What does it even mean to "believe" something?

I've done three posts recently that dealt with the issue of "beliefs". First I talked about "derp", which I defined as the tedious repetition of beliefs too strong to be swayed by evidence. Then I jumped back into the blogosphere discussion of whether bets reveal beliefs. Finally, I asked whether inflationistas really believe their warnings of inflation.

But in all these discussions, there's been a more subtle and fundamental issue nagging at me. It's the question: What does it even mean to "believe" something in the first place?? This question seems like a trivial semantic issue, but it's very deeply important for all kinds of economics issues, from Bayesian inference to behavioral economics to the axioms of standard consumer choice theory and game theory.

And it's a question to which I don't really know a satisfactory answer. I am not sure what it means to "believe" something.

One idea of belief is a feeling of certitude. I may have a strong emotional reaction of "Yeah!" to one statement, and a reaction of "No way!" to another. For example, if you say "The sun rises in the east" I feel a feeling of "Yep!", but if you say "The sun rises in the west", I feel a feeling of "No way!" So is this a good definition of "belief"?

Not necessarily. First off, it can't be measured very precisely. Suppose I'm trying to decide whether I believe there's a 50% chance of rain tomorrow, or a 60% chance. My feeling of certitude might be about the same for both those propositions, and there's no way to tell which I "believe" more.

Also, certitude may not be invariant to the situation in which the question is posed. When I am actually required to act, my feeling of certitude may vanish. A great example is this recent study on partisan differences in survey responses:

But when there was money on the line, the size of the [partisan answer] gaps [on factual questions] shrank by 55 percent. The researchers ran another experiment, in which they increased the odds of winning for those who answered the questions correctly but also offered a smaller reward to those who answered “don’t know” rather than answering falsely. The partisan gaps narrowed by 80 percent.

This illustrates the conflict between what I call "Tribal Reality" and "Extant Reality". In response to a statement like "Global warming is a myth", conservatives may feel an upwelling of emotional certitude, due to their tribal affinity with a movement that has long sought to deny or downplay global warming. When there's nothing on the line, that feeling of certitude will determine the response to survey questions. But when there are actual consequences for getting the question right or wrong - when Extant Reality comes into the picture, in other words - emotional certitude may take a back seat.

OK, then how about the idea of a belief as "the degree to which you're willing to bet on something"? That seems like a reasonable definition, but it has big problems too. First of all, single bets can be hedged by outside bets, as I pointed out in the discussion on whether bets reveal beliefs. In that case, bets are not informative. Second of all, even if they are not hedged, bets depend on personal psychological characteristics like risk aversion and loss aversion and ambiguity aversion. In other words, bets will always depend on preferences. Since preferences depend on many outside things, a definition of beliefs that includes preferences will again result in "beliefs" changing depending on totally unrelated things, like whether I lose my job.

OK, well how about the notion of "probability" from Bayesian inference? In Bayesian probability theory, a probability and a belief are the same thing. I used this concept in my definition of "derp" (a "prior" and a "posterior" are both "probabilities"), but I have to admit that here too, I was working with a term without being sure of its usefulness.

In Bayesian probability theory, you assign a number to an event. That number is a "probability", and there are rules for how to update it in response to new data. But suppose you ask me to assign a probability to the event of the Republicans winning the election, and I say "I think there's a 120 percent chance!" Obviously I'm just saying words that I heard somewhere, and obviously my notions of what a "percent chance" means are very different from that of, say, most statisticians. I can feed a probability of 1.2 into Bayes' Rule, sure, but does the output of that exercise deserve to be called a "belief"?

OK, so suppose you tell me "No, silly, you have to give a number between 0% and 100%. That's how percents work!" So I think carefully for a second, and say "OK, I think there's a 99.999% chance that the Republicans will win the election." But obviously I am just repeating another popular catch phrase here. My number comes from my emotional feeling of certitude, not from any sort of internal engagement with Extant Reality.

