Things to Read on the Morning of September 12, 2014

Must- and Shall-Reads:

 

  1. Cardiff Garcia: Slacking to Stand Still: “A paper released last week by [Stephanie Aaronson et al.]… concludes that most of the decline in the labour force participation rate since the recession has been structural…. ‘Our cohort-based model suggests that cyclical weakness was depressing the participation rate by about ¼ percentage point in 2014:Q2’…. The wider issue is that trends thought to be structural aren’t necessarily irreversible…. The dovish argument, to which we still subscribe, is that the only way to know is for the Fed to aggressively pursue [expansion until]… the labour market becomes so tight that employers feel they have no choice but to make work more attractive…. Year-on-year headline PCE inflation is 1.6 per cent through July, the last available reading–which also happens to be its average rate since the recession. That’s not only an extended period of undershooting 2 per cent, but also a staggering demand fail given what happened to labour markets in that period…. To further make incoming data, rather than time, the clear contingency on which to base monetary policy would be perfectly sensible…

  2. Amanda Kowalski: The Early Impact of the Affordable Care Act State-By-State: “In the individual health insurance market… at least 13.2 million people were covered in the second quarter of 2014, representing an increase of at least 4.2 million increase beyond pre-ACA state-level trends…. Market participants in ‘direct enforcement; states that ceded all enforcement of the ACA to the federal government are worse off by approximately $245 per participant on an annualized basis relative to participants in all other states…. Market participants in the six states that had severe exchange glitches are worse off by approximately $750 per participant on an annualized basis relative to participants in other states with their own exchanges…”

  3. Lucia Foster, Cheryl Grim, and John Haltiwanger: Reallocation in the Great Recession: Cleansing or Not?: “The high pace of reallocation across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. While these patterns hold on average, the extent to which the reallocation dynamics in recessions are “cleansing” is an open question. We find downturns prior to the Great Recession are periods of accelerated reallocation even more productivity enhancing than reallocation in normal times. In the Great Recession, we find the intensity of reallocation fell rather than rose and the reallocation that did occur was less productivity enhancing than in prior recessions.”

  4. Matthew Weinzerl: Seesaws and Social Security Benefits Indexing: “The indexation of Social Security benefit payments may seem like an issue about which only an economist could get excited, but it has emerged in recent years as a áashpoint of debate in the United States. In his 2014 budget, President Obama proposed changing the price index with which retiree benefits are adjusted for inflation. In brief, the change was expected to lower the growth rate of benefits for all retirees, though at advanced ages that change would have been offset by progressive “benefit enhancements.” Because it was not tied to an increase in the starting level of those benefits, the Presidentís proposal was expected to reduce the total present value of benefits. The President’s proposal was explicitly intended to appeal to Congressional Republicans eager to reduce future spending on Social Security, but it was deeply unpopular with many of his fellow Democrats. When negotiations on more general fiscal policy challenges yielded little progress over the subsequent year, the President removed the proposal from his 2015 budget. His spokesperson made clear, however, that changes to indexation were still on the table if included in broader budget deals…”

  5. Stephanie Aaronson et al. (2006) The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply: “Increases in the participation rate of adult women likely stem from numerous structural factors…. It seems likely that new generations internalized many of these changes more easily than did mature cohorts, who had already made “sticky” choices…. Much of the change in the aggregate female participation rate appears to have resulted from progressively higher average participation rates of successive cohorts….. The participation rate for men in their prime working years… held steady during the strong labor market of the mid- to late-1990s. After turning down again during the 2001 recession, it has been fairly flat since 2002…”

  6. Tony Yates: A Mauling Minsky Moment: Comment on Martin Wolf: “Minsky’s reading of economic systems was a stroke of creative, imaginative but informal genius.  But it’s highly conjectural.  It may be part of the story of the financial collapse that financial system stability is inherently destabilising, or it may not.  Just because intermediation was cheap and plentiful before it became expensive and scarce does not validate Minsky.  There are plenty of other preceding and coincident events which don’t fit…. Besides, as a theoretical conjecture, it needs working through. Before we accept Minsky’s verbal conjecture, what would an artificial economy do if you peopled it with agents with imperfect apprehensions of risk? Would such artificial systems be characterised by a ‘stability is destabilising’ dynamic?… If you follow Paul Krugman’s reasoning, the financial crisis, at least as manifest in spreads, is over and done with.  And it’s lasting consequences for demand and inflation are down to insufficiently stabilising fiscal policy.  There’s no room for a ‘stability is destabilising’ dynamic here.  The future would be bright if Governments simply spent more money raising the natural rate. But suppose we accept the idea at face value. One reading of it suggests that we restricting bank leverage as Martin Wolf urges won’t work by itself.  A long period of stability breeding complacency would presumably erode the support for these restrictions…”

Should Be Aware of:

 

  1. Screenshot 9 11 14 11 11 AMData Science!

  2. Robert Shiller: Parallels to 1937: “The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by World War II, a conflict that cost more than 60 million lives. By the time recovery finally arrived, much of Europe and Asia lay in ruins.
    The current world situation is not nearly so dire, but there are parallels, particularly to 1937. Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences.”

