Category: Equitablog

Corey Robin sends us to John Stuart Mill: War and Commerce: “But the economical advantages of commerce…

are surpassed in importance by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, in the present low state of human improvement, of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. Commerce is now what war once was, the principal source of this contact.

Daniel Kuehn: Facts & other stubborn things: Quick thoughts on “How to Pay for the War”: “I’ve recently been leafing through a first edition…

of Keynes’s How to Pay for the War…. It’s a really fascinating read…. I like it a lot for a couple reasons: 1. First it highlights quite explicitly the mission that is animating Keynes pretty much from the beginning, which is how a free society works in the modern economy. He sees one group of people who embrace a free society that pretend there is nothing really different about a modern economy (what he refers to elsewhere as ‘laissez faire’, and then he sees another group that understands there is something different but addresses it by abandoning the free society (communists and fascists). He thinks that neither are a viable option. This understanding of his role is there throughout his life, but it comes out very clearly in How to Pay for the War. 2. The General Theory is detailed on investment theory but not as detailed on consumption…. [Here] Keynes seems to really deal a lot more with micro consumption behavior, which is understandable since he’s talking about intertemporal public finance and tax issues. 3. He is talking about slowing growth and fighting inflation. A lot of people act like Kenyes forgot to address this, sometimes based on nothing more than a well circulated Hayek Youtube video…. 4. He talks about expectations for post-war slumps, and as anyone that knows about his exchange at the Fed in ’43 I believe (maybe ’42) he is not pessimistic about it like Samuelson was at the time. 5. He carries over critiques of price controls and rationing that echo insights into consumer theory that he was making as far back as Economic Consequences of the Peace.

Over at Twitter, @TheStalwart dares me to make the #inflationbear case. I do so in 17 tweets:

(1/17) In the 27 years that Greenspan and Bernanke he were chairs of the Federal (2/17) Reserve annual real GDP growth stopped cold or actually (3/17) fell once every nine years or so. These recessions took place without the Federal Reserve wishing for a (4/17) recession to curb inflation. These recessions took place even though the Federal (5/17) Reserve thought it was following appropriate, stabilizing monetary policy. (6/17) A decade ago I would have said that the American economy had strong equilibrium restoring forces: (7/17) that the chances of another recession before full recovery to no.@TheStalwart small. I cannot say that today. The chances of another recession now look more or less normal (9/17) 50-50 or so in the next five years.

And should such a recession come, the Federal Reserve will not be (10/17) able to lower interest rates to fight it. And should such a recession come, the Federal Reserve has (11/17) shown it has no taste for the extraordinary balance-sheet expansions needed to effectively fight it. (12/17) And should such a recession come, the broken politics of Washington prevent fiscal expansion to (13/17) stabilize aggregate demand. And should such a recession come, Tim Geithner by failing to take (14/17) the equity of the too-bit-to-fail-banks burned up the political will for finance-sector anti-recession (15/17) policies.

A Federal Reserve where a large chunk of the FOMC takes 2%/year as an inflation ceiling. (16/17) A government that is out of ammunition should there be another adverse shock. The lower tail in (17/17) which PCE inflation over the next decade significantly undershoots 2%/year is thick.

The past 17 tweets have been the #inflationbear case. I do not stand behind them as a forecast: they are a scenario only

Weekend Reading: US Federal Reserve Chair Janet Yellen and Managing Director of the International Monetary Fund (IMF) Christine Lagarde: Inaugural Michel Camdessus Central Banking Lecture on Financial Stability’, at the IMF

CHRISTINE LAGARDE: Oh, my goodness. Madam Chairman, you have impressed us enormously with a rich, dense, very informative and very candid read — your read of the current situation and how monetary and macroprudential — monetary policy and macroprudential tools could be used in sequence, in parallel, in different circumstances. And I would like to, maybe following the Stradivarius analogy of Michel, to stay loyal to (our man ?) today, what would you say? Would you say that macroprudential tools are second fiddle to the main Stradivarius of monetary policy? Or would you say that, depending on circumstances, macroprudential tools become the first violin and have to deal with the issues as a first line of defense?…

