Must-read: Narayana Kocherlakota: “Fragility of Purely Real Macroeconomic Models”

Must-Read: This strikes me as DeLong and Summers (1986) done right and done better with the zero lower bound included–i.e., how we would have done it had we been smarter (and had not the 1982 but today’s math macro econ toolkit). The ability of the price level as a whole to jump discontinuously and instantaneously matters a lot in virtually any expectational model…

Narayana Kocherlakota: Fragility of Purely Real Macroeconomic Models: “Purely real models that abstract from the presence of nominal rigidities…

…(at least implicitly) assume that the Phillips curve is vertical…. Such models are fragile, in the sense that their implications change significantly when the Phillips curve is even slightly less than vertical…. In the perturbed models… [with] a lower bound on the nominal interest rate… outcomes necessarily depend on agents’ beliefs about the long-run level of economic activity. The magnitude of this dependence becomes arbitrarily large as the slope of the Phillips curve becomes… loser to vertical…. The limiting purely real model ignores this form of monetary non-neutrality and macroeconomic instability. I conclude that purely real models are too incomplete to provide useful guides to questions about business cycles. I describe what elements should be added to such models in order to make them useful.

Must-read: Ryan Avent: “No Take-Backs: The Fed Makes the Best of the Bad Situation It Created”

Must-Read: Back at the end of last October, when the Federal Reserve decided it was going to hike interest rates in December, there were three reasonably-likely outcomes for the US economy over what was then the next six months: the economy could roar ahead, and a 2015:IV rate hike followed by a 2016:I one would look prescient while a 2015:IV pause and a 2016:I double-hike would look a little behind the curve; the economy could plod along, in which one hike in either 2015:IV or 2016:I would look arguable; or the economy could dive, in which case a 2015:IV hike would look like a significant unforced error.

Now roaring ahead is off the table. The prospects now for October-April are for either a plod or a dive…

Ryan Avent: No Take-Backs: The Fed Makes the Best of the Bad Situation It Created: “SUPPOSE for a moment that you are sitting on the Federal Open Market Committee…

…You think that it was sensible to raise the fed funds target in December… [think] the second half of 2015… [shows] employers adding workers at a sustained, rapid clip… oil can’t fall that much farther… payroll growth at this pace and unemployment rate has to eventually lead to much faster wage growth and higher inflation. There’s a risk that high inflation would be hard to bring down, and we don’t want to create a new recession by hiking rates a lot in a short period of time. So best to get started with the hikes now…. So you raise rates. And… all hell breaks loose…. Market-based measures of future inflation trip on a stone and faceplant….

So then you all meet again in January…. What do you do, then? Well, you release a statement… which makes the best of December’s unforced error. And… think very hard about how to change gears in March if things continue on…. The Fed… could not simply point to the real-economy data, which don’t look that different now than they did in December, and say that its outlook hadn’t really changed…. A statement… that it remained… hawkish… would force… to a nasty market panic. And enough panic can become self-fulfilling.

The statement therefore needed to… demonstrate that: the Fed’s view is basically unchanged, but the Fed is also aware of potential trouble brewing and stands ready to act accordingly, but the brewing trouble isn’t the sort of thing that should cause anyone to worry…. The problem is that now the Fed doesn’t meet again until March…. If it chooses to wait while markets do their thing, a March policy reversal could come too late to prevent a sharp deceleration in American economic activity….

It is possible that America’s recovery will roar ahead, and the Fed will be able to hike four times in 2016. But the Fed is now in a very uncomfortable position, which could easily become much more uncomfortable still. That was always the risk in hiking before economic conditions really demanded it. When both interest rates and inflation are very low, there is unlimited room to increase rates in response to an unexpected (and improbable) surge in inflation to a rate well above the target. On the other hand, under those circumstances it is very hard to react in time and with adequate force to an unexpectedly weak economic performance…

Today’s economic history: Richard J. Evans reviews ‘Karl Marx’ by Jonathan Sperber

Myself, I would translate ‘Alles Ständische und Stehende verdampft’ as “All the established estates and orders of society are steamed away”…

Richard J. Evans (2013): Review of ‘Karl Marx’ by Jonathan Sperber: “Marx v. The Rest…. Previous accounts of Marx’s life have gone one of two ways…

…Either he is seen as a prophet… or… a misguided and misguiding ideologue…. This book aims to scrape away the patina of retrospective polemic to reveal Marx in the context of his own times…. Sperber provides a new translation of the much discussed sentence in the Manifesto, ‘Alles Ständische und Stehende verdampft’: ‘All that is solid melts into air’ in the standard English version but rendered by Sperber as ‘Everything that firmly exists and all the elements of the society of orders evaporate.’ What Marx had in mind was not some mystical process of transformation, but the dissolution of hierarchical Prussian society by the steam-power of industry. Political revolution leading to a communist regime… would be achieved on the lines of the French Revolution’s… Jacobin phase, from 1792 to 1794….

