Month: January 2015

Must- and Shall-Reads:

• Bill Gale: “President Obama’s new proposal to tax capital gains at death is a welcome change that would close a huge loophole…. [But] for some assets, it would be a record-keeping nightmare…. There is an easy fix…. We should allow taxpayers to have a ‘standard basis’… 20% percent of current asset value…”
• Noah Smith: “5 Questions About the ‘Victory’ of the Right: 5. Did the Left Win the Economics Debate Over 1900s-1930s, and since then Left and Right Have Been Haggling Over Details?”
• Kansas Center for Economic Growth Weblog
• Nick Bunker: Capital taxation: What is it good for?
• Simon Wren-Lewis: When Central Bank Losses Matter
• Austin Frakt: NICE’s application of cost-effectiveness threshold(s)

1. Shane Ferro: Robots Won’t Save Us From Secular Stagnation: “It’s time to welcome our robot overlords, says University of Manchester economist Diane Coyle in the Financial Times.… Coyle gives the historical example of the washing machine…. Sure, if the robots come and take everyone’s jobs, but then people find ways to work the same amount doing different things, productivity will increase drastically. The economy will probably boom. But this assumes that nothing blows up the global economy before we get to that point…. If low interest rates continue to create asset bubbles that then pop dramatically–which seems to be the real fear of some people who are talking about secular stagnation–the economy could be in rough shape for a long time before the robot (or demographic) saviors come. It is possible to be afraid of robots and of asset bubbles at the same time.”

2. Mike Konczal sends us to:

   Danny Yagan: Capital Taxes and the Real Economy: The 2003 Dividend Tax Cut: “Policymakers frequently propose to use capital tax reform to stimulate investment and increase labor earnings. This paper tests for such real impacts of the 2003 dividend tax cutó one of the largest reforms ever to a U.S. capital tax rateó using a quasi-experimental design and a large sample of U.S. corporate tax returns from years 1996-2008. I estimate that the tax cut caused zero change in corporate investment, with an upper bound elasticity with respect to one minus the top statutory tax rate of .08 and an upper bound e§ect size of .03 standard deviations. This null result is robust across speciÖcations, samples, and investment measures. I similarly Önd no impact on employee compensation. The lack of detectable real e§ects contrasts with an immediate impact on Önancial payouts to shareholders. Economically, the Öndings challenge leading estimates of the cost-of-capital elasticity of investment, or undermine models in which dividend tax reforms a§ect the cost of capital. Either way, it may be di¢ cult for policymakers to implement an alternative dividend tax cut that has substantially larger near-term e§ects.”

3. Paul Krugman: The European Scene: “The ECB’s plan… the German media are already howling, with Bild warning that Draghi’s expected actions will reduce the pressure for reform in ‘crisis-hit countries such as… France.’… Look at ‘crisis-hit’ France; investors are so worried about France that they won’t hold its bonds unless offered, um, 0.64 percent, the lowest rate in history. But never mind… the French must be in crisis, because they still believe in social insurance, and besides, they’re French. Notice also that crisis-hit Spain is now paying a lower interest rate than Britain…. This should… put an end to all the talk about how low British rates are the reward for austerity, and so on…. Very low rates reflect market expectations that (a) the European economy will remain very weak and (b) that the ECB will continue to fall far short of its inflation target…. The market is saying both that there are very few good investment opportunities out there–few enough that paying the German government to protect the real value of your wealth is a good move–and that inflation over the next five years will be around 0.4 percent, not the target of 2 percent…. The markets don’t believe that the US is immune to these ills. Market expectations of inflation… have fallen off a cliff…. [Yet] Fed officials seem weirdly complacent…”

Should Be Aware of:

• Emily Badger: “Uber and Lyft have become so popular so quickly in large part because they’ve filled a big gap in the urban transportation market. The smartphone-enabled ride services have offered more predictability than cabs, faster travel than transit, and fewer hassles–no parking, for one–than personal cars…”
• Peter Brown (2013): Recovering Submerged Worlds

