Category: Equitablog

Must- and Shall-Reads:

• Paul Krugman: Is Free Trade Passe?
• Nicholas Bagley: A compilation of my posts on King and Halbig

 

1. Tim Duy: Employment Report, Yellen Speech: “I am wondering what the Fed will do if the unemployment rate touches 5% and wage growth and inflation remain anemic? Not my baseline scenario, but I am wondering how patient they will be…. Yellen made some interesting remarks…. ‘As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries…. This normalization could lead to some heightened financial volatility…. The Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy….’ Take note of the specific emphasis on financial volatility. The message is that market participants should not expect the Fed to react to every twist and turn in equity markets. More to the point, they expect volatility…. They are signalling that market participants misread the likely path of the Federal Reserve when 2 year yields collapsed last month. That said, I am fairly concerned that the Fed is not taking the flattening of the yield curve seriously enough. I see that as a signal that they have less room for normalization than they might think they have.”

2. Simon Wren-Lewis: Getting the Germany Argument Right: “As the Eurozone experiences a prolonged demand-deficient recession, and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right…. There are two wrong directions… to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’… to argue that Germany needs to expand to help its Eurozone neighbours…. The first… legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties…. The second… tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours… suggests that the current German macroeconomic position is appropriate…. The uncomfortable truth for Germany, which both the previous arguments can miss, is that the appropriate macroeconomic position for Germany at the moment is a boom, with inflation running well above 2%…. From the perspective of the Eurozone as a whole, the efficient solution would be above 2% inflation in Germany, and below 2% inflation elsewhere…. If your starting point is what happened in Germany from 2000 to 2007, then current German arguments can look incredibly self-centred. They seem to say: we suffered a recession from 2000 to 2007 which led to a beggar my neighbour outcome, now you have to suffer a worse recession to put right the problem we created. But… I think the German position is more about ignorance than greed…. The ultimate problem is that what Germany sees at virtue is pre-Keynesian macroeconomic nonsense, nonsense that is doing other countries a great deal of harm..”

3. Steven Johnson: We’re living the dream; we just don’t realize it: “Over the past two decades, what have the U.S. trends been for the following important measures of social health: high school dropout rates, college enrollment, juvenile crime, drunken driving, traffic deaths, infant mortality, life expectancy, per capita gasoline consumption, workplace injuries, air pollution, divorce, male-female wage equality, charitable giving, voter turnout, per capita GDP and teen pregnancy? The answer for all of them is the same: The trend is positive…. The quality-of-life and civic health trends in the developing world are even more dramatic…. We are much more likely to hear about these negative trends than the positive ones for two primary reasons. First… the positive trends in our social health are coming from a… complex network of forces…. The public sector doesn’t have billions of dollars to spend on marketing campaigns to trumpet its successes…. We underestimate the amount of steady progress that continues around us, and we misunderstand where that progress comes from. We should celebrate these stories of progress, not so we can rest on our laurels but instead so we can inspire the next generation to build on that success.”

4. Paul Krugman: Keynes Derangement Syndrome: “Broadly speaking there were two views about what would happen when central banks hugely expanded the monetary base…. [The] Keynesian viewpoint saw this action as harmless at worst, possibly somewhat helpful…. On the other side, many people were quite sure that explosive inflation was just around the corner. So this was as clear a test as you’re ever likely to get. But the side that got it wrong refuses to take no for an answer…. The crudest level is that of the inflation truthers [like Niall Ferguson], who insist that the government is covering up real inflation. There’s also the ‘I never said that’ faction, claiming that they haven’t been refuted, because they only said there was a ‘risk’ of hyperinflation–I’m not sure which position is more contemptible. At a higher level are those [like Martin Feldstein] who claim that we would have had runaway inflation if only the Fed hadn’t decided to pay 0.25 percent, that’s right, 0.25 percent, interest on reserves. Aside from being highly implausible, this runs up against the example of Japan…. And at the highest level we have the neo-Fisherite claim [by John Cochrane and others] that everything we thought we knew about monetary policy is backwards, that low interest rates actually lead to lower inflation, not higher…. Nick Rowe has been working very hard to untangle the logic of these arguments, basically trying to figure out how the rabbit got stuffed into the hat; the meta-point here is that all of the papers making such claims involve some odd assumptions that are snuck by readers in a non-transparent way. And the question is, why? What motivation would you have for inventing complicated models to reject conventional wisdom about monetary policy? The right answer would be, if there is a major empirical puzzle. But you know, there isn’t…”

