…and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right…. There are two wrong directions… to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’… to argue that Germany needs to expand to help its Eurozone neighbours…. The first… legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties…. The second… tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours… suggests that the current German macroeconomic position is appropriate…. The uncomfortable truth for Germany, which both the previous arguments can miss, is that the appropriate macroeconomic position for Germany at the moment is a boom, with inflation running well above 2%…. From the perspective of the Eurozone as a whole, the efficient solution would be above 2% inflation in Germany, and below 2% inflation elsewhere…. If your starting point is what happened in Germany from 2000 to 2007, then current German arguments can look incredibly self-centred. They seem to say: we suffered a recession from 2000 to 2007 which led to a beggar my neighbour outcome, now you have to suffer a worse recession to put right the problem we created. But… I think the German position is more about ignorance than greed…. The ultimate problem is that what Germany sees at virtue is pre-Keynesian macroeconomic nonsense, nonsense that is doing other countries a great deal of harm..
Month: November 2014
Afternoon Must-Read: Steven Johnson: We Are Living the Dream
Steven Johnson (2012): We’re living the dream; we just don’t realize it: “Over the past two decades…
…what have the U.S. trends been for the following important measures of social health: high school dropout rates, college enrollment, juvenile crime, drunken driving, traffic deaths, infant mortality, life expectancy, per capita gasoline consumption, workplace injuries, air pollution, divorce, male-female wage equality, charitable giving, voter turnout, per capita GDP and teen pregnancy? The answer for all of them is the same: The trend is positive…. The quality-of-life and civic health trends in the developing world are even more dramatic…. We are much more likely to hear about these negative trends than the positive ones for two primary reasons. First… the positive trends in our social health are coming from a… complex network of forces…. The public sector doesn’t have billions of dollars to spend on marketing campaigns to trumpet its successes…. We underestimate the amount of steady progress that continues around us, and we misunderstand where that progress comes from. We should celebrate these stories of progress, not so we can rest on our laurels but instead so we can inspire the next generation to build on that success.
On Jeff Madrick’s “How Mainstream Economic Thinking Imperils America”: Daily Focus
On Jeff Madrick’s “How Mainstream Economic Thinking Imperils America”
J. Bradford DeLong :: U.C. Berkeley :: Prepared: 2014-10-22
The Seven Bad Ideas Jeff Madrick Sees
- The “Invisible Hand”
- Say’s Law
- Friedman’s Folly: Government’s Limited * Social Role
- Low Inflation Is All That Matters
- “There Are No Bubbles”
- Globalization Is Always Good
Economics Is a Science
In Madrick’s Introduction
- Praised in the Introduction: John Maynard Keynes, Dani Rodrik
- Criticized in the Introduction:
- Adam Smith–no comment necessary…
- Olivier Blanchard–the de facto leader of the Sixth International: on the left of the spectrum of policymakers…
- Larry Summers–principal advocate of the Keynesian expansionary-fiscal solution to our troubles…
- Milton Friedman–when he was alive, the most powerful advocate of unlimited quantitative easing…
- Bob Rubin–on his watch big banks were bailed-in during financial crises, not bailed-out…
- Ben Bernanke–most left-wing central banker we had (although I will concede his attachment to 2%/year inflation target, and failure to reach it, are huge minuses)…
- Robert Lucas–underbriefed and destructive…
Reading Along…
-
Madrick on Christina Romer:
- “In a piece she wrote for The New York Times criticizing an increase in the minimum wage, Christina Romer, the former Obama adviser and considered by many to be a political liberal, implicitly made this same oversimplified assumption that workers usually get what they deserve. This is an example of Friedman’s broad influence…”
-
Romer:
- We have better policies available: expand the EITC is better targeted
For the long-run, universal kindergarten and pre-K have more bang for the buck
And these are expansionary fiscal policy–spending money gives a macroeconomic boost as well
But if the choice is for a higher minimum wage or nothing, I’m for a higher minimum wage…
- We have better policies available: expand the EITC is better targeted
Food for Thought
- Of these 8 whom Madrick criticizes…
- …Somewhere between 5 and 7 are to the left of current North Atlantic policymakers
- Not excluding Obama
PFoJ vs. JPF, Perhaps?
