Things to Read on the Evening of August 24, 2014

Must- and Shall-Reads:

• Simon Wren-Lewis: UK 2015: 2010 Déjà vu, but without the excuses
• Cliff Asness: An Old Friend: The Stock Market’s Shiller P/E
• Brad Plumer: Iceland’s Bárðarbunga Volcano Has Started Erupting
• Roger E. Backhouse and David Laidler: What Was Lost with IS-LM
• Jason Karaian: Norway’s gargantuan sovereign wealth fund, by the numbers

1. Kevin Drum: Welfare Reform and the Great Recession “CBPP…. Welfare reform… in its first few years… seemed like a great success… but it was a bubbly economy that made the biggest difference. So how would welfare reform fare when it got hit with a real test? Answer: not so well. In late 2007 the Great Recession started, creating an extra 1.5 million families with children in poverty. TANF, however, barely responded at all. There was no room in strapped state budgets for more TANF funds…. This is why conservatives are so enamored of block grants. It’s not because they truly believe that states are better able to manage programs for the poor than the federal government. That’s frankly laughable. The reason they like block grants is because they know perfectly well that they’ll erode over time. That’s how you eventually drown the federal government in a bathtub. If Paul Ryan ever seriously proposes—and wins Republican support for—a welfare reform plan that includes block grants which (a) grow with inflation and (b) adjust automatically when recessions hit, I’ll pay attention. Until then, they’re just a Trojan Horse…. After all, those tax cuts for the rich won’t fund themselves, will they?”

2. Anne VanderMey: Joe Blasi’s Easier Solution to Wealth Inequality?: “Joseph Blasi… along with… Richard Freeman and Douglas Kruse, wrote… The Citizen’s Share: Reducing Inequality in the 21st Century… corporate profit-sharing, employee stock ownership, and stock option plans…. The idea is rooted, he says, in the Founding Fathers’ original vision of widespread land ownership…. ‘Why isn’t our plan radical?’ Blasi asks. ‘Because the founders of the American revolution had this view. That broad-based capital ownership was necessary for the republic to exist.’… ‘We have to find a way for citizens to have some ownership of the technologies of the future…. We could have a future where technology creates a low feudal serf class—people with low wages or flat wages or high structural unemployment… or… a future where we have a smaller workweek and citizens broadly have more capital ownership.'”

3. James Pethokoukis: Does the GOP have a policy problem or a messaging problem? Both, it seems “Byron York…. ‘The reformers face resistance not just from the corners of the conservative world that disagree with them on taxes, immigration, and other, perhaps lesser issues. They are also under attack from those in the Republican establishment who see no need to reevaluate GOP policies. According to this faction, the party doesn’t have a policy problem; it has a messaging problem.’ Obviously I think the GOP has a policy problem. But that aside, Rs should not underestimate just how bad their messaging problem is…. GlobalStrategyGroup…. While voters by a huge margin prefer candidates focused on ‘more economic growth’ versus ‘less income inequality’, voters also think… raising the minimum wage and guaranteeing a minimum wage–are better for growth than  business tax cuts or reducing top marginal income tax rates…. And… voters seem to have a much broader view of what policies qualify as ‘pro-growth’. Whatever the economic argument the GOP is making, the party does not seem to be making it very well.”

4. Binyamin Applebaum: On the Decline in Labor Force Participation: “Davis and Haltiwanger attribute… to the aging of the work force as people get older, they tend to change jobs less frequently. The decline in the creation of new companies is also playing a role. In effect, companies are getting older, too. This has been particularly pronounced in the retail sector, where giants like Walmart and McDonald’s offer relatively stable employment…. The cost of training workers has increased, partly because the share of all workers who require government licenses has grown by one estimate from about 5 percent in the 1950s to 29 percent in 2008. This discourages hiring. So do legal changes that have made it more difficult to fire employees…. It also mentions health insurance as a reason that employees may stay put. In the view of Mr. Davis and Mr. Haltiwanger, the recession just made a bad situation worse…. But economists and policy makers will have to reconcile the assertion that these trends were the dominant factors with the reality that the employment rate rose in the years before the recession, then dropped sharply during the recession. The new paper, like others of its genre, basically requires belief in a big coincidence: that a short-term catastrophe happened to coincide with the intensification of long-term trends — that the economy crashed at the moment that it was already beginning a gradual descent.”