The problem for Marx was that his anti-Prussian campaign required the co-operation of left-wing liberals and democrats, while his championing of the class struggle meant turning against them. While Marx vacillated, the workers lost interest in the former campaign and the democrats were alienated by the latter….

The exiles meanwhile accused each other of hypocrisy and embezzlement, taking each other to court and resorting to fisticuffs; two of them even fought a duel. Although this dire situation has often been blamed on Marx, he had previously been quite capable of working amicably with his associates, including the democrats of Cologne, and Sperber is more inclined to blame Engels, whose tactless and bullying personality he repeatedly criticises. The situation was made worse by scurrilous rumours spread by German and Austrian police spies, who swarmed around them like flies around a corpse….

Marx withdrew from politics and devoted himself to forging a new career as a journalist, writing articles for the New York Tribune, commissioned by an American working on the paper who had met him in Cologne. He published 487 articles in all, about a quarter of them ghostwritten by Engels when Marx was ill. They amounted to more, in sheer volume, than the sum total of everything else Marx published in his lifetime, and while many biographers pass over them silently, Sperber does a good job of analysing their content, particularly Marx’s extensive commentaries on the Crimean War. The fiasco of the British conduct of the war convinced him that the prime minister, Lord Palmerston, was a paid agent of the Russians, whom Marx had long loathed as ‘the gendarme of Europe’…. The money he got for his journalism, together with subsidies from the prosperous Engels, enabled his family to rent a house in Kentish Town, in North London, to buy their own furniture for it, and to afford modest luxuries like picnics on Hampstead Heath….

Marx’s Herr Vogt is usually ignored as a ‘non-canonical’ work, but Sperber shows that it was more influential and more widely read at the time than the subsequently canonical Eighteenth Brumaire. The charge that Vogt was a client of French imperialist designs on the Rhineland was vindicated when Napoleon III fell in 1870…. At the time, Vogt won the argument, but the dispute brought Marx new political allies, notably the revolutionary socialist Ferdinand Lassalle…. Marx and Engels did not entirely trust the flamboyant Lassalle, and they peppered their letters about him with anti-semitic invective, painting him as a vulgar, pushy parvenu, ‘Isidor Berlin Blue Dye’, ‘the little Yid Braun’. Lassalle invited Marx to Berlin, where he threw dinner parties for him and took him to the opera, cheekily finding him a seat next to the royal box. Marx visited old friends in Cologne and family in Trier, where his mother graciously cancelled his debts to her….

It was Marx’s ‘passionately irreconcilable, uncompromising and intransigent nature’ that had ‘the deepest and most resonant appeal, and has generated the sharpest rebukes and opposition, down to the present day’, Sperber writes, while downplaying the legacy of his ideas. He has given us a Marx for the post-Marxist age, a superb 21st-century biography that sets its subject firmly in his 19th-century context but also explains why his legacy continues to be fought over.

Must-reads: January 28, 2016


Must-read: John Quiggin: “Education: An Investment, Not a Filter”

Must-Read:John Quiggin: Education: An Investment, Not a Filter: “Implicit in this statement is the ‘screening’ theory of education…

…The idea that doing a degree might equip you with useful specific knowledge, or with general skills in reasoning, writing and so on, doesn’t get mentioned…. However, the long-term evidence is clear: in Australia, as everywhere else in the world, the wage premium for graduates has remained large enough to make going to university a very good decision, even as the proportion of young people undertaking university education has risen from a tiny minority in the mid-20th century to around 40 per cent today. One interpretation of this is that, over the past century or more, the entire world has been engaged in more and more elaborate screening for no good reason. A more plausible explanation is that technological change has eliminated the kinds of jobs that used to employ kids with a Year 10 education (the median level of achievement when I was young), and replaced them with jobs that need the skills (specific and general) of a university graduate. There’s every reason to think that these trends will continue in the future, so we are going to need more education not less…

Must-read: Noah Smith: “Book Review: ‘Economics Rules'”

Must-Read: Noah Smith: Book Review: “Economics Rules”: “I love a good book about econ philosophy-of-science…

Economic Rules: The Rights and Wrongs of the Dismal Science, by Dani Rodrik, is my favorite book in this vein to come out in quite some time…. I do have one big problem: the first two chapters. These chapters consist entirely of Rodrik’s very general thoughts on economic models, and what they should and shouldn’t be used for. The problem with these early chapters is the audience. Economists will already have heard most or all of these philosophical ideas. Non-economists, in contrast, will probably not understand…. These early chapters… fall into an uncanny valley, too old-hat for economists but too inside-baseball for non-economists.  So I fear that many readers may get turned off early….

