Things to Read on the Morning of August 19, 2014

Must- and Shall-Reads:

1. Dean Baker: Stock Returns: Between Shiller and DeLong: “Stocks still look like a pretty good deal, since even if there is some decline in the profit share of income and also some reversion toward long-term trends in price to earnings ratios (my bet is that the ratio stays above 20), then the real returns are still likely to be well above 3.0 percent. In short, I can’t see the basis for Shiller’s big fears. On the other hand, the high price to earnings ratios in the stock market means returns will almost certainly be lower in the next decade or so than their long-term average. (There actually is a very good paper on this topic, see Baker, Delong, and Krugman, 2005.)”

2. Humans Need Not Apply:

3. Heidi Przybyla: Obamacare Losing Punch as Campaign Weapon in Ad Battles: “Republicans seeking to unseat the U.S. Senate incumbent in North Carolina have cut in half the portion of their top issue ads citing Obamacare, a sign that the party’s favorite attack against Democrats is losing its punch. The shift–also… in… Arkansas and Louisiana–shows Republicans are easing off their strategy of criticizing Democrats over the Affordable Care Act now that many Americans are benefiting from the law and the measure is unlikely to be repealed. ‘The Republican Party is realizing you can’t really hang your hat on it’, said Andrew Taylor…. Republican pollster Whit Ayres, who has advised U.S. Senate candidates including Marco Rubio…. ‘Obamacare will not be the most important issue’, and Republicans will have to ‘target people very directly’… said Ayres, who co-wrote a memo this month for outside spending groups such as Crossroads GPS and the American Action Network…”

4. Lawrence Summers (1982): The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect: “There is no evidence that interest rates respond to inflation in the way that classical or Keynesian theories suggest, For the period 1860-1940, it does not appear that inflationary expectations had any significant impact on rates of inflation in the short or long run. During the post-war period interest rates do appear to be affected by inflation. However, the effect is much smaller than any theory which recognizes tax effects would predict. Furthermore, all the power in the inflation interest rate relationship comes from the 1965-1971 period…. The relationship between inflation and interest rates remains weak even at low frequencies…. Cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher’s theoretical prediction. Rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.”

5. Andrew Brown: The Great Chinese Exodus: “Recently, Ms. Sun flew to San Francisco to shop for a school for her daughter, browse for property and handle the paperwork for permanent U.S. residency. She insists that she’s not leaving China forever—-a sentiment expressed by many on their way out who see a foreign passport as an insurance policy in case things go badly wrong in China. ‘I’m just giving my family another option’, she says. A college professor, who insisted on anonymity… takes a darker view of China’s prospects as he prepares to emigrate to the U.S., joining his two children…. In China, he pronounces, ‘Once you get rich, they arrest you’…. His real concern is that to get ahead, he’s had to make compromises with his principles… and now he worries that it could all be snatched away. In China, a weak, corrupt legal system may sometimes work in favor of entrepreneurs while they’re clawing their way up, cutting corners along the way, but it is almost always a liability once they’ve made it…. China, he concludes, is still ‘a very backward country’…. Beijing takes an intense pastoral interest in the Chinese diaspora. It has some 48 million members—-about double the number of Indians living outside their country…. And the outflow has only just begun…. The Chinese government has no desire to slow the flow of students…. Not even Deng could have imagined the human torrent his ‘open door’ reforms would eventually unleash. Try 100 million—and counting.”

6. Roger Farmer: The Treasury and the Fed are at Loggerheads over QE: “How successful was operation twist at changing the maturity structure of Treasury securities held by the public? In Figure 4, I break down Treasuries held by the public as a fraction of total debt outstanding. This figure shows that although the Fed switched its holdings from yields of three months to two years to yields in the two to ten year range (Figure 3) this operation was swamped, after November of 2008, by Treasury operations that increased the supply of maturities in the two to ten year range (Figure 4). The end result was that the public ended up holding more of these two to ten year bonds in 2010 than before the recession hit. Could we have a little coordination here guys?”

And:

• Izabella Kaminska: Kinder Morgan, MLPs and the sell case
• File770: “The bloc vote for Vox Day’s Opera Vita Aeterna kept Ken Liu’s ‘The Litigation Master and the Monkey King’ off the ballot…”

Should Be Aware of:

1. Ben Adler: Joel Kotkin thinks you want to live in Houston. Here’s why you don’t: “There are people who have made a career out of being consistently wrong, and then there’s Joel Kotkin…. Kotkin has based his main thesis on not understanding basic economics…. If prices are high in a handful of elite, dense, coastal cities such as Boston, Washington, New York, San Francisco, and Portland, that’s because demand to live in them is high. If prices are low in the sprawling metropolitan regions of Houston, Dallas, Phoenix, or Atlanta, that’s because demand to live in them is relatively low. And yet, for the last decade, Kotkin, an urban studies professor at Chapman University in Orange, Calif., has been churning out op-eds in leading national newspapers such as The Wall Street Journal, arguing that suburban-style Sun Belt cities are the future and Americans want suburban sprawl precisely because prices are high in dense cities and low in sprawling Southern and Western regions. Yes, you read that correctly. Kotkin repeatedly claims that because population growth is greater in Sun Belt cities and their suburbs than in urban coastal cores, it shows that most Americans, especially middle-class families, prefer living in those places…”

2. Simon Maloy: The right’s “bombshell” deceit: Why the left’s defense of Perry reveals so much: “The Hack Gap is defined as the relative lack of left-leaning pundits and media types who will abandon principle in order to move the political ball forward. ‘Conservatives outscore us considerably in the number of bloggers/pundits/columnists/talking heads who are willing to cheerfully say whatever it takes to advance the party line, no matter how ridiculous it is’, Mother Jones’ Kevin Drum wrote of the Hack Gap back in 2012…. Consider the liberal reaction to the legal acrobatics underway in Texas and compare that to the conservative reaction to the D.C. Circuit Court panel’s ruling in… Halbig…. Up and down the line, from right-wing magazines to think tanks to Fox News to talk radio, all the organs of the conservative movement were praising the legal wisdom of the decision and obvious illegality of the Affordable Care Act’s subsidies. Even as reporters began digging through the decision and finding obvious errors of logic and instances of the Halbig plaintiffs contradicting themselves on their own argument, conservatives kept the faith. It got to be that conservative pundits were rewriting the political history of the ACA and arguing that everyone involved in writing and analyzing and covering the bill simply failed to notice this critically important question of intent that they now hope will undermine the entire law. Some left-leaning writers have devoted a lot of time to explaining this phenomenon, like Brian Beutler and Jonathan Chait, who used a certain sitcom episode as a devastatingly effective Halbig analogy…. Conservatives fell in line to advance their political goals, and got busy tearing down everything they once believed in order to build a rickety support structure…. The difference in reaction is no less striking. The Hack Gap, for better or worse, is very real.”