Things to Read on the Morning of May 30, 2014

Should-Reads:

1. Kevin O’Rourke: Whither the Euro?: “All these difficulties were properly pinpointed by traditional optimal currency area theory…. Around the euro area periphery… capital inflows pushed up wages and prices. But what goes up does not come down so easily when there is no independent currency. Labor mobility within the euro area remains limited: young Irish workers emigrate to Australia or Canada, the Portuguese to Angola or Brazil. And with no federal budget to smooth asymmetric shocks, procyclical austerity, which exacerbates rather than ameliorates recessions, has been the policy weapon of choice during this crisis—whether imposed by the markets or by euro area politicians and central bankers. Mass unemployment in the periphery is exactly what theory would predict in such circumstances. Indeed, since 2008 we have learned that traditional optimal currency area theory was too sanguine about European monetary union. In common with much mainstream macroeconomics, it ignored the role of financial intermediaries such as banks, which link savers and borrowers. Many of the euro area’s most intractable problems stem from the flow of capital from the core to the periphery via interbank lending. When that capital stopped flowing, or was withdrawn, the resultant bank crises strained the finances of periphery governments. That further worsened bank balance sheets and credit creation, leading in turn to worsening economic conditions and rising government deficits—a sovereign bank doom loop that kept replaying…” The astonishing thing to me is how close the rhyme has been between the history of the travails of the interwar gold standard and the history of the twenty-first century Europe: terrible policies, repeated…

2. Nick Bunker: CEO pay, equity and efficiency | Washington Center for Equitable Growth: “The median… CEO… made $10.5 million in 2013…. Is this rising pay for executives a major contributor to rising inequality? And if so, is it necessary for a well-functioning company?… The overall income distribution compiled by economists Emmanuel Saez and Thomas Piketty… threshold for the top 0.01 percent, $7.2 million…. Are they a significant share of that group?… Bakija… Cole… and… Heim… executives, managers, and supervisors were 30 percent of the top 1 percent and 42.5 percent of the top 0.1 percent. That occupation group doesn’t include managers from the financial sector… another 13.2 percent of the 1 percent and 18 percent of the top 0.1 percent…. There is evidence that CEOs as a class are overpaid…. Bertrand… and… Mullainathan of Harvard University show that CEO pay in the oil-and-gas industry is just as responsive to upticks in business fortunes due to luck or to random rises in oil prices, as to upticks in fortunes due to skill…. Betrand and Mullainathan argue that their result is evidence of the capture of the pay-setting process by CEOs…” Larry Summers likes to state that private-equity CEOs make as much–more–than public-company CEOs, and so it cannot be purely capture of the pay-setting process. I think that is an inference too far: talk to the princes of private equity and see how many public-company CEOs they would hire–I think the number is rather small…

3. Nick Bunker: Tax cuts for the kids: “A number of reform-minded conservatives gathered at the American Enterprise Institute last week to celebrate the publication of a new book, Room to Grow…. One particularly interesting proposal is a call for ‘family friendly’ tax reform from economist Robert Stein…. Senator Mike Lee… child rebate set at $2,500 per child…. By focusing the tax cut on families that have children, the plan would help the development of future human capital…. The Stein-Lee plan does have some serious problems. The tax refund is not refundable…. And in an effort to make the plan revenue neutral, Lee would reduce tax credits for those at the bottom of the income ladder, as Chuck Marr at the Center for Budget and Policy Priorities has pointed out, making the issue of access even worse for low-income families. This conservative version of family friendly tax reform won’t become law anytime soon. Nor should it. But the recognition that increasing the disposable income of families is key to growth and mobility is certainly a welcome policy position from the right…” I am less sanguine: a non-refundable tax credit really is a non-starter from the get-go…

Should Be Aware of:

• Russell Korobkin: Relative Value Health Insurance
• USA: Viking Artefacts Discovered Near Great Lakes
• Danielle Kurtzleben: Millennials are playing it safe, and that makes them bad investors
• Jonathan Chait: Business Lobby Tries to Frighten America About Clean Energy, Fails Utterly
• Amos Barshad: Building the Imperfect Pop Star: Charli XCX is responsible for one of the year’s biggest hits — so why isn’t she huge yet?

