Evidence-Based Policy

32
Wed, Aug 3, 2016 - 6:44am

A funny coincidence occurred recently—yet another week when the Fed is hinting, signaling, screaming (but probably lying) that they will raise interest rates. A colleague asked me if I would review an article she has written for an encyclopedia on research methods. Her article explains “Evidence-Bassed Policy” and discusses how political and community leaders use this method to make wiser decisions, to solve problems and plan for the future. Actually, I don’t think that coincidences are usually coincidences, just like the “sometimes” thing with cigars and Freudian obsessions. So I’d like to muse about the FED’s decision-making methods here in this short essay, and contrast them with the theory behind their rationale.

My esteemed statistician colleague wrote:

Evidence-based policy emerges from a comprehensive, non-partisan investigative process of evaluating and prioritizing the relevant empirical data to support claims regarding the best course of action to solve a societal problem.*

That actually makes a lot of sense. In fact, I think I actually use a form of this when I look at stock charts, draw trendlines and use Fibonacci levels to make stock decisions. I even use this in my spreadsheets for my personal budget each month. But as I look at he ideal behind this concept, then examine the definition, and and consider the FED’s public statements , I smell something utterly rotten.

But is this how the FED determines public policy? Note the key terms in this definition, and then consider

  • Comprehensive: No—their primary data is provided by a couple of key government agencies like the BLS who use flawed or opaque methodologies to derive their results, then must revise each month as actual data is added to the mix. While the FED employs its own team of finance staticians, these folks are never cited in their bi-monthly minutes or by their jawboning governors.
  • Non-partisan: No—Eployees of said government data agencies appointed by and beholden to the current administration.
  • Investigative process: Not really—they investigate a limited range of economic activity with flawed methods.
  • Evaluating: No—not when the FED governors who do this “evaluation” regularly use terms ilke “believe and metaphors like “headwinds” Just a few days ago, Kaplan, from the Dallas FED stated, “We still believe the consumer will be strong in 2016”.
  • Priortizing: Not really—The jobs reports seem to be the sole data point they rely on.
  • Relevant empirical data: No—data not empirically derived with birth-death jobs model.
  • Support claims: Perhaps the flawed data support claims… Hmmm… They have to have a scapegoat standing by somewhere.
  • Best course of action: Are you kidding—QE, Operation Twist, ZIRP, NIRP, and helicopter money.
  • Solve societal problem: Well, according to Obama, all is solved, the economy is strong, and we should keep the Democrats in power.

The Fed claims that they use Evidence-Based Policy to guide their handling of the economy. They make decisions on whether or not to raise or lower interest rates based on “the data” on the economy—quarterly GDP, Jobless claims, job additions, etc. But the gorilla in the corner is the data. We have talked at great length about the validity of this data, noting that the unemployment rate is far higher than officially claimed, recognizing that the inflation rates have been typically higher. The “birth-death model” for job growth is an indirect, and flawed, method, of counting the number of jobs. Then the News media dutifully reports all these weeky and monthly “estimated” statistics that are continually revised by the BLS while other government entities keep the precise numbers (not estimates) tucked away somewhere.

The DJIA number is the primary data point that Americans use to gage the health of the economy. When it crashes, they look at their IRA portfolio bottom line and get nervous. So do the politicians. And they act fast. Since 2008 they have kept stock indexes moving higher, intervening with the PPT every time investors head for the exits, coaxing them back in with the fear of missing out. But you will never hear the FED or anyone say "Stocks are tanking, bonds are in the toilet, so we better do something to keep these sheep from getting restless and heading to the streets to protest." Seems that this is one of the only data streams the FED pays attention to... and of course whatever Kuroda says over at the BOJ.

What gets my goat is that the Internal revenue service keeps accurate, detailed and up-to-date records of how much money every citizen is paid each month (jobs). For that matter, the social security administration also keeps precise records on who has an employer paying benefits on their behalf. The city governments know to the penny how many new goods were sold in their locales every quarter. But does anyone in the government offices aks these sources for their data—data that is not statistically derived, but simply counted up as the receipts roll in? Oh, that would be too easy for these federal agencies to do. They gotta make it complicated to justify their budget and high-salaried directors.

Ring, ring.

"Hey Koskinen. Janet here. We have a meting tomorrow to decide whether or not to raise rates. I need to know how many people in this country have a job." (pause) "What? Why not?" (pause) "You mean that you know to the penny how much tax was collected from every paycheck, but you didn’t program your computer to count the number of paychecks?" (pause) "Yes, I understand. Things are tight. But where did Ben get his data?" (short pause) "OK. I’ll call Erika Groshen over at the BLS. She’s got a 632 million budget to estimate that number."