Now of course this example is of a silly survey respondent, but in a subtler way it applies to mathematically sophisticated people too, even Bayesian statisticians! As Larry Wasserman points out, statisticians often choose their prior when conducting a Bayesian inference. They choose the prior based on some attractive properties, like "uninformativeness" with respect to some function of the parameters. If I choose my "prior" based on some consideration that has nothing to do with the question at hand, can the "prior" really be said to constitute a "belief"? This sort of "belief" is just as unstable as the others. (Also note that it lacks any emotional certitude, and you probably wouldn't bet on it either.)

So all of our intuitive definitions of "belief" will sometimes rely on external conditions that have nothing to do with the statement about which we are trying to determine our "belief". It seems to me that whatever my true "belief" about statement X is, it should (for most types of X) have nothing to do with whether I'm in a good or bad mood that day, or whether the question is framed using politically incendiary language, or whether my financial portfolio is net long inflation, or whether I am a risk-averse person, or whether I'm trying to use that "belief" to publish an empirical paper.

And yet I cannot think of any definition of belief that satisfies those invariance criteria. Furthermore, all of our intuitive definitions of "belief" seem to conflict with each other pretty severely in certain situations.

So I'm still not really sure what it means to "believe" something.

TRIA Captives and Republican Politics

With the current version of the Terrorism Risk Insurance Act (TRIA) set to expire at the end of next year unless Congress takes affirmative action to extend it, one thing has become clear already: the politics are complicated.   More specifically, the Republican caucus in the House of Representatives appears to be divided as to whether the federal government should continue to play a role in the private insurance marketplace.

Those with an interest in the continued viability of TRIA captives should pay attention because this is shaping up to be a very fluid and uncertain legislative process.  But before getting too far into the political weeds, a quick historical refresher would probably be helpful.

TRIA was first passed by Congress on a bipartisan basis in 2002 with the intent of helping to stabilize the property insurance marketplace in the aftermath of the 9/11 terrorist attacks.   The Act created a reinsurance program providing for a federal backstop for industry losses exceeding $100 million per year connected with future terrorist attacks.

The program details are that 85% of insured losses would be paid by the federal government after an insurer meets a deductible of 20% of annual premiums.    For losses up to $27.5 billion, the Treasury Department will collect 133% of payouts through surcharges on property/casualty policies.  Regulators have been given discretion to develop specifics to recoup payouts in access of $27.5 billion.

The Act was extended without much opposition in 2005 and 2007 so what’s different this time around?  Those votes were cast prior to the 2010 congressional election, which swept into office many “Tea Party” Republicans and Democratic control was upended in the House.

There is no shortage of commentary with regard to whether or not the growing influence of these small government true believers within the House Republican Caucus is good for the party over the longer term so this blog will refrain from offering similar political commentary.

What we can say with some certainty is the emerging debate over TRIA re-authorization is exposing the same type of divide among Tea Party and “establishment” Republicans that has been seen repeatedly over the past three years on high profile legislation.  Sometimes the party coalesced and other times it did not.

The current TRIA extension legislation (H.R. 508) is now pending in the House Financial Services Committee, which is chaired by Rep. Jeb Hensarling (R-TX).    While a member of the party leadership, his conservative political orientation more often than not synchs with the Tea Party Caucus.

Clearing Hensarling’s committee is the first step to final enactment, but while the congressman has not explicitly ruled out moving the legislation, he has signaled real skepticism of maintaining the federal government’s role in the private insurance market, even in the cases of terrorism.

In recent meetings with Republican members of the committee (most of whom were not in Congress when the law was originally passed in 2002), industry lobbyists have confirmed conflicting positions.   Some acknowledge that practical marketplace realities dictate the extension, while others have indicated they will oppose the legislation, citing the overriding priority of reducing the size and scope of the federal government.  For their part, House Democrats are mostly sitting back at this point while the Republican politics play out.   

Obviously there is still quite a bit of time on the game clock for congressional action and political ideology could very well yield to practical realities, but it’s risky to simply assume another TRIA extension will be pro forma.   After all, if Congress can go to the brink over raising the debt ceiling, tax hikes and budget sequesters, why should we think that H.R. 508 will be pushed over the finish line by the tailwind from previous years?

 

How to be a Nostradumbass

...or, in case you're me, a "Noahstradumbass".

