Seduced by Numbers

A Review of the book , “Escape from Model Land” in The WSJ explains the limits of models in determining policy.

 My Life as a Quant was written decades ago about an academic with a Phd in math and physics hired by a hedge fund to construct risk models.  He warned his new employers about the limits and assumptions of models and how they were inappropriate for the task they sought to apply, but they paid him far more than he could ever earn in academia so he delivered.

In Black Swan Nassim Taleb warned of the faith placed in risk models

In 1998 Long Term Capital Management (LTCM) collapsed from an over reliance on risk models – even with two Nobel Prize winning economists in the company- it was the biggest bailout on Wall Street until 2008

My summary of LTCM was “the replacement of a philosophical understanding of risk with delusional mathematical models”.

I have seen complicated models I could not begin to understand used to justify some of the dumbest fucking investments I could imagine.  Wealth management professionals fall prey to this lunacy.

In The Tyranny of Reason Yuval Levin warned of the dangers of applying the logic of hard science to social realms.   Even when applied to pandemics and climate change there are tradeoffs that exceed the reach of scientific certainty.

IMO one of the reasons it is so common to see economists weighing in on climate change is their understanding of the limits of elegant models as a harbinger of scientific truth. Another is their understanding of tradeoffs.

Models seek to represent the real world, but they live outside it. Indeed, they exist in their own “wonderful place,” what Ms. Thompson dubs “Model Land.” In Model Land, the assumptions of a model are considered “literally true,” enabling expansive exploration and ambitious predictions. The problem is that Model Land is easy to enter but difficult to escape. Having built “a beautiful internally consistent model,” Ms. Thompson writes, it can be “emotionally difficult to acknowledge that the initial assumptions on which the whole thing is built are literally not true.”

We may be inclined to regard models as objective expressions of truth, yet they are deliberately constructed interpretations, imbued with the values and viewpoints of the modelers—primarily, as Ms. Thompson notes, well-educated, middle-class individuals.

“Science cannot tell us how to value things,” Ms. Thompson says. “The idea of ‘following the science’ is meaningless.”



Policies and Outcomes

While it is dubbed the Inflation Reduction Act of 2022 it is spoken of as a climate bill.  I am skeptical that it accomplishes either.

Inflation is a mismatch between supply and demand.  To fight inflation you can decrease demand or increase supply. Raising taxes on production and increasing government spending does the opposite of both.

While everyone is parsing the definition of recession and trying to deny we are in one, we should simply recognize it as a likely response to the overspending, while sharply constraining supply, on the pandemic followed by a more rapid than expected recovery. A recession is not the end of the world; we have advanced through dozens of them. Inflation today is a product of monetary policy funding profligate fiscal policy. “Milton Friedman is not in charge anymore” (Biden) has proven prophetic.

Kevin Williamson comments of the climate side of this bill in The Democrats’ Unserious Climate-Change Deal:

Unsurprisingly, the European Union is farther along that curve than is the United States, which relies on renewables for about 13 percent of all its power compared with the European Union’s 22 percent, and which generates about 20 percent of its electricity by means of renewables, compared with the European Union’s 38 percent. That has real consequences for climate policy: By the most economically relevant measure (emissions per unit of GDP) the United States is about twice as carbon-intensive as Germany.

But it is Germany, not the United States, that is getting ready to fire up coal plants.

Policy proposals are constrained only by the utopian imagination; policy outcomes are constrained by physics, geography, and technology, among other inconvenient exogenous factors. At a sufficient level of subsidy, wind and solar are economically viable alternatives to coal and gas, but they are intermittent, and it is likely that their role in total electricity generation will always be a limited one. Affordable, nearby hydrocarbons — Russian gas or, in its absence, coal — are what is going to fill in the gaps.

