I often wonder how much our view of political institutions is shaped by Hollywood films. For instance, when you look at various times that President Trump got into hot water, they were often occasions when he seemed to assume that things in government are done the way they are portrayed in the movies.  He didn’t seem to understand that the President is not a king, and that certain procedures must be followed.

Spying is an almost perfect subject for a Hollywood film. Alfred Hitchcock liked The 39 Steps so much that he directed three versions of the same basic story (most famously, North By Northwest.)  But spying is usually much more boring than the way it’s portrayed in films.

Is spying actually important? And is spying something we should be worried about? (Those are two different questions.) I don’t know enough about the subject to have a firm opinion, but I suspect that spying is overrated as a problem, at least during peacetime.

David Beckworth has a podcast with Gerard DiPippo discussing a recent story about Chinese spying on the Fed. 

Beckworth: I got a kick out of the one part where they said the modeling techniques were shared with a Chinese and as anyone who follows the Fed knows, the Federal Reserve – US model, FRB/US, is kind of an old school model with thousands of equations. If that’s the model they shared, and the thing is, you can actually get that model yourself. You can download it from the Fed’s website.

Beckworth: And there are lots of places that have modeling techniques. I mean, there’s a great place in Germany at the Institute for Monitoring Financial Stability, and they have a macro-economic model database. They literally go out and collect all these different DSGE models from all around, from papers, and they put them together and you can run simulations there. The Chinese could go to this website and run the simulations for themselves. I found it humorous that they got a model, but overall, again, just not a big sense of, “Wow, they got this information. Now we’re in trouble.” It was more of a, “it’s unfortunate, we need to do a better job to prevent it,” but it’s not like they’ve sold our secrets to nuclear weapons or stealth technology or something like that.

DiPippo: Yeah. I think that’s right. I mean, the Fed again is really transparent. A lot of their research is published. Internal deliberations are sensitive and you’re right that, in theory, if you had access to that, you could essentially front run the Fed and make some money in the markets. I honestly would be surprised if that’s the Chinese motivation here. I don’t think the PBOC or generally the Chinese government is all that sophisticated of an investor, and that’s not what they’re looking for. And the report doesn’t really even suggest that. It seems like they just want more general information on what the US is thinking. And the broad mandate for all Chinese collectors is just figuring out what is the US going to do next, right? And especially with China, but not limited to that. So again, not surprising they’re doing this, but my worries are in no way higher today than they were yesterday, from reading this report.

Beckworth: Yeah. I just listened to a podcast today with Bill English and he was a former head of the monetary affairs division. And he talked about how over time, if you look at the members of the FOMC, how their information gathering processes change, it used to be they would just read staff reports from the Fed staff at the Federal Reserve. But now they go lots of places. They go to Twitter, they go to blogs, they read investment notes. And so, in a sense, they’re also searching for information. And if the Chinese really wanted to know what they’re thinking, just go through the open access, public data at the FedWatch, all the stuff out there that you and I follow on a regular basis. It’s not as if there’s some secret knowledge that’s hidden at the Fed that is just earth-shattering and is going to change the world.

So it seems like a big non-story.  The theft of macro computer models seems almost comical—maybe we are tricking the Chinese into repeating our mistakes.  

Of course the Chinese do lots of other types of spying as well.  They undoubtedly steal quite a few trade secrets from the US and other developed countries, which is much more important than the spying on the Fed.  But in my view it’s still not something we should be worried about.  (By “we” I mean the public as a whole—if I were the company losing the secrets I’d certainly be upset.)

If I were the Chinese or the Russians, I’d be much more worried about US spying than I am about Chinese or Russian spying on us.  That’s because the US is already something of an open book.  Here’s DiPippo:

DiPippo: I mean, look, in general, as someone said earlier, it’s a case of a fairly closed system trying to spy on an open system as we are. And in an open system, it’s just much easier to get information. And I think it’s harder to actually interfere with policy because there are so many others trying to do so as well. And we know what those vectors are. 

Ukraine’s government should have been putting more effort into spying on Putin, so that it wasn’t caught off guard by the Russian invasion.

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