Beyond the Quotidian: The Real-World Impact of Economic Analysis

Finance: History and Policy - Robert E Wright · one year ago · 142 views

 Individuals or small teams can move markets or persuade policymakers with incisive economic analysis. Economic analysis melds models, data, and experience to prognosticate broad market movements or to steer policy discussions. It is empirical but not exclusively quantitative, giving both numbers and words their due weight. It synthesizes large swathes of information while searching for big picture patterns that can help businesses, investors, or policymakers to foresee the next big crisis or innovation before it overwhelms positions outflanked by an inherently volatile world. Economic analysis differs from financial price data dissemination and post-market narration, which date from the 16th century. It offers less precise predictions than forecasting, which in modern form began in the 1920s, because it tries to capture sea changes, not middle run trends or short-term fluctuations. Its scope far exceeds that of securities or even industry analysis. Warren Buffett and Alan Greenspan both exemplify the power of economic analysis. The former made billions for stockholders through extensive reading and contemplation rather than relying on technical signals or trading hunches. The latter’s understanding of macroeconomy conditions proved largely ineffable but almost infallible as he guided U.S. monetary policy for the almost two decades now called The Great Moderation. This post surveys three older but no less important economic analyses, Economist editor Walter Bagehot’s (1826-1877) lender of last resort rule, Brian Anderson’s (1886-1949) case for free trade in the Chase Economic Bulletin at the apex of American protectionism, and Wilma Soss’s (1900-1986) empirically based campaign to put women on the board of directors of America’s largest corporations. Bagehot (pronounced badge ut), longtime editor of The Economist, explicated the lender of last resort trigger rule employed by the Bank of England during the periodic financial crises that struck the City of London in the Victorian Age. Sometimes called Bagehot’s Dictum, the rule, laid bare by Bagehot in his 1873 book Lombard Street, stated that to stave off panic and contagion central banks should lend freely to all borrowers with sufficient collateral at a rate of interest high relative to pre-panic levels. Implemented but left unarticulated by U.S. Treasury Secretary Alexander Hamilton (1757? - 1804) during financial panics in 1791 and 1792, Bagehot’s Rule ensured that solvent firms could borrow from the central bank when needed but had incentive to do so only when no private lender would provide better terms. The collateral requirements minimized moral hazard while also protecting the central bank from losses. In the aftermath of the 2008 global financial crisis, central bankers, including the Fed’s Brian F. Madigan, pointed to the continued overall usefulness of Bagehot’s Rule when “interpreted in the context of the modern structure of financial markets and institutions.” A Ph.D. economist, Anderson wrote economic analyses for the Chase Economic Bulletin for much of the 1920s and 1930s. One of his themes was that America thrived due to trade, not tariffs. Policymakers ignored his analysis until America’s high tariff regime exacerbated the Great Depression and helped foment the Second World War. As nineteenth century French political economist Frederic Bastiat (1801-1850) put it, “Barriers result in isolation; isolation gives rise to hatred; hatred, to war; war, to invasion.” Especially relevant for policy discussions today, Anderson warned against what he termed “the balance of trade bogey.” Americans fetishized a “favorable balance of trade,” but “the fear” of imports, he explained, “is an idle one” because “Europe will not merely send us goods, but will also provide us with funds with which to pay for them.” “A rich capitalist country,” he concluded, “can afford to import more than it exports.” Financial journalist and notorious corporate gadfly Soss used her weekly NBC radio show, Pocketbook News, to push for corporate governance reforms like cumulative voting and independent audits. Importantly, Soss leveraged her empirical studies of widespread female stockownership to induce many major U.S. corporations in the 1950s, 60s and 70s to put qualified women, like Alice E. Crawford of the Corn Exchange Bank, on their boards. Women remain underrepresented in C-suites but, thanks in large part to Soss’s trenchant analysis and promotional efforts, female directors are no longer anomalies.    Economic analyses require information acquisition but also the ability to process data and news as rationally as possible given the natural constraints of the human brain. Many of the best models are mental, incapable of being explicitly shared because they form from embodied human capital, or what was once known as wisdom. To gain an edge over competitors, economic analysts think opportunistically and flexibly, like a fox, hunter, or natural intelligence, not in well-worn rows, like a hedgehog, farmer, or artificial intelligence. Like Anderson, Bagehot, Buffett, Greenspan, and Soss, the best economic analysts read widely and critically, selecting readings based on their perspicacity rather than reputation or popularity. Then, they write.