Stimulus and Equities, Working in Government, Detecting Bullshit

Sunday August 8, 2021

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Transcript

Welcome to “What Happens Next.” My name is Larry Bernstein. “What Happens Next” is a podcast where experts are given just six minutes to present, and this is followed by a question-and-answer period for deeper engagement. This week’s topics include stimulus inequities, working in government, and detecting bullshit.

Our first speaker will be Robin Greenwood, who is the George Gund Professor of Finance and Banking at Harvard Business School. I met Robin through my business partner, Mike Gorzynski, who co-taught a course with Robin at HBS. Robin has been responsible for organizing and teaching the corporate finance department segment of Harvard Business School’s curriculum. Robin spoke twice before on What Happens Next. His first presentation was on streamlining the bankruptcy process during COVID, and the second one was on predicting financial crises. Today, Robin will discuss his recent research and how the government stimulus programs for COVID have led to rising stock prices. I want to learn from Robin what he thinks the current $1 trillion infrastructure bill and the additional $3.5 trillion Biden spending proposal will do to stock prices in the future based on his recent research.

Our second speaker is Bruce Tuckman, who is the former chief economist at the Commodities Futures Trading Commission, and is currently the Clinical Professor of Finance at the NYU Stern School of Business. Bruce and I were business partners back when we worked together at Salomon Brothers in the fixed income arbitrage department. My boss at the time, Rob Stavis, interviewed Bruce to be a quantitative analyst in our US Treasury and derivatives department to work with me. Rob asked me if I wanted to interview Bruce, but he said it wasn’t necessary because he already knew my opinion on the matter. I was confused, because at the time, I had never met Bruce. I asked Rob what my opinion was going to be, and he told me I was going to love him. And as usual, Rob was right.

Bruce joined the independent government agency, the CFTC, the Commodity Futures Trading Commission, in June, 2017, where he worked as their chief economist for three years. This was Bruce’s first position in government. And I’ve asked Bruce to tell us about what he learned working for an independent government agency and how to motivate a bureaucracy. I’ve entitled this session: “Tuckman Goes to Washington.”

Our final speaker today is John Petrocelli, who is a professor of psychology at Wake Forest University. He is the author of the book entitled Life-Changing Science of Detecting Bullshit. I am really excited to learn about how to find out how much bullshit is out there and how to navigate that fine line between truth, lies, and bullshit.

Since the beginning of What Happens Next, I have commented on the Bureau of Labor Statistics monthly labor report. I do this because it is the most important economic statistic in the US and it is the best indicator to evaluate the health of the economy and the job market.

The employment report that was released on Friday was a whopper. The establishment survey showed a gain of 943,000 jobs which was above the street economists forecasts. There were also revisions to the past two months for an additional 120k.jobs.

The unemployment rate fell by 0.5% on the month to 5.4% with 8.7 million unemployed. This compares to over 16 million a year ago. Pre-Covid, in February 2020, when we were at full employment the unemployment rate was 3.5% with 5.7 million unemployed.

Here is what I thought was interesting in the detail of the report, college educated workers is basically at full employment at just 3% so future workers will have to come from the pool of less educated workers. And this month we saw pretty dramatic declines in unemployment among high school educated workers, African Americans, and teenagers.

The demand for labor remains on fire. The latest JOLTS data shows an all-time high 9.2 million job openings, which is double normal levels.

The dynamism of the labor market is really surprising to me. Over the past 12 months, 73 million Americans have new jobs while 65 million jobs were terminated. This is because many people switch jobs and often multiple times a year. The 73 million new jobs should be taken in context of the total 152 million employed people in the US.

The labor sector with the greatest improvement has been leisure and hospitality. This sector was the hardest hit by Covid and is now rehiring. Leisure represented half of all private sector increases in employment despite the rapid rise in the Delta variant. This sector still has 1.7 million fewer workers than pre-COVID so we should expect this sector to be where most employment growth comes from in the months ahead.

There are still millions of Americans who are not working and not looking for work. As Casey Mulligan has informed us on What Happens Next that the cause is substantial government payments that encourage low wage employees not to work. Workers’ wages have risen 4% year over year and in the lowest paid group wages increased by 10%.