So they have at their disposal accurate data for their evidence based policy from tax records, yet they choose to use the BLS data which is derived with complicated mathematical models by statistical experts. And they they have to revise it every month. And THIS is the “evidence” used by the fed to determine what they will do—the most powerful organization on earth uses flawed data on which flawed, fallacious, falsified, and simply F’ed up “evidence” is used to base their decisions with this “evidence-based policy that is the buzzword of governmental leaders at every level.

Incredible! We have the blind leading the blind. We fell into a ditch in 2008 and have never gotten out.

Can the Fed really be that incompetent?

I don’t think so! I think they know precisely what they are doing and can explain it to anyone. The problem is that we would not like their explanation, if they were truthful. and they want the world to think we are out of the ditch already. NIRP says otherwise.

So, no. The FED is not incompetent. But they are not leaders. They are employees who dutifully and diligently follow instructions of their superiors. And all this time they claim they are using “evidenced-based policy” to make their decisions. But in reality, they follow orders of leaders who fear the masses and have to keep the bread and circuses flowing—retirement accounts, green stock indexes, and the constant stream of entertainment.

I am feeling cynical again and should stop writing.

*Ah Yes, you are looking to check on my esteemed colleague and a citation ... I’ll withhold her name here since she may not want to be associated with a goldbug like me and probably doesn't want her name soiled by such a “radical” blog. Besides, the article is still “in press.” Once it is published, she is fair game.

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AlienEyes
Aug 6, 2016 - 1:51am

Politics From an Engineer's Perspective

In engineering one will find more than a few different types of concrete. A-3, A-4, A-6, Concrete with "high early" add mixture, fiber-crete, steel reinforced, WW reinforced concrete, vermiculite concrete, fast slump "shotcrete", etc.

Let me decode some of these designations. A-3 means concrete with a breaking strength of 3,000 psi (pounds per square inch). A-4 means the same but with a breaking strength of 4,000 psi. High-early means high strength early. (concrete reaches 90% of its ultimate strength in seven days and 100% in 28 days.) However, high-early curing add mixture weakens concrete and shortens its lifespan. WW stands for welled-wire reinforced concrete which is used in driveways and roads. Vermiculite concrete is lighter (and weaker) and is used in swimming pools. "Shotcrete" can be sprayed under pressure onto a surface (like an old culvert) to reinforce it and seal leaks and cracks. My point is that you get from concrete in strength, exactly what you put into it and all concrete is certainly not equal.

Now let's take a look at voters. I am sure I have heard "American voters are idiots" at least a thousand times and to a certain extent, it is absolutely true. Fact is that along with the average voters are brilliant voters and textbook, certifiable moron voters. In our system, the proportion of bright voters, average (IQ) voters and near idiot voters can tell volumes about the voter pool and their inclinations at the polls. Put another way, you can count on idiot voters to vote like idiots. Forget about education because it is to a great extent, indoctrination, plain and simple. What I'm talking about is the basic ability to learn or IQ, whether "formally educated" or not. I have met MENSA members at meetings who drove a truck for a living but had an IQ of 150. One of the problems with a high IQ is that some of the brightest figure it all out early on and realize they don't have to study and bust their arse in college to live a very happy and comfortable life with little or no effort on their part and very low stress. They are not stupid by any measure and in fact have given reduced stress a very high priority in their calculus of life.

Now at the other end of the spectrum we have 'hollow people" who couldn't count their balls and get the same answer twice in a row. (To avoid being a sexist, ....and women who count their balls and get one for their answer every time.) These poor people are truly pathetic but certainly anything but bright. THAT poses a big problem. Our "all inclusive" political system is literally designed to fail and regularly does exactly that. Our voter pool is, by law, constantly polluted and poisoned by the votes of morons. WTF do we expect when the number of stupid voters skyrockets ? That is exactly where we are right now. Liberal or conservative politics aside, a pool full of fools will make their presence known and not in a positive way. Where does one find additional stupid voters ? Immigration. The successful people tend to stay put and for the most part, total failures tend to be the vast majority of immigrants. They are looking for a nanny state to take care of them and most of them will vote accordingly...if they can figure out how to pull the lever. The demonrats have focused on this and made it their mantra. "Come on in and all you have to do for tons of free sh!t is vote for us. We will take care of you."

