by Nate Silver
45. Frank H. Knight, Risk, Uncertainty, and Profit (New York: Riverside Press; 1921). http://www.programme-finance.com/teletudiant/Knight.%20Risk,%20Uncertainty%20and%20Profit.pdf.
46. In a Texas hold ’em game with one card to come.
47. Why is this the case? “For most of the U.S., land is abundant,” Anil Kashyap explained in a note to me. “So the value of a house and a plot of land is about what the cost of construction would be. With all the technical progress in building, construction costs have fallen steadily. So expecting appreciation is doubtful. The big exception is places where there are building restrictions. One way to see this is to notice that Texas had almost no bubble. Why? Because there is no zoning and few natural limitations.”
48. During the 1950s, consumers had extraordinarily rich balance sheets. For a variety of reasons—prudence brought on by the memory of the Great Depression, restrictions on prices and production of consumer goods during the war years, and a booming labor market that required all hands on deck—Americans had an unprecedented amount of savings. During World War II, Americans kept as much as 25 percent of their incomes, and savings rates remained elevated in the years that followed.
49. “Historical Census of Housing Tables,” Housing and Household Economic Statistics Division, U.S. Census Bureau; last updated October 31, 2011. http://www.census.gov/hhes/www/housing/census/historic/owner.html.
50. David R. Morgan, John P. Pelissero, and Robert E. England, Managing Urban America (Washington, DC: CQ Press, 2007).
51. “Annual Statistics: 2005,” Housing and Household Economic Statistics Division, U.S. Census Bureau; last updated October 31, 2011. http://www.census.gov/hhes/www/housing/hvs/annual05/ann05t12.html.
52. “Historical Income Tables—Families,” Housing and Household Economic Statistics Division, U.S. Census Bureau; last updated August 26, 2008. http://www.webcitation.org/query?url=http%3A%2F%2Fwww.census.gov%2Fhhes%2Fwww%2Fincome%2Fhistinc%2Ff01AR.html&date=2009-04-12.
53. In fact, as Anil Kashyap pointed out to me, the zip codes that saw the biggest increase in subprime lending had declining employment, rising crime, and deteriorating fundamentals. See Atif Mian and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis,” Quarterly Journal of Economics 124, no. 4 (2009). http://qje.oxfordjournals.org/content/124/4/1449.short for additional detail.
54. David Leonhardt, “Be Warned: Mr. Bubble’s Worried Again,” New York Times, August. 21, 2005. http://www.nytimes.com/2005/08/21/business/yourmoney/21real.html?pagewanted=all.
55. Urban Land Price Index in “Japan Statistical Yearbook 2012,” Statistical Research and Training Institute, MIC. http://www.stat.go.jp/english/data/nenkan/1431-17.htm.
56. Karl E. Case and Robert J. Shiller, “Is There a Bubble in the Housing Market?” Cowles Foundation for Research in Economics, Yale University, 2004. http://www.econ.yale.edu/~shiller/pubs/p1089.pdf.
57. Some economists I spoke with, like Jan Hatzius, dispute the Case–Schiller data, noting that the quality of housing data is questionable prior to the 1950s. But even using 1953 as a starting point—when the data quality significantly improves—there had been no overall increase in the value of homes between 1953 and 1996. The paper gains that homeowners may have thought they had achieved were no more than enough to pay for inflation.
58. “S&P/Case Shiller Home Price Index.”
59. “New Private Housing Units Authorized by Building Permits,” Census Bureau, United States Department of Commerce. http://research.stlouisfed.org/fred2/data/PERMIT.txt.
60. Alex Veiga, “U.S. Foreclosure Rates Double,” Associated Press, November 1, 2007. http://www.azcentral.com/realestate/articles/1101biz-foreclosures01-ON.html.
61. “Crist Seeks $50M for Homebuyers,” South Florida Business Journal, September 13, 2007. http://www.bizjournals.com/southflorida/stories/2007/09/10/daily44.html.
62. Vikas Bajaj, “Federal Regulators to Ease Rules on Fannie Mae and Freddie Mac,” New York Times, February 28, 2008. http://www.nytimes.com/2008/02/28/business/28housing.html.
63. Survey of Professional Forecasters, November 2007. See table 5, in which the economists give a probabilistic forecast range for gross domestic product growth during 2008. The chance of a decline in GDP of 2 percent or more is listed at 0.22 percent, or about 1 chance in 500. In fact, GDP declined by 3.3 percent in 2008. http://www.phil.frb.org/research-and-data/real-time-center/survey-of-professional-forecasters/2007/spfq407.pdf.
