The EMH Isn't Testable and That's OK - Part II

In Part I, we defined the Efficient Markets Hypothesis and introduced the joint hypothesis problem. I don't want to primarily post on zombie debates, but John Quiggin's book gives me a chance to discuss a little bit about what a lot of modern finance is built on, before I start blogging about whether or not stochastic volatility is a risk factor in a linear factor model (stay tuned!).

I'll let Quiggin start us off with his view:

“But as a string of philosophers of science, being with the late Karl Popper, have shown, a theory that can’t be refuted by any conceivable evidence isn’t really a theory at all…The global financial crisis, along with the earlier dotcom crisis has shown that, on any ordinary understanding of its terms, the efficient markets hypothesis can’t be right…So supporters of the efficient markets hypothesis have sought a redefinition that would make it invulnerable to refutation…This argument in one form or another has been put forward by all the leading defenders of the EMH, notably including Eugene Fama and John Cochrane of Chicago and Scott Sumner of Bentley University.”

Quiggin argues in the chapter that trying to squirm out of irrefutable evidence EMH defenders have changed the theory over time to render it useless. That narrative is completely false. Here is Eugene Fama in 1970 in a seminal paper on the EMH, before he was the “father of modern finance” and was just a young professor trying to sort out the theory, “the theory of efficient markets is concerned with whether prices at any point in time "fully reflect" available information. The theory only has empirical content, however, within the context of a more specific model of market equilibrium, that is, a model that specifies the nature of market equilibrium when prices "fully reflect" available information.”

It’s not nearly as elegantly stated as it is in the previously linked podcast, but that's the joint hypothesis problem in its first formulation in 1970. I am really surprised it isn’t front and center in Quiggin’s account of EMH, because it is certainly front and center in any finance course discussing the testing of EMH. The joint hypothesis problem isn't new, and it isn't something that proponents of EMH have been hiding for the last forty-two years.

Is this a sham? In finance, It's pretty humbling to try to create the "right" theory for prices. The world is complicated and modeling that is hard. How many essential types of risk are there? Can I really model them all? Even the most important ones? What about cash flows? Am I certain I can predict how the growth of the internet and technology will effect firm's various business activities? Is it possible to imagine a world where the dotcom bust doesn't happen, a world with a few more Amazon's, a world where the biotech boom that was so desired actually pays the dividends we dreamed about? Believe me, I'm open to the idea that bubbles can occur. Here is a really good case that the dotcom crash was a classic bubble/mania, but let's admit that the endeavor of diagnosing a bubble even ex post is not simple, much less ex ante. We only observe one outcome of many possible futures.

So I've argued that Quiggin's narrative is wrong. Testing EMH may be impossible, but that isn't something Quiggin discovered. Academics have been discussing the joint hypothesis problem, since the EMH's inception, rather than stuck in a self-erected cell built by constant squirming from critics. In part 3, I'll try to argue all is not lost, if the EMH isn't testable.

Quiggin Responds!

John Quiggin, author of Zombie Economics, graciously engages this post I made in response to his book in the comments. He also points to an interesting and easy to read paper he wrote on the equity premium puzzle. My real critique is that the equity premium puzzle isn't an EMH puzzle it's a macroeconomics puzzle. Let me try to explain the difference.

In Quiggin's book and definition of EMH he is confounding two ideas:

    Efficient Markets Hypothesis - prices fully reflect all available information.

    Market Efficiency - a well functioning market will allocate all resources in the best possible way

The second idea is often strictly defined as the First Fundamental Welfare theorem, which basically says that if you make a bunch of assumptions (that aren't true) like markets are perfectly competitive, markets are complete, no externalities and perfect information, then the market outcome is efficient.  In this case, efficient means pareto efficient, a weak notion that means we can't make one person better off without hurting anyone else.

This confusion explains a lot of odd statements he makes, like, "The Efficient Markets Hypothesis implies that governments can never outperform well-informed financial markets."

The first fundamental theorem does say that (under very restrictive assumptions) and if our notion of improvement is limited to pareto efficiency, but the EMH just says markets adjust in the background.  Let's say there is an negative externality called pollution.  A government may be able to enact a policy to limit pollution and make everyone better off, say a tax on gasoline.  The EMH just says that stocks will adjust to that new policy.  The tax on gasoline will limit the amount of gasoline consumed, so companies like Exxon and BP will see their profits decrease.  People will probably drive less, so Ford's stock will go down.  The EMH just says that security prices will reflect all available information.

