Should-Read: Dan Drezner (2014): What Nick Kristof Doesn’t Get About the Ivory Tower

Should-Read: From four years ago. Interesting that in Dan’s view Beltway types have neither the speed of analysis of the money people nor the depth of knowledge of the academics, and in fact have no strengths at all—unless you want to claim that its major additional weakness, groupthink, is also a strength. The major weaknesses of the other two are nicely phrased: money types tending to oversimplify, and academics to overcomplicate: Dan Drezner (2014): What Nick Kristof Doesn’t Get About the Ivory Tower: “Three tribes that dominate the discussion of foreign affairs—academics, Beltway types and money folks… Continue reading Should-Read: Dan Drezner (2014): What Nick Kristof Doesn’t Get About the Ivory Tower

Should-Read: Katrine Jakobsen et al.: Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark

Should-Read: Katrine Jakobsen et al.: Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark: “Denmark… the effects of wealth taxes… on wealth accumulation…

…Denmark used to impose one of the world’s highest marginal tax ates on wealth, but this tax was drastically reduced and ultimately abolished between 1989 and 1997. Due to the specific design of the wealth tax, these changes provide a compelling quasi-experiment for understanding behavioral responses among the wealthiest segments of
the population.

We find clear reduced-form effects of wealth taxes in the short and medium run, with larger effects on the very wealthy than on the moderately wealthy. We develop a simple lifecycle model with utility of residual wealth (bequests) allowing us to interpret the evidence in terms of structural primitives. We calibrate the model to the quasi-experimental moments and simulate the model forward to estimate the long-run effect of wealth taxes on wealth accumulation. Our simulations show that the long-run elasticity of wealth with respect to the net-of-tax return is sizeable at the top of distribution. Our paper provides the type of evidence needed to assess optimal capital taxation…

Should-Read: Noah Smith: Rational Markets Theory Keeps Running Into Irrational Humans

Should-Read: Noah Smith: Rational Markets Theory Keeps Running Into Irrational Humans: “To many young people, the idea of efficient financial markets—the idea that…

…in the words of economist Eugene Fama, “At any point in time, the actual price of a security will be a good estimate of its intrinsic value”—probably seems like a joke. The financial crisis of 2008, the bursting of the housing bubble, and gyrations in markets from gold to Bitcoin to Chinese stocks have put paid, at least for now, to the idea that prices are guided by the steady hand of rationality. The theory won Fama an economics Nobel Prize in 2013, but he shared it with Robert Shiller, whose research poked significant holes in the idea decades ago. But believe it or not, there was a time when efficient markets theory occupied a place of honor in the worldview of economists and financial professionals alike….

In “ETF Arbitrage and Return Predictability,” economists David Brown, Shaun Davies and Matthew Ringgenberg take advantage of the way exchange-traded funds are structured. An ETF typically has a designated set of traders called “authorized participants” (APs) who are able to carry out arbitrage between the fund and its underlying assets, whether stocks, bonds or commodities. When the price changes, APs respond by buying and selling the underlying assets, and by either creating or redeeming shares of the ETF, until the two values come back into line. They are, by design, rational arbitrageurs. Generally, an ETF’s APs do a good job of keeping the fund’s value close to the value of the assets it owns. Many studies confirm this. But Brown et al. find that APs’ arbitrage coincides with a deviation of asset values from their fundamentals. When traders other than the APs push around the price, the changes in the prices of the assets tend to reverse themselves over the subsequent months. Anyone watching the APs’ arbitrage trades—which are public record, since they involve the creation and destruction of ETF shares—can then bet that the recent rise or fall in the price of the assets underlying the ETF will be reversed. And make a lot of money. Under efficient markets theory, that’s not supposed to happen….

Efficient markets theory never really fits the facts, but it never quite dies, either.