64. Households between the 20th and 80th percentiles in the wealth distribution.
65. Edward N. Wolff, “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007,” Working Paper No. 589, Levy Economics Institute of Bard College, March 2010. http://www.levyinstitute.org/pubs/wp_589.pdf.
66. Atif R. Mian and Amir Sufi, “House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis,” Chicago Booth Research Paper No. 09-20, May 2010. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1397607.
67. The 14 percent decline is after inflation.
68. Wolff, “Recent Trends in Household Wealth.”
69. Binyamin Applebaum, “Gloom Grips Consumers, and It May Be Home Prices,” New York Times, October 18, 2011. http://www.nytimes.com/2011/10/19/business/economic-outlook-in-us-follows-home-prices-downhill.html?ref=business.
70. Dean Baker, “The New York Times Discovers the Housing Wealth Effect;” Beat the Press blog, The Center for Economic and Policy Research, October 19, 2011. www.cepr.net/index.php/blogs/beat-the-press/the-new-york-times-discovers-the-housing-wealth-effect.
71. Figures are based on reports from the Federal Reserve Bank of New York, which show an average daily trading volume in the mortgage-backed securities market of $320 billion per day. Over 250 trading days, this works out to about $80 trillion in trades over the course of a year. James Vickery and Joshua Wright, “TBA Trading and Liquidity in the Agency MBS,” Staff Report No. 468, Federal Reserve Bank of New York, August 2010. www.ny.frb.org/research/staff_reports/sr468.pdf.
72. This trading volume is also quite large as compared with the actual value of mortgage-backed securities, which was about $8 trillion.
73. Ilan Moscovitz, “How to Avoid the Next Lehman Brothers,” The Motley Fool, June 22, 2010. http://www.fool.com/investing/general/2010/06/22/how-to-avoid-the-next-lehman-brothers.aspx.
74. Robin Blackburn, “The Subprime Crisis,” New Left Review 50 (Mar.–Apr. 2008). http://www.newleftreview.org/?view=2715.
75. Niall Ferguson, “The Descent of Finance,” Harvard Business Review (July–August 2009). http://hbr.org/hbr-main/resources/pdfs/comm/fmglobal/the-descent-of-finance.pdf.
76. David Miles, Bank of England, “Monetary Policy in Extraordinary Times,” speech given to the Centre for Economic Policy Research and London Business School, February 23, 2011. http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech475.pdf
77. Investopedia staff, “Case Study: The Collapse of Lehman Brothers,” Investopedia; April 2, 2009. http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp#axzz1bZ61K9wz.
78. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (Aug. 1970). http://sws.bu.edu/ellisrp/EC387/Papers/1970Akerlof_Lemons_QJE.pdf.
79. “Lehman Brothers F1Q07 (Qtr End 2/28/07) Earnings Call Transcript,” Seeking Alpha, Mar. 14, 2007. http://seekingalpha.com/article/29585-lehman-brothers-f1q07-qtr-end-2-28-07-earnings-call-transcript?part=qanda.
80. Investopedia staff, “Case Study: The Collapse of Lehman Brothers.”
81. Abigail Field, “Lehman Report: Why the U.S. Balked at Bailing Out Lehman,” DailyFinance, March 15, 2010. http://www.dailyfinance.com/2010/03/15/why-the-u-s-balked-at-bailout-out-lehman/
82. Summers was also secretary of the treasury under President Clinton.
83. This is my example, not Summ
ers’s, who instead gave me an example involving the price of wheat.
84. Although lemonade does not behave this way, economists have sometimes debated whether another tasty beverage—French wine—does. Over certain price ranges, increasing the price of a wine may increase demand because the customer sees high price as a signifier of superior quality. Eventually, though, even the most spendthrift oenophiles are priced out, so the positive feedback does not continue indefinitely.
85. Per interview with George Akerlof. “You may know what to pay for House A versus House B versus House C because you can say one has a kitchen with gadgets that is worth $500 more than House B, which has a kitchen with no gadgets. But you don’t know what the price of a house should be.”
86. Carmen M. Reinhart and Kenneth S. Rogoff, “The Aftermath of the Financial Crisis,” Working Paper 14656, NBER Working Paper Series, National Bureau of Economic Research, January 2009. http://www.bresserpereira.org.br/terceiros/cursos/Rogoff.Aftermath_of_Financial_Crises.pdf.