1. Tim Murphy: Mike Huckabee’s PAC Paid His Family Almost $400,000: “Huck PAC… ‘is committed to electing conservatives across the nation at all levels of government’…. Since its inception, Huck PAC has never spent more than 12 percent of its funds on candidates or other PACs. It gave only 5 percent of its revenues—that is $47,000 of $1,063,142—to candidates during the 2012 cycle…. Last July, Politico reported on Huckabee’s penchant for charging state Republican parties for expensive, chartered flights—$15,944 for one trip to Iowa—when traveling for meetings and fundraisers. In 2009, an Alabama congressional candidate was forced to take out a loan after Huckabee’s $33,990 speaking fee ended up costing more than the candidate had raised at the fundraiser…”

2. Jamelle Bouie: Robert E. Lee Day: “This is the Gen. Robert E. Lee who led Confederate armies in war against the United States, who defended a nation built on the ‘great truth’ that the ‘negro is not equal to the white man,’ and whose armies kidnapped and sold free black Americans whenever they had the opportunity…. He sold children and oversaw brutal punishments, including sewing brine into the wounds of returned fugitives…. ‘If the image of Lee changes in history, the man himself did not, even in the face of the greatest provocations,’ writes Paul Greenberg for the Arkansas-Democrat Gazette in its annual editorial on the life of Lee, ‘His victories were great, but his honor greater.’”

3. Lauren Davis: He Went In For A Tune-Up And Came Out With A Full Cerebral Upgrade): “As the mask clicked over his face and the new neural pathways lit up, Zourn immediately wondered if he had paid too much for the upgrade. ‘That’s normal,’ the tech told him as she gave his mask a quick polish. ‘The upgrade makes you a savvier shopper, but only after we’ve debited your account.'”

4. Mark Joseph Stern: American Sniper Lawsuit: Chris Kyle Told Lies About Jesse Ventura: “The Ventura story wasn’t true, and Ventura meant to prove it. So he took Kyle to trial, suing him–and, after he died, his estate…. On July 29, 2014, a federal jury returned from six days of deliberations to award Ventura $1.845 million in damages…. Kyle’s widow… is currently appealing the decision; her odds of winning appear quite low. All of this presents a very big problem for HarperCollins…. Ventura brought another lawsuit for unjust enrichment, this time against HarperCollins. The lawsuit explains that while Kyle is the one who defamed Ventura, HarperCollins played up those defamatory statements in order to boost its sales—and with reckless disregard to the truth of Kyle’s claims. This suit is the second of Ventura’s one-two punch, and from here, it looks like a knockout. During the first trial, Ventura’s attorneys uncovered records of HarperCollins’ negligence in fact-checking Kyle’s book, as well as evidence that HarperCollins specifically touted the Ventura story to drum up publicity…”

5. Charles Pierce: Ron Fournier’s Idiocy Reappears As He Attempts To Counsel President Obama On Progress And Partisan Gains: “Tell me I didn’t call this 150 words ago. The areas of ‘potential agreement’ that Clinton found involved repealing the Glass-Steagall Act and deregulating the commodities futures market. I don’t think we should burn down the world economy so that Ron Fournier can feel comfortable about how well the system works…”

Apropos of Shane Ferro vs. Diane Coyle…

First, “secular stagnation” was a bad phrase for Larry Summers to have chosen to label what he wants to talk about. It is true that it was the phrase used by Alvin Hansen when he worried about a very similar thing at the end of the 1930s. And it is true that the root cause of what worried Hansen was his fear that technological progress had reached its culmination point–hence that future high return investments would be scarce. But what Hansen and Summers both worry about is not the absence of rapid technological progress per se.

What they both worry about is the possibility of a world in which, when investors have realistic expectations, total desired investment spending is lower than total economy-wide planned saving at full employment, even when were the safe nominal interest rate to fall to zero. If so, then full employment can only be attained if it is accompanied by unrealistically optimistic expectations by investors–bubbles, which then pop, doing unbelievable amounts of damage.