  3. Graph Privately Owned Housing Starts 1 Unit Structures FRED St Louis FedThe Housing Super-Bust

Morning Must-Read: Matthew Weinzerl: Seesaws and Social Security Benefits Indexing

Matthew Weinzerl: Seesaws and Social Security Benefits Indexing: “The indexation of Social Security benefit payments…

…may seem like an issue about which only an economist could get excited, but it has emerged in recent years as a áashpoint of debate in the United States. In his 2014 budget, President Obama proposed changing the price index with which retiree benefits are adjusted for inflation. In brief, the change was expected to lower the growth rate of benefits for all retirees, though at advanced ages that change would have been offset by progressive “benefit enhancements.” Because it was not tied to an increase in the starting level of those benefits, the Presidentís proposal was expected to reduce the total present value of benefits. The President’s proposal was explicitly intended to appeal to Congressional Republicans eager to reduce future spending on Social Security, but it was deeply unpopular with many of his fellow Democrats. When negotiations on more general fiscal policy challenges yielded little progress over the subsequent year, the President removed the proposal from his 2015 budget. His spokesperson made clear, however, that changes to indexation were still on the table if included in broader budget deals…

Two Comments on Matthew Weinzerl’s “Seesaws and Social Security Benefits Indexing”

First:

Let me try to widen the scope of this discussion…

When I think about vehicles to provide retirement-income security…

  1. I think that encouraging people to invest in 401(k)s leads them, because of poor financial education, to pay a 2%/year tax on their asset accumulations to Wall Street–a transfer that is 100% a dissipative minus for any utilitarian societal welfare calculation given how rich the princes of Wall Street already are.

  2. I think that having firms provide defined-benefit pensions hasn’t worked out that well in the long run: firms do not survive long enough, and if they do along comes Bain Capital to exploit the legal gap between the cash-flow and the control rights of future pension beneficiaries and put the scraps of the mostly-expropriated pension assets to the PBGC.

  3. I think that Social Security indexed to prevailing wages provides an extraordinarily efficient way of providing a form of retirement savings that–given the enormous risk premia we see in financial markets–value extremely high. If we were to ask, say, Citicorp here how much it would charge to write a contract matching the return on your Social Security benefits, it would be astronomical. The only major drawback of relying more on Social Security that gives me pause is Marty Feldstein’s long-time worries about the effect of Social Security on national capital accumulation and thus on the level of economy-wide real wages.

Given that the first rule of market economics is that you should do less of what dissipates wealth and more of what creates wealth, I am–as I have long been–somewhat puzzled by the focus here…

And:

When back in 1994 Joe Stiglitz came up with the bright or perhaps not-so-bright idea of proposing changes in the Social Security benefits indexation formula, the key piece was tying changes in Social Security benefits indexation to changes in tax bracket breakpoints. This was both because it made sense to view the social-insurance system as a whole–both taxes and benefits–and as a way to assemble a proposal that would make it past the multiple veto points of our eighteenth-century mechanistic orrery of a governmental system and also increase utilitarian societal welfare. So if I may channel Joe Stiglitz, I think he would say that there ought, somewhere, to be a wealth tax component to this proposal somewhere. If there were, what would it be?

Matthew Weinzerl: Seesaws and Social Security Benefits Indexing: “The indexation of Social Security benefit payments…

…may seem like an issue about which only an economist could get excited, but it has emerged in recent years as a áashpoint of debate in the United States. In his 2014 budget, President Obama proposed changing the price index with which retiree benefits are adjusted for inflation. In brief, the change was expected to lower the growth rate of benefits for all retirees, though at advanced ages that change would have been offset by progressive “benefit enhancements.” Because it was not tied to an increase in the starting level of those benefits, the Presidentís proposal was expected to reduce the total present value of benefits. The President’s proposal was explicitly intended to appeal to Congressional Republicans eager to reduce future spending on Social Security, but it was deeply unpopular with many of his fellow Democrats. When negotiations on more general fiscal policy challenges yielded little progress over the subsequent year, the President removed the proposal from his 2015 budget. His spokesperson made clear, however, that changes to indexation were still on the table if included in broader budget deals…

Morning Must-Read: Lucia Foster, Cheryl Grim, and John Haltiwanger: Reallocation in the Great Recession: Cleansing or Not?

Lucia Foster, Cheryl Grim, and John Haltiwanger: Reallocation in the Great Recession: Cleansing or Not?: “The high pace of reallocation…

…across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. While these patterns hold on average, the extent to which the reallocation dynamics in recessions are “cleansing” is an open question. We find downturns prior to the Great Recession are periods of accelerated reallocation even more productivity enhancing than reallocation in normal times. In the Great Recession, we find the intensity of reallocation fell rather than rose and the reallocation that did occur was less productivity enhancing than in prior recessions.

When I looked at this, it seemed to me that it made a lot of difference whether your unit of observation was the firm or the worker. The average existing firm did indeed become more productive in a recession, in part through “shooting the wounded” and in part because the fear of being hanged tomorrow concentrates a person’s mind remarkably. But the average worker and the average unit of capital became less productive: after all, can you think of something worse for overall economic efficiency than shifting workers into the “unemployed” sector and shifting capital into the “idle” sector?