September ends the extra Federal unemployment benefits, so we will likely get a surge in low wage worker supply. I expect that these workers will get hired rapidly. It will be interesting to see if the higher wages and starting bonuses last when the supply of workers increases dramatically.

The number of people teleworking continues to decline. In May 2020, 35% of all workers teleworked, today it is down to 13% and is falling at about 1% per month. There has been a lot of discussion about what is the new normal about working from home, and the numbers suggest that most people are going back to the workplace.

                                        
 
 
 
 
 

Robin Greenwood

Topic: How Much Did the Covid Stimulus Increase Stock Prices
Bio: George Gund Professor of Finance and Banking at Harvard Business School

Transcript

Robin Greenwood:
Larry, thanks for the opportunity. I’m going to be speaking about some work with Toomas Laartis and Jeffrey Wurgler, who are both at NYU, and the work is called stock market stimulus. What we’re interested in is the dramatic rise of the stock market between March of last year and today, in particular the role of government stimulus payments in generating that rise. Now, I’m not going to be focused on the macroeconomic effects of the stimulus payments, for example, through businesses, cashflow growth, and so on, but rather the direct effects of the stimulus payments, insofar as they ended up as flows into the stock market. So just to give you a sense of what’s going on here, maybe the best starting point is to look at anecdotes from Reddit and places like WallStreetBets, if you were to peruse these places and see what people are talking about when they’re speaking about different stocks. Back in April of last year, these are just some quotes, “Threw down my whole stimulus check on Roku and doubled it. God bless America.” Then the next round of stimulus checks in January of this year, “Yeah, Pa, get your stimulus check and dump it into stocks.” And then in March 2021, “I can’t wait for my stimulus check to drop tomorrow and grab some more AMC.” So certainly, people who were in the market for speculative stocks have been talking about the effect of the stimulus payments. So, the way that I’m going to talk about this is first talk to you about the overall structure and some of the timing of the stimulus payments, then talk about how we think about the investment of those checks, how much might’ve made its way into the stock market, and then give you some evidence on the link to overall stock market activity. And I should say one of the most challenging things here is that it’s very difficult to draw a causal link between inflows and the overall market.

Our general approach in this work has been to try to focus on the most speculative stocks in the market, which we believe ended up getting the largest inflows during this time. The type of data that we analyzed were US Treasury and IRS news releases, discussion to Treasury officials, Reddit, Google, Google trends, requests on things like lottery spending and all sorts of interesting other data. Okay, let me first just take you through the overall structure and timing of the data, just to give you a sense. There were three sets of checks that were sent out on April 15th of last year, on January 4th of this year, and then on March 17th of this year. The first set of payments was approximately $300 billion, then $164 billion, and then $411 billion in the most recent round. Now, interestingly, you can really get in the weeds as to when the checks were sent out. And it turns out, especially in the first round, the government had some trouble getting the dollars in the hands of people. That being said, these days are roughly right in the sense that most of the money was dispersed right around these dates. The first order of business was really to establish how people say they use the stimulus check and then how people talk about the spending. And then we have some direct evidence on the spending as well. It turns out the Census runs The Pulse Survey, where they check in on US households. And on weeks 12, 22, and 27, they asked households how they had spent or plan to spend the payments they had received from the government. In the first round, about 14% of them reported putting some of the money into savings and investment. In the second round, 15%. And then in the third round, 23%, as the economy was kicking up.

Also consistent with this is that if you look at overall discussion of, for example, the word stimulus check in WallStreetBets and other places, you will find them really picking up around the time of these checks. The most interesting piece of evidence that we looked at here was on data collected by Raj Chetty and his co-authors. And they tracked daily spending of individuals during this time. Low-income households, for the most part, pour the money directly into a retail and grocery spend. And you see very little of that happening for the middle-income households, suggesting that it either ends up in savings of some sort or elsewhere that we can’t track. We looked at measures for the stock market activity. The first was order flow, so trying to figure out, where do we find patterns of retail demand? For example, particularly in, let’s call it, the most Robinhood-y type stocks. And then the second was to look at the overall performance of these stocks during that time.