87. Carmen M. Reinhart and Vincent R. Reinhart, “After the Fall,” presentation at Federal Reserve Bank of Kansas City Jackson Hole Symposium, August 2010. http://www.kcfed.org/publicat/sympos/2010/reinhart-paper.pdf.
88. This is one reason why it may not be harmful—some studies have even claimed that it may be helpful—for a president to experience a recession early in his term. The American economy was in recession in 1982, for example, but recovered from it with spectacular 8 percent growth in 1983 and 6 percent growth in 1984, helping Ronald Reagan to a landslide victory for a second term. There is some evidence, in fact, that presidents may have enough influence on fiscal and monetary policy to help perpetuate these outcomes. Since 1948, the median rate of GDP growth is 2.7 percent in the first year of a president’s term and 2.8 percent in the second year—but 4.2 percent in both the third and the fourth years.
For additional discussion, see Larry Bartels, “The President’s Fate May Hinge in 2009,” The Monkey Cage, November 2, 2011. http://themonkeycage.org/blog/2011/11/02/the-presidents-fate-may-hinge-on-2009-2/.
89. Ezra Klein, “Financial Crisis and Stimulus: Could This Time Be Different?” Washington Post, October 8, 2011. http://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.html.
90. Christina Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan,” January 9, 2009. http://www.economy.com/mark-zandi/documents/The_Job_Impact_of_the_American_Recovery_and_Reinvestment_Plan.pdf.
91. Paul Krugman, “Behind the Curve,” New York Times, March 8, 2008. http://www.nytimes.com/2009/03/09/opinion/09krugman.html.
92. Peter Roff, “Economists: Stimulus Not Working, Obama Must Rein in Spending,” US News & World Report, June 10, 2010. http://www.usnews.com/opinion/blogs/peter-roff/2010/06/10/economists-stimulus-not-working-obama-must-rein-in-spending.
93. For instance, the Wall Street Journal forecasting panel in January 2009 predicted that unemployment would rise to 8.5 percent by the end of the year. By contrast, the White House’s “without stimulus” forecast predicted 9.0 percent, whereas their “with stimulus” forecast predicted 7.8 percent. Since the Wall Street Journal panel would not have known at the time about what magnitude of stimulus might be passed, it is not surprising that they wound up somewhere in between the two cases.
However, the White House’s “with stimulus” forecast claimed unemployment would actually fall between the first half and second half of 2009, something which no consensus forecast from the Wall Street Journal panel or the Survey of Professional Forecasters ever did. So, although the White House’s forecast wasn’t all that far removed from private-sector forecasts in anticipating where the unemployment rate would end up by the close of 2009, it did envision a different trajectory, anticipating that the curve would already be bending downward by that point in time.
94. Klein, “Financial Crisis and Stimulus: Could This Time Be Different?”
95. Lisa Mataloni, “Gross Domestic Product: Fourth Quarter 2008 (Advance),” Bureau of Economic Analysis, U.S. Department of Commerce, January. 30, 2009. http://www.bea.gov/newsreleases/national/gdp/2009/gdp408a.htm.
96. “Real Gross Domestic Product, 1 Decimal,” Bureau of Economic Analysis, U.S. Department of Commerce. http://research.stlouisfed.org/fred2/data/GDPC1.txt
97. Specifically, the forecast for the unemployment rate a year in advance of the forecast date.
98. This is based on my analysis of data from the Survey of Professional Forecasters.
99. Antonio Spilimbergo, Steve Symansky, and Martin Schindler, “Fiscal Multipliers,” International Monetary Fund Staff Position Note SPN/09/11, May 20, 2009. http://econ.tu.ac.th/class/archan/RANGSUN/EC%20460/EC%20460%20Readings/Global%20Issues/Global%20Financial%20Crisis%202007-2009/Academic%20Works%20By%20Instituion/IMF/IMF%20Staff%20Position%20Notes/Fiscal%20Multipliers.pdf.
100. “93% of Drivers Consider Themselves Above Average. Are You Above Average?” Cheap Car Insurance, Aug. 24, 2011. http://www.cheapcarinsurance.net/above-avarege-driver/.
101. Financial Crisis Inquiry Commission Report, 2011. http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
CHAPTER 2: ARE YOU SMARTER THAN A TELEVISION PUNDIT?
1. The McLaughlin Group transcript, Federal News Service, taped October 31, 2008. http://www.mclaughlin.com/transcript.htm?id=687.
2. “Iowa Electronic Markets,” Henry B. Tippie College of Business, University of Iowa. http://iemweb.biz.uiowa.edu/pricehistory/PriceHistory_GetData.cfm.
