by Kyle Johnson

 

Put up or shut up—the free market throws down a gauntlet to professional economists. Have you noticed their failure to pick it up?

 

Betting Markets

Gambling gets a bad rap, but talk is cheap. There’s a certain level of honor in putting your money where your mouth is. Gambling is a way to test the sincerity of one’s beliefs.

The recent presidential election thrust a new betting app named Kalshi into the spotlight. Download it and you’ll discover the ability to place wagers on more than elections. Users can also bet on various economic events and official statistics, such as:

• The Fed decision in December.
• Upcoming unemployment figures.
• Upcoming jobs figures.
• GDP for Q4 24.
• CPI for cars, shelter, gas, food, and apparel.
• Core inflation.
• The size of the Fed’s balance sheet before 2026.

Economists should be salivating at the opportunity to profit from their alleged “expertise.”

 

Three-Card Monte or Casino Royal?

People can look at the exact same thing but see something very different. With respect to official economic statistics, I see a rigged game, such as three-card monte.

My reasoning is simple. Economists often pretend they’re measuring things objectively, like chemists or physicists do, but there’s a lot of subjectivity in statistics. And government economists seem to be the worst of the lot.

Take hedonic adjustments, for example. I don’t care which products government economists believe are substitutes for others, they are not the same products. Or consider the CPI Housing Survey, which asks homeowners what they believe they could receive in rent if they were to rent out their home. Purely subjective.

These approximations—not measurements—are subject to human bias. Tomes have been written on that matter. Briefly:

1. People act with self-interest.
2. Government economists are people.
3. Therefore, government economists will act with self-interest.

Like the rest of us, government economists fear getting fired and desire promotions. Those higher up tend to hire people who agree with their views.

Since the beginning of 2023, final job revisions have been downward in 16 of 20 months. If the errors were random, they should be downward and upward about half the time. So even if we assume there’s no impropriety, consistently missing to one side indicates a systemic error the BLS has yet to correct. And the size of the errors is substantial. The most recent data tacked on another 112,000 job “losses” to September’s massive 818,000 downward revision.

As is the case in many other occupations, access to privileged information presents an opportunity for personal gain. Accidental or otherwise, BLS information has leaked on more than one occasion. According to a Bloomberg report earlier this year, a BLS economist emailed a group which he called “my super users” and relayed data to major Wall Street firms prior to official releases. Of course, the BLS officially denied having super users. But there’s ample evidence they have a problem with employees going rogue. The BLS has also been late to publish data, which could provide time for certain investors to minimize or avoid losses or get positioned for gains.

It seems foolish to assume BLS employees behave like impartial, infallible robots rather than human beings. Their failure to protect data calls into question how their figures are calculated in the first place.

But economists like Claudia Sahm will hear nothing of the sort. In a Bloomberg piece titled “The Jobs Numbers Went Down, But Trust in Them Shouldn’t” Sahm insists that “Data revisions should not raise questions about the integrity of the BLS.”

On her X account on January 18, 2024, she posted: “I’ll never question the integrity of national economic statistics.” This seems to be the standard position held by economists.

OK, fine. Have it your way. If you believe that government statistics are beyond reproach, then the betting market for them is trustworthy.  Step right up and place your bets.

 

Pros vs. Joes

Imagine a world in which professional poker players refuse to play against amateurs and where Wall Street professionals refuse to engage pajama-clad traders.

Absurd, right?

Well, that’s what’s going on in the betting markets. Professional economists are nowhere to be found.

Given their confidence, modern economists should be wagering impressive sums on official economic statistics.

Have they no interest in earning money from their “expertise?”

Economists spend considerable amounts of time and energy complaining about their detractors. Why not profit from them?

Did economists lose their mojo?

No, their absence is an act of strategic cowardice.

 

Heroes In Their Own Minds

Cowardice is not an accusation I make lightly. But it’s proportionate to how many economists view themselves as heroes. We need to look no further than what Paul Krugman wrote in the Guardian back in 2012 about the lasting impact of reading Isaac Asimov’s Foundation Trilogy in his adolescence. There are spoilers below.

Krugman confesses:

“I didn’t grow up wanting to be a square-jawed individualist or join a heroic quest; I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behavior to save civilization.”

Hari Seldon is not the main character in Asimov’s book series, but he is an important one. He’s a mathematics professor who develops “psychohistory”—an algorithmic science capable of predicting the future.

Seldon predicts the collapse of an empire which spans 25 million different worlds. He warned that humanity would descend into barbarism for a period of 10,000–30,000 years. But thanks to his mathematical models, the period of human suffering was reduced to just 1,000 years.

In short, Seldon used math to gain clairvoyance.

Asking himself a question, Krugman ponders:

“What do I think of Asimov’s belief that we can, indeed, conquer that final frontier—that we can develop a social science that gives its acolytes a unique ability to understand and perhaps shape human destiny?”

Krugman answers that on a good day, he feels we’re making progress “in that direction.” Crediting himself with leading the charge, Krugman then claims ownership of “a fair number of such good days lately.”

He describes being struck by the predictive power of good economics, especially when contradicting “popular prejudices” and “common sense.”

Krugman laments his need to convince others of the wisdom behind his economic policy prescriptions. Enviously, he notes how Seldon didn’t need to convince an emperor regarding policy decisions. Instead, Seldon concealed his project under a false front. Without giving away too much of the plot, his plan was executed without anyone being the wiser. Nobody opposed him as his brilliance unfolded century after century.

Krugman barely stops short of claiming his opponents are too stupid to appreciate his own brilliance, which would be undeniable if only his policies were implemented and given sufficient time.

