Category: Equitablog

The extremely sharp but differently-thinking Peter Thiel:

Peter Theil: Robots Are Our Saviours, Not the Enemy: “Americans today dream less often of feats that computers will help us to accomplish…

…[and] more and more we have nightmares about computers taking away our jobs…. Fear of replacement is not new…. But… unlike fellow humans of different nationalities, computers are not substitutes for American labour. Men and machines are good at different things. People form plans and make decisions…. Computers… excel at efficient data processing but struggle to make basic judgments that would be simple for any human…. [At] PayPal… we were losing upwards of $10m a month to credit card fraud…. We tried to solve the problem by writing software…. But… after an hour or two, the thieves would catch on and change their tactics to fool our algorithms. Human analysts, however, were not easily fooled…. So we rewrote the software… the computer would flag the most suspicious trans­actions, and human operators would make the final judgment. This kind of man-machine symbiosis enabled PayPal to stay in business…. Computers do not eat…. The alternative to working with computers… is [a world] in which wages decline and prices rise as the whole world competes both to work and to spend. We are our own greatest enemies. Our most important allies are the machines that enable us to do new things…

Chicago Federal Reserve Bank President Charles Evans’s position seems to me to be the position that ought to be the center of gravity of the Federal Open Market Committee’s thoughts right now, with wings on all sides of it taking different views as part of a diversified intellectual portfolio. Charles Evans:

Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy: “At the end of the second quarter of 2014…

…the labor force participation rate was between 1/2 and 1-1/4 percentage points below trend… as much as 3/4 of a percentage point below predictions based on its historical relationship with the unemployment rate…. Virtually all the gap during this cycle has been due to withdrawal from the labor market of workers without a college degree…. If skills mismatch were an ongoing problem, we’d expect to see wages rising for those with the skills in demand…. Pools of potential workers other than the short-term unemployed, notably the medium-term unemployed and the involuntary part-time work force, substantially influence wage growth at the state or metropolitan statistical area level…. Current circumstances and a weighing of alternative risks mean that a balanced policy approach calls for being patient in reducing accommodation…. The biggest risk we face today is prematurely engineering restrictive monetary conditions…. If we were to… reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment…. There are great risks to premature liftoff…. And the costs of being mired in the zero lower bound are simply very large…

Yet Evans is out there on his own–with perhaps Narayana Kocherlakota beside him.[[3]][3]

As I see it:

1. The past decade has demonstrated that to properly reduce the risks of hitting the zero nominal lower bound on safe short-term interest rates, we need not a 5%/year but at least a 6.5%/year business-cycle peak safe short nominal rate.1 With a 3%/year short-term peak real natural interest rate, we need not a 2%/year but a 3.5%/year inflation target instead.

2. It is likely that the safe natural real rate of interest has fallen by 1%-point/year. That means that a healthy economy properly distant from the ZLB requires not a 3.5%/year but a 4.5%/year inflation target.

3. It is very important when the economy hits the zero lower bound on nominal interest rates that expectations be that the time spent at the ZLB will be short. To build those expectations, it is important that when the economy emerges from the ZLB it undergo a period in which the long-run inflation target is overshot.

4. The likelihood is that downward movements in labor force participation that are cementing into structural impediments to employment can be reversed if high demand pulls workers back into the labor force before the cement has set, but only with difficulty otherwise. The benefit-cost analysis thus calls for an additional inflation overshoot in order to satisfy the Federal Reserve’s dual mandate.

5. If the Federal Reserve aims at a 2%/year inflation target and fails to raise interest rates sufficiently early, it may wind up with 4%/year inflation and have to raise short-term real interest rates to 6%/year–a nominal interest rate of 10%/year–to return the economy to its inflation target. If the Federal Reserve prematurely raises interest rates, it may wind up with 0%/year inflation and wish to lower short-term real interest rates to -2%/year to return the economy to its inflation rate. With inflation at 0%/year, it cannot do that. Thus the risks are asymmetric: raising interest rates later than optimal under perfect foresight carries much lower risks than does raising interest rates earlier than optimal.

6. Since 1979 the Federal Reserve has built up enormous credibility as the guardian of price stability and has wrecked whatever credibility it had as the guardian of low unemployment. A situation in which the general expectation is that the Federal Reserve will do too little to guard against high unemployment is worse than a situation in which the general expectations is that the Federal Reserve will too little to guard against inflation–“it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier”.2

7. The PCE price index is now undershooting its pre-2008 trend by fully 5%: the proper optimal-control response to a large negative real demand shock is not a price level track that falls below but rather one that rises above the previously-anticipated trend path.