The case for a carbon tax is that current U.S. practice does not put any price on the externalities associated with burning hydrocarbons. And that is fair enough. But we should not delude ourselves into thinking that there exists some “clean” source of energy capable of sustaining modern life. As Thomas Sowell put it, “There are no solutions; there are only tradeoffs.” Some of those tradeoffs are economic: You can pay to make renewables relatively affordable either by subsidizing them or by taxing hydrocarbons. Others are environmental: The more batteries are used in transportation and utilities, the more battery manufacturing and disposal are going to be major environmental problems. Petrochemicals and petroleum-derived polymers are used in manufacturing solar cells, wind turbines, batteries, and much else that is “green.”

It is particularly amusing to watch Democrats argue for a bill that purports to address the problem of businesses not paying their “fair share” in taxes while larding up that same bill with billions of dollars in special-interest tax credits for their favorite businesses. That is the great Democratic tax strategy: create tax subsidies for businesses and then, two elections later, complain that businesses take advantage of tax subsidies. It is the unserious program of an unserious party run by unserious people…

Even if we were willing to endure what surely would be an astronomical transition cost, there isn’t an electric long-haul truck on the market that can do what a diesel-powered semi does — at any price. Container ships are the lifeblood of the global trade in physical goods, and most of those run on barely refined oil. Even if we were willing to deal with the security issues involved in developing a nuclear-powered global cargo fleet (there have been prototypes), those ships do not yet exist, and neither does the fuel-processing infrastructure that would be necessary to sustain them.

HKO

  1. Trade-offs.  Energy independence has national security implications. Imagination and fears must face physical realities. Why is a barrel of oil from Venezuela or Saudi Arabia more carbon neutral than a barrel from Texas?
  2. Tax policy is once again much less about transferring from rich to poor than it is about transferring from politically unconnected to politically connected.
  3. Fairness is ephemeral.  Today it is fair to subsidize the buyer of a $100,000 Tesla.  An all electric Hummer has a greater carbon footprint than an economy size internal combustion vehicle, but only the Hummer gets a generous tax subsidy.


Centrally Planned Ignorance

From National Review, Kevin Williams’ China’s Population Problem:

Governments always operate in ignorance, and authoritarian governments suffer from this more than the governments of liberal societies. That is because in liberal societies, the spontaneous orders of markets, civil society, and open intellectual life help to organize and deploy useful knowledge in ways that centralized bureaucracies cannot.

Political actors — not only elected officials but also career bureaucrats and expert managers — do not err randomly or in ways that are entirely unpredictable. That is because political actors, even the most intelligent and well-meaning of them, are not the dispassionate philosopher-kings of the progressive imagination. Political actors have incentives, and they act in accordance with those incentives. This produces biases that are mostly predictable: bias toward bigger budgets and bigger staffs, bias toward settlements and procedures that minimize institutional accountability, bias toward relying on metrics of progress that are easy to measure and likely to obscure or minimize ongoing problems (you can tell a great deal about an institution by what questions its managers choose not to ask and which metrics they choose not to measure), etc. Among central governments, the bias tends to be toward centralization. Among local governments, the bias tends to be toward localizing power and delocalizing funding. Police departments are predictably biased against civilian-review boards. Public-school teachers’ organizations are biased against measuring performance rather than relying on criteria such as seniority in decisions relating to compensation and advancement.

The Communist bosses in Beijing have certain ideological biases that have evolved over the years. Unsurprisingly for an authoritarian ideology with its roots in agrarian and pre-industrial social arrangements, the Chinese long regarded themselves as having a population problem. The peasants may have been lionized as the vanguard of the revolution, but there were countless millions of them, and the Communist planners regarded them as liabilities rather than as assets — mouths to be fed rather than a productive work force. Central planners are reliably unable to cope with the organic pace of change as it happens in the real world — which does not operate on a series of five-year plans — and, among their other errors, the authorities in Beijing continued believing that they had a population problem long after it was plain that they did not.

The Chinese are not alone in this. In the West, progressives have been for many years hostage to the deathless superstition of “overpopulation” and all of the predictable Malthusian errors that go along with it. Paul Ehrlich, the wrongest man in the history of modern American thought, captivated a generation with his Population Bomb and his predictions that the world would soon run out of . . . everything, really: food, energy, industrial metals, etc. In 1970, he predicted that “in ten years, all important animal life in the sea will be extinct.” He predicted that the United Kingdom would cease to exist, that hundreds of millions would die in inevitable famines, etc. Subsequent prophets from Al Gore to Greta Thunberg have offered variations on the same theme. Thank goodness we were not persuaded by their forebears back when they were insisting that we were on the verge of a “new ice age” and drawing up plans to cover the polar ice caps in coal soot in order to warm up the planet and thereby prevent . . . climate change.

