{"id":4861,"date":"2012-10-20T13:41:16","date_gmt":"2012-10-20T20:41:16","guid":{"rendered":"http:\/\/www.blackswanreport.com\/blog\/?p=4861"},"modified":"2012-10-20T13:41:16","modified_gmt":"2012-10-20T20:41:16","slug":"nassim-taleb-heres-why-governments-always-miss-their-own-budget-deficit-targets-business-insider","status":"publish","type":"post","link":"https:\/\/www.blackswanreport.com\/blog\/2012\/10\/nassim-taleb-heres-why-governments-always-miss-their-own-budget-deficit-targets-business-insider\/","title":{"rendered":"NASSIM TALEB: Here’s Why Governments Always Miss Their Own Budget Deficit Targets – Business Insider"},"content":{"rendered":"

The pdf is actually called Econfragilize<\/a><\/p>\n

\n

(The book isn’t actually out until late November, but Taleb posted this appendix, entitled WHERE MOST ECONOMIC MODELS FRAGILIZE AND BLOW PEOPLE UP<\/a>, on his website today.)<\/p>\n

The problem is that the economic data forecasts the government uses to plan its budget around \u2013 like where unemployment will be a year from now, for example \u2013 are pretty much taken as a given, instead of looked at as mere likelihoods with some given probability.<\/p>\n

When the government plans its budget this way, it tends to underestimate the damage when things get worse than they initially expected.<\/p>\n

Taleb illustrates how this mistake causes governments to continually underestimate the size of their budget deficits and miss their targets:<\/p>\n

Say a government estimates unemployment for the next three years as averaging 9 percent; it uses its econometric models to issue a forecast balance B of a two-hundred-billion de\ufb01cit in the local currency. But it misses (like almost everything in economics) that unemployment is a stochastic variable. Employment over a three-year period has \ufb02uctuated by 1 percent on average. We can calculate the effect of the error with the following:<\/p>\n

Unemployment at 8%, Balance B(8%) = \u221275 bn (improvement of 125 bn)<\/p>\n

Unemployment at 9%, Balance B(9%)= \u2212200 bn<\/p>\n

Unemployment at 10%, Balance B(10%)= \u2212550 bn (worsening of 350 bn)<\/p>\n

The concavity bias, or negative convexity bias, from underestimation of the de\ufb01cit is \u2212112.5 bn, since \u00bd {B(8%) + B(10%)} = \u2212312 bn, not \u2212200 bn.<\/p>\n

In this example, Taleb identified that since unemployment typically varies around 1 percent, one should take estimates of what happens when it goes 1 percent lower than expected and when it goes 1 percent higher than expected.<\/p>\n<\/blockquote>\n

via NASSIM TALEB: Here’s Why Governments Always Miss Their Own Budget Deficit Targets – Business Insider<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

The pdf is actually called Econfragilize (The book isn’t actually out until late November, but Taleb posted this appendix, entitled WHERE MOST ECONOMIC MODELS FRAGILIZE AND BLOW PEOPLE UP, on his website today.) The problem is that the economic data forecasts the government uses to plan its budget around \u2013 like where unemployment will be […]<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[530,1,73],"tags":[],"class_list":["post-4861","post","type-post","status-publish","format-standard","hentry","category-antifragility-2","category-contributors","category-pdf"],"_links":{"self":[{"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/posts\/4861","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/comments?post=4861"}],"version-history":[{"count":2,"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/posts\/4861\/revisions"}],"predecessor-version":[{"id":4863,"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/posts\/4861\/revisions\/4863"}],"wp:attachment":[{"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/media?parent=4861"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/categories?post=4861"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.blackswanreport.com\/blog\/wp-json\/wp\/v2\/tags?post=4861"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}