Krugman’s forecasting track record proves he’s no Seldon. But if there were any doubts, the betting markets deliver a fatal blow.

Obviously, you must place your bet before official economic statistics are published. But economic stats are backward-looking. If you wait until the last possible moment to place your bet, all the circumstances and events impacting a given economic statistic have already occurred.

Seldon accurately predicted events that were yet to unfold thousands of years into the future. By all appearances, Krugman cannot ascertain events as they occur, or even after the fact.

 

Murky by Design

Economists have frequent opportunities to make public forecasts, but few make clear, specific predictions for which they can be held accountable. They prefer the rats’ nest of mushy claims, counterclaims, and subsequent rebuttals.

The system of self-policing among economists is indefensible—it’s rife with petty name-calling, favoritism, intentional mischaracterizations, and downright malice. Preferences are presented as fact. Political opinions are smuggled in with regularity.

Many economists pretend their worst calls never happened. They’ll often move the goal posts, suddenly changing which metrics they prefer. I recently covered Claudia Sahm’s word play. Economist Robert P. Murphy wrote a lengthy book, Contra Krugman, on Krugman’s rhetorical shenanigans.

Well, the betting markets could help sort things out in a hurry.

Betting slips are binary—right or wrong.

Economists regularly claim to be one of the few people who saw this or that. But a wager’s odds reveal if the bettor went with the crowd or against the grain.

It would be fascinating to watch economists place wagers and post them publicly. But don’t get your hopes up. By all appearances, professional economists won’t volunteer for such transparency.

 

Gatekeeping Clout-Chasers

Economists enjoy playing games of pomp and circumstance: the degrees they’ve earned, the schools they attended, where they’ve been published, the books and papers they’ve read, the institutions they’ve worked for, etc.

The objectivity of betting markets threatens such pageantry.

As Krugman described in the Guardian, central to his worldview is that human civilization needs saving. Modern economists seem to agree that it’s perpetually in a state of disrepair. And by golly, they’re just the person to poke and prod everyone into place. This top-down worldview necessitates cozying up to political power and the money spigot at the Fed. Heroes in the making, modern economists seek to become Fed chair, Treasury secretary, or the namesake of a school of thought.

But they risk little. Not even $1, the minimum bet on Kalshi.

$1 is too expensive… not monetarily, of course. But professional economists can’t risk losing their positioning, especially to “outsiders.” It would be embarrassing for them to perform no better than a coin flip. Consistently losing to nameless, faceless, and uncredentialed armchair economists would be career-ending. Or should be.

 

Duplicitous Content Creators

If you’re on social media, you’ve probably encountered the lowest form of “content creation” known: reaction videos.

First, someone is recorded doing something genuinely impressive (often a feat of athleticism, a display of artistic talent, or sharing an obscure bit of knowledge or unique insight). And rather than spreading the video, someone downloads it and records a new video of themselves “reacting” to the impressive one. They then re-upload a combination of the two videos with their face superimposed on top of the original video.

Making expressive faces and pointing to words on the screen qualifies as “original content” on many social media platforms. It’s a desperate attempt to gain followers and perceived social relevance. But at the end of the day, the face-makers don’t insist on being recognized as talented.

If only modern economists could act with such dignity. But they are a shameless bunch.

In the days, hours, and minutes before an official statistic is released, many economists refuse to make a firm forecast, let alone place an actual bet. But immediately after the announcement is made, it’s lights, camera, action.

If you follow the financial news, you can’t avoid their interviews and op-eds. They talk a lot but say very little. It’s a barrage of low-effort economic “reaction” content. They repeat which numbers went up, and which numbers went down. They spin a story about the recent past, perhaps adding in a historic anecdote for good measure. But their primary concern is telling everyone how right they’ve been about the economy and where it’s heading next.

It would be nice if economists had the decency to admit their words have a short shelf life. Hardly a week goes by without an official data release, and they won’t be making any concrete forecasts or wagers on the next figures either. So they’ll slither away, only to re-emerge after the next figures are posted, speaking with great bravado once again.

What a gross charade.

 

Endgame

This cycle repeats until opportunity strikes. The best-positioned economists get tapped to be the face of some economic package or initiative.

Consider what happened with the $800+ billion American Recovery and Reinvestment Act (ARRA) stimulus package. At the time, it was the largest-ever stimulus package of its kind.

You might recall that Christina Romer and Jared Bernstein warned that if Congress failed to act, unemployment could rise to 9%. But their proposal would cap unemployment at 8%. Ultimately, ARRA was passed in February 2009, and unemployment hit 10% in October later that year. Denying the bailout could have exacerbated problems, mainstream economists concluded that things were far worse than they believed—everyone should thank their lucky stars the bill was passed.

Romer went on to teach economics at UC Berkeley. Bernstein now chairs President Biden’s Council of Economic Advisors.

Not bad after being horribly wrong.

You can expect something similar to happen once again. But 11- and 12-figure expenditures barely make headlines these days. Modern economists fantasize about trillion-dollar schemes as they curry favor with powerbrokers.

When the time comes, the economists leading the policy du jour will insist you trust their promises and multi-year forecasts for various economic metrics… you know, the very same ones on which they refuse to wager today.

Do they argue that it’s easier to forecast the long term compared to the short term?

I suspect not.

It seems we’re stuck with “heroes” lacking the courage to demonstrate their competency.

KJ

 

P.S. Unlike professional economists, Lobo doesn’t just talk a big game—he puts his money where his mouth is. View his track record for yourself. If you’re impressed, scroll to the bottom and sign up for our free, no-hype, no-spam newsletter: the Speculator’s Digest.