Things to Read on the Evening of February 27, 2015

February 27, 2015

Must- and Shall-Reads:

 

  1. Paul Krugman: The Closed Minds Problem: “When I was a young economist… I lived… in a world in which ideas… met in relatively open intellectual combat… [and] better ideas tended to prevail: if your model of trade flows or exchange rate fluctuations tracked the data better… you could expect it to be taken up by many if not most researchers…. This is still true in much of economics…. But people who declared back in 2009 that Keynesianism was nonsense and that monetary expansion would inevitably cause runaway inflation are still saying exactly the same thing after six years of quiescent inflation and overwhelming evidence that austerity affects economies exactly the way Keynesians said it would… founders of the Shadow Open Market Committee and Nobel laureates…. This isn’t just a story about economics; it covers everything from climate science and evolution to Bill O’Reilly…. So what should those of us who really wanted to be part of what we thought this enterprise was about do?… I see three choices: 1. Continue to write and speak as if we were still having a genuine intellectual dialogue…. That’s one way to understand Olivier Blanchard’s now somewhat infamous 2008 paper on the state of macro; he was… trying to appeal to the better angels of freshwater nature. The trouble… [this] end[s] up legitimizing work that doesn’t deserve respect…. 2. Point out the wrongness, but quietly and politely. This… [is] useful to anyone who reads it. But nobody will. 3. Point out the wrongness in ways designed to grab readers’ attention… ridicule… snark… names attached. This will get read; it will get you some devoted followers, and a lot of bitter enemies. One thing it won’t do, however, is change any of those closed minds. So is there a reason I go for door #3…. Yes–because the point is not to convince Rick Santelli or Allan Meltzer that they are wrong…. It is, instead, to deter other parties from false equivalence. Inflation cultists can’t be moved; but reporters and editors who tend to put out views-differ-on-shape-of-planet stories because they think it’s safe can be, sometimes, deterred if you show that they are lending credence to charlatans…. The inflation-cult story is, I think, a prime example…. It really would be nice not having to do things this way. But that’s the world we live in…”

    <–ridicule as the ultima ratio intelletualum against the closed-minded

  2. James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West: The Equilibrium Real Funds Rate: Past, Present and Future: “The uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed… a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2%…. Dhis uncertainty, we are skeptical of the ‘secular stagnation’ view that the equilibrium rate will remain near zero for many years to come…. The disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment…. The uncertainty around the equilibrium rate argues for more ‘inertial’ monetary policy than implied by standard versions of the Taylor rule… a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.”

    <–uncertainty calls for highly “inertial” policy followed by rapid response…

  3. Barry Eichengreen: Greece in Light of the Past and Future of the Euro: “I’m strongly of the view that 1929-1931 and 2008-2010 were cut from the same cloth, broadly speaking, whereas 1920-1922 was a fundamentally different animal… caused by monetary tightening by the Federal Reserve designed to wring inflation out of the economy, not by deeper economic and financial imbalances like those that set the stage for 1929-1931 and 2008-2010. The economy recovered quickly from the 1920-1921 downturn, despite an absence of monetary and fiscal stimulus, because of the delayed resumption of ocean shipping after World War I and resulting availability of cheap imported inputs… inferring from 1920-1921 that the economy can recover spontaneously from a serious downturn would be erroneous…”

    <–political economy and societal welfare require that macroeconomic policy deliver full employment…

  4. Morning Must-Read: Carter Price: Is a Line of Code More Like a Factory or a Painting?: “Benzell… Kotlikoff… LaGarda…and… Sachs [claim]… in most cases rapid technological advancement decreases wages and raises inequality…. If we believe that once code is written, it is good forever (maybe with a few tweaks or upgrades over time), then the stock of code would grow rapidly. If that stock of code is a substitute for future code, then demand for high-tech workers would decrease over time… push down wages not just for high-tech workers but also for other workers…. But… what if it is more like art?… We have more than a hundred years of movies, but new movies are still produced and make lots of money. Coders are still producing new video games despite no one needing to rewrite Tetris…. Technology has not led to mass unemployment and immiseration of labor in the past, yet the very nature of technological development means each invention and advancement is new… [and so] the this-time-is-different argument is generally pertinent, but cannot easily be verified a priori…”

