Things to Read on the Morning of September 11, 2014

Must- and Shall-Reads:

• Barry Eichengreen: The Rules of Central Banking Are Made to Be Broken
• Jared Bernstein: Larry Summers adds concerns about insufficient supply to those about inadequate demand… to which I ask, “why go there?”
• Matthew C. Klein: Wealth effect may one day stop being so great for wealthy, says wealthy person

1. Adam Posen: The Old Normal for The World Economy

2. Ryan Sweet and Adam Ozimek: U.S. Employment Outlook: Solving the Wage Puzzle: “The U.S. labor market has tightened, but wage growth remains mediocre at best. This appears counterintuitive: All else equal, falling rates of unemployment should prompt faster wage growth. Several potential explanations have been offered…. One is that the unemployment rate could be sending a false signal about the amount of slack in the job market. Another… blames pent-up wage deflation… firms could not cut nominal wages by as much as they wanted during the recession, and are thus reluctant to raise wages now…. Because the economies of U.S. states experienced different rates of recession and recovery, they offer a laboratory in which to test the pent-up wage deflation hypothesis…. In six states the unemployment rates are below NAIRU, while in four states it is 1.5 percentage points above full employment…. The pent-up wage deflation hypothesis predicts that wages will accelerate not steadily, but quickly once the tipping point is reached. While the data show some relationship between wages and the unemployment gap, the results show little evidence of an acceleration in wage growth as the economy approaches full employment. This suggests there is no pent-up wage deflation…. We believe the labor market still has considerable slack… includ[ing] workers unemployed longer than six months, those who left the workforce but will return once job opportunities appear, and part-timers who would prefer to work full time…. Because the unemployment rate is no longer an accurate measure of labor force, assumptions about the unemployment gap can produce incorrect expectations of when wages will accelerate…”

3. Helene Jorgensen and Dean Baker: The Affordable Care Act: A Family Friendly Policy: “Table 3 gives a breakdown of the distribution of part-time employment by age, gender, and whether or not the household has children. As can be seen, women accounted for the entire rise in voluntary part-time employment, with an increase of 3.2 percent in 2014 compared with 2013. By contrast, voluntary part-time employment for men actually fell slightly. Furthermore, it is younger workers, ages 16-35, who account for the bulk of the increase. The number of people in this age group voluntarily working part-time rose by 5.0 percent. By comparison it dropped by 5.2 percent for workers between the ages of 45-55. There were small rises of less than 1.0 percent for the other two age groups. The biggest increase in voluntary part-time is for young people with children. The percentage of employed young people with children working part-time increased 11.3 percent from 2013 to 2014. For young people with three or more children the percentage working part-time increased by 15.4 percent.”

4. Henry Aaron, David Cutler, and Peter Orszag: Stop the Anti-Obamacare Shenanigans: “So far, opponents of the Affordable Care Act have lost every major battle to repeal or invalidate it. Some of them are now urging the courts to interpret the health reform law in a way that would guarantee its failure…. Having failed to undo the individual mandate to buy health insurance, opponents now claim that, under the law, subsidies for low- and moderate-income Americans to buy insurance may be paid only in those states–currently 14–that have set up their own online insurance exchanges. This would torpedo a central goal of the law: the expansion of coverage. At first, those of us who support Obamacare thought these claims were a joke. On July 22, the federal appellate court in Richmond, Va., rejected one such claim, but the same day, astonishingly, the federal appellate court for the District of Columbia Circuit ruled, 2 to 1, in favor of the plaintiff in a similar case, Halbig v. Burwell…. Now the opponents of Obamacare are asking the Supreme Court to immediately hear an appeal of the Richmond decision…. The law specifically instructed the secretary of health and human services to create and manage the exchanges for states that chose that option. And when the law was passed, everyone involved in the law’s passage understood that this directive vested federal exchanges with the same mission and authority as state-mandated exchanges…. Whatever one thinks of the Affordable Care Act, it is absurd to argue that its drafters intended to make insurance unaffordable.”