5. Howard Gleckman: Six clues to whether a GOP Senate can move policy: “President Obama says he supports corporate reform. Cruz wants a flat tax. Paul Ryan, who wants to be the new chair of the House Ways & Means Committee, favors broad-based overhaul rather than corporate reform alone. House Speaker John Boehner says he favors tax reform but when presented with a plan by Ways and Means Chair Dave Camp earlier this year, Boehner ran…. Democrats and Republicans are completely at loggerheads over whether reform should cut taxes, raise them, or leave them roughly the same. Other than that, a deal is imminent…. The Affordable Care Act: Cruz wants to repeal it. McConnell says that’s a fool’s errand but vows to do what he can to hamstring the program…”

Should Be Aware of:

• Noah Smith: Some Nonfiction Books I Really Like

 

1. Andrew Hill: Thomas Piketty’s ‘Capital’ wins Business Book of the Year: “The £30,000 prize was awarded to Thomas Piketty’s controversial economics bestseller following what Lionel Barber, FT editor and chairman of judges, said was a ‘vigorous debate’ about ‘an incredibly strong field’ of six shortlisted titles…. ‘While not everyone agreed on the policy prescriptions, we recognised the quality of the scholarship,’ Mr Barber said on behalf of the judges. He called it ‘a challenging, but ultimately important book’…. Each of the other shortlisted authors will receive £10,000. They are: Nick Davies’s Hack Attack, about the phone-hacking scandal that embroiled Rupert Murdoch’s media empire; The Second Machine Age, by Erik Brynjolfsson and Andrew McAfee, about the promise of the digital revolution; Creativity, Inc., by Pixar co-founder Ed Catmull, with Amy Wallace, on how Mr Catmull manages the animation studio’s ‘smart creatives’; House of Debt, Atif Mian and Amir Sufi’s analysis of how to prevent future recessions; and Dragnet Nation, an investigation of the growth of the ‘surveillance economy’ by Julia Angwin…”

2. Noah Smith: Blaming Easy Money for Alien Invasions: “Sometimes I feel like if aliens opened a wormhole and invaded the solar system tomorrow, there are people who would immediately start writing articles blaming the incursion on the Federal Reserve’s program of quantitative easing. Niall Ferguson… might be one of those people. On Oct. 24, Ferguson penned a column in the Wall Street Journal blaming QE for the stock market volatility of Oct. 15…. No doubt Ferguson sees Oct. 15 either as a delayed reaction to earlier indications of tightening, or a sign of a sudden shift in the market’s expectations regarding future tightening. But he presents no evidence for either of these…”

3. Charles Gaba: Making a mountain out of 7 million QHPs: “Critics of the Affordable Care Act… are screaming bloody murder about Obamacare ‘messing up everything for the whole country!’ On the other hand, they’re also trying to ridicule the law for ‘only enrolling 7 million people out of over 300 million!!’ (their inaccurate phrasing, not mine)…. Here’s the rough situation from just before the Affordable Care Act… 11 million people enrolled on the private individual market (i.e., signing up for Blue Cross/Aetna/etc. directly), and around 42 million not covered whatsoever. These… are the ones that the ACA has the most dramatic, obvious impact on, so let’s look…. Coverage through Medicaid has gone up from around 17.9 percent of the total to around 21.8 percent…. Coverage in the individual market has gone up from around 3.5 percent to around 4.9 percent…. The total number of uninsured in the U.S. has dropped from around 13.6 percent to around 9.9 percent.”

A puzzling piece from the very sharp Gillian Tett of the FT. My tentative conclusion was that she has fallen victim to the anthropologist’s disease–getting so far into the heads and the mindsets of the culture she is observing that she loses track of the fact that there is a world outside. I have been holding this for a couple of days for two reasons:

• I hope I will think of something smarter to say, and
• As long as this is on the front burner and I am thinking about it, I can procrastinate on other, more important, more urgent tasks.

But enough is enough…

Let us begin with the lesson:

Gillian Tett: Midterm Rational Exuberance Is Not Just for U.S. Republicans: “HBS alumni… asked to explain why America’s economic growth has been so dismal…. The most hated culprit was the political machine. Half… declared the US political process worse than that of any other leading nation…. Can the midterms change the mood?… With the Republicans controlling Congress, they finally have an incentive to… show voters in 2016 that they can actually get things done…. Trade is one obvious arena…. Infrastructure is another…. And corporate tax reform might–possibly–produce pleasant surprises….