And, no, I do not have an explanation of why the financial crisis Great Recession **Lesser Depression** was destructive of average productivity at the firm level…

Department of “Huh?!” John J. Mearsheimer Thinks the West Caused the Ukraine Crisis?: The Honest Broker for the Week of September 19, 2014

John Mearsheimer is only one of a surprising number claiming that the current crisis in Ukraine is predominantly the U.S.’s, and NATO’s, and the Ukraine’s fault:

John Mearsheimer: How the West Caused the Ukraine Crisis: Why the Ukraine Crisis Is the West’s Fault: “The United States and its European allies share most of the responsibility…

…The taproot of the trouble is NATO enlargement…. For Putin, the illegal overthrow of Ukraine’s democratically elected and pro-Russian president–which he rightly labeled a “coup”–was the final straw…. Realpolitik remains relevant–and states that ignore it do so at their own peril. U.S. and European leaders blundered in attempting to turn Ukraine into a Western stronghold on Russia’s border….

Soviet leaders… and their Russian successors did not want NATO to grow any larger and assumed that Western diplomats understood their concerns. The Clinton administration evidently thought otherwise…. The first round of enlargement… 1999… the Czech Republic, Hungary, and Poland. The second… 2004… Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia. Moscow complained bitterly…. The alliance considered admitting Georgia and Ukraine…. Putin maintained that admitting those two countries to NATO would represent a “direct threat” to Russia….

The West’s triple package of policies–NATO enlargement, EU expansion, and democracy promotion–added fuel to a fire waiting to ignite…. On February 21, the government and the opposition struck a deal…. But it immediately fell apart, and Yanukovych fled to Russia the next day. The new government in Kiev was pro-Western and anti-Russian to the core, and it contained four high-ranking members who could legitimately be labeled neofascists. Although the full extent of U.S. involvement has not yet come to light, it is clear that Washington backed the coup…. For Putin, the time to act against Ukraine and the West had arrived….

Ukraine serves as a buffer state of enormous strategic importanc…. No Russian leader would tolerate a military alliance that was Moscow’s mortal enemy until recently moving into Ukraine. Nor would any Russian leader stand idly by while the West helped install a government there that was determined to integrate Ukraine into the West…. This is Geopolitics 101: great powers are always sensitive to potential threats near their home territory….

There is a solution to the crisis in Ukraine, however–although it would require the West to think about the country in a fundamentally new way…. Western leaders should acknowledge that Ukraine matters so much to Putin that they cannot support an anti-Russian regime there…. The United States and its allies should publicly rule out NATO’s expansion… considerably limit its social-engineering efforts inside Ukraine. It is time to put an end to Western support for another Orange Revolution…. Even if one… believes that Ukraine has the right to petition to join the EU and NATO, the fact remains that the United States and its European allies have the right to reject these requests…. Indulging the dreams of some Ukrainians is not worth the animosity and strife it will cause, especially for the Ukrainian people…

Mearsheimer appears to believe:

  1. There is a thinking entity called “Russia” which has preferences and interests, and which has rights to have its preferences satisfied and its interests accommodated.
  2. “Russia” has an interest in and prefers to have Kiev ruled by a corrupt thug pleasing to whatever corrupt thug currently rules in Moscow.
  3. The United States should not say “boo” to this: it should not seek to extend its security umbrella over Kiev, it should not seek greater economic integration with Kiev, it should not encourage the growth of a civil society and democratic polity in Kiev that would object to be ruled by a corrupt thug pleasing to Moscow.
  4. The rest of NATO and the European Union should also not say “boo” to this: they should not seek to extend its security umbrella over Kiev, they should not seek greater economic integration with Kiev, they should not encourage the growth of a civil society and democratic polity in Kiev that would object to be ruled by a corrupt thug pleasing to Moscow.

Needless to say, if Mearsheimer were to attempt to explain his reasoning to an intelligence from outer space–vast or not, cool or warm, sympathetic or unsympathetic–he would be met with vast incomprehension. It would see not Russia but Russians. It would see that many of those Russians believe that they and their ancestors belonged to various imagined communities in the past–the Tsarist Empire, the Union of Soviet Socialist Republics–but it would not see “Russia” as having interests in preferences. It would see Russians as such–and it would see Russians aggregating up their individual preferences into those of the community that they imagine they belong to and wish to belong to.

And the Russians have always–well, since Dmitri Donskoi–oscillated between seeking to and believing they belong to three different imagined communities, which have themselves changed over time. Think of each of these three in terms of its notional geographic center: Kiev, Novgorod, and Moscow.

The imagined community that is Kievan ‘Rus is the east most outpost of a Mediterranean and European-oriented civilization. It saw itself as in the sphere of influence of the Byzantine Empire ruled from Constantinople. And then, after the fall of Constantinople, it sought a place as a European marshland oriented toward Vilnius or Warsaw on which it relied to try to protect it from the steppe nomads–the Mongols and the Turks. capital of the Byzantine Empire-that-was, that is–and Warsaw.