Such “badly behaved investment demand and savings supply functions”, as Marty Feldstein called them when he taught me this stuff the first time I saw it back in the winter of 1980, can have four causes:

1. Technological stagnation, which lowers the social and private rate of return on investment and pushes desired investment spending down too far.
2. Limits on societal investment absorption coupled with rapid declines in the prices of investment goods, which together put too much downward pressure on the feasible profitable share of investment spending.
3. Technological inappropriability, in which the market cannot figure out how to properly reward those who invest in new technologies even when they have enormous social returns, which also lowers the private rate of return on investment and pushes desired investment spending down too far.
4. High income inequality, which boosts the desired savings share of production as the only things the superrich can thank of to do with their wealth is to bless their heirs or play status games with each other, which pushes planned savings up too much.
5. Inflation too low, which means that even a zero safe nominal rate of interest is too high a real rate of interest to balance desired investment and planned savings at full employment.
6. Broken finance, which fails to properly mobilize the risk-bearing capacity of society and so drives too large a wedge between the risky returns on real investments and the safe interest rate on the debt of trustworthy sovereigns.

Of these six, robots would prevent (1), could cause (2), and are not terribly relevant to (3)-(6).

I think the big problem is (6), aided by (5). Larry Summers seems to think the big problem is some mix of (2)-(4)–and that, for reasons I don’t fully understand but are connected with bubbles and money illusion, resolving (5) by a higher inflation target is likely to make things worse…

Shane Ferro:

Mike Konczal sends us to:

And over the past six months the market has come to believe:

1. The FOMC’s policies are and will be too tight for it to hit its 2%/year inflation rate target over the next five years.
2. Rather, the FOMC’s policies will produce an average inflation rate of 1.3%/year over the next five years–a cumulative undershoot in nominal demand by an additional 3.5%-points.
3. But because the FOMC will not realize its policies are too tight–will explain away the quarter-by-quarter undershoots as due to special factors until late in this decade–investments in 5-Year Treasury notes will produce positive real returns, an expectation not held since 2010.

And, as near as I can see, the FOMC factions believe:

1. Interest rates need to be raised now so that commercial banks can return to their normal business models and not be forced to attempt profitability via the reach for yield by making risky loans that they cannot properly evaluate.
2. The market’s macro expectations are less well-informed than those of the Fed staff, and should be ignored as reflecting fads and fashions, panic and exuberance.
3. All or nearly all of the excess 2%-point decline in prime-age male labor-force participation over and above long-term trends is not or is no longer “cyclical”, in that these missing male workers cannot be pulled back into the labor force unless the economy becomes one of such high pressure as to produce unacceptable inflation.
4. All or nearly all of the excess 1.5%-point decline in prime-age female labor-force participation over and above the declining structural trend that (perhaps) began in 2000 is not or is no longer “cyclical”, in that these missing female workers cannot be pulled back into the labor force unless the economy becomes one of such high pressure as to produce unacceptable inflation.
5. It is not worth running any inflation risks to find out whether our views are correct or not.

From my perspective, all I can think is that the FOMC hs fallen victim to a form of groupthink in which it really does not understand the situation and the risks. The members of the FOMC who seek primarily to normalize interest rates out of a concern for the commercial banking sector do not understand:

1. Expectations of normal inflation rates and full employment need to proceed interest rate increases.
2. If they do not premature interest-rate increases will have to be rapidly reversed.
3. And the time spent near the ZLB will be even longer.

The members of the FOMC who seek optimal control do not understand:

1. How uncertain we are right now about the current state of the economy.
2. How uncertain we are right now about the current structure of the economy.
3. How even if the bond market’s shift over the past six months in its expectations is not a good rational forecast, it is nevertheless a major leftward shift in the IS curve that needs to be neutralized by someone.
4. How dire the situation in Europe is.
5. How much of the linkages across the Atlantic are due not to (small) trans-oceanic trade flows and their influence on aggregate demand, but rather to psychological animal-spirits contagion.

Paul Krugman is on the case:

Paul Krugman: The European Scene: “The ECB’s plan… the German media are already howling…

…with Bild warning that Draghi’s expected actions will reduce the pressure for reform in ‘crisis-hit countries such as… France.’… Look at ‘crisis-hit’ France; investors are so worried about France that they won’t hold its bonds unless offered, um, 0.64 percent, the lowest rate in history. But never mind… the French must be in crisis, because they still believe in social insurance, and besides, they’re French. Notice also that crisis-hit Spain is now paying a lower interest rate than Britain…. This should… put an end to all the talk about how low British rates are the reward for austerity, and so on….