The EMH is still not a weak hypothesis.  If we imagine that the government is deciding on whether or not to enact the policy, the market prices must be constantly adjusting to the updating chances that the knew policy will be enacted.  The prices must be the best guess for the properly discounted value of future dividends for every stock in the market, even stocks that will only be barely affected by the law, like a theme park that will lose profits, because it is far out of town and a few less people will want to make the drive.

Digesting Justinian

My last post went after some dumb lessons people were drawing from ancient Rome.  In the spirit of being constructive, here's a better lesson:

So for a long time Rome's legal system had these people called the jurists.  If you were in a lawsuit you would go to a jurist and tell him about your case.  Then he'd write a legal opinion applying the law to your facts (normally favorably), tell you exactly what to plead, etc.  He wouldn't actually argue the case -- advocates like Cicero were for that -- but he'd come up with smart reasons for why you should win, and would grapple in smart ways with any novelties or tough questions of law your case presented.

If a Jurist was particularly smart, his decisions would sort of take on an air of gospel truth, and eventually become law.  And this worked great.  Over time the Romans developed the most important legal system in world history, still the basis of the law in dozens of countries, exactly this way.  But as time dragged on more and more jurists kept writing.  By the middle of the empire, when jurists stopped being a thing, there was a *lot* of gospel truth out there, written by a *lot* of well respected jurists.

So it became a library sciences problem.  And, as they have so often in the past, the library sciences failed civilization.  Romans just didn't have the publishing industry or the filing skills to make sure anyone -- much less hick lawyers out in the provinces -- had access to what every jurist said ever.  So some lawyer in northern France would go on vacation in Spain and come back with a bunch of books he found (authentic? who knows!) from famous jurists.  Suddenly, he's throwing out established legal "facts" no one in the entire province had ever heard before.  Big problem!

So the emperor Justinian fixed all that.  First, he basically pruned the list of people whose writings were considered "canon."  Then, he went through the writings of the people who were left, cutting and pasting, arranging by topic, and throwing a lot of stuff out.  Only what he left in counted as law.  That became the digest, and it's the most important legal work ever in the history of animals.

So what can we learn from all this?  Well, sometimes perfectly good methods for generating law, if left on too long, generate too much law.  And sometimes going through all that big mess of law and throwing out the bad stuff and keeping the good stuff works wonders.

This has a huge bearing on our society.  We don't have jurists, but we do have the common law, and the most unique characteristic of common law legal systems is that judges can make law.  Full stop.  When Americans talk about "the law," they aren't just talking about all the bills passed in all the legislatures, they're talking about every word every appellate judge has said since the 1700's.  And that's a lot of law!

Fortunately, library science has kept up -- who knows where we would be without computers -- but while we are physically capable of managing all that law, you can't help but wonder if all the expense is worth it.  When you hire a lawyer you are paying for him to subscribe to a service that collects and annotates all those cases, paying for him to search through all those cases, and paying for him to try to make sense of all of them and how they affect you.  It ain't cheap!  Multiply that by hundreds of thousands of lawyers and you get a lot of money being thrown after this stuff.

People are cognizant of this  I think, though it's hard to separate complaints that the law is too complicated (in this complex a society, probably inevitable) from the complaint that there is just too much of the damn stuff.  But even though people are aware of it, you almost never hear anyone propose Justinian's solution: let's just throw out a lot of the common law.  People have codified the common law before, but that process, while radical, normally clarifies that anything not intentionally changed in the common law still matters, and normally allows for past common law to interpret the new code, so it's not as radical as what I am suggesting: put together some panels,  decide what cases count and what don't, and move on, the vast bulk of American common law gutted from the system.  Will it be a political process?  Probably.  Will it run into due process and contract clause problems if it tries to be retroactive?  Yup.  Is it still worth doing?  I don't know!  But it's worth thinking about.

I suspect your opinion on the indeterminacy of the law -- how capable the law if of "forcing" outcomes to legal cases on judges and juries -- affects how you think about the Justinian solution.  If you think the law is pretty indeterminate, then all that common law floating around doesn't do much but complicate the process of judges making pragmatic policy decisions.  If you think the law forces decisions on judges, then all that common law floating out there should make decisions more automatic and easy, since so many cases have already been addressed.