Old Kiev, the city of Oleg and his Rurikid descendants, was oriented toward Constantinople, and via its Slavonic Orthodox church and Byzantine culture Kieven ‘Rus has retained a strong degree of orientation toward the rest of the Greek-orthodox world. But old Kiev’s residents were all slaughtered and the city razed in 1240 by Batu Khan’s Mongols. We see a rebuilt Kiev in 1262. It was ruled by Lithuanian princes. At first it owes allegiance and tribute to the militarily-stronger Khanate of the Golden Horde. After 1362 it is part of the Grand Duchy of Lithuania. After 1569 it is part of the Kingdom of Poland. In 1648 the Dneipr Cossacks allied with Muscovy to establish the Hetmanate. The hetmanate is first independent, then autonomous and self-governing but owing allegiance to the Muscovite Tsar in Moscow, and after 1775 neither independent nor autonomous nor self-governing. From 1775 until the fall of the Tsarist empire in 1918 Kiev was ruled from Moscow–but much of Kievan ‘Rus, what we now call the western Ukraine, was ruled from Vienna, with its major city of Lviv called Lemburg. After the 1918-1922 Russian Civil War Kiev was, again, ruled from Moscow until 1991–but it was a strange sort of rule, in which schoolchildren were taught that they were one of fifteen equal and autonomous union republics in the Union of Soviet Socialist Republics, of their own nationality, with their own language, traditions, history, and heritage; while behind the scenes all the shots were called in Moscow.

The imagined community that was the ‘Rus of Novgorod the Great has always been oriented toward the Baltic and the North Sea beyond: Sweden, Germany, the Hanseatic League, Holland, international trade. Peter the Great, the Romanov Czar of Muscovy, built St. Petersburg precisely because he wished his empire to imagine itself not so much Muscovite as Novgorodian. Peter saw Saint Petersberg as providing his Moscow-centered realm with “a window on the west” that was maritime Europe. But the Baltic littoral and as far inland as you could navigate a barge in summer did not need a window on the west: Novgorod (and Riga) were cities as European as Helsinki or Stockholm or Danzig.

And then there is the imagined community of Muscovy ‘Rus. Far enough north in the forests that the Mongols could not easily and permanently dominate it. Far enough east that western Europeans could not easily control it–as Karl XII Vasa discovered at Poltava in 1709, as Napoleon I Bonaparte discovered at Kaluga in 1812, and as Adolf Hitler discovered at Stalingrad in 1942. Muscovy ‘Rus is the civilization of the Third Rome, the heart of Slavonic Orthodoxy: neither western European, Middle-Eastern, nor steppe-Mongol. Muscovy ‘Rus is the civilization of the very strong leader–the vozhd–desperate for geographic buffers against invaders from the east, from the south, and most recently from the west. Moscow, after all, was sacked in 1238, 1382, 1571, 1610, and 1812, and what Hitler and the Nazi Germans did to Russia in 1941-1944 was worse by far than a mere sack.

The polity of the Tsars came to dominate the lands of all the Russians in a long slow process of fits and starts, and carried along with it a collective decision imposed by persuasion, force, and fraud that the Russians were to imagine that their community was Muscovy ‘Rus–not Kievan ‘Rus oriented toward Constantinople, Vienna, and Warsaw; not Novgorod ‘Rus oriented toward Stockholm, Copenhagen, and Hamburg. At least some of the Tsars who did the most to advance the political project of the Muscovite empire–Peter the Great, Catherine the Great, and Alexander I with his French-speaking aristocracy come immediately to mind–had at least mixed thoughts about this. They, it was clear, would have greatly preferred that the empire they were building has its heart in Novgorod ‘Rus rather than Muscovy ‘Rus. Consider: Peter I Romanov’s daughter Elizbeth I Romanov married a Russian. But afterwards Russian blood ran scarce in the family of the Tsar: Elizabeth brought her half-German nephew Peter von Holstein-Gottorp to Moscow and married him to Sophia von Askanien–who became Catherine the Great. Their son Paul I Romanov married Sophia Dorothea von Beutelsbach. Their son Nicholas I Romanov married Charlotte von Hohenzollern. Their son Alexander II Romanov married Marie von Hesse und zu Rhein. Their son Alexander III Romanov married Princess Dagmar of Denmark. And their son Nicholas II Romanov married Alix von Hesse und zu Rhein.

The ambivalent attitude of the rulers of ‘Rus toward their Muscovy power base came to a sharp end in 1917 with the accession to power of Vladimir Ilyich Ulyanov–Lenin. Lenin believed that he was a bit player in the great socialist revolution of the early twentieth century. It was his job, he believed to make the socialist revolution for the nationality of the Moscow-centered Great Russians. Other nationalities–Finnish, German, Estonian, Polish, Ukrainian, Georgian, Kazakh, and so forth–would make their own socialist revolutions. He would help to the extent that he could. But to take over was not his job. He did not aspire to rule the empire of the Tsars: he did not want to be the jailer of the prison-house of nationalities that the Romanovs had assembled under their rule. He sought, rather, to lead the Russian people–in comradely and brotherly alliance with their neighbors–into Karl Marx’s classless utopia. This made Lenin both an anti-nationalist and a cosmopolitan nationalist. He was an anti-nationalist in that–unlike nearly everyone else of his followers–he did not particularly care about the terms on which his Bolshevik Russia made its peace with Germany and withdrew from World War I. The German socialist revolution was imminent, after all, and after it took place borders would be adjusted and treaties rewritten in mutual brotherhood. He did not think that Russia should be great. He thought that peoples should be free–and socialist, and therefore allied.

Lenin’s successor Stalin would have none of this. He wanted the empire of the Tsars, and more. Local autonomy and local nationality were useful illusions with which to beguile, but power needed to be centralized in Moscow, in the Kremlin, and in Stalin. However, a strange thing happened. The formal structure of the USSR remained that of fifteen union republics. And the educational system of the Soviet Union taught everyone that their ethnicity was an honorable nationality of its own. And over seventy years people came to believe this: come 1991 the Estonians were more Estonian, the Ukrainians more Ukrainian, the Georgian more Georgian, and the Kazakhs and Tadjiks more Kazakh and Tadjik than they had been eighty years before.

