Things to Read on the Morning of October 12, 2014

Must- and Shall-Reads:

• Stanley Fischer: =The Federal Reserve and the Global Economy
• Paul Hannon: Regulators Are in the Dark on Shadow Banking, Says BOE’s Jon Cunliffe

1. Heather Boushey and Carter Price: How Are Economic Inequality and Growth Connected?: A Review: “Ostry, Berg, and their IMF colleague Charalambos Tsangarides include an analysis of the impacts of redistribution, as well as market inequality. They find that economic growth is lower and periods of growth are shorter in countries that have high inequality as measured by the Gini coefficient of income after taxes and transfers.43 In the same paper, the researchers show that transfers (redistributions of income from upper to lower income individuals) do not harm economic growth—at least up to a point consistent with policies in other wealthy nations. This most recent work provides strong evidence that higher levels of income inequality are detrimental to long-term economic growth and that the policies some nations have taken to redress inequality not only do not adversely impact growth but, instead, spur faster growth. Notably, this finding applies to both developed and developing countries…”

2. Paul Krugman: Europanic 2.0 – NYTimes.com “Anyone who works in international monetary economics is familiar with Dornbusch’s Law: ‘The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.’ And so it is with the latest euro crisis… the euro area as a whole, which is sliding into a deflationary trap with the ECB already essentially at the zero lower bound. Draghi can try to get traction through quantitative easing, but it’s by no means clear that this could do the trick… and… he faces severe political constraints…. What strikes me, also, is the extent of intellectual confusion that remains. Germany still seems determined to regard the whole thing as the wages of fiscal irresponsibility, which not only rules out effective fiscal stimulus but hobbles QE, since it’s anathema for them to consider buying government debt. And it’s remarkable, too, how the logic of the liquidity trap remains elusive even after six years–six years!–at the zero lower bound. Not the worst example, but I read Reza Moghadam…. Augh! If it’s external competitiveness you’re worried about, depreciating the euro is what you want, not wage cuts. And cutting wages in a liquidity-trap economy almost surely deepens the slump. How can this not be part of what everyone understands by now? Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength. But I (and others I talk to) are having an ever harder time seeing how this ends… non-catastrophically…. What’s your scenario?”

3. Dean Baker: David Leonhardt Wonders Why Its Cold In the Winter and Wages Aren’t Rising: “The economy is still way below potential GDP…. The employment to population ratio is still close to 4.0 percentage points below its pre-recession level. Even if we restrict the question to prime age workers… to eliminate the issue of retirement, the drop is still 3.0 percentage points. The share of the workforce involuntarily working part-time is still more than 50 percent above its pre-recession level…. There is still a large amount of slack in the labor market…. With the answer right in front of him, like the French colonel in Casablanca, Leonhardt rushes to round up the usual suspects…. Unfortunately, the data refuse to cooperate…. The wages for recent college grads has fallen sharply since 2000…. The obvious issue is that we need more demand in the economy. That can be most easily accomplished with more government spending…”

4. Pedro Nicolaci da Costa: Fed Can’t Keep Falling Short of Inflation Goal, Says Evans: “The Federal Reserve can afford to keep interest rates at zero at least until inflation rises to its 2% target, which will probably not happen in the next two years, Chicago Fed President Charles Evans said Saturday…. He said the central bank shouldn’t raise interest rates until early 2016 since much ground needs to be made up on inflation and employment…. Mr. Evans says he sees the U.S. economy, which has been stumbling along at an annual rate of growth of around 2% since the start of the recovery from the recession, picking up to a pace closer to 3%… unemployment remains elevated and inflation is still well below the central bank’s official 2% target… the Fed should be symmetric about hitting its inflation target, and that staying below it for a prolonged period was equally problematic as hovering above it… sees inflation staying below the Fed’s 2% objective ‘well past 2017’. That view underpins his position, one of the most aggressive at the central bank…”

