Category: Equitablog

Kevin Drum: Welfare Reform and the Great Recession “CBPP…. Welfare reform… in its first few years…

…seemed like a great success… but it was a bubbly economy that made the biggest difference. So how would welfare reform fare when it got hit with a real test? Answer: not so well. In late 2007 the Great Recession started, creating an extra 1.5 million families with children in poverty. TANF, however, barely responded at all. There was no room in strapped state budgets for more TANF funds…. This is why conservatives are so enamored of block grants. It’s not because they truly believe that states are better able to manage programs for the poor than the federal government. That’s frankly laughable. The reason they like block grants is because they know perfectly well that they’ll erode over time. That’s how you eventually drown the federal government in a bathtub. If Paul Ryan ever seriously proposes—and wins Republican support for—a welfare reform plan that includes block grants which (a) grow with inflation and (b) adjust automatically when recessions hit, I’ll pay attention. Until then, they’re just a Trojan Horse…. After all, those tax cuts for the rich won’t fund themselves, will they?

Paul Krugman: Core Success: “Cecchetti and Schoenholtz on core inflation…

reminds me that this concept, too, has been a huge success…. Those of us who looked at core inflation came in for a lot of abuse during the ‘debasing the dollar’ period of 2010-2011, when right-wingers were writing to Ben Bernanke to attack his policies and Paul Ryan was warning that rising commodity prices were the harbinger of runaway inflation. Assertions that fundamental inflation hadn’t gone up were met with ridicule and insults. But sure enough, the commodity price effect on inflation was a blip, and went away. And the inflation hawks learned their lesson, and revised their models. Hahahaha–just kidding.”

Binyamin Applebaum: On the Decline in Labor Force Participation: “Davis and Haltiwanger attribute… to the aging of the work force…

…as people get older, they tend to change jobs less frequently. The decline in the creation of new companies is also playing a role. In effect, companies are getting older, too. This has been particularly pronounced in the retail sector, where giants like Walmart and McDonald’s offer relatively stable employment…. The cost of training workers has increased, partly because the share of all workers who require government licenses has grown by one estimate from about 5 percent in the 1950s to 29 percent in 2008. This discourages hiring. So do legal changes that have made it more difficult to fire employees…. It also mentions health insurance as a reason that employees may stay put. In the view of Mr. Davis and Mr. Haltiwanger, the recession just made a bad situation worse….

But economists and policy makers will have to reconcile the assertion that these trends were the dominant factors with the reality that the employment rate rose in the years before the recession, then dropped sharply during the recession. The new paper, like others of its genre, basically requires belief in a big coincidence: that a short-term catastrophe happened to coincide with the intensification of long-term trends — that the economy crashed at the moment that it was already beginning a gradual descent.

Extra Credit for the Weekend: Janet Yellen: Labor Market Dynamics and Monetary Policy

James Pethokoukis: Does the GOP Have a Policy or a Messaging Problem? Both “Byron York…. ‘The reformers face resistance…

not just from the corners of the conservative world that disagree with them on taxes, immigration, and other, perhaps lesser issues. They are also under attack from those in the Republican establishment who see no need to reevaluate GOP policies. According to this faction, the party doesn’t have a policy problem; it has a messaging problem.

Obviously I think the GOP has a policy problem. But that aside, Rs should not underestimate just how bad their messaging problem is…. GlobalStrategyGroup…. While voters by a huge margin prefer candidates focused on ‘more economic growth’ versus ‘less income inequality’, voters also think… raising the minimum wage and guaranteeing a minimum wage–are better for growth than  business tax cuts or reducing top marginal income tax rates…. And… voters seem to have a much broader view of what policies qualify as ‘pro-growth’. Whatever the economic argument the GOP is making, the party does not seem to be making it very well.

In the email:

Professor DeLong–I’m the Program Director for a new channel that’s a partnership with the Wharton School. Read about us here: http://www.siriusxm.com/businessradio

Would you be available… between 1 and 1:30 pm ET to join us on our “Behind the Markets” program? Our host is Wharton Finance Professor Jeremy Siegel.

Yes! Jeremy Siegel is always worth talking to!!

1:00 pm – 2:00 pm: Behind The Markets:

Anyone can follow the ups and downs of Wall Street numbers—but on Behind the Markets get the insight you need to make the calls that will make or break your business. Host Jeremy Schwartz is joined each week by Wharton Finance Professor Jeremy Siegel, the author of Stocks for the Long Run, “the” book about stocks for market insiders. They’ll discuss the how and why behind the market’s performance, and talk with leading economists and market strategists about what’s ahead for the economy and your portfolio.