IMHO, you need to reject all 7 of the above points completely in order to think that the FOMC’s goal of returning inflation to 2%/year and keeping it there is anywhere close to an optimal-control path for an institution governed by its dual mandate. I really do not see how you can reject all seven.

Moreover, financial markets right now believe that the Federal Reserve’s policy is not going to attain 2%/year inflation–not now, not over the next five years. Since June the on-track-to-recovery Confidence Fairy–to the extent that she was present–has flown away:

Thus right now justifying the Federal Reserve’s policy track seems to me to require rejecting all seven of the points above, plus rejecting the financial markets’ read on monetary policy, plus rejecting the consideration that depressed financial markets–even irrationally-depressed financial markets–should be offset with additional demand stimulus.

Yet only two of the seventeen FOMC participants are with me. Am I off my rocker? Have they been consumed by groupthink? How am I to understand all this?

[3]: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.pdf (Percent
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2014: Advance release of table 1 of the Summary of Economic Projections to be released with the FOMC minutes)

970 words

Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy: “At the end of the second quarter of 2014…

the labor force participation rate was between 1/2 and 1-1/4 percentage points below trend… as much as 3/4 of a percentage point below predictions based on its historical relationship with the unemployment rate…. Virtually all the gap during this cycle has been due to withdrawal from the labor market of workers without a college degree…. If skills mismatch were an ongoing problem, we’d expect to see wages rising for those with the skills in demand…. Pools of potential workers other than the short-term unemployed, notably the medium-term unemployed and the involuntary part-time work force, substantially influence wage growth at the state or metropolitan statistical area level…. Current circumstances and a weighing of alternative risks mean that a balanced policy approach calls for being patient in reducing accommodation…. The biggest risk we face today is prematurely engineering restrictive monetary conditions…. If we were to… reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment…. There are great risks to premature liftoff…. And the costs of being mired in the zero lower bound are simply very large…

Michael Lewis: Occupational Hazards of Working on Wall Street: “Technology entrepreneurship will never have the power to displace big Wall Street banks…

…in the central nervous system of America’s youth, in part because tech entrepreneurship requires the practitioner to have an original idea, or at least to know something about computers, but also because entrepreneurship doesn’t offer the sort of people who wind up at elite universities what a lot of them obviously crave: status certainty…. The question I’ve always had about this army of young people with seemingly endless career options who wind up in finance is: What happens next to them? People like to think they have a ‘character’, and that this character of theirs will endure…. It’s not really so…. The best a person can do… is to choose carefully the environment that will go to work on their characters. One moment this herd of graduates of the nation’s best universities are young people…. The next they are essentially old people… gaming ratings companies… designing securities to fail… [to] make a killing off the… dupe[s]… rigging various markets at the expense of… society… encouraging… people to do stuff with their capital… they never should do….

All occupations have hazards. An occupational hazard of the Internet columnist… is that he becomes the sort of person who says whatever he thinks will get him the most attention rather than what he thinks is true, so often that he forgets the difference. The occupational hazards of Wall Street are… the pressure to pretend to know more than he does… hard to form deep attachments to anything much greater than himself… enormous pressure to not challenge or question existing arrangements…. So watch yourself, because no one else will.

Must- and Shall-Reads:

• Ta-Nehisi Coates: The Case for Reparations
• John Bogle on the Rise of Index Funds
• Michael McKenzie: Treasury market cuts US inflation outlook
• Tim Harford: Selten’s Chain-Store Paradox

1. Young Rand Paul (1984): Stealing to Help the Needy: “To the editors: After reading Mr. Wilzrkarth’s editorial (Feb. 2) condemning President Reagan’s plan for a ‘New Federalism’, every national person should contemplate the essence of the system that has created such a controversy. The main thrust of the article lies in the assertion that neither state governments nor private charity can absorb the immensity of the welfare system. We have been taught as Christian people that it is wrong to steal. But underlying the whole welfare concept is the principle of theft. Money in the form of taxes is confiscated from the producers in society and redistributed to those who can’t or won’t produce. The immoral act of stealing, thus, has become moral in the eyes of society. Immediately, I sense the horror stricken faces of those persons finishing the previous paragraph. Why, he would let the needy starve! My reply would be: How many realistic people believe there are 22 million Americans who need food stamps to survive? How many open-minded people believe 11 million Americans actually need sustenance? Let us assume a highly unlikely percentage, such as half, truly need some support. If individuals were not burdened by taxes incurred by this wealth transfer system, the truly needy would surely be supported. Randall H. Paul; Biology, ’85”

2. David G. Blanchflower and Adam Posen: Wages and Labor Market Slack: Making the Dual Mandate Operational: “We examine the impact of rises in inactivity on wages in the US economy and find evidence of a statistically significant negative effect. These nonparticipants exert additional downward pressure on wages over and above the impact of the unemployment rate itself. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. We also examine the impact of long-term unemployment on wages and find it has no different effect from that of short-term unemployment. Our analysis provides strong empirical support, we argue, for the assessment that continuing labor market slack is a key reason for the persistent shortfall in inflation relative to the Federal Open Market Committee’s (FOMC) 2 percent inflation goal. Further, we suggest our results point towards using wage inflation as an additional intermediate target for monetary policy by the FOMC.”