5. Ricardo Hausmann: Why Are Growth Rates Converging Among Some and Diverging Among Others?: “When Adam Smith wrote The Wealth of Nations in 1776, per capita income in the world’s richest country–probably the Netherlands–was about four times that of the poorest countries. Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand. But, over the past three decades, the trend reversed. Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand…. Yet some countries are still diverging. While the Netherlands was 5.8, 7.7, and 15 times richer than Nicaragua, Côte D’Ivoire, and Kenya, respectively, in 1980, by 2012 it was 10.5, 21.1, and 24.4…. The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. An apt metaphor is a game of Scrabble…. Countries with few ‘letters’ lack incentives to accumulate more letters, because they cannot do much with any additional one: you would not want a TV remote control if you didn’t have a TV, and you would not want a TV broadcasting company if your potential customers lacked electricity. This trap becomes deeper the longer the alphabet and the longer the words…”

6. Duncan Black: Who Cares?: “I have theories, but I do get a bit puzzled by the intensity of general anti-immigrant (read: anti-latino immigrant) sentiment in this country. Not surprised that it exists, just surprise at the intensity of the issue in certain segments of the population. I’ll switch back and forth between undocumented and documented immigrants a bit here probably, but what the hell could possibly motivate people to picket and scream at a bus full of refugee kids? On the flip side, here in the urban hellhole nobody seems to care. My fair city is hardly a shining example of racial harmony, but anti-immigrant sentiment appears to be incredibly muted. Of course it exists, it just doesn’t seem to exist with any intensity in the city.”

7. Kessler: Don’t Be Fooled by Recent Hawkish Fed Commentary: “As we go into next week’s Fed meeting, the market has become consumed with the idea that the Fed funds rate may be raised earlier than the market expects…. A San Francisco Federal Reserve paper has pointed out that the Fed’s own expectations of when they will raise rates is on-average sooner than what the market… some Fed members have suggested it is time to remove a piece of language in the Fed statement promising a ‘considerable time’ between the end of QE3 and the first rate rise…. The Fed’s own expectation of rate rises comes from a survey of the 16 FOMC participants…. Doing this math suggests that the Fed expects the Fed funds rate to be 1.20% by the end of 2015 but, the Fed Funds futures market is priced such that the Fed Funds rate will be 0.77% at the end of 2015, a difference of nearly two 0.25% rate hikes (0.43%). This is the crux of the SF Fed paper…. The markets are not simply unaware… the markets are… more dovish… because… Plosser… Lacker… and… Fisher… have wanted to raise rates with any excuse tracing back to 2008…. These three (and a few others), are afraid of something they have no evidence of (runaway inflation around any corner), and are too insulated from main street…. If the highest three votes in the Fed expectations survey are removed, the average Fed expectations align… with… the market…. The housing market has clearly rolled over, consumer spending hasn’t shown life, and the all-important wage growth is lackluster. The mostly academic Fed is too smart to use the excuse of the ‘air’ of recovery to make a hawkish move. There is simply no reason for it.

8. Matthew C. Klein: Wealth effect may one day stop being so great for wealthy, says wealthy person

• Bill Gardner: Tools for statistical writing and reproducible research: RStudio: RStudio | knitr | R Markdown

1. Pierre-Cyrille Hautcoeur, Angelo Riva, and Eugene N. White: Banque de France’s 1889 ‘lifeboat’ bank rescue : “The key challenge for lenders of last resort… >…is to ameliorate financial crises without encouraging excessive risk-taking…. The lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines–notably on the Comptoir’s board of directors. This appears to have reduced moral hazard–there were no financial crises in France for 25 years…”

