May 21, 2015

Hearing the Economic Signals amid the Economic Noise

Remember our blog about “inflection points”—a term Intel’s Andy Grove coined to help businesses identify significant shifts that could spell trouble for a company’s products and services? Inflection points often show up in graphs, tables, and statistical indicators.  Ironically, there is no dearth of such indicators when it comes to business and economics, and that’s a big problem, according to Nate Silver, author of The Signal and Noise: Why So Many Predictions Fail—But Some Don’t (2012).
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Why?  Because “we face danger whenever information growth outpaces our understanding of how to process it.” Ironically, the human race has survived because human beings are good at processing and analyzing data to discern meaningful patterns. But today the vast stream of data generated from many sources could be having unintended consequences, such as allowing us to select only that data that conforms to our preconceived ideas. Consequently, we may be missing the signals for the noise and wasting our time chasing false leads.

If this sounds too abstract for public policy, let’s turn to a recent Christian Science Monitor article about wages. Some economic signals show that wages are finally going up, which is good news, especially for states that rely on consumer spending to fill their tax coffers. But this time, things are different. People are saving their extra cash or paying down debt. “The U.S. savings rate in the first three months of 2015 increased to 5.5 percent—its highest level since the end of 2012,” the article stated. Did the economic forecasters predict the increase in savings?

In his assessment of the 2008 housing collapse and the deep recession it triggered, Silver recommended that, “we must think differently about our ideas—and how to test them. We must become more comfortable with probability and uncertainty. We must think more carefully about the assumptions and beliefs we bring to a problem.”