- A little misplaced ire, I think…
- But I don’t want to go there…
- I would rather go to…
I See Four Yawning Gulfs
- Between:
- the economic policies that those whom I regard as “serious” economists are advocating, and
- those that are being implemented…
- Between:
- what economics says, and
- what right-of-center economists are telling their political masters it says…
- Between:
- what economics says, and
- what economics should say…
- Between:
- my “inside” view of what I think economics says, and
- Jeff Madrick’s “outside” view of what he thinks economics says…
As I See It
- The problem of where economics starts
- The problem of the decreasing relevance of the Smithian model
- The stringent requirements for market effectiveness
Current policy and current tasks
- Where Economics Starts
- Economics starts from the presumption:
- that market success is the benchmark, and
- that market failure is anomalous
- It ought to start from the presumption:
- that market construction is difficult
- It ought to have:
- a grammar of other forms of organization—
- command, bureaucracy, charity, cooperative, regulated monopoly, yardsticks, etc.—
- and where they succeed and where they fail
Decreasing Relevance of the Smithian Model
- We have a great deal of economic life in sectors where we know the market will not work well, and
- These sectors will only grow in relative importance:
- Pensions
- Health-care finance
- Education
- Infrastructure
- Research and development
- Information goods more generally
The Stringent Requirements for Market Effectiveness
- Here are seven requirements:
- Distribution of wealth corresponding to fairness and utility
- Aggregate demand matched to potential supply
- Competition
- Calculation
- Rivalry
- Excludability
- Information symmetries
- And, no, a night-watchman, a court, and cutting property rights at the joints will not get us there
Current Policy and Current Tasks
- Policy is far to the right of even where the really-existing economics profession is
- At least, where the “serious” piece of it, in an intellectual sense, is
*And it is not to the smart right either - Why?
How to fix it?
- Books like Jeff’s, of course, but what else?
- Two tasks:
- Move the “serious” economics profession
- Move policymaking to the “serious” economics profession
- Both seem of equal importance and difficulty
Veterans, for-profit higher education, and economic outcomes
Americans often use Veterans Day to consider the actions that soldiers, sailors, marines, and airmen undertake during wartime. But tomorrow we should also think about what happens to veterans after they return home. In particular, we should consider how the government helps improve veterans’ futures through education.
The federal government has taken steps in the past to use the military as a force for social mobility. The original GI Bill gave millions of veterans a helping hand through higher education—legislation that was updated by Congress for the post-9/11 world in 2008. Sadly, the promise of this original bill didn’t reach all veterans, particularly African-Americans. What’s more, in recent years veterans have been increasingly likely to attend for-profit colleges instead of public institutions or private non-profit schools—with mostly unsatisfactory results.
Enrollment at for-profit colleges increased dramatically over the past 15 or so years as taxpayer support for public community colleges was cut and as for-profit schools aggressively advertised their services. Veterans are a favorite target of for-profit schools due to a loophole in federal student aid rules. The so-called 90-10 rule cuts off federal funding for any school that receives more than 90 percent of its revenue from federal financial aid. But financial aid for veterans is exempted from this rule. So if a school can enroll a high number of veterans, they can get around the loophole, though there is a rule that caps veteran enrollment at 85 percent of students.
This trend might not be particularly worrisome if veterans were receiving a quality education from for-profit schools. But a large body of research shows that students who attend for-profit schools don’t get the same sort of return on their investment that other students do.
Research by Stephanie Cellini of George Washington University and Latika Chaudhary of Scripps College shows that graduates of associate degree programs at for-profit schools have an earnings advantage over high-school educated workers. They also find, however, that this return is lower than returns found for other kinds of higher-education institutions.
David J. Deming, Claudia Goldin, and Lawrence Katz, all of Harvard University, find that for-profit graduates fare worse on a variety of measures compared to students at non-profit private and public universities and colleges. They end up having higher unemployment and lower earnings six years after graduation. In another paper with Noam Yuchtman, of the University of California, Berkeley, and Amira Abulafi, of the National Bureau of Economic Research, the three Harvard researchers find that students who go to for-profit schools are 22 percent less likely to get a callback after applying for a job.
If we want to uphold our end of the bargain with veterans, we need make sure to create a program that does its best to boost outcomes for those returning home. Policymakers need to consider the best ways to give veterans a helping hand up the income ladder in our time of high and rising economic inequality.
