Things to Read on the Morning of September 10, 2014

September 10, 2014

Must- and Shall-Reads:

 

  1. Andreas Fuster, Basit Zafar, and Matthew Cocci: Why Aren’t More Renters Becoming Homeowners?: “With a stronger economy and eased credit standards, flows into homeownership would pick up. However, one caveat is that many potential buyers with relatively low credit scores (35 percent of renters in our sample think that their credit score is below 680) might now be ‘discouraged’, meaning that they are convinced that they would not be granted credit and thus may fail to apply for a mortgage even after an easing in standards. Also, relaxing credit standards may, of course, have undesirable consequences down the road, since borrowers with lower credit scores are at higher risk of default.”

  2. Andy Harless on Twitter JOLTS hires sqrt openings Sqrt approx best loglin fit Likely shifts 8 2006 7 2010 Also possible 10 2001 10 2005 http t co vsCGNjDwAndrew Harless: Employment, Interest, and Money: An Ultraminimalist Model of the Beveridge Curve, or, How I Learned to Start Worrying and Love Structural Unemployment: “The cumulative sum of the residuals peaks in July 2006, suggesting that there may be a structural break in August. A casual look at the residuals strongly suggests another structural break in July 2010. Both purported structural breaks go in the same direction: a decline in the number of hires associated with any given number of job openings. So, contrary to what I said in 2010, it does look like we are seeing more structural unemployment now than in the past…. So what does all this imply about the natural rate of unemployment?… If the relationship between hiring and unemployment is stable, as it appears to be, then my model implies that shifts in the matching function will determine a shifting relationship between the (assumed constant) NAIRV and the NAIRU (Non-Accelerating Inflation Rate of Unemployment, a.k.a. the natural rate of unemployment). For what it’s worth, my estimates suggest that the hypothesized August 2006 and July 2010 shifts in the matching function would, collectively, increase the NAIRU by a factor of about one and a third. So if the NAIRU was 4.5% (my best guess, which happens to be conveniently divisible by 3) in July 2006, it is 6% now…”

  3. Jens H.E. Christensen and Simon Kwan: Assessing Expectations of Monetary Policy: “An ongoing concern has been that the public might misconstrue the Fed’s forward guidance about future monetary policy and underappreciate the extent to which short-term interest rates may vary with future news about the economy. Evidence based on surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants. The public also may be less uncertain about these forecasts than policymakers.”

  4. Marika Cabral, Michael Geruso, an Neale Mahoney: Does Privatized Health Insurance Benefit Patients or Producers? Evidence from Medicare Advantage: “The debate over privatizing Medicare stems from a fundamental disagreement about whether privatization would primarily generate consumer surplus for individuals or producer surplus for insurance companies and health care providers. This paper investigates this question by studying an existing form of privatized Medicare called Medicare Advantage (MA). Using difference-in-differences variation brought about by payment floors established by the 2000 Benefits Improvement and Protection Act, we find that for each dollar in increased capitation payments, MA insurers reduced premiums to individuals by 45 cents and increased the actuarial value of benefits by 8 cents. Using administrative data on the near-universe of Medicare beneficiaries, we show that advantageous selection into MA cannot explain this incomplete pass-through. Instead, our evidence suggests that insurer market power is an important determinant of the division of surplus, with premium pass-through rates of 13% in the least competitive markets and 74% in the markets with the most competition.”

