Month: December 2014

…[Steven] Johnson picks six profound technologies and follows their path from earliest prehistory to the modern age… glass (from Venetian glassblowers to telescopes and microscopes); cold (from icehouses to modern refrigeration, and the way our food infrastructure, medical science, and geography have been transformed by the ability to manipulate heat); sound (from early chanted ritual to phonographs, to music, urban noise, and radar); hygiene (the key innovations that let cities grow without being destroyed by disease, the germ theory of medicine, and clean rooms in microprocessor factories); time (early astronomy, the age of navigation and the Longitude Prize, the industrial revolution and the timeclock, and microsecond timing in modern computers); and, finally, light (from candles to whaling; the changes to human sleep cycles thanks to artificial light, lasers and electron microscopy).

Each of these six lively stories is a tapestry worn of fascinating technical tid-bits and engrossing stories of personal sacrifice, genius, error, foolishness and difficulty from the cluster of inventors who are responsible for each one…

One of the things I have never understood is why Barack Obama and Tim Geithner

Roger Farmer:
Real business cycle theory and the high school Olympics:
“I have lost count of the number of times…

…I have heard students and faculty repeat the idea in seminars, that ‘all models are wrong’. This aphorism, attributed to George Box, is the battle cry  of the Minnesota calibrator, a breed of macroeconomist, inspired by Ed Prescott…. The cry has been used for three decades to poke fun at attempts to use serious econometric methods to analyze time series data. Time series methods were inconvenient to the nascent Real Business Cycle Program that Ed pioneered because the models that he favored were, and still are, overwhelmingly rejected by the facts. That is inconvenient.

Ed’s response was pure genius. If the model and the data are in conflict, the data must be wrong…. In a puff of calibrator’s smoke, the history of time series econometrics was relegated to the dustbin of history to take its place alongside alchemy, the ether, and the theory of phlogiston. How did Ed achieve this remarkable feat of prestidigitation? First, he argued that we should focus on a small subset of the properties of the data….

Ed argued that the trends in time series are a nuisance if we are interested in understanding business cycles and he proposed to remove them with a filter… remov[ing] a different trend from each series and the trends are discarded when evaluating the success of the theory…. He proposed that we should evaluate our economic theories of business cycles by how well they explain co-movements among the wiggles.

When his theory failed to clear the 8ft hurdle of the Olympic high jump, he lowered the bar to 5ft and persuaded us all that leaping over this high school bar was a success. Keynesians protested. But they did not protest loudly enough and ultimately it became common, even among serious econometricians, to filter their data with the eponymous Hodrick-Prescott filter….

We don’t have to play by Ed’s rules…. Once we allow aggregate demand to influence permanently the unemployment rate, the data do not look kindly on either real business cycle models or on the new-Keynesian approach. It’s time to get serious about macroeconomic science and put back the Olympic bar.

Must- and Shall-Reads:

• Zack Beauchamp: Torture is a culture. Releasing the Senate Report is a way of fighting it
• John Aziz: Breaking the Cycle of Deficit Fetishism
• Greg Ip:
  What should the Federal Reserve do?: The case for opportunistic inflation
• Matthew Yglesias:
  Why Elizabeth Warren is going to war with Obama over Antonio Weiss
• Carola Binder:
  Mixed Signals and Monetary Policy Discretion

1. Jack Lew:
   Fires Back at Elizabeth Warren: ‘You need multiple perspectives’ | WashingtonExaminer.com:
   “You need multiple perspectives represented in a department like the Treasury. I think you’re hearing more from the few than from the many…. It is a natural thing for there to be some lingering concerns about whether or not the institutions… that caused the last crisis are truly changed. It’s a lot to expect for the American people who are struggling with wages that are not rising as fast as they should to say everything’s fine.”
   

2. Jared Bernstein:
   My version of the progressive agenda fits on a little bag. Take that, complexity!:
   “I was having a coffee with someone at the Corner Bakery who argued that the problem with the policy agendas of people like me is that they’re way too complex. ‘You couldn’t write it down on this little bag, for example,’ he said, a bit haughtily for my taste, as he threw down the gauntlet and handed me the bag…. The topic is: ‘Ways to reduce inequality and generate broadly shared prosperity.’ I’ll write it all down here …. Full employment! Low-income Households: education opportunity, expand EITC, higher min wage, subsidized jobs (direct job creation). Middle class: affordable higher education, boost manufacturing through lower trade deficit! **High end:&& close wasteful tax loopholes, financial market oversight (fewer bubbles), ‘financial transaction tax.’ I suppose you could argue there’s more… politicians committed to reconnecting growth and prosperity… willing to write the budgets… reducing the influence of money in politics… financial transaction tax… a tiny tax on security trades, like 0.03 percent… that would raise significant revenue while dampening unproductive volatile and high-speed trades.)…. Protecting what we’ve got, from social insurance to labor laws to Obamacare. But… there’s no great mystery to pushing back on the great economic disconnect. In fact, it’s in on the bag.”
   