HKO

Worth a read and reread.  National Review writers like Williamson and Goldberg are unique by the way they tie the tools of history and political philosophy to current events and problems.  This context is sorely lacking in most reporting on current events.

Conservatives and progressives are distinguished by sharp philosophical differences. One is the belief in permanent principles of human nature, and another it whether humanity is an asset or a liability. Some of the greatest moral preening about humanity is often accompanies by the cruelest treatment of individual humans.



The Cost of Virtue Signaling

from Holman Jenkins at The Wall Street Journal, Press Is the Enemy of Climate

Unfortunately the U.S. media have become a positive hindrance to public understanding. Consider that systemization of banality known as Axios. Last week it told its presumably politically engaged readership that the way to “be smart” about climate change is to understand that “In climate science, one side is the scientific consensus, and the other is a small but vocal faction of people trying to fight it.”

In other words, reduce everything to a binary question of believers vs. deniers, good guys vs. bad guys. Here’s the sad truth: This narrative is mostly an invention of journalists for their own convenience. It relieves them of having to understand a complicated subject.

I’m not trying to be funny. Over the past 15 or 20 years, the climate beat has been handed over to reporter-activists who’ve decided that climate science is impenetrable but at least nobody ever got fired for exaggerating the risks of climate change.

Their ignorant crisis-babble is why electorates everywhere now believe climate and prosperity are necessarily at odds. Every study, including the U.S. government’s latest, shows the opposite: Continued prosperity is essential to mitigating the risks of climate change.

HKO

The strength of a consensus can me measured by its tolerance for  dissent.  A consensus with strong factual support is not afraid of skeptics.

How much would you bet on the price of oil in 30 years?  Or the price of corn or computer chips?  Yet we are willing to make an enormously costly bet on the climate several decades out, which is subject to far more uncontrollable and unknowable elements?  Why? Because we are playing with other people’s money.  The cost of virtue signaling is zero.

When the bill is no longer restrained in elegant committee rooms, limousines, and private jets you get the response like the riots in Paris.

 

 

 



The 34% Consensus

Matt Ridley brings some objectivity to an issue where it is sorely lacking- Climate Change

It is a long post and is a compilation of a few of his articles:

excerpts:

The climate change debate has been polarized into a simple dichotomy. Either global warming is “real, man-made and dangerous,” as Pres. Barack Obama thinks, or it’s a “hoax,” as Oklahoma Sen. James Inhofe thinks. But there is a third possibility: that it is real, man-made and not dangerous, at least not for a long time.

This “lukewarm” option has been boosted by recent climate research, and if it is right, current policies may do more harm than good. For example, the Food and Agriculture Organization of the United Nations and other bodies agree that the rush to grow biofuels, justified as a decarbonization measure, has raised food prices and contributed to rainforest destruction. Since 2013 aid agencies such as the U.S. Overseas Private Investment Corporation, the World Bank and the European Investment Bank have restricted funding for building fossil-fuel plants in Asia and Africa; that has slowed progress in bringing electricity to the one billion people who live without it and the four million who die each year from the effects of cooking over wood fires.

It cannot be what is happening to world temperatures, because they have gone up only very slowly, less than one-half as fast as the scientific consensus predicted in 1990 when the global warming scare began in earnest. Even with this year’s El Nino-boosted warmth threatening to break records, the world is barely half a degree warmer than it was about 35 years ago (the surface data sets say nearly 0.6 degrees, the satellite data sets about 0.4 degrees of warming since 1979). Also, it is increasingly clear that the planet was significantly warmer than today several times during the last 10,000 years. [An excellent source of charts and data on climate is at: http://www.climate4you.com]

Nor can it be the consequences of this recent temperature increase that worries world leaders. On a global scale, as scientists keep confirming, there has been no increase in frequency or intensity of storms, floods or droughts, while deaths attributed to such natural disasters have never been fewer, thanks to modern technology and infrastructure. Arctic sea ice has recently melted more in summer than it used to in the 1980s, but Antarctic sea ice has increased, and Antarctica is gaining land-based ice. Sea level continues its centuries-long slow rise – about a foot per century – with no sign of recent acceleration.