This matters…. Company executives have been sitting frozen in recent years, reluctant to invest, because of uncertainty…. $2tn of spare cash is sitting on US corporate balance sheets… banks have another $2.8tn of funds sitting idly at the Federal Reserves…. If just a tiny proportion can be deployed, the economic impact could be significant. And if a few tangible policy changes emerge from Congress, it is possible animal spirits will return. Even amid the business elite, from Harvard and elsewhere, who have been trained to be so cynical about politicians’ ability to do anything at all.

But when I look at the numbers for the economy-wide components of fixed investment:

Depressed business animal spirits do not jump out at me. Private nonresidential fixed investment spending is above its average share of GDP since 1950. It is at its average since 1990. Private fixed investment in equipment and software spending is similarly above its post-1950 average. This variable is about 0.5%-points of GDP below its post-1990 average–but we are not experiencing a giddy high-tech dot-com bubble either. It is residential investment spending that is 1.8%-points below its post-1950 and 1.4%-points below its post-1990 average–and of this shortfall, all is in single-family housing and none in multiple-unit dwelling construction. And it is public infrastructure investment that is way low.

So when I look at this, I see an economy depressed because public investment and single-family residential construction are depressed. The first is depressed because of austerity: it’s a policy choice. The second is depressed because the Obama administration has failed to take any of the steps that would have been necessary to unblock the clogged single family-housing finance credit channel. Business executives are depressed because the economy is depressed. But if you just looked at the graphs rather than talking to the people, you would not be inclined to reach for “uncertainty” to explain “reluctance to invest”–you would simply say that business investment looks more-or-less normal for a non-boom phase of the business cycle in which constraints on production capacity are not yet a thing.

The $2tn of spare cash on corporate balance sheets then looks not like a consequence of depressed investment, but a consequence of profits elevated by the collapse of the labor share that businesses are reluctant to pay out. And the $2.8tn of cash held by banks looks like a not unreasonable investment given that Treasury bonds pay little and can always go down in price, and Treasury bonds pay little because the labor share is low, savings are high, investment is normal, and inflation expectations are low.

I guess what I am saying is this: If business executives’ animal spirits were unduly and irrationally depressed, it would be more credible to say that some political Potemkin village press events in Washington–Obama, Boehner, and McConnell proving that they can get things done, a minor trade deal, a small corporate tax deal, might summon the Confidence Fairy. But if business executives’ current level of investment reflects a more-or-less normal assessment of fundamentals, such an argument becomes less credible. Then you would need serous policies that led to serious money flows to boost corporate investment.

Cough. Infrastructure bank. Cough.

Cough. Resolving uncertainty about Fannie Mae’s long-term role. Cough.

In short: macroeconomic recovery requires not just Potemkin-village media opportunities to summon the Confidence Fairy, but real money spent buying real stuff.

And, of course, we are not going to get our public-infrastructure bank. Nor hs the Obama administration shown any inclination to, say, putting Glenn Hubbard in charge of unblocking the single housing-finance credit channel.

Indeed, realism peeks through in one passage in Tett’s column:

It is also painfully easy to imagine another scenario: Republicans spend two years pushing partisan issues (such as the repeal of the Affordable Health Care act); and Mr Obama infuriates Republicans by using executive powers to push favoured causes, such as immigration reform. If that happens, partisan battles, and business despair, will remain intense….

180 Doe Library :: U C Berkeley :: 12:00 noon – 1:15 pm :: Monday November 3, 2014

1. Situate it in its context: relative to the Anglo American economy, the Iberian economies, the pre-conquest era, and–recently–the Pacific Rim as an example of an economy that works well…

2. Before 1850, it was Latin America that was the prize: Mexico, Peru, the Silver Mountain, the Sugar Islands

3. It was Europe’s most prosperous, civilized, and technologically progressive peoples that grasped that opportunity–Portuguese mariners, Aragonese merchants, backed by Castilian crusader steel.

4. Parliamentary liberties and freedom of speech considerably more advanced in the Castile of Isabella Trastamera and the Aragon of Ferdinand Trastamera than in the England of Henry Tudor.

