Should-Read: I think Emily Eisner gets this right: Emily Eisner: Women in Economics at Berkeley

Should-Read: I think Emily Eisner gets this right: Emily Eisner: Women in Economics at Berkeley: “However in order to turn bold ideas into a reality, the AEA needs to establish institutions and systems that will incentivize the behavior they endorse…

…and address issues as they come up (and evolve over time). Professions such as sociology and law have modeled the type of robust code of conduct that a profession such as economics could adopt. These other professions have established more specific guidelines for conduct with other professionals, clients, research subjects, audience members, and the general public. While the current draft put out by the AEA does allude to social media and spaces where comments can be made anonymously as venues that need to maintain a high standard of conduct, they do not explicitly address the specific forms of misconduct that would violate the Code. This leaves ample room for ambiguity and inaction in the case of misconduct. Further, the Code does not offer a system of recourse for those who have witnessed or fallen victim to violations of conduct. Without a formal process of reporting and addressing violations, it is not clear that this Code will exist as anything other than wishful thinking…

Should-Read: Valerie Cerra and Sweta C. Saxena: The Economic Scars of Crises and Recessions

Should-Read: “Hysteresis” in response to 2007-2009 is, I have to admit, much less than I feared it would be six years ago. But it is also much much bigger than zero. The points about the calculation and measurement of potential output are especially important: Valerie Cerra and Sweta C. Saxena: The Economic Scars of Crises and Recessions: “According to the traditional business cycle view… our new study casts doubt on this traditional view and shows that all types of recessions…

…including those arising from external shocks and small domestic macroeconomic policy mistakes—lead to permanent losses in output and welfare…. Some researchers have explained the sluggish post-crisis growth as driven by demographic trends or other factors specific to the United States. But such explanation ignores the fact that output dynamics after the crisis followed a similar pattern seen in other countries…. Using updated data from 1974 to 2012, we confirm our earlier findings that the irreparable damage to output is not limited to financial and political crises. All types of recessions, on average, lead to permanent output losses. Contrary to conventional wisdom, we also show that countries do not typically have growth booms before crises and recessions….

What does this… mean for economic policy?… The concept and measurement of the output gap may need to be revisited…. Estimating potential output by smoothing the path of actual output creates false cycles and constant revisions in potential output estimates. For instance, there has been a constant downward revision in the estimated path of potential output for the United States and a closing of the output gap in recent years. But potential GDP estimates were revised down to actual GDP, not the other way around. Such revisions and closures of output gaps are partly just a result of measurement issues. When including years of lower output after the crisis, potential GDP (the measured trend) is mechanically reduced, with a corresponding dramatic change in our view of history. We now measure a very positive output gap (when actual output is above potential) for most advanced countries on the brink of the crisis in 2007, even though there were no signs of overheating at the time…

Should-Read: Paul Krugman: Immaculate Inflation Strikes Again

Should-Read: Paul Krugman: Immaculate Inflation Strikes Again: “Oh, dear. We’ve been here before…. Economics is about what people… do…

…Your story… has to include an explanation of how peoples’ incentives change. That’s why the doctrine of immaculate transfer, which asserts that saving-investment balances translate into trade balances without any adjustment of the exchange rate, is silly…. Similarly, even if you think that inflation is fundamentally a monetary phenomenon (which you shouldn’t, as I’ll explain in a minute), wage- and price-setters don’t care about money demand; they care about their own ability or lack thereof to charge more, which has to–has to–involve the amount of slack in the economy….