  5. **Walter Frick: If Your Kids Get Free Health Care, You’re More Likely to Start a Company: “Starting a business is risky enough in the best of circumstances. Most new ventures fail, and the prospect of forgoing a salary is enough to keep many would-be entrepreneurs from taking the plunge. But think about how much harder it would be if your child had a health condition, and you couldn’t get her insurance if you struck out on your own. That’s less of a problem in the U.S. than it was a few years ago, thanks to Obamacare, but until recently it was a very real conundrum…. Gareth Olds of Harvard Business School… analyzed Census data from before and after the passage of the Children’s Health Insurance Program in the U.S…. The self-employment rate for CHIP recipients increased from just under 15% of those eligible to over 18%. That amounts to an a 23% increase. The rate of ownership of incorporated businesses–a better proxy for sustainable, growth entrepreneurship–increased even more dramatically, from 4.3% to 5.8%, an increase of 31%…. The basic intuition behind his methods is that a family just above the CHIP cutoff isn’t all that different from a family just below it…”

  6. Jonathan Chait: Why the Worst Governments in America Are Big Small Local Governments: “Police militarization bore only the faintest responsibility for the tragedy in Ferguson…. Old-fashioned policing tools were all the Ferguson police needed to engage in years of discriminatory treatment, to murder Michael Brown, and to rough up journalists covering the ensuing protests…. Ferguson has exposed a genuine opening for thinking about public life in a way that cuts across traditional ideological lines. The problem is what you might call Big Small Government…. Ferguson… is an Orwellian monstrosity. Its racially-biased Police Department is the enforcement wing of a predatory system of government described in scathing detail in a recent report by ArchCity Defenders… an instrument of fiscal (in additional to social) domination. Court fines account for a fifth of the city’s revenue. Police officers disproportionately search black drivers…. The city issues three warrants per household, and its draconian justice system appears designed to bleed its victims. The report notes, ‘A Ferguson court employee reported that the bench routinely starts hearing cases 30 minutes before the appointed time and then locks the doors to the building as early as five minutes after the official hour, a practice that could easily lead a defendant arriving even slightly late to receive an additional charge for failure to appear.’… There are not many people who find their freedom so unjustly impaired by the government in Washington as the people of Ferguson are by their local government…. Big Small Government is all around us. We simply haven’t trained our minds to notice it… both right and left have exhibited forms of this mental block…. Why do coastal states lack affordable housing? Because regulations prevent dense construction…. Here is a genuine case of onerous regulation with dire economic consequences…. Or consider occupational licensing. Some 29 percent of American workers need a state-issued license in order to legally do their job…. Income inequality isn’t just about low taxes for the rich and generous compensation for executives; it’s also about the difficulty working-class Americans have getting a job as a barber or a dental hygienist. These regulations don’t exist because of a popular outcry from voters terrified that the person they hire to help them pick out new drapes may lack formal training for the job. They exist because they serve the narrow interests of tradesmen…”

  7. Simon Wren-Lewis: Unconventional Monetary Policy versus Fiscal Policy: “I cannot see why some people insist that unconventional monetary policy is always preferable to fiscal policy. In a comment on a recent Nick Rowe post, Scott Sumner writes ‘My views is that once the central bank owns the entire stock of global assets, come back to me and we can talk about fiscal stimulus’. What this effectively means is that it is better for one arm of the state (the central bank) to create huge amounts of money to buy up large quantities of assets than to let another arm of the state (the Treasury) advance consumers rather less money to spend or save as they like. This preference just seems rather strange, but maybe Lenin would have approved!”

  8. Ryan Cooper: America is running out of jobs. It’s time for a universal basic income: “The politics of a guaranteed income get a lot easier when you acknowledge that the U.S. is no longer the land of opportunity…. The fundamental bargain of American society is that for anyone willing to hustle, there is a decent job to be found, or one that will at least prevent abject destitution. It underpins our national mythos as the land of opportunity and self-reliance. It has always been less true than anyone wanted to admit, but for an increasingly large fraction of the population–start with the 16 percent of Americans who regularly don’t have enough to eat–it’s a sick joke…. One can easily imagine the historical process described by Marx going in reverse. In today’s labor market, where there are still twice as many job seekers as job openings, the constant conservative carping about the ‘dignity of work’ sounds more jarring and vindictive by the day. As someone with a nice, stimulating job, I agree that work can help people flourish. But in an economy that is flatly failing to produce enough jobs to satisfy the need, a universal basic income will start to seem more plausible–even necessary.”