Short blogging, I an't good at it.

Interview with Robert Lucas

Noah Smith and Steve Williamson point us to this interview with the famous macroeconomist.

Lucas is not the straw man he's sometimes made out to be.

My favorite bits:

"But the term "Lucas critique" has survived, long after that original context has disappeared. It has a life of its own and means different things to different people. Sometimes it is used like a cross you are supposed to use to hold off vampires: Just waving it it an opponent defeats him. Too much of this, no matter what side you are on, becomes just name calling."

Defending New Keynesian models?

If we accept any version of the Quantity Theory of Money then it seems clear that it does not hold at high frequencies (which is what I think price stickiness means). If we don't accept the Quantity Theory of Money at low frequencies then I guess we should just close up shop. There are some hard unresolved problems to be faced.

Causes of business cycles. This is the first time I've heard any macroeconomist say this explicitly, but it is also my view:

I drew from this the idea that all cycles are probably driven the same kind of shocks. Since I was convinced by Friedman and Schwartz that the 1929-33 down turn was induced by monetary factors (declined is money and velocity both) I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin.

Ed Prescott was skeptical about this strategy from the beginning...He also thought we needed to have some kind of benchmark theoretical model to give us a start...

As I have written elsewhere, I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!

This is beautiful.

Q: If the economy is currently in an unusual state, do micro-foundations still have a role to play?

Lucas: "Micro-foundations"? We know we can write down internally consistent equilibrium models where people have risk aversion parameters of 200 or where a 20% decrease in the monetary base results in a 20% decline in all prices and has no other effects. The "foundations" of these models don't guarantee empirical success or policy usefulness.

What is important---and this is straight out of Kydland and Prescott---is that if a model is formulated so that its parameters are economically-interpretable they will have implications for many different data sets... This kind of cross-validation (or invalidation!) is only possible with models that have clear underlying economics: micro-foundations...This is bread-and-butter stuff in the hard sciences. You try to estimate a given parameter in as many ways as you can..."Unusual state"? Is that what we call it when our favorite models don't deliver what we had hoped? I would call that our usual state.

EMH

I am going to do my own series on EMH.  This is it.

The EMH Isn't Testable and That's OK - Part I

After reading this feisty exchange between Stephen Williamson and John Quiggin, I wanted to address an argument Quiggin raises against the Efficient Markets Hypothesis (EMH). I read the EMH chapter in his book, Zombie Economics, first, just to make sure I was really seeing the strongest form of his point and not some watered down blog version. While there is much in the book I disagree with, I think Quiggin attempts to grapple with his opponents’ strongest arguments. And he’s a first rate economist (top 1% according to this ranking).

What is the Efficient Markets Hypothesis?

Quiggin gives this definition, “financial markets are the best possible guide to the value of economic assets and therefore to decisions about investment and production. This requires not only that financial markets make the most efficient possible use of information, but that they are sufficiently well-developed to encompass all economically relevant sources of risk.” I honestly don’t know what that means. What is an economic asset? Are there non-economic assets? “Best possible guide for who”? Encompassing all risk sounds like a notion of market completeness, but that isn’t a requirement of market efficiency. Market completeness is just the notion that any risk I have can be insured. This is obviously not true; for instance, I think I'll get a PhD, but I might not. I could flunk out. I'd love to buy insurance against that possibility, but I can't. Does that mean IBM’s stock isn’t fairly priced?

I’m going to use a simple definition given by Eugene Fama in this podcast and seminal paper, and since Fama is one of the major foils in the book, that seems especially appropriate. EMH says, “prices reflect all available information.” This obviously leads to the question, what is the “available information”? Fama broke the EMH into three forms, in order to try to encompass the types of tests people were doing at the time (he regrets this, btw). The forms are weak – the relevant information is past prices, semi-strong – the relevant information is all publically available data (financial statements, earnings announcements…), or strong all public and private data. Quiggin is mostly talking about the semi-strong form, which is standard.

