Make Sense of Economic Climates with David Bieri

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Travis

I don't know about you, but I hear a lot about the economy and quite honestly it can make my head spin a little bit. Between the news I hear about the stock market and job losses or job gains and the gross domestic product and then tariffs on top of all of that, it's just a lot. So, I'm curious how I as an individual can make sense of all of this and maybe what I should do about it. Thankfully, this is an area of expertise for Virginia Tech's David Pieri and he was kind enough to share his insights with me. David is an associate professor of urban affairs and planning as well as an affiliate faculty of economics and in the Blackwood Department of Real Estate. His research interests include the history of spatial economics digital central banking currencies and blockchain economics, international monetary systems, and global financial regulations. So with that type of expertise, I simply asked David how he makes sense of the current economic landscape and really any economic landscape. He shared some of the specific data points that he looks at, but probably more importantly, he stressed how economic forecasts differ from something such as weather forecasts in that they can be influenced by the forecaster, and he also stressed how important narratives are to this entire economic picture. We talked a little bit about how we got to where we are in terms of how we think about economics, and he shared some of his personal advice on how he thinks individuals should approach the current economic landscape. So if you, like me, are curious how you can better understand just any economic landscape, I think this podcast will be well worth your money. Of course, it's also free, so there's that. Be sure to follow, rate, and or subscribe to the podcast. I'm Travis Williams and this is Virginia Tech's Curious Conversations.

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Travis

So we were talking before we jumped on here a little bit about how the average person can make sense of the current economic climate that we're in. But I think maybe there's some universal, maybe some universal principles to how we could go about just making sense of economic situations in general. And so I guess for you as somebody that studies this, how do you go about making sense of economic situations?

David

Well, by gathering a lot of information. And this is very easy in this day and age because it's a subject that's being discussed in the media. We have access to data in unprecedented ways from government agencies and so forth. So you can sort of synthesize your own read of the situation. But in the ways in which this current situation is somewhat different from others, perhaps, is that we have prevailing uncertainty.

It is extremely difficult to know. You look at the tea leaves, as it were, in terms of different data sources, and they all seem to point somewhat in different directions or allow for multiple reads, at least. Having said this, the most recent readings of GDP, a performance metric for our economy, are turned negative.

And so that gives people pause because if we have two quarterly readings of negative GDP, we are by some definitions in a recession. And that's the big, R word that we are worried about. Now, again, as we'll talk maybe in a little bit in economics, definitions matter a great deal. And my recession might not be my definition of recession might not necessarily be the same as in this country, the national Bureau of Economic Research's Business Cycle Dating Committee, quite a mouthful there, that officially tells us whether we have exposed after the fact experienced the recession. So when we, for practical purposes, worry about recessions, that's a contraction of economic activity, some of the first signs are out there. So we have cause to be concerned. because the data suggests it. So right now, it's very difficult to make sense of things. Part of the reason why it's so difficult is because at the center of it all is the government. In our textbooks, this is a case that simply doesn't exist. We usually assume that the government is the source of certainty in the economy, that the uncertainty in an economic system comes from you and I and corporations and everybody else who makes decisions about the allocation of resources in the future. But the government supposedly knows what it's doing and it's giving us certainty. This is a key function, for example, for the Federal Reserve. It should take away uncertainty and whenever markets sense that the Fed isn't giving them enough certainty, markets get nervous and jittery. So right now is somewhat unique because the first hundred days of this administration have been all about, in some ways, creating strategic uncertainty, which is a way of doing business.

Travis

When you look at different data and different numbers, is there anything like that should you particularly pay attention to as a good marker?

