Month: June 2014

Brink Lindsey: Why Living on the Dole is Bad for You: “I worry that a U[niversal ]B[asic ]I[ncome] would further encourage mass idleness…

…a serious and worsening social blight among the less educated and less skilled, I favor instead social policies that promote engagement in the work force… through wage subsidies for low-skill work. Flanigan says this makes me a paternalist…. I don’t think the paternalism charge really gets us anywhere…. The purpose of both a UBI and wage subsidies is to help people…. In one sense, then, both policies are paternalistic…. Viewed from another angle, though, neither policy is properly considered paternalistic. Paternalism, after all, is about reducing people’s choices for their own good. But either a UBI or wage subsidies would expand the choices…. The great virtue of a UBI is its directness and simplicity… more helpful to the disadvantaged than the patchwork of frequently intrusive, infantilizing, bureaucratic, and wasteful means-tested programs…. If I could wave a magic wand and replace the policy status quo with a UBI, I would do so. That said, my reading of the available evidence convinces me that a social policy that channels benefits through work and thereby encourages paid employment has important advantages…

Should-Reads:

1. Jeffrey Frankel: Emerging and developing countries should target nominal GDP growth: “In the 1980s, major advanced countries tried the money supply. After the monetarist approach failed, some switched to targeting the inflation rate. But they repeatedly missed their targets…. The problem with these approaches to monetary-policy targeting is that even though a particular numerical target may be reasonable when it is set, subsequent unexpected developments often make the target hard to live with. The monetary authorities are then confronted with a harsh choice between violating their announced target, and thus undermining the credibility that was the point of the exercise, or setting policy too tight or too loose, thus doing unnecessary damage to the economy. Major central banks can generally withstand failure to achieve targets without a fatal loss of credibility…. The situation is different in emerging and developing economies…. Emerging-market countries ought to consider targeting nominal GDP. Relative to inflation targeting, the great virtue of NGDP targeting is that it is robust…”
2. Ezra Klein: Hardcore conservative agree with liberals on a lot. They just don’t want to compromise: “The most important conflict in American politics right now isn’t ideological. It’s operational. It’s about whether politicians should bend their principles and compromise to get things done…. The conflict is located in the Republican Party… centered in the House Republican Conference. The disagreements between the various factions of House Republicans are modest…. But the disagreements on how to achieve those goals are vast…. Pew… sort[ed Americans] into seven different political camps…. Only one of the seven groups–the ‘steadfast conservatives’–says they prefer politicians to stick to their positions rather than compromise… 12 percent of the country… 19 percent of the politically engaged…. Thus far, though, the Republican Party has somewhat uncomfortably adopted the positions of the business conservatives and the political style of the steadfast conservatives. The result is a congressional coalition where the votes exist for immigration reform but the compromises required to pass it are too politically dangerous, and where Wall Street is unpopular but where there’s no chance of Republicans joining Democrats to impose stricter regulations on financiers…”

Should Be Aware of:

• Melinda Taub: The Wikipedia Entry for Guam, Retold as a YA Novel
• Ta-Nehisi Coates: How Racism Invented Race in America
• Jeff Madrick: Inequality Begins at Birth
• Jeff Spross: Why A National Carbon Tax Would Be Amazing — In Four Charts

And:

1. Josh Marshall: Did Chris McDaniel Himself Commit Voter Fraud?: “Here’s the [Mississippi] statute’s language… ‘No person shall be eligible to participate in any primary election unless he intends to support the nominations made in the primary in which he participates.’ You don’t just have to intend to vote for the person you’re voting for. You have to intend to vote for whoever wins the primary…. Just before the runoff when asked whether he would vote for Cochran if Cochran won, McDaniel said: ‘I’ll have to think about it, depending on what happens that evening. I’ll let you know that evening.’… By McDaniel’s own public statement, he was at best uncertain whether he planned to vote for the winner of the primary he was participating in… it sounds like he was himself ineligible to vote on Tuesday. That may be true of thousands of other[s]… But none of them were quoted on the eve of the primary essentially disqualifying themselves from participating. But McDaniel was. And for what it’s worth, the laws un-enforcability was, I think, judged on the basis of impossibility of proving intent…. Have they ever had someone who, at a minimum, suggested they hadn’t decided whether they would vote for the nominee?…”
2. David Weigel: In Defense of Parachute Political Reporting: “A few readers in North Carolina, mostly in media, think I parachuted into the state and insulted their work…. I assume that the ‘ignorant, stereotyping’ line implies that I was calling local reporters lazy. Nope! North Carolina reporters have been filing deeply reported scoops about the legislature’s surge of conservative bills all year, and I’ve been sending readers their way. In June, when Charlotte Observer reporter Tim Funk got arrested covering a Moral Monday protest, I put up video and linked to his account…. I’d argue that the outlets that rip off local content are a bigger problem than parachuters, but, whatever—it’s annoying when national reporters arrive, when you’ve got the story covered perfectly well, thanks. Understandable, but it misses the point. A political movement needs… to reach beyond the local media…. The local malefactors don’t want the national media attention. That was what my story was about, and, nope, I’m not sorry that I took the time to report it in person.”