The claim that there’s weak or no evidence of a link between unemployment and inflation is sustainable only if you insist on restricting yourself to recent U.S. data. Take a longer and broader view, and the evidence is obvious. Consider, for example, the case of Spain. Inflation in Spain is definitely not driven by monetary factors, since Spain hasn’t even had its own money since it joined the euro. Nonetheless, there have been big moves in both Spanish inflation and Spanish unemployment…. Low unemployment… the result of huge inflows of capital, fueling a real estate bubble. Then came the sudden stop after the Greek crisis, which sent unemployment soaring…. The pre-crisis era was marked by relatively high inflation, well above the euro-area average; the post-crisis era by near-zero inflation, below the rest of the euro area, allowing Spain to achieve (at immense cost) an “internal devaluation” that has driven an export-led recovery. So, do you really want to claim that the swings in inflation had nothing to do with the swings in unemployment? Really, really? But if you concede that unemployment had a lot to do with Spanish inflation and disinflation, you’ve already conceded the basic logic of the Phillips curve….

Economics is about what people do, and stories about macrobehavior should always include an explanation of the micromotives that make people change what they do. This isn’t the same thing as saying that we must have “microfoundations” in the sense that everyone is maximizing; often people don’t, and a lot of sensible economics involves just accepting some limits to maximization. But incentives and motives are still key. And it’s ironic that macroeconomists who are deeply committed to the microfoundations project–or, as Trump might say, the “failing microfoundations project”–also seem to be especially likely, perhaps due to their addiction to mathiness, to forget this essential rule.

Should-Read: Ezra Klein: Sam Harris, Charles Murray, and the allure of race science

Should-Read: Ezra Klein: Sam Harris, Charles Murray, and the allure of race science: “This is not ‘forbidden knowledge’. It is America’s most ancient justification for bigotry and racial inequality…

…On Monday morning, I woke up to a tweet from Sam Harris, the bestselling author and popular podcast host, referencing a debate we never quite had over race and IQ…. The background to Harris’s shot at me is that last year, Harris had Charles Murray on his podcast…. Harris’s conversation with Murray was titled, tantalizingly, “Forbidden Knowledge,” and in it, Harris sought to rehabilitate the conversation over race and IQ as well as open a larger debate about what can and cannot be said in today’s America….

Subsequently, Eric Turkheimer, Kathryn Paige Harden, and Richard E. Nisbett—three academic psychologists who specialize in studying intelligence—wrote a piece for Vox arguing that Murray was peddling pseudoscience and Harris had been irresponsible in representing it as the scientific consensus…. Harris responded furiously to their article and publicly challenged me, as Vox’s editor-in-chief at the time, to come on his show and debate the issue. Over email, after failing to persuade Harris to have Turkheimer, Harden, or Nisbett on instead, I accepted…. [But] he ultimately refused to have me on his podcast on the grounds that a conversation between the two of us would be “unproductive,” pivoting to a demand that I instead publish an op-ed supporting his views….

Here is my view: Research shows measurable consequences on IQ and a host of other outcomes from the kind of violence and discrimination America inflicted for centuries against African Americans. In a vicious cycle, the consequences of that violence have pushed forward the underlying attitudes that allow discriminatory policies to flourish and justify the racially unequal world we’ve built…. You cannot discuss this topic without discussing its toxic past and the way that shapes our present. The conversation between Murray and Harris, one not unique to them, is particularly important right now because it shows how longstanding, deeply harmful tropes are being rehabilitated across the right as a brave stand against political correctness, and as a justification for cutting social programs and giving up on efforts to foster racial equality.

So let’s dive in. This isn’t “forbidden knowledge.” It’s ancient prejudice…. For two white men to spend a few hours discussing why black Americans are, as a group, less intelligent than whites isn’t a courageous stand in the context of American history; it’s a common one…. This pattern has played out across American history, and these ideas have persisted well into the modern age. William F. Buckley, the venerated founder of National Review, wrote this in a 1957 in a column titled “Why the South Must Prevail”:

The central question that emerges… is whether the White community in the South is entitled to take such measures as are necessary to prevail, politically and culturally, in areas in which it does not predominate numerically? The sobering answer is Yes—the White community is so entitled because, for the time being, it is the advanced race. It is not easy, and it is unpleasant, to adduce statistics evidencing the median cultural superiority of White over negro, but it is a fact that obtrudes, one that cannot be hidden by ever-so-busy egalitarians and anthropologists…

That was just 60 years ago. It was within my mother’s lifetime. Are we so sure our generation’s version of this argument will look so much better 60 years from now? Whatever the future holds, the idea that America’s racial inequalities are driven by genetic differences between the races and not by anything we did, or have to undo, is not “forbidden knowledge”—it is perhaps the most common and influential perspective in American history…. If you’re going to discuss this topic, that’s a history you need to reckon with….