    <–we don’t know, and can’t know, because innovation is by definition new…

  5. Paul Krugman: Quantitative Easing and Monetary Aggregates: “I get especially annoyed when economists who have been wrongly predicting inflation say that it’s not their fault–who could have known that banks would just sit on all those reserves? The answer is, anyone who had paid attention…. Let me quote myself, from… 1998…. Data from the 1930s… seemed to confirm…. Japan gave us another experiment, when it tried quantitative easing…. Theory and experience both predicted exactly the sterility of monetary base expansion that we saw in practice. And, you know, that’s the kind of successful prediction that is supposed to change peoples’ minds: if you’re that wrong about how an experiment turned out, and someone else made a prediction you considered foolish but turned out completely right, you’re supposed to concede that just maybe, possibly, they were on to something. The fact that essentially nobody on that side of the debate has budged in the slightest tells us that whatever it is they’ve been doing, it’s not scientific research.”

    <–the failure of inflation to emerge over the past half-decade is on surprise to anyone who understood Hicks (1937)…

  6. Evening Must-Read: Lemin Wu: If Not Malthusian, Then Why?: “The pre-industrial stagnation of living standards. Technological improvement in luxury production… faster than improvement in subsistence production, would have kept living standards growing…. [There is] a puzzle of balanced growth between the luxury sector and the subsistence sector…. [The hypothesis is of] group selection in the form of biased migration. A tiny bit of bias in migration can suppress a strong tendency of growth. The theory reexplains the Malthusian trap and the prosperity of ancient market economies such as Rome and Song…”

    <–implications of technological change in making “luxuries”…

  7. Christian Dippel, Avner Greif, and Daniel Trefler: Rents from Trade and Coercive Institutions: Removing the Sugar Coating: “The 19th century collapse of world sugar prices should have depressed wages in the British West Indies sugar colonies. It did not. We explain this by showing how lower prices weakened the power of the white planter elite and thus led to an easing of the coercive institutions that depressed wages e.g., institutions that kept land out of the hands of peasants. Using unique data for 14 British West Indies sugar colonies from 1838 to 1913, we examine the impact of the collapse of sugar prices on wages and incarceration rates. We find that in colonies that were poorly suited for sugar cane cultivation (an exogenous colony characteristic), the planter elite declined in power and the institutions they created and supported became less coercive. As a result, wages rose by 20% and incarceration rates per capita were cut in half. In contrast, in colonies that were highly suited for sugar cane there was little change in the power of the planter elite — as a result, institutions did not change, the market-based mechanisms of standard trade theory were salient, and wages fell by 24%. In short, movements in the terms of trade induced changes in coercive institutions, changes that are central for understanding how the terms of trade affects wages.”

    <–how apparently competitive labor markets can stay very far indeed from having wages equal marginal products…

Should Be Aware of:

 

  1. Cory Doctorow: I have journeyed to the soul of chocolate and I bring you good tidings: “It started when one of my local coffee shops announced that it would be serving cold-brewed chocolate…. I schemed to do it on my own…. Nibs… about four ounces… with eight cups of water. The next 24 hours were delicious torture, as the office filled with the incredible, rich aroma of chocolate liquor being leached from the precious nibs with aching, tender slowness…. The resulting drink was…amazing Every one of the flavors of raw, bitter chocolate, teased out in aromatic glory, delicate and individuated in a golden, translucent drink that was not sweet, but also far less bitter than unsweetened chocolate on its own…. The equipment–a plastic jug, $6 nut-milk bag, and $20 grinder, are unlikely to break your bank, and are good for lots of stuff besides this weird chocolate beverage that’s done my head in.”

    <–cold-pressed chocolate drinks are now a thing…

February 27, 2015

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