Already-Noted Must-Reads:

1. Greg Ip: The inflation panic: The spontaneous combustion theory of inflation: “I find the panic over inflation perplexing…. Factual. Yes, core CPI inflation has rebounded to 2% from 1.6% in February…. What should we infer from this? Nothing…. Theoretical. If you have a forecast of higher inflation, it helps to have a theory of the inflation determination process…. Many critics think the prolonged period of low real rates and the large size of the Fed’s balance sheet are in and of themselves inflationary, but this is divorced from any consideration for why real rates are negative and the Fed’s balance sheet so large in the first place. Charlie Evans, president of the Federal Reserve Bank of Chicago, calls this ‘the spontaneous combustion theory of inflation… Households and businesses simply wake up one day and expect higher inflation is coming without any further improvement in economic fundamentals’…. Strategic…. Hoover Institution… scholars were deeply concerned…. Many cited the 1970s…. What these analyses ignore is the asymmetry of risks…. The Fed… knows how to get inflation back down…. By contrast, recent history shows how few effective tools central banks have for reversing inflation that falls too far…”
2. John Quiggin: Douthat squares the circle on climate change: “Matt Yglesias… ‘For smart, up-and-coming conservatives to mention climate change, they would have to… sound like rubes by siding with the conspiracy theorists, or… alienate the rubes by acknowledging the basic facts and the coming up with some other reason to favor inaction? The optimal choice is not to choose.’ I made much the same point a year ago in response to Ramesh Ponnuru’s plaintive observation that ‘To be a good reformer [in liberal eyes] a conservative has to agree that the vast bulk of conservatives are insane’…. Ross Douthat tries to respond to Yglesias. He ends up both confirming the point regarding climate change and illustrating the true nature of reform conservatism.

   “Since Douthat can’t refute Yglesias’ point about the craziness of the Republican base, he doesn’t try. Rather, he dismisses the point as ‘silly’ and moves straight to his own apologia for lining up with the crazies…. Supposedly, a relatively modest slowdown in economic growth means that it is now imperative to do nothing about climate change. The best way to understand Douthat’s piece is by reverse engineering his argument as a constrained minimization problem The objective is to minimize the craziness he needs to embrace, subject to the constraint that he must end up in line with the denialist conspiracy theorists who dominate the base. The best approach is to combine the most inflated estimates of the cost of mitigation, with the rosiest projections of the implications of doing nothing…. The Republican party is a coalition of crazies, racists and plutocrats. But there is a political requirement to talk about policy in a way that is not obviously crazy, racist or pro-rich. The task of conservative intellectuals is to square this circle…”

3. Owen Zidar sends us to Jeanne Lafortune, José Tessada, and Ethan Lewis: People and Machines A Look at The Evolving Relationship Between Capital and Skill In Manufacturing 1850-1940 Using Immigration Shocks: “[Did the] Second Industrial Revolution change the way inputs were used in the manufacturing sector[?]… We estimate the impact of immigration-induced changes in skill mix in local areas in the United States between 1860 and 1940 on input ratios within manufacturing…. Production functions were strongly altered over the period under study: capital began our period as a q-substitute for high skill workers and a strong complement of low-skill workers. This changed around the turn of the twentieth century when capital became a complement of skilled workers and decreased its complementary with low-skilled workers…. Within-industry changes in production technique were the dominant manner in which areas adapted to immigration driven skill shocks…. We nevertheless fail to find significant impact of changes in skill mix on wages…
4. Joseph Kane and Robert Puentes: The Enormous Wage Potential of Infrastructure Jobs: “Cutting across multiple industries and geographies, infrastructure jobs offer needed stability. Since these jobs also typically require less formal education and pay competitive wages across a variety of occupations, they give workers from all backgrounds a chance to make a decent living in today’s unforgiving economy… pay 30 percent more to lower income workers—wage earners at the 10th and 25th percentile—relative to all jobs nationally…. Infrastructure occupations not only employ thousands of workers with a high school diploma or less, but they also frequently offer higher wages compared to many other jobs, particularly those involved in sales, maintenance, production, and other support activities. For example, paving equipment operators, recyclable material collectors, and industrial truck operators are among the largest infrastructure occupations that fall into this category, paying significantly more to workers without an advanced degree who might otherwise be employed as assemblers, counter attendants or cashiers. Plumbers, bus drivers and electrical power-line installers illustrate these patterns as well…. On-the-job training, in particular, is essential for these workers, many of who undertake apprenticeships and certifications to operate our infrastructure systems for decades…”