Things to Read on the Morning of November 9, 2014
Must- and Shall-Reads:
- : Europe’s Fiscal Wormhole
- : Commercial security at the birth of writing, arithmetic, and religion in ancient Sumer
-
: Halbig, King, and the Limits of Reasonable Legal Disagreement: In the debates over the constitutionality of the Affordable Care Act… I did not dismiss the arguments of those who disagreed with me. There often has been reasonable, irreconcilable disagreement over the meaning of the Constitution…. Halbig and King… are different. I can accept… that the relevant provisions of the ACA are ambiguous. What I cannot accept as reasonable or responsible… is the argument… that the ACA Congress clearly and unambiguously accomplished what no Member of Congress, no one in the Congressional Budget Office, none of the four dissenting Justices in NFIB v. Sebelius, and no state official realized that Congress had accomplished when it passed the ACA: self-destructively limit the tax subsidies that make health insurance affordable for millions of Americans to those who have the good fortune of happening to reside in states that set up their own health insurance exchanges…. Some may conclude that I am not as tolerant of reasonable legal disagreement as I think I am or used to be. Others may conclude that I care too much about the draconian financial consequences for millions of Americans and insurance companies if this litigation succeeds. I have considered these possibilities, and I have rejected them. The plaintiffs’ case is so weak and transparently political that it is dismaying to see it be taken seriously. -
: The Supreme Court will hear King. That’s bad news for the ACA: “In a significant setback for the Obama administration, the Supreme Court just agreed to review King v. Burwell, the Fourth Circuit’s decision upholding an IRS rule extending tax credits to federally established exchanges…. At least four justices… voted to take the case… The justices’ votes on whether to grant the case are decent proxies for how they’ll decide the case. The justices who agree with King wouldn’t vote to grant…. The justices who disagree with King… there are at least four such justices…. That means that either Chief Justice Roberts or Justice Kennedy will again hold the key vote. None of this bodes well for the government. That’s not to say the government can’t win. It might. As I’ve said many times, the statutory arguments cut in its favor. But the Court’s decision to grant King substantially increases the odds that the government will lose this case. The states that refused to set up their own exchange need to start thinking—now—about what to do if the Court releases a decision in June 2015 withdrawing tax credits from their citizens.” -
: The Economics of Inclusion: “I believe that both inequality and slow growth often result from a particular form of exclusion….Thanks to more than two centuries of sustained growth, average per capita income in the OECD countries is just under $40,000–3.3, 11.3, and 17.7 times more than in Latin America, South Asia, and Sub-Saharan Africa, respectively. Sustained growth has obviously not included the majority of humanity…. GDP per worker in… Nuevo León in Mexico is eight times that of Guerrero…. Why would capitalists extract so little value from workers if they could get so much more out of them?…To form part of the modern economy, firms and households need access to networks…. But connecting to these networks involves fixed costs….It is the fixed costs that limit the diffusion of the networks. So, a strategy for inclusive growth has to focus on ways of either lowering or paying for the fixed costs that connect people to networks. Technology can help…. But in other areas, the issue involves public policy…. A strategy for inclusive growth must empower people by including them in the networks that make them productive. Inclusiveness should not be seen as a restriction on growth to make it morally palatable. Viewed properly, inclusiveness is actually a strategy that enhances growth. -
: Forget the 1%: “It is the 0.01% who are really getting ahead in America…. Saez and… Zucman… uses a richer variety of sources…. The share of wealth held by the bottom 90% is an effective measure of ‘middle class’ wealth…. In the late 1920s the bottom 90% held just 16% of America’s wealth—-considerably less than that held by the top 0.1%, which controlled a quarter of total wealth just before the crash of 1929…. By the early 1980s the share of household wealth held by the middle class rose to 36%—roughly four times the share controlled by the top 0.1%…. From the early 1980s… these trends have reversed…. The 16,000 families making up the richest 0.01%, with an average net worth of $371m, now control 11.2% of total wealth—-back to the 1916 share, which is the highest on record…. The top 0.1%… hold 22% of America’s wealth…. The outsize fortunes of the few would not be too worrying were they largely the product of entrepreneurial activity…. The club of young rich includes not only Mark Zuckerbergs, the authors argue, but also Paris Hiltons…. The share of labour income earned by the top 0.1% appears to have peaked… held in the form of shares… levelled off… held in bonds has risen… hint[ing] that America’s biggest fortunes may be starting to have less to do with building businesses…” -
: Are Big Cities Expensive?: “Most of the variation in prices across cities can be attributed to flaws in the conventional indexes… compar[ing] prices of similar but not identical goods… not adjust[ing] for the availability of goods…. Big cities like New York are typically reported to have a cost of living more than double that of small cities like Des Moines, Iowa with nominal wages that are only 40% higher on average. Why then isn’t there a massive exodus from large cities into small ones? A common explanation is that larger cities offer better amenities (Glaeser and Kerr 2008)….We suggest a much simpler explanation…. We study the prices of barcoded grocery items sold across cities in the US and find that almost all of the variation in prices across cities can be attributed to flaws in the data used to make spatial price comparisons…” -
: Black holes and Neo-Fisherites are a monetary phenomenon: “Suppose… the central bank sets a nominal rate of interest…. Nominal demand for goods can spiral down to zero, if people expect it to…. Nominal demand for goods can spiral up to infinity, if people expect it to…. But what is happening to the nominal stock of base money if the economy sprials down into a black hole? And what is happening to the nominal stock of base money if the economy spirals up into a white explosion? Neo-Wicksellian models are silent…. If it lets the stock of base money spiral down to zero… then of course the economy would spiral down into a black hole. But… central banks did not in fact do this…. We need to introduce money explicitly if we want to understand what happens…. Take a related question–the Neo-Fisherite question. If the central bank permanently raises the nominal interest rate, will this result in higher or lower inflation? If you tell me what permanently raising the nominal interest rate does to the base money supply growth rate, I can answer your question…. The Neo-Wicksellian perspective… is what leads us to ask… badly-posed questions…”
Should Be Aware of:
- Frank Bruni: The Church’s Gay Obsession
- The Best Way to Type ¯_(ツ)_/¯
- The Nytpicker (August 2009): How Does Alessandra Stanley Get To Keep Her Job As TV Critic? That’s One Question Clark Hoyt Neglects To Ask.