I will state the obvious. White people enslaved black people on this land before the United States was even a country. Our founding document counted African Americans as three-fifths of a person. If I drive a few minutes into Virginia, I will ride over a highway named for US senator and Confederate leader Jefferson Davis, who said, “We recognize the fact of the inferiority stamped upon that race of men by the Creator, and from the cradle to the grave, our Government, as a civil institution, marks that inferiority.” The current president of the United States has made defending the monuments of Davis and his compatriots a signature issue. The Civil War was followed by the domestic terror of the South’s backlash to Reconstruction. Segregation was enforced by violence. Plunder, lynching, and humiliation were constant. And these are just the headline abuses. Less bloody and brutal forms of discrimination were, and are, ubiquitous.

This is not our past. It is our present…. Today, white and black children do drugs at similar rates, but black children are arrested far more often. Today, our schools are more segregated than at any point in half a century, with all the attendant damage that does to black children. Today, among children born into the top fifth of the income distribution, white children have a 41 percent chance of holding their station, while black children have only an 18 percent chance. International evidence suggests oppression, discrimination, and societal resentment lowers group IQs….

If… Harris’s conversation with Murray… had simply observed the existence of a racial IQ gap (that has already closed substantially over time), hypothesized that advances in genetics might one day reveal group differences, and then cautioned that no one knows anything yet—there would be no controversy. That was not the conversation they had….

This brings us to Charles Murray and the strange apportionment of sympathy that underlies this whole conversation — and many conversations about “PC” culture today…. If Murray is a cautious scholar who does everything possible to avoid racial controversy and nevertheless has had his career destroyed by social justice warriors, it is understandable why his example would strike fear into the hearts of similarly oriented commentators: There but for the grace of God go I, and all that. But I do not buy this interpretation of Murray’s career…. Murray pretends a strange innocence over why the racial arguments in his book attracted so much attention…. Murray has repeatedly courted racial controversy over the years, and even so, he holds a top position at a respected think tank, gets his books reviewed by the most important outlets, is invited to write op-eds in national newspapers, and remains an important commentator on current events. His career is proof not of how little racial controversy you can provoke before being sanctioned, but of how much….

In this country, given our history, discussions about race and IQ need more care and context than they get. As a starting point, rather than being framed around the bravery of the (white) participants for having a conversation that has done so much damage, they should grapple seriously with the costs of America’s most ancient justification for bigotry, and take seriously why so many are so skeptical that this time, finally, the racial pessimists are right when they have been so horribly wrong before…

The flat Phillips Curve and U.S. labor’s share of income

Federal Reserve Chairman Jerome Powell speaks during a news conference following the Federal Open Markets Committee meeting in Washington.

How flat is the Phillips Curve—the relationship between unemployment and inflation? This question is very much on the minds of U.S. central bankers because over the past several years the unemployment rate has dropped, yet inflation has remained subdued. That dynamic has many economists and analysts arguing that the Phillips Curve looks flat, meaning lower unemployment won’t lead to much higher inflation.

Now, it seems, monetary policymakers at the Federal Reserve agree, argues Tim Duy of the University of Oregon. After last week’s meeting of the Federal Open Markets Committee, where monetary policymakers released their projections of unemployment, inflation, and interest rates, Duy contends that they are now among those who believe in a flat Phillips Curve and are betting on it in future plans for monetary policy. If he’s correct, then what might the central bankers be observing that might explain the lack of an inflationary response to a tighter labor market?

