and the southwestern province of Balochistan are the two most “affected provinces in terms of human and infrastructural impact,” OCHA wrote in a Tuesday press release.

Myanmar arrest of ex-U.K. ambassador is ‘hostage diplomacy,’ activists say (Washington Post) The Myanmar military’s recent arrest of a former British ambassador is an example of “hostage diplomacy,” activists and opposition politicians say. The detention of the ex-diplomat came as Britain moved to further isolate the Southeast Asian regime. Vicky Bowman, who served as British ambassador to Myanmar from 2002 to 2006, was arrested Wednesday evening at her Yangon apartment along with her husband, Htein Lin, a renowned Burmese artist. They join the 15,000-plus people arrested by the military junta since it seized power in a coup in February 2021, said the Assistance Association for Political Prisoners, a nonprofit that tracks people persecuted by the regime. The figures include at least three other foreigners.

South Korea records world’s lowest fertility rate again (BBC) South Korea has again recorded the world’s lowest fertility rate with the number sinking to a new low. The rate in the country first dropped lower than one child per woman in 2018. But on Wednesday, figures released by the government showed the figure had dropped to 0.81—down three points from the previous year, and a sixth consecutive decline. In comparison, the average rate across the world’s most advanced economies is 1.6 children. Countries need at least two children per couple—a 2.1 rate—to keep their population at the same size, without migration.

Israel’s Arab citizens, key to Netanyahu’s fate, debate worth of voting (Washington Post) A breakthrough in Israel’s seemingly endless political deadlock came last year when an Arab party made the unprecedented move of joining a coalition spanning the Israeli political spectrum to oust Benjamin Netanyahu after he had been in office for 15 years. It didn’t last, and as the country gears up for another election, in November, the big question for many is whether Netanyahu will make a comeback—and the role Israel’s long-marginalized Arab voters may play in blocking or facilitating his return. It is a rare moment in the electoral spotlight for Israel’s Palestinian citizens. Many, however, are frustrated at being viewed just in the context of Netanyahu’s political fortunes while their grievances, including discrimination against them, remain unaddressed. A recent poll found that about 69 percent of Palestinian citizens of Israel said they were worse off than last year, according to pollster Yousef Makladeh, the head of the Statnet research institute, which is based in Carmel City, Israel. Eighty percent said they did not care whether Netanyahu returned as prime minister.

Plant cognition? (New Scientist) Plants operate in ways that are difficult for us to perceive, so people have traditionally assumed they aren’t doing very much. But more recently, researchers have found them to possess many sophisticated and surprising abilities. Plants can sense and react to more aspects of their environments than we can, and they maintain bustling social lives by communicating with each other above and below ground. They also interact with other species. Tomato plants, for example, release chemicals that encourage their caterpillar predators to indulge cannibalistic instincts and turn on each other. Bee orchids trick male bees into landing on their flowers by looking and smelling like exotic female bees, then load the duped insects with pollen. Evening primroses can “hear” their pollinators and fire up nectar production when exposed to their specific vibration frequencies. Arabidopsis plants can use the unique wavelength profiles of light reflected off nearby plants to tell relatives from non-relatives. Some of these capabilities are stock responses to particular situations—simple, hardwired reactions. Other behaviors, though, might be underpinned by some form of cognition.

Auto-warranty robocalls (CNN) No sentence in the English language may be more infuriating than the following 12 words: “We have been trying to reach you about your car’s extended warranty.” If you’ve picked up the phone in response to an unknown caller anytime in the last several years, chances are you’ve encountered this incessant and irritating automated message. But according to state and federal officials, just two men may be responsible for an overwhelming share of the billions of auto-warranty spam calls that have hit US phones. Now, a new lawsuit in Ohio is trying to cut them off at their source, following a years-long effort across the public and private sectors to turn the tide on the scourge of robocalls. Ohio Attorney General Dave Yost described the illegal robocalls as a “biblical plague of locusts that’s descending on our cell phones.” Last year, Americans received an estimated 21 billion scam robocalls, according to YouMail, a robocall blocking and analysis company. Consumer advocacy groups say unwanted robocalling costs Americans an estimated $30 billion a year, ranging from money lost directly through fraud to as much as $3 billion a year in lost time and nuisances.