David

The hiring, the job creation, for example, the monthly non-farm, the so-called non-farm payroll. So these are employment numbers in the non-farm sector. So everything that's not agricultural and mining usually gives us a good sense of how strong the US economy is. And then the other element to that is how much people expect or the market expects a certain number and then the actual reading when it comes in, is it above or below? So that's certainly one. Then at less regular intervals, I just mentioned GDP. So the performance of the overall economy, GDP readings are usually quite useful. Other labor market metrics like unemployment numbers. And then you have a whole host of other more technical numbers that we don't need to essentially concern ourselves with, but it's our job as economists to sort of synthesize a larger picture from that and then make predictions about the future, right? Because that's the game that we're in. We're making forecasts, we're making and these forecasts are some people like the analogy with the weather forecast, there is one fundamental difference. If you're a meteorologist, and you're predicting the weather, and we're getting ever increasingly more sophisticated in terms of the types of models that we can have and we can make highly localized forecasts and whatnot. But in one way, weather forecasts are fundamentally different from economic forecasts in that the weather does not react as a system to our forecast. I can be terribly off and the weather doesn't say, Bieri's forecast was off by so much, let me punish him for his mistakes. Economic forecasts are quite different in that sense because the market or people and businesses tend to react to a forecast that's off. There are surprises and people say, oh my God, we didn't expect the economy to be X and so therefore we're adjusting our expectations, which in and of itself then creates a new baseline. It's technically we call this as the recursiveness of forecasting. So there are feedback loops. And why is that? Because we're dealing with humans and not natural phenomena.

Travis

Yeah, that's fascinating. And I'll have to remind all the kids that blame the weatherman when it doesn't snow in the winter and they have to go to school. Well, it doesn't react to him.

David

Indeed, that's a good point. Thank you for pointing this out. There is another element in this, which is, we like positive surprises more than negative ones? And how do we react to those? And the snow is a very good example, because on balance, we know, that's the science of weather forecasting too, to some extent, that catastrophizing things a little bit is better than underestimating how much snow there was. unless you're a kid, of course, you get very upset because you can't build a snowman or an igloo. Most people would like to have less snow than anticipated, rather than more snow. So in Econ, it works the same. We react less to positive surprises sometimes than we react to negative ones. Although financial markets can sometimes be excessively volatile in either direction.

Travis

It sounds kind of like preparing for the worst but hoping for the best type of mentality sometimes.

David

Very much so, very much so.

Travis

Well, you mentioned the future, and I know that one of the things, the exchanges we've had before talked about maybe how the past can help with some of maybe how we interpret what's happening now and maybe what happened in the future. Are there some specific things in the past that helps you understand or interpret our current moment?

David

Yes, thanks for the opportunity to talk a little bit about the past and in particular about a subject that is perhaps no longer so fashionable within the discipline of economics itself and that is the history of how we think about the subject itself. So how we as economists, as discipline have been thinking about the past. In other words, our own history of ideas, ideas that are very important to the current situation, the idea of free trade, the idea of protectionism, the idea of a manufacturing-based society versus an agrarian society or a service-based society. And what's important to recall is in that sense that these economics is essentially a discipline where people make arguments about the vision of society, particularly different visions of society.

Adam Smith's vision for society was a very different one than the great Karl Marx, who when analyzing the system that we live in, which is capitalism, we could perhaps modify it somewhat by saying we live in a highly financialized version of capitalism, which means nothing but it's a form of capitalism within which the financial sector plays an increasingly important role. Credit is at the core of everything that we're doing from buying a home to paying things before you actually or purchasing them before you actually own them pay as you go type schemes. So, so financialized capitalism is the system that we live in and economists since Adam Smith, so for roughly the last 300 years have been forming their own views about how such a system should function.