Very low rates reflect market expectations that (a) the European economy will remain very weak and (b) that the ECB will continue to fall far short of its inflation target…. The market is saying both that there are very few good investment opportunities out there–few enough that paying the German government to protect the real value of your wealth is a good move–and that inflation over the next five years will be around 0.4 percent, not the target of 2 percent….

The markets don’t believe that the US is immune to these ills. Market expectations of inflation… have fallen off a cliff…. [Yet] Fed officials seem weirdly complacent…

947 words

Must- and Shall-Reads:

• Ben Friedman: “James Tobin often remarked that there are worse things than three percent inflation, and from time to time we have them. Indeed, we just did. In the same vein, there are worse things than sovereign debt defaults, and from time to time we have them too. They are in progress as we meet.”
• James Hamilton: “The [SNB] just wanted to try something different. But I confess that it is a great mystery to me why…. This has to be a major hit to Swiss exports and tourism, leave the SNB with little credibility and negative capital… cause significant financial disruptions… around the world.”
• Barry Eichengreen: Hall of Mirrors: The Great Depression, The Great Recession, and the Uses-and Misuses-of History
• Jenée Desmond-Harris: The Poor People’s Campaign: the little-known protest MLK was planning when he died
• C. Kirabo Jackson et al.: The Effects of School Spending on Educational and Economic Outcomes: Evidence from School Finance Reforms

1. Tim Duy: Will The Fed Take a Dovish Turn Next Week?: “We are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn… global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar… pointing to rapidly rising downside risks…. Expectations of the first rate hike have been pushed out  to the end of this year, seemingly in complete defiance of Fed plans…. [But] kind of a ‘Fed is from Mars, markets are from Venus’ situation…. My takeway is that the Fed sees the timing of the first rate hike as less important than everything that comes after that hike. This will leave them less eager to delay the hike… I suspect they see little chance of damage from that first hike alone…. I don’t see how they can justify raising rates without some reasonable acceleration in wage growth… [but] perhaps… they can justify it on the basis of 25bp won’t hurt anyone ..”

2. Willem Buiter: The SNB, the Exchange-Rate Peg, and the Interest-Rate ZLB: “[Superior] would have been the continuation of the exchange rate floor…. The old regime, with or without the additional 50bps cut… was viable and superior to the new regime…. Central banks can live with very large balance sheets… diversify… out of euro forex…. There is no ostensible problem with the central bank having to live with becoming an even larger hedge fund/asset manager or Sovereign Wealth Fund…. It may be that the political scrutiny that would come with an even larger balance sheet… was a source of concern…. But such discomfort would seem to be a small price to pay compared to the cost to the nation of a massively overvalued currency, serious deflation and the resulting harmful effects on the real economy…. The second superior alternative would have been to abolish the effective lower bound on the nominal interest rate…. There is little empirical evidence on demurrage for paper currency…. There are no serious arguments against creating a financial system where nominal policy rates can be set with equal ease at -5% as at +5%…. The ELB can be eliminated… by abolishing currency/cash… checkable deposits… credit cards, debit cards and cash-on-a-chip cards… existing and yet-to-be invented e-money… taxing currency, in the spirit of Gesell (1916)… end the fixed exchange rate, currently set at unity, between SNB deposits and cash… encourage the use of the deposit Franc as the numéraire… for price and wage setting…. The good news is that, apart for the reputational damage suffered by the SNB… much of the damage can be undone. The SNB… [could] restore as much of the status quo ante as possible by restoring a floor to the exchange rate of the CHF and the euro (or to the effective exchange rate of the CHF for some suitable basket of currencies)…. No doubt the euros would be galloping in at any floor that is not well below 1.20 CHF per euro, but Switzerland has many skilled asset managers who could invest the rapidly expanding resources of the SNB in a globally diversified portfolio of nominal and real assets. The second damage-limiting option is to abolish the ELB on nominal interest rates as soon as possible…

3. Franklin Delano Roosevelt (1935): “Today a hope of many years’ standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last…”