Should-Read: Paul Krugman: Unicorns of the Intellectual Right

Should-Read: Paul Krugman: Unicorns of the Intellectual Right: “Economics… a field with a relatively strong conservative presence…. [But] trying to find influential conservative economic intellectuals is basically a hopeless task…

…While there are many conservative economists with appointments at top universities, publications in top journals, and so on, they have no influence on conservative policymaking. What the right wants are charlatans and cranks, in (conservative) Greg Mankiw’s famous phrase. If they use actual economists, they use them the way a drunkard uses a lamppost: for support, not illumination. The appointment of Larry Kudlow to head the National Economic Council epitomizes the phenomenon…. Kudlow… is basically a TV personality, whose shtick is preaching the magic of tax cuts, and nothing–not the Kansas debacle, not the Clinton boom, not the strong job creation that followed Obama’s 2013 tax hike–will change his mind. And it’s not just that he’s incurious and inflexible: selling snake oil is his business model, and he can’t change without losing everything. And that’s the kind of guy Republicans want…. If you get a conservative economist who isn’t a charlatan and crank, you are more or less by definition getting someone with no influence on policymakers. But that’s not the only problem….

Conservative economic thought is… [also] in an advanced state of both intellectual and moral decadence…. I’ve written a lot about the intellectual decadence…. Anti-Keynesians refused to reconsider their views when their own models failed the reality test while Keynesian models, with some modification, performed pretty well. By the time the Great Recession struck, the right-leaning side of the profession had entered a Dark Age, having retrogressed to the point where famous economists trotted out 30s-era fallacies as deep insights….

There has been a moral collapse–a willingness to put political loyalty over professional standards. We saw that most recently in the way leading conservative economists raced to endorse ludicrous claims for the efficacy of the Trump tax cuts, then tried to climb down without admitting what they had done. We saw it in the false claims that Obama had presided over a massive expansion of government programs and refusal to admit that he hadn’t, the warnings that Fed policy would cause huge inflation followed by refusal to admit having been wrong, and on and on…. I suspect… it’s… a desperate attempt to retain some influence on a party that prefers the likes of Kudlow or Stephen Moore. People like John Taylor just keep hoping that if they toe the party line enough, they can still get on the inside. But so far this keeps not happening…. And no, you don’t see the same thing on the other side….

Am I saying that there are no conservative economists who have maintained their principles? Not at all. But they have no influence, zero, on GOP thinking. So in economics, a news organization trying to represent conservative thought either has to publish people with no constituency or go with the charlatans who actually matter. And I think that’s true across the board. The left has genuine public intellectuals with actual ideas and at least some real influence; the right does not. News organizations don’t seem to have figured out how to deal with this reality, except by pretending that it doesn’t exist. And that’s why we keep having these Williamson-like debacles.

Now That John Williams Is President of the New York Fed, He Really Should Convene a Blue Ribbon Commission on What the Inflation Target Should Be

From June 2017: Fed Up Rethink 2% Inflation Target Blue-Ribbon Commission Conference Call: I hear four arguments for not changing the 2%/year inflation target, even though pursuing that target found us in a situation where monetary policy was greatly hobbled in its ability to manage the economy for a solid decade. And, as best as I can evaluate them, all four of these arguments seem to me to be wrong. They are:

  1. The Federal Reserve, even at the zero lower bound, has powerful tools sufficient to carry out its stabilization policy tasks….

  2. The problem is not the 2%/year target but rather pressure on the Federal Reserve… from substantial numbers of economists and politicians practicing bad economics and motivated partisan reasoning….

  3. A higher inflation rate would bring shifting expectations of inflation back into the mix, distract people and firms from their proper task of calculating real costs and benefits to worry about monetary policy, and make monetary policy management more complicated….

  4. The Federal Reserve needs to maintain its credibility, and if it were to even once change the target inflation rate, its commitment to any target inflation rate would have no credibility….