And:

1. Marshall Steinbaum: Piketty versus Hassett: a primer on after-tax income and inequality: “Hassett’s praise for the potential for income redistribution to rectify injustice in market outcomes is notable, but in fact there have been many comparisons of pre- and post-tax-and-transfer income distributions, starting with this one from the Congressional Budget Office. Spoiler alert: they’re not very different from Piketty’s analysis. The reason? While transfer payments have increased (mostly thanks to an aging population), effective tax rates at the top of the income distribution have fallen sharply since 1980 (and we have the government debt to prove it)…” The big enchilada in all this is made up of the government-funded health programs. Evaulating them is difficult: they are boosts to reasonable assessments the real income of the poor, but it is not the case that the boost to the real income is the same as the amount of money spent by the government, for people would have gotten some charity care if there were neither Medicaid nor SCHIP. How much of a boost? That is very hard to assess…

2. Nob Akimoto: Dear Nate Silver: Hire Better Editors: “I get that some folks thought we were being too hard on Silver over the Pielke stuff. Fine. But look at this recent piece of utter dreck. Anyone with a basic understanding of statistics (ie not Benjamin Morris) would know that you don’t suss out meaning in regressions using highly highly correlated numbers. Multicollinearity is an actual thing.  You have to consider interaction terms and It’s not a difficult thing for actual quantitative researchers to know. And you know what? A basic understanding of demographic and nutritional data would know that weight and height are HIGHLY correlated variables, especially in such a selectively created population like the NFL. Otherwise the result is just numerology. May as well hire Dan Brown to write articles about quarterbacks, seriously…”

Already-Noted Must-Reads:

1. Daniel Kuehn: Facts & other stubborn things: It’s all about the discontinuities: “The other day I posted a suspicion of mine that Giles was very wrong about Piketty based on his treatment of discontinuous data series…. It was just a suspicion, but it was due to a problem that I think anyone who has worked with disparate data sources would immediately recognize. ]Howard Reed has gone through the data sources and he agrees….](http://www.theguardian.com/news/datablog/2014/may/29/piketty-chris-giles-and-wealth-inequality-its-all-about-the-discontinuities) This is one of the best commentaries on this argument that I’ve seen yet. He does a great job walking you through the problems in Giles’s work. What’s more amazing is that Giles seems to recognize the difference between what he did and what Piketty did, but he does not recognize it’s significance. btw – some comments by Phil Magness on Facebook suggest he doesn’t get this point either…”

2. Howard Reed: Piketty, Chris Giles and wealth inequality: it’s all about the discontinuities: “I have identified three major discontinuities between the series for the years 1974-81…. Taken as a whole, these discontinuities imply that the estimate of the top 10% share of wealth is 22.5 percentage points lower by 2010 than it would have been if the wealth statistics had been collected on a consistent basis after 1974 as they were before 1974…. The main difference between the Piketty time series for UK inequality and the Giles time series for UK inequality, is that Piketty corrects his data series to allow for this 23 percentage-point drop (caused by changes in the methodology used to measure the wealth distribution), whereas Giles does not. While Giles has made it clear to me in private correspondence that he was fully aware of the discontinuities in the data series, he chose not to correct his final published data series to allow for them…”

3. Paul Krugman: Cutting Back on Carbon: “Next week the Environmental Protection Agency is expected to announce new rules designed to limit global warming. Although we don’t know the details yet, anti-environmental groups are already predicting vast costs and economic doom. Don’t believe them. Everything we know suggests that we can achieve large reductions in greenhouse gas emissions at little cost to the economy. Just ask the United States Chamber of Commerce. O.K., that’s not the message the Chamber of Commerce was trying to deliver…. [But] the report considers a carbon-reduction program that’s probably considerably more ambitious than we’re actually going to see, and it… sounds like Dr. Evil intoning ‘one million dollars’. These days, it’s just not a lot of money…”

4. Timothy Layton: If ObamaCare plans are only offering narrow networks, blame information asymmetry: “I think there is an additional issue to consider: the salience of information provided to consumers. In the Marketplaces, plans are differentiated mostly by three factors: Price, cost-sharing, and network. Anyone who has visited one of the state Marketplace websites knows that both price and cost-sharing information are very salient. However, information about a plan’s network is much murkier. Sure, anyone can follow a series of links to an insurer’s (often unclear) website and type in the name of specific providers to determine whether they belong to the insurer’s network. But, for most consumers, especially those with limited experience interacting with specific providers, a list of every doctor in the insurer’s network obviously does not provide a clear picture of the quality of the network. In economics, this lack of information about network quality is referred to as an information asymmetry. Information is asymmetric because insurers know more about the quality of their network than consumers.  In a famous paper that won him the Nobel Prize in Economics, George Akerlof showed that asymmetric information can produce market failures…”