And one of the things that I’d never heard about that turns out that you can pinpoint retail order flow very precisely these days because of algorithms that allow you to figure out what the net price improvement is on a trade and only retail gets price improvement. And you can document that pretty clearly. Now, it turns out, so if you look around these windows, especially the first window around the stimulus check, the retail share of share volume really shoots up. You can also look at this retail volume in a bunch of different ways. I’d like just to share with you the numbers in terms of what happens to the overall returns during this period. On the April period last year, the most speculative stocks outperformed the least speculative stocks. Keep in mind, this is a very short window, just a few days, really, when we’re tracking this, on the order of four percentage points. Then if you look in January of this year, it’s on the order of three percentage points. And then in March of this year, on the order of one to two percentage points. I think the bottom line here is that we can find some evidence of the stimulus checks affecting the most speculative stocks. Having said that, the direct effects on these days are fairly modest. And our next order of business, and this is something that we’ve been investigating, is really trying to figure out whether there are any positive feedback effects that are really these checks being the first step in a chain of capital entering the stock market and juicing up valuations. And I think I’ll stop there.

Questions for Greenwood

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Bruce Tuckman

Topic: Tuckman Goes to Washington
Bio: Former Chief Economist at the Commodities Futures Trading Commission and Clinical Professor of Finance at NUY Stern

Transcript

Larry Bernstein:
Our second speaker is, Bruce Tuckman who is the former chief economist at the CFTC, the commodities futures trading commission, which is an independent government agency. Bruce is a finance professor at NYU. And I’m very interested in learning from Bruce, what it was like to move from the private sector to an independent government agency. Bruce, go ahead.

Bruce Tuckman:
Thanks, Larry. So having spent all of my life in the private sector, the thing that struck me the most about my time at the CFTC is how much power and discretion an independent agency has in its work, and even more so how our system of government is designed to try to check that power and discretion. So, first of all, what makes an agency independent? The answer is actually different for different agencies, but for the CFTC it’s the fact that the commissioners are of course appointed by the President, confirmed by the Senate, but then they cannot be removed, except for cause, unlike the head of the treasury, the president can fire at any time. That’s the first thing.

The second thing is that the CFTC rules have the force of law, but they’re not reviewed by the White House. They don’t go through the White House the way the department of labor regulations would do. So as a result, the agency, in particular a chair who manages the staff, has enormous amount of discretion. What do I mean by discretion? Well, what rulemakings you’re going to take up. The Dodd-Frank rulemaking, for example, took 10 years at the CFTC and the SEC and other independent agencies is actually still going on Dodd-Frank. There are a lot of choices you can make along the way. Another part of the discretion is how to interpret congressional statutes. There’s a lot of discussion in the courts about that and I’ll talk about that in a minute, but how do you interpret what Congress told you to do? There are also no action letters, which is a lot of what an agency does, which is say, “Hey, in a particular situation, a particular actor doesn’t have to follow this rule on a temporary basis or on a permanent basis because their situation is slightly different.”

And then finally, where to focus enforcement? In a world of limited resources, choices have to be made about which cases are going to be brought against people who are violating the rules of the agency. What are the checks on this very broad power and discretion? I’m going to list five checks. The first one is Congress. Congress can drag the chair in and ask questions and hold hearings, which of course, depending on what their views are, can be pleasant or unpleasant. Congress also sets the budget each year for the CFTC. Now, this is actually less of a check for other agencies. The SEC, for example, has its own sources of money from fees from the industry. And the Fed of course has its own revenue making machine there. But for the CFTC, that was a check because they had to ask Congress for money every year. The only thing I would say about that check is not all issues rise to Congress’ attention that to be certain kinds of issues that it’s going to get Congress to think about things like that. The second check is the fact that there are minority commissioners. There are three commissioners from the parties, the present president and two from the other party. So non-controversial rules are just going to pass through an internal process. Every commissioner is just going to sign off and it’s done. It has the force of law. But any commissioner can refuse to go through that process and force a public meeting and a vote on the rule and the minority commissioner can dissent publicly. And that is a great incentive to negotiate and compromise and come to the right place. I was impressed that this is an extremely big deal, and this is prevailed personal opinion, why I don’t like the single commissioner structure at the CFPB because you don’t have these other commissioners who are very involved in the issues who can get up and dissent publicly.