And one of Smithers and Marx's contemporaries, David Ricardo, gave us the idea of the comparative advantage, which is at the core of what inspires why nations should trade with each other. And that has ultimately led to an argument that free trade is good for everybody. Now, is this idea still an idea that we should maintain have seen that free trade in the second part of the 20th century after World War II has actually led to a lot of prosperity elsewhere. If China were not allowed to engage with the world as it was, it could not have developed as it has since the 1960s and 70s. So economic development and trade are closely linked. But in many instances, how much free trade in practice is good depends on the situation. Right now we're in a situation where we are assuming that a lot of free trade is simply good, but we might want to reconsider. This is not the first time that economists who in principle have said free trade is amazing in practice have become more national in their opinion. And I point to one great economist, arguably the greatest one of the 20th century, John Maynard Keynes, who was an avid protagonist of free trade, right up until after World War One, became very skeptical of the capabilities of free trade when he even advised FDR in a famous op-ed in the New York Times to perhaps focus a little more on national self-sufficiency for strategic reasons. And so in that sense, unlike in physics, in economics, ideas matter a great deal how we think about things matters greatly. example, amongst some other ideas, so I would say that, you know, the idea of the comparative advantage by David Ricardo, we have to look at with some skepticism because, for example, he assumed that capital couldn't move in for the comparative advantage for complete specialization. He used the examples of England and Portugal. England does everything better, wool production, wine production. Portugal has a complete advantage in producing wine better than wool in his example. And so he inferred from that or created a logical argument and first small static model from it to suggest that if Portugal specialized in the thing that it was comparatively better at and England specialized in what it was comparatively better at, the comparative and not the absolute advantage would actually encourage them to engage in trade.

He did not consider a number of things that we can from today's perspective say are completely unrealistic. He assumed full employment. He assumed, as I mentioned, no capital mobility. So in that sense, when we invoke these ideas and say, look, tariffs are terrible because they interfere with free trade, and we're arguing like David Ricardo, we have to say, well, but this is not the early 19th century anymore. Plus his assumptions do not necessarily correspond with what we can claim is realistic. There are other ideas that we have forgotten about. For example, there is a German economist called Friedrich List, and he was the first one to really formulate why import tariffs on infant industries were so important to allow for economic development, because Germany in the 19th century was relatively late coming to the industrialization game and Liszt argued that if you're late to the game, you need tariffs to protect yourself because otherwise everybody else is taking advantage of you and then as he formulated it, kicking away the ladder so you cannot do it. And so then this idea of infant industry protection using tariffs has a lot of validity in that sense. By the way, Alexander Hamilton supported that same line of thinking for the United States and particularly for the cotton industry tariffs were used not only to raise revenue, but also to protect infant industries in the now newly independent colonies from technology transfer and so forth. So that's definitely an idea to keep. You then also had in this country another great economist with phenomenal ideas that we no longer necessarily teach so much. that's Torsten Veblen, the great American institutionalist who gave us ideas about symbolism in economics.

For example, that many decisions that we take in economics might not necessarily be rational, but are symbolic value, keeping up with the Joneses. We do things not because ultimately we rationally think that they're necessary, but we buy the bigger homes because we want to impress, we are positional. And so in that sense, tariffs, he argued, fall into that realm of political theater. They are not necessarily the best economic policy, but they are extremely powerful as a negotiation tactic. And this is currently what's going on, right? And so...tariffs are a form, he would argue, of cultural code. They are part of how you do business. You cut each other deals. And the reason why Veblen is such an interesting economist who's no longer taught is because when economics peaked in the... When it became a codified discipline in the mid-19th century, mostly based in Britain, using in a movement called marginalism that helped explain a lot in Victorian England where things were extremely stable and people were making decisions at the margin.