5. Indeed, the Empire of Liberty had a better advocate in Simon Bolivar than in George Washington and his successors.

6. Simon Bolivar freed not just his slaves, but all the slaves of Venezuela.

7. George Washington freed his slaves–but only after his death. Thomas Jefferson freed his–if they were his descendants. James Madison and James Monroe did not free theirs. John Adams and John Quincy Adams had none, and the latter fought all his life for the petitions for freedom of the slaves in the United States to be heard in Congress. But Andrew Jackson spent his life trying to buy more slaves. Martin Van Buren’s slave Tom ran away–and then, when he was found, Van Buren sold him for $50 to the slave-catcher. William Henry Harrison tried to turn Indian into slave territory when he was governor. John Tyler, James K. Polk, and Zachary Taylor–not until we get to Millard Filmore do we get another American President even close to as free-soil as the Adams’s were: “God knows that I detest slavery, but it is an existing evil, for which we are not responsible, and we must endure it, and give it such protection as is guaranteed by the Constitution, till we can get rid of it without destroying the last hope of free government in the world…”

8. Indeed, look at U.S. politics in the first 20 years after the Constitutional Convention. Washington thought his own Secretary of State–Jefferson–was on the point of betraying the U.S, to France, and would gladly sacrifice liberty in America to advance the cause of the French Revolution. Jefferson was certain that John Adams was plotting to restore the British monarchy–and Adams would have, if the alternative was the coming to power of some American Robespierre–and that Alexander Hamilton was ready to become a military dictator. Hamilton was shot dead by Jefferson’s running mate and vice president, Aaron Burr, whom Jefferson then tried for treason. Burr was not convicted solely because the Chief Justice, John Marshall, thought that if he set Burr free he might be able to cause Jefferson yet more trouble. A banana republic–the ideal type of a banana republic, in fact–save that they grew no bananas…

9. Living standards, natural resources, population densities, and rates of demographic expansion give Latin America an edge over Anglo America through the first quarter of the nineteenth century, at least.

10. The coming of the steam engine and then, a generation later, the telegraph ought to have brought the world together in terms of ironing out economic divergences.

11. The technologies of the Industrial Revolution? The first generation of industrial technologies circa 1780 were potentially profitable only in Britain, with its uniquely high real wages and uniquely low price of coal at the factory gate. But by 1850 steam engines, spinning jennies, power looms, and railroads were potentially profitable everywhere.

12. Yet the story of economic development is of a steadily-widening relative-income gap: a widening gap between Anglo America and the Southern Cone on the one hand and the rest of Latin America up until 1918 or so; then a widening gap between Anglo America and all of Latin America save Venezuela up to 1950 or so; and then relative stasis–average growth in Latin America at about the same pace as Anglo America, with on average neither widening nor closing of the relative gap (save Venezuela and, after 1958, the peculiar case of Cuba).

13. By 1950, down to perhaps a quarter of Anglo American levels…

14. No worse than rest of exNorth Atlantic world, but no better..:

15. Since 1950, relative parity is normal…

16. Theories of economic relative retardation and growth inevitably fall into two broad categories: “the rich are so good, and the poor are so bad” theories; and “the rich are so bad, and the poor are so good” theories.

17. International trade and the international economy in general as engines of extraction theories: comparative-advantage traps, debt traps, vulnerability to cyclical fluctuations traps. Escape from the trap via neo-mercantilist protection, inward focus on resource accumulation, and import-substitution industrialization–turn the global economy into your servant rather than your master through clever technocratic policies of one sort or another. Raul Prebisch. (Early) Fernando Henrique Cardoso. Immanuel Wallerstein.

18. Unorthodox Marxist class-structure-a-fetter-on-development theories: latifundia and neo-feudalism, but not just rural neofeudalism: the heyday of the PRI in Mexico as a “new class” bureaucracy variant of robber baronage and clientage, focused on extracting rents for political powerbroker and their clients from the most productive pressure points of the economy–natural resources, high-productivity export manufacturing, tourism. Hernando de Soto, The Other Path. Andrei Shleifer et al., “Legal Origins”. Acemoglu, Johnson, and Robinson, “Comparative Origins”. What makes these people unorthodox Marxists is that Karl Marx believed in progress, and so a “bourgeois revolution” as inevitable: superstructure could not indefinitely contain the pressures being generated by the economic changes of the base. In the end, all of the feudal and neo-feudal and aristocratic and caste and estate-based blockages to market capitalism–and thus prosperity–would be “steamed away”. “All that is solid melts into air…” really does not do the German justice…