Anne VanderMey: Joe Blasi’s Easier Solution to Wealth Inequality?: “Joseph Blasi… along with… Richard Freeman and Douglas Kruse, wrote…

…The Citizen’s Share: Reducing Inequality in the 21st Century… corporate profit-sharing, employee stock ownership, and stock option plans…. The idea is rooted, he says, in the Founding Fathers’ original vision of widespread land ownership…. ‘Why isn’t our plan radical?’ Blasi asks. ‘Because the founders of the American revolution had this view. That broad-based capital ownership was necessary for the republic to exist.’… ‘We have to find a way for citizens to have some ownership of the technologies of the future…. We could have a future where technology creates a low feudal serf class—people with low wages or flat wages or high structural unemployment… or… a future where we have a smaller workweek and citizens broadly have more capital ownership’…

Must- and Shall-Reads:

• Jesse Livermore: Fixing the Shiller CAPE: Accounting, Dividends, and the Permanently High Plateau
• Mark Thoma: A Conversation with Peter Diamond

• Carola Binder: Wage Inflation and Price Inflation

• Matt O’Brien: Worse than the 1930s: Europe’s recession is really a depression: “As I was arguing last week, it’s time to call the eurozone what it really is…. Six and a half years later, Europe has distinguished itself by not having much of a recovery at all. And, as you can see above, that’s about to make it worse than the worst of the 1930s…. It’s a policy-induced disaster. Too much fiscal austerity and too little monetary stimulus have crippled growth like almost never before. Europe is doing worse than Japan during its “lost decade,” worse than the sterling bloc during the Great Depression, and barely better than the gold bloc then—though even that silver lining isn’t much of one. That’s because, at this rate, it’ll only be another year until the eurozone is well behind the gold bloc, too. So how is Europe making the Great Depression look like the good old days of growth? Easy: by ignoring everything we learned from it…. The euro is the gold standard with moral authority. And that last part is the problem…. Europe is stuck with a fixed exchange system that doesn’t let them print, spend, or devalue their way out of a crisis. But, unlike then, Europe might never give it up. It’s a fidelity to failure that even the gold bloc couldn’t have imagined. And that leaves the ECB as Europe’s only hope—which means they’re probably doomed…. They have made a desert, and called it the eurozone.”

• Scott Sumner: Black Swans: “Brad DeLong… is mildly critical of Shiller… in almost precisely the same way that I am…. DeLong and I think… the real mystery [is] not so much why stocks were so high in 1929, 2000, and now, but rather why they were so low 90% of the time. I think WWI is a great black swan example, but… I’d like to throw out another possible black swan—1968…. Switching to a permanent fiat system was much more inconceivable to people in the old days than you might imagine…. Even Keynes opposed a pure fiat regime, and viewed these historical examples as sort of pathological cases…. DeLong identifies three periods when stock investors did poorly over the following 10 years—right before WWI, the late 1960s and early 1970s, and the late 1990s. Even today I’m not sure exactly how much of the poor stock market performance of 1968-81 was due to the Great Inflation…. I am confident, however, that moving to a fiat money regime was a black swan for the US 30-year Treasury bond market, and pretty much every other bond market as well.”

• Alex Tabarrok: Ferguson and the Modern Debtor’s Prison: “How does a stop for jaywalking turn into a homicide and how does that turn into an American town essentially coming under military control with snipers, tear gas, and a no-fly zone? We don’t yet know exactly what happened between the two individuals on the day in question but events like this don’t happen without a deeper context. Part of the context is the return of debtor’s prisons that I wrote about in 2012…. You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant ‘low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay’…”

• Cardiff Garcia: Video and review: “The System Worked”, by Dan Drezner “I kept thinking of the well-publicised conversation… in January 2009…. Geithner: ‘Your accomplishment is going to be preventing a second Great Depression.’ Obama: ‘That’s not enough for me. I’m not going to be defined by what I’ve prevented.’ Geithner: ‘If you don’t prevent a depression, you won’t be able to do anything else.’ Obama: ‘I know. But it’s not enough.’ For global economic governance, as opposed to Presidential legacies, avoiding economic catastrophe when catastrophe was a non-trivial possibility is enough. That’s the case made by Drezner…. So, was it indeed good enough? Sluggish recovery in the US accompanied by lower median incomes. Double-dip recession in Europe…. Ongoing stagnation in Japan pending the outcome of Abenomics. Slowing growth in China…. A Bank for International Settlements that called for tighter money earlier than any reasonable analysis could justify. Currency wars. An IMF that pushed austerity before a later volte-face, not to mention its numerous mistakes in tackling the euro zone crises…. All of these items would suggest a deep failure….
  &nbsp
  “Drezner… begins by highlighting the scale of the global collapse…. And yet, despite important local exceptions, the worst global consequences of the Depression were avoided…. Later mistakes were inexcusable, especially the turn to austerity and premature monetary tightening in Europe. Yet many of these subsequent errors were national policy failures and ‘had little or nothing to do with foreign economic policy or adherence to global governance structures’–admittedly a fine and not always obvious distinction…. I find the argument persuasive….
   