Come the fall of the Soviet Union in 1991, therefore, we find that we have five overlapping and inconsistent lines of division/poles of attraction:

  1. The continued attraction of the peoples of all the Russias to the three different imagined communities–Orthodox/pan-Slavic/Polish Kievan ‘Rus, autonomous and separate Muscovite ‘Rus, and cosmopolitan-European Novgorod ‘Rus.

  2. 70 years of cultural and psychological nation-building of a separate nation in each union republic and, within the union republics, each autonomous region.

  3. A greater degree of ethno-linguistic fragmentation within the boundaries of the Soviet Union’s successor states than had been seen elsewhere in Europe since the 1920s–for with notably rare exceptions (cough, Crimean Tartars, cough, and others) Stalin’s terror was equal-opportunity (if with an anti-semitic bias) and did little to alter the ethno-linguistic balance of a region.

  4. Combined and uneven economic and political development in the successor states of the USSR.

  5. Historical memories of Muscovite domination from the Kremlin–cough, holodomor,cough–that do not make people who do not identify themselves as belonging to the Great Russian ethnos eager for another round…

And everyone involved is now all trying to work all of this out.

But where in all of this, an alien intelligence would ask, is it written in stone that whoever rules in the Kremlin speaks for Russia–or, at least, speaks for Muscovy ‘Rus–and his the right to install a corrupt thug of this choice in Kiev, or to veto any Kievan government he does not like?

If John Mearsheimer were a smarter man, he would, I think, be speaking not to Obama but to Putin. He would not be telling Obama to cool it on “social engineering” in–i.e., the economic development and democratization of–the Ukraine. He would be telling Putin that the imposition of Soviet puppet regimes in Poland, Czechoslovakia, East Germany, and Hungary produced an enormous running sore and was a long-term source of great weakness for the Soviet apparatchicks who ruled in the Kremlin. And he would be telling Putin that pulling the Crimea, Donetsk, and Luhansk away from Kiev will do more than anything else could to ensure that those who rule in Kiev will offer him and his successors in the Kremlin as little as possible. And that going beyond that to install and maintain a puppet regime in Kiev will do more damage to the security of Muscovy ‘Rus than almost anything else one could imagine.

Comment on: Janice Eberly and Arvind Krishnamurthy: Efficient Credit Policies in a Housing Debt Crisis

Comment on: Janice Eberly and Arvind Krishnamurthy: Efficient Credit Policies in a Housing Debt Crisis:

The banks got at lot of money very cheaply–5%/year preferred-stock money giving up neither equity nor debt control rights at a time when Warren Buffett, front-running the Treasury, was able to extract 10%/year plus enormous option kickers for the money he committed to bank rescue. The auto companies–they got money, but the unions took a substantial hit, and the top executives lost their jobs. The homeowners got…

It still is a mystery to me why we did not offer all underwater and above water homeowners a conforming-loan refi with equity kickers depending on how far underwater the homeowner was. We didn’t do that. We got rid of the debt overhang via foreclosures and (some) case-by-case renegotiations, and as Paul Willen says it was brutal and ugly.

But right now… we built, during the housing bubble, about 1 million single-family houses above trend. Since 2007 we have built between 500 and 600 thousand houses per year when long-run trend used to be 1.2 million a year. Netting out the 1 million extra houses built, we are now 4 million single-family houses short–4 million families who in a normal economy would be in their own homes are now living in their sisters’ basements, with little sign that the by-now enormous underhang relative to 1948-2008 housing trends is exerting any pressure for a single-family housing construction recovery.

SO why is this? Are potential homeowners unwilling to take on the types of risk they routinely took on? Is it lenders who are unwilling to take on the types of risk they routinely took on? Of course it is both. But what is clear is we haven’t unclogged the single-family housing credit channel. And the question is: is this an enormous social loss? Or should we never have established the previous housing-finance pattern in the first place?

A new and useful measure of inequality

Ask most economists about the level of inequality in a country and chances are they will first point to its Gini coefficient. The statistic gives a single number that shows the level of inequality in the distribution of any kind of good. It could be income, wealth, or consumption. The “Gini” is widely cited and very useful, but a new inequality measure, the Palma index, can help complement the Gini coefficient and other measures of inequality.

To understand the “Palma,” though, one first needs to grasp the intricacies of the Gini. The Gini coefficient ranges from 0 to 1, with a coefficient of 0 signifying a perfectly equal distribution and 1 a perfectly unequal distribution. In the first case, every individual or household has an equal amount of whatever it is that’s being measured—let’s say income. And in the second case, only one individual or household has all the income.

The calculation of the coefficient isn’t straightforward. Graphically, imagine a coordinated plane. The x-axis is the cumulative share of the population. If you’re at 0.9 on the axis then you’re at the point representing the first 90 percent of the population. The y-axis is the cumulative share of (for our purposes here) income.

Then there are two lines. The first is the line of equality. It has a slope of exactly 1, so that for each cumulative share of the population it has the same share of the cumulative income. For example, the first 50 percent of the population would have 50 percent of total income. The second line is the so called Lorenz curve, (named after the early 20th century U.S. economist Max O. Lorenz), which traces out the actual distribution of income in a given population, say, a country. So, for example, the first 50 percent of the population may have only 30 percent of income.