2. Simon Wren-Lewis: Types of Unemployment: “[In] Pascal Michaillat and Emmanuel Saez[‘s model]… the labour market has an identical search structure to the goods market…. As labour market tightness increases, any vacancy is less likely to result in a hire…. Profit maximisation determines capacity, not output. Output is influenced by capacity, but it is also influenced by aggregate demand. Now consider an increase in the aggregate demand for goods, caused by–for example–a reduction in the price level. That results in more visits to producers, which will lead to more sales…. This leads firms to want to increase their capacity, which means increasing employment…. This increases labour market tightness and reduces unemployment…. In this model unemployment can be of three ‘types’: classical (w too high), Keynesian (aggregate demand too low), but also frictional. This model can also generate four ‘regimes’…. We do not need to ask whether demand is greater or less than ‘supply’, but equally we do not presume that output is always independent of ‘supply’…”

3. Jed Lewison: McConnell campaign says aide at center of bribery scandal was paid nearly $500k to hold his nose: “Senate Minority Leader Mitch McConnell and his team aren’t saying anything about… Jesse Benton amid a Ron Paul presidential campaign bribery scandal. But Joe Sonka flags one thing that they are saying—and why it’s hilarious: ‘Behind the scenes, McConnell’s campaign staff has tried selling journalists on the talking point that Benton wasn’t an important part of the campaign, and that his longtime aide Josh Holmes has been running the show. If that is true–and it might be–one has to ask why McConnell’s campaign committees and the Republican Party of Kentucky have paid Benton a salary of $458,000 for his work as campaign manager. In other words, explaining that you paid someone an extraordinary amount for a job that wasn’t very important is difficult when the person in question is at the center of a scandal where someone was bribed by a campaign for political support.’ In fact, if it’s true that McConnell paid Benton a half-million dollars for what amounted to a no-show job in which his only responsibility was preventing tea partiers from dethroning the five-term senator, doesn’t that sound an awful lot like a bribe, or at a minimum, pay-to-play? I mean, in Benton’s own words, he didn’t like McConnell. He was just holding his nose—and getting a fat paycheck for doing so—until Rand Paul’s 2016 presidential campaign. That actually raises another question: What promises, if any, did Mitch McConnell make to Rand Paul about 2016? Of course, now that Benton is gone, those promises are probably inoperative, which means not only is it questionable whether Benton will play any role in Paul’s campaign, but it’s almost certain that McConnell won’t deliver whatever help that he promised to send Rand’s way. That’s the thing about making deals with liars and cheats: If they can break their word, they will.”

4. Miles Kimball: Safe, Legal, Rare and Early: “Even after birth, loving parents feel a baby becoming more and more precious with every passing day. And with passing time, the child gains a greater and greater consciousness of its own existence, and (in all but pathological cases) its own strong desire to live. At the other end, even before conception, I like to think that even the unconceived have at least some small ethical interest in getting a chance to become an actual human being. So to me, there are no sudden ethical jumps, but instead, a gradually increasing ethical weight to a developing human life, at least from shortly before conception to shortly after birth…”

5. Charles Pierce: Here’s Some Stupid For Lunch: “I hate to do it, but welcome to the Cafe, my man Chuck Todd…. In one of his first acts as the caretaker at journalism’s Overlook Hotel… Chuck interviewed the president and… note the gotcha smirk on the screengrab… told the president that the latter had not mentioned the word “Syria” yet in the interview. Except, well, you can see this coming, right? ‘THE PRESIDENT:… the schism between Sunni and Shia that has been fueling so much of the violence in Syria…. ‘CHUCK TODD: You’ve not said the word, “Syria,” so far in our conversation.’…. That, by the way, was the fourth time the president had mentioned Syria in the interview in which my man Chuck said he hadn’t mentioned Syria at all. Rookie mistake. Could have happened to anyone. No, what gets my man Chuck the prime seat at this lunch counter is the clumsy little tap-dance he did to try and distract us from said mistake. ‘CHUCK TODD: Part one of my interview there. Some of you may have noted that I said the president hadn’t mentioned the word “Syria” at all in one of my questions. He had mentioned it, but he hadn’t said whether he was taking military action there.’ Dear lord, they’re not even trying hard any more.”