Category: Equitablog

Must-Read: John Voorheis, Nolan McCarty, and Boris Shor: Unequal Incomes, Ideology and Gridlock: How Rising Inequality Increases Political Polarization

Posted on by Brad DeLong

Must-Read: John Voorheis, Nolan McCarty, and Boris Shor: Unequal Incomes, Ideology and Gridlock: How Rising Inequality Increases Political Polarization: “Income inequality has a large, positive and statistically significant effect on political polarization…

…Economic inequality appears to cause state Democratic parties to become more liberal. Inequality, however, moves state legislatures to the right overall. Such findings suggest that the effect of income inequality impacts polarization by replacing moderate Democratic legislators with Republicans…

Must-read: Yi Wen: “The Making of an Economic Superpower–Unlocking China’s Secret of Rapid Industrialization”

Posted on by Brad DeLong

Must-Read: Yi Wen: The Making of an Economic Superpower–Unlocking China’s Secret of Rapid Industrialization: “Poverty or backwardness or the lack of industrialization is always and everywhere a social coordination-failure problem…

…The problem arises because creating markets and the corresponding economic organizations (based on the principle of the division of labor) are extremely costly and require gigantic coordination efforts and trust from all market participants. In a most fundamental sense, the “free” market is a public good, and the most fundamental one, whereas its pillar is social trust…. Development is first and foremost a problem rooted in both missing markets and missing market-creators, in both market-coordination failures and government failures…. The benefits of the market are largely social while its costs (of creation and participation) are largely private. Hence, historically, a natural process of mass-market formation/fermentation has been a lengthy evolutionary process… initially accomplished mainly by a powerful and colossal merchant class that acted collectively under a nationalistic mercantilist spirit and backed fiercely by their government….

What China’s development experience showed to the world is that the centuries-long Western-style “natural” and lengthy market-fermentation process can be dramatically accelerated and re-engineered by the government, by its acting as the market creators in place of the missing merchant class, yet without repeating the Western powers’ old development path of barbaric primitive accumulations based on colonialism and imperialism and slave trade. China’s development experience thus suggests a new model (theory) of economic development, which can be labeled as the New Stage Theory (NST), or “Embryonic” Development Theory (EDT)…

An Excellent Nobel Prize for Angus Deaton–But Was Eugene Fama Always Such a Total [Redacted]?

Posted on by Brad DeLong

A truly excellent economics Nobel Prize–I have learned a lot from Angus Deaton.

And I look at my desk and see my copy of Akerlof and Shiller’s Phishing for Phools that I am halfway through on my desk. And I think about the panel I was on with Paul Krugman at New York Comic Con yesterday. There is a subset of economics Nobel Prize winners who are true geniuses, from whom I have learned and continue to learn an immense amount.

But then I turn to my computer to sort through my unread browser tabs.

And the first thing that comes up is: Eugene Fama: http://www.chicagobooth.edu/capideas/magazine/fall-2015/whos-really-in-charge.

And all I can think is: “What a maroon!”

I first remember becoming really aware of Eugene Fama in the aftermath of the stock market’s Black Monday in 1987. He and Merton were out there in its aftermath opining that the 25% fall in the value of equities on Black Monday was a rational revaluation in response to that day’s market news–it was just that we economists were just not smart enough to figure out what that news was that the marginal trader on Wall Street had learned that day, but it was probably something about the tax treatment of takeovers.

That struck me as moronic. I asked my elders: “They’re kidding, aren’t they?” My elders said: “Nope.”

Today I find Eugene Fama saying something else that strikes me as equally moronic:

Is Sally taking Lucy for a walk, or is Lucy taking Sally for a walk?… The Fed isn’t all powerful. Obviously, they couldn’t set interest rates at 10% and leave them there forever, any more than Sally could make Lucy go for a walk if she really didn’t want to. So who’s really in charge?… 83% of the movements in the Fed’s target rate just follow other short-term rates. There are a lot of forces affecting interest rates, and the Fed is just one small part…. And remember, this isn’t the interest on one loan–the Fed claims to control all the interest rates in the economy…

We did this experiment of seeing who was taking whom for a walk–or, rather, the German Reichsbank did it.

The Reichsbank did it back in the 1910s. It set its discount rate at 5%/year nominal. It left it there. It had no problem doing so. There was none of this “the Fed can’t make the market go for a walk if it really didn’t want to…” BS.

Of course, the Reichsbank wished, after the fact, that it had not done so.