19. One-unfortunate-accident-after-another theories: The long nineteenth century required either fluency in English or an exceptionally-favorable geographic environment–which the Southern Code had–in order to successfully adapt and adopt the technologies of the Industrial Revolution. In the twentieth century bets on globalization crapped out with the coming of the Great Depression, Imperial Preference, and the Smooth-Hawley Tariff. Bets on import-substitution then missed the biggest expansion of world trade ever in the Thirty Glorious Years. The switch to “neoliberal” policies then got squashed by the oil shocks, the coming of monetarism, and more recently the rise of China. Plus collateral damage from the Cold War–the Cold War in Asia gave Japan and the rest of the Pacific Rim preferential access to Anglo-America’s markets, the Cold War in Europe was fought on terrain where the propertied right that had bet on Naziism kept its head down, but the Cold War in Latin America was different…

20. But do we really have to choose? (17) can be evaded via clever technocrats pursuing state-led development–but, in Lant Pritchett’s words, what can be worse than state-led development policies pursued by an anti-developmental state? The anti-developmental state that trapped Latin America in (17) and was the product of unfortunate early wealth concentration and frontier absence in history via (18) could have been surmounted except for the unfortunate accidents of (19)–which pre-dated the Cold War: it was FDR who said that while Somoza may be an SOB he is our SOB. And unfortunate accidents would not have had as large deleterious effects had the global economy of (17) been more genuinely open and stable.

21. From this perspective, Latin American relative retardation–even in the Southern Cone–from 1850-1950 looks overdetermined: it would have been a miracle had it not taken place.

22. Still, literacy, life expectancy, prosperity, etc. vastly better than in 1825–and, relatively, better than Africa, South Asia, non-coastal East Asia (for the moment?), and (perhaps?) Muscovy and its dependencies. Relative retardation is relative to the North Atlantic plus the Asian Pacific Rim only.

23. Nobody intelligent would say that they know the relative weight to be assigned to these different overdetermining factors. Only a strong desire to obtain tenure and to do so by publishing articles that establish or refute particular narrow theories could induce anybody sane to claim to do so.

24. Looking forward: But do the burdens of the past still lie on the future?

25. Chance of making the global economy your servant rather than your master? Here the news is bad: over the past two decades neither the North Atlantic nor the Pacific Rim has been able to master the global economy. Instead, episodes of policy disorder and macroeconomic stress that those of us who focused on the North Atlantic used to see as confined to Latin America are now global.

26. Class structure a fetter on development? As income inequality in the United States surpasses that of Brazil, and as rent-seeking in everything from Berkeley NIMBYism to the ability of a very narrow fossil fuel-complex interest group to block urgent action on global warming to the ability of the princes of Wall Street to extract their fortunes, it is not that Latin America has promise of attaining the kind of institutional successes seen in the post-WWII North Atlantic. Rather, the North Atlantic–plus Japan–appear to be copying institutional failure, or at least underperformance.

27. Could we pray for good luck? It is hard to see what else we can do.

28. God knows the North Atlantic broadly construed–extending to Tokyo and Moscow–has not been immune to history. But it was a history of grasping technological possibilities perhaps too well, and reactions to them. Now, perhaps, North Atlantic history is becoming more “normal”…

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Tim Duy: Employment Report, Yellen Speech: “I am wondering what the Fed will do…

…if the unemployment rate touches 5% and wage growth and inflation remain anemic? Not my baseline scenario, but I am wondering how patient they will be…. Yellen made some interesting remarks…. ‘As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries…. This normalization could lead to some heightened financial volatility…. The Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy….’ Take note of the specific emphasis on financial volatility. The message is that market participants should not expect the Fed to react to every twist and turn in equity markets. More to the point, they expect volatility…. They are signalling that market participants misread the likely path of the Federal Reserve when 2 year yields collapsed last month. That said, I am fairly concerned that the Fed is not taking the flattening of the yield curve seriously enough. I see that as a signal that they have less room for normalization than they might think they have.

Simon Wren-Lewis: Getting the Germany Argument Right: “As the Eurozone experiences a prolonged demand-deficient recession…

…and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right…. There are two wrong directions… to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’… to argue that Germany needs to expand to help its Eurozone neighbours…. The first… legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties…. The second… tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours… suggests that the current German macroeconomic position is appropriate…. The uncomfortable truth for Germany, which both the previous arguments can miss, is that the appropriate macroeconomic position for Germany at the moment is a boom, with inflation running well above 2%…. From the perspective of the Eurozone as a whole, the efficient solution would be above 2% inflation in Germany, and below 2% inflation elsewhere…. If your starting point is what happened in Germany from 2000 to 2007, then current German arguments can look incredibly self-centred. They seem to say: we suffered a recession from 2000 to 2007 which led to a beggar my neighbour outcome, now you have to suffer a worse recession to put right the problem we created. But… I think the German position is more about ignorance than greed…. The ultimate problem is that what Germany sees at virtue is pre-Keynesian macroeconomic nonsense, nonsense that is doing other countries a great deal of harm..

