Category: Equitablog

Must- and Should-Reads:

• Martin Feldstein: The U.S. Underestimates Growth
• William Gale: State income tax cuts: Still a bad idea
• Jody Shenn: “Thanks to a push by President Barack Obama’s administration, more and more student-loan borrowers are signing up for income-driven repayment programs, allowing them to pay a fraction of what they would otherwise owe…”
• Must-Read: Kevin Hjortshøj O’Rourke: Moving on From the Euro
• Must-Read: Mark Thoma: The Politics of Economics and ‘Very Serious People’
• Simon Wren-Lewis: The F story about the Great Inflation
• Must-Read: Cathy O’Neil: Greek Debt and German Banks
• Must-Read: Daniel Davies: The Verjus Manifesto
• Must-Read: Mark Thoma: 12 Good and Bad Parts of Online Education
• Must-Read: Matthew Yglesias: The Amazing Persistence of Reagan Derp
• Paul Krugman: Annoying Euro Apologetics
• Nick Bunker: Beware of simple U.S. tax reform plans
• Luigi Zingales: Why Zingales is so “soft” on Greece
• Lars Jonung and Eoin Drea: The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, 1989-2002
• Nick Bunker: Is technological change key in the decline of U.S. labor share of income? – Washington Center for Equitable Growth
• Charles Kenny: Why Factory Jobs Are Shrinking Everywhere
• Visualizing Economics: Created by Catherine Mulbrandon at http://VisualizingEconomics.com

Might Like to Be Aware of:

• Peter Watts: “[Roger] Lewin’s paper reports that one out of ten hydrocephalus cases are so extreme that cerebrospinal fluid fills 95% of the cranium… yet apparently, fully half have IQs over 100…. The paper is titled “Is Your Brain Really Necessary?”, and it seems to contradict pretty much everything we think we know about neurobiology…”
• LizardBreath: Rough Rider Greases Up
• JavaScript: The Good Parts
• Learn to Crunch Big Data with R
• Ben Thompson: “Twitter has such a significant hill to climb: not only do they need a new CEO, they probably need a new board as well. Having a mixture of former CEOs and folks who don’t use Twitter doesn’t exactly suggest that the CEO decision will be based on what is best for the product. And that makes me pretty pessimistic.”

Last month the sharp and hard-working Jeff Spross wrote:

Jeff Spross: Why Americans Are so nostalgic About the Manufacturing Industry: “The U.S. still manufactures a lot of stuff, but most of it isn’t stuff average American consumers buy…

…These days, we mostly make heavy industrial equipment, circuitry, aircraft, and other big and expensive goods and high-end products…. A lot of manufacturing went overseas… so we get imports for a lower cost, which improves our standard of living. People in other, less developed nations get new jobs, which… improves theirs. A win-win, theoretically speaking. Same goes for rising automation…. But the 1950s economy was also a delicately balanced ecosystem… where wages were good, health and pension benefits… plentiful… job security was high…. Globalization gave certain interests and centers of power in our society the wedge and hammer…. Unions became far weaker, business owners and management got much freer hands, and worker bargaining power collapsed. The economic benefits… weren’t broadly shared…. Other Western countries also endured globalization, but managed to keep their levels of inequality lower…. If we’d found some sort of alternative economic strategy for producing those same results, it’s unlikely voters or politicians would be nostalgically lamenting any [manufacturing] decline.

Moving our workers and our capital out of manufacturing could have been a good idea. It would have been beneficial if it were to take advantage of supply from people in other countries who could make things more cheaply. It would have been benevolent to make space for other countries to engage in successful economic development. Those both would have been good things. But there is an “if”. Those would have been good things if and as long as the industries that we were moving people and capital out of manufacturing into were genuinely the industries of the future.

What do I mean by “industries of the future”? The proper industries of the future are those that are pronounced positive spillover is associated with them–working at them and producing in them build skills and knowledge that can be deployed elsewhere in the economy. The proper industries of the future are those in which a value added is high, not in the sense that less-than-fully-informed consumers are willing to pay for them but the people in their right minds will after the fact look back and say: that was worth buying. The big problem with America’s relative shift out of manufacturing since 1975 was that the “industries of the future” that we shifted into–such treasures as high finance, health-care insurance administration, real-estate transactions, and prisons–were such wonderful prizes from the perspective of societal value-added.