By 1922 its policy of fixing the discount rate at 5%/year nominal had created one hell of an inflationary mess:

Reichsbank discount rate 1920s Google Search

Eugene Fama: Who’s Really in Charge?:

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Must-Read: Paul Krugman: Angus Deaton and the Dodd-Frank Election

Posted on by Brad DeLong

Must-Read: Paul Krugman: Angus Deaton and the Dodd-Frank Election: “Angus Deaton has won the Nobel, which is wonderful…

…a fine writer with important things to say about political economy. Cardiff Garcia excerpts a passage in which he explains why we should care about the concentration of wealth at the top:

[T]here is a danger that the rapid growth of top incomes can become self-reinforcing through the political access that money can bring. Rules… set not in the public interest but in the interest of the rich, who use those rules to become yet richer…. To worry about these consequences of extreme inequality has nothing to do with being envious of the rich and everything to do with the fear that rapidly growing top incomes are a threat to the wellbeing of everyone else…

Confessore, Cohen, and Yourish documents… that campaign finance this election cycle is dominated by a tiny number of [the] extremely wealthy… overwhelmingly flowing to Republicans…. The biggest piece of the super-rich-super-donor story is money from the financial sector. And there has… been a huge swing of finance capital away from Democrats to Republicans that began… after the passage of financial reform…. the people who brought you the financial crisis trying to buy the chance to do it all over again.

Angus Deaton and the Dodd Frank Election The New York Times

Note that “finance” as a whole was split 50-50 in the money it gave in 2008, and split 75-25 Republican in the money it gave before 2008–Tom Ferguson of U.Mass is the Master of All Who Know on these issues. “Hedge funds” are (or were) people who were not terribly invested in the pre-2009 structure of Wall Street, were relatively young, and were much more Democratic than finance as a whole even before 2008. Their swing to the Republicans is very bad news. You would think that after Arthur Burns’s inflation, Ronald Reagan’s deficits, and Ben Bernanke’s financial crisis that they would be wary. Economic regulation is onerous. But macroeconomic mismanagement is disastrous.

But no…

Must-Read: Oregon Economic Forum

Posted on by Brad DeLong

Must-Read: Oregon Economic Forum to examine the post-recovery economy: “The 2015 Oregon Economic Forum… will be held Thursday, Oct. 15, at the Portland Art Museum, 1219 S.W. Park Ave…

…Forum director Tim Duy, an economist at the UO, and Bruce McCain, chief investment strategist of Key Private Bank, kick off the hour-long event with a status update of Oregon’s and the country’s economies. They will take a closer look at the financial markets and preview the economic forecast for 2016. Moderator Brad DeLong, a professor of economics at the University of California, Berkeley, will then guide a broader conversation about Federal Reserve policy, the extent of any effect on the U.S. from China’s slowing economy and what is–or isn’t–happening to inflation….

Mark McMullen, state economist for Oregon, Tom Potiowsky, chair of the Department of Economics at Portland State University and former state economist, and Christopher Allanach, an economist in the Legislative Revenue Office, will look at the changing structure of the state’s economy and its revenue streams… [and] about what Oregonians can do to ensure a bright economic future.

Jim Tankersley of The Washington Post will delve into the current economic health of the middle class in the keynote address, ‘Reflections on the Middle Class in the Aftermath of the Great Depression’…

Monday DeLong Smackdown: Kevin Drum Asks a Question About the Attainability of a 4%/Year Inflation Target

Posted on by Brad DeLong

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A very effective smackdown, I must say:

Kevin Drum: 4%/Year Inflation: “Generally speaking, I’m in DeLong’s camp…

…But here’s my question: what makes him think that the Fed can engineer 4 percent inflation right now? And what would it take? I ask this because it’s conventional wisdom that a central bank can engineer any level of inflation it wants if it’s sufficiently committed and credible about it. And that’s true. But my sense recently has been that, in practice, it’s harder to increase inflation than it sounds. The Bank of Japan has been trying to hit the very modest goal of 2 percent inflation for a while now and has had no success. Lately it’s all but given up. ‘It’s true that the timing for achieving 2 percent inflation has been delayed somewhat,’ the BOJ chief admitted a few months ago, in a statement that bears an uncomfortable similarity to the emperor’s declaration in 1945 that ‘the war situation has developed not necessarily to Japan’s advantage.’

So I’m curious. Given the current state of the economy, what open market operations would be required to hit a 4 percent inflation goal? How big would they have to be? How long would they have to last? What other extraordinary measures might be necessary? I’ve never seen a concrete technical analysis of just how much it would take to get to 4 percent. Does anybody have one?