Steven Johnson (2012): We’re living the dream; we just don’t realize it: “Over the past two decades…

…what have the U.S. trends been for the following important measures of social health: high school dropout rates, college enrollment, juvenile crime, drunken driving, traffic deaths, infant mortality, life expectancy, per capita gasoline consumption, workplace injuries, air pollution, divorce, male-female wage equality, charitable giving, voter turnout, per capita GDP and teen pregnancy? The answer for all of them is the same: The trend is positive…. The quality-of-life and civic health trends in the developing world are even more dramatic…. We are much more likely to hear about these negative trends than the positive ones for two primary reasons. First… the positive trends in our social health are coming from a… complex network of forces…. The public sector doesn’t have billions of dollars to spend on marketing campaigns to trumpet its successes…. We underestimate the amount of steady progress that continues around us, and we misunderstand where that progress comes from. We should celebrate these stories of progress, not so we can rest on our laurels but instead so we can inspire the next generation to build on that success.

Powerpoint on Jeff Madrick

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On Jeff Madrick’s “How Mainstream Economic Thinking Imperils America”

J. Bradford DeLong :: U.C. Berkeley :: Prepared: 2014-10-22

The Seven Bad Ideas Jeff Madrick Sees

• The “Invisible Hand”
• Say’s Law
• Friedman’s Folly: Government’s Limited * Social Role
• Low Inflation Is All That Matters
• “There Are No Bubbles”
• Globalization Is Always Good
  Economics Is a Science

In Madrick’s Introduction

• Praised in the Introduction: John Maynard Keynes, Dani Rodrik
• Criticized in the Introduction:
  • Adam Smith–no comment necessary…
  • Olivier Blanchard–the de facto leader of the Sixth International: on the left of the spectrum of policymakers…
  • Larry Summers–principal advocate of the Keynesian expansionary-fiscal solution to our troubles…
  • Milton Friedman–when he was alive, the most powerful advocate of unlimited quantitative easing…
  • Bob Rubin–on his watch big banks were bailed-in during financial crises, not bailed-out…
  • Ben Bernanke–most left-wing central banker we had (although I will concede his attachment to 2%/year inflation target, and failure to reach it, are huge minuses)…
  • Robert Lucas–underbriefed and destructive…

Reading Along…

• Madrick on Christina Romer:

  • “In a piece she wrote for The New York Times criticizing an increase in the minimum wage, Christina Romer, the former Obama adviser and considered by many to be a political liberal, implicitly made this same oversimplified assumption that workers usually get what they deserve. This is an example of Friedman’s broad influence…”

• Romer:

  • We have better policies available: expand the EITC is better targeted
    For the long-run, universal kindergarten and pre-K have more bang for the buck
    And these are expansionary fiscal policy–spending money gives a macroeconomic boost as well
    But if the choice is for a higher minimum wage or nothing, I’m for a higher minimum wage…

Food for Thought

• Of these 8 whom Madrick criticizes…
• …Somewhere between 5 and 7 are to the left of current North Atlantic policymakers
• Not excluding Obama

PFoJ vs. JPF, Perhaps?

• A little misplaced ire, I think…
• But I don’t want to go there…
• I would rather go to…

I See Four Yawning Gulfs

• Between:
  • the economic policies that those whom I regard as “serious” economists are advocating, and
  • those that are being implemented…
• Between:
  • what economics says, and
  • what right-of-center economists are telling their political masters it says…
• Between:
  • what economics says, and
  • what economics should say…
• Between:
  • my “inside” view of what I think economics says, and
  • Jeff Madrick’s “outside” view of what he thinks economics says…

As I See It

• The problem of where economics starts
• The problem of the decreasing relevance of the Smithian model
• The stringent requirements for market effectiveness

Current policy and current tasks

• Where Economics Starts
  • Economics starts from the presumption:
  • that market success is the benchmark, and
  • that market failure is anomalous
• It ought to start from the presumption:
  • that market construction is difficult
• It ought to have:
  • a grammar of other forms of organization—
  • command, bureaucracy, charity, cooperative, regulated monopoly, yardsticks, etc.—
  • and where they succeed and where they fail

