Saturday, January 19, 2013

Economic Storytelling

Near the end of President Obama's first term, he commented that "When I think about what we've done well and what we haven't done well, the mistake of my first term -- couple of years -- was thinking that this job was just about getting the policy right. And that's important. But the nature of this office is also to tell a story to the American people that gives them a sense of unity and purpose and optimism, especially during tough times." Junot Diaz wrote in the New Yorker that
It has always seemed to me that one of a President’s primary responsibilities is to be a storyteller. We all know the importance of narratives, of stories; they are part of the reasons our brains are so damn big. We need stories, we thrive on them, stories are how we shape our universe. Tolkien could have been talking about the power of stories when he described his One Ring: stories rule us, they find us, they bring us together, they bind us, and, yes, they can pull us apart as well. If a President is to have any success, if his policies are going to gain any kind of traction among the electorate, he first has to tell us a story. 
All year I’ve been waiting for Obama to flex his narrative muscles, to tell the story of his presidency, of his Administration, to tell the story of where our country is going and why we should help deliver it there. A coherent, accessible, compelling story—one that is narrow enough to be held in our minds and hearts and that nevertheless is roomy enough for us, the audience, to weave our own predilections, dreams, fears, experiences into its fabric.
Not only the President, but also members of the Fed, act as storytellers. The word "story" is used 34 times in the January 30-31 Federal Open Market Committee (FOMC) transcripts and a total of 82 times in 2007 FOMC transcripts.

The committee members clearly recognized the importance of providing a narrative to the public. Mishkin said that "We need to tell a story, a good narrative, about [the forecasts]. To be understood, the forecasts need a story behind them.  I strongly believe that we need to write up a good story and that a good narrative can help us obtain public support for our policy actions—which is, again, a critical factor." Similarly, Kohn said that "the story we tell, the narrative, is as important as, if not more important than, the particular numbers that we give out.  It’s really the story that people use to inform their own forecasts of the future, to judge how events are unfolding relative to our expectations, to understand which aspects of the economic environment we’re really paying most attention to, and therefore to help predict."

At times, however, the FOMC had difficulties knowing what story to tell themselves, let alone the public. Here are a few excerpts from the January meeting:

MR. STOCKTON.  At the time of the last FOMC meeting, we were feeling as though the  incoming spending data were coming in pretty darn close to our expectations and were pretty consistent with our story about entering a period of below-trend growth.  As we noted, and President Moskow quizzed us about, the big fly in the ointment with respect to our story was the labor market and its ongoing strength.

MR. STOCKTON As Larry said, even given the overall dimensions of the housing shock, we’ve been
encouraged about our story of stabilization.  But I remember that, as we went into the investment
shock earlier in this decade, we just didn’t have enough imagination about how bad things could
get, and we kept thinking that we were seeing signs of slowing or stabilization, that the new
technology was still great, and that there should be reasons or underlying motivation for investment.

MS. PIANALTO For the most part, the intermeeting data have been favorable for the manufacturing sector.  The industrial production numbers, for example, have been strong, but manufacturing employment remains flat. The usual story that makes sense of these disparate trends is the continuing strength in manufacturing productivity.  But I’d like to mention another element in the picture—others have mentioned it this morning—and that’s the skills mismatches.

MS. PIANALTO placements are up 17 percent this year, the strongest showing since 2001.  The story is that relatively high profits and good business prospects
are driving up demand.

VICE CHAIRMAN GEITHNER We see the same basic story that the Greenbook does in support of continuing expansion going forward.

MR. KROSZNER We have good short-term stories about how the slowdown in energy prices in the
second and third quarters and some other temporary factors with respect to owners’ equivalent
rent could be bringing down inflation.  But when we consider a longer period and try to look at
the systematic data, we don’t see those kinds of relationships.  Are we just in some sort of regime
shift?  Are those correlations not very good because we just haven’t had a lot of variation in the
data over the past ten to twenty years, and so those forces are actually there, but we just find it
very difficult to pull them out econometrically?  For me that is a puzzle, to be able to tell a short-term story with each of these pieces, but when I go to the staff and ask, “Well, what is the
systematic evidence on it?” they say, “Well, it really isn’t there.”  That is a bit disturbing for me
in trying to figure out where things are likely to go.