The Phillips Curve can break down in a number of ways because the process of transforming lower unemployment to higher inflation has several steps. In the past, faster wage growth passed through into higher inflation, as firms needed to increase prices to make up for higher wages. But a look at the data shows that inflation appears less responsive to wage growth than in the past. Higher wages should push up costs and therefore prices, yet the breakdown of this relationship might be due to some more cushion in companies’ balance sheets—namely, profits.

The share of income going to labor in the United States has been on the decline since about 2000. A declining labor share of income might give companies more space to deal with higher wages. If the decline is due to increasing bargaining power of employers, for example, then a higher share of income going to labor wouldn’t necessarily mean higher inflation because employers can afford to absorb those slightly higher costs without biting too much into their profits.

But if the decline in the U.S. labor share of income is due to changes in productivity growth, then letting the labor share increase could set off inflationary pressures. Firms would not have as much cushion to raise wages out of profits and would need to raise prices. It’s not clear which story holds up better without turning to the data, but a quick look suggests the first scenario might hold more truth. (See Figure 1.)

Figure 1

The chart above shows that since 2000, when the U.S. labor share started its decline, inflation seems unrelated to the amount of income going to labor. Look at the flat relationship between inflation and the labor share during this time period—the red dots. A simple regression analysis shows no statistically significant relationship. A higher labor share of income was associated with higher inflation during earlier time periods—the green dots—but the relationship weakened over time. By the 2000s, the relationship disappeared.

In short, the Federal Reserve might have nothing to fear from a rising labor share of income. A potential new member of the central bank has said as much in the past. In a 2014 analysis for the asset management firm PIMCO, Richard Clarida (the rumored frontrunner to be the next Federal Reserve vice chair) pointed out the lack of pass-through from a higher labor share to higher inflation.

The possible reasons behind the currently flat Phillips Curve are numerous, and whether this relationship will hold up for long is very much up for debate. But the fact that a higher labor share isn’t a clear cut sign that accelerating inflation will soon arrive might give the Fed some comfort that its recent bet on a flatter Phillips Curve might pay off.

DeLong Says Tax Bill Has 70% Chance of Passing | Bloomberg Daybreak Asia 2017-12-01

The Trump Ryan McConnell Tax Cut My Angry Face

Professor DeLong Says Tax Bill Has 70% Chance of Passing: From 2017-12-01: Not a transcript but much more what I wish I had said—that is, heavily edited and revised to increase clarity, decrease stupidity, and file a little bit of the ragged stream-of-consciousness rough edges off.

Nevertheless, holds up very nicely, no? (BTW, this is my angry face):

There are still many potential stumbling blocks in the way of the high-end tax cut bill currenty inching its way through the senate. The current issue is the so-called “trigger”—the provision of the bill that would eliminate the tax cuts if the federal deficit turned out to come in high. Apparently the trigger has failed the so-called “Byrd Bath” as the Parliamentarian removes pieces of the bill that do not qualify for the special un-filibusterable Reconciliation process. The “trigger” has been removed from the bill. The bill’s proponents are frantically trying to figure things on the floor—frantically trying to come up with a substitute that would be acceptable both to the small number of members of the Republican congress who are more deficit hawkish and also to the larger number of members in the Republican caucus who are more supply-side optimistic—or, I would say, “crazy”.

I think the bill still has a 70% chance of passing. Certainly the stock market here in the United States appears to be fixing its odds at about a 70% chance of passing.

I, however, would like to step back and take a broader view. What is even crazier than Republican legislators believing this particular high-end tax cut will effectively pay for itself is the fact that we have arrived at this point at all. There are some 12 Democratic senators would gladly sign on to a corporate tax cut that broadened the base and lowered the rates. They would gladly sign on—provided they could be convinced that this was not just another shift in the income distribution from the non-rich toward the rich and that it would significantly strengthen the economy. And that test could be passed: I and many other economists not indentured to various Republican political masters see lots of opportunity to broaden the base, lower the rates, and strengthen the economy via real tax reform.