#headlines #news

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alterannews · 2 years

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Brace yourselves: New Penn Wharton budget model finds that Joe Biden's illegal student loan cancellation will cost way more than we were told

Brace yourselves: New Penn Wharton budget model finds that Joe Biden’s illegal student loan cancellation will cost way more than we were told

Great news, everyone! Remember how Joe Biden’s huge taxpayer-funded bailout for student loan debtors was going to cost us over $300 billion, which would come out to about $2,000 per taxpayer? Well, it looks like those numbers were incorrect.It’s really going to cost us like three times the initial quotes. That’s according to a new Penn Wharton budget design. Here’s how they summarized their…

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mostlysignssomeportents · 1 year

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The problem with economic models

When students of statistics are introduced to creating and interpreting models, they are introduced to George Box’s maxim:

All models are wrong, some are useful.

It’s a call for humility and perspective, a reminder to superimpose the messy world on your clean lines.

If you’d like an essay-formatted version of this article to read or share, here’s a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2023/04/03/all-models-are-wrong/#some-are-useful

Even with this benediction, modeling is forever prone to the cardinal sin of insisting that complex reality can be reduced to “a perfectly spherical cow of uniform density on a frictionless plane.” Partially that’s down to human frailty, our shared inability to tell when we’re simplifying and when we’re oversimplifying.

But complex mathematics are also a very powerful smokescreen: because so few of us are able to interpret mathematical models, much less interrogate their assumptions, models can be used as “empirical facewash,” in which bias and ideology are embedded in equations and declared to be neutral, because “math can’t be racist.”

The problems with models have come into increasing focus, as machine learning models have increasingly been used to replace human judgment in areas from bail assessment to welfare eligibility to child protective services interventions:

https://memex.craphound.com/2018/01/31/automating-inequality-using-algorithms-to-create-a-modern-digital-poor-house/

But even amidst this increasing critical interrogation of models in new domains, there is one domain where modeling is all but unquestioned: economics, specifically, macroeconomics, that is, the economics of national government budgets.

This is part of a long-run, political project to “get politics out of budgeting” -a project as absurd as “getting wet out of water.” Government budgeting is intrinsically, irreducibly political, and there is nothing more political than insisting that your own preferences and assumptions are “empirical” while anyone who questions them is “doing politics.”

This model-first pretense of neutrality is a key component of neoliberalism, which saw a vast ballooning of economists in government service — FDR employed 5,000 economists, while Reagan relied on 16,000 of them. As the jargon and methods of economics crowded out the language of politics, this ideology-that-insisted-it-wasn’t got a name: economism.

Economism’s core method is reducing human interaction to “incentives,” to the exclusion of morals or ethics — think of Margaret Thatcher’s insistence that “there is no such thing as society.” Economism reduces its subjects to homo economicus, a “rational,” “utility-maximizing” automaton responding robotically to its “perfect information” about the market.

Economism also insists that power has no place in predictions about how policies will play out. This is how the Chicago School economists were able to praise monopolies as “efficient” systems for maximizing “consumer welfare” by lowering prices without “wasteful competition.”

This pretense of mathematical perfection through monopoly ignores the problem that anti-monopoly laws seek to address, namely, the corrupting influence of monopolists, who wield power to control markets and legislatures alike. As Sen John Sherman famously said in arguing for the Sherman Act: “If we will not endure a King as a political power we should not endure a King over the production, transportation, and sale of the necessaries of life.”

https://marker.medium.com/we-should-not-endure-a-king-dfef34628153

Economism says that we can allow monopolies to form and harness them to do only good, enforcing against them when they abuse their market dominance to hike prices. But once a monopoly forms, it’s too late to enforce against them, because monopolies are both too big to fail and too big to jail:

https://doctorow.medium.com/small-government-fd5870a9462e

Today, economism is helpless to do anything about inflation, because it is ideologically incapable of recognizing the inflation is really excuseflation, in which monopolists blame pandemic supply shocks, Russian military belligerence and supposedly overgenerous covid relief programs for their own greedy profiteering:

https://pluralistic.net/2023/03/11/price-over-volume/#pepsi-pricing-power

Mathematics operates on discrete quantities like prices, while power is a quality that does not readily slot into an equation. That doesn’t mean that we can safely discard power for the convenience of a neat model. Incinerating the qualitative and doing arithmetic with the dubious quantitative residue that remains is no way to understand the world, much less run it:

https://locusmag.com/2021/05/cory-doctorow-qualia/

Economism is famously detached from the real world. As Ely Devons quipped, “If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’”

https://pluralistic.net/2022/10/27/economism/#what-would-i-do-if-i-were-a-horse

But this disconnection isn’t merely the result of head-in-the-clouds academics who refuse to dirty their hands by venturing into the real world. Asking yourself “What would I do if I were a horse?” (or any other thing that economists are usually not, like “a poor person” or “a young mother�� or “a refugee”) allows you to empiricism-wash your biases. Your prejudices can be undetectably laundered if you first render them as an equation whose details can only be understood by your co-religionists.