We just have to cover the “prices reflect” part and this is really the crux of the issue. Quiggin argues that EMH implies that prices generated by markets are “right” (scare quotes in the original). The only distinction Fama would make is that they are the best guess, but not necessarily correct. Otherwise they would agree on this statement by Quiggin, “the value of an asset is determined by the flow of income it generates over the period for which it is held and its disposal value. This stream of payments can be converted into a current value by a discounting procedure: [at the] “right” discount rate.” I like this statement. To know what the price should be, we need to know its future cash flows and we need to know what rate to discount the flows.

Here is the crux of the issue. In order to know if the market prices are right we need some theory to tell us what the cash flows will be and more importantly, how to discount them. But how do we know if our theory is correct? In order to test our theory, we have to assume markets are efficient and see if our theory matches market prices. This is called the joint hypothesis problem and has been taught in finance courses for a long time.

This problem really should have been central to the chapter (as it is in Finance courses), because every one of the reasons Quiggin gives in refutation of the EMH is subject to the joint hypothesis problems. Stock prices are too volatile. How volatile should prices be? We need some theory. Is the theory wrong or EMH? Quiggin places great weight on the recent financial crisis, and after every market crash there is always lots of clamoring against EMH. But what theory says markets can’t crash?

Quiggin argues that EMH has been redefined in response to criticism to make it unfalsifiable. As such it isn’t science, but a new sham hoisted on you by the finance community. In Part II, I’ll argue at the very least, it’s an old sham :-). And that maybe there is some hope.

The Supreme Court did not Destroy the Roman Republic

This is maybe the worst article I've read on the internet in a month.  The article's argument goes something like this: the supreme court overturned some recent limits on campaign spending, and American campaigns might get more expensive as a result.  The Roman Republic also had expensive campaigns during the first century BC.  Therefor, campaign spending might destroy our republic, as it did Rome.

Lots of problems with that, but the biggest is that campaign spending had very little to do with the fall of the Roman Republic.  The decades before the empire are largely a story of private armies fighting civil wars: First Marius raised a private army loyal to himself and dominated politics, than Sulla did, then Caesar and Pompey did, then they fought with their private armies and Caesar won, then Marc Antony and Augustus took Caesar's private army and killed the people who killed him, then they fought each other.  Finis rei publicae.  And those were just the big names, plenty of other people tried this "raise an army and take over" shtick.  For example, the article mentions Cicero as a dude who hypocritically fought for less campaign spending.  Which I guess he did?  But his most important act as Consul was to put down the Catalinarian conspiracy, a plot to -- you guessed it -- raise a private army and take over Rome.

The Republic fell for a lot of reasons, and I don't want to oversimplify this.  Roman politics at that time was an eddy of factionalism, ambition, and ideology as aristocrats fought demagogues (the optimates vs the populares)  provincials fought citizens (the social wars), and patronage networks fought for dominance (see Cicero's entire legal career).   But at the end of the day the Republic fell because individuals kept raising armies, starting civil wars, and seizing power.  It's just not a story about messy political campaigns --Caesar and the senate didn't fall out over a super PAC-- it's a story about powerful generals with access to loyal veterans and large fortunes jockeying for power.   Unless you have a much lower opinion of our officer corps than the average American, that is not going to be a problem here any time soon.

New Co-Blogger

A proud welcome to this blog's new co-blogger, Charlie Clarke.  Charlie has a masters in economics and is currently working on a PhD in finance, both of which should allow him to contribute a fascinating new "knowing what the hell he's talking about" edge to things.

Pros and Propholactics Pt. 2 -- Health and Safety Regulation

This is a continuation of a series about LA county mandating condom usage in porn.  Part I is here.

Advocates of the rule see it as an obviously correct workplace safety regulation: unprotected sex is dangerous, these people are having unprotected sex on the job, let's protect them.

Except that's not fully convincing.  Some jobs are dangerous -- fishing off the coast of Alaska, building a house, repairing broadcast towers.  People die doing this stuff.  But we let them because our society is not all about maximizing safety.

In life there are risks and there are rewards, and generally we trust tort law and the free market to sort that out.  If someone wants to pay you to do something dangerous, he'll have to pay you more.  If someone is negligent or lies to you to put you in a dangerous situation  you can sue them.  When do we depart from that rule?  Do any of those exceptions apply here?  Let's find out!