The coefficient is the ratio between the area under the line of equality to the area between the Lorenz curve and the line of equality. To give a concrete example, the Gini coefficient in the United States for post-tax and transfer income in 2010 was 0.434, a 21 percent increase since 1979.

Clearly, one flaw of the coefficient is that it’s not easy to explain. Furthermore, changes in the Gini coefficient don’t tell us where the changes in the distribution occurred. The Lorenz curve could shift in a number of ways and end up having the same area between it and the line of equality.

Yet another issue with the Gini is that it’s overly responsive to the changes in the middle of the distribution. If there are changes in the so called tails of the distribution—the low and high ends—then the Gini might not pick it up.

Enter the Palma index. The index was created by economists Alex Cobham of the Center for Global Development and Andy Sumner of King’s College London. Based on work of University of Cambridge economist Gabriel Palma, they point out that there isn’t much change across time or across countries in income going to the middle class after adjusting by income per capita for each country. In other words, middle classes don’t shrink or expand all that much overall so a measure of inequality that focuses on the tails may be more useful.

The Palma is simply the ratio of the share of income held by the top 10 percent of the population compared to the share of income held by the bottom 40 percent. Cobham and Sumner find that the Palma tracks the Gini well, so it captures the overall level of inequality well. But in some cases it can show increases in inequality that the Gini misses. Case in point: the Palma for post-tax income in the United States for 2010 was 1.98, a 43 percent increase since 1979. The larger increase compared to the Gini (21 percent) shows how much of the rising inequality was due to changes at the tails.

The likelihood that the Palma replaces the Gini coefficient as the singularly important inequality statistic is unlikely. But that isn’t the best way to use the statistic or any statistic for that matter. The Palma can serve as a complement to, not a substitute for, the Gini. And the two statistics should be used in concert with data on the shares possessed by certain segments of the population as well as other measures. When it comes to statistical measures, at least in this case, more is better.

Afternoon Must-Read: Amanda KowalskI: The Early Impact of the Affordable Care Act State-By-State

Amanda Kowalski: The Early Impact of the Affordable Care Act State-By-State: “In the individual health insurance market…

…at least 13.2 million people were covered in the second quarter of 2014, representing an increase of at least 4.2 million increase beyond pre-ACA state-level trends…. Market participants in ‘direct enforcement; states that ceded all enforcement of the ACA to the federal government are worse off by approximately $245 per participant on an annualized basis relative to participants in all other states…. Market participants in the six states that had severe exchange glitches are worse off by approximately $750 per participant on an annualized basis relative to participants in other states with their own exchanges…

Morning Must-Read: Cardiff Garcia: Slacking to Stand Still

Cardiff Garcia: Slacking to Stand Still: “A paper released last week by [Stephanie Aaronson et al.]… concludes that most of the decline in the labour force participation rate since the recession has been structural…. ‘Our cohort-based model suggests that cyclical weakness was depressing the participation rate by about ¼ percentage point in 2014:Q2’…

As I said before, this smells to me like overfitting: I want a reconciliation with Moffitt et al. (2012) and also a much better reconciliation with the behavior of the prime-aged participation rate as well:

NewImage

To quote Aaronson et al. (2006):

Increases in the participation rate of adult women likely stem from numerous structural factors…. It seems likely that new generations internalized many of these changes more easily than did mature cohorts, who had already made “sticky” choices…. Much of the change in the aggregate female participation rate appears to have resulted from progressively higher average participation rates of successive cohorts….. The participation rate for men in their prime working years… held steady during the strong labor market of the mid- to late-1990s. After turning down again during the 2001 recession, it has been fairly flat since 2002.

That is not the lead-in that would lead us to expect a conclusion that the 2.5%-point decline in prime-age participation since 2007 is “structural”…

Cardiff goes on:

The wider issue is that trends thought to be structural aren’t necessarily irreversible…. The dovish argument, to which we still subscribe, is that the only way to know is for the Fed to aggressively pursue [expansion until]… the labour market becomes so tight that employers feel they have no choice but to make work more attractive…. Year-on-year headline PCE inflation is 1.6 per cent through July, the last available reading–which also happens to be its average rate since the recession. That’s not only an extended period of undershooting 2 per cent, but also a staggering demand fail given what happened to labour markets in that period…. To further make incoming data, rather than time, the clear contingency on which to base monetary policy would be perfectly sensible…

Things to Read on the Morning of September 11, 2014

Must- and Shall-Reads:

 

  1. Adam Posen: The Old Normal for The World Economy

  2. Ryan Sweet and Adam Ozimek: U.S. Employment Outlook: Solving the Wage Puzzle: “The U.S. labor market has tightened, but wage growth remains mediocre at best. This appears counterintuitive: All else equal, falling rates of unemployment should prompt faster wage growth. Several potential explanations have been offered…. One is that the unemployment rate could be sending a false signal about the amount of slack in the job market. Another… blames pent-up wage deflation… firms could not cut nominal wages by as much as they wanted during the recession, and are thus reluctant to raise wages now…. Because the economies of U.S. states experienced different rates of recession and recovery, they offer a laboratory in which to test the pent-up wage deflation hypothesis…. In six states the unemployment rates are below NAIRU, while in four states it is 1.5 percentage points above full employment…. The pent-up wage deflation hypothesis predicts that wages will accelerate not steadily, but quickly once the tipping point is reached. While the data show some relationship between wages and the unemployment gap, the results show little evidence of an acceleration in wage growth as the economy approaches full employment. This suggests there is no pent-up wage deflation…. We believe the labor market still has considerable slack… includ[ing] workers unemployed longer than six months, those who left the workforce but will return once job opportunities appear, and part-timers who would prefer to work full time…. Because the unemployment rate is no longer an accurate measure of labor force, assumptions about the unemployment gap can produce incorrect expectations of when wages will accelerate…”