Yet, rather than take that path, McConnell and Ryan are moving forward with this Republican only thing that truly is down to the wire.

And as they get down to the wire, the potential benefits to the economy as a whole are evaporating. All that is left is a shift in the income distribution away from the non-rich to the rich. And even that is badly drafted: it is starting to look like incentives are going to be further disrupted and distorted so that there may not be growth benefits but rather growth harm to the economy as a whole.

The expensing provision—the provision by which companies get to deduct their investment expenditures from their tax base—expires. And it expires after five years. That means that McConnell and Ryan and Trump are trying to give corporations a big incentive to crowd a whole bunch of their investment spending in the five-year near future while that window is open. Then, after the window closes, they have an incentive to cut back on investment spending. That could well produce a small boom and then a small bust in the economy: stronger investment from 2018-2022, and then weaker investment starting in 2023. That go-stop is unproductive, and a good way to weaken the economy.

Republicans say that when the time comes around for expensing to expire, they will simply renew it. But that would require they maintain control of all three potential blockers—House, Senate, and Presidency. And if we have learned any lessons from ObamaCare and the Bush II tax cuts for the rich, it is that bills passed through Reconciliation along party-line votes are very unstable as policies.

Yet there are at least 12 Democrats in the senate in line to support corporate tax reform that would genuinely broaden the base, lower the rates, and provide a significant plus to the economy as a whole. Yes, such a deal would have gotten less money to the superrich who are now the key financial support base of the American economy—perhaps half as much money. But that money would be much more stable. And the chances of Republicans being able to run in 2020 on the basis of good economic stewardship would be noticeably higher.

As it is—the Joint Committee on Taxation’s report is now out, and we are talking about real GDP growth over the next decade of only 0.08%. And that is for how much is produced in the United States. For how much flows in income to Americans, it is at best a zer, more likely a small negative as a bunch of the tax cut goes to foreign investors from day 1.

I am flummoxed.

At is not as though this issue appeared by surprise. It is not as though they had to put a critical proposal today in a month without any staff preparation on options, alternatives, benefits, and costs. They had years to prepare. Yet these idiots really do seem to have done their homework in the bus on the way to the school….

A recession? Probably not. There is a significant minus to GDP growth coming in five years from the expiration of expensing. There is the risk that each time you load on the national debt a little more you increase potential financial instability. That does add a little bit to recessionary dangers. But interest rates are still extremely low . Slower growth rather than any serious risk of a session follow from this.

Should-Read: Joe Weisenthal: On Twitter

Should-Read: I agree with Joe Weisenthal. Certainly I did not have incomprehensible optimism back in 2009/2010. And to the extent I was hopeful, the hope drained away quickly with every talk I had with Obama Administration or European technocrats describing what they were facing. Someday I hope Christie Romer will write up her impressions of the Federal Reserve’s Jackson Hole Conference—kind of a Masque of the Red Death situation in terms of being clueless as to what was about to go down. The financiers and policymakers were happy because a Great Depression had been avoided and because ultra-low interest rates had boosted asset values and made them close to whole. But…: Joe Weisenthal: On Twitter: “Every time I see a version of this chart (this time from Deutsche Bank’s Torsten Slok) I’m blown away by what seems (in retrospect) to be incomprehensible optimism back in 2009/2010…”

Fed Funds Futures

Should-Read: Thomas Piketty: Brahmin Left vs. Merchant Right: Rising Inequality and the Changing Structure of Political Conflict (Evidence from France, Britain and the US, 1948-2017)

Should-Read: Thomas Piketty: Brahmin Left vs. Merchant Right: Rising Inequality and the Changing Structure of Political Conflict (Evidence from France, Britain and the US, 1948-2017): “Using post-electoral surveys from France, Britain and the US…

…a striking long-run evolution in the structure of political cleavages. In the 1950s-1960s, the vote for left-wing (socialist-labour-democratic) parties was associated with lower education and lower income voters. It has gradually become associated with higher education voters, giving rise to a “multiple-elite” party system in the 2000s-2010s: high-education elites now vote for the “left”, while high-income/high-wealth elites still vote for the “right” (though less and less so).

