Calling a recession too early (and incorrectly) —Jason Smith

Econo-physicist Jason Smith demonstrates how to deal with a failed model forecast — acknowledge it, explain it, learn from it, and move on to improving the process.

Information Transfer Economics
Calling a recession too early (and incorrectly)
Jason Smith

Jason Smith — A Workers' History of the United States 1948-2020

After seven years of economic research and developing forecasting models that have outperformed the experts, author, blogger, and physicist Dr. Jason Smith offers his controversial insights about the major driving factors behind the economy derived from the data and it's not economics — it's social changes. These social changes are behind the questions of who gets to work, how those workers organize, and how workers identify politically — and it is through labor markets that these social changes manifest in economic effects. What would otherwise be a disjoint and nonsensical postwar economic history of the United States is made into a cohesive workers' history driven by women entering the workforce and the backlash to the Civil Rights movement — plainly: sexism and racism. This new understanding of historical economic data offers lessons for understanding the political economy of today and insights for policies that might actually work.…

Information Transfer Economics
A Workers' History of the United States 1948-2020
Jason Smith

Jason Smith — Unions, inequality, and labor share

The information transfer model tracks this pretty well.

Information Transfer Economics
Unions, inequality, and labor share
Jason Smith

Jason Smith — I'll say similar things for half the salary

Jan Hatzius made some macro projections about wages, unemployment, and inflation:

Goldman’s Jan Hatzius wrote Sunday that unemployment should continue to decline to 3% by early 2020, noting the labor market also has room to accommodate more wage growth. Hatzius predicted that average hourly earnings would likely grow in the 3.25% to 3.50% range over the next year. ... For now, Goldman has a baseline forecast of 2.3% for core PCE ...

Well, these are all roughly consistent with Dynamic Information Equilibrium Model (DIEM) forecasts from almost two years ago….

Information Transfer Economics
I'll say similar things for half the salaryJason Smith

See also

Sectoral balance chart.

Business Insider
Goldman's Top Economist Explains The World's Most Important Chart, And His Big Call For The US Economy

Joe Weisenthal

Jason Smith — What do equations mean?

Jason Smith comments on J. W. Mason and Arun Jayadev on MMT and conventional economics from the point of view of scientific modeling in macro.

Information Transfer Economics
What do equations mean?
Jason Smith

Jason Smith — One purpose of information theory

Unfortunately, Shannon's entropy, often referred to as information entropy, and then shortened to just information, is often confused with the colloquial term "information". This brings connotations of data, of knowledge, of specific sets of symbols with specific meaning. But as Shannon and Weaver said in their book from a year later, we must not confuse information theory information with meaning. This collision of terminology is amplified when it encounters economics, where information economics deals specifically with the economic value of meaningful information.

I believe the best way to understand this difference is to understand what information theory illuminates. Information theory gives us a way to quantify concepts when we have limited knowledge about what underlies those concepts. For example, information theory is essentially a more general framework that encompasses thermodynamics in physics — thermodynamics is the science of how collections of atoms behave despite not having remotely enough knowledge about the trillions upon trillions of atoms to make a model. We give up talking about what a single atom in a gas is doing for what an atom could be doing and with what probability. We cease talking about atoms are doing and instead talk about the realm of possibilities (the state space) and the most likely states....

Information Transfer Economics
One purpose of information theory
Jason Smith

Jason Smith — Economic growth in India

I always like looking at the data for other countries than the US — laziness and the ease of accessing FRED data are big reasons for most of the models being tested on US data. Additionally, the political economy of the US tends to bring up more US-centric questions.

I'm also not very well informed about a lot of the political economy and economic history of other countries. This is both good and bad. It's good because it means I don't go modeling the data with a preconceived economic history; it's bad because I don't necessarily have decent intuitive explanations for what the models uncover. I'd be appreciative for any information about the economic history of India beyond my rudimentary knowledge above in comments. 

Information Transfer Economics
Economic growth in India
Jason Smith

Jason Smith — Yield curve inversion and a future recession

Looking at the recent data and assuming the dynamic equilibrium model is correct along with a linear trend in rate increases, we see that the indicator will enter the error band sometime before 2020:…

However, the period of time the spread spends inside that error band ranges from a few months to a year (yield curve inversion is usually described as being an indicator a recession will happen within a year). So unless we have other data, we won't be able to predict the timing of this future recession. We do have other indicators, and this extrapolation is consistent with them.

Information Transfer Economics
Yield curve inversion and a future recession
Jason Smith

Jason Smith — Three sigma deviation in the 10-year rate

Now you might wonder how raising interest rates to only about 2% could trigger a recession today in the same way raising interest rates to 14% did in the 80s. I admit I don't have a good answer to this except to say increasing labor force participation in the 80s probably provided a sufficient tailwind that Fed had to do do much more.

In any case, this makes for an excellent test of the model. Interest rates should come back down in the near term (about 6 months). A possible mechanism to bring them down is recession. The longer they stay at the 99.9% of their range or further, the more likely the model can be rejected.

Mirabile dictu! An economic model that is testable.

Information Transfer Economics
Three sigma deviation in the 10-year rate
Jason Smith

Jason Smith — The economic way of thinking?

More on the foundations of economics.

Information Transfer Economics
The economic way of thinking?
Jason Smith

Jason Smith — Sustained growth?