In a stable society where things aren't moving societally, you can start focusing on, well, am I buying with my marginal pound some apples or carrots? so economics became focused a lot on that. But Veblen said this type of economics doesn't explain anything in the America that he was experiencing, which is post post civil war and beginning of the Robert Barons. He said this is is nonsense at the margin. This doesn't explain anything. What we need is a new form of economics that helps us understand, explain what's actually going on in America. As as I look into the America of the late 19th century, early 20th century with the Carnegie's, the Rockefellers and so forth, the Robert Barons, I have to come up with a theory. And this is where he essentially identified that economics was a lot of theatrics and a lot of social positioning and a lot of institutional games, the role of the state versus the free versus the businessman. Roosevelt busting trusts against the Robert Barons is as much about political theater as it is good economics. You see, David Ricardo was also a great politician, British politician, and if he have the British Navy to terrorize the rest of the world into having, engaging in trade relations with them, of course, he would be a great advocate for free trade. And economists obliged and gave him essentially the manifesto, or he helped create it. to say that this is the ideology that goes along with, yes, I'm going to say it, colonialism, a form of colonialism, something that then Karl Marx, of course, said, this is what capitalism does. It is crisis prone. It is not at all the system that we say that is self-regulating, et cetera, et cetera. Crises in capitalism aren't an aberration of the system. They're, in fact, a feature. It is designed. to be crisis prone, which is why then the state needs to be captured so that it can fix it. And we have to argue that the first part of this century has given us plenty of evidence to say that this is actually not too far off the mark. So in terms of ideas from the past that we should definitely relegate to the basura, as some people say, the trash heap. would be this idea of perfect competition, that our economy is this self-stabilizing system where if everybody just behaves nicely and optimally, then everything will be good. It won't be, and it never has been. And so if we go that, so in other words, the myth of the free market, nobody in their right mind thinks that this is some type of natural law. Then Some other types of ideas that are creeping into the discourse today, know, sort of mercantilistic ideas from areas gone by is that like trade is a zero sum game, imports bad, exports good type thing. That's a 17th century type attitude. This is not how things work today and we shouldn't be perhaps too naive or too ready to employ rhetoric. And here is I'm coming back to this element that economics is a lot about narratives and it is a lot about rhetoric.

I don't want to take away from the fact that we can make it scientific. I do not want to take away from the fact that in the 20th century we have learned, for example, how to measure up the economy for scientific management purposes. And there is no mistake that metrics like GDP, performance metrics of the economy, were invented so as to managerially get a handle on the economic system.

Travis

It does sound like the study of economics is both science and storytelling, both data and then how we interpret the data, but also some feelings mixed in there, which isn't that surprising in some ways, because on an individual level, I know that how my family spends our money, it's not always just math. It's a lot of commercials and feelings, and there's a lot that goes into it. And sometimes we get things and we buy things simply because of a feeling that we get from them.

David

For sure. And there is another really interesting element to this, which is, of course, the economy is made up of individuals. And then the collective actions of these individuals create emergent properties of an economy. This is, by the way, the creation of the genius of John Maynard Keynes to say that we cannot understand total if we simply look at the individuals, right? There are things that happen at the macro. He created macroeconomics as we know it. If you need to look at what all of these bots are doing in combination and they create phenomena that can be measured, that can be quantified, that are observable, Unemployment rates, inflation rates, and these phenomena have relationships to each other and we try to quantify what these relationships are in order for us to make predictions about the behavior of the system as a whole.

Travis

On an individual level, I mean, maybe this is too broad of a question, but I am curious what types of things an individual can do to maybe position themselves in as positive place as possible in a time like this?

David

 It's going to say, I don't want to come across as too unscientific, but I do think there isn't at this current moment, there isn't much that we can do that we wouldn't otherwise that would otherwise not be sound advice, which is don't have too, too high of of a, of debt to income ratio. Don't have all of your eggs in, in, in, in your basket. Some people might. worry about their exposure to financial market income. Where is your primary source of income? Is it wage-based? Is it... financial market based. so the bottom line really has to be stay calm, because there isn't an awful lot that we as individuals can do other than trying to insulate ourselves from particular types of shocks in the future. But this does not make this current situation different than any other situation, except for perhaps sometimes because we're so prone to narratives, a little bit of introspection and say, how much do you really care or should you care in terms of your overall happiness, whether you're still stuck with an iPhone 14 instead of the latest one that might be a little more expensive? So I find sometimes a little bit, and this is where that's just a personal opinion in all of this. Of course, we've all suffered from the bout of inflation that made groceries more expensive. And of course, We want housing to be more plentiful and more affordable. But right now, the majority of our focus is on, what happens if the new Audi gets more expensive and whatever the Wii 2 or the latest PlayStation will be, will be not here in time for Christmas.