Should-Reads:

1. Noah Smith: John Cochrane’s thoughts on the recession and recovery: “A ‘demand-side’ recession should see a drop in inflation, and a ‘supply-side’ recession should see a rise in inflation…. It’s unlikely that the economy is as simple…. But the intuition is still there. Consider Cochrane’s proposed alternative reasons for the slow recovery: 1) policy uncertainty, 2) regulation and taxes, and 3) redistribution. All of these things are basically impediments to the production process–i.e., they make it more costly to produce things…. Higher costs should get at least partially passed on to the consumer in the form of higher prices…. Now, it’s possible to write down a macro model in which anticipation of higher costs tomorrow actually causes prices to go down today. In fact, for any X, it’s probably possible to write down a modern macro model in which X happens. But this idea goes strongly against basic economic intuition. The Cochrane/Taylor/Mulligan/Prescott/Baker/Bloom/Davis thesis isn’t obviously wrong, but it’s obviously counterintuitive…. But there is also the issue of parsimony. Cochrane writes: ‘These [policy] problems did not cause the recession. But they are worse now, and they can impede recovery and retard growth.’ I think people naturally see the recession and the recovery as one single phenomenon, and tend to prefer explanations in which there is only one cause for both. If you have two completely separate explanations–one for the recession and one for the slow recovery–you’re adding a lot of free parameters… [and] model complexity should be penalized, as with some sort of information criterion…”

2. Adam Ozimek: Why You Don’t Need To Be A Paternalist To Embrace Welfare Paternalism: “Incentivizing work is consistent with… non-paternalis[m] when you remember that the government on net disincentivizes work and employment… the status quo is that many people are probably working an inefficiently low amount. On the margin, incentives that lean towards work and against leisure probably increase efficiency…. If giving someone money means they choose less work and more leisure that is fine, and they are better off. However welfare recipients choose to spend their money, they are better off…. No, the instinctive support for working that many feel has a completely non-paternalistic basis: given the world we live in, on many margins working more has positive spillovers, and is economically efficient…”

Should Be Aware of:

• Stephanie Aaronson et al. (2006): Lars Svensson: The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply
• Virginia Heffernan and Gemma Correll: “Death of an Unpublished Tweet: A flowchart helps you decide which of your bright ideas to post, and which to compost…”
• William G. Gale and Peter R. Orszag (2002): A New Round of Tax Cuts?
• Timothy B. Lee: Larry Lessig raised $5 million to reform campaign finance. Now he needs GOP support

And:

1. Evan Soltas/Kindea Labs: America’s Real Racism Problem — Visualized:

2. Jaume Ventura and Alberto Martin: Managing Credit Bubbles: “Changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an ‘optimal’ bubble size that trades off these two effects and maximizes long-run output and consumption. The ‘equilibrium’ bubble size depends on investor sentiment, however…. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the ‘optimal’ bubble by taxing credit when the ‘equilibrium’ bubble is too high…. The same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it….”

3. Robert Sanders: Extinct human cousin gave Tibetans advantage at high elevation: “Tibetans were able to adapt to high altitudes thanks to a gene picked up when their ancestors mated with a species of human they helped push to extinction, according to a new report by University of California, Berkeley, scientists…. An unusual variant of a gene involved in regulating the body’s production of hemoglobin… became widespread in Tibetans after they moved onto the high-altitude plateau several thousand years ago. This variant allowed them to survive despite low oxygen levels at elevations of 15,000 feet or more, whereas most people develop thick blood at high altitudes, leading to cardiovascular problems. ‘We have very clear evidence that this version of the gene came from Denisovans’,” mysterious human relative that went extinct 40,000-50,000 years ago, around the same time as the more well-known Neanderthals, under pressure from modern humans, said principal author Rasmus Nielsen, UC Berkeley professor of integrative biology. ‘This shows very clearly and directly that humans evolved and adapted to new environments by getting their genes from another species.’ Nielsen and his colleagues at BGI-Shenzhen in China, the world’s largest genome sequencing center, will report their findings online on July 2 in advance of publication in the journal Nature…”