3. Jason Fried (2012): Some advice from Jeff Bezos: “Jeff Bezos… shared an enlightened observation about people who are ‘right a lot’. He said people who were right a lot of the time were people who often changed their minds…. The smartest people are constantly revising their understanding, reconsidering a problem they thought they’d already solved. They’re open to new points of view, new information, new ideas, contradictions, and challenges to their own way of thinking…. What trait signified someone who was wrong a lot of the time? Someone obsessed with details that only support one point of view…”

4. John Holbo: If she weighs the same as a duck… she’s made of wood… and therefore–: “Unless I’m missing something, [Stanley] Kurtz’s actual argument [at National Review] that Hillary has consistently remained an Alinskyite radical is that, for decades, she has consistently done absolutely nothing whatsoever to suggest this is true–as one would expect! She is, to all appearances, moderate, incrementalist and pragmatic. Just like Barack Obama, who is such a model Alinskyite radical that he is on track to govern for eight years and retire to private life without once doing anything to suggest he’s got a radical bone in his body. How much more sinister would The Manchurian Candidate have been if the trigger word were never spoken? The sleeper never wakes! (A lone hero tries to warn the world but, because there is literally nothing to warn people about, he is ignored.)

5. Suzy Khimm: How DC’s conservative elite view liberals: “Here’s the view from the Heritage Foundation: Liberalism creates self-indulgent, licentious hedonists willing to cede every other kind of freedom to an increasingly authoritarian government. ‘Give up your economic freedom, give up your political freedom, and you will be rewarded with license’, said Heritage’s David Azerrad, describing the reigning philosophy of the left. ‘It’s all sex all the time. It’s not just the sex itself—it’s the permission to indulge.’ Liberals, said editor Bill Voegeli, want to create ‘the United States of Feeling Good About Ourselves’. What’s more, they think that those who disagree with them ought ‘to imprisoned—not to be debated, to be locked up on criminal charges and imprisoned’, said the National Review’s Kevin Williamson…. The event at Heritage—which prides itself as being the intellectual backbone of the conservative movement—was intended to address where liberalism was headed…. At the Tuesday event, a curious portrait of modern-day liberalism emerged. Liberalism meant Robert F. Kennedy Jr. and Gawker (for wanting to punish climate change deniers), Senate Democrats (for wanting to undo Citizens United), writer Matt Yglesias (for wanting to eliminate summer vacations), the term ‘mansplaining’ (for being a symptom of P.C. extremism), and Rolling Stone magazine (for giving voice to far-left writers in ‘the most frivolous consumer product in the history of frivolous consumer products’, per Williamson). But more than anything, the panelists stressed, liberalism is an idea, and a deadly one at that: a Janus-faced monster of moral relativism and authoritarianism.”

6. • Daron Acemoglu and James Robinson: Taxation vs. Expropriation: “What’s the difference between a 50% marginal tax rate on income vs. 50% expropriation by a kleptocratic ruler or corrupt officials?… Most citizens of Western democracies (with the notable exception of Tea Party supporters in the United States) are happy with marginal tax rates around 50% or sometimes above, but few businessmen in sub-Saharan Africa or South Asia can be found to sing the praises of similar rates of expropriation or corruption. Why?… High tax rates that emerge from the democratic process are viewed more positively… because citizens consent to them with the expectation that the proceeds will be used for spending that they value…”

7. Schumpeter: Entrepreneurs Anonymous:/a> “Over half of American startups are gone within five years. Most of the survivors barely stumble along…. Barton Hamilton of Washington University in St Louis compared the income distributions of American employees and entrepreneurs, and concluded that the latter earned 35% less over a ten-year period than those in paid jobs…. The paradox of the current, romantic view of entrepreneurs is that it leads us to undervalue their achievements. It is easy to envy people if you focus on a handful of success stories…. Would-be entrepreneurs need to have a more measured view of the risks involved before they start a business. But society also needs to have more respect for people who put their lives on the line to build something from nothing.”