The third of the five checks I want to talk about, and this is something I knew nothing about it before I entered government, is the APA or the Administrative Procedures Act. There are a whole set of rules about making rules. There are two types of lawyers at the CFTC. There are the securities law lawyers who worry about securities law. And then there are the APA lawyers who are all about how you go about making rules. And I’m not a lawyer, so I’m sure I’m not going to get this a hundred percent right. But the basic idea is rules have to come from reasoned decision-making. They can’t be arbitrary and capricious, which is one of the legal phrases. And this is reviewable by courts. The courts can decide if a particular rule follows these criteria. And there’s a big debate in the legal profession, which I’m not super qualified to talk about, about how much courts should defer to agencies when they make the rules. And another part of the APA, which is very important, is that when an agency is going to make a rule, it has to make a proposal, give notice that it’s thinking about making a rule, open up the proposal for public comment. And all serious comments will be read and will be addressed in the rulemaking. If anyone on this call has a view about something an agency is doing and they write it, it’s almost a hundred percent sure it’s going to be read and extremely likely it’s going to be addressed in the final rulemaking.

The result of that rulemaking takes a lot of time. It’s particularly difficult for a new administration to come in and reverse course from a proposal that’s already existing. How do you make the argument that, “Hey, this agency stood before the public and said, this is the most sensible thing to do. And now you’re doing something completely different.” And of course, every administration has a limited amount of time in which to do things. The fourth of the list of checks I want to talk about are cost benefit considerations. Rules under certain statutes, like the commodity exchange act, which is what the CFTC works with, require cost benefit considerations. When a proposal is made, you have to list out all of the costs and benefits of what’s going to be the effect, the impact, of this rule. You don’t have to weigh them one against another, but you have to list them. And a rule can be challenged in court if important cost and benefits are omitted. Now interestingly, cost-benefit considerations are not required of all statutes. For example, a bank holding company act does not require a cost benefit considerations and rulemaking under that act. And that’s where the Volker rule lives. The Volker rule didn’t have to do that as a lot of other Dodd-Frank rules had to do. And then the final check, the fifth and final check I want to talk about is, civil servants. So civil servants have lots of protections. A new administration, as existed in the founding of our country, the new administration can no longer come in and just fire everyone and start from scratch. There are also detailed procedures for hiring senior civil servants to prevent what’s called burrowing. And that’s a word I did not know, again, before joining the government.

And that’s when political appointees try to hire senior civil servants, sorry, try to hire other political appointees as senior civil servants. And there are a lot of procedures to prevent that from happening. I, for example, was not allowed on a particular hiring committee because I was a political appointee. Civil servants that I bumped into and worked with responded very well to direction from the CFTC chair, recognizing the new administration. Here’s what the chair wants to do. And that chair’s confirmed by the Senate, we should do that. But of course, in theory, it’s possible for senior servants to have their own agenda or to slow walk any particular administration. Larry, those were most of my prepared remarks.

Questions for Tuckman

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John Petrocelli

Topic: Detecting Bullshit
Bio: Professor of Psychology at Wake Forest University
Reading: The Life-Changing Science of Detecting Bullshit is here

Transcript

Larry Bernstein:
With that, I’m going to move on to our final speaker, John Petrocelli, who’s going to talk about detecting bullshit.

I want to open up by saying that approximately 15 years ago at book club, I had philosopher Harry Frankfurt from Princeton, speak to my book club about his book entitled On Bullshit. And it had a very dramatic effect on me and my philosophy on thinking about bullshit. And it did for John as well. And John has dedicated a substantial portion of his research and thinking about Frankfurt’s work and its application. John, I very much look forward to hearing from you about how to detect all that bullshit that’s out there. Go ahead, John.

John Petrocelli:
And I’d like to talk today a bit about how our world is simply awash with misinformation, disinformation, fake news, hoax news, fabricated news, inaccurate news, spin, and deception. And a common thread through each of these sources is a pervasive and insidious communicative substance that we commonly refer to as bullshit, which is not just a cutesy or intentionally provocative word, but now a technical term as used in philosophy and psychology to signal that something has been communicated without regard for truth, genuine evidence or established knowledge. And bullshitting behavior is often characterized by the use of rhetorical strategies designed to disregard truth, evidence, or established knowledge, such as exaggerating one’s knowledge, their competence or skills, or talking about things of which one knows little to nothing about in order to embellish or impress others, fit in with others, influence or persuade others, or to confuse or hide the fact that one really doesn’t know what they’re talking about.