Decreasing Relevance of the Smithian Model

• We have a great deal of economic life in sectors where we know the market will not work well, and
• These sectors will only grow in relative importance:
  • Pensions
  • Health-care finance
  • Education
  • Infrastructure
  • Research and development
  • Information goods more generally

The Stringent Requirements for Market Effectiveness

• Here are seven requirements:
  • Distribution of wealth corresponding to fairness and utility
  • Aggregate demand matched to potential supply
  • Competition
  • Calculation
  • Rivalry
  • Excludability
  • Information symmetries
  • And, no, a night-watchman, a court, and cutting property rights at the joints will not get us there

Current Policy and Current Tasks

• Policy is far to the right of even where the really-existing economics profession is
• At least, where the “serious” piece of it, in an intellectual sense, is
  *And it is not to the smart right either
• Why?

How to fix it?

• Books like Jeff’s, of course, but what else?
• Two tasks:
  • Move the “serious” economics profession
  • Move policymaking to the “serious” economics profession
  • Both seem of equal importance and difficulty

Lightly-edited transcript of discussion

Must- and Shall-Reads:

• Guntram B. Wolff: Europe’s Fiscal Wormhole
• Nick Szabo: Commercial security at the birth of writing, arithmetic, and religion in ancient Sumer

 

1. Neil Siegel: Halbig, King, and the Limits of Reasonable Legal Disagreement: In the debates over the constitutionality of the Affordable Care Act… I did not dismiss the arguments of those who disagreed with me. There often has been reasonable, irreconcilable disagreement over the meaning of the Constitution…. Halbig and King… are different. I can accept… that the relevant provisions of the ACA are ambiguous. What I cannot accept as reasonable or responsible… is the argument… that the ACA Congress clearly and unambiguously accomplished what no Member of Congress, no one in the Congressional Budget Office, none of the four dissenting Justices in NFIB v. Sebelius, and no state official realized that Congress had accomplished when it passed the ACA: self-destructively limit the tax subsidies that make health insurance affordable for millions of Americans to those who have the good fortune of happening to reside in states that set up their own health insurance exchanges…. Some may conclude that I am not as tolerant of reasonable legal disagreement as I think I am or used to be. Others may conclude that I care too much about the draconian financial consequences for millions of Americans and insurance companies if this litigation succeeds. I have considered these possibilities, and I have rejected them. The plaintiffs’ case is so weak and transparently political that it is dismaying to see it be taken seriously.

2. Nicholas Bagley: : The Supreme Court will hear King. That’s bad news for the ACA: “In a significant setback for the Obama administration, the Supreme Court just agreed to review King v. Burwell, the Fourth Circuit’s decision upholding an IRS rule extending tax credits to federally established exchanges…. At least four justices… voted to take the case… The justices’ votes on whether to grant the case are decent proxies for how they’ll decide the case. The justices who agree with King wouldn’t vote to grant…. The justices who disagree with King… there are at least four such justices…. That means that either Chief Justice Roberts or Justice Kennedy will again hold the key vote. None of this bodes well for the government. That’s not to say the government can’t win. It might. As I’ve said many times, the statutory arguments cut in its favor. But the Court’s decision to grant King substantially increases the odds that the government will lose this case. The states that refused to set up their own exchange need to start thinking—now—about what to do if the Court releases a decision in June 2015 withdrawing tax credits from their citizens.”

3. Ricardo Hausmann: The Economics of Inclusion: “I believe that both inequality and slow growth often result from a particular form of exclusion….Thanks to more than two centuries of sustained growth, average per capita income in the OECD countries is just under $40,000–3.3, 11.3, and 17.7 times more than in Latin America, South Asia, and Sub-Saharan Africa, respectively. Sustained growth has obviously not included the majority of humanity…. GDP per worker in… Nuevo León in Mexico is eight times that of Guerrero…. Why would capitalists extract so little value from workers if they could get so much more out of them?…To form part of the modern economy, firms and households need access to networks…. But connecting to these networks involves fixed costs….It is the fixed costs that limit the diffusion of the networks. So, a strategy for inclusive growth has to focus on ways of either lowering or paying for the fixed costs that connect people to networks. Technology can help…. But in other areas, the issue involves public policy…. A strategy for inclusive growth must empower people by including them in the networks that make them productive. Inclusiveness should not be seen as a restriction on growth to make it morally palatable. Viewed properly, inclusiveness is actually a strategy that enhances growth.

