Things to Read on the Morning of December 15, 2013

Must-Reads:

1. Jared Bernstein: Inequality, Ezra, Paul, and the Unifying Theory (and Evidence): “There’s an interesting back and forth going on…. The President recently averred that inequality is the defining challenge of our time.  Ez[ra Klein] argues that perhaps growth and unemployment better represent that challenge. Paul [Krugman] offers four strong reasons why, no, inequality is a fine candidate…. Well, here’s a unifying theory: demand-side policies that that significantly lower unemployment will also reduce inequality…. Over the period when labor markets were tight 2/3′s of the time, incomes grew together.  Over the period when labor markets were tight 1/3 of the time, they grew apart…. So we don’t have to choose whether to fight weak demand or high inequality.  Fight the former and you’ll help reduce the latter. And yes, it’s a bit of a strange discussion given that the political system is fighting neither, though that’s not entirely true.  Sub-nationally, there’s stuff going on here…”

2. Chang-Tai Hsieh et al.: The Allocation of Talent and U.S. Economic Growth: “In 1960, 94 percent of doctors and lawyers were white men. By 2008, the fraction was just 62 percent. Similar changes in other highly-skilled occupations have occurred throughout the U.S. economy during the last fifty years. Given that innate talent for these professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage. This paper measures the macroeconomic consequences of the remarkable convergence in the occupational distribution between 1960 and 2008 through the prism of a Roy model. We find that 15 to 20 percent of growth in aggregate output per worker over this period may be explained by the improved allocation of talent.”

3. Josh Marshall: Paper Tiger, Past Their Prime, or Something Else?: “I’m generally of the opinion that ‘the Tea Party’ is… a rebranding of… the base right-wing of the GOP…. But… I think we should speak of two ‘Tea Parties’. There’s there’s that 20% or so of the electorate that is right-wing and moving further right, deeply hostile to President Obama and generally feeling they’re trying to hold their ground in what is likely a losing fight against the transformation of America by immigrants, urban values, ‘socialism’ and the rest. Then you’ve got… Club for Growth, FreedomWorks and Heritage Action. These are each groups funded by extremely wealthy donors and… almost exclusively driven by enforcing tax cuts, anti-regulatory politics and laissez-faire economics. As Boehner suggested, they don’t even seem particularly focused on policy anymore but rather on keeping politics maximally polarized and aggrandizing their own power and fundraising ability. I don’t go so far as to say they’re wholly distinct or unconnected. The two groups have a common interest in maintaining a climate of political confrontation and crisis. But for not altogether similar reasons.”

Should-Reads:

1. Rex Nutting: Not just too big to fail, banks are too big. Period: “Finance is so big that it’s literally more trouble than it’s worth…”

2. Simon Wren-Lewis: mainly macro: The UK recovery and the pessimists’ refrain: “UK GDP per person since 1950… past recessions have essentially turned out to be temporary deviations from trend growth…. There are two arguments that this time will be different: what I will call the pessimists’ refrain. The first is that we were fooling ourselves before the recession, because in reality we were ‘living beyond our means’…. The second is that since 2008/9 productivity has stalled because the financial system in the UK has been broken. I call these ‘refrains’, because they usually come with a repeated message: we should stop stimulating the economy, because if we try to get back the ground we lost, we will fail and instead generate inflation…. Organisations like the OECD and IMF now calculate that in 2007 output gaps were large and positive…. That is not what these organisations were saying at the time. In the June 2008 Economic Outlook, the equivalent numbers were 0.4%, 0.0%, 0.4% and 0.2%…. This change of view on output gaps, where 2007 goes from balance to a significant boom, is largely inevitable given the way the OECD and IMF calculate these numbers…. Given these uncertainties, two implications for policy seem clear. First, we should stimulate demand until there are clear signs of overheating in both the goods and labour markets…. Second, to the extent that we do not recover the ground that we lost in the recession, the costs of the financial crisis are even larger than we thought. This suggests we must do something to make the economy less dependent on the behaviour of a small number of large UK banks…”