5. Paul Krugman: Core Success: “Cecchetti and Schoenholtz on core inflation reminds me that this concept, too, has been a huge success…. Those of us who looked at core inflation came in for a lot of abuse during the ‘debasing the dollar’ period of 2010-2011, when right-wingers were writing to Ben Bernanke to attack his policies and Paul Ryan was warning that rising commodity prices were the harbinger of runaway inflation. Assertions that fundamental inflation hadn’t gone up were met with ridicule and insults. But sure enough, the commodity price effect on inflation was a blip, and went away. And the inflation hawks learned their lesson, and revised their models. Hahahaha–just kidding.”

6. Barry Ritholtz: Your Weekend Reading on the CAPE: “When CAPE measures are less than 10, future 10-year returns are outstanding. Over the long run, returns fall the higher CAPE rises. However, in the short run, it is anyone’s guess. As Kitces has noted, CAPE is terrible as a market-timing tool, but it does add value for long-term retirement planning…. What CAPE does well: 1) Expected Returns: CAPE is good at providing expected 10-year equity returns…. 2) Market Peaks: When readings of CAPE are at very high (typically top quintile) it can signal a market top…. 3) Market Bottoms: When CAPE measures are at extreme lows, it generates an excellent long-term entry point into equities…. The measure of CAPE is simple, clean, easy to understand, and has a century-long track record. Thanks to Shiller, it was well-conceived and objective…. There are numerous criticisms of CAPE:1) Financial-Crisis-Distorted Earnings…. 2) Changes in Accounting…. 3) Low Interest Rates: With less competition from fixed income assets, stock markets end up with a higher P/E ratio than they otherwise would…. 4) Track record: Perhaps the biggest criticism is that since 1990, CAPE has spent 98 percent of the time above its historical average. The metric’s failure to mean-revert over the last 23 years raises questions about its long-term utility…”

7. Tim Harford: Why inflation remains best way to avoid stagnation: “Normally, when an economy slips into recession the standard response is to cut interest rates. This encourages us to spend, rather than save, giving the economy an immediate boost. Things become more difficult if nominal interest rates are already low…. There is a simple alternative, albeit one that carries risks. Central bank targets for inflation should be raised to 4 per cent. A credible higher inflation target would provide immediate stimulus (who wants to squirrel away money that is eroding at 4 per cent a year?) and would give central banks more leeway to cut real rates in future…. An inflation target of 4 per cent… will not happen…. What practical policy options remain? That is easy to see. We must cross our fingers and hope that Prof Summers is mistaken.”

Should Be Aware of:

• Rebecca Solnit: Are the Techno Riche Really Ruining San Francisco?
• Nick Rowe: Second best monetary and fiscal policy and the strategy space
• Brad DeLong (2010): Is Macroeconomics Hard?

2. Paul Krugman: Draghi at Deflation Gulch:“I know Mario Draghi… I both like and admire him…. [I read] his Jackson Hole speech as the words of a man who knows perfectly well how dire the situation is, and is sailing as close to the wind as he can, but is all too aware of how inadequate that’s likely to be…”

3. Rakesh Vohra: Rethinking Intermediate Microeconomics “About a year ago, I chanced to remark upon the state of Intermediate Micro…. My chair very kindly gave me the chance to put the world to rights. Thus trapped… I begin next week. By the way, according to Alvin Roth, when an ancient like myself chooses to teach intermediate micro-economics it is a sure sign of senility. What do I intend to do differently?… Begin with monopoly, followed by imperfect competition, consumer theory, perfect competition, externalities and close with Coase. Why monopoly first?…. It involves single variable calculus rather than multivariable… student[s] enter the class thinking that firms `do things’ like set prices. The traditional sequence begins with a world where no one does anything. Undergraduates are not yet like the white queen, willing to believe 6 impossible things before breakfast…. Preferences… quasi-linear…. Producer theory? Covered under monopoly, avoiding needless duplication.”