4. Ryan Avent: Forget the 1%: “It is the 0.01% who are really getting ahead in America…. Saez and… Zucman… uses a richer variety of sources…. The share of wealth held by the bottom 90% is an effective measure of ‘middle class’ wealth…. In the late 1920s the bottom 90% held just 16% of America’s wealth—-considerably less than that held by the top 0.1%, which controlled a quarter of total wealth just before the crash of 1929…. By the early 1980s the share of household wealth held by the middle class rose to 36%—roughly four times the share controlled by the top 0.1%…. From the early 1980s… these trends have reversed…. The 16,000 families making up the richest 0.01%, with an average net worth of $371m, now control 11.2% of total wealth—-back to the 1916 share, which is the highest on record…. The top 0.1%… hold 22% of America’s wealth…. The outsize fortunes of the few would not be too worrying were they largely the product of entrepreneurial activity…. The club of young rich includes not only Mark Zuckerbergs, the authors argue, but also Paris Hiltons…. The share of labour income earned by the top 0.1% appears to have peaked… held in the form of shares… levelled off… held in bonds has risen… hint[ing] that America’s biggest fortunes may be starting to have less to do with building businesses…”

5. Jessie Handbury and David E. Weinstein: Are Big Cities Expensive?: “Most of the variation in prices across cities can be attributed to flaws in the conventional indexes… compar[ing] prices of similar but not identical goods… not adjust[ing] for the availability of goods…. Big cities like New York are typically reported to have a cost of living more than double that of small cities like Des Moines, Iowa with nominal wages that are only 40% higher on average. Why then isn’t there a massive exodus from large cities into small ones? A common explanation is that larger cities offer better amenities (Glaeser and Kerr 2008)….We suggest a much simpler explanation…. We study the prices of barcoded grocery items sold across cities in the US and find that almost all of the variation in prices across cities can be attributed to flaws in the data used to make spatial price comparisons…”

6. Nick Rowe: Black holes and Neo-Fisherites are a monetary phenomenon: “Suppose… the central bank sets a nominal rate of interest…. Nominal demand for goods can spiral down to zero, if people expect it to…. Nominal demand for goods can spiral up to infinity, if people expect it to…. But what is happening to the nominal stock of base money if the economy sprials down into a black hole? And what is happening to the nominal stock of base money if the economy spirals up into a white explosion? Neo-Wicksellian models are silent…. If it lets the stock of base money spiral down to zero… then of course the economy would spiral down into a black hole. But… central banks did not in fact do this…. We need to introduce money explicitly if we want to understand what happens…. Take a related question–the Neo-Fisherite question. If the central bank permanently raises the nominal interest rate, will this result in higher or lower inflation? If you tell me what permanently raising the nominal interest rate does to the base money supply growth rate, I can answer your question…. The Neo-Wicksellian perspective… is what leads us to ask… badly-posed questions…”

Should Be Aware of:

• Frank Bruni: The Church’s Gay Obsession
• The Best Way to Type ¯_(ツ)_/¯
• The Nytpicker (August 2009): How Does Alessandra Stanley Get To Keep Her Job As TV Critic? That’s One Question Clark Hoyt Neglects To Ask.

 

1. Rich Yeselson: Six Points on the Midterm Elections: “Many voters don’t understand the structures and details of politics… don’t understand… separation of powers in an age of parliamentary[-discipline] parties…. More than 40% of them… don’t even know… which party controls… Congress…. Older people do not want some libertarian desert, and certainly do want to keep their welfare gerontocracy…. Voters were moderately liberal not only on the minimum wage, but also climate change and path to citizenship for illegal immigrants…. It’s not the 1930s anymore–white people in Kentucky, Louisiana, and Arkansas despise anything that reminds them of the national Democratic party, which they already think is socialist as it is. They don’t want it to move left, they think it’s grotesquely left enough as it is…. Government is not assumed to be the vehicle for the collective aspirations of the American people, but, rather, a highly problematic institution (which it is!)…. A centrist Democrat, Mary Burke, lost by a solid 7% to a union slayer, Scott Walker, and Walker took 34% of the union household vote…. We don’t even know what will ‘work’ in a place like Wisconsin. Good policy should be promoted, and maybe it will lead to good politics. But most of the country doesn’t want to move to the left…. Perhaps… the entire New Deal era was itself a historical anomaly, which temporarily masked the deep American divisions over race and religion, and suppressed for a time a fetish of individuation at the usual expense of social solidarity…”