Here's a quick guide for making easy ("dumbass") predictions that are nearly guaranteed to be borne out by events, thus making you look like a sage. The key is to make non-time-sensitive predictions of things that are very likely to happen at some point in the infinite future.

For example: "The S&P 500 will eventually hit 6,000." OK, sure. Suppose that stock prices are a random walk (or if you prefer, stock returns are a fractional Brownian motion with drift, driven by tempered stable innovations with ARMA-GARCH volatility clustering blah blah blah). Well, the variance of a random walk goes to infinity as you look farther and farther into the future. So if you wait long enough, it's a statistical certainty that someday the S&P will hit 6,000. And your prediction will be "vindicated". But at (almost) any point in time, 6000 is NOT the optimal forecast for the future price of the S&P.

Lots of things in finance are pretty similar to (lognormal) random walks. Exchange rates, stock prices, etc. So you can be a Nostradumbass by making predictions about these things but conveniently leaving out the time frame (e.g. "all fiat currencies go to zero eventually"). Make sure to make up a neat story to "explain" your prediction. If the dollar is at 0.8 euros and you predict that someday it'll go to 0.4 euros, make sure to call a "bubble". Actually, the "bubble" story is an especially handy one, since you can say "No one can predict the timing of a bubble burst, but it has to burst eventually, and the fundamentals point to a true value of 0.4."

(If anyone asks you where you got your prediction, tell them you got it from many years of carefully studying the Human Action Axiom.)

OK, here's an even easier example. Some things probably can't go on forever, so according to Stein's Law, they will someday end. So just find something that probably can't go on forever, and predict that it will someday stop. For example, China probably can't keep growing faster than rich economies forever (no country can). So just predict that someday, China's growth will slow. Bingo! As soon as the inevitable happens, you will be "vindicated" and appear "prescient". It might take 10 years, but the resultant glory will be worth the wait.

Now, maybe people are ribbing you about the fact that your predictions don't come with a time frame. Never fear. A slight upgrade to your Nostradumbass strategy will silence the doubters. First, find something that is probably stationary, like real interest rates. Then predict that they'll return to their long-run level. Make sure that the time frame of your prediction is longer than the typical time frame of mean reversion for that variable - so if interest rates usually revert to the mean in 5 years, predict that interest rates will normalize within 10 years.

(Note: Be careful with this last strategy! This strategy does have a nonzero chance of failing. If the thing you thought was stationary is not in fact stationary - for example, if you think economies always bounce back within 10 years of a recession, but actually GDP is unit-root, then you're in trouble! But on average, things that look stationary will turn out to be stationary, and so on average your predictions will be "vindicated" using this strategy.)

But always, always remember the cardinal rule of the Nostradumbass: Make up a good story. Your story should have two key characteristics: 1. Originality, and 2. Truthiness.

1. Originality. If you're predicting that China's growth will someday slow, your story should not be something like: "Eventually, technological catch-up will be exhausted and the marginal product of capital will fall." These are things that everyone knows! No one will think you're a sage for citing these things. Instead, say something like "China's type of growth model is unsustainable." Originality means that instead of applying a well-known formula or just looking at the historical pattern, people will think that they need your unique insight into the quirks and complexities of the present situation.

2. Truthiness. Remember, people suffer from confirmation bias, meaning they like to hear stuff that dovetails with their existing beliefs. Tell people a story that jives with their political prejudices. If you're predicting a 50% drop in stocks (someday!), tell people that it's because America's economy used to be built on sound economic fundamentals and sound money, but that government meddling and the liberal contempt for private business have eroded our foundations. Eventually - who can say when! - the markets must realize this, and the bubble will pop. Truthiness allows you to increase the sense of pleasure your believers get when your prediction is finally "vindicated".

To sum up: The world is full of both statistical randomness and simple well-known inevitabilities. But humans are full of confirmation bias, the need for the illusion of understanding, and the need to believe in sages. You can take advantage of these two facts and become a respected sage without ever having to do any really hard thinking. The Nostradumbass life is a good one.

Michael Lind's mercantilist critique

Michael Lind's article, "Econ 101 is killing America", is not very cohesive, and it contains a number of big mistakes, both about the content of Econ 101 and about the advice economists give to policymakers.