These are good problems to have. And maybe this is because our inability to influence the larger picture, we have to go back and ask ourselves in terms of our own resilience. And I think in that sense, as a recently naturalized citizen, I would say this is a very uniquely American moment. We've been through worse and previous generations have been through worse and they...they managed to do it. again, I don't want to sound glib and not account for the tremendous amount of suffering in this than the other. But were some of the stock market values completely in a bubble state? Absolutely. Does it matter that Tesla, Apple and all of these corporations lost so much in terms of their market cap? This economist says no, it's a good thing. mean, Joseph Schumpeter said, And I'm going to use his words exactly when he emigrated, an Austrian-born American economist came to Harvard in 1932. And he told his students, look, a recession is like a cold douche. And he meant shower. A recession is like a cold shower, not only because it realigns things, but it gets people thinking about what really matters. And sometimes this chasing after higher home prices higher stock prices. For what? For what? To buy more crap? No. And again, but this is where it becomes very, and again, you know, people losing jobs because of these tariffs, because not a good thing. But this is the very unfortunate thing about it. It will hit where it hits. The previous 2008 crisis was a six to eight crisis was like this. COVID was like this. And we have seen, though, that the American economyin all of these crises, the resilience of the American economy was greater than anybody else's. And this is largely because of its people, which is the biggest asset that this economy has.

Travis

So if I'm understanding it correctly, maybe being calm and maybe just reassessing what actually where happiness is actually coming from, which just sounds like great life advice in general.

David

Very much so, but as an economist, sort of somewhat unhappy to give it unless I embrace some of the greats, because it feels like you're not doing your job as a scientist if you say this. However, I will come back to this and say, actually, Adam Smith, before he wrote his great book, The Wealth of Nations, he wrote a theory of moral sentiments. And so it's a two step process. Being an economist in of the Smithian kind. means that you think about the human condition first and then the material reality afterwards. And so it is actually very important, the types of moral and value assumptions that we make for the system that we're in before we look at the mechanics. That type of economics is of course no longer present in our current textbooks because we relegate morals and values and all of that in our diagrams to a sort of a Deus ex machina, an exogenous thing. Somehow the people in the economy inherit the beliefs and whatever from somewhere. Not in Smith's world. No, no, no. They are severely imprinted with particular types of societal norms and values in Weblen's world too. And so the types of economics that we're currently teaching are an economics of empty bots that have certain mechanistic principles that they just go around, but they have no morality, they have nothing. And so maybe the lesson from today could be that instead of worrying about the mechanics, let's worry about what will influence the mechanics and which is free will, or who we are as humans, things we care about, right?

Travis

I think it's very obvious that you really enjoy this topic. Whereas for me, sometimes thinking about the economic picture of things is kind of the stressful thing. So I am curious, this is kind of maybe a last question. What do you most like about studying this topic?

David

that it engages our reality, our material reality, but it connects to our spiritual reality and it is, we are in the river of history. can't step in, the Greeks reminded us that we can't step into that same river twice, but we cannot pretend that we're completely free from the past. And if we do not re-examine and revisit the past to sift through what it can offer us all suffering that has happened before us was for naught. And so I think it's a great privilege to be able to be thinking about this and to think of visions of society. This is maybe the final thing that I want to say. One of the things that fascinates me so much about modern economists, as I said, from Adam Smith to Ricardo to Marx to Schumpeter to Keynes, is that unlike other authorities of the past, They didn't have the church behind them. They did not have a state behind them, nor did they have any other type of material or power or monopoly behind them. The thing that made them powerful was their ideas, the ways in which that they thought about the system that was developing in front of them. And capitalism is, of course, a highly dynamic system, and it has led to the greatest changes. in social arrangement over the last 2000 years. And so to be able to think about how ideas can influence our future, to me, is one of the most important things that one could spend one's time doing.

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Travis

Thanks to David for helping us better understand how we can make sense of economic landscapes. If you or someone you know would make for a great Curious Conversation, email me at traviskw at vt.edu. I'm Travis Williams and this has been Virginia Tech's Curious Conversations.

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