Perhaps it’s the predictions that worry the world leaders, then. Here, as we are often told by journalists, the science is “settled” and there is no debate. But scientists disagree: they say there is great uncertainty, and they reflected this in their fifth and latest assessment for the Intergovernmental Panel on Climate Change. It projects that temperatures are likely to be anything from 1.5C to 4.5C degrees warmer by the latter part of the century – that is to say, anything from mildly beneficial to significantly harmful.

The 40,000 people meeting in Paris over the next ten days are committed to the view that the weather is certain to do something nasty towards the end of this century unless we cut emissions. In this they are out of line with scientists. A survey of the members of the American Meteorological Society in 2012 found that only 52% agree that climate change is mostly man-made, and as to its being very harmful if unchecked, only 34% of AMS members agree. The rest said they think it will be either not harmful or not very harmful.



The Publication Bias

From The Truth Wears Off by Jonah Lehrer in The New Yorker:

An excellent article on the publication bias- keep in mind that in order to be peer reviewed it has to be published- although up to a third of articles claimed to be peer reviewed in one of the IPCC report were not. IN Mann’s case 43 of the peer reviewed had also co – authored studies with him- again I question some of the peer review process.  It is supposed to be squeaky clean. If it is not then there is corruption that is quite damaging to the scientific profession.

 Jennions, similarly, argues that the decline effect is largely a product of publication bias, or the tendency of scientists and scientific journals to prefer positive data over null results, which is what happens when no effect is found. The bias was first identified by the statistician Theodore Sterling, in 1959, after he noticed that ninety-seven per cent of all published psychological studies with statistically significant data found the effect they were looking for. A “significant” result is defined as any data point that would be produced by chance less than five per cent of the time. This ubiquitous test was invented in 1922 by the English mathematician Ronald Fisher, who picked five per cent as the boundary line, somewhat arbitrarily, because it made pencil and slide-rule calculations easier. Sterling saw that if ninety-seven per cent of psychology studies were proving their hypotheses, either psychologists were extraordinarily lucky or they published only the outcomes of successful experiments. In recent years, publication bias has mostly been seen as a problem for clinical trials, since pharmaceutical companies are less interested in publishing results that aren’t favorable. But it’s becoming increasingly clear that publication bias also produces major distortions in fields without large corporate incentives, such as psychology and ecology.

Stated in another way-  97% of egg-lovers claim eggs are awesome. 97% of the Flat Earth Society believe the Earth is flat. 97% of the Labour Party believe in Labour. 97% of musicians think that people need music in their lives. 97% of climate scientists believe in anthropogenic global warming. 97% of YouTube commenters believe that they know everything. I think there’s a pattern here.

Lehrer further illuminates-

 Such anomalies demonstrate the slipperiness of empiricism. Although many scientific ideas generate conflicting results and suffer from falling effect sizes, they continue to get cited in the textbooks and drive standard medical practice. Why? Because these ideas seem true. Because they make sense. Because we can’t bear to let them go. And this is why the decline effect is so troubling. Not because it reveals the human fallibility of science, in which data are tweaked and beliefs shape perceptions. (Such shortcomings aren’t surprising, at least for scientists.) And not because it reveals that many of our most exciting theories are fleeting fads and will soon be rejected. (That idea has been around since Thomas Kuhn.) The decline effect is troubling because it reminds us how difficult it is to prove anything. We like to pretend that our experiments define the truth for us. But that’s often not the case. Just because an idea is true doesn’t mean it can be proved. And just because an idea can be proved doesn’t mean it’s true. When the experiments are done, we still have to choose what to believe. ♦