Reasons for regulating health and safety:

1. Information overload: Consumers gotta consume, and in the modern economy they are faced with a lot of options.  Of the thousands of restaurants in your city, which are safe?  Which brand of toothpaste is safest?  Is the escalator in this mall dangerous?  Tough to say!  In situations like that, where there are big information asymmetries  some people think it makes sense to protect the ignorant party.  Rather than being paralyzed having to research a hundred restaurants  you can just show up and be pretty confident some official has inspected the kitchen.  Score.

This doesn't really apply in this case.  The porn stars aren't random people who wandered onto a set, this is their profession.  They're aware of the safety precautions that have been taken (mandatory testing), the safety precautions that haven't been taken (no condoms), are comfortable with that mix.

2. Tough Bosses: The "let's just let the free market work it out" rule implies that employees and workers will negotiate the "correct" mix of safety and danger.  A lot of people aren't comfortable with that, and think that employers have some coercive power over employees, maybe because of transactional costs (hard for employees to unite and negotiate as one), maybe because of the market just not being a magical cure-all, whatever.  So the workers want a safety railing and the evil plutocrat says "no!"  Society passes regulations to get them that railing.

This certainly doesn't apply in this case: it's for situations where management and labor are fighting, but teh porn stars oppose this regulation as heartily as the owners.

3. Human Rights: Some things are just wrong and people shouldn't be allowed to do them.  Lots of people think you shouldn't be able to sell yourself into slavery, or work an 11 year old for 12 hours a day in a factory, or whatever.

I don't think this applies here.  Lots of people think you shouldn't be able to sell sex, but no one thinks you shouldn't be able to have sex without wearing a condom.  Condom-less sex is not the sort of act so insulting to human dignity that we want to ban it.

4. Externalities: Management and labor agree that they are causing the right amount of pollution, but maybe the dude downstream for where they are dumping the toxic waste disagrees.  We impose regulations on things that could be seen from a worker-safety perspective -- handling toxic waste -- because we are actually worried about other people -- the civilians downstream.

I don't think this applies here.  Yes, people who have condom-less sex risk contracting and spreading disease.  But that's true of people who are doing it professionally and people who aren't.  If this regulation isn't targeted at protecting porn starts, its protecting everyone, everyone should be willing to live by the same rule (IE, condom-less sex should be banned society wide).

***

So of all the traditional reasons I can think of for workplace safety regulation, none of them seem to apply here.  This looks a lot more like "I know this is a risky job, but it's not crazy risky ("porn star" is not the most dangerous job in America, by a long shot), my boss is taking some reasonable precautions  and I'm getting paid a premium for the danger.  Let's do this."  And in a free market society, that's pretty much how we apportion risk.

Did I miss something?

Pros and Prophylactics Pt. I -- Introductory Post

LA County recently mandated that actors uses condoms in hardcore porn shoots.  So gross and who cares, except porn is a billion dollar industry in LA.  So this matters.

Basically the dispute is safe sex advocates on one side and the porn industry (and, crucially, the porn stars themselves) on the other.  It's a pretty simple argument: "This is basic workplace safety stuff, and promotes safe sex besides."  vs "We already have a vigorous STI testing program that keeps performers safe.  We don't want to go further since using condoms hurts profits, both because dudes are dumb and don't like watching condom-porn and because it increases production costs, since condoms chafe a bit, especially over the super-long sex sessions used on a shoot, and actors and actresses need to spend more time on a shoot resting when they are used."  I strongly suspect the pornographers are right on this one, and I'm going to do a series of blogs explaining why.  I am planning on three posts: why it's a bad idea as workplace safety regulation, why it's a bad idea from a first amendment point of view, and why it's a bad idea from a privacy rights point of view (there should be a better term for the kind of rights I am talking about, but the courts call them privacy rights so I will to).

Crucially, I won't be doing a close cost-benefits analysis of how much this will cost the industry vs. how many people it will save from STIs.  I think that's the most relevant kind of way to figure out the right solution here, but that sort of thing is hard to do.  Suffice to say there are real costs (Vivid pictures tried to go all condom and was losing so much money they had to stop) and real benefits (people won't get sick, duh) involved here.

Click here for part 2 of this series, IF YOU ARE MAN ENOUGH.  Or woman enough.  Or gender-is-a-spectrum enough.