Joseph Kane and Robert Puentes: The Enormous Wage Potential of Infrastructure Jobs: “Cutting across multiple industries and geographies…

…infrastructure jobs offer needed stability. Since these jobs also typically require less formal education and pay competitive wages across a variety of occupations, they give workers from all backgrounds a chance to make a decent living in today’s unforgiving economy… pay 30 percent more to lower income workers—wage earners at the 10th and 25th percentile—relative to all jobs nationally…. Infrastructure occupations not only employ thousands of workers with a high school diploma or less, but they also frequently offer higher wages compared to many other jobs, particularly those involved in sales, maintenance, production, and other support activities. For example, paving equipment operators, recyclable material collectors, and industrial truck operators are among the largest infrastructure occupations that fall into this category, paying significantly more to workers without an advanced degree who might otherwise be employed as assemblers, counter attendants or cashiers. Plumbers, bus drivers and electrical power-line installers illustrate these patterns as well…. On-the-job training, in particular, is essential for these workers, many of who undertake apprenticeships and certifications to operate our infrastructure systems for decades…

I think there are four big valid issues with Thomas Piketty’s grand argument:

1. As the W/Y_net ratio rises the net rate of profit is likely to fall, and so it is highly unreasonable to imagine that the net savings rate out of income s_net will not fall rapidly and substantially and so greatly attenuate any rise in W/Y_net. Thus substantially rising W/Y is not a problem that we should expect to see.

2. Should the W/Y_net ratio rise substantially, the net rate of profit is likely to fall, and so the share of income earned from wealth will rise only slightly–and may not rise at all. This is not a problem: this is wealthholders providing workers with lots of capital services at a cut-rate price. Thus rising W/Y is likely to rather than lowers working-class incomes and is unlikely to worsen the income distribution, and so the prospect is not a problem.

3. Even should the W/Y_net ratio rise substantially and even should the net rate of profit not fall, wealth is unlikely to become or remain highly concentrated. A high W/Y and a high r x W/Y is a big problem only if wealth becomes and remains highly concentrated, and that we are unlikely to see.

4. Even should the W/Y_net ratio rise substantially and even should the net rate of profit not fall and even should wealth become and remain highly concentrated, plutocrats are highly likely to get into status games of spend-my-money-to-change-the-world, and so we are unlikely not have a world in which heirs and heiresses exercise undo influence over our priorities. Even should the distribution of wealth and of income become markedly more unequal, it is unlikely to distort society’s choices and lead to a grossly unequal distribution of utility.

I figure each of these has about a 20% chance of coming true, and thus that Piketty’s scenario is a (slightly) less than 50-50 shot, even with policy and politics on autopilot. Of these, I think (2) is the most important: why should we care if W/Y_net rises if r x W/Y_net Does not?

And, of course, there are also a bunch of issues on the other side–a bunch of questions I have never in 35 years gotten answers to concerning why we take the Solow model as the baseline:

1. Why is depreciation a “rusting” constant fraction of capital value, rather than proportional to D utilization or related to obsolescence and technological progress?

2. Why should gross savings ever be a constant fraction of gross output? What possible rule of thumb in a world in which people receive their net incomes could possibly generate such an outcome?

3. Plus there is the… rather odd… Handling of population growth vis-à-vis per capita income growth in the Ramsey model…

A significantly better baseline, I think, would have net investment as some parameter times next income from wealth plus some parameters times net income from labor, and have the rate of net profit as some reasonable function of the wealth to that income ratio…

Owen Zidar sends us to Jeanne Lafortune, José Tessada, and Ethan Lewis: People and Machines: A Look at The Evolving Relationship Between Capital and Skill In Manufacturing 1850-1940 Using Immigration Shocks: “[Did the] Second Industrial Revolution change the way…

…inputs were used in the manufacturing sector[?]… We estimate the impact of immigration-induced changes in skill mix in local areas in the United States between 1860 and 1940 on input ratios within manufacturing…. Production functions were strongly altered over the period under study: capital began our period as a q-substitute for high skill workers and a strong complement of low-skill workers. This changed around the turn of the twentieth century when capital became a complement of skilled workers and decreased its complementary with low-skilled workers…. Within-industry changes in production technique were the dominant manner in which areas adapted to immigration driven skill shocks…. We nevertheless fail to find significant impact of changes in skill mix on wages…

John Quiggin: Douthat squares the circle on climate change: “Matt Yglesias… ‘For smart, up-and-coming conservatives…

…to mention climate change, they would have to… sound like rubes by siding with the conspiracy theorists, or… alienate the rubes by acknowledging the basic facts and the coming up with some other reason to favor inaction? The optimal choice is not to choose.’ I made much the same point a year ago in response to Ramesh Ponnuru’s plaintive observation that ‘To be a good reformer [in liberal eyes] a conservative has to agree that the vast bulk of conservatives are insane’…. Ross Douthat tries to respond to Yglesias. He ends up both confirming the point regarding climate change and illustrating the true nature of reform conservatism.