Rodrik really shines when he talks about his own field, development econ. He gives a vivid recounting of the Washington Consensus – why it was adopted, why it went wrong, and how the mistakes could have been avoided. The story of the Washington Consensus provides the perfect backdrop for Rodrik’s ideas about what economists and models should do. The episode demonstrates why it’s important for policy advisors to look at a bunch of alternative models, and use personal judgment to choose which ones to use as analogies for reality. It is the perfect example of the ‘models as fables, economists as doctors’ worldview that Rodrik is trying to lay out. In fact, I wish more of the book had been about trade and development….

I find myself pretty much in agreement…. It’s very difficult to sum them all up (so go read the book), but here’s a few that really stood out: Rodrik notes that economists tend to present a much more simplistic, pro-market stance to the public than they show in their research and behind closed doors…. Rodrik strongly criticizes the New Classical and RBC macro theorists…. Rodrik tries to counter the criticism that economists ignore things like norms. In doing so, he basically says ‘The evidence shows that norms often matter, and economists pay attention to the evidence.’… This is a great book, and a quick read. Get it and read it if you haven’t.

Must-read: Richard Mayhew: “School Lunches and Medicaid: a BFD”

Must-Read: Richard Mayhew: School Lunches and Medicaid: a BFD: “[‘Interested State agencies that administer the National School Lunch Program (NSLP)…

…can now use Medicaid data to certify students for free and reduced priced lunches.’] Kids who have enough to eat and are not worried about having enough to eat have two significant advantages over kids who don’t have enough to eat and have to worry about that. The first is simple, they have more energy to spend on high intensity activities of play and learning (speaking as a dad of a first grader, those two things should be very close to the same a good chunk of the time). Secondly and slightly more subtly, kids who are not worried about their next meal are able to devote high complexity cognitive processes to other things. Kids (and adults) have a finite amount of brain horsepower available at any given time. Not worrying about food frees up capacity for other things. Kids who are worried about food are devoting a limited brain budget to that task and not to other things.

The free and reduced price school lunch program in most districts… has a significant amount of paperwork and potential stigma…. People who… have signed up for Medicaid or CHIP… have routine income verification processes…. Allowing states to use pre-exisiting data to pre-qualify kids for free or reduced price school lunches will help a few more kids get a quality daily meal or two in their stomachs which should their well being in addition to school performance. It is also an example of the government working to actively improve peoples’ lives while streamlining the interaction. If we could only make it mandatory that states use Medicaid or SNAP eligiblity data to drive the full array of income qualified social services instead of silo-ing different categories of assistance, so duplication and administrative burden increases wasted costs without providing qualified individuals the services and assistance that they need.

Must-read: Mark Thoma: “Why GDP Fails as a Measure of Well-Being”

Must-Read: Mark Thoma: Why GDP Fails as a Measure of Well-Being: “Catherine Rampell provides a nice summary of the alternative measures that have been proposed…

…However, none of these alternatives deal with the main problem… how to measure the full impact of technology on our lives…. GDP assigns a zero value to goods with a zero price, but those goods aren’t valued at zero and as they become more prominent, we’ll need to find a way of including the benefits they provide in our measures of the standard of living…. When you hear that your standard of living has gone up, ask yourself what has happened to leisure time?… How much of technology’s benefits might have been missed–how often do you use Wikipedia? And how was the additional GDP distributed across the population–did it mostly go to the 1 percent?…

Obamacare increases the salience of antitrust in health insurance markets from “important” to “essential”

As the extremely sharp Aaron Edlin has taught me, apropos of the current wave of proposed health insurance mergers—Aetna-Humana, Anthem-Cigna, and Centene-HealthNet:

The coming of Obamacare makes any willingness on the part of antitrust authority to allow these mergers to go through extremely dangerous and destructive policy indeed.

The imposition of the individual mandate to purchase health insurance makes maintaining competition in health insurance markets significantly more important. Usually, the exercise of market power and the ability to easily collude implicitly or explicitly made possible by large market shares are curved by the possibility of exit. The “exit the market and buy something else” option for consumers is the one competitor that the firm cannot acquire and merge with. It is the one competitor with which the firm cannot collude, implicitly or explicitly.

Imposing an individual mandate to purchase is a wise policy in a marketplace where the major market failure is adverse selection. It threatens to be a catastrophic policy in the marketplace where the major market failure is the exercise of sellers’ market power.

(AP Photo/J. Scott Applewhite, File)

The forthcoming-behavioral-economics of abundance: Project Syndicate

Over at Project Syndicate: Economics in the Age of Abundance: 250 years ago in the richest society that was then or ever had been–Imperial Augustan-Age Britain–the adolescents sent to sea by the Marine Society to be officers’ servants were half a foot–15 cm–shorter than their counterpart gentry’s sons whose heights were recorded as they entered the army as officers. 150 years ago the working class of the United States–the richest working class that was then or ever had been–was still spending roughly 2/5 of extra income at the margin simply on more calories. Pre-Industrial Agrarian-Age human populations, even Mid-Industrial populations, and a third of the world today were and are under what nutritionists and public-health experts see as severe and damaging nutritional biomedical stress. READ MOAR