  3. Www cepr net documents publications aca pt 2014 09 pdfHelene Jorgensen and Dean Baker: The Affordable Care Act: A Family Friendly Policy: “Table 3 gives a breakdown of the distribution of part-time employment by age, gender, and whether or not the household has children. As can be seen, women accounted for the entire rise in voluntary part-time employment, with an increase of 3.2 percent in 2014 compared with 2013. By contrast, voluntary part-time employment for men actually fell slightly. Furthermore, it is younger workers, ages 16-35, who account for the bulk of the increase. The number of people in this age group voluntarily working part-time rose by 5.0 percent. By comparison it dropped by 5.2 percent for workers between the ages of 45-55. There were small rises of less than 1.0 percent for the other two age groups. The biggest increase in voluntary part-time is for young people with children. The percentage of employed young people with children working part-time increased 11.3 percent from 2013 to 2014. For young people with three or more children the percentage working part-time increased by 15.4 percent.”

  4. Henry Aaron, David Cutler, and Peter Orszag: Stop the Anti-Obamacare Shenanigans: “So far, opponents of the Affordable Care Act have lost every major battle to repeal or invalidate it. Some of them are now urging the courts to interpret the health reform law in a way that would guarantee its failure…. Having failed to undo the individual mandate to buy health insurance, opponents now claim that, under the law, subsidies for low- and moderate-income Americans to buy insurance may be paid only in those states–currently 14–that have set up their own online insurance exchanges. This would torpedo a central goal of the law: the expansion of coverage. At first, those of us who support Obamacare thought these claims were a joke. On July 22, the federal appellate court in Richmond, Va., rejected one such claim, but the same day, astonishingly, the federal appellate court for the District of Columbia Circuit ruled, 2 to 1, in favor of the plaintiff in a similar case, Halbig v. Burwell…. Now the opponents of Obamacare are asking the Supreme Court to immediately hear an appeal of the Richmond decision…. The law specifically instructed the secretary of health and human services to create and manage the exchanges for states that chose that option. And when the law was passed, everyone involved in the law’s passage understood that this directive vested federal exchanges with the same mission and authority as state-mandated exchanges…. Whatever one thinks of the Affordable Care Act, it is absurd to argue that its drafters intended to make insurance unaffordable.”

  5. Ricardo Hausmann: Why Are Growth Rates Converging Among Some and Diverging Among Others?: “When Adam Smith wrote The Wealth of Nations in 1776, per capita income in the world’s richest country–probably the Netherlands–was about four times that of the poorest countries. Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand. But, over the past three decades, the trend reversed. Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand…. Yet some countries are still diverging. While the Netherlands was 5.8, 7.7, and 15 times richer than Nicaragua, Côte D’Ivoire, and Kenya, respectively, in 1980, by 2012 it was 10.5, 21.1, and 24.4…. The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. An apt metaphor is a game of Scrabble…. Countries with few ‘letters’ lack incentives to accumulate more letters, because they cannot do much with any additional one: you would not want a TV remote control if you didn’t have a TV, and you would not want a TV broadcasting company if your potential customers lacked electricity. This trap becomes deeper the longer the alphabet and the longer the words…”

  6. Duncan Black: Who Cares?: “I have theories, but I do get a bit puzzled by the intensity of general anti-immigrant (read: anti-latino immigrant) sentiment in this country. Not surprised that it exists, just surprise at the intensity of the issue in certain segments of the population. I’ll switch back and forth between undocumented and documented immigrants a bit here probably, but what the hell could possibly motivate people to picket and scream at a bus full of refugee kids? On the flip side, here in the urban hellhole nobody seems to care. My fair city is hardly a shining example of racial harmony, but anti-immigrant sentiment appears to be incredibly muted. Of course it exists, it just doesn’t seem to exist with any intensity in the city.”

  7. Kessler: Don’t Be Fooled by Recent Hawkish Fed Commentary: “As we go into next week’s Fed meeting, the market has become consumed with the idea that the Fed funds rate may be raised earlier than the market expects…. A San Francisco Federal Reserve paper has pointed out that the Fed’s own expectations of when they will raise rates is on-average sooner than what the market… some Fed members have suggested it is time to remove a piece of language in the Fed statement promising a ‘considerable time’ between the end of QE3 and the first rate rise…. The Fed’s own expectation of rate rises comes from a survey of the 16 FOMC participants…. Doing this math suggests that the Fed expects the Fed funds rate to be 1.20% by the end of 2015 but, the Fed Funds futures market is priced such that the Fed Funds rate will be 0.77% at the end of 2015, a difference of nearly two 0.25% rate hikes (0.43%). This is the crux of the SF Fed paper…. The markets are not simply unaware… the markets are… more dovish… because… Plosser… Lacker… and… Fisher… have wanted to raise rates with any excuse tracing back to 2008…. These three (and a few others), are afraid of something they have no evidence of (runaway inflation around any corner), and are too insulated from main street…. If the highest three votes in the Fed expectations survey are removed, the average Fed expectations align… with… the market…. The housing market has clearly rolled over, consumer spending hasn’t shown life, and the all-important wage growth is lackluster. The mostly academic Fed is too smart to use the excuse of the ‘air’ of recovery to make a hawkish move. There is simply no reason for it.