That's what it has come to and we are all suffering as a result. We are using weak concrete and then wondering why it failed to support the load. We made it fail with a stupid smile on our faces. Our entire political system desperately needs an overhaul. We need to have a revision of qualifications for voters. Citizens should have to take an IQ test as a qualification to vote. Score less than 95 or 100 and you can stay here but you are denied the right to vote simply because you are unfit to do so. This would actually have a benefit to the dim-witted. They would no longer be ruled to some extent by the desires of morons or taken advantage of by crooked politicians. Sooner or later, this will be our last chance to save ourselves from a total collapse of our political system....which is much closer than most realize.

The radical "final solution" took place in WWII Germany because the communists had become a direct and very serious threat to the German state. Eighty percent of German Jews were ardent communist or Marxist and by being such, signed their own death warrants. They simply could not be trusted and were deemed expendable. It's about the same in America today and past history is being totally ignored. I fear we will be forced into the same desperate corner as Germany and at some point, react in an extremely radical way. It has happened before and only a fool would think it can't happen again. At present, we are insuring that it will.

AE

tyberious
Aug 3, 2016 - 6:12pm

Zika HOAX

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onesong
Aug 3, 2016 - 5:27pm

Don't make a big deal of it...

Buy it lightly on the way up. When it hits 18, buy it all!

pabste
Aug 3, 2016 - 3:42pm

ALERT! ALERT!

Houston, we have a problem! AG just won't stay RED!

pabste
Aug 3, 2016 - 3:26pm

After watching for the last

After watching for the last several days, seems like we should be selling our miners after the morning rise, and buying them back late in the day after the smash?????

We might be able to pick up MORE shares????

tyberious
Aug 3, 2016 - 3:00pm

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Marcrward
Aug 3, 2016 - 2:43pm

Cal Lawyer

"Question everything, and isolate the assumptions and premises, then ask whether the conclusion is sound if the assumptions or premises are incorrect"

I concur, "all models are wrong, but some are useful" is a phrase I keep in mind daily.

Modern Portfolio Theory is the mathematical formula that defines the best portfolios to invest your assets in order to minimize risk and maximize return. The assumptions that have held true up until now, will be destroyed going forward.

MPT would never recommend holding physical silver due to its historical volatility (manipulated?) and lackluster annual returns.

keep stacking.

Marcrwardmatt_
Aug 3, 2016 - 2:36pm

Re: modest Salary

matt_

or by investing in junior mining stocks and physical silver right now?

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Aug 3, 2016 - 2:23pm

I LOVE Evidence

This was my favorite course of all in law school. It encapsulates everything there is to being a lawyer.

"Evidence" as a concept takes into account the frailties of being a human being, coupled with the need for objective, that is, tamper-proof, persuasive "facts." It deals with psychology, memory, the whole gamut.

Studies have shown repeatedly, and convincingly, that human beings cannot be trusted to preserve truth from memory. There are too many filters, biases, what not, such that even though someone actually saw something, the perception of that event passes through filters and biases and what comes out in the end is subject to differing degrees of believability.

That is why juries traditionally put far more weight in actual writings, made contemporaneously at the time of the act, condition or event, as writings, unless forged, are apt to be more reliable than human memories.

But, that leads us to the conundrum that is the government "official" narrative.

Mr. Fix has hit it dead on. He is correct.

Anything emanating from anything or anyone "official" is to be distrusted, as the product of bias, corruption, ineptness, or evil. Period.

As for the "evidence" paradigm of supporting a conclusion, what I learned long ago still applies.

When presented with a conclusion, reason backwards and analyze EVERY SINGLE ASSUMPTION. Attack the assumptions, and premises upon which the conclusion(s) is(are) based, and universally, there will be weakness to attack. No question.

Don't just accept the conclusion. To do that marks one indelibly as a sheeple.

No.

Question everything, and isolate the assumptions and premises, then ask whether the conclusion is sound if the assumptions or premises are incorrect (or outright made up, like the BLSBS numbers).

THEN, ask why, like the brilliant Dr. J points out, the conclusions are based on such flimsy and fake assumptions when better (and accurate) date IS available?

Then, run that through a syllogism: (1) if the assumptions are fake, (2) but actual, real data exists, then (3) why is the conclusion based on the fake assumptions? Does that not prove that the conclusion is faulty simply because the underlying assumptions are based on fake data?

Anyhow, great article, as always, Dr. J!

Thank you a TON for this.

matt_
Aug 3, 2016 - 2:08pm

Re: modest salary

A US congressional house member makes $174,000 a year. It is high relative to the average wage in the US, but it isn't a lot of money. Try turning that $174,000 salary into $3 million in 5 years. That is a nearly impossible feat when starting from zero net worth. Becoming fabulously wealthy on $174,000 a year is only made possible through means that are illegal for everyone who is not a US senator or representative.

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