4. Lars Syll: Krugman on the relevance of the history of economic thought: “Being myself the author of seven books on the history of economic thought I can’t but applaud Krugman’s plaidoyer…. The financial crisis of 2007-08 and its aftermath definitely shows that something has gone terribly wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable…. Modern mainstream macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’…. Mainstream macroeconomists… want to be able to use their hammer. They decide to pretend that the world looks like a nail and that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption–and the ensuing results are financial crises and economic havoc…”

Already-Noted Must-Reads:

1. Robert Shiller: “[Eugene Fama] Is a Careful Researcher, an inspired researcher. I don’t know if Fama ever states his theory really clearly, if he did it might sound a little odd…. I shouldn’t try to psychoanalyse Eugene Fama but I know that he is committed… to a libertarian philosophy, teaching at the University of Chicago where Milton Friedman once lived. It must affect your thinking somehow that they really believe in markets. I think that maybe he has a cognitive dissonance. His research shows that markets are not efficient. So what do you do if you are living in the University of Chicago? It’s like being a Catholic priest and then discovering that God doesn’t exist or something, you can’t deal with that, you’ve got to somehow rationalise it…. Some people who seem crazy turn out to be smart after all. Apparently that is what Fama thinks. I think they are just crazy,” Shiller said, conceding his remarks “may be insulting” to his fellow laureate…. [He has a] fundamentally different view of the world. That’s the world we live in, when it comes to economics people have emotions, it’s not like chemistry or physics…”

2. Lars Svensson: Why leaning against the wind is the wrong monetary policy for Sweden: “Sweden has pursued a tighter monetary policy than is necessary to achieve the inflation target in order to reduce risks associated with household indebtedness…. According to the Riksbank’s own recently published calculations, the benefit of this policy – in the form of lower risks from household debt – is completely insignificant compared to the cost in terms of higher unemployment and lower inflation. Since inflation has fallen much below the inflation target and households’ inflation expectations, the policy has instead actually increased households’ real debt burden and, if anything, increased any risks from the debt. Thereby it has made more difficult the work of the Finansinspektionen (FI, the Swedish FSA) to reduce any such risks…”

4

Robert Shiller: “[Eugene Fama] is a careful researcher, an inspired researcher….

…I don’t know if Fama ever states his theory really clearly, if he did it might sound a little odd…. I shouldn’t try to psychoanalyse Eugene Fama but I know that he is committed… to a libertarian philosophy, teaching at the University of Chicago where Milton Friedman once lived. It must affect your thinking somehow that they really believe in markets. I think that maybe he has a cognitive dissonance. His research shows that markets are not efficient. So what do you do if you are living in the University of Chicago? It’s like being a Catholic priest and then discovering that God doesn’t exist or something, you can’t deal with that, you’ve got to somehow rationalise it…. Some people who seem crazy turn out to be smart after all. Apparently that is what Fama thinks. I think they are just crazy,” Shiller said, conceding his remarks “may be insulting” to his fellow laureate…. [He has a] fundamentally different view of the world. That’s the world we live in, when it comes to economics people have emotions, it’s not like chemistry or physics…

Lars Svensson: Why leaning against the wind is the wrong monetary policy for Sweden: “Sweden has pursued a tighter monetary policy than is necessary…

…to achieve the inflation target in order to reduce risks associated with household indebtedness…. According to the Riksbank’s own recently published calculations, the benefit of this policy – in the form of lower risks from household debt – is completely insignificant compared to the cost in terms of higher unemployment and lower inflation. Since inflation has fallen much below the inflation target and households’ inflation expectations, the policy has instead actually increased households’ real debt burden and, if anything, increased any risks from the debt. Thereby it has made more difficult the work of the Finansinspektionen (FI, the Swedish FSA) to reduce any such risks…

Should-Reads:

