The Easy Macro Policy Hack

We live in an increasingly complex world moving at an increasingly fast pace. The way it comes at us, it feels like we’re at the receiving end of a firehose. It demands quick reactions and baits us into quick conclusions. Compound this by our ever-shorter attention span, and the age-old challenge of battling conformation bias is today a lot tougher.

Typically, when we confronted with an issue where we have little knowledge, we’ve looked to public figures whose views we’ve come to trust. But in today’s world, the pressures of social media/cable TV forces these people to have impossibly immediate, confident answers, so they—just like us–tend to shoot from the hip and fill their own information gaps with some combination of ideology and tribalism. As a result, bad (often partisan) ideas proliferate wider and faster than ever before. It’s not a coincidence that measures of political polarization started going haywire after the advent cable TV and have accelerated in the age of social media.

So how do you deal with the partisan cacophony? Here’s my policy hack: Look abroad. One of the best ways to cut through the bullshit is to look around at other countries’ experiences. My general rule is if you see the same problem in a raft of other countries, it’s almost certainly a global phenomenon and not about policy.

This doesn’t mean policy doesn’t matter or can’t attenuate the problem. Certainly, it does and it can. But when the phenomenon is global, policy is unlikely the primary cause and policy remedies might not be able to do all that much to fix it.

Not all policy issues lend themselves to international comparison, but many do. Let me give you two prominent examples.

Income inequality

The popular divide is conservatives want to blame low interest rates over the last 15 years and progressives want to put it all on tax cuts that didn’t trickle down. There is a mountain of evidence in the US that pushes back against these views, but in the clamor of partisan politics and tribal allegiances it is all too easy to find a way to dismiss them.

But not when you look abroad. When you look around world what you see very clearly is income inequality is increasing within most countries, even as it decreases across countries. And that it started in the late 70s-early 80s—well before we in the US had ever heard of the Greenspan put or The Bernank.

Here’s a handy chart of the timeline of income inequality in the US from a Bloomberg post last week:

Income inequality started a long time ago. https://www.bloomberg.com/news/articles/2017-12-15/how-america-s-inequality-machine-is-firing-the-dow-into-orbit

Again, I’m not saying that tax cuts and Fed policy didn’t play any role. Tax cuts that didn’t trickle down certainly did and Fed policy could have. But when you look around the world across countries that have an array of different monetary and fiscal policies and see the same basic pattern, it puts our parochial talking points into better perspective.

The Global Financial Crisis

There was a very strong ideological narrative that persists in certain quarters that the Global Financial Crisis was caused by Congress forcing Fannie Mae and Freddie Mac to crank out sub-prime mortgages and the Federal Reverse keeping interest rates too low for too long.

Again, there is plenty is data here at home to beat this thesis down. We know that Fannie and Freddie’s CRA lending was very small in the grand scheme of things and their market share shrank sharply in the bubble years, and that the collapse in credit standards was a market-driven shadow banking affair. We also know that the years of most aggressive mortgage lending were 2005-2007, when the Fed fund rate was around 5%, making it hard to pin the market frenzy on low rates.

But the easier path is to look around the world, to countries that didn’t have a Fannie or Freddie, whose central banks had different policies from the Fed. And when you see countries like Ireland, Spain, Iceland, who had real estate bubbles magnitudes larger than ours, it becomes much easier to recognize it was at its core a global, private-sector phenomenon.

Using international comparisons in policy analysis is not a panacea, but in macro it should be the first tool you reach for to beat back confirmation bias.

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