For example, since when does Econ 101 teach that static efficiency (i.e. efficiency today) is more important than dynamic efficiency (i.e. efficiency across all time)? It doesn't. Lind's point #2 is just wrong. And since when does Econ 101 say that everything in the economy is determined by markets? It doesn't! Government spending is a big deal in Econ 101. So Lind's point #3 is just wrong. And since when does Econ 101 ignore externalities? It doesn't. So Lind's point #5 is just wrong. And not only does Econ 101 not actually teach these things, but no economic policy advisor worth 2 cents would give policy advice based on these things.

Anyway, with that out of the way, let me say that I think Lind's article, scattershot and often mistaken as it is, makes a substantial and important point. So yes, this is a (partial) defense of Lind.

Lind's points #6, 8, 9, and 10 can be paraphrased as follows:

6. Econ 101 ignores the research activities of monopolies.

8. Econ 101 says that industrial policy is always bad, when in fact it is often good.

9. Econ 101 says that tax-based industrial policy is always bad, when in fact it is often good.

10. Econ 101 says free trade is always a win-win, when in fact one party often loses out from trade.

These four points are fair descriptions of what Econ 101 teaches. Econ 101 teaches that monopolies can be good, but only because their activities contain negative externalities, so that the restrictions on activity from a monopoly work against the externality. Econ 101 doesn't have much to say about industrial policy, other than one-paragraph outlines of some classic arguments in favor of it ("strategic industries", "infant industries", and so on). And Econ 101 definitely teaches that free trade always can, with appropriate transfers, be beneficial for all.

And from the anecdotal evidence I've seen, a large majority of economists give policy advice that is closely in accordance with these Econ 101 teachings. They advise against allowing monopolies, against industrial policy, and against restrictions on international trade. Free trade is often cited as "the one thing economists can agree on".

Lind's main critique, after we strip away the canards, is therefore a mercantilist critique. It's not a Keynesian, or leftist, or post-Keynesian, or Austrian critique. It's not really about the recent crisis. It's not about business cycles, financial instability, stabilization policy, quantitative easing, or fiscal stimulus. It's not about redistribution, fairness, poverty, etc. It's about long-term growth. Lind is arguing that mercantilists know something that we don't about how to make a country grow and prosper in the long term. He is arguing that by uniting against industrial policy and strategic trade policy, economists have doomed our country to subpar growth.

I'm a lot more sympathetic to mercantilism than most economists I've met, but I don't think Lind has convincing evidence that mercantilism works. Nevertheless, I think Lind makes a good point. Economists  ' public arguments against mercantilism overwhelmingly draw on simple Econ 101 theories and concepts. This puts defenders of mercantilism at an unfair disadvantage; the arguments against mercantilism will be a lot simpler from the arguments in favor, but simplicity does not equal correctness.

And as I've argued before, I think non-economists grasp this very quickly and intuitively. Most people have instinctive sympathy for mercantilism, and they can smell the oversimplification in economists' arguments against it. They know that every country that ever got rich was fairly or extremely mercantilist during its period of rapid growth. So "the one thing economists can agree on" becomes "the one thing economists and the public disagree about most". Michael Lind is really making the everyman's case against the econ profession. And he's not a solitary voice, either; Edward Luce's recent book, Time to Start Thinking, made many of the same points.

So whether Lind is right or wrong on the substance, economists should think twice before jeering and dismissing him. Lind's mercantilist critique is quite representative of the doubts that many, many people have about economists and economics.

Do the inflationistas really believe what they say?

For several months I've wanted to write a post titled something like "The absolute epic crushing devastation of the inflationista worldview". But I didn't get around to it, and that is a good thing, because Matt O'Brien does it much better than I ever could. And Paul Krugman, who has basically made a sport of slaying inflationistas, chimes in, differentiating between several levels of inflationista derp. The Inflationista Hall of Shame includes New Classical economists, Austrians, conservative politicians, some Wall Street macro types, faceless European institutions, and Niall Ferguson.

