Things to Read on the Afternoon of January 2, 2015

January 2, 2015

Must- and Shall-Reads:

 

  1. David Leonhardt:
    About Writing What We Wished to Read:
    “Four particularly satisfying projects started in a similar way: A few of us here wanted to read something that we hadn’t been able to find. So we set out to write it…. Our election-night vote tracker…. The project on the growing number of Americans who aren’t working, despite being of working age…. The lack of cross-country comparisons on the state of the middle class and poor in various countries…. The interactive… that allowed readers… to understand the playoff scenarios for every N.F.L. team…”
  2. Yael T. Abouhalkah:
    Brownback’s Tax Cuts Are Not Wooing Jobs to Johnson County:
    “The mantra from… Brownback… to… Johnson County… [was] that his steep income tax cuts, geared toward high earners, would bring a flood of jobs over the state line from Missouri. But… the tax reductions… in 2013… failed to… employment growth to Johnson or Wyandotte counties…. The Missouri side of the region added 8,400 workers on nonfarm payrolls between November 2013 and November 2014… 1.5 percent…. The Kansas side… only 1,900 employees… 0.4 percent. Overall, the metropolitan region grew a paltry 1 percent…. The governor and other true believers need to acknowledge the obvious: Simply slashing taxes is not the way to woo people to Kansas, and especially to Johnson County, where people expect good services…”
  3. Simon Wren-Lewis:
    On the Stupidity of Demand-Deficient Stagnation:
    “Demand deficiency when inflation is persistently below target… should not occur, because it is easy to solve technically…. The huge waste of resources that we see in the long and incomplete US recovery, the even slower UK recovery and the absence of recovery in the Eurozone are all unnecessary…. We have become fixated by the labels ‘monetary’ and ‘fiscal’ policy, and created an independent institution to handle the former…. Within the existing institutional framework, there is plenty to be done to convince fiscal policy makers that reducing deficits should not be a priority in the short term, or in trying to improve the monetary policy framework so liquidity traps happen less often. Yet it would be better still if we had an institutional framework which was a little more robust to failures on either front. We need to regain the possibility of money-financed fiscal stimulus in a liquidity trap…”
  4. Robert Lucas:
    Rational Expectations Panel:
    “One thing economics tries to do is to make predictions about the way large groups of people, say, 280 million people are going to respond if you change something in the tax structure, something in the inflation rate, or whatever…. Neurophysiology is exciting, cognitive psychology is interesting… Freudian psychology…. Kahnemann and Tversky haven’t even gotten to two people; they can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in–let alone 250 million. This is like saying that we ought to build it up from knowledge of molecules or–no, that won’t do either, because there are a lot of subatomic particles…. We’re not going to build up useful economics… starting from individuals…. Behavioral economics should be on the reading list…. But to think of it as an alternative to what macroeconomics or public finance people are doing or trying to do… there’s a lot of stuff that we’d like to improve–it’s not going to come from behavioral economics… at least in my lifetime…”
  5. Paul Krugman:
    “I find myself in meetings with international financial types. It’s all the usual discussions, and they don’t like to talk domestic U.S. politics, but then at some point, somebody says, what if we had another major financial crisis? What if we really needed something like TARP again? What are the chances that something like TARP could actually happen in this political environment? And everybody goes quiet, and looks down at their blotter…”
  6. :
    Interview with Kenneth Arrow | Federal Reserve Bank of Minneapolis:
    “Arrow: I think the answer is yes, that learning models will turn out to be more accurate…. The first experimental work tended to show that static markets come to equilibrium very quickly… [but] that asset markets show all sorts of anomalies and do not come into the long-run equilibrium within the length of the experiment…. October ’87 is a wonderful example…. At least as far as the financial markets are concerned, there is increasing evidence against rational expectations, even at the macro level…”

Should Be Aware of:

 