Something to think about.

Information Transfer Economics
Sustained growth?

Jason Smith

Jason Smith — 2.4% growth forever?

Mentions Stephanie Kelton.

In addition to trying to set up a framework to understand these phenomena for the future book, I also saw a tweet from Stephanie Kelton talking about the downward revisions of potential RGDP and potential NGDP both in level and growth rate [3]. She thinks that 2% growth going forward is too pessimistic -- saying we can get 3% growth. Now the model above says that the dynamic equilibrium is 2.4% (so I'd agree that 2% growth is a shade pessimistic, see [3]).

But there is never a period in the history where the US has achieved a sustainable RGDP growth above the 2.4% dynamic equilibrium rate where we have decent data. The 60s and 70s involved a major change in the civilian labor force (increasing the relative fraction of women in the labor force) that gave us 20 or more years of RGDP growth periodically above 2.4% coupled with bouts of sub-2.4% growth. The only other times of above-2.4% growth were during the dot-com and housing bubbles.

I'm not saying it isn't possible, but it would require something that hasn't been tried in post-war US history [4]....

Information Transfer Economics
2.4% growth forever?
Jason Smith

See also

Losing my vestigial monetarism

On prediction parables

Jason Smith — Money is the aether of macroeconomics

So I've never really understood Modern Monetary Theory (MMT). In some sense, I can understand it as a counter to the damaging "household budget" and "hard money" views of government finances. To me, it still cedes the equally damaging "money is all-important" message of monetarism and so-called Austrian school that manifests even today when a "very serious person" tells you it's really the Fed, not Congress or the President that controls the path of the economy and inflation when neither inflation nor recessions are well-understood in academic macroeconomics. People have a hard time giving up talking about money...

Information Transfer Economics
Money is the aether of macroeconomics
Jason Smith

Jason Smith — Immigration is a major source of growth

One of the findings of the dynamic information equilibrium approach (see also my latest paper) is that nominal output ("GDP") has essentially the same structure as the size of the labor force.

The major shocks to the path of NGDP roughly correspond to the major shocks to the Civilian Labor Force (CLF). Both are shown as vertical lines. The first is the demographic shock of women entering the workforce....

With the positive shock of women entering the labor force ending, immigration is a major (and perhaps only) source of growth in the US aside from asset bubbles [3].

Information Transfer Economics
Immigration is a major source of growth
Jason Smith

Jason Smith — Information transfer economics: year in review 2017

With 2017 coming to a close, I wanted to put together a list of highlights like I did last year. This year was the year of dynamic information equilibrium as well as presentations. It was also the year I took some bigger steps in bringing my criticisms of economics and alternative approaches to the mainstream, having an article at Evonomics and publishing a book....

Information Transfer Economics
Information transfer economics: year in review 2017
Jason Smith

Jason Smith — My introductory chapter on economics

Short and not wonkish. Worth a read.

Information Transfer Economics

My introductory chapter on economics

Jason Smith

Brian Romanchuk — Book Review: A Random Physicist Takes On Economics

Wonkish unless you have been following Jason Smith's blog on information transfer economics. For those who have, his book looks like an interesting read, and Brian's review is helpful in approaching it.

Bond Economics
Book Review: A Random Physicist Takes On Economics
Brian Romanchuk

Cameron K. Murray — A random physicist takes on economics

Short appreciation of Jason Smith's A Random Physicist Takes on Economics. He likes it.

Jason Smith, a random physicist, has a new book out where he takes aim at some of the core foundations of microeconomics. I encourage every economist out there to open their mind, read it, and genuinely consider the implications of this new approach.

Go get it now. It only costs a few bucks.

Fresh Economic Thinking

A random physicist takes on economics
Cameron K. Murray

Jason Smith — A random physicist takes on economics: Out now!

My Kindle e-book is out now!

Here's the blurb:

A Random Physicist Takes on Economics is a novella-length critique of economic methodology from an outsider's perspective as well as a proposal for a new way of understanding supply and demand and rational agents as emergent concepts from the complex behavior of real people. After a brief biographical introduction on how he ended up doing economic research, author, blogger and physicist Jason Smith leverages "irrational" random agents and information theory to argue against the modern understanding of ubiquitous economic constructs such as so-called "rational" expectations, prediction markets, and utility maximizing agents using examples consisting of nothing more complicated than Dungeons and Dragons dice sets and pints of blueberries. Sometimes the unrealistic assumptions frequently made by economists about human rationality are found to be unnecessary to produce the same standard economic results. Sometimes "irrational" agents give insight as to why standard economic results fail. In the end, Dr. Smith calls for economists to present more uncertainty and plead greater ignorance when it comes to questions of politics and policy, and for everyone to move beyond zero-sum economic thinking and towards embracing the diversity and complexity of economic systems.

Information Transfer Economics
A random physicist takes on economics: Out now!
Jason Smith

Jason Smith — The unrealistic assumptions of information equilibrium

Reflections on a post by Brad DeLong, Clueless Delong Was Clueless About What Was Coming In 2007 And 2008. You might want to look at this first, but what Jason Smith says is interesting regardless.

Information Transfer Economics
The unrealistic assumptions of information equilibrium
Jason Smith

See also

Bootstrapping measurements