Category: Equitablog

Must- and Shall-Reads:

• Jared Bernstein:
  Here’s why wages aren’t growing: The job market is not as tight as the unemployment rate says it is
• Dean Baker and Jared Bernstein:
  Getting Back to Full Employment: A Better Bargain for Working People
• Steven Johnson:
  How We Got to Now: Six Innovations That Made the Modern World – Boing Boing
• Via Mark Thoma: Simon Wren-Lewis:
  “Let us hope for a Syriza victory: If you think this sentiment is dangerous, because you have read that if this left wing party formed a government after the forthcoming Greek elections the Eurozone would be plunged into crisis, I suspect you should reconsider where you get your information…”
• Jared Bernstein:
  “I was chatting about that ‘why’ question with EPI research director Josh Bivens this morning and he said, ‘the Fed’s interest rate increase is the new deficit reduction. Everyone just knows it needs to happen.’ It’s an awfully apt analogy, if you ask me. For years, even when the evidence of pre-emptive fiscal contraction, aka austerity, was known to be clearly negative, serious people insisted that deficits had to come down. Now many of those same finger-waggers just feel it in their bones: the Fed needs to liftoff…”

1. Lawrence Summers:
   Response to Marc Andreessen on Secular Stagnation:
   “The essence of the secular stagnation issue is not whether technology has stopped advancing; but rather whether there is a mismatch between desired saving and investment opportunities that results in low equilibrium real interest rates, precipitates financial instability, and may inhibit economic growth…. For the roughly 30 years after World War II, the American economy generated consistent growth in living standards with business cycles of relatively low amplitude.  From the early 1980s until the late 1990s, the economy again preformed quite well…. We have plenty of experience with satisfactory economic performance to set as an aspiration…. Markets–in the form of 30-year indexed bonds–are now predicting that real rates well below 2 percent will prevail for more than a generation…. I think it is quite plausible and consistent with Marc’s picture that equilibrium real rates were roughly constant at around 2 percent until the mid-1990s and have trended downward since that time…. Marc and I agree that we are headed into a period of soft real interest rates, where there will be more money available than great deals.  This may, as he suggests, not be all bad; as it will make it easier for risky ideas to get funded. The danger… is that the zero lower bound on nominal rates will prevent the attainment of full employment as desired investment falls short of desired saving. A related danger is that the very low interest rates will encourage risk-taking and asset price inflation in ways that will ultimately give rise to financial instability…. The experience of the US economy in the 1930s demonstrates [that] even with rapid innovation it is possible for economic performance to be very poor when finances are not successfully managed…”
   

2. Jean-Claude Trichet (June 2010):
   A Trip Down Euromemory Lane:
   “As regards the economy, the idea that austerity measures could trigger stagnation is incorrect … In fact, in these circumstances, everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today…”
   

3. 
   Kevin Drum:
   America’s Real Criminal Element: Lead:
   “Washington, DC, didn’t have either Giuliani or Bratton, but its violent crime rate has dropped 58 percent since its peak. Dallas’ has fallen 70 percent. Newark: 74 percent. Los Angeles: 78 percent…. Howard Mielke… Sammy Zahran… lead and crime… six US cities that had both good crime data and good lead data going back to the ’50s, and they found a good fit in every single one. In fact, Mielke has even studied lead concentrations at the neighborhood level in New Orleans and shared his maps with the local police. ‘When they overlay them with crime maps,’ he told me, ‘they realize they match up.’… We now have studies at the international level, the national level, the state level, the city level, and even the individual level. Groups of children have been followed from the womb to adulthood, and higher childhood blood lead levels are consistently associated with higher adult arrest rates for violent crimes. All of these studies tell the same story: Gasoline lead is responsible for a good share of the rise and fall of violent crime over the past half century…. The gasoline lead hypothesis helps explain some things we might not have realized even needed explaining…. Murder rates have always been higher in big cities than in towns… big cities have lots of cars in a small area, they also had high densities of atmospheric lead during the postwar era. But as lead levels in gasoline decreased, the differences between big and small cities largely went away. And guess what? The difference in murder rates went away too…”

Should Be Aware of:

• Ta-Nehisi Coates (2013):
  Some Thoughts on Michael Kelly
• Oliver Landmann:
  EMU and the Cyclical Behavior of Fiscal Policy: A Suggested Interpretation

1. Alan Taylor:
   Surprising New Findings Point to “Perfect Storm” Brewing in Your Financial Future: “This basic aggregate measure of gearing or leverage is telling us that today’s advanced economies’ operating systems are more heavily dependent on private sector credit than anything we have ever seen before. Furthermore, this pattern is seen across all the advanced economies, and isn’t just a feature of some special subset (e.g. the Anglo-Saxons).”
   