-
: Six Points on the Midterm Elections: “Many voters don’t understand the structures and details of politics… don’t understand… separation of powers in an age of parliamentary[-discipline] parties…. More than 40% of them… don’t even know… which party controls… Congress…. Older people do not want some libertarian desert, and certainly do want to keep their welfare gerontocracy…. Voters were moderately liberal not only on the minimum wage, but also climate change and path to citizenship for illegal immigrants…. It’s not the 1930s anymore–white people in Kentucky, Louisiana, and Arkansas despise anything that reminds them of the national Democratic party, which they already think is socialist as it is. They don’t want it to move left, they think it’s grotesquely left enough as it is…. Government is not assumed to be the vehicle for the collective aspirations of the American people, but, rather, a highly problematic institution (which it is!)…. A centrist Democrat, Mary Burke, lost by a solid 7% to a union slayer, Scott Walker, and Walker took 34% of the union household vote…. We don’t even know what will ‘work’ in a place like Wisconsin. Good policy should be promoted, and maybe it will lead to good politics. But most of the country doesn’t want to move to the left…. Perhaps… the entire New Deal era was itself a historical anomaly, which temporarily masked the deep American divisions over race and religion, and suppressed for a time a fetish of individuation at the usual expense of social solidarity…”
Nighttime Must-Read: Neil Siegel: Halbig, King, and the Limits of Reasonable Legal Disagreement
…I did not dismiss the arguments of those who disagreed with me. There often has been reasonable, irreconcilable disagreement over the meaning of the Constitution…. Halbig and King… are different. I can accept… that the relevant provisions of the ACA are ambiguous. What I cannot accept as reasonable or responsible… is the argument… that the ACA Congress clearly and unambiguously accomplished what no Member of Congress, no one in the Congressional Budget Office, none of the four dissenting Justices in NFIB v. Sebelius, and no state official realized that Congress had accomplished when it passed the ACA: self-destructively limit the tax subsidies that make health insurance affordable for millions of Americans to those who have the good fortune of happening to reside in states that set up their own health insurance exchanges….
Some may conclude that I am not as tolerant of reasonable legal disagreement as I think I am or used to be. Others may conclude that I care too much about the draconian financial consequences for millions of Americans and insurance companies if this litigation succeeds. I have considered these possibilities, and I have rejected them. The plaintiffs’ case is so weak and transparently political that it is dismaying to see it be taken seriously.
Weekend reading
This is a weekly post we publish every Friday with links to articles we think anyone interested in equitable growth should read. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.
Saving our way out of wealth inequality?
Derek Thompson looks at the data on U.S. wealth inequality and considers how we can get the broad swath of Americans to save more [the atlantic]
Shane Ferro thinks the emphasis should be more on spurring income growth rather than directly increasing savings [business insider]
Requiems for quantitative easing
Steve Randy Waldman thinks quantitative easing is pretty terrible, but it was the best available option [interfluidity]
“The Fed needs a change in behaviour, a change in target, or a change in personnel.” Ryan Avent castigates the Federal Reserve for ending QE. [the economist]
He’s a businessman, not business, man
When hearing economic policy advice from business people, we need to remember that there is no representative business, says Ryan Decker. [updated priors]
The disconnect between profits and investment
“Financial engineering, in other words, is Apple’s hotly anticipated new product.” Matt O’Brien looks at why Apple is borrowing money while sitting on $155 billion in cash. [wonkblog]
Afternoon Must-Read: Nicholas Bagley: The Supreme Court Will Hear King. That’s Bad News for the ACA
In the other 31 states, Obamacare is doing fine and is likely to keep doing fine in spite of whatever the Supreme Court rules in King. In those 31 states, they either have state exchanges that are unaffected by King or will quickly add a state wrapper to their federal exchange: no state politicians of any party are going to accept ObamaCare money to cover their Medicaid poor and deny exchange subsidies to their middle class.