1. Joseph P. Newhouse and Thomas G. McGuire: How Successful Is Medicare Advantage?: “Beneficiaries make ‘mistakes’ in their choice of MA plan options that can be explained by behavioral economics…. The high prevalence of ‘zero-premium’ plans signals inefficiency in plan design and in the market’s functioning…. The adverse selection problem, in which healthier, lower-cost beneficiaries tend to join MA, appears much diminished. The available measures, while limited, suggest that, on average, MA plans offer care of equal or higher quality and for less cost than traditional Medicare…. Medicare policies regarding lock-in provisions and risk adjustment that were adopted in the mid-2000s have mitigated the adverse selection problem previously plaguing MA…. Policy changes in Medicare that reform the way that beneficiaries are charged for MA plan membership are warranted to move more beneficiaries into MA…”

2. Nick Bunker: What is compensation? And what should it be?: “Given the wide range of employee benefits provided by employers and the difficulty in sometimes providing those benefits, we have to ask if employers are the right vehicles for providing some non-wage benefits. Perhaps the provision of some these benefits are better handled by the federal government. And some benefits might be best left for workers to purchase in the market with their wage earnings. These questions about the proper role of employer and government in providing benefits are some of the most controversial in our policy debates. But that intensity is just a sign that they are the questions we should be asking and need to answer…”

3. Paul Krugman: Build We Won’t: “The aftermath of the bursting bubble was (and still is) a very good time to invest in infrastructure…. But what actually happened was exactly the opposite: an unprecedented plunge in infrastructure spending. Adjusted for inflation and population growth, public expenditures on construction have fallen more than 20 percent since early 2008. In policy terms, this represents an almost surreally awful wrong turn; we’ve managed to weaken the economy in the short run even as we undermine its prospects for the long run. Well played!And it’s about to get even worse…. How did things go so wrong? As with so many of our problems, the answer is the combined effect of rigid ideology and scorched-earth political tactics…. It’s hard to think of any good reason why taxes on gasoline should be so low, and it’s easy to think of reasons, ranging from climate concerns to reducing dependence on the Middle East, why gas should cost more…. The collapse of public investment was, therefore, a political choice. What’s useful about the looming highway crisis is that it illustrates just how self-destructive that political choice has become. It’s one thing to block green investment, or high-speed rail, or even school construction. I’m for such things, but many on the right aren’t. But everyone from progressive think tanks to the United States Chamber of Commerce thinks we need good roads. Yet the combination of anti-tax ideology and deficit hysteria (itself mostly whipped up in an attempt to bully President Obama into spending cuts) means that we’re letting our highways, and our future, erode away…”

Should Be Aware of:

• David Blumenthal and Sara R. Collins: Health Care Coverage under the Affordable Care Act — A Progress Report
• David Atkins: No, Barry Ritholtz. It’s not an “incompetent Congress.” It’s immoral Republicans
• Ursula Moffitt: Experts Talk: An Interview with Dr. Mark Thoma
• Heather Boushey and Nick Bunker: “If the current share of prime-age workers with a job becomes the new standard, then the long-run growth rate of the economy is at risk…. The result would be a less prosperous future…”
• Thomas Palley: Milton Friedman’s economics and political economy: an old Keynesian critique
• Tim Cook:An Alabama day that forever changed my life
• Jim Sleeper: New shots heard ’round the world
• Hannah Giorgis: The Soapbox: Black Nerds, Escapism, & Why We Need More Diverse Books

And:

1. Noam Scheiber: Hillary Clinton’s Inequality Strategy: “‘Inequality’ encompasses two separate but related issues… economic stagnation afflicting people in the middle and bottom… the rapidly improving fortunes of the ultra-rich…. When Democrats use the term inequality these days, they typically mean the latter…. But the working-folks stagnation issue is certainly real and emotional enough that Democratic voters are quite concerned about it, too…. And so Clinton is able to deliver a mostly compelling response to questions about inequality by focusing on this question, and mostly leaving the uncomfortable-sounding plutocracy stuff unmentioned…. I suspect Clinton, like most left-of-center politicians, has simply spent a lot more time thinking about how you boost the fortunes of struggling workers than reining in the power of the very rich…. Still, I have a hard time believing there isn’t some serious calibration going on here—a bit of needle-threading designed to address the topic that most exercises Democratic voters without alienating the people she’ll need to fund her presidential campaign…”