8. Richard Mayhew: Tools to Detect Bulls—: “There are a couple obvious sign-posts…. If you start to see the following signs, you are either engaging with a sophomore in college who just learned something really cool in an introductory class but has neither the advanced classes in the field nor the experience to know better or you are seeing bulls—. 1. The units of analysis make no sense: Avik Roy’s ‘study’ of sticker shock in 2014 based on average prices per county had the unit of analysis as the county…. There are 3,144 counties in the US. 8 counties contain slightly more than 10% of the US population, and the largest county in the US, Los Angeles County, is roughly 120,000 times larger than the least populated…. 2. The comparisons are wildly bizarre: Again, Avik Roy compares community rated insurance with a fairly rich benefit package to underwritten insurance with significant exclusions of coverage…. It is real easy for an insurance company to offer low prices when it is statistically unlikely to pay big claims due to a screening of the risk pool…. 3. The claims are incredible: Timothy Jost looked at Avik Roy’s Obamacare replacement plan…. ‘He claims it would increase access to providers by 4 percent (98 percent for Medicaid recipients) and average health outcomes by 21 percent, while reducing the federal budget deficit by $29 billion over the first 10 years and $8 trillion over 30 years…. These claims are based on analysis of the proposal conducted by Stephen Parente, an American Enterprise Institute Scholar. I can find, however, no description of the methodology, or for that matter of the inputs, applied in this analysis. In particular, how Parente and Roy modeled an improvement in health outcomes, something the CBO never attempts, is a complete mystery.’… 4. The underpants gnomes dominate the theory of change:… When the underpants gnomes have to do the heavy lifting in a theory of change, it is either a first draft that needs to be fleshed out…. Congressman Ryan (R-Wis) wants to use dynamic scoring to get around the fact that he is making two incompatible promises–lower tax rates, especially on the wealthy, and revenue neutrality…. 5. Don’t look at past predictions: Be extremely skeptical of people who don’t audit their past predictions. Jonathan Chait ripped Reason magazine’s Peter Suderman apart on his Obamacare predictions…. People get things wrong all the time. That is fine. It is not fine when there is no evaluation of the process that produces wrongness as that guarantees the continuation of the Garbage In-Garbage Out loop. There are plenty of other high quality bullshit detection tools that are useful in policy analysis, but the above tools can be safely applied by anyone with some curiosity and interest in a subject.”

Should Be Aware of:

• Ruthanna Emrys and Anne M. Pillsworth: Finding the Other Within: [H.P. Lovecraft’s] “The Shadow Over Innsmouth” | “The Litany of Earth”
• Bryan Burrough: On Writing Narrative
• Alfred Marshall: “Highly paid labour is generally efficient and therefore not dear labour; a fact, though it is more full of hope for the future of the human race than any other that is known to us, will be found to exercise a very complicating influence on the theory of distribution.”
• Scott Brown blanks on abortion bill he co-sponsored

1. Ali Ozdagli: Financial Frictions and the Reaction of Stock Prices to Monetary Policy Shocks: “This paper reveals and tests a new theoretical implication of the credit channel of monetary policy: as financial frictions (monitoring or auditing costs) increase, the reaction of stock prices to monetary policy shocks decreases. Correspondingly, towards the end of the Enron accounting scandal, the stock prices of firms sharing the same auditor as Enron responded by about 50 to 60 basis points less than other firms to a 10 basis point reduction in the federal funds target rate. This effect is particularly strong among more opaque firms for which financial statements likely provide a more important monitoring tool.”

2. Regis Barnichon and Andrew Figura: The Effects of Benefits on Unemployment and Labor Force Participation: “This paper presents estimates of the effect of emergency and extended unemployment benefits (EEB) on the unemployment rate and the labor force participation rate using a data set containing information on individuals likely eligible and ineligible for EEB back to the late 1970s. To identify these estimates, we examine how exit rates from unemployment change across different points of the distribution of unemployment duration when EEB is and is not available, controlling for changes in labor demand and demographic characteristics. We find that EEB increased the unemployment rate by about one-third percentage point in the most recent recession but did not affect the participation rate. In previous recessions, the effect of EEB on the unemployment rate was even smaller.”