And the worst outcomes of bullshit communications are false beliefs and bad decision-making. A surprisingly, a disturbingly large percentage of really smart people believe that storing batteries in the freezer will improve their performance, that you can see the Great Wall of China from space, that people who own cats live longer than people who don’t, that wines become finer with age, and that diamonds are a sound investment, but none of these things are actually true. In my research, I found a very big problem, and that is that most everyone thinks they can readily detect bullshit and thereby feels unaffected by it, despite research clearly demonstrating that bullshit is not easily detected. And no matter how smart we believe ourselves to be, we’re all susceptible to bullshit. In fact, research shows that people who are most confident in their ability to detect bullshit are often the least capable. And this is because the mental skills that one needs to be competent in something are often the very same mental skills one needs to recognize their own and others’ competence in that domain. But fortunately, there’s a more scientific basis to this whole thing, and we can approach it as such. And this kind of rational method will help us actually understand and overcome bullshit more effectively.

Bullshitting is sometimes confused for lying, but there are critical differences between bullshitting and lying. Liars actually know and care about the truth, and a liar’s agenda is to detract us from the truth altogether. Liars also don’t believe what they say. Bullshitters, on the other hand, often do believe what they say, but they don’t know what the truth is. They don’t really care. They aren’t even trying to know. And in fact, sometimes by chance, bullshitters say something correct, but even they wouldn’t know it because they aren’t paying attention to truth, established knowledge, or evidence for their claims. If I said to you, Pluto is a planet, and I know perfectly well that it is not, then I’m lying to you. However, if I said, Pluto is a planet without any care for its truth such that I don’t even know if it’s true or false, then I’m bullshitting you. Now, like most people, you probably believe that bullshit is harmless and, if anything, less insidious than that of lies. Besides, no one is harmed when our uncle claims that in 1982, he was capable of throwing a football over a mountain. And if bullshitting children that a special compound in the swimming pool water reveals the presence of urine helps to prevent such unwanted behaviors, perhaps some bullshit is even beneficial to society.

Yet the notion that bullshit is completely harmless just isn’t so. Some bullshit clearly has harmful potential. For example, “Did you see her face. Who would vote for a face like that?” This sort of bullshit is just plain bad. It degrades, it objectifies women, and suggests that women can’t be good leaders unless they’re attractive. Furthermore, some bullshit is dangerous because it is able and very likely to cause harm. For instance, “I can text while driving without any effects on my performance. You know that everybody does it. I don’t see the problem.” No, no, no. This bullshit is this is not only incorrect, but it promotes a flippant attitude toward compelling evidence that suggests otherwise, and a belief in it can cause direct harm to society writ large. My research suggests that bullshit can have several negative effects on memory, attitudes, and opinions, and most importantly, decision-making. Bullshit affects these things because it impacts what we believe to be true, and what we believe to be true is fundamental to human behavior.

Bullshit-based beliefs can come with great costs. It’s not only the stuff of unreasonable markups that we often pay for used cars, real estate, wine, jewelry, and so many other things. It’s the stuff of Bernie Madoff’s success in swindling billions of dollars from even the most experienced financial experts with his Ponzi scheme. And it’s the stuff underlying the protocols of China’s great leap forward under the direction of Mao Zedong, which resulted in the deaths of 36 million people from starvation. It’s the stuff of Andrew Wakefield’s fraudulent research that has led to the well-debunked assertion that the measles, mumps, and rubella vaccine causes autism in children. And it’s the stuff of senseless conspiracy theories that compel people to storm their own country’s Capitol Building in hopes of reversing a fair election.
From 10 years of empirical research on the topic and speaking with hundreds of expert bullshit detectors, I’m convinced that all of our problems, whether they be personal, interpersonal, professional, or even societal, are either directly or indirectly linked to mindless bullshit reasoning and communication. Most people are susceptible to the unwanted effects of bullshit because the mental skills that protect them from it do not come naturally. They must be trained. And part of being a good bullshit detector involves recognizing when and under what conditions we are likely to encounter. And that is what my research has been about.

Questions for Petrocelli

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