Via Paul Krugman, who says “Europe marched into this disaster with eyes wide shut”: Jean-Claude Trichet (June 2010):
A Trip Down Euromemory Lane:
“As regards the economy…

…the idea that austerity measures could trigger stagnation is incorrect.… In fact, in these circumstances, everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today…

Must- and Shall-Reads:

• Mark Thoma:
  Full Employment Alone Won’t Solve Problem of Stagnating Wages
• Carola Binder:
  Targeting from Below
• Matthew C. Klein:
  Getting around the “safe asset shortage”, Australian style
• Josh Barro:
  Fidelity Introduces Location-Based Stock-Picking App, for Some Reason:
  “It’s Grindr, but for stocks. The brokerage firm Fidelity announced a new feature Monday on its mobile app: ‘Stocks Nearby.’ It helps you hook up with the publicly traded companies doing business nearest your current location. A news release promotes the update like this: ‘”As the investing maxim goes, buy what you know”, said Velia M. Carboni, senior vice president, mobile channel at Fidelity. “The Fidelity Stocks Nearby tool enables investors to immediately research businesses that show promise – on the go. Imagine an investor coming upon a store that is packed with customers – with Stocks Nearby they can easily begin to answer the question if it’s a good investing opportunity.”‘ I always thought the best investing maxim went ‘buy low-fee index funds,’ but I digress…”
• Ryan Cooper:
  The Eurozone must choose: Democracy or austerity?
• World Bank:
  Understanding the Plunge in Oil Prices: Sources and Implications
• Gavyn Davies:
  The global deflation shock – how big and how bad?
• Ian Millhiser:
  “Walker, according to Cannon, ‘is the only Republican governor who refused to establish an exchange but still put forward a proposal that relied on there being subsidies in a federal exchange’…. Cannon himself… [thus states] that Walker did not embrace the King plaintiffs’ reading…. Walker’s views… demonstrate that ‘a state official…’ was unable to ascertain the alleged consequences…. Thus, even if the King plaintiffs are correct that Obamacare conditions tax credits on a state setting up its own exchange, that condition is unconstitutional.”
• Frances Moore:
  “We estimate that the social cost of carbon is not $37 per ton, as previously estimated, but $220 per ton…”

