Wednesday, August 18, 2010

Decisively Noncommittal

There are two phrases that economists use (frequently) that pundits, activists, and politicians just hate: “it depends,” and “all other things held equal.” As it turns out, whether something is true or false absolutely depends on these two relativistic phrases. I understand that they do not create ideal conditions for political frenzy, and that they do create the unpleasant necessity of actually studying the issue, instead of just screaming about it, but that’s life. Deal with it.

Case in point: “quantitative easing” and inflation. Conservatives seem to have reached the shrill pitch of a dog whistle over the Federal Funds rate and current monetary policy. The consensus orthodox Tea Party position seems to be that: 1) abnormally low interest rates created conditions of low returns, forcing lenders to make riskier loans, and 2) increases in money supply driven by the Treasury will cause inflation to spiral out of control. These arguments are driven by simple macro-economic heuristics that may or may not hold true, depending upon circumstances. What people don’t seem to be willing to do, either because it doesn’t serve their political purposes or just because they have no idea what they’re talking about, is to actually look at the data and question the assumptions which underlie their arguments. You might, if you actually cared to know the truth, ask the following sets of questions:

  1. . Does the Fed actually control commercial interest rates? What’s the relationship between the Federal Funds rate and the prime rate? If they move together, what explains the difference? Is it random? What market factors drive that difference? You might, having asked these questions, be in a better position to test the hypothesis (or unreasoned assertion) that Fed policy led to risky lending. Just sayin’.
  2. If money supply is increased, what is the prevailing tendency on inflation? What happens to Treasury yields for long-term notes? Are these tendencies currently being observed? If not, what other factors could influence Treasury bond yields? What happens when we take into consideration GDP growth and employment? What if we look at sentiment about other currencies and foreign sovereign debt?

Yes, Wally, you do actually have to ask these questions, and they really do matter. They matter enough to make something true or false, and not just the little insignificant somethings, either. I’m not arguing that these positions have no merit – I’m just arguing that they need to be argued. Start with the data. As some of you may have noticed, I created a WolframAlpha widget and added it to Contrendium. No commercial interest, but you should go check them out.

Create your own queries and widgets – you will be amazed by how much cool data they have. At least play with MacSanitizer (my widget). Want to test that thesis about money supply and inflation? Go for it. The Federal Funds rate and the prime rate? Have a ball. Cumulative Federal debt and Treasury yields? Knock yourselves out. People can make any argument they wish, but to quote Deming, “In God we trust . . . all others must bring data.”

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