5. Steve Randy Waldmann: Scale, progressivity, and socioeconomic cohesion: “US taxation may not be as progressive as it appears because of sales and payroll taxes, but European social democracies have payroll taxes too, and very large, probably regressive VATs…. Universal taxation for universal benefits seems to work a lot better at building cohesive societies than taxes targeted at the rich that finance transfers to the poor, because universality engenders political support and therefore scale. And it is scale that matters most of all…. How can a regressively financed program making regressive payouts reduce inequality? Easily, because no (overt) public sector program would ever offer net payouts as phenomenally, ridiculously concentrated as so-called ‘market income’…”

Should Be Aware of:

• Jeff Spross: America’s Biggest Solar Provider Has A New Way To Make Rooftop Systems More Affordable

1. Kevin O’Rourke: Sinking, fast and slow: “For well over a year now some of us have been pointing out that the Eurozone crisis was entering a very dangerous phase, in which slowly increasing unemployment would eat away at the foundations of Europe’s societies, while short-sighted politicians and excitable journalists proclaimed that the Euro was saved…. I find myself worrying most about France. Twiddling their thumbs and hoping that something (the economy) will turn up, flawed macroeconomic policy notwithstanding, seems to have been the French government’s master plan up till now…. You may think that Paul Krugman is being too alarmist when he raises the possibility of President Le Pen, and I hope you are right. But Sarkozy’s apparent return to the political fray does worry me. Of course, you may think that if he wins the UMP nomination, the Left will rally round and vote for him when it comes to the second round. How confident are you about that?”

2. Barkley Rosser: The Washington Post’s Fred Hiatt Hysterical Over Losing His Schtick: “For years, this Editor of the Editorial page of the Washington Post has made his named appearances on the editorial page (he daily bloviates the main ed lead anonymously) only to call for cutting Social Security, and occasionally Medicare as well… [also] R.J. Samuelson, Ruth Marcus, and even more recently, Catherine Rampell. I almost wrote on this when he went nuts over this on Monday, but Dean Baker whonked on him pretty solidly immediately, pointing out how stupid and ridiculous he looked, declaring that while today’s US debt/GDP ratio is 74%, with near zero interest rates, ten years from now the CBO says it will be 78%, which Hiatt hysterically declared to be ‘dangerous’…. The ridicule has mounted, some of it more general, some of it more specific…. John Podesta, whom he cited in his Monday WaPo piece, perhaps the single most stupid and embarassing column he has ever written, has dumped all over him in on Twitter with an accompanying column…. So, let me add my two bits to this that none of the above have yet said. First of all, it is amazing that when confronted with good news from the CBO that medical care costs are falling, leading to declining future deficit projections, Hiatt does not applaud, indeed, does not anywhere in his column even note that this is a change…. So, I feel sorry for Fred. Beating up on seniors who have paid in their taxes for what they are getting has been the one an only topic that has inspired him to write columns under his own name for many years. The new projections of lower deficits, good news to most of us, simply do not register with him…”

3. Matthew Yglesias: The real problem with Nate Silver’s model is the hazy metaphysics of probability: “The most interesting subplot of 2012 US election coverage was the battle between the poll-oriented quants–most famously Nate Silver–and sundry television know-nothing pundits who insisted based on their guts that Mitt Romney was going to pull it out. The 2014 horserace has produced… a proliferation of quantitative models based on poll aggregation… [and] its own entertaining feud between the famous, entertaining, and media-savvy Nate Silver and the less-known Princeton University scientist Sam Wang…. We’re never going to know which model is correct…. If we got to look at 100 or a 1,000 midterm elections, we’d end up with a pretty good sense of whether Silver’s forecast or Wang’s forecast is the more accurate one. But elections simply don’t happen that frequently…. Which isn’t to say we should go back to the bullshitting-on-television approach to understanding elections. Rather, we should try to remember the high-level points that all these models have in common, namely “the candidate leading in the polls usually wins” and “aggregating polls is more accurate than looking at particular ones.” Unlike fussing over the details of 51 percent vs 57 percent, these are actionable insights…. Smart people are really good at devising sophisticated explanations for why their preferred outcome is also the likely one…”