Must-Read: The very sharp Kevin O’Rourke concludes that it is time to throw in the towel on the eurozone. I think it is worth one more throw of the dice: perhaps European macroeconomic stabilization regulation can be moved out of the hands of the Eurocracy in Brussels and Frankfurt and into a more general North Atlantic macroeconomic stabilization regulatory apparatus in Washington. A utopian project? Yes, but worth attempting. If that does not work–or if that is not attempted–I cannot find any holes in Kevin’s logic:

Kevin Hjortshøj O’Rourke: Moving on From the Euro: “European Monetary Union was never a good idea…

…I remember my surprise when, as a young assistant professor, I realized that I was opposed to the Maastricht Treaty…. European integration is a very good thing. But the textbook economics I was teaching showed how damaging EMU could be in the absence of European fiscal and political union. Nothing that has happened since has convinced me that the textbook was excessively pessimistic. On the contrary: it was far too optimistic…. It has been obvious for some years that the “actually existing EMU” has been a costly failure, both economically and politically. Trust in European institutions has collapsed, and political parties skeptical not just of the euro, but of the entire European project, are on the rise. And yet most economists, even those who were never keen on EMU in the first place, have been reluctant to make the argument that the time has come to abandon a failed experiment….

Five years on, the eurozone still lacks a proper banking union, or even… a proper lender of last resort… a higher inflation target remains unthinkable… the German government argues that defaults on sovereign debt are illegal…. Pro-cyclical fiscal adjustment is still the order of the day. The European Central Bank’s belated embrace of quantitative easing was a welcome step forward, but policymakers’ enormously destructive decision to shut down a member state’s banking system–for what appears to be political reasons–is a far larger step backward. And no one is talking about real fiscal and political union, even though no one can imagine European Monetary Union surviving under the status quo.

Meanwhile, the political damage is ongoing: not all protest parties are as pro-European as Greece’s ruling Syriza…. For economists like me, who have balked at advocating an end to the failed euro experiment and favored reform, perhaps it is time to admit defeat and move on. If only anti-Europeans oppose EMU, the EU baby could end up being thrown out with the euro bathwater. An end to the euro would indeed provoke an immense crisis. But ask yourself this: Do you really think the euro will be around in its present form a century from now? If not it will end, and the timing of that end will never be “right.” Better, then, to get on with it before more damage is done.

Must-Read: Why is it always the people who work hard to mark their beliefs to market–like Mark Thoma–who are hesitant and worry that their political priors are contaminating their assessment of what policies actually work? Why is it that it is those whose policy views have no contact with reality are those who never think of marking their beliefs their market?

Mark Thoma: The Politics of Economics and ‘Very Serious People’: “There is one government intervention that Democrats often promote that has always been harder for me to justify based upon economics…

…the redistribution of income and wealth. I was one of those people who believed in leveling an extremely uneven playing field, and then letting the chips fall where they may. So long as everyone has an equal chance at success, there is nothing to worry about. But over time, my view has shifted. We should still do all we can to equalize opportunity, but redistribution cannot be avoided. First, there is growing evidence that once inequality passes a critical threshold, it becomes a drag on economic growth. So there is an efficiency argument for redistributing income. Second, it isn’t possible to equalize opportunity without some a priori redistribution. The wealthy have inherent social and economic advantages that perpetuate inequality across generations, and I see no way to solve that without some degree of redistribution through high inheritance taxes or other means.

Third, technological change may doom some households to a meager existence. No matter how hard they try, no matter how much education or retraining they receive, they won’t be able to find jobs that have been taken over by machines and digital technology. That is not their fault, it is an outcome of the economic system itself, and some type of social insurance that augments their income is appropriate in such a case.

I have no doubt that political considerations motivate the views and policy proposals of some economists, particularly, though far from exclusively, those outside of academia. I also have no doubt that my political views influence me in ways that I am unaware of…. But I hope that, to the extent possible, my political views on economic issues are informed by solid theoretical and empirical results. And when the economics and politics are at odds, as they often are on issues such as free trade and immigration, the economics must prevail.