  “But ‘good enough’ is a tough sell, and my colleague Alan Beattie isn’t buying…. Alan writes: ‘The truth, as both of us I think admit, is that the record of global governance is patchy, and its results even now uncertain’…. whether the system as a whole worked is probably less important than knowing how to distinguish between the parts that worked and the parts that failed. The forthcoming book by Barry Eichengreen, whose data Drezner cites, appears to split the difference. Beattie refers to the resilience of wrong-headed ideologies…. Consider how much commentary about the crisis has naturally focused on the long list of subsequent policy failures. It’s good to have at least one book emphasising that the list could have been much longer still…”

• Willem H. Buiter: The Simple Analytics of Helicopter Money: Why It Works – Always: “A permanent/irreversible increase in the nominal stock of fiat base money rate which respects the intertemporal budget constraint of the consolidated Central Bank and Treasury…. Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.”

• 3rdMoment: On Bob Shiller and CAPE: “While I have great respect for Shiller, I don’t understand his confidence that the CAPE is likely to return to it’s historical average of around 16…. 1. The average levels of CAPE in most of the last century appear, with hindsight, to have been puzzlingly low…. 2. There has been a large shift in corporate payout mix, from virtually all dividends in the past, to a roughly equal mix of dividends and share repurchases today. This by itself will add a couple of points to CAPE…. 3. Some other accounting changes… might raise the CAPE…. 4. Lower information and transaction costs and the rise of index investing have dramatically lowered the cost of maintaining a globally diversified portfolio…. 5. The real ‘risk free’ return on treasuries seems to be very low…. This lowers the return stocks need to be attractive by comparison…. Some of these reasons are more certain than others, but taken together they seem to show that we have good reason to expect CAPE levels significantly above the historical average going forward. Are there any countervailing reasons offsetting the list above, factors that would tend to make CAPE lower than in the past? I can’t really think of any. And I haven’t seen anybody else offering any.”

• Scott Lemieux: “Textualists” Decline to Cite Inconvenient Text “The premise… is that if close attention to isolated textual clauses produces an outcome that will cause millions of people to lose health care coverage, ‘with reluctance’ these people must be sacrificed to… ‘textualism’. Never mind that your theory… produces an absurd result inconsistent with what everyone understood the statute to mean…. Needless to say, this theory has less than no chance of convincing anybody who doesn’t share the fanatical opposition to the ACA of the people who developed it. Fortunately, there’s a remedy… the en banc rehearing…. The architects of the Halbig litigation are desperate to avoid this outcome…. An obvious problem for these ‘textualists’… is that not… the relevant textual passage of the Federal Rules of Appellate Procedure specifically cites circuit splits as an example of… the ‘exceptional importance’ that merits en banc review.
   
  “So how do the Halbig architects in their deep reverence for textual language deal with this? Briane Gorod[:]… ‘Funnily enough, these ostensible textualists declined to cite—even once—the text of the rule…. The law’s challengers try to distract… by pointing to a number of cases in which the D.C. Circuit (and other courts) declined to grant en banc review.’… Parody is killed again. Now, you might say that this is flagrantly unprincipled. But, to borrow Mark Tushnet’s line, it is simultaneously 0% and 100% principled. Obviously, they don’t really care about their particularly unattractive and unworkable version of ‘textualism’. The principle of ‘we must pursue any ad hoc legal theory that has a chance of sabotaging the Affordable Care Act’, though–they’re deeply committed to that one.”

• On wages and inflation: jeers for fears: “We live in disinflationary times. Technological innovation in uniquely labour-saving sectors and globalisation holding down goods prices and wages. Aging populations. Stagnationist trends combined with inadequate crisis response policy, resulting in persistent global economic slack…. US headline PCE inflation has averaged 1.6 per cent since the start of the recession–a tremendous demand fail given the severity of the downturn and the ensuing sluggishness in real growth during the recovery. Deflation is still a legitimate worry in Europe, where inflation expectations have just tumbled again…. An uptick in wage growth from its currently weak pace wouldn’t necessarily be inflationary, at least not right away. We’ve recently come across two helpful items–one from a BCA Research note and another from an article by Chicago Fed economists–explaining why. Martin Barnes…. ‘If wage trends are going to be a key determinant of Fed policy, then there is a risk that policy could be tightened prematurely…. In some ways, the technological and global forces that are depressing employee compensation give support to the idea that the economy may struggle to return to more normal growth rates. At the extreme, it even supports the secular stagnation thesis. If that is the case, then the Fed would be justified in taking a cautious approach to tightening–even if wage growth picks up.’… [Cleveland] Fed economists [Edward S. Knotek II and Saeed Zaman]…. ‘Connections among wages, prices, and economic activity are more akin to a tangled web than a straight line…. We document evidence of a more stable wage Phillips curve than a price Phillips curve, which is consistent with the idea that subdued wage growth is symptomatic of the existence of slack in the labor market. But given wages’ limited forecasting power, they are but one piece in a larger puzzle…'”

Should Be Aware of:

And:

• Neil Irwin: Why the Middle Class Isn’t Buying Talk About Economic Good Times
• Peter Cappelli: Skill Gaps, Skill Shortages and Skill Mismatches: Evidence for the US
• The Feynman Lectures on Physics
• Uwe Reinhardt: You Think Financing U.S. Health Care Is Bizarre? Check Out 340B Drug Pricing