Of course it isn't just people in the popular press warning about "the bond bubble", inflation, and "all this money printing". Every Wall Street guy I hang out with in New York seems to think the same thing. "We had the Tech Bubble...we had the Housing Bubble...and I tell you what," confided a stockbroker friend to me over dinner two weeks ago, "I think right now we're in the Central Bank Bubble." To which I of course replied, "If everyone thinks it's a bubble, why doesn't it pop?"

But anyway, the question is no longer whether the inflationistas have a good point. They do not. At some point in the infinite future there will almost certainly be a period of inflation, but any theories or worldviews that kept confidently predicting inflation between 2008-2013 have now been falsified by events.

So the question is: Why do people continue to profess those same inflationista views? 

I think the answer is probably different for different groups of inflationistas. For New Classical economists like Steve Williamson (Update: After an email exchange, I'm thinking that I wasn't being fair to Steve; it appears that he was merely taking the results of this model a bit too literally), it's probably just a case of investment in, and commitment to, their own theoretical paradigm. Inflation happened in the 70s, and New Classical theory won lots of plaudits because it seemed to explain what was going on. Lots of guys have made their careers working in that paradigm. To admit that the theory only "explained" the 70s, but not the current situation, would be to say "My career has been spent working with theories that are mostly wrong." Theoretically there should be no shame in such an admission; Tycho Brahe was a truly great astronomer even if his model of the solar system was wrong. The "Hall of Shame" doesn't need to actually involve real shame. But in the real world, everyone defends their paradigm with daggers drawn.

For "Austrians", we have to make a distinction between Austrian economists like Bob Murphy and "Wall Street Austrians" like Peter Schiff who cite Austrian ideas as justification for their investment decisions. The former are defending their (mostly dead) econ research paradigm. The latter, though, are probably more cynical. Guys like Schiff make their millions selling investors (mostly rich middle-aged guys) newsletters and managing their money for a hefty fee. Schiff has to convince his investors that he understands economics better than all the academics, and that this allows him to make macro predictions that will beat the market. Warnings about inflation plays well with the middle-aged rich conservative dudes who remember the 70s and identify easy money with liberalism. So that's basically an affinity con.

The hedge fund and other Wall Street guys have basically been explained by Brad DeLong. They made some "widowmaker" macro trades, and took a loss, and they're pissed. The Fed forced them to concede that it has the power to keep interest rates low without causing inflation, but they still feel like they should have been right, because dammit, they knew the fundamentals, and the Fed cheated! 

As for Europeans, I'm not sure. It might be the past experience of Weimar hyperinflation - remember that wheelbarrow full of cash! - or something having to do with the politics of debtor and creditor nations in the Eurozone. Or just stuffy bureaucratic institutional culture. Anyway, I freely admit that my understanding of Europeans is severely limited.

And as for conservative hucksters like Niall Ferguson and Erick Erickson, well, asking why those guys say anything they say is just a waste of time. Just do the sensible healthy thing, and ridicule them.

(Update: Paul Krugman points out another category of inflationistas: non-New Classical economists politically aligned with the Republican Party, such as Michael Boskin, Allan Meltzer, Martin Feldstein, and John Taylor. For these guys, Krugman says, it's all political. They perceive expansionary stabilization policy as wise and prudent when a Republican is in the White House, but as liberal folly when the president is a Democrat. This seems reasonable to me. Remember that John Taylor wrote that deficit spending exploded under Carter, when actually it was under Reagan.)

So to sum up, there are three main reasons for predicting inflation, in defiance of both market expectations and recent past experience. These are 1. Commitment to a research paradigm, 2. Emotive expressions of political and personal anger, and 3. Cynical affinity manipulation. None of these things is likely to respond to any amount of data in the short term. None of them depends on correctly predicting or understanding Extant Reality. They are, rather, artifacts of a different kind of reality than the kind that moves the planets in their orbit, lands men on the Moon, and propels cannonballs in nice parabolic arcs into the walls of Constantinople. They are artifacts of Tribal Reality, the kind of reality created by human beings repeating the same words back and forth to each other in order to confirm membership in a group. The war between Extant Reality and Tribal Reality has been raging for millennia, and it will not be resolved by a few years of low inflation.

ACA Gobbles Up Self-Insurance Marketplace One Bite at a Time

This week’s announcement that the ACA’s employer-mandate provision has been postponed has understandably gotten a lot of attention.  It’s a big deal for sure, but while federal regulators punted on this high profile provision, they demonstrated no such caution with the release of two sets of final rules over the past week that will have the likely effect of eroding the self-insurance marketplace.

So while everyone is talking about the employer-mandate development, it’s important to interject some exclusive reporting and commentary regarding separate finalized ACA rules related to contraceptive coverage and student health plans to demonstrate how self-insurance options are being quietly restricted in certain market segments.

The rule-making process for contraceptive coverage has certainly attracted much attention over the past two years, but this blog is agnostic regarding the ongoing religious liberty debate that dominates the headlines.   We have, however, been very interested in how the final rules will affect self-insured religious organizations, of which there are many.

As some may recall, when the controversy originally erupted over the prospect of religious organizations being forced to provide coverage for contraceptive coverage, Obama’s political operatives quickly hatched a plan: insurance companies would be required to include this coverage at no cost to the religious organizations.

Notwithstanding the fact that this accommodation failed to satisfy religious liberty objections, the White House overlooked the fact that a large percentage of religious organizations operate self-insured group health plans, so the suggested insurance company fix would not apply to these plans.

Faced with this realization, regulators have floated various proposals during the rule-making process on how self-insured religious organizations can comply with the law.  Most of these proposals have been variations on the theme of forcing third party administrators to take responsibility for coordinating such coverage. 

For good measure, regulators offered a closing comment in the proposed rules essentially saying that such organizations can always convert to fully-insured arrangements if self-insurance is no longer viable.  You have to appreciate such bureaucratic thoughtfulness.

Based on the final rules released last week, it appears that the viability of self-insured plans will be significantly compromised.  At issue is that regulators are forcing TPAs to serve as plan fiduciaries solely for the purpose of arranging separate contraceptive coverage for plan participants.

Industry stakeholders have raised numerous concerns that such an approach is legally questionable and would expose TPAs to a variety of legal liability scenarios.  But the regulators flatly rejected these comments, asserting that “the Department of Labor’s view that is has the legal authority to require the third party administrator to become the plan administrator under ERISA section 3(16) for the sole purpose of providing payments for contraceptive services if the third party administrator agrees to enter into or remain in a contractual relationship with the eligible organization to provide administrative services for the plan.”  

Already acutely sensitive to potential fiduciary designations outside of the ACA context, it’s a reasonable conclusion that at least some TPAs will consider the new rules to be a tipping point, forcing them to part ways with their religious organization clients, which in turn will make it more difficult for such organizations to maintain their self-insured plans.

In separate news, CMS published the final rule last week clarifying exemptions to the individual mandate requirement in as provided for in the ACA.  As part of this, the rule also contained the final language on which "non-insurance” programs will be considered minimum essential coverage (MEC) for purposes of satisfying the mandate.

The earlier, proposed version of the rule had included self-funded student health plans in the list of allowable MECs.  Under the final version of the rule, however, self-funded student plans will only be considered MEC for plan years beginning before December 31, 2014.  After that date, such plans will have to apply to CMS to maintain the exemption.

Given the explicit goal of the Administration to steer as many young and healthy individuals into the exchanges as possible, this blog is highly skeptical that such exemptions will be forthcoming.  And of course, the real effect of this rule won’t be felt until after the 2014 elections. 

We’ll concede the fact that student health plans and religious organizations do not represent major segments of the overall self-insurance marketplace, but they are viable segments that are being quietly gobbled up by the bureaucracy.    So while everyone understandably is now talking about the employer-mandate delay, much of the real action continues to be in the details of the highly technical ACA implementation rules that cannot be easily distilled by the media nor understood by most health care reform observers.

 

 

Do beliefs contain useful information?

The "Do bets reveal beliefs?" discussion continues. This is very interesting to me, since in finance experiments, you often depend on bets accurately revealing beliefs.

But lost in the mayhem of the debate is a second question: Do beliefs contain useful information in the first place?