MR. REIFSCHNEIDER...consider one important communication task, the telling of the central story of the outlook...Distilling an informative message from multiple forecasts is difficult, even if those forecasts provide a considerable amount of detail about the outlook.  In fact, it is an open question as to whether it would always be possible to craft a central narrative that would command the consent of a majority of the Committee, given the diversity of your views...Telling the central story would remain difficult if, after settling on, say, a common path for oil prices, you still disagreed markedly about its economic implications.

MS. YELLEN Given the diversity of views, it’s fair to say that in most meetings, no unified forecast or forecast story even exists, and I don’t see how participants who fundamentally disagree could, if we tried to produce a unified forecast, speak in public about the economy without revealing those differences... One way to expedite the preparation of the narrative is for all of us before the meeting to share our individual forecasts along with a brief written story explaining them.

MR. KOHN ... You could tell a coherent story around the central tendencies.  Sometimes we had to use a little imagination, but it wasn’t really incoherent.  [Laughter]  I think that Chairman Bernanke demonstrated this in his last two testimonies—to take the central tendencies as we submit them and tell a pretty good story that’s helpful to the public.

MR. BARRON I believe it is imperative that any forecast be accompanied by a story to support the
outlook... Numbers without the story would be analogous to asking a doctor to treat a patient by seeing only the skeleton.


Steve Roth said...

Nice post, Carola. This goes to the crux of how we determine causation. First you expect to see correlation, or else you tend to presume no causation. But if there is correlation, the only way to really convince re: causation is to tell a coherent story about the mechanism, and how it works.

We feel confident that the sun will rise in the east every day not just because it has always done so, but because we have a cogent, coherent, convincing, and comprehensive story about gravity, momentum, etc.

Wrote this up a bit here:

Carola Binder said...

Thank you for that link. I like what you wrote about the difference between science and engineering. I went to Georgia Tech intending to become an engineer, which seemed like the natural thing to do since I was good at math. But my real lifelong passion has been stories, and I think that is why I am becoming an economist instead. I think studying economic history is also helpful in learning to look for coherent mechanisms that are convincing about causation.

Unknown said...

I invite you to have a look at If You're So Smart: The Narrative of Economic Expertise (U of Chicago Press, 1990) and then Knowledge and Persuasion in Economics (Cambridge U Press, 1994).

Unknown said...

Sorry, I didn't mean to be Unknown. I am, Deirdre McCloskey, and wrote the two books on the narrative and the philosophy of science relevant to economics.

Carola Binder said...

Professor McCloskey, thanks, I look forward to reading those. I enjoyed reading your work on the enclosure movement.

MichaelErard said...

How about a book on the economics of narrative expertise? said...

Sociologists have also been studying narrative and economic policymaking. Two excellent examples using FOMC minutes are Greta Krippner (2007) "The Making of US Monetary Policy", and Abolafia (2010) "Narrative Construction as Sensemaking: How a Central Bank Thinks."

Claudia said...

Carola, I am not sure how broadly this generalizes, but stories and narratives are an important piece of Fed forecasting. I am sure you're familiar with work by the Romers and others that take this narrative approach. See a new NBER WP by Dominguez and Shapiro in this style. One reason for stories is we all know with real time forecasting that the numbers will be many moving parts, revisions ahead to focus on numbers. Stories can fit a wider range of numbers, though there are limits. Changing stories to keep up with a quickly changing economy is no easier than getting models to forecast turning points. And it may even be harder. It's a lot more work to change your story about how the world works than to change some numbers. But you can see in the FOMC minutes over the crisis that the story did evolve. Glad you are blogging on the transcripts, much interesting material.