3. Martin Wolf:
   Europe’s Lonely and Reluctant Hegemon:
   “Some are born great, some achieve greatness, and some have greatness thrust upon ’em. Germany is now experiencing the last in full measure. So how is it faring with this eminence? Quite well, but not well enough…. Remarkably, of Europe’s large countries Germany has arguably the most stable and adult democracy. It is free of the xenophobic populism that mars the others. In Angela Merkel, it possesses an exceptionally mature and responsible leader.
   Despite these triumphs, all is not well. The eurozone economy is mired in stagnation and ultra-low inflation. Yet many German policy makers resist efforts to change this for the better…. Meanwhile, to the east a revanchist Russia has destabilised a hapless Ukraine and threatens to destabilise even more of its former empire. Again, just as is the case for the economy, this challenges postwar Germany’s reflexes. It wishes to avoid a more assertive posture but can no longer do so. The difficulty Germany finds in playing its new roles is understandable. Germany did not seek the euro. On the contrary, it was a price others foolishly asked Germans to pay for unification…”
   

4. Paul Krugman:
   Profiles in Coreage:
   “Tim Duy… reminds us of the spring of 2011, when headline inflation had risen a lot mainly due to oil prices. He portrays Ben Bernanke as being all alone in insisting that the inflation bump was a blip…. As I recall, most saltwater economists agreed…. What Duy doesn’t say is that the inflation fight of 2011 was… another aspect of the fight over how the economy works–and another big victory for the Keynesian view. The concept of core inflation arises out of the notion that most prices are ‘sticky’, revised only on occasion, and that when they are revised they are set taking into account expected inflation over some length of time looking forward…. And yes, this means that you should discount the effects of falling oil prices in the same way you discount the effects of rising oil prices. I would nonetheless urge the Fed to hold off on rate hikes, but for different reasons–the asymmetry in risks between raising rates early and raising them late. And I worry that the Fed may be losing the thread here (hi Stan!). But that’s another topic.”
   

5. Ian Buruma:
   Immigration and the New Class Divide:
   “What can American Tea Party enthusiasts, Russian chauvinists, fearful Dutch and Danes, and Singaporean leftists possibly have in common that is driving this anti-immigrant sentiment?… The livelihoods of most of the middle-aged rural white Americans who support the Tea Party are hardly threatened by poor Mexican migrants… [but they do] share… anxiety about being left behind in a world of easy mobility, supranational organizations, and global networking…. It would be a mistake to dismiss anxiety about immigration as mere bigotry or apprehension about the globalized economy as simply reactionary. National, religious, and cultural identities (for lack of a better word) are being transformed, though less by immigration than by the development of globalized capitalism…. The new class divisions run less between the rich and the poor than between educated metropolitan elites and less sophisticated, less flexible, and, in every sense, less connected provincials. It is irrelevant that the provincials’ political leaders (and their backers) are sometimes wealthier than the resented metropolitan elites. They still feel looked down upon…. Populist rabble-rousers like to stir up such resentments by ranting about foreigners who work for a pittance or not at all. But it is the relative success of ethnic minorities and immigrants that is more upsetting to indigenous populations. This explains the popular hostility toward Obama…”
   

Should Be Aware of:

• Annie Lowrey:
  The Rise of the Economic-Policy Truthers
• Nick Szabo:
  Unenumerated: The dawn of trustworthy computing
• Bill Montague:
  Herrenvolk Democracy and the American Right’s Peculiar Definition of Tyranny
• Vasiliki Fouka
• Walt Mossberg:
  On the market share war between Apple and Android:
  “In my conversations with Apple executives, they vehemently insist that market share isn’t–and won’t be–their goal, and even go so far as to say that most public market-share numbers are somehow off the mark, though they decline to explain how.'”
  

1. Lant Pritchett and Lawrence Summers: Growth Slowdowns: Middle-Income Trap vs. Regression to the Mean: “No question is more important for the living standards of billions of people or for the evolution of the global system than the question of how rapidly differently economies will grow over the next generation. We believe that conventional wisdom makes two important errors…. First, it succumbs to the extrapolative temptation and supposes that, absent major new developments, countries that have been growing rapidly will continue to grow rapidly, and countries that have been stagnating will continue to stagnate. In fact… past is much less the prologue than is commonly supposed. Second, conventional wisdom subscribes to the notion of a ‘middle-income trap’…. Any tendency of this type is very weak, and that what is often ascribed to the middle-income trap is better thought of as growth rates reverting to their means…
   