3. Thoreau: Merit-based charade: “I’ve been thinking more about Twilight of the Elites…. I wish Chris Hayes had come up with a descriptor better than ‘meritocracy’ for what he’s arguing against. The issue is… that our elite is exceptionally isolated and powerful, and more and more of a monoculture. And our ‘solution’ is to use educational tools to solve problems that are fundamentally not about education…. I admit that I don’t have an obvious candidate that packs all of the counter-intuitive punch and connects to all the ideas presented there, but when you pick a term like that you are just setting up the argument against yourself…”

4. David Freedman (2010): “In my view, regression models are not a particularly good way of doing empirical work in the social sciences today, because the technique depends on knowledge that we do not have…. Their conclusions may be valid for the computer code they have created, but the claims are hard to transfer from that microcosm to the larger world…. I doubt that models can be rescued by technical fixes. Arguments about the theoretical merit of regression or the asymptotic behavior of specification tests for picking one version of a model over another seem like the arguments about how to build desalination plants with cold fusion and the energy source. The concept may be admirable, the technical details may be fascinating, but thirsty people should look elsewhere…. Causal inference from observational data presents may difficulties, especially when underlying mechanisms are poorly understood. There is a natural desire to substitute intellectual capital for labor, and an equally natural preference for system and rigor over methods that seem more haphazard…. However, the assumptions often turn out to be unsupported by the data. If so, the rigor of advanced quantitative methods is a matter of appearance rather than substance…”

David G. Blanchflower and Adam S. Posen: Wages and Labor Market Slack: Making the Dual Mandate Operational: “We examine the impact of rises in inactivity…

…on wages in the US economy and find evidence of a statistically significant negative effect. These nonparticipants exert additional downward pressure on wages over and above the impact of the unemployment rate itself. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. We also examine the impact of long-term unemployment on wages and find it has no different effect from that of short-term unemployment. Our analysis provides strong empirical support, we argue, for the assessment that continuing labor market slack is a key reason for the persistent shortfall in inflation relative to the Federal Open Market Committee’s (FOMC) 2 percent inflation goal. Further, we suggest our results point towards using wage inflation as an additional intermediate target for monetary policy by the FOMC.

Ezra Klein: In conservative media, Obamacare is a disaster. In the real world, it’s working: “Before Obamacare launched…

…conservative outlets warned that the law would collapse as insurers shunned the overpriced, overregulated insurance exchanges…. I remember, a month or two after HealthCare.Gov opened (and crashed), being on a panel with a conservative writer who said that Obamacare might well enter a death spiral as insurers pull out of the marketplaces. On Tuesday, the idea that insurers would flee Obamacare joined the long procession of Obamacare disasters that simply didn’t happen…. This news is not, as I write this on Tuesday evening, being carried on the home pages of Fox Business, HotAir.com, or the Heritage Foundation. (In case you’re wondering, the most recent Obamacare article on FoxBusiness.com is “Obamacare website still not secure?”; on Hot Air.com, it’s “How many people are poised to lose 2014 Obamacare coverage?”; at Heritage, it’s “Why you can’t keep your plan under Obamacare, explained in 3 minutes”.)… My hunch is that relatively few conservatives realize that premiums are lower-than-expected, and that the law’s costs are lower-than-expected ($104 billion lower, as of April 2014)….

Republicans have, for a long time, been putting forward health-care plans that would devolve single-payer insurance programs like Medicare to private insurers that would hold down costs by narrowing networks and managing care. Then, they figure, Americans can shop around, and the market will reward the plans that hold down costs and punish the plans that don’t. These ideas were present in the health reforms Mitt Romney passed in Massachusetts, and Obamacare borrowed heavily from them. Rep. Paul Ryan has also been a key sponsor of these ideas. But now that they’re happening in Obamacare, he’s selling it to conservatives like some kind of catastrophe…. Except that very dynamic is exactly the way Ryan’s own fabled Medicare plan is designed to work…. On the whole… costs are lower than expected, enrollment is higher than expected, the number of insurers participating in the exchanges is increasing, and more states are joining the Medicaid expansion. Millions of people have insurance who didn’t have it before. The law is working. But a lot of the people who are convinced Obamacare is a disaster will never know that, because the voices they trust will never tell them.

Jason Fried (2012): Some advice from Jeff Bezos: “Jeff Bezos… shared an enlightened observation…

…about people who are ‘right a lot’. He said people who were right a lot of the time were people who often changed their minds…. The smartest people are constantly revising their understanding, reconsidering a problem they thought they’d already solved. They’re open to new points of view, new information, new ideas, contradictions, and challenges to their own way of thinking…. What trait signified someone who was wrong a lot of the time? Someone obsessed with details that only support one point of view…

The people putting their money on the line in financial markets now think that the Federal Reserve is going to undershoot its 2%/year inflation target by a cumulative total of more than 2%-points over the next five years.

And the Federal Reserve’s Open Market Committee is thinking of tightening monetary policy?