But the politicians and Obamacare are now in much bigger trouble in the nineteen states with one-third of the population: Alabama, Alaska, Florida, Georgia, Kansas, Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Wisconsin, Wyoming. If King brings down the hammer, will the politicians of the nineteen nullification states throw away the $40 billion in exchange subsidies to their middle-class citizens that are currently anticipated for 2016? That seems a very heavy political lift.
And I very much doubt that the King appellants will be able to round up their fifth vote: the Supreme Court would have to overrule long lines of statutory interpretation and break a great deal of administrative law in pieces to get there. They might: this is a very partisan Supreme Court that follows the election returns. But I think Roberts wishes to have a place in history different from that of MacReynolds.
the Supreme Court just agreed to review King v. Burwell, the Fourth Circuit’s decision upholding an IRS rule extending tax credits to federally established exchanges…. At least four justices… voted to take the case… The justices’ votes on whether to grant the case are decent proxies for how they’ll decide the case. The justices who agree with King wouldn’t vote to grant…. The justices who disagree with King… there are at least four such justices…. That means that either Chief Justice Roberts or Justice Kennedy will again hold the key vote. None of this bodes well for the government. That’s not to say the government can’t win. It might. As I’ve said many times, the statutory arguments cut in its favor. But the Court’s decision to grant King substantially increases the odds that the government will lose this case. The states that refused to set up their own exchange need to start thinking—-now—-about what to do if the Court releases a decision in June 2015 withdrawing tax credits from their citizens.”
Afternoon Must-Read: Ricardo Hausmann: The Economics of Inclusion
…often result from a particular form of exclusion….Thanks to more than two centuries of sustained growth, average per capita income in the OECD countries is just under $40,000–3.3, 11.3, and 17.7 times more than in Latin America, South Asia, and Sub-Saharan Africa, respectively. Sustained growth has obviously not included the majority of humanity…. GDP per worker in… Nuevo León in Mexico is eight times that of Guerrero…. Why would capitalists extract so little value from workers if they could get so much more out of them?…To form part of the modern economy, firms and households need access to networks…. But connecting to these networks involves fixed costs….It is the fixed costs that limit the diffusion of the networks. So, a strategy for inclusive growth has to focus on ways of either lowering or paying for the fixed costs that connect people to networks. Technology can help…. But in other areas, the issue involves public policy…. A strategy for inclusive growth must empower people by including them in the networks that make them productive. Inclusiveness should not be seen as a restriction on growth to make it morally palatable. Viewed properly, inclusiveness is actually a strategy that enhances growth.
Lunchtime Must-Read: Ryan Avent: Forget the 1%. It’s the Top 0.01% Who Are Really Getting Ahead in America
>…Saez and… Zucman… uses a richer variety of sources…. The share of wealth held by the bottom 90% is an effective measure of ‘middle class’ wealth…. In the late 1920s the bottom 90% held just 16% of America’s wealth—-considerably less than that held by the top 0.1%, which controlled a quarter of total wealth just before the crash of 1929…. By the early 1980s the share of household wealth held by the middle class rose to 36%—roughly four times the share controlled by the top 0.1%…. From the early 1980s… these trends have reversed…. The 16,000 families making up the richest 0.01%, with an average net worth of $371m, now control 11.2% of total wealth—-back to the 1916 share, which is the highest on record…. The top 0.1%… hold 22% of America’s wealth…. The outsize fortunes of the few would not be too worrying were they largely the product of entrepreneurial activity…. The club of young rich includes not only Mark Zuckerbergs… but also Paris Hiltons…. The share of labour income earned by the top 0.1% appears to have peaked… held in the form of shares… levelled off… held in bonds has risen… hint[ing] that America’s biggest fortunes may be starting to have less to do with building businesses…
1. Most wealth will be deployed, at least at the relevant margin, not in productive entrepreneurial or labor-complementary activities but in at best parasitic rent-seeking activities.
2. Democratic politics will not save us–that only exceptional circumstances in the twentieth century allowed for a democratic politics of progressive social insurance to level society and so promote social welfare in the face of the Gramscian hegemony of the *bourgeoisie*.
Both of these seem to me to be quite plausible, and perhaps true. But I think Piketty would have been very well-advised to have spent a lot more time backing them up in his book than he in fact did…