I argue that this can contribute to explaining rising inequality and the lack of democratic response to it, as well as the rise of “populism”.

I also discuss the origins of this evolution (rise of globalization/migration cleavage, and/or educational expansion per se) as well as future prospects: “multiple-elite” stabilization; complete realignment of the party system along a “globalists” (high-education, high-income) vs “nativists” (low-education, low-income) cleavage; return to class-based redistributive conflict (either from an internationalist or nativist perspective). Two main lessons emerge. First, with multi-dimensional inequality, multiple political equilibria and bifurcations can occur. Next, without a strong egalitarian-internationalist platform, it is difficult to unite low-education, low-income voters from all origins within the same party…

Should-Read: Paul Krugman: Globalization: What Did We Miss?

Should-Read: Paul Krugman: Globalization: What Did We Miss?: “Anyone who worked on the political economy of trade policy knew that fights over tariffs look very much as if they come out of a specific-factors world…

…labor and capital within a given industry are generally on the same side in trade policy disputes, not on opposite sides as they would be if they were thinking about the broad factoral distribution of income. It should have been obvious that the general politics of globalization would reflect that same reality. That is, never mind the question of how trade affects the blue-collar/white-collar wage gap, or the aggregate Gini coefficient; the politics of globalization were likely to be much more influenced by the experience of individual sectors that gained or lost from shifting trade flows…

Should-Read: Nicholas Gruen: The middleware of democracy. Or from knowledge to wisdom: or at least knowledge 2.0

Should-Read: Nicholas Gruen: The middleware of democracy. Or from knowledge to wisdom: or at least knowledge 2.0: “Simon Heffer’s High Minds presents us with a portrait of the mid-Victorians in which they consciously set about building… ours… liberal democratic world…

…To do so they recognised the need for all sorts of public goods… education and health… an honest public service chosen on merit… civic virtue… a stirring and a sobering story reflecting an age which I think had a more balanced understanding of the necessary ecology of public and private goods each reinforcing each other in building the Good Life. Today… our contemporary vision is profoundly skewed toward private good and private endeavour…. As Heffer makes clear, this Victorian quest was not just economic. It was a political project…. They knew that democracy was coming, so they needed to get The People a decent education before they used their vote to wreck the place….

The Victorians rightly spent a lot of their time worrying about the tyranny of the majority and so championed things like the independence of the judiciary. We also have various lower levels of independence for institutions like statutory authorities, the central bank, the bureaucracy and and so on…. The class basis of democratic capitalism–in which the middle class and its preoccupation with respectability defended various abstract principles like ministerial responsibility–is being broken down by the bread and circuses of vox pop democracy and the politico/infotainment complex….

When I was doing the Government 2.0 Taskforce I was wondering–as were many people–how can we get a Wikipedia of government…. In figuring out how the world ‘is’ or even ‘will be’ we have made some good progress in the last decade or so with

  • Wikipedia and similar informational goods on the net
  • Prediction markets
  • The Good Judgement project.

But while all of these new things help discipline the process by which we aggregate and judge views–including, crucially, sorting good from bad views–the fact remains that these things only measure good judgement regarding predictions of the way the world is or will work out not how it should be or work out. That’s what YourView was built to try to do, and it seems to do a reasonable job of it…. YourView is currently largely in mothballs and not being promoted by its owners any more. They’ve promoted it pretty vigorously for a good while now, seeking  support from media companies, philanthropy and various educational and intelligence organisations but so far without sufficient success to ensure viability. So next time you hear someone banging on about how data isn’t information and information isn’t knowledge and knowledge isn’t wisdom and all that stuff, ask them if they know about YourView and if they’re helping it try to scale the solution to that rather large problem…