3. Tim Harford: The gross distortions of GDP: “As the economist Diane Coyle points out in her forthcoming book GDP: A Brief But Affectionate History, the idea that GDP would measure wellbeing was sidelined in the 1930s. Simon Kuznets produced the first serious estimates of US GDP in 1934, and wanted to adjust his calculations to reflect ‘the elements which, from the standpoint of a more enlightened social philosophy than that of an acquisitive society represent disservice rather than service’. It was a political battle that Kuznets lost…. Financial services… according to the UK’s national accounts… grew at the fastest rate on record in the fourth quarter of 2008…. GDP measures the price paid for goods and services, but many valuable digital services are free or cheap. Brynjolfsson and co-author JooHee Oh reckon that every year consumers in the US are enjoying an extra $100bn of services online they don’t have to pay for…”

4. Paul Krugman: TPP and IP, A Brief Note: “Dean Baker takes me to task over the Trans Pacific trade deal, arguing that it’s not really about trade — that the important (and harmful) stuff involves regulation and intellectual property rights. I’m sympathetic to this argument; this was true, for example, of DR-CAFTA, the free trade agreement with Central America, which ended up being largely about pharma patents. Is TPP equally bad? I’ll do some homework and get back to you.”

And:

• Nicholas Carlson: Tim Armstrong, Patch, And AOL
• Stanley Fischer (1977): Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule
• J. Bradford DeLong (2000): The Triumph of Monetarism?

Matthew Yglesias: Music streaming subscriptions: Water/diamonds paradox explains why they’re hard to sell |
Greg Mankiw and Company Do Good on Cap-and-Trade (from 2004) | Matthew Yglesias: Ten theses on growth, employment, and inequality | Jason Sattler: Early Medicaid Success Is A Victory Against Inequality | Dean Baker: Ezra Klein Misses the Mark: Inequality and Unemployment Are the Same Problem | Robert Waldmann: Angry Bear » Neo-Paleo-Keynesians Krugman and DeLong |

Should Be Aware of:

1. David Beckworth: Macro and Other Market Musings: The Wrong Debate: Helicopter Drops vs. Quantative Easing: “We should not be surprised that the Fed’s QE programs have not packed more of a punch. U.S. monetary authorities have clearly indicated the programs are temporary. (QE3, though, has added some permanency with its data-dependent nature and appears to have offset much of the 2013 fiscal drag.) We should also, then, not be surprised that Abenomics–which has signaled a permanent expansion of the monetary base–is doing so much better than the original Bank of Japan QE program of 2001-2006. Finally, we should also not be surprised as to why FDR’s 1933 decision to go off the gold packed such a punch. It permanently raised the monetary base. All of these experiences paint a picture of the relationship between the expected permanency of monetary base injections and aggregate demand growth…”

2. Jon Stewart: The Daily Show Takes on Fox’s War on Christmas: ‘S00t’s Getting Weird Edition’

3. Mark Kleiman: Journalistic query: Who got hurt in Ft. Lee?: “When a politician calls a scandal involving himself ‘sensationalized’, you know he’s in deep yoghurt. When he says ‘mistakes were made’, the passive voice is a tell for near-panic. When he starts firing subordinates, that means he knows he’s near the edge of the cliff. And when he says he wants to ‘turn the page’, it’s a good bet the story is far from over. The New York Times story on the Chris Christie/Ft. Lee gridlock story includes all four of those markers of a major affair in the making. For those of you joining us late, the background is that the Mayor of Ft. Lee, NJ, a Democrat refused to endorse Gov. Soprano for re-election, and suddenly, without warning, two of the three lanes on the on-ramp from Ft. Lee to the George Washington Bridge were closed during the first four days of school in September, gridlocking the city for four days. Fortunately, the mayor doesn’t seem to own a horse. See the scorching email from the Executive Director of the Port Authority to his subordinates unearthed by the Wall Street Journal. The punchline is that the Governor wants to know whether Ft. Lee should permanently lose access to the bridge, which seems to be a not-too-subtle way of telling Ft. Lee officials that even worse things could happen to them if they get too friendly with investigators.”

And:

• Robert Waldmann: A Dynamic Macroeconomic Model with Downward Nominal Rigidity
• James Forder: Academic Profile: Economists on Samuelson and Solow on the Phillips curve | Friedman’s Nobel Lecture reconsidered | The historical place of the ‘Friedman-Phelps’ expectations critique |
• David C. Wheelock (2002): Conducting Monetary Policy Without Government Debt: The Fed’s Early Years

Patrick Foye: Fort Lee, NJ | Rick Perlstein: Professors to Grad Students: Focus on Studies, Not Wages |