Should-Read: Mary Daly: Raising the Speed Limit on Future Growth

Should-Read: The eminent and brilliant Mary Daly is one of the people on the shortest of my short lists of people who would be a good next president of the Federal Reserve Bank of San Francisco. Here she is talking in Phoenix, AZ: Mary Daly: Raising the Speed Limit on Future Growth: “Why aren’t American workers working?…

Some of the drop owes to wealthier families choosing to have only one person engaging in the paid labor market (Hall and Petrosky-Nadeau 2016). And I emphasize paid here…. Some of the lost labor market participation seems related to having the financial ability to make work–life balance choices. Another factor… is ongoing job polarization that favors workers at the high and low ends of the skill distribution…. Our economy is automating thousands of jobs in the middle-skill range, from call center workers, to paralegals, to grocery checkers…. These pressures on middle-skilled jobs leave a big swath of workers on the sidelines, wanting work but not having the skills….

The final and perhaps most critical issue…. We’re not adequately preparing a large fraction of our young people for the jobs of the future…. By 2020, for the first time in our history, more jobs will require a bachelor’s degree than a high school diploma (Carnevale, Smith, and Strohl 2013)…. In 2016 only 37% of 25- to 29-year-olds had a college diploma (Snyder, de Brey, and Dillow 2018)…. So where should we focus our efforts when it comes to getting more young people into college? One place to start is in working to equalize educational attainment across students of different races and ethnicities…. Given the important role that education plays… equalizing… educational attainment across these groups has big benefits….

The really good news is that education is generally a win–win, beneficial to individuals and to taxpayers. We know that those with a college degree are much more likely to become top earners during their career, regardless of their financial background (Daly 2012; Daly and Bengali 2013, 2014; and Daly and Cao 2015). They have lower unemployment rates, and they’re less likely to become unemployed during a recession. And while there’s no doubt the cost of college is a strain for many, the average time it takes to recoup that cost is 10 years (Abel and Deitz 2014). This means that, relative to many other investments, education pencils out, even if graduates don’t go on to earn top salaries. For taxpayers the math is even more straightforward. A detailed study by the OECD shows that college is a great investment for taxpayers (OECD 2017). The costs paid to educate are more than covered by increased productivity, longer and more stable work lives, and higher tax revenues from graduates…. Education is incentive compatible, good for everyone involved…

Should-Read: Larry Summers: No, “Obamasclerosis” wasnt a real problem

Should-Read: I need to figure out why the usually-reliable Greg Ip has started giving more credence than he should to the claims of Trump hacks and flacks like Kevin Hassett, Larry Kudlow, Peter Navarro, and their ilk: Larry Summers: No, “Obamasclerosis” wasnt a real problem: “The Wall Street Journal’s Greg Ip… finds credible… claims that President Barack Obama’s policies… materially slowed economic growth…

… even though Ip acknowledges that the CEA’s assertions regarding magnitudes are likely exaggerated.

The CEA’s thesis is that a wave of tax and regulatory policies reduced both workers’ incentives to work and businesses’ incentives to invest, leading to slower economic growth than would otherwise have been achievable…. At least three broad features of the economic landscape make the CEA’s view an unlikely explanation for disappointing economic growth….

  1. The dominant reason for slow growth has been what economists label slow “total factor productivity” (TFP) growth…. There is no basis for supposing that levels of labor input or capital are less than one would expect given the magnitude of the Great Financial Crisis…. This suggests the lack of importance of the various factors adduced by the… [Trumpists’] report….

  2. The biggest surprise of the last few years has been the remarkably low rate of inflation even as the unemployment rate has reached 4 percent….. If, as the CEA believes, our slow economic growth is a result of too little supply of labor and capital, one would expect surprisingly high, rather than surprisingly low, inflation as demand growth collided with constricted supply…. The secular stagnation hypothesis that emphasizes issues on the demand side would predict exactly the combination of sluggish growth, low inflation and low capital costs that we observe….

  3. The… thesis… that capital has been greatly burdened in recent years by onerous regulation, high taxes and a lack of availability of labor… is belied by the behavior of the stock market and of corporate profits…. The observation that share buybacks appear to be the largest use of the proceeds from the Trump tax cuts points in the same direction. Costs of capital have not been responsible for holding back investment in the United States in recent years.