  1. Alicublog:
    Mario Cuomo, 1932-2015.:
    “Jacob Weisberg ’94: ‘Cuomo has also often indulged, as in a speech he gave at Harvard in 1992, in old-fashioned liberal cant. Talking about the culture of dependency, he said, was blaming the victim. Welfare, he insisted, was a small part of the federal budget. Reform, he said, was “not the solution”. He has excused the rise in single-parent families by calling it “nothing new”. This is truly inexcusable.’ Cuomo’s POV was certainly passing out of favor, and Weisberg’s into it; very shortly thereafter, Clinton and Gingrich would make pauper-punching a bi-partisan sport, and their heirs are still trying to make poor people’s lives more miserable and peddling marriage-makes-you-rich hokum. I’d say Cuomo will be missed, but I think we’ve been missing him a long time already.”
  2. Hunter Walker:
    Jim Webb’s Defense Of His PAC Doesn’t Add Up:
    “The statement claimed Hong Le Webb was paid ‘for her activities relating to various aspects of multiple website designs’…. She received $13,800 for overseeing the redesign of the committee’s relatively simple site…. The firm that executed the design seems to have been paid less. It received $10,000…. In addition to the money paid to Webb’s family, the records show the committee only used about 20% of the money it spent to support its stated mission of contributing to political candidates and groups…. The fact so little of the donor money taken in by Webb’s PAC went to its stated purpose was entirely ignored in Owens’ statement…”
  3. John Cassidy:
    Interview with James Heckman:
    “H: I want to distinguish between two different ideas…. The part of the Chicago School that has been justified is the claim that people react to incentives…. The other part of the Chicago School, which Stiglitz and Krugman have criticized, is the efficient-market hypothesis. That is something completely different…. I think you could fault the regulators as much as the market. From about 2000 on, there was a decision made in Washington not to regulate these markets. People like Greenspan were taking a very crude and extreme form of the efficient-markets hypothesis and saying this justified not regulating the markets. It was a rhetorical use of the efficient-markets hypothesis to justify policies. C: What about the rational-expectations hypothesis, the other big theory associated with modern Chicago? How does that stack up now? H: I could tell you a story about my friend and colleague Milton Friedman. In the nineteen-seventies, we were sitting in the Ph.D. oral examination of a Chicago economist who has gone on to make his mark in the world. His thesis was on rational expectations. After he’d left, Friedman turned to me and said, ‘Look, I think it is a good idea, but these guys have taken it way too far.’… It didn’t have any empirical content. When Tom Sargent, Lars Hansen, and others tried to test it using cross equation restrictions, and so on, the data rejected the theories. There were a certain section of people that really got carried away. It became quite stifling. C: What about Robert Lucas? He came up with a lot of these theories. Does he bear responsibility? H: Well, Lucas is a very subtle person, and he is mainly concerned with theory. He doesn’t make a lot of empirical statements. I don’t think Bob got carried away, but some of his disciples did. It often happens. The further down the food chain you go, the more the zealots take over…. We knew Keynesian theory was still alive in the banks and on Wall Street. Economists in those areas relied on Keynesian models to make short-run forecasts. It seemed strange to me that they would continue to do this if it had been theoretically proven that these models didn’t work. C: What about the efficient-markets hypothesis? Did Chicago economists go too far in promoting that theory, too? H: Some did. But there is a lot of diversity here. You can go office to office and get a different view…. [Fischer Black] was very close to the markets, and he had a feel for them, and he was very skeptical. And he was a Chicago economist. But there was an element of dogma in support of the efficient-market hypothesis. People like Raghu [Rajan] and Ned Gramlich [a former governor of the Federal Reserve, who died in 2007] were warning something was wrong, and they were ignored. There was sort of a culture of efficient markets—on Wall Street, in Washington, and in parts of academia, including Chicago…. Everybody was blindsided by the magnitude of what happened. But it wasn’t just here. The whole profession was blindsided…. It is what I see as the booster stage—the rational-expectation hypothesis and the vulgar versions of the efficient-markets hypothesis that have run into trouble. They have taken a beating—no doubt about that. I think that what happened is that people got too far away from the data, and confronting ideas with data. That part of the Chicago tradition was neglected, and it was a strong part of the tradition. When Bob Lucas was writing that the Great Depression was people taking extended vacations—refusing to take available jobs at low wages—there was another Chicago economist, Albert Rees, who was writing in the Chicago Journal saying, No, wait a minute. There is a lot of evidence that this is not true. Milton Friedman—he was a macro theorist, but he was less driven by theory and by the desire to construct a single overarching theory than by attempting to answer empirical questions. Again, if you read his empirical books they are full of empirical data. That side of his legacy was neglected, I think. When Friedman died, a couple of years ago, we had a symposium for the alumni devoted to the Friedman legacy. I was talking about the permanent income hypothesis; Lucas was talking about rational expectations. We have some bright alums. One woman got up and said, ‘Look at the evidence on 401k plans and how people misuse them, or don’t use them. Are you really saying that people look ahead and plan ahead rationally?’ And Lucas said, ‘Yes, that’s what the theory of rational expectations says, and that’s part of Friedman’s legacy.’ I said, ‘No, it isn’t. He was much more empirically minded than that.’ People took one part of his legacy and forgot the rest. They moved too far away from the data…”

January 2, 2015

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