Thursday, December 6, 2012

Shake, Rattle, and Roll

By Keith McDowell

“What it was, was an earthquake,” to paraphrase a famous 1950s comedy routine about football by the incomparable Andy Griffith. But there was nothing comedic about “the big one” that occurred on 6 April 2009 in L’Aquila, Italy that killed over 300 people. Sadly, the aftershocks of such a major earthquake are never pretty, whether it’s the massive destruction wrought on the infrastructure – the Fukushima nuclear power plant debacle from the 2011 Tohoku quake in Japan being the most notable, the death of innocent people, or the privations of the survivors. But who would have thought that scientists would be in danger from the aftershocks of an earthquake? Yet, such was the case in Italy.

On 22 October 2012 in an Italian courtroom, seven scientists and experts were convicted of manslaughter for providing “inexact, incomplete, and contradictory information” prior to the L’Aquila earthquake. The stunning decision was described by Dan Murphy in The Christian Science Monitor as “a triumph of scientific illiteracy.” Indeed! If not for the truly tragic dimensions of the L’Aquila earthquake, the soap opera in that Italian courtroom would be comparable to the 1633 Catholic inquisition in Rome against Galileo Galilei.

Have we as a world society learned nothing from the advance of knowledge through rational and scientific reasoning? Is civilization doomed to make decisions based on religious dogma, mythology, personal whims, demagoguery, and counterfactual ideas? I suppose one should take solace in the fact that such nonsensical behavior is not limited to America as proven in that Italian courtroom.

So, what are the facts when it comes to earthquake prediction? It’s simple. No one can predict the precise time and location of an earthquake! Yes, we’ve learned a great deal about what causes earthquakes and their behavior. We know how to build structures that can withstand an earthquake, but prediction? Emphatically, no!

In fact, there are many scientists who believe that we will never be able to “predict” the occurrence of an earthquake. And it all begins with the difference between “predicting” and “forecasting.” Do you remember those old jokes about your weatherman? “If there is a 50-50 chance that a forecast will go wrong, 9 times out of 10 it will.”

The story of modeling the weather goes back to the 1960s when Dr. Edward Lorentz introduced “chaos theory” to the world in 1963 and later “the butterfly effect” in 1969. Sensitivity to initial conditions, as “the butterfly effect” is known to scientists, states that a butterfly deciding to flap its wings in China could subsequently lead to a tornado in Kansas. In other words, incredibly small changes at the beginning of a process can lead to radically different end results. Thus, as a practical matter, one cannot precisely predict the time and location of a weather event. The same is true for earthquakes.

But whether it’s the severity of weather events or the magnitude of earthquakes, scientists have developed and are continuing to improve mathematical models that describe the distribution of such events and thereby our ability to “forecast.” What does forecast mean? It means that if we take a long enough span of time that includes a significant sample size of “events,” then we know that those events will fall on the established probability distribution. Thus, we can “forecast” that there is a 10% probability (or whatever the actual percentage is) that an earthquake of magnitude 7.0 will occur in Los Angeles in this century, but cannot “predict” exactly when and where it will occur.

Folks, that’s the truth of the matter. And convicting scientists for their inability to “predict” an earthquake or meteorological event is dumb and dumber – or better said: scientific illiteracy.

But the story doesn’t end with natural events driven by Mother Nature. How about the economy and financial systems? Yep, scientists, mathematicians, and economists have been at work in that sphere as well. Believe it or not, there is a field of study known as “econophysics” or the “physics of finance.” The University of Houston Department of Physics even has a subdivision devoted to such work. Quoting from their webpage, econophysics is “the study of dynamical behavior of financial and economic markets” using the “vast amount of market data” that “has become available allowing empirical studies of market behavior to be performed.”

And exactly what have econophysicists learned? Probably the most important fact is that we now have a very clear picture of the probability distribution for excursions or fluctuations in markets. Technically, it’s known as a “fat tail” distribution where the probability for a large fluctuation decays as the fourth power of the size of the fluctuation. In simple terms, large fluctuations are much more probable than one might have thought. Does anyone remember 2009?

Evidence suggests that one can improve incrementally the market performance of a portfolio by making use of our enhanced understanding of markets as a nonlinear dynamical system. Talk about the possibility for innovation and entrepreneurship! Perhaps you should call your broker or financial planner and see if they are up-to-speed on “fat tail” distributions and econophysics. It’s for certain that Congress is not.

And that brings us to the “fiscal cliff” debate and the truly ridiculous behavior of many in Congress to ignore some basic elements of truth from economic data analysis – especially those who hold to the tea party platform. Like many people, I obtained a copy of Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, the report from the Congressional Research Service by Thomas L. Hungerford dated 14 September 2012. Here is what Hungerford said in his concluding remarks:

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.

Obama is right; the GOP is wrong! Taxing the top 2% will help reduce the deficit but not hurt the recovery. Do we as a nation really want to follow in the footsteps of those jurists in Italy who practiced scientific illiteracy – or in our case, economic illiteracy? As Paul Krugman pointed out in an opinion piece in support of Obama’s position, it’s simple economic math. The cuts in spending laid out by the GOP such as raising the Medicare age don’t add up. And as to closing tax loopholes, do we really want to eliminate mortgage and charitable deductions, two of the largest components of our tax deduction system? For those who sincerely want to understand fully the dimensions of the economic mess we are in and what to do about it, read the book Beyond Outrage by Robert Reich.

And don’t forget, the “fiscal cliff” is not just about raising again the tax rate for those making more than $250,000. It’s about budget sequestration and the evisceration of scientific research in America. It’s about killing the goose that lays the golden egg of innovation, our passport to global competition and economic prosperity.

As a nation, we must govern ourselves in a balanced manner consistent with our Constitution using sensible rules of engagement and a decision process based on verifiable and known information. We cannot tolerate any other approach.

It’s time to shake, rattle, and roll the members of Congress and tell them to get on with the business of governing America. 

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