Two of these if-I-were-a-horse models reign invisibly and totally over our daily lives: the Congressional Budget Office model and the Penn Wharton Budget model. Every piece of proposed government policy is processed through these models, and woe betide the policy that the model condemns. Thus our entire government is conducted as a giant, semi-secret game of Computer Says No.

This week, The American Prospect is conducting a deep, critical dive into these two models, and into the enterprise of modeling itself. The series kicks off today with a pair superb pieces, one from Nobel economics laureate Joseph Stiglitz, the other from Prospect editor-in-chief David Dayen and Rakeen Mabud, chief economist for the Groundwork Collaborative.

Let’s start with the Stiglitz piece, “How Models Get the Economy Wrong,” which highlights specific ways in which the hidden assumptions of models have led us to sideline good policy (like increasing spending during recessions) and make bad policy (like cutting taxes on the rich):

https://prospect.org/economy/2023-04-03-how-models-get-economy-wrong/

First, Stiglitz sets out a general critique of the assumptions in neoclassical models, starting with the “efficient market” hypothesis, that holds that the market is already making efficient use of all our national resources, so any government spending will “crowd out” efficient private sector activity and make us all poorer.

There are trivially obvious ways in which this is untrue: every unemployed person who wants a job is not being used by the market. The government can step in — say, with a federal jobs guarantee — and employ everyone who wants a job but isn’t offered one by the public sector, and by definition, this will not crowd out private sector activity.

Less obvious — but still true — is that the private sector is riddled with inefficiencies. The idea that Google and Facebook make “efficient” use of capital when they burn billions of dollars to increase their surveillance dragnets is absurd on its face. Then there’s the billions Facebook set on fire to build a creepy dead mall it calls “the metaverse”:

https://www.youtube.com/watch?v=EiZhdpLXZ8Q

Then we come to some of the bias in the models themselves, which consistently undervalue the long-run benefits of infrastructure spending. Public investments of this kind “yield very high returns,” which means that even if a public sector project reduces private sector investment, the private investments that remain produce a higher yield, thanks to public investment in a skilled workforce and efficient ports, roads and trains.

A commonplace among model users is that we must make “The Big Tradeoff” — we can either reduce inequality, or we can increase prosperity, but not both, because reducing inequality means taking resources away from the business leaders who would otherwise build the corporations whose products would make us all better off.

Despite the fact that organizations from the OECD to the IMF have recognized that inequality is itself a brake on economic growth, fostering destructive “rent seeking” (seen today online in the form of enshittification), the most common macroeconomic models continue to presume that an unequal society will be as efficient as a pluralistic one. Indeed, model-makers treat attention to inequality as an error bordering on a mortal sin — the sin of caring about “distributional outcomes” (that is, who gets which slice of the pie) rather than “growth” (whether the pie is getting bigger).

Stiglitz says that model makers have gotten a little better in recent years, formally disavowing Herbert Hoover’s idea of expansionary austerity, which is the idea that we should cut public spending when the economy is shrinking. Common sense tells us that this will make it shrink faster, but expansionary austerity (incorrectly) predicts that governments that cut spending will produce “investor confidence” and trigger more private investment.

This reliance on what Paul Krugman calls the “Confidence Fairy” is tragically misplaced. Hoover’s cutbacks made the Great Depression worse. So did IMF cutbacks in “East Asia, Greece, Spain, Portugal, and Ireland.”

Expansionary austerity is politics dressed up as economics. Indeed, the political ideology subsumed into our bedrock models has caused governments to fail to anticipate crisis after crisis, including the 2008 Great Financial Crisis.

The politics in modeling are especially obvious in the process running up to the Trump tax cuts (as is often the case with Trump, he draws with a fisted crayon where others delicately shade with a fine pencil, making it easier to see the work for what it is) (see also: E. Musk).