If the “Obamasclerosis” theory does not fit the facts of slow growth in recent years, what are its likely causes?… My guess is… hysteresis effects from the financial crisis and associated recession, reduced application of innovation in the economy in recent years, and possibly the adverse effects of rising monopoly power and diminishing competition…

It is puzzling. Kevin Hassett’s arguments seem transparently false—claims on the other of magnitude as “supply curves slope up” and “burdensome regulations raise stock prices”. They are not the type of thing that I would have expected anyone working for the Wall Street Journal news pages to validate.

It is the case that some Wall Street Journal insiders claim that editor Gerard Baker was a catastrophic choice: that he is a Trumpist true believer who has created a pre-1990 Eastern European atmosphere at the news pages of the Journal as he has decided to light the news pages’ credibility as an information intermediary on fire in an attempt to make Trump look less bad in relative perspective by making everybody else look as bad as possible.

Others say that the pressure is coming from Rupert, James, and Lachlan Murdoch and that Baker is trying hard to do as good a job as possible under the circumstances.

Should-Read: Mark Antonio Wright: Oklahoma’s Teachers & Education Funding Issues

Should-Read: Read National Review before… well, before today… about Oklahoma Governor Mary Fallin, and you read things like “There’s still quite a bit of experienced managerial and legislative talent walking through the lobby of Trump Tower these days… Oklahoma governor Mary Fallin…” and “A Mama Grizzly Wins in the Sooner State”. All that is now, as they say, inoperative. But surely NR could have given its loyal readers a heads-up sometime in the past eight years that MISTAKES WERE MADE?: Mark Antonio Wright: Oklahoma’s Teachers & Education Funding Issues: “No reasonable examination of the facts can avoid laying blame at the feet of Republican governor Mary Fallin…

…Once a rising conservative star, Fallin served three terms as Oklahoma’s lieutenant governor and two terms in the U.S. House before she was elected to the governorship in the GOP-wave year of 2010, accompanied by big Republican majorities in both houses of the legislature. The ensuing years, however, have seen a constant stream of budget and funding missteps…. Government in Oklahoma needs deep reform. If the states are meant to be, in our federal system, sovereign “laboratories of democracy,” then Oklahoma’s leaders should realize that their current experiment is failing…. Four-day school weeks, classrooms with 40 kids, and students forced to sit on the floor is no one’s idea of a successful educational environment. Conscientious Okies should get to work…

Should-Read: Federal Reserve Bank of San Francisco: Leadership and Membership Announcements

Should-Read: The people who are going to pick the next President of the Federal Reserve Bank of San Francisco: Tamara Lundgren, Rosemary Turner, Alex Mehran, Barry M. Meyer, Steven E. Bochner, Sanford L. Michelman: Federal Reserve Bank of San Francisco: Leadership and Membership Announcements: “Tamara Lundgren, president and CEO, Schnitzer Steel Industries, Inc., Portland, OR, has been elected as a class B director… Continue reading Should-Read: Federal Reserve Bank of San Francisco: Leadership and Membership Announcements

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Should-Read: Jesse K. Anttila-Hughes et al.: Mortality from Nestlé’s Marketing of Infant Formula in Low and Middle-Income Countries

Should-Read: Jesse K. Anttila-Hughes et al.: Mortality from Nestlé’s Marketing of Infant Formula in Low and Middle-Income Countries: “Intensive and controversial marketing of infant formula is believed to be responsible for millions of infant deaths in low and middle-income countries (LMICs)…

…yet to date there have been no rigorous analyses that quantify these effects. To estimate the impact of infant formula on infant mortality, we pair country-specific data from the annual corporate reports of Nestlé, the largest producer of infant formula, with a sample of 2.48 million births in 46 LMICs from 1970-2011. Our key finding is that the availability of formula increased infant mortality by 9.4 per 1000 births, 95%CI 1 among mothers without access to clean water, suggesting that unclean water acted as a vector for the transmission of water-borne pathogens to infants. We estimate that the availability of formula in LIMCs resulted in approximately 66,000 infant deaths in 1981 at the peak of the infant formula controversy…