Should Be Aware of:

 

  1. Martin Wolf: Europe has to do whatever it takes: “In the second quarter of this year, real domestic demand in the eurozone was 5 per cent lower than in the first quarter of 2008. The eurozone’s unemployment rate has risen by just under 5 percentage points since 2008. In the year to July 2014, consumer price inflation in the eurozone was 0.4 per cent…. The eurozone is in a depression; lack of demand has played a crucial role; and the European Central Bank has failed to deliver on its own price-stability target. This is not just sad. It is dangerous. It is folly to assume continued stability if economic performance does not improve. A necessary, though not sufficient, condition for grappling with these challenges is understanding them…. Mario Draghi… the one senior eurozone policy maker who shows a grasp of the issues, made a vital contribution at this year’s Jackson Hole symposium…. The capacity of the peoples of member states to tolerate high unemployment and deep slumps has been impressive. But it cannot be unlimited. If that is what the powers that be continue to advocate, the result will probably be a populist reaction…. Who is sure Marine Le Pen, leader of the far right National Front party, will not be the next president of France? Who would follow Matteo Renzi, Italy’s prime minister, if he failed? Yes, these member states need to act. But they surely need support. Mr Draghi has shown the way. The eurozone must follow.”

  2. Sahil Kapur: GOP’s Obamacare Nightmare Is Coming True: It’s Working: “Conservative strategist Bill Kristol’s 1993 memo–‘”Defeating President Clinton’s Health Care Proposal’–warning that reform would paint Democrats as ‘the generous protector of middle-class interests’ and strike a ‘punishing blow’ to the GOP’s anti-government ideology…. The real fear back then was that health care reform would succeed. Two decades later, Kristol’s prophecy is haunting Republicans…. The shift has been crystallized in contentious Senate races this fall. Senate Minority Leader Mitch McConnell (R-KY) recently signaled that Kentuckians benefiting from the state’s Obamacare exchange and Medicaid expansion should be able to keep their coverage. Senate GOP candidates Joni Ernst of Iowa, Tom Cotton of Arkansas, Scott Brown of New Hampshire and Terri Lynn Land of Michigan have all refused to call for rolling back Medicaid expansion in their states. The number of television ads attacking the law have plummeted in key battleground states since April, and now even vulnerable Democratic Sen. Mark Pryor of Arkansas is touting his vote for protecting Americans with preexisting conditions under Obamacare…”

  3. Gavyn Davies: The US recovery looks sustainable this time: “The key question is whether this apparently healthy recovery in growth rates can be maintained this time…. When growth was last above trend in 2010, it proved to be a false dawn. The onset of fiscal tightening… slowed the growth of demand. Confidence… was further punctured by threats of fiscal default in Washington, and fears of a collapse of the euro. These threats to confidence have now largely disappeared…. And in the past 3 months, there is evidence that global GDP growth is picking up…. The stimulus to economic recovery from rising domestic demand in the US looks set to continue…. Housing has barely recovered yet and there is pent up growth from an expansion in the number of households as children eventually move out of their parents’ basements…. With the crucial exception of the labour participation rate… most labour market indicators are moving towards previous mid cycle norms…. The economy could run into supply side constraints that lead to overheating… but… it seems premature to worry too much about capacity limits at present. Labour and capital resources are still under-utilised…. As Dominic Wilson of Goldman Sachs pointed out last week, the US continues to track a fairly normal recovery path for an economy that has been hit by a major housing and financial shock…. With demand recovering and supply not yet a constraint on output growth, there is one remaining worry, and that is financial market over-exuberance. The Fed is still largely ignoring the recent BIS warning…. The Fed clearly thinks that the BIS is crying wolf, but in my view it is the most visible wolf out there at present. Unless the financial markets cause an accident, as they have on some recent occasions, this recovery in economic growth should persist for a while.”