Must-Read: A very nice income inequality visualization from Catherine Mulbrandon. I want another set, however, also. I want to set that has the top 10% undifferentiated on the left, and then the next 20%, the next 30%, and the next 40% on the right:

Visualizing Economics: Created by Catherine Mulbrandon at http://VisualizingEconomics.com:

Live from Bullwinkle Plaza: Ted Miguel is 1… 2… 3… 4… 5… 6… 7… 8… 9… 10… 11… 12… 13… offices down the hall. So be warned!

BUT NEVERTHELESS:

My take on this is the same as the very sharp and very hard working Chris Blattman’s: http://chrisblattman.com/2015/07/23/dear-journalists-and-policymakers-what-you-need-to-know-about-the-worm-wars/ http://chrisblattman.com/2015/07/24/the-10-things-i-learned-in-the-trenches-of-the-worm-wars/

1. One of the things I love about the Internet is that it brought a lot of very smart people to a key intellectual problem, the discussion brought out the central assumptions and claims, and they were answered within about a day or two. See Berk Ozler, for example. My conclusion is that the Kenya deworming results are relatively robust. Yay hive mind.

2. On the other hand, the hive mind has a tendency to be grumpy, rude, shrill and angry. I found the debate more dignified than some, but vicious at times.

3. I am guilty as well. I was too quick to suspect and insinuate bad faith on the part of the replicators. I can hold suspicions but I shouldn’t publicly insinuate or accuse without grounds. I am sorry for that.

4. I do find any big, coordinated media push of a scientific finding to be problematic, to say the least. This drove and drives my suspicion of bias, even if accidental.

5. To me the big failure in this entire business was by the editor of the academic journal. The competing claims on whether or not the results are fragile or not, and why, should never have been allowed to remain ambiguous.

6. To me, a glitzy media push undermined the credibility and intentions of the journal further. This is a general problem in medicine and hard science that I do not see as much in social science (where the journals could care less about news coverage).

7. On the journalist side, I can’t blame any of the writers for not following the finer statistical points. I had trouble myself. But almost none of the journalists read the reply by Miguel and Kremer (published by the same journal) and maybe none called Miguel or Kremer on the phone. I am told I was the first. Tell me if I’m wrong, but isn’t this the definition of sloppy journalism?

8. I think the deworm the world movement has also tended to exaggerate or selectively quote the evidence in order to justify the cause. GiveWell has a much more balanced account: the evidence is not that great, but it’s good enough. Sort of. I thought GiveWell had one of the best posts. Do read it. http://blog.givewell.org/2015/07/24/new-deworming-reanalyses-and-cochrane-review/

9. To me, the real tragedy is that, 18 years after the Kenya deworming experiment (which was not even a real experiment) we do not have large-scale, randomized, multi-country, long-term evidence on the health, education, and labor market impacts of deworming medicine. This is not some schmuck cause. This is touted as one of the most promising development interventions in human history.

10. I also fear for the reputation of replications in development economics. I imagine some of the problems could be addressed by getting more clarity into pre-analysis plans for replications. But the incentives to make mountains out of molehills is huge. Maybe everyone should sign a “no glitzy media push” pledge.

The current and the greater onrushing disaster that is macroeconomic policy in the eurozone is, in my opinion, the result of two things:

1. Setting up a Single currency in the region much broader than any optimum currency area.

2. Abysmal macroeconomic management by would-be economic hegemons that do not understand that system management needs to keep him employment high and thus make adjustment easy.

Even if dismantling the eurozone is not possible, transferring authority for North Atlantic macroeconomic management as a whole out of Europe is possible.

Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain? No: “Is the euro zone’s leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece…

…a reasonable chance to meet their growth, employment, and fiscal objectives?…. Unfortunately, the answers… are… obvious… (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone…. In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today… the unemployment rate in the euro zone is more than 11 percent… a very large share of… younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential….