  8. Matthew C. Klein: Wealth effect may one day stop being so great for wealthy, says wealthy person

Should Be Aware of:

 

  1. Pierre-Cyrille Hautcoeur, Angelo Riva, and Eugene N. White: Banque de France’s 1889 ‘lifeboat’ bank rescue : “The key challenge for lenders of last resort… >…is to ameliorate financial crises without encouraging excessive risk-taking…. The lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines–notably on the Comptoir’s board of directors. This appears to have reduced moral hazard–there were no financial crises in France for 25 years…”

  2. Simon Wren-Lewis: Types of Unemployment: “[In] Pascal Michaillat and Emmanuel Saez[‘s model]… the labour market has an identical search structure to the goods market…. As labour market tightness increases, any vacancy is less likely to result in a hire…. Profit maximisation determines capacity, not output. Output is influenced by capacity, but it is also influenced by aggregate demand. Now consider an increase in the aggregate demand for goods, caused by–for example–a reduction in the price level. That results in more visits to producers, which will lead to more sales…. This leads firms to want to increase their capacity, which means increasing employment…. This increases labour market tightness and reduces unemployment…. In this model unemployment can be of three ‘types’: classical (w too high), Keynesian (aggregate demand too low), but also frictional. This model can also generate four ‘regimes’…. We do not need to ask whether demand is greater or less than ‘supply’, but equally we do not presume that output is always independent of ‘supply’…”

  3. Jed Lewison: McConnell campaign says aide at center of bribery scandal was paid nearly $500k to hold his nose: “Senate Minority Leader Mitch McConnell and his team aren’t saying anything about… Jesse Benton amid a Ron Paul presidential campaign bribery scandal. But Joe Sonka flags one thing that they are saying—and why it’s hilarious: ‘Behind the scenes, McConnell’s campaign staff has tried selling journalists on the talking point that Benton wasn’t an important part of the campaign, and that his longtime aide Josh Holmes has been running the show. If that is true–and it might be–one has to ask why McConnell’s campaign committees and the Republican Party of Kentucky have paid Benton a salary of $458,000 for his work as campaign manager. In other words, explaining that you paid someone an extraordinary amount for a job that wasn’t very important is difficult when the person in question is at the center of a scandal where someone was bribed by a campaign for political support.’ In fact, if it’s true that McConnell paid Benton a half-million dollars for what amounted to a no-show job in which his only responsibility was preventing tea partiers from dethroning the five-term senator, doesn’t that sound an awful lot like a bribe, or at a minimum, pay-to-play? I mean, in Benton’s own words, he didn’t like McConnell. He was just holding his nose—and getting a fat paycheck for doing so—until Rand Paul’s 2016 presidential campaign. That actually raises another question: What promises, if any, did Mitch McConnell make to Rand Paul about 2016? Of course, now that Benton is gone, those promises are probably inoperative, which means not only is it questionable whether Benton will play any role in Paul’s campaign, but it’s almost certain that McConnell won’t deliver whatever help that he promised to send Rand’s way. That’s the thing about making deals with liars and cheats: If they can break their word, they will.”

  4. Miles Kimball: Safe, Legal, Rare and Early: “Even after birth, loving parents feel a baby becoming more and more precious with every passing day. And with passing time, the child gains a greater and greater consciousness of its own existence, and (in all but pathological cases) its own strong desire to live. At the other end, even before conception, I like to think that even the unconceived have at least some small ethical interest in getting a chance to become an actual human being. So to me, there are no sudden ethical jumps, but instead, a gradually increasing ethical weight to a developing human life, at least from shortly before conception to shortly after birth…”

  5. Charles Pierce: Here’s Some Stupid For Lunch: “I hate to do it, but welcome to the Cafe, my man Chuck Todd…. In one of his first acts as the caretaker at journalism’s Overlook Hotel… Chuck interviewed the president and… note the gotcha smirk on the screengrab… told the president that the latter had not mentioned the word “Syria” yet in the interview. Except, well, you can see this coming, right? ‘THE PRESIDENT:… the schism between Sunni and Shia that has been fueling so much of the violence in Syria…. ‘CHUCK TODD: You’ve not said the word, “Syria,” so far in our conversation.’…. That, by the way, was the fourth time the president had mentioned Syria in the interview in which my man Chuck said he hadn’t mentioned Syria at all. Rookie mistake. Could have happened to anyone. No, what gets my man Chuck the prime seat at this lunch counter is the clumsy little tap-dance he did to try and distract us from said mistake. ‘CHUCK TODD: Part one of my interview there. Some of you may have noted that I said the president hadn’t mentioned the word “Syria” at all in one of my questions. He had mentioned it, but he hadn’t said whether he was taking military action there.’ Dear lord, they’re not even trying hard any more.”