3. The McLaughlin Group transcript, Federal News Service; taped November 7, 2008. http://www.mclaughlin.com/transcript.htm?id=688.
4. Nate Silver, “Debunking the Bradley Effect,” Newsweek, October 20, 2008. http://www.thedailybeast.com/newsweek/2008/10/20/debunking-the-bradley-effect.html.
5. Academic studies of The McLaughlin Group have come to similar conclusions. See for example: Lee Sigelman, Jarol B. Manheim, and Susannah Pierce, “Inside Dopes? Pundits as Political Forecasters,” The International Journal of Press/Politics 1, 1 (January 1996). http://hij.sagepub.com/content/1/1/33.abstract.
6. Predictions were not evaluated for one of three reasons: the panelist’s answer was too vague to formulate a testable hypothesis, or the prediction concerned an event in the distant future, or the panelist dodged McLaughlin’s question and did not issue a prediction at all.
7. Two of the less-frequent panelists, Clarence Page and Mort Zuckerman, had more promising results, while Crowley’s were especially poor—but none of these trends were meaningful statistically.
8. Eugene Lyons, Workers’ Paradise Lost (New York: Paperback Library, 1967).
9. Tetlock has since moved to the University of Pennsylvania.
10. An “expert,” to Tetlock’s thinking, is anyone who makes a living on their supposed prowess in a particular field—for instance, the Washington Post’s Moscow correspondent would be an expert on the USSR, as would a tenured Sovietologist at Berkeley.
11. Phillip E. Tetlock, Expert Political Judgment (Princeton, NJ: Princeton University Press, 2006), pp. 107–108.
12. The CIA’s incorrect estimates of the Soviet Union’s GDP came in part because they were looking at the country’s impressive military and extrapolating backward from that to estimate the overall size of its economy. But the Soviet Union was spending a much higher percentage of its domestic product on its military than were the free economies of Europe and North America.
13. Abram Bergson, “How Big Was the Soviet GDP?” Comparative Economic Studies, March 22, 1997. http://web.archive.org/web/20110404205347/http://www.allbusiness.com/government/630097-1.html.
14. Some of this section is per my interviews with Bruce Bueno de Mesquita, the New York University political scientist.
15. Louis Menand, “Everybody’s an Expert,” New Yorker, December 6, 2005. http://www.newyorker.com/archive/2005/12/05/051205crbo_books1.
16. Dick Morris, “Bush Will Rebound f
rom Katrina Missteps,” The Hill, September 7, 2005.
17. Justin Gardner, “Dick Morris’ Crazy Electoral Map,” Donklephant.com, October 15, 2008. http://donklephant.com/2008/10/15/dick-morris-crazy-electoral-map/.
18. Dick Morris and Eileen McGann, “Goal: 100 House Seats,” DickMorris.com, September 27, 2010. http://www.dickmorris.com/goal-100-house-seats/.
19. Dick Morris, “Krauthammer’s ‘Handicapping the 2012 Presidential Odds,’ ” DickMorris.com, April 25, 2011. http://www.dickmorris.com/comments-on-krauthammers-handicapping-the-2012-presidential-odds/.
20. Phillip E. Tetlock, Expert Political Judgment, p. 79.
21. James A. Barnes and Peter Bell, “Political Insiders Poll,” National Journal, October 28, 2010. http://www.nationaljournal.com/magazine/political-insiders-poll-20101028?print=true.
22. FiveThirtyEight’s forecasting model, which has no insider knowledge, called nine of the eleven races correctly—better than both the Democratic insiders (who called an average of 6.9 right) and the Republicans (8.4).
23. Note that these predictions weren’t even internally consistent: if Democratic insiders expected to win almost all the marginal races, for instance, they ought to have predicted their party would perform well enough to hold the House.
24. Although race and gender were certainly key factors in the 2008 race, the media often defaulted to them as explanations when there were better hypotheses at hand. For instance, at some points in the 2008 primary campaign, it was noted that Obama was doing relatively poorly among Hispanic voters, the implication almost always being that Hispanic voters distrusted black candidates. In fact, I later found, Obama’s lagging numbers among Hispanics had little do to with their race and everything to do with their income status. Clinton generally did better with working-class voters, and because many Hispanics were working-class, she also did better with that group. But controlling for income, there was essentially no difference in Clinton’s performance among whites and Hispanics. And indeed, Obama had little trouble winning Hispanic votes once he squared off against the Republican nominee, John McCain, taking about two-thirds of their votes.