Since Douthat can’t refute Yglesias’ point about the craziness of the Republican base, he doesn’t try. Rather, he dismisses the point as ‘silly’ and moves straight to his own apologia for lining up with the crazies…. Supposedly, a relatively modest slowdown in economic growth means that it is now imperative to do nothing about climate change. The best way to understand Douthat’s piece is by reverse engineering his argument as a constrained minimization problem The objective is to minimize the craziness he needs to embrace, subject to the constraint that he must end up in line with the denialist conspiracy theorists who dominate the base. The best approach is to combine the most inflated estimates of the cost of mitigation, with the rosiest projections of the implications of doing nothing…. The Republican party is a coalition of crazies, racists and plutocrats. But there is a political requirement to talk about policy in a way that is not obviously crazy, racist or pro-rich. The task of conservative intellectuals is to square this circle…

Greg Ip: The inflation panic: The spontaneous combustion theory of inflation: “I find the panic over inflation perplexing…

…Factual. Yes, core CPI inflation has rebounded to 2% from 1.6% in February…. What should we infer from this? Nothing…. Theoretical. If you have a forecast of higher inflation, it helps to have a theory of the inflation determination process…. Many critics think the prolonged period of low real rates and the large size of the Fed’s balance sheet are in and of themselves inflationary, but this is divorced from any consideration for why real rates are negative and the Fed’s balance sheet so large in the first place. Charlie Evans, president of the Federal Reserve Bank of Chicago, calls this ‘the spontaneous combustion theory of inflation… Households and businesses simply wake up one day and expect higher inflation is coming without any further improvement in economic fundamentals’…. Strategic…. Hoover Institution… scholars were deeply concerned…. Many cited the 1970s…. What these analyses ignore is the asymmetry of risks…. The Fed… knows how to get inflation back down…. By contrast, recent history shows how few effective tools central banks have for reversing inflation that falls too far…

In relatively short order after John Paulson and company figured out how to sell mortgage finance short–how to collect the money from selling MBS to addled investors without having to first finance the construction of five-bedroom houses with swimming pools in the desert between Los Angeles and Albuquerque–the housing bubble reached its peak.

It seems at least plausible that if Paulson and company had been in business in 2004 the bad bets of MBS buyers would have gone into the pockets of short sellers rather than being wasted financing the construction of houses people really do not want to live it. And it seems at least plausible that if the supply of MBS had not been limited by housing construction, the price peaks would have been lower, the losses when MBS prices returned to fundamentals would have been less, and that even with all of the portfolio and risk-management dysfunction in the too-big-to-fail money-center banks and all the regulatory dysfunction at the Federal Reserve the bubble collapse would not have taken down our too-big-to-fail money-center banks, and we would not be in our current mess.

We do not like short-selling during the panic of the crisis during the panic and the crisis because then is when we want to bail-in people. In the panic and the crisis short-selling is the reverse: an enabler of and a force multiplier for destabilizing positive-feedback trading. But before the panic and the crisis short-selling is a valuable curb on enthusiasm, and a valuable stabilizing mechanism.

And the excellent Noah Smith brings refreshments in the form of empirical evidence from the hard-working and thoughtful Ringgenberg et al.:

Noah Smith: Don’t Shortchange Short Sellers: “‘Short Selling Risk’, by Matthew Ringgenberg, Adam Reed, and Joseph Engelberg…

…look at how short-selling actually works in real life… and figure out what the costs of shorting really are…. The… risk of high fees…. Dealers generally have the ability to recall a stock loan at any time…. That’s another big risk, and it happens about 2 percent of the time. So… over-optimistic longs get to set the price…. There has been a lot of controversy over short-selling. People are afraid that shorts can foment panic, driving down stock prices by making it look as if there has been a piece of bad news, then buying at the dip and earning a double profit when the artificial panic fades…. On the other hand, plenty of finance professors view shorts as society’s best hope of killing asset bubbles before they get too big…. Ringgenberg et al. find… stocks for which shorting costs are higher experience less short selling, and have lower returns going forward. Other profs have found that short-selling risks tend to increase the time it takes stocks to incorporate new information into the price….

Shorts seem bad because they profit from stocks going down. But if shorts are bad, then so are risk managers. If shorts are bad, then so is anyone who shoots down an idea in a board meeting. Shorts are the leash that markets put on asset bubbles. We should be helping them do their job.

: <>