Essence Of Decision by Ben Hunt, Salient Partners
The essence of ultimate decision remains impenetrable to the observer — often, indeed, to the decider himself.
? John F. Kennedy (1917 – 1963)
I have found that the best way to give advice to your children is to find out what they want and then advise them to do it.
?Harry Truman (1884 – 1972)
As far as I was concerned, his decision was one of non-interference — basically, a decision not to upset the existing plans.
?Lt. Gen. Leslie Groves (1896 – 1970), commanding officer of the Manhattan Project, discussing Truman’s okay to drop atomic weapons on both Hiroshima and Nagasaki.
“Ah,” she cried, “you look so cool!”
Their eyes met, and they stared together at each other, alone in space. With an effort she glanced down at the table.
“You always look so cool,” she repeated.
She had told him that she loved him, and Tom Buchanan saw.
? F. Scott Fitzgerald, “The Great Gatsby” (1925)
And that was the end of the party. When Tom Buchanan saw.
|Lear:||Create her child of spleen, that it may live
And be a thwart disnatur’d torment to her!
Let it stamp wrinkles in her brow of youth,
With cadent tears fret channels in her cheeks,
Turn all her mother’s pains and benefits
To laughter and contempt, that she may feel
How sharper than a serpent’s tooth it is
To have a thankless child!
|? William Shakespeare, “King Lear” Act 1 Scene 4 (1606)|
|Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.
? Jon Hilsenrath, “The Great Unraveling: Years of Missteps Fueled Disillusion with the Economy and Washington” (August 26, 2016)
|John Hale:||Theology, sir, is a fortress; no crack in a fortress may be accounted small.|
|? Arthur Miller, “The Crucible” (1953)|
Few of us can easily surrender our belief that society must somehow make sense. The thought that the State has lost its mind and is punishing so many innocent people is intolerable. And so the evidence has to be internally denied.
The structure of a play is always the story of how the birds came home to roost.
That’s a very good question. I don’t know the answer. But can you tell me the name of a classical Greek shoemaker?
? Arthur Miller (1915 – 2005)
That last, one of my all-time favorite quotes, was in response to a shoe manufacturer who asked why Miller’s job should be subsidized while his was not. Miller’s finest accomplishment: when McCarthy and crew forced him to testify in their Communist witch hunt, he refused to name names. Miller was a leftie and a huge ego. And a freedom lover. Imagine that.
Yet each man kills the thing he loves
By each let this be heard
Some do it with a bitter look
Some with a flattering word
The coward does it with a kiss
The brave man with a sword
? Oscar Wilde, “The Ballad of Reading Gaol” (1898)
We’ll get the kiss, not the sword. Don’t know when, but it’s going to kill this market that the Fed loves.
In 1969, Graham Allison published an academic paper about the Cuban Missile Crisis, which he turned into a 1971 book called Essence of Decision. That book made Allison’s career. More than that, the book provided a raison d’être for the Kennedy School of Government at Harvard, which — combined with Allison’s fundraising prowess — transformed a sleepy research institute into the most prominent public policy school in the world.
The central idea of Essence of Decision is this: the dominant academic theory to explain the world’s events is a high-level, rational expectations model based on formal economics, a theory that ignores the impact of bureaucratic imperatives and institutional politics. If you look at the Cuban Missile Crisis through all three lenses, however, you get a much better picture of what actually happened in October 1962. In fact, the more you dig into the Cuban Missile Crisis, the more it seems that the actual people involved (on both sides … Allison wrote a follow-up edition in 1999 when Russian archives opened up post-Gorbachev) made their actual decisions based on where they sat (bureaucracy) and where they stood (internal politics), not on some bloodless economic model. Publicly and after the fact, JFK and RFK and all the others mouthed the right words about geopolitical this and macroeconomic that, but when you look at the transcripts of the meetings (Nixon wasn’t the first to tape Oval Office conversations), it’s a totally different story.
Allison’s conclusion: the economic Rational Actor model is a tautology — meaning it is impossible to disprove — but that’s exactly why it doesn’t do you much good if you want to explain what happened or predict what’s next. It’s not that the formal economic models are wrong. By definition and by design, they can never be wrong! It’s that the models are used principally as ex-post rationalizations for decisions that are actually made under far more human, far more social inputs. Any big policy decision — whether it’s to order a naval blockade or an air strike on Cuba, or whether it’s to drop atomic bombs on Hiroshima AND Nagasaki, or whether it’s to raise interest rates in September or December or not at all — is a combination of all three of these perspectives. But for Allison’s money, we’d do better if we focused more on the bureaucratic and political perspectives, less on the rational expectations perspective.
Allison is writing this in 1969! And here we are, almost 50 years later, still consumed by a theology of formal economic models, still convinced that Fed decision-making can be explained or predicted by our armchair analysis of Taylor Rule inputs. From an anthropological perspective, it’s pretty impressive how the high priests of academic economics have expanded their rule. From a human perspective, it’s awfully depressing.
What follows is my analysis of the Fed’s forthcoming decision on interest rates from a bureaucratic and an internal politics perspective. Seen through these lenses, I think they hike. Maybe I’m wrong. These things are always probabilistic shades of gray, never black and white. But what I’m certain about is that the bureaucratic and internal politics perspectives give a different, higher probability of hiking than the rational expectations/modeling perspective. So heads up.
First the bureaucratic perspective.
What I’m calling the bureaucratic perspective, Allison calls the “Organizational Behavior” perspective. His phrase is better. It’s better because entities like the Federal Reserve are, of course, large bureaucracies, but what we’re trying to analyze here is not the level of do-nothing inertia that we usually associate with the word “bureaucracy”. What we’re trying to analyze is the spirit or culture of the organization in question. What is the institutional memory of the Fed? What do personnel, not just the Fed governors but also the rank-and-file staffers, believe is the proper role of the institution? Most importantly, how do these personnel seek to protect their organization and grow its influence within the