1. Nick Rowe:
   Worthwhile Canadian Initiative: Did Inflation Targeting Destroy Its Own Signal?:
   “The Calvo Phillips Curve has a very special property: the subset of firms that change their prices in any period is a perfectly representative sample of all firms… [that] makes the Calvo Phillips Curve very easy to use, which is why macro modellers like to use it. But that property stacks the modeller’s deck in favour of inflation targeting and against NGDP targeting. Because it makes deviations of inflation from target a perfect signal of monetary disequilibrium…. Inflation targeting has such desirable welfare properties… [because] the firms that can change prices do exactly what the firms that cannot change prices would like to do…. Real world central banks know… some prices are stickier… pay more attention to core inflation… ‘target the stickiest price’ is the slogan that captures this idea…. Fluctuations in inflation are a noisy signal of monetary disequilibrium, because the firms that do change prices are not always representative of the firms that don’t. And by targeting inflation the central bank makes inflation stickier, and this reduces inflation’s signal/noise ratio. Fluctuations in output are also a noisy signal…. NGDP targeting is unlikely to be exactly optimal, but may well be better than inflation targeting, which puts all the weight on one noisy signal and ignores the other…. The big puzzle of the recent recession is why the inflation guard dogs failed to bark…. The NGDP guard dogs barked loud and clear, giving a consistent and correct signal. That is what we need to model. And if we can model that, we may also have a model in which targeting NGDP can do better than targeting inflation. But we will need to move away from the Calvo Phillips Curve to build that model. Which is going to make it harder.”
2. John Plender:
   Bewitched by mandarins of central banking:
   “The continuing fall in government bond yields in the advanced economies at the turn of the year was a salutary reminder of how hard it is to invest in markets that are heavily distorted by central banks. At the start of 2013 there was near-consensus among investors that US Treasury yields had nowhere to go but up…. The US Federal Reserve did indeed stop buying in the summer, but Treasury prices continued to rise and yields to fall. The most plausible explanation for this defiance of conventional wisdom was the persistence of global imbalances… excess savings in Asia and northern Europe had to find a home. The additional yield available in the US market, along with the potential for further dollar strength, made this a compelling trade…. Central banks, most notably the Fed, have put a cushion under asset prices when they go down while imposing no cap when they bubble up…. The great bond bull market that began in 1982 has yet to revert…. Market professionals who have hitherto contributed to the efficiency of market pricing through their analytical skills are reduced to hanging sheeplike on the words of central bankers about the likely direction of bond-buying programmes. And they remain bewitched by the mandarins of central banking despite the mixed quality of their forward guidance…. Whatever the benefits of QE, there are bound to be significant economic costs arising from the artificially cheap cost of capital. Capital will be misallocated. And it may go on being misallocated, for the central banks seem to be trapped in a process whereby measures to counteract the fallout from one bubble pave the way for another.”
3. Sheryl Sandberg and Adam Grant:
   Why Women Stay Quiet at Work:
   “YEARS ago, while producing the hit TV series ‘The Shield,’ Glen Mazzara noticed that two young female writers were quiet during story meetings. He pulled them aside and encouraged them to speak up more. Watch what happens when we do, they replied. Almost every time they started to speak, they were interrupted or shot down before finishing their pitch. When one had a good idea, a male writer would jump in and run with it before she could complete her thought…. We’ve both seen it happen again and again. When a woman speaks in a professional setting, she walks a tightrope. Either she’s barely heard or she’s judged as too aggressive. When a man says virtually the same thing, heads nod in appreciation for his fine idea. As a result, women often decide that saying less is more…. This speaking-up double bind harms organizations by depriving them of valuable ideas…. The long-term solution to the double bind of speaking while female is to increase the number of women in leadership roles…. When President Obama held his last news conference of 2014, he called on eight reporters — all women. It made headlines worldwide. Had a politician given only men a chance to ask questions, it would not have been news; it would have been a regular day. As 2015 starts, we wonder what would happen if we all held Obama-style meetings…. Doing this for even a day or two might be a powerful bias interrupter…. We’re going to try it to see what we learn…”