  4. Chris Dillow: Interest Rates and the 1%: “Nick Rowe says some of the answers to Paul Krugman’s question–why do some of the 1% want to raise interest rates?–are daft conspiracy theories. I’m in two minds here…. Since the mid-80s, the income share of the 1% has risen at the same time as real interest rates have fallen. This tells us that low rates are compatible with the 1% doing well…. Easy money is good for asset prices… allow[s] banks to borrow cheaply to the benefit of senior bankers…. Why do some of the 1% want higher rates? One big reason is an empirical claim–that a small rate rise now would nip inflation in the bud and so prevent bigger rises later…. In this sense, I sympathise with Nick. We don’t need a conspiracy theory. Those who want higher rates are making a reasonable (though I think dubious) intellectual point. However, there is a political undertow here… about the balance of risks. In particular, the 1% are more inflation-phobic and less unemployment-phobic than the rest of us. I agree with Steve that the rich hate inflation not least because it creates uncertainty. (There’s also the historical point that the inflationary 70s also saw the nadir of the fortunes of the 1%: this might be just coincidence, but why risk it?) This alone creates a bias to tighten. What amplifies this bias is that the rich can tolerate mass unemployment…. Peter’s question: why has the Keynesian coalition vanished from modern politics? It’s because it is no longer politically necessary. It was not Keynes who convinced capitalists of the need for full employment but Lenin…. I sympathize with both sides. On the one hand, Nick’s right to say the call for higher rates is the sort idea that people reasonably disagree about. But on the other hand, an understanding of economic policy surely requires us to ask: what is in the interests of the 1%?…”

  5. Lee Billings: Time Travel Simulation Resolves “Grandfather Paradox”: “On June 28, 2009… Stephen Hawking threw a party…. Everyone was invited but no one showed up. Hawking had expected as much, because he only sent out invitations after his party had concluded. It was, he said, ‘a welcome reception for future time travelers’, a tongue-in-cheek experiment to reinforce his 1992 conjecture that travel into the past is effectively impossible. But… time travel… would have profound implications for fundamental physics… quantum cryptography… computing…. Our best physical theories seem to contain no prohibitions on traveling backward through time… ‘closed timelike curve[s]’….David Deutsch… the paradoxes created by CTCs could be avoided at the quantum scale…. ‘It’s intriguing that you’ve got general relativity predicting these paradoxes, but then you consider them in quantum mechanical terms and the paradoxes go away’, says University of Queensland physicist Tim Ralph…. Ralph and… Martin Ringbauer… imagine that a fundamental particle goes back in time to flip a switch on the particle-generating machine that created it. If the particle flips the switch, the machine emits a particle—the particle—back into the CTC; if the switch isn’t flipped, the machine emits nothing…. Self-consistency in the quantum realm… any particle entering one end of a CTC must emerge at the other end with identical properties…. Ringbauer and their colleagues… polarized photons… ‘encode their polarization so that the second one acts as kind of a past incarnation of the first… [the simulation] allows us to study weird evolutions normally not allowed in quantum mechanics’. Those… would have remarkable practical applications, such as breaking quantum-based cryptography through the cloning of the quantum states of fundamental particles…. ‘In the presence of CTCs, quantum mechanics allows one to perform very powerful information-processing tasks, much more than we believe classical or even normal quantum computers could do’…. Deutsch’s model isn’t the only one around…. Seth Lloyd… resolves the grandfather paradox using quantum teleportation and a technique called post-selection, rather than Deutsch’s quantum self-consistency…. ‘Deutsch’s theory has a weird effect of destroying correlations… a time traveler who emerges from a Deutschian CTC enters a universe that has nothing to do with the one she exited in the future. By contrast, post-selected CTCs preserve correlations, so that the time traveler returns to the same universe that she remembers’…. This property of Lloyd’s model would make CTCs much less powerful for information processing, although still far superior to what computers could achieve in typical regions of spacetime…”