2. Lawrence Summers:
   Crumbling Infrastructure Sign of Lost Collective Faith:
   “Take a walk from the US Air Shuttle in New York’s LaGuardia airport to ground transportation. For months you will have encountered a sign saying ‘New escalator coming in Spring 2015’. Or take the Charles River at a key point separating Boston and Cambridge which is little more than 100 yards wide. Traffic has been diverted to support the repair of a major bridge crossing the river for more than two years, and yet work is expected to continue into 2016…. It will take almost half as long to fix the escalator in LaGuardia as it took to build the Empire State building 85 years ago. Is it any wonder that the American people have lost faith in the future and in institutions of all kinds? If rudimentary tasks such as keeping escalators going and bridges repaired are too much to handle, it is little surprise that disillusionment and cynicism flourish…. The escalator that will take five months to repair is privately owned. Although it is in an airport, failure cannot be blamed on public authorities. Necessary maintenance had been delayed for years–with the escalator in question even being stripped for spare parts to support other escalators. Now the new owner has many priorities; the replacement of the escalator system is only one…. The focus of infrastructure discussions in both the public and the private sector needs to shift from major new projects whose initiation and completion can be the occasion for grand celebration to more prosaic issues of upkeep, maintenance, and project implementation…. The public and the media on their behalf need to be much less accepting of institutional failure. It has been said that we do not want to know all to which we can become accustomed. A vicious cycle in which governments perform poorly and so are starved of resources and so perform worse is serious threat to healthy democracy. Something similar can happen to business…. Fixing escalators and building bridges may seem like small stuff at a time of economic crisis and geopolitical instability. But it is time we recognise the importance of what may seem small to what is ultimately important–the faith of citizens in their collective future.”
   

3. Gavin Davies:
   The Fed’s plan to “normalise” interest rates | Gavyn Davies:
   “One of the most successful rules for investors in the past few years has been never to underestimate the innate dovishness of the Federal Reserve. Whenever there has been a scare that the Fed might move in a hawkish direction, this has quickly proven to be a mistake…. In recent months, however, the markets may have become over confident about the Fed’s dovishness in the face of a large and persistent decline in the US unemployment rate…. ‘Normalisation’ is the new buzzword. Fed Vice Chairman Stanley Fischer made it clear in an interview with Jon Hilsenrath of the Wall Street Journal last week that he believes that interest rates are far below normal, even if inflation stays low. A further upward adjustment in market rates may become necessary soon, unless inflation greatly surprises the Fed on the downside…”
   

for the living standards of billions of people or for the evolution of the global system than the question of how rapidly differently economies will grow over the next generation. We believe that conventional wisdom makes two important errors….

First, it succumbs to the extrapolative temptation and supposes that, absent major new developments, countries that have been growing rapidly will continue to grow rapidly, and countries that have been stagnating will continue to stagnate. In fact… past is much less the prologue than is commonly supposed.

Second, conventional wisdom subscribes to the notion of a ‘middle-income trap’…. Any tendency of this type is very weak, and that what is often ascribed to the middle-income trap is better thought of as growth rates reverting to their means…

My panel contribution:

Cato Economic Growth Conference Panel 4

• Conference video page: The Future of U.S. Economic Growth | Cato Institute
• 51 short online essays on: Reviving Economic Growth: A Cato Online Forum | Cato Institute

Torsten Slok says:

And Tim Duy says:

Tim Duy: Challenging the Fed: Both Paul Krugman and Ryan Avent are pushing back on the Federal Reserve’s apparent intent to raise rates in the middle of next year. Why is the Fed heading in this direction?… I don’t think that the Fed is reacting to external criticism.

What I think is that there are two basic views of the world. In one view, the post-2007 malaise is simply the hangover from a severe financial crisis. Time heals all wounds, including this one, and the recent data suggests such healing is underway.

The alternative view is that the economy is suffering from secular secular stagnation… suggests the need for a very low or negative real interest rates to maintain full employment…. I believe that the consensus view on the Fed is the former, that the malaise is simply temporary (“a temporary inconvenience”) and now ending…. The Summary of Economic Projections[‘s] implied equilibrium Federal Funds rate is around 3.75%… below what might have been perceived as normal ten years ago… [but from] slower potential growth rather than secluar stagnation….

Gavin Davies… catches… Stanley Fischer… reject[ing] the main monetary policy implication of the secular stagnation hypothesis…. I find it hard to believe that Fischer carries anything but extreme intellectual weight within the Fed…. This is not to say that I do not share Krugman’s and Avent’s concerns. I most certainly do….

If you want to know what the Fed is thinking at this point, a journalist needs to push Yellen on the secular stagnation issue at next week’s press conference. Does she or the committee agree with Fischer? And does she see any inconsistency with the SEP implied equilibrium Federal Funds rates and the current level of long bonds?