Things to Read at Dinnertime on November 19, 2013

WCEG: Things to Read at Dinnertime on November 19, 2013##

Must Reads:

1. Simon Johnson: It’s Fed Versus Moody’s for ‘Most Wrong’ Crown: “Who was more wrong in the run-up to the financial crisis of 2008: the Federal Reserve or Moody’s Investors Service? This isn’t an academic question; both organizations are still hugely relevant to shaping the way we see our financial system and the risks it contains. And both are now apparently underestimating the dangers again. To be fair, the thinking at both places has shifted, but not anywhere close to enough. The reason for this is simple: The incentives that encouraged their misperceptions before 2008 remain in place today…”
2. Joshua Angrist et al: Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited: “House Committee on Banking and Currency, March 18, 1935: Goldsborough: ‘You mean you cannot push a string…’ Eccles: ‘That is a good way to put it: one cannot push on a strong…. Beyond creating an easy-money situation through reduction of discount rates and through the creation of excess reserves, there is very little if anything the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation, monetary action can very effectively curb undue market expansion…'”

Should-Reads:

1. cingraham: Ideology and party unity in the House, 1857-2011
2. Wolfgang Munchau: Why Europe needs to try unconventional policy: “Last week’s dreadful data for the eurozone tell us that a long period of low economic growth and excessively low inflation lies ahead…. What should the European Central Bank do now?… If Mario Draghi, the ECB president, wants to make a real difference, he should contemplate quantitative easing…. QE has the advantage that it is legally beyond reproach… a pure monetary policy operation… cannot be mistaken for an illegal monetisation of sovereign debt…. Would QE work? Once you hit the zero limit on interest rates, QE is the most effective policy instrument…. And if you are worried about the impact of QE on financial stability, you might want to consider the impact of a long depression…”
3. Daniel Altman: Predicting the Economic Future Through Convergence: China: “So economists re-examined the theory of convergence… countries’ living standards could converge in the long term, but only if they had similar economic foundations… deep factors whose importance was easily perceptible yet hard to quantify…. There are still vast differences between China and these wealthier economies that are likely to hold China back…. Two factors… particularly important… are openness to trade and the ease of starting a business (Aghion and Howitt 2009). China has done much to open its markets since Mao’s death, but it still has a long way to go…. When it comes to opening a business, China ranks even further behind…”
4. Paul Krugman: The New Keynesian Case for Fiscal Policy: “Much of the academic profession decided more than 30 years ago that… what we needed was an equilibrium model of the business cycle. By the time the utter failure of the equilibrium project became apparent, you had a whole generation of economists who knew that Keynesianism of any form was nonsense based on what they had heard somewhere, so they didn’t read any of the stuff… and were flabbergasted to learn that there was in fact an extensive New Keynesian literature…. So some props to John Cochrane for at least trying to catch up. Unfortunately, he’s still working from the baseline assumption that people like me (and Mike Woodford, whom he really should be reading) must be kind of stupid, and so he can’t be bothered to actually figure out how the models work. At least I think that’s what’s happening…. Cochrane’s latest seems to be driven by a confusion between the effect of fiscal expansion on GDP… and… on consumption…. I won’t try to figure out the roots of this failure of reading comprehension…. This isn’t hard–at least it shouldn’t be for anyone with a graduate training in economics. Just try actually reading what New Keynesians write.”
5. Joe Gagnon (2009): Low Interest Rates May Be Here To Stay: “One of the most striking features of today’s economy is that interest rates… are at 50-year lows…. ‘Normal’ interest rates are likely to be lower than most people expect…. Investment demand has declined in the advanced economies… slower population growth… the winding down of the productivity ‘catch-up’… lower marginal tax rates and declining rates of inflation… the governments of many Asian economies have funneled unprecedented amounts of capital into advanced-country financial markets in an effort to hold their currencies down and maintain export-led growth… commodity exporters, especially oil exporters, saved a high fraction of their revenues…. What are the prospects going forward?… We need to craft a regulatory framework that enables our financial system to operate safely in an environment of low interest rates…”
6. Mark Thoma: How Economists Can Tame Irrational Exuberance: “Is Shiller correct? Should economists drop the assumption of rational expectations, at least in some instances?… The rationality assumption is reasonable in some cases…. For monetary policy, where the Fed goes out of its way to make its policy rule known, and in financial markets where the participants study the markets as part of their jobs and there are considerable amounts of money on the line, perhaps those conditions are approximated. But does anyone understand what policy rule can be used to anticipate fiscal policy actions (who expected Congress to cut spending in a recession?), and does the typical household sufficiently understand how policy shocks affect the economy?”

Things You Should Be Aware of:

Jared Bernstein: Inequality’s Roots: Beyond Technology | Max Chafkin: Udacity’s Sebastian Thrun, Godfather Of Free Online Education, Changes Course | Joseph E. Gagnon: Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis | James Surowiecki: Valuing the Free Digital Economy | Paul Krugman: Bubbles, Regulation, and Secular Stagnation | Jay Inslee, Steve Beshear and Dannel P. Malloy: How we got Obamacare to work | Lincoln’s Gettysburg Addresses |