Category: Equitablog

Barry Ritholtz: What’s the Penalty for Pundits Who Get It Wrong?: “Five years ago, Arthur Laffer…

…wrote an op-ed article… a grab bag of his pet peeves: opposition to Federal Reserve policies … concern about the ‘unfunded liabilities of federal programs’… he decried deficits, which in large part are the result of his thesis that tax cuts often increase revenue. As it turns out, for the most part, they don’t…. Pretty much every single warning, every data point, every item Laffer complained about was wrong. Why does this happen, and why are there no penalties for being so inaccurate? … This isn’t about economics, it’s about politics. Unfortunately, the dismal science has become the vehicle of choice for those who seek to further their own political agenda…

Should-Reads:

1. Ben Adler: Will EPA’s power plant regulations be stopped in the courts? | Grist: “1) Opponents will try to kill an earlier rule for new power plants… if they succeed, then the EPA won’t have grounds to move forward with its existing-plant rule…. 2) Opponents will challenge the rule’s ‘outside the fence’ approach…. EPA’s proposal for existing plants… sets statewide emissions rates…. But the Clean Air Act has never been used this way before…. 3) Opponents will challenge the rule for imposing different standards on different states…. 4) Opponents will fight over state compliance plans. Even if the rule is upheld in federal court against the challenges outlined above, that is still just the beginning. Each state must come up with a plan to meet its rate target and get EPA approval for it…. 5) If states don’t submit compliance plans and EPA writes the plans for them, opponents will sue over that…”

2. Jesse Rothstein: California Ruling on Teacher Tenure Is Not Whole Picture: “Firing bad teachers actually makes it harder to recruit new good ones, since new teachers don’t know which type they will be. That risk must be offset with higher salaries — but that in turn could force increases in class size that themselves harm student achievement…. Early [tenure] decisions–not in the first year, but soon after–actually improve student achievement. That’s partly because stable faculