Actuarial Model of the Economy

An actuarial model of the U.S. economy would be probabilistic, demographic, holistic, complex, and actuariall sound. It would incorporate Enterprise Risk Management, Dynamic Financial Analysis, General Linear Modeling, Econometrics, and Complexity Science.

Who cares?

Well, the global and U.S. economies are on their deathbeds, the environment is collapsing, we are running out of resources, and the demographics of upcoming generations is unsupportable by existing institutions.

Unless somebody in Washington realizes that the analytical tools being used to evaluate public policy initiatives are outdated, and prone to misdiagnosis, (how do you think we got here?) all the "geniuses" in the world (Summers, Geithner, Goolsby, Clinton, Kudlow, Welch, Bernacke, Volcker...) will fail.

Demonstrating a model which will supplement and transcend the impossibly complicated financial and economic models currently in use is not realistic on a blog.

The basic outline of such a model, however, can be attempted.

The modeling team will consist of physicists, mathematicians, economists, computer scientists, financial engineers and actuaries with a mix of management, technical, and public policy expertise.

Such a team does not currently exist as such.

The model input will be as much detail about the federal budget and national economy as is deemed feasible and useful. It will be enough data to see all the major interactions which occur as a result of government activity but not so much as to be analytically unworkable.

The analytics will be a mix of traditional econometric and financial models supplemented by advances in actuarial science, complexity science, data-mining and visualization, and computer processing which have thus far not been utilized in public policy modeling.

The output will be impact by area by time frame by uncertainty level of alternative government actions. For example, if $100 million of government largess is to be bestowed upon the "auto industry", the impact on all areas impacting and impacted by the auto sector will be shown under various scenarios.

If $100 billion is to be allocated to the "financial sector'" the various ways that the money can flow through the economy under various economic scenarios can be tested. That allocation can (to some degree) be targeted to have the desired impact on national welfare.

For more information, go to my website, paradigmactuaries.com.

Lee

Obama's First Stumble

It had to happen.

It's kind of a relief.

Nobody's perfect.

The bailout/stimulus proposal which came out this week won't work!

It's not Barack's fault. He needs to rely on his advisers even as he occasionally transcends them.

It's really not their fault either. They don't know any better. No one told them that their failed models need updating.

But it'a too important to ignore. Between the Federal Budget and potential stimuli/bailouts, there are trillions of dollars at stake. More importantly, there is the opportunity to transform the economy into one that is sustainable and more just.

We are at the edge of a precipice that we created, and we only get one chance to step back and save the economy.

Does it make sense to continue to spend government money based on analysis which has proven to be wrong so many times?

Would it make sense to allocate a small portion of new government spending on the development of a new structure for public policy analysis which has proven itself many times?

The answers are obvious.

There is a team of the best minds in the fields of particle physics, complexity science, actuarial science, and computer science ready to be assembled. They can build a model with the best data mining, enterprise risk management, dynamic financial analysis, data visualization, demographic, probability, and management analytics available.

Such a model can supplement existing economic, financial and public policy models in determining where spending will have optimal effect, what the uncertainties are, how to make adjustments dynamically, how to handle interactions, and all the other factors existing models ignore or miss.

The best minds in Washington are doing their best, but is isn't good enough. Some of the programs proposed will have some positive impact, but no one knows how much, or whether more innovative approaches would have much more effect.

What if we find, that using the best analytics possible, the impact of bailout and stimulus activity can be increased 100 fold or more over the next decade?

Should we at least consider it?

The global economy is collapsing.

Social Security is effectively bankrupt.

The healthcare system is crumbling under its own weight.

The deficit is dangerous, particularly if forecasts of the future US economy are distorted.

None of these issues are adequately addressed in proposals made to date.

The Federal Budget, along with all bailout and stimulation activity is a complex system which impacts a web of other complex systems. Government spending impacts the healthcare system, the infrastructure system, the prison system, the retirement system, the welfare system, the education system, and a variey of other systems, not to mention foreign relations.

Each of these systems has subsystems like housing, transportation, energy, goods, services, environment, medicine, and so on.

No model in place in Washington can deal with the interconnections, demographics, uncertainties, management, and data requirements of such a complex network.

We can transform the economy successfully . We can evolve into a country with sustainable and just results.

We have the intellectual resources.

We have the technical resources.

Yes we do.

Lee

The Obama Economic Plan-An Agent Based Model

Our new President will be sworn in Tuesday.

His first priority will be to "fix the economy".

Unless someone in his circle knows about agent based modeling and other complexity science and actuarial tools, he will fail.

The current plan appears to consist of the following as the next "phase" of the "stimulus/bailout":

$550 billion for infrastructure, science, energy, and education programs over two years.
$275 billion in tax cuts for businesses and consumers.

Sounds good.

But has anyone done a cost-benefit analysis of how this spending in conjunction with the other $2.8 trillion in government spending will transition us toward a sustainable future of fiscal wealth and harmony?

We want it to be easy. Just pick out a few programs and, boom, economic nirvana.

Not.

We've tried that.

Now we are $60 trillion in the hole (Don't forget Social Security, Medicare, Veterans benefits...), are adding about a $ Trillion a year, and GNP is tottering as global resources decline.

If some measure of GNP doesn't start to grow dramatically, game over.

Happily, there is hope. In the labs of Los Alamos, Santa Fe, Batavia, Champaign, Ann Arbor...models have been developed which can definitively show how expenditures can ripple through a global economy and which can test alternative approaches.

We can use these models to find stimulus and bailout programs which could actually create an engine of economic growth for the U.S.

These models didn't exist in the 1930's, so trial and error had to happen in the real economy. We can now simulate the economy and test various scenarios. That way we can have a sense of long term welfare effects of whatever expenditures are deemed worthy.

Isn't it worth the effort?

The alternative is to keep randomly throwing money at a system which has proven itself incapable of meaningful transition.

Our production systems, housing systems, transportation systems, healthcare systems, financial systems, education systems, welfare systems...are all interconnected.

All must be transformed simultaneously for real change to occur and real welfare to be increased

Are we up to the task?

Yes we are.

For more go to paradigmactuaries.com

Lee

Republican Think Tank

Now that's an interesting idea. What in the world do they think about? How their heroes, the Bushes and Reagan, have quadrupled the budget deficit in a mere 20 years of governance?

When Reagan came to power in 1980 the deficit wasn't even a trillion dollars. "W" has done that in a year.

By 1992, when Clinton came unto office, it had ballooned to over $4 trillion. Under "W" it grew another $4 trillion to $10 trillion.

The unpaid obligations run up by Bush will add at least another trillion. And that doesn't count the unfunded programs like Social Security and Medicare which continue to balloon out of control. The Medicare Part D disaster which came in under Bush will add billions.

Oh yeah, what about tax reform and regulatory relief for small business?

Of course, the $10 trillion figure often used for the debt is as phony as Groucho Marx's glasses. The true debt under reasonable accounting standards is probably at least five times as high. Much of the difference is in unfunded Social Security and Medicare obligations resulting from benefit increases which were not offset by revenue increases.

Welcome to our world children. You must fund the programs we enjoyed in a global economy which will enjoy increasing population and declining resources.

Of course our "anti-government" Republicans are not content to take away our economic freedoms.They want government mandates to replace individual freedon in decisions about healthcare, religion, and speech.

What about the Democrats? Well they are complicit in out of control spending, but they don't preach about limited government and lower taxes, much less moral superiority (Can you say Larry Craig, Newt Gingrich, Bob Dole, Ted Stevens, Dennis Hastert, Tom Delay...?)

At least Republicans know the difference between Shiites's and Suni's. Woops. Hundreds of billions of dollars and thousands of lives to replace one with the other in Iraq. Welcome President Al Sadr.

What about healthcare, science, the economy, the environment, foreign relations...?

Nice stewardship "W".

Well, we elected a President who seems to have intellect and compassion. He seems to want to return government to the people. He seems to appreciate the role of science, the arts, and education in Americaan life. He has a plan to transform the economy and put us back on the path of world leadership.

Yes we can.

Lee

The Dismal Science

Thomas Malthus is often credited with the notion that economics is a dismal science. In, An Essay on the Principle of Population..., he argues that population will always outstrip the resources necessary to sustain it.

Some would say that the subsequent centuries have shown him to be overly pessimistic, although poverty has been a fact of life for many world citizens forever.

In 2008 there are signs that the Malthusian vision may apply more broadly than just in "undeveloped" nations.

The world is awash in pollution, people, resource shortages, and other elements which could overwhelm the fragile systems which exist to nurture the human race.

The 6 billion people inhabiting the planet today are already feeling the pressure.

That number is expected to grow dramatically in the coming years. It is unclear from where the energy, water, and other resources needed to provide a decent life will come.

The basic framework for economic theory continues to be from Adam Smith's Wealth of Nations (1776). Modifications accomodating the depression era adjustments of Keynes and new mathematical structures of recent years have not changed the basic structure of economic theory.

Economics as taught and practiced today still assumes unlimited resources and negligible externalities. Needs of future generations are ignored. This not unlike the Federal Budget process which ignores the massive debts with which we are condemning future generations.

The Invisible Hand, like the General Will, is a wonderful metaphor, but it is not always operative.

Today we can do better. The analytical and information tools of complexity and actuarial science are available te lead us out of the wilderness. We can include demographic trends, probabilistic scenarios, multifractal models, and agent based methodologies which provide perspective on the complexities of our global economy.

We just need the will.

Lee

USA Today

Today's USA editorial should have outraged all world citizens. The man responsible for Iraq, the global economic crisis, soaring deficits, environmental destruction, and the unplanning of the family isn't done. He is now (actually his cohorts are since he is clueless) proposing rules to:

1. Put coal burning power plants near national parks.
2. Put mining waste in streams and valleys.
3. Overturn the ban on concealed weapons in national parks.
4. Expand ability of healthcare workers to deny women needed care.

So while burdening our children with trillions of dollars of debt that must be paid back in years when the country and world are managing declining resources and increasing population, the Republicans believe our biggest problems are that women have too much freedom, national parks are too quiet and clean, and not enough people are shooting each other.

When will they ever learn?

Lee