Support the People who are Troops, not the "Troops"

Unicorn in Uniform has a great new post about "supporting the troops" that got me thinking.  Her point is that we shouldn't take "supporting the troops" so far that it just becomes empty praise, a "thank you for your service" as automatic as sneezing, because what good does that do?  She adds that we certainly shouldn't take it to so far that a moment's joke at the troops' expense is a life altering event, because actual servicemen and women don't want that kind of support-the-troops-or-else culture.

I'd take it one step further: we should support the individuals in the military because they are great, not because they are in the military.  Most of the people I know in the military are smart and hard working and funny and thoughtful and conscientious.  In most cases, I don't think that's because they are serving, it's just how they are  (often I know this, because I knew them before they enlisted or got their commission).  The military has been an important road out of poverty for a lot of people I know, but if we gave them a civilian road (better and less costly education options?  More use of professional internships for high schoolers, along the German model?) I think they'd be just as well off.

I feel semi-comfortable generalizing my personal experiences, here.  It's really hard to make a great person at the age of 18, so it makes sense that most soldiers and sailors and airmen and marines were probably pretty awesome from the get go (albeit needing a bit of maturing).  Under this telling, it's more about great people being attracted to a life of service and sacrifice than it is great people being forged by a life of service and sacrifice and fighting lava monsters.  So yes, the troops are impressive people doing a great thing and should be thanked and respected for it, but we should recognize that if this was pre-WWII and we didn't have a large standing military, most of them would still be impressive people doing something great and impressive and charitable for their fellow Americans.  Or, you know, slaves.  Things sucked back then.

Once you separate that, supporting the bad-ass people who are the troops from supporting the troops, two things happen.  1. You are a lot more prepared to encounter the (incredibly small) minority of people serving who suck.  2.  The military, as opposed to the troops, looks less unambiguously good.  The military isn't what made all these great troops we should support.  They were already great.  No, the military is what took all these great, hard working, smart, idealistic people out of the economy that builds things and put them in the economy that blows things up.

Maybe we are blowing up the right amount of things, and if we spent less on blowing things up we'd be less safe, less free, and less able to invest and trade.  Maybe we are spending too much.  But that calculation should be based on how much stuff we want and need to blow up, not on whether we support the troops.  Once we start blowing up or preparing to blow up too much stuff, each extra servicewoman assigned to that task is a major waste, a transformation of one of our great creators into a great destroyer.  And it doesn't do her many favors besides: giving the individuals in the military a robust economy and lots of alternative careers after military service is the single best way to support them, not wasting trillions on military spending.

So support the troops, they're great and we owe them.  But don't let that support affect how you think about military spending.  If we cut military spending and lose 5 combat brigades, that's not thousands of troops hurt; it's 1000s of great people who are going to get a chance to do great things for the civilian economy.

And yes, I realize that is a lot stronger argument at full employment than it is now, in an economy where laid of veterans risk unemployment.  That's just reason 50000  to wait for the economy to improve before cutting spending, on the military or on anything else.

Posting

I am going to try to semi-frequently update this blog.  If you have ideas on what you would like to see me write about, questions, or links you want shared, give me a heads up.

Currently the idea is to cover economic and legal policy.  I have no economics training and my legal training ain't any more special than hundreds of thousands of other lawyers, but I can at least promise to keep the racial epithets to a minimum.

The Fish Call Cliff

Rule of thumb: anyone trying to simultaneously make you scared of both

 1. the fiscal cliff and 2.  not getting the deficit fixed in the next few years

has a bad underlying model of how the economy works.  The "fiscal cliff" is a bunch of tax hikes and spending cuts that get rid of the deficit real fast.  Since the "fiscal cliff" is just sharp deficit reduction, if going off the fiscal cliff is a bad idea right now, by definition sharp deficit reduction is a bad idea right now.

You should also be wary of people who oppose stimulus but support the fiscal cliff. If cutting a lot of government spending and raising taxes is a bad idea right now because it will hurt the economy, maybe lowing taxes and raising spending is a good idea because it will stimulate the economy?  As near as I can tell, if the fiscal cliff is a bad idea it's a bad idea for pretty Keynesian reasons.

That said, it is possible to be worried about both the deficit and the fiscal cliff, but you should expect those people to talk about the deficit as a long term problem we have some time to fix.  If we have to fix it now now now, then the fiscal cliff does that.  If we have some time and if we want to keep spending up and taxes low now to stimulate the economy, then the fiscal cliff is too abrupt and should be avoided.