2. Robert Johnson: Ugly Money Politics:

3. Louis Johnston: Hobby Lobby ruling: The crux of the problem is employer-provided health insurance | MinnPost: “The old saying, ‘If you find yourself in a hold, stop digging’ applies here. Yes, we’ve fought over the Affordable Care Act and yes, it passed muster with the Supreme Court two years ago.  But the court’s latest ruling only sets up another round of litigation that gets us no closer to what really matters for public policy: ensuring that all Americans have access to health care.  Let’s acknowledge our mistake in not getting rid of the employer-based base for our health insurance and get on with building a new foundation that will serve us in the future…”

Already-Noted Must-Reads:

1. Jordan Ellenberg: The Summer’s Most Unread Book Is…: “Every book’s Kindle page lists the five passages most highlighted by readers. If every reader is getting to the end, those highlights could be scattered throughout…. Thus, the Hawking Index (HI): Take the page numbers of a book’s five top highlights, average them, and divide by the number of pages in the whole book. The higher the number, the more of the book we’re guessing most people are likely to have read…. “The Goldfinch” by Donna Tartt: 98.5%…. “Catching Fire” by Suzanne Collins : 43.4%…. “The Great Gatsby” by F. Scott Fitzgerald : 28.3%…. “Fifty Shades of Grey” by E.L. James: 25.9%…. “Flash Boys” by Michael Lewis : 21.7%…. “Lean In” by Sheryl Sandberg : 12.3%…. “Thinking Fast and Slow” by Daniel Kahneman : 6.8%…. “A Brief History of Time” by Stephen Hawking: 6.6%…. “Capital in the Twenty-First Century” by Thomas Piketty : 2.4%…. Mr. Piketty’s book is almost 700 pages long, and the last of the top five popular highlights appears on page 26…”

2. Scott Lemieux: 5 Men on Supreme Court Impose Substantial Burden on Women in Illogical Decision: “It is extraordinary implausible that Congress intended for any bare assertion of religious conflict to trigger strict scrutiny for every federal regulation. It is proper for the courts to be highly deferential on the question of whether a litigant’s religious beliefs are sincere, but whether the burden on these beliefs is substantial is an inquiry the courts are not merely permitted but obligated to make. This inquiry should dispose of the challenge to the mandate, because in this case the burden on employers is trivial. The ACA’s regulations do not require anybody to use contraceptives contrary to their religious beliefs, and the employers are not implicated in the decision to include contraceptives as part of the package that employers must provide employees in order to maintain the tax benefits of paying employees in health insurance in lieu of wages. The triviality of the burden involved here is particularly obvious, given that Hobby Lobby covered several of the contraceptives it now challenges in its employee insurance package until 2012—an alleged burden onits religious beliefs that it failed to notice until it became convenient for a larger political purpose. That’s pretty much the definition of an ‘insubstantial’ burden…”

3. Matt O’Brien: Is this the jobs recovery we’ve been looking for?: “just a few weeks ago, the Federal Reserve forecast that unemployment would be 6.0 to 6.1 percent by the end of the year. It’s 6.1 percent already. But the big question is whether this will be enough to bring back the shadow unemployed. It hasn’t yet. In June, there were 275,000 more people working part-time for economic reasons. And though it sounds like good news that long-term unemployment fell by 293,000, it probably isn’t when you consider that, as Ben Casselman shows, most of them are giving up rather than finding work. In other words, there’s still plenty of shadow slack, and that probably explains why average hourly earnings have barely kept up with inflation, up just 2 percent the past year…”