Axiomatic to model-building is the idea that if you tax something, you’ll get less of it (“incentives matter”). The theory of corporate tax cuts goes like this: “if we tax corporations for the money they might otherwise use to build new plant and hire new workers, they will do less of those things.”

That’s a reasonable assumption — which is why we don’t tax companies on capital investments and their payrolls. These expenses are deducted from a company’s profits before it calculates its taxes. Corporate taxes are levied on profits, net of spending on labor and plant.

But when the CBO modeled the Trump cuts, it operated on the assumption that the existing tax system was punishing companies for hiring people and expanding operations, and thus concluded the reducing taxes would lead to more of these activities. On that basis, the tax cuts were declared to be expansionary, a means of driving new private sector activity. In reality, all they did was create more profits, which rich people used to bid up the prices of assets, creating a dangerous asset bubble — not investment in productive capacity.

In “Hidden in Plain Sight,” the other Prospect piece that dropped today, Dayen and Mabud tell us just how wrong the models were about the Trump cuts:

https://prospect.org/economy/2023-04-03-hidden-in-plain-sight/

The CBO predicted that the cuts would drive a 0.7% increase in GDP over a decade, while Penn Wharton predicted 0.6–1.1% growth. Both were very, very wrong:

https://www.npr.org/2019/12/20/789540931/2-years-later-trump-tax-cuts-have-failed-to-deliver-on-gops-promises

Despite the manifest defects of these models, we still let them imprison our politics. When Elizabeth Warren proposed a 2% wealth tax on assets over $50m, she asserted that this would reduce billionaires’ fortunes by $3.75T over 10 years, but the Penn Wharton model knocked $1T off it, and declared that the real impact of the policy would be a reduction in investment, depressing long-run growth. The politics of a wealth tax are sound — the kind of politics that wins elections and restores faith in democracy — but the economism of models sweeps the proposal off the table and into the dustbin of history.

The Penn Wharton model simply refuses to factor in absolutely key aspects of a wealth tax plan, from the impact of increased enforcement to the economic benefits of universal child care, increased education funding, student debt cancellation and other programs that could be enacted with the fiscal space opened up by reducing billionaires’ spending power.

The Warren policy is rare because we got to hear about it — through a national election campaign — before it was strangled by the model-makers. More often, proposals like this are quietly snuffed out even before they’re introduced to the legislature, when they are run through the model and told Computer Says No.

Modeling isn’t intrinsically bad, but “all models are wrong” and what determines whether a model is useful are the politics of its assumptions. Economism insists that there are no politics in model-making, which creates unfixable flaws in its models.

One core political assumption in economism’s models is that government shouldn’t exercise power to produce outcomes — rather, it should “nudge” markets with incentives (which, we are constantly reminded, “matter”). This means that we can’t ban pollution — we can only offer “cap and trade” systems to incentivize companies to pollute less. It means we can’t do Medicare For All, we can only “bend the cost-curve” with minor interventions like forcing hospitals to publish their rate-cards.

Economism — and its institutions, like the CBO — are “short-run Keynesian and long-run classical” — that is, they only consider the benefits of public spending over the shortest of timespans, and assume that these evaporate over long time-scales. That’s exactly backwards, as anyone who’s ever traveled on a federal highway or visited a national park can attest:

https://prospect.org/politics/congress-biggest-obstacle-congressional-budget-office/

All of this is worsened by politicians, who exploit the primacy of economism to attack their adversaries. When the CBO or Penn Wharton release a report on a policy, they often wrap their conclusions with caveats about uncertainties and ranges — but these cautions are jettisoned by opportunistic politicians who seize a single headline figure and use it as a club against their opponents.

In the coming week, the Prospect will run deep dives into the defects of CBO and Penn Wharton, along with other commentary. It’s very important work, throwing open the doors to the inner sanctum of economism’s sacred temple. I’ll be following it eagerly.

Image: bert knottenbeld (modified) https://www.flickr.com/photos/bertknot/8375267645/

CC BY-SA 2.0 https://creativecommons.org/licenses/by-sa/2.0/

[[Image ID: A Tron-like plane of glowing grid-squares. Two spherical cows roll about on the plane, chased by motion lines. The gridlines are decorated with complex equations from the Penn-Wharton Budget Model.]]

#pluralistic #the american prospect #penn wharton budget model #some models are useful #congressional budget office #macroeconomics #all models are wrong #joseph stiglitz #economism #inevitabilism

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