Things to Read on the Morning of November 6, 2014
Must- and Shall-Reads:
- : To seize future, state must seize innovation
- : EconoSpeak: Public Works, Economic Stabilization and Cost-Benefit Sophistry
- : Wealth Inequality and Savings
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: The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis: “The sharp increase in mortgage defaults in 2007 is significantly amplified in subprime ZIP codes, or ZIP codes with a disproportionately large share of subprime borrowers as of 1996. Prior to the default crisis, these subprime ZIP codes experience an unprecedented relative growth in mortgage credit. The expansion in mortgage credit from 2002 to 2005 to subprime ZIP codes occurs despite sharply declining relative (and in some cases absolute) income growth in these neighborhoods. In fact, 2002 to 2005 is the only period in the past eighteen years in which income and mortgage credit growth are negatively correlated. We show that the expansion in mortgage credit to subprime ZIP codes and its dissociation from income growth is closely correlated with the increase in securitization of subprime mortgages.” -
: Japan on the Brink: “Japan’s current plan to hike consumption taxes a second time… has become… a sort of Rubicon for policy. And let me admit that people I respect–like Adam Posen, and some officials at international organizations–believe that Abe should go through with the hike. But I strongly disagree…. Right now, Japan is struggling to escape from a deflationary trap; it desperately needs to convince the private sector that from here on out prices will rise…. The pro-tax-hike side worries that if Japan doesn’t go through with the increase, it will lose fiscal credibility and… the bond vigilantes will attack. Why don’t I share that view? Partly because I don’t see how this supposed crisis of confidence is supposed to work…. When a country borrows in its own currency and doesn’t face inflationary pressure (quite the contrary), it’s very hard to see how a Greek-style crisis is even possible. Short-term interest rates are controlled by the Bank of Japan; long-term rates mainly reflect expected short rates. Yes, investors could push the yen down, but that would be a good thing from Japan’s point of view. Posen says stocks could crash, but I guess I don’t see why if interest rates stay low and corporate Japan becomes more competitive thanks to a weaker yen. Seriously: tell me how this is supposed to work… [how a] fear that Japan might eventually monetize some of its debt–isn’t actually a positive development. Meanwhile, it seems to me that Japan should be very, very afraid of losing momentum in the fight against deflation…. Could I be wrong?… Of course…. But it’s all about weighing the risks. Right now, the risk of losing anti-deflation credibility looks much worse than the risk of losing fiscal credibility. Please, don’t hike those taxes!” -
: Worthwhile Canadian Initiative: Neo-Fisherites and the Scandinavian Flick: “If you look at Sweden, reality just confirmed that beloved economic theory. The Riksbank raised interest rates because it was scared that low interest rates would cause financial instability. Lars Svensson resigned in protest. Then inflation fell, and the Riksbank needed to cut interest rates even lower than before…. If you don’t know how to drive a car, and you don’t even have a clue whether you turn the steering wheel clockwise or counter-clockwise if you want to turn right, one good strategy is to borrow a car, and a wide open field, and experiment. Make a random turn of the wheel, and see what happens. The recent data point in Sweden was a natural experiment like that…. Theory says, and the data confirm, and the advice of experienced practitioners confirms, that if it wants to raise inflation the central bank should first lower interest rates. Then, when inflation and expected inflation starts to rise, it can raise interest rates, higher than they were before. Then, and only then, does the Fisher effect kick in…. That is the Scandinavian flick we saw recently… the wrong way round…. Figuring out the intuition behind John Cochrane’s paper, to see what was really going on in his model, really drained me. Do I really have to wade through that Stephanie Schmidt-Grohe and Martin Uribe paper too, and reverse-engineer their result as well? I’m too old for this. Don’t any of you young whippersnappers have an economic intuition? Do you all get snowed by every fancy-mathy paper that comes along? I expect I will have to. Pray for me.” -
: Millions More Votes Were Cast For Democrats In The Incoming Senate Than For Republicans: “When the new, GOP-controlled Senate opens its first session next January, it will be strikingly unrepresentative of the voters who elected its members… millions more Americans actually cast a vote for a Democratic Senate candidate than voted for a Republican candidate during the three election cycles that built the incoming Senate…. Republican Senate candidates outperformed Democrats by 2,733,121 votes in 2010, while Democrats outperformed Republicans by a much larger 10,867,709 votes in 2012…. [Our estimates] as of 9 a.m. Wednesday morning, was a total of 22,524,388 votes cast for Republicans and 19,594,164… in the 2014 cycle…. When the results from all three elections are combined, a total of 5,204,364 more votes were cast for Democrats than Republicans…” -
: 2015 Rate Hike ‘Inappropriate’ : “[He] said it would be ‘inappropriate’ for the Fed to lift rates at any point in 2015 as PCE, the central bank’s measure of inflation, is unlikely to reach 2 per cent until 2018…. He said that inflation below 2 per cent was ‘just as much of a problem’ as inflation above that level, adding that the Fed should clarify that its inflation objective is symmetric…. Traders currently bet the Fed will lift rates at its September meeting, according to Fed Funds Futures contracts analysed by Bloomberg.”
Should Be Aware of:
- California Weather Blog
- : What has been the best corporate Darwin Award? A decision made by a company that basically killed the business
- : A Rudderless Campaign Promises 2 More Years of Trench Warfare | Mother Jones
- : Bell Tolls for Obama Ahead of 2016
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: Jung Hyun Choi and I write about Income Inequality across Cities: “Negative labor market conditions, concentration of skilled workers, and racial segregation are positively associated with the level of income inequality. The level of inequality in these cites also tends to rise grow at a faster pace. While differences in the minimum wage level do not seem to have any association with income inequality across cities, we find some evidence that differences in unemployment insurance benefits and greater unionization lowered increases in the income inequality.” -
: Failed by #EconomicGrowth?: “Before 1850, both [China and Japan] were ruled by stable dictators[hips] who relied on bureaucrats to govern their domains…. In a large domain, the ruler’s inability to closely monitor bureaucrats creates opportunities for the bureaucrats to exploit taxpayers. To prevent overexploitation, the ruler has to keep taxes low and government small. Our dynamic model shows that while economic expansion improves the ruler’s finances in a small domain, it could lead to lower tax revenues in a large domain as it exacerbates bureaucratic expropriation…. We find that the state taxed less and provided fewer local public goods per capita in China than in Japan. Furthermore, while the Tokugawa shogunate’s tax revenue grew in tandem with demographic trends, Qing China underwent fiscal contraction after 1750 despite demographic expansion. We conjecture that a greater state capacity might have prepared Japan better for the transition from stagnation to growth…” -
: “What this narrative does not explain, however, is why China pursued such an inefficient mode of fiscal management. Given the challenges of graft and the fear of revolt, Sng and Moriguchi assume that it was the most rational or “optimal” course. The authors point to but dismiss lightly the question posed by Qing historians that the goals of the late imperial Confucian state might not have been compatible with “rational” state expansion. In other words, rather than fearing peasant revolt, the choice of tax rate might have to do with ideological reasons. Similarly, the idea that the Japanese state shared a “Confucian” outlook (p4) is overly simplistic, especially as consistently high levels of taxation in Tokugawa Japan undermine the idea that Tokugawa Japan was a “benevolent” state…”