4. Andrew Fieldhouse: 5 Years After the Great Recession, Our Economy Still Far from Recovered: “This June marks the five-year anniversary of the end of the Great Recession, but champagne toasts would be distastefully premature, as the U.S. economy remains far from fully recovered. The partial recovery that has materialized has been quite uneven, favoring growth of corporate profits and stock prices over employment and wage growth, while wide discrepancies persist in regional economic health…. 57 percent of surveyed American adults believed the United States was still in a recession…. Early into the recovery, roughly 11 million jobs were needed to restore the unemployment rate to pre-recession levels. Today, that number stands at an improved, but still staggering 7 million jobs needed…. The economy has added 198,000 jobs per month on average over the last year…. If this pace of hiring is sustained, it will take nearly another five years to restore pre-recession employment rates…. The unemployment rate has been an exceptionally misleading economic indicator in recent years, primarily falling because workers have been dropping out of the labor force, not because a rising share of the population is employed. The Economic Policy Institute estimates that nearly 6 million workers are still “missing” from the labor force because of the lack of jobs…. In the year before the Great Recession… 79.9 percent; in May, only 76.4 percent of prime-age workers were employed, and less than one-third of the decline from the Great Recession has been recovered…”

5. Nick Rowe: Insufficient Demand vs?? Uncertainty: “Let’s assume that increased political uncertainty caused a reduction in willingness to ‘hire, lend, or invest’…. The sign is right, but I don’t know about the magnitude. A monetarist would say that would increase the demand for money, and that would cause a recession, unless the central bank took sufficient offsetting action. A New Keynesian/Neo Wicksellian would say that would reduce the natural rate of interest, and that would cause a recession, unless the central bank took sufficient offsetting action…. It’s not just an either/or thing. Nor is it even a bit-of-one-plus-bit-of-the-other thing. Increased political uncertainty can cause a recession via its effect on demand. Unless monetary policy responds appropriately. (And that, of course, would mean targeting NGDP, because inflation targeting doesn’t work when supply-side shocks cause adverse shifts in the Short Run Phillips Curve.)”

6. Mark Thoma: “On Whether Supply or Demand Shocks are the source of aggregate fluctuations, Blanchard and Quah (1989), Shapiro and Watson (1988), and others had it right (though the identifying restriction that aggregate demand shocks do not have permanent effects seems to be undermined by the Great Recession ). It’s not an either/or question, it’s a matter of figuring out how much of the variation in GDP/employment is due to supply shocks, and how much is due to demand shocks…. Overall, across all these papers, it is demand shocks that play the most prominent role. Supply shocks do matter, but not nearly so much as demand shocks when it comes to explaining aggregate fluctuations…”

Mark Thoma: “On Whether Supply or Demand Shocks are the source of aggregate fluctuations…

…Blanchard and Quah (1989), Shapiro and Watson (1988), and others had it right (though the identifying restriction that aggregate demand shocks do not have permanent effects seems to be undermined by the Great Recession ). It’s not an either/or question, it’s a matter of figuring out how much of the variation in GDP/employment is due to supply shocks, and how much is due to demand shocks…. Overall, across all these papers, it is demand shocks that play the most prominent role. Supply shocks do matter, but not nearly so much as demand shocks when it comes to explaining aggregate fluctuations…

**Nick RoweInsufficient Demand vs?? Uncertainty: “Let’s assume that increased political uncertainty…

…caused a reduction in willingness to ‘hire, lend, or invest’…. The sign is right, but I don’t know about the magnitude. A monetarist would say that would increase the demand for money, and that would cause a recession, unless the central bank took sufficient offsetting action. A New Keynesian/Neo Wicksellian would say that would reduce the natural rate of interest, and that would cause a recession, unless the central bank took sufficient offsetting action…. It’s not just an either/or thing. Nor is it even a bit-of-one-plus-bit-of-the-other thing. Increased political uncertainty can cause a recession via its effect on demand. Unless monetary policy responds appropriately. (And that, of course, would mean targeting NGDP, because inflation targeting doesn’t work when supply-side shocks cause adverse shifts in the Short Run Phillips Curve.)