  6. Charlie Stross: Schroedinger’s Kingdom: the Scottish Political Singularity Explained: “I’m here to interest you in my writing, not recruit you for my Army of Minions™…. But there’s a point where politics impinges directly on the circumstances of my writing, and that’s when it goes nonlinear, and by nonlinear I mean ‘depending on the outcome of three upcoming elections, I may be living in one of three different countries in two years’ time’…. It makes it really hard to even think about writing that next near-future Scottish police thriller when I can’t predict what country it will be set in, much less what its public culture will look like or where it will be ruled from…. History happened… the Darien scheme nearly bankrupted Scotland’s ruling class, and in a desperate attempt to recapitalize (with help from their peers in London) they did an abrupt U-turn on the previous century’s policy of sharing a crown but not a parliament, and signed up for the Act of Union in 1707…. This was… an excellent deal for the rich landowners and the metropolitan elites of Edinburgh and Glasgow, but a terrible one for the highland poor. However, a number of anomalies remained…. This arrangement worked more or less all right for a couple of centuries. With the industrial revolution, the major cities of the English midlands, the North of England, and the Scottish lowlands prospered: their fortunes were based on shipping, trade, and manufacturing industry. London also prospered as a centre of commerce, and was a major financial hub: Edinburgh, the Scottish capital, was a secondary financial centre…. So what went wrong?… The loss of relative advantage in manufacturing industry… Margaret Thatcher…. The recession of 1979-82… was just the start of what seemed at times to be almost an undeclared civil war against the north of Britain…. [Today’s] Scottish Parliament is not unconditionally sovereign. It exercises powers delegated to it by the Westminster Parliament; certain powers are reserved—policy on illegal drugs, immigration, foreign policy, defence, and taxation are exercised in Westminster…. We now have a parliament led by the SNP (a carefully-planned impossibility), a centre-left party: and an opposition consisting, in order of size, of: Scottish Labour (as reformed by Tony Blair into a right wing party with left-wing heritage), the Liberal Democrats, trailed by the Conservatives and the Greens…. It’s been fairly obvious for about three decades now that there’s a growing political rift between Scotland and England. England seems to be becoming more parochial, europhobic, and anti-immigrant, and the political sails of all the main English parties are being trimmed to the right…. A vote will be held on the 18th of September. If there is a majority for independence, then the constitutional shit will hit the fan because Westminster will be required to negotiate and enact the enabling legislation for Scottish independence… with a UK-wide General Election coming up in June 2015. The enabling legislation can’t be rushed through before the next election (it’s too big and complex), so it’s going to trail into the next Westminster parliament…. So: in 2017, Scotland will either be an independent nation (initially a constitutional monarchy retaining the shared Crown, as was the case prior to 1707), or part of the UK. Why did I say there might be two different UKs? Well, that’s down to UKIP and the Conservative euroskeptics…. The worst case outcome, circa 2017, is that Scotland remains manacled to an England that has voted in a government of the Home Counties, who despise the Scots, and who have successfully campaigned for a referendum in which the English protest vote determines that Scotland will be dragged out of the EU in a vain attempt to wind the clock back to an imaginary vision of a 1950s conservative utopia that never was. Or Scotland might remain part of a UK, but one where when push came to shove the racist right took a kicking… and the softer right-wing government of New Labour is back in charge…. But in the meantime: it’s impossible for me to write fiction set in the near future of Scotland until after we’ve navigated the political white water ahead: the referendum in September 2014, the general election in June 2015, and (optionally) the further UK referendum in 2016/17…”

    • Stefania D’Amico, Roger Fan, and Yuriy Kitsul: The scarcity value of Treasury collateral: Repo market effects of security-specific supply and demand factors: “In the special collateral repo market, forward agreements are security-specific, which may magnify demand and supply effects. We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all outstanding U.S. Treasury securities. We find an economically and statistically significant scarcity premium. This scarcity effect is quite persistent, passes through to Treasury market prices, and explains a significant portion of theflow-effects of LSAP programs, providing additional evidence for the scarcity channel of QE. Through the same mechanism, the Fed’s reverse repo operations could alleviate potential shortages of high-quality collateral.”

September 10, 2014

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