I think the answer is: We don’t know whether it is in fact possible for a central bank today to hit a 4%/year average inflation target via conventional ordinary quantitative easing. It might well require other tools. For example:

  • Miles Kimball’s negative interest rates.
  • Helicopter drops–that is, allowing everyone with a Social Security number to incorporate as a bank, join the Federal Reserve system, and borrow at the discount window, with the loan discharged by the individual’s death.
  • The Federal Reserve as infrastructure bank–an extra $500 billion/year of quantitative easing buying not government or mortgage bonds but directly-financing public investments.
  • Extraordinary quantitative easing–buying not the close substitutes for money that are government bonds but rather the not-so-close substitutes that are equities.

I say: If we could win the argument about what the goal is, we could then begin the discussion about what policies would be needed to get us there.

“Your Mom Isn’t Here” Jobs…

Posted on by Brad DeLong

Live from (Outside of) New York ComicCon: We Have (Close to the Equivalent of) Replicators: So Why Do We (Still) Have Non Personal-Service Jobs?

We grow things–but fewer and fewer of us do. We make things–but fewer and fewer of us do. We provide personal services–non-information and information. What else do we do?

It strikes me that a huge proportion of jobs these days are really “your mom isn’t here!” jobs.

What proportion of jobs wouldn’t it be necessary if people would only behave–if people would reliably and properly drop the money they owe into the jar, would clean up if they spilled something, leave the place in the clean state it was when they arrived, would not break machines by trying to operate them when they do not understand them, and so on?

Must-Read: Matt Phillips: Bernanke: I’m not really a Republican anymore

Posted on by Brad DeLong

Must-Read: As I have said before and will stay again, the Republican Party could be taking a victory lap right now with respect to monetary policy–pointing out that the most successful recovery in the North Atlantic from 2008-9 was engineered by a Republican following Friedmanite countercyclical monetary policies. But no! They would rather be Hayekians, predicting imminent hyperinflation…

Why? I think it’s the Fox News-ification of the Republican Party: terrify people in the hope that you will then gain their attention and they will give you money…

Matt Phillips: Bernanke: I’m not really a Republican anymore: “Ben Bernanke has publicly broken ranks with the Republican party…

…In one of the more revealing passages of… The Courage to Act… [he] lays out his experience with Republican lawmakers during the twin financial and economic crises….Continual run-ins with hard-right Republicans… pushed him away from the party that first put him in charge of the Fed….

[T]he increasing hostility of the Republicans to the Fed and to me personally troubled me, particularly since I had been appointed by a Republican president who had supported our actions during the crisis. I tried to listen carefully and accept thoughtful criticisms. But it seemed to me that the crisis had helped to radicalize large parts of the Republican Party….

The former Princeton economics professor said he had:

lost patience with Republicans’ susceptibility to the know-nothing-ism of the far right. I didn’t leave the Republican Party. I felt that the party left me.

He later concludes: ‘I view myself now as a moderate independent, and I think that’s where I’ll stay’…

Noted for the Evening of October 10, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

In Which I Call for a More Optimistic Martin Wolf…

Posted on by Brad DeLong

Live from Lima, Peru: Martin Wolf, can I get you to say something optimistic?

The last four times I have been in the same room with Martin Wolf, he has left me profoundly depressed. He has just done it again–by reminding me how many of the lessons of the 1930s have been lost, and how much the Federal Reserve needs to assume the role of global Kindlebergian hegemon that it is currently refusing. So I had a question to ask that I hoped would elicit an optimistic answer…

Alas! I did not get to ask it. But here it is:

Let me see if I can get you to agree with an optimistic view of emerging markets’ future–if and after we can resolve all the difficulties that Ken Rogoff calls the ongoing hangover of the debt supersupercyle…

Back before 1970 we had not just non-convergence but divergence: the Matthew 25:29 global economy, as the rest of the world grew much more slowly than the North Atlantic core plus the East Asian and Peripheral Europe convergence club. Since 1970 we have had China, and now India, plus on average not divergence but relatively stasis elsewhere. Does not this suggest that we would be seeing “convergencence” in the emerging world if not for the fact that China is bigfooting everybody else out of the niches for export-led convergence growth? And that the future looks relatively bright for emerging-market convergence as China transitions to a different growth model, and open up the export-led convergence growth space?

Can I get you to agree with that?