What is a problem… is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home… Two concrete proposals. First, negotiations over Greece’s evidently unsustainable debt burden should be based on explicit assumptions about European growth. If European growth turns out to be weaker than projected… Greece should be allowed greater leeway…. Second, it’s time for the leaders of the euro zone to address the problem of large and sustained trade imbalances… which… impose significant costs and risks…

If I were Ben Bernanke, I would put this much more strongly. The ECB, the IMF, and the northern European fiscal authorities have conspicuously failed to do their job to maintain a stable path of nominal demand growth the previously anticipated level in the euro zone. They also have failed to create the preconditions for Greece to grow out of its depression:

Since the primary responsibility for the fact that Greece’s debt is now unsustainable lies with the masters and designers of the current macroeconomic situation–with the ECB, the IMF, and the northern European fiscal authorities–creditors of Greece need to apply to them, And not to Greece, for rep for repayment. Greece’s debt should now be wiped clean.

Perhaps the ECB and the northern European fiscal authorities should be given one more chance to get their institutions of collective macroeconomic management right. And perhaps they can do so: impose responsibility for adjustment on surplus as well as deficit regions, set up the requisite system of fiscal transfers as insurance to make a currency union a win-win, and so forth. I would recommend against it. And if they are given one more chance, there need to be consequences if in five years eurozone economic governance and collective macroeconomic management are still in as great as mess as they are today.

Either then–or, I would prefer, now–Europe needs to cede control over macroeconomic management to more responsible actors. I would suggest a condominium of the U.S. and the IMF to serve as a hegemon for the North Atlantic macroeconomy as far as stabilization policy is concerned. A reallocation of more of the North Atlantic votes in the IMF to the United States and a substantial multiplication of the IMF’s resources could do the job.

Must-Read: Robert Hall says somewhere that the MIT guys ret-conned the name of the first computer he programmed–CADET–to “can’t add: doesn’t even try” because decimal arithmetic was beyond it. And the age of Reagan–the seven fat years 1982-1989 of Robert Bartley–were a glorious time for America’s upper class. But the arithmetic needed to recognize that that was not true for the country as a whole is very elementary indeed…

Matthew Yglesias: The Amazing Persistence of Reagan Derp: “The most telling part… is when [John] Cochrane veers off topic…

…and starts singing the praises of the Reagan Revolution under which ‘malaise ended, we won the cold war, and there was an economic boom.’… The economic policy points here are just not true…. There was a severe recession at the start of his term, a rapid recovery from the severe recession that was well-timed for his landslide reelection, and then several years of fine-but-unremarkable growth…. The boom and the supply-side revolution just didn’t happen. There was no turnaround of the mid-seventies decline in Total Factor Productivity. There was no increase in the growth rate of private business investment. And there was no turnaround of the long-term decline in male labor force participation. This is pretty basic stuff. But it’s ignored not just by conservative politicians or popular writers, but by PhD-wielding academic economists. And it’s just wrong.

Over at Grasping Reality: Today’s Economic History: Alfred and Mary Marshall on The Confidence Fairy: Alfred Marshall and Mary Marshall (1885), Economics of Industry, Book III: Market Value: Chapter 1: Changes in the Purchasing Power of Money http://tinyurl.com/dl20110818j: “If all trades which make goods for direct consumption…

…agreed to work on and to buy each other’s goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. The trades which make fixed capital might have to wait a little longer, but they too would get employment when confidence had revived so far that those who had capital to invest had made up their minds how to invest it.

Confidence by growing would cause itself to grow; credit would give increased means of purchase, and thus prices would recover. Those in trade already would make good profits, new companies would be started, old businesses would be extended; and soon there would be a good demand even for the work of those who make fixed capital. There is of course no formal agreement between the different trades to begin again to work full times and so make a market for each other’s wares. But the revival of industry comes about through the gradual and often simultaneous growth of confidence among many various trades; it begins as soon as traders think that prices will not continue to fall: and with a revival of industry prices rise.

[Note: The most plausible of all the plans that have been suggested by Socialists for the artificial organization or industry is on which aims at the ‘abolition of commercial risk’. They propose that in times of depression government should step forward and, by guaranteeing each separate industry against risk, cause all industries to work, and therefore to earn and therefore to buy each other’s products. Government, by running every risk at once, would, they think, run no risk. But they have not yet shown how government could tell whether a man’s distress was really due to causes beyond his own control, nor how its guarantee could be worked without hindering that freedom on which energy and the progress of invention depend.]