4. Ezra Klein: Why Republicans Can’t Replace ObamaCare: “Cato’s Michael Cannon scolds the right for getting outplayed, again and again, on health care. ‘Conservatives are falling into the same trap… conceding… that the government should be trying to provide everybody with health insurance…. Once you accept those premises, all of your solutions look like the left’s solutions.’… Cannon is right. The basic project of health reform, at least as it’s been understood in American politics in recent decades, involves the government giving money to poor people so they can buy health-care insurance. That money needs to come from somewhere…. The problem for conservatives is that making sure poor people have health insurance is politically popular…. Philip Klein illuminates an inconvenient truth: upheaval in the health-care system typically makes for terrible politics…. This is the central problem for conservative health reformers… the party doesn’t want to make the sacrifices necessary to unite behind an alternative to Obamacare, much less actually pass and implement it…. Klein identifies three schools of conservative thought on what to do next: the Reform School… the Replace School… repeal Obamacare and replace it with Obamacare-lite; and the Restart School, which… rejects the idea that the government should be… expand[ing] access to health care…. Klein’s book is… far and away the clearest, most detailed look at conservative health-policy thinking…. But… the important cleavage… is between those in the party who want to prioritize health reform and those who don’t…. And that’s really the problem for conservative health reformers. For all the plans floating around, there’s little evidence Republicans care enough about health reform to pay its cost.”

Should Be Aware of:

• Steven Miner: Review of Roger Moorhouse: ‘The Devils’ Alliance: Hitler’s Pact With Stalin, 1939-41′
• Robert Reich: The New Compassionate Conservatism and Trickle-Down Economics
• Snowdonia Cheese Company

1. John Holbo: The Race Card, Circa 1871: “Jon Chait has an interesting column… Stephen Budiansky… ‘waving the bloody shirt’ wasn’t functionally a smear against post-Civil War Democrats, turning every debate about post-war issues into a re-commencement of old hostilities. Rather…. ‘In 1871, Klansmen in Mississippi accosted Allen Huggins, a northerner who had helped educate freed slaves, thrashed him within an inch of his life, and threatened to kill him…. The bloody shirt was Huggins’s, allegedly waved by Republican Benjamin Butler on the House floor… not the relic of an ancient feud but evidence of an ongoing epidemic of rampant violence.’… It was, right from the start, the double-reverse ‘bloody shirt’ gambit. False flag. An attempt to generate a smokescreen to conceal present violence, by falsely alleging that the people drawing attention to present violence were merely trying to inflame people regarding past violence…. Think of how weird it is that the Democratic attitude, which evolved ‘waving the bloody shirt’ as a rhetorical defense mechanism, was probably something like this: ‘I do not oppose Reconstruction, but of course that does not mean that I do oppose the near-murder of any carpetbagger who would educate former slaves!’ Chait’s point is that, in this case, a propaganda talking point won, becoming proverbial historical wisdom…”

2. * Munilass: A Defense of Disruption as a Cultural Phenomenon: “Wieseltier’s remark…. Isn’t it possible both to resent living in a universe of content-driven drones, mindlessly copying and pasting articles and co-opting narratives, but still be excited about the democratization of ideas?… Disruption is not the same thing as nihilism. Moreover, nihilism wasn’t invented in the 21st century…”

In its review of my next-door office neighbor, friend, and patron Barry Eichengreen’s superb Hall of Mirrors: The Great Depression, The Great Recession, and the Uses-and Misuses-of History, the London Economist writes things like:

Mr Eichengreen at times stretches the facts to fit his narrative. He accuses the Fed of keeping monetary policy too tight because of a preoccupation with inflation; but it enacted several rounds of unconventional stimulus…

This simply will not do.

Barry has substantial discussions of when, how, and why he thinks that the Federal Reserve kept monetary policy too tight because of a preoccupation with inflation.

You can disagree with the analytical framework he uses to make his assessment that monetary policy was “too tight”–smart people like Jeremy Stein do.

But you cannot say that Barry’s documented and well-supported analytical judgment “stretches” the facts, without any further elaboratio–unless, of course, you want to get a reputation for being in the fact-stretching business yourself.

The London Economist is right now in a race to establish itself as a trusted information intermediary with entities like the Financial Times, Business Insider, and http://vox.com. Right now it appears to me at least to be well behind the leaders. Things like this do not help it…