4. Cory Doctorow:
   Jo Walton’s “The Just City”:
   “Athena… outside of time… constrained by fate and providence… has heard the prayers of all her worshipers through the ages who have read Plato’s Republic…. So she summons them all to a volcanic island… doomed to be lost to eruption… ensuring that her tampering… will not unduly disrupt the future, which will only dimly remember the island as Atlantis. In this place, men and women from all times and places set to making a place for the children whom they will raise to be philosopher kings…. The children of the Just City are then inducted into the Platonic system of education and indoctrination. And here is where Walton shines… the small and hurtful and glorious business of interpersonal relationships… the incredible beauty and the cruelty of utopian projects. Nobody writes like Walton. The Just City manages to both sympathize with social engineering at the same time as it demolishes paternalistic solutions to human problems. In so doing, this book about philosophy, history, gender and freedom also manages to be a spectacular coming-of-age tale that encompasses everything from courtroom dramas to sexual intrigue…”
5. PGL:
   Robert Samuelson Credits Reagan for the Volcker Disinflation:
   “We can go back to a 1986 discussion from Tom Redburn: ‘President Reagan’s four appointees as governors of the Federal Reserve Board prodded Fed Chairman Paul A. Volcker toward a less restrictive monetary policy when they outvoted him last month on a cut in a key interest rate charged to financial institutions, sources said Tuesday.’ The people that President Reagan was appointing to the Federal Reserve did not agree with the Volcker majority and eventually garnered enough influence to force a less restrictive monetary policy. I offer this not as a criticism of President Reagan as some of us loathed the severity of Volcker’s tight monetary policy. But people like Samuelson heart both Reagan and tight monetary policies. Faced with the inconsistency of these two positions–they decide to rewrite history. Update: Dean Baker has more on this including a nice graph of inflation that undermines this line from Samuelson: ‘Worse, government seemed powerless to defeat it.’ Never mind that Dean’s graph shows inflation fell when the FED did tight money under Nixon and again fell after Gerald Ford started up with those damn WIN buttons.”
6. Dylan Matthews:
   Bernie Sanders opens a new front in the battle for the future of the Democratic Party – Vox:
   “President Obama’s biggest problem in the Senate is obviously its new Republican majority, but opposition from the left wing of the Democratic caucus appears to be growing too. Most prominently, Sen. Elizabeth Warren (D-MA) has clashed with the White House on a key Treasury Department position and the CRomnibus spending package. But new budget committee ranking member Sen. Bernie Sanders (I-VT) is poised to break dramatically from traditional Democratic views on budgeting, from Obama to Clinton to Walter Mondale and beyond. His big move: naming University of Missouri – Kansas City professor Stephanie Kelton as his chief economist. Kelton is not exactly a household name, but to those who follow economic policy debates closely, tapping her is a dramatic sign. For years, the main disagreement between Democratic and Republican budget negotiators was about how to balance the budget — what to cut, what to tax, how fast to implement it — but not whether to balance it. Even most liberal economists agree that, in the medium-run, it’s better to have less government debt rather than more. Kelton denies that premise…”
7. Miles Kimball:
   Cognitive Economics:
   “Economic research using more and more direct data about what is in people’s minds is flourishing. But much more can be done. Fostering continued progress in this area of Cognitive Economics calls for three inputs. First, new theoretical tools for dealing with finite cognition need to be developed, and existing theoretical tools sharpened. Second, welfare economics needs to be toughened up for the rugged landscape revealed by peering into people’s minds. Third, the statement ‘The data are endogenous’ needs to become not only an econometrician’s warning but also a motto reminding economists that new surveys can be designed and new data of many kinds can be collected to answer pressing questions.”