In an econ experiment, of course they do, because researchers want to understand how humans process information. But how about in the real world? Take my bet with Brad DeLong. Suppose that bet did reveal my true belief, i.e. that inflation is going to spike. Suppose I really really really believed that, very strongly. So what? The belief of Noah Smith, no matter how strong, tells you incredibly little about the future path of inflation that the market for TIPS didn't already tell you.

Now, maybe there are exceptions to this. Suppose you have a well-respected, widely trusted expert in monetary economics, such as Steve Williamson. Last March, Steve Williamson confidently predicted a near-term spike in inflation, despite low TIPS breakevens, claiming that his understanding of monetary economics gave him private information that the market did not possess. If you believed that expert prediction, and increased your inflation hedging accordingly, then you lost money. Perhaps you are mad at Steve for losing you money, and you sulkily suspect that maybe Steve didn't really believe his own prediction. You wish that Steve had been forced to somehow reveal that he really, truly believed that inflation would spike, and was not pulling your leg.

But even in the case of experts, I think you need to be very, very confident in the expert's record before you give special weight to that expert's opinion. For example, Michael Boskin is legendary for getting every major macroeconomic prediction wrong since the beginning of time (update: Scott Sumner dutifully informs us that some of Boskin's so-called "predictions" were actually just implausible and unverifiable explanations for things, not true predictions). Paul Krugman is somewhat ahead of the average of pundits, though it's a small sample. Robert Shiller has an impeccable record of bubble prediction, but that sample is even smaller.

So the only time beliefs reveal useful information about financial outcomes, such as inflation, is if you trust a very special expert. If that expert is pulling your leg, then you have a problem. But I contend that this situation is very very very rare, because reliably market-beating experts are very very very rare.

So we see that the situations in which (economics) bets can most easily be made - concrete, financially important outcomes - are not only the situations in which bets are least likely to reveal beliefs (because either hedging or making the same bet with better odds is always possible using public markets), but also the situations in which individual beliefs are the least likely to contain useful new information.

But I suspect that the bet advocates (Alex Tabarrok and Bryan Caplan) want to extract a different kind of information from bets. I suspect -  and if I'm wrong, please correct me - that they are concerned with the ulterior motives of people who advance economic theories. For example, perhaps they suspect that Keynesians don't really believe in Keynesian business cycle models, but want increased government spending for the sake of redistribution. Or perhaps they believe that inflation hawks don't really believe their dire warnings of inflation, but want higher real interest rates for the sake of redistribution.

In this case, forcing an economist to reveal his or her true beliefs might be very useful. If it was revealed that an economist didn't really believe in the quantitative predictions of a theory that (s)he had spent a great deal of time and effort promoting, then that might be a signal that the economist had promoted the theory because of some ulterior motive.

And knowing the ulterior motives of would-be experts can be very useful information in situations in which public financial markets can't give you an answer. For example, suppose Economist A says "The Fed should lower interest rates to boost the economy! I know this because of my New Keynesian model." And Economist B says "Lower interest rates will just lead to inflation without boosting the economy! I know this because of my RBC model." And suppose that the New Keynesian model also just happens to predict lower inflation over the next 6 months, while the RBC model also just happens to predict higher inflation. In that case, forcing Economists A and B to make a bet on upcoming inflation might - or so Tabarrok and Caplan seem to hope - be able to reveal whether one or both of these economists actually has little confidence in his own theory. That in turn would reveal that that economist very possibly had some ulterior motive in advocating for that theory in the first place, which in turn would tell you not to trust that economist on policy matters in which the ulterior motive might apply.

This is what I think Alex Tabarrok is hoping when he says that a bet is a "tax on bullshit". He wants not to extract useful information about financial markets, but to reveal the ulterior motives of disingenuous public intellectuals, and thus get a better idea of whom to trust in the Marketplace of Ideas.

This, I think, is an excellent goal. Some kinds of bullshit are useful and should not be taxed, but disingenuous theory-promotion by public intellectuals seems to produce a negative externality that should be taxed away. The question of whether public bets are the tool to accomplish this goal, however, seems to hings on a lot of the questions Tyler Cowen has raised, such as what a public intellectual really risks when making a bet.