Should Be Aware of:

• Marc Andreessen:
  The Future of the News Business: A Monumental Twitter Stream All in One Plac
• Ada Palmer:
  “Machiavelli awoke such a firestorm by creating an ethics which works without God.  Utilitarianism depends entirely on evaluating the earthly consequences of an act, and can be used as a functional system for decision-making whether or not there exists any external divine force or absolute code of Truth”
• Paul Krugman:
  “Robert Samuelson… declared himself ‘maddened’ by [my] column whose economic analysis he doesn’t actually dispute. What’s going on?… Reaganolatry…. Reagan must be seen as the hero who saved America… must be given credit for a disinflation carried out by a Fed chairman who was appointed by, and began his anti-inflation crusade under, Jimmy Carter. Anything perceived as detracting from the Reagan legend is infuriating, even if you can’t find anything wrong with the substance.”
• Giovanni Pico della Mirandola:
  Oration on the Dignity of Man

1. Yael T. Abouhalkah:
   KC and St. Louis are big cities facing lots of big challenges:
   “St. Louis is in a world of hurt for many reasons. The latest blow… Stan Kroenke… might build a stadium in Los Angeles County and possibly move the Rams there…. Kansas City looks at least a little better than St. Louis in key metrics such as population growth, crime rates and job gains…. Several emailed responses also made the excellent point that the state of Missouri’s future will be a lot brighter if both Kansas City and St. Louis can find ways to prosper. These two cities… are the economic engines of the entire state. Both cities have plenty of strong points…. Yet boosters… often forget that many other large cities offer the same–or even better–amenities… bring new life to Kansas City and St. Louis… add lots more people and jobs… reducing outrageous violent crime rates… exist such as investing in better public schools, infrastructure and transit…. Kansas City had 16.5 murders per 100,000 residents. St. Louis, with a staggering 50 murders per 100,000…. 31 of the 50 largest cities had under 10…. Kansas City was a woeful 21st on gaining employment over a three-year timetable; St. Louis was 24th… trailed a long list of more successful employment magnets: Raleigh, Dallas/Ft. Worth, Seattle, San Diego, Portland, Austin, San Antonio, Charlotte, Oklahoma City, Denver, Nashville, Milwaukee, Indianapolis, Louisville, Cincinnati and Minneapolis…”
2. Jo Walton:
   The Flight Into Egypt: “The Holy Family flew economy, of course,/Every seat taken, after the holidays,/The donkey crammed into the luggage rack,/Lying patiently among outsize carry-on,/Ears twitching, and one little bray at takeoff. The baby doesn’t make a sound,/Strapped inside Mary’s seatbelt, smiling,/Good as gold, beautific,/From the tip of His halo to the soles of His chubby feet. Mary has eyes for no one but Him,/If she must fasten oxygen masks it will be His first,/Whatever they tell her./A harried flight attendant pauses to coo,/’What a little one, isn’t he lovely!’ And Joseph nodding, ‘Just two weeks old,/Visiting family, yes, very first flight,’/Accepts the plush airplane, crayons, frankincense,/Compulsively checking the papers inside his jacket,/Looking ahead through the turbulence towards the landing, Hoping they will be granted/Refugee status.
   “
3. Izabella Kaminsky:
   Do you have a finance degree from the university of Bitcoin?:
   “As ever, even in the cyber age, we therefore find ourselves at the mercy of same old suspects: ‘the good’ (the legal government systems that supposedly defend our interests or in some cases doesn’t) ‘the bad’ (organised private mercenary operations who have the loyalty of those who can defend our interests but which demand protection rents from us weaker common folk) and ‘the ugly’ (malevolent predators who just want to mess with the system and/or survive by preying on the weak, and who the bad claim to defend us from.) If that’s the case, the above is a true reflection of anacyclosis at work. It also suggests the only way society can truly preserve the stability and technological advances achieved by collaborative processes is by all of us mastering the techniques that can help defend us from the predators and destabilisers who understand how easy it is to cheat the system. And that, we dare say, amounts to a population-wide IT/encryption literacy campaign. Which, by definition, is a multi-generational project which will be unlikely to reap returns within the next business cycle, let alone overnight.”

The very sharp John Plender makes what is now the standard–but I believe incoherent–argument that central banks are doing bad things with quantitative easing and need to reverse it and raise interest rates. They need to do so, Plender thinks, even though doing so will reduce spending, raise unemployment, put downward pressure on wages and prices, and increase risk in a world that still appears to be grossly short of risk bearing capacity. So it is natural to ask: “Why?” What is the upside supposed to be? Is there an upside aside from believing that this will make it easier for investment managers to report black rather than red numbers to their clients while still holding safe Treasury bond-based portfolios?

That Plender’s argument is incoherent is, I think, demonstrated by the fact that markets do not respond as he thinks he should–he saw the end of large-scale US QE coming at the start of 2013, and confidently predicted a fall in US Treasury bond prices that simply has not happened.

The way I see it is this: The root problem is an inability of financial intermediaries to stand behind or to credibly assess risks, and so a reluctance on the part of investors to provide the factor of production of risk-bearing to the marketplace. Pushing safe interest rates way, way, way down and then pushing the supply of risk-free assets that the private sector can hold way, way, way down provides a form of Dutch courage to otherwise reluctant investors: even though they don’t trust financial intermediaries’ risk assessments, the low rates on and low volumes of safe assets give them no alternative. The long-run problems are twofold: First, safe interest rates expected to be very low for a long time artificially boost the value of long-duration assets–so capital is misallocated and we wind up with a capital structure that has in it too many long-duration relatively-safe projects that make at best very small contributions to societal well-being. Second, the demand for risky assets just generated is not a well-based demand for soundly-analyzed risks but rather for any priced risk at all–so the market becomes vulnerable to Ponzi and near-Ponzi finance.

From my point of view, however, the proposed cure of higher unemployment, lower demand, and greater fundamental risk from continued and deeper depression is worse than the disease. First best would be fixing the credit channel so that financial intermediaries would be able to stand behind risks they have credibly assessed. Second best is having the government take over and be a financial intermediary–have it borrow and spend, accepting that its spending will to a certain degree follow a political logic of greasing powerful and squeaky wheels more than amplifying wealth. Third best is continuing QE. Worst is attempting to revert to normal interest rates without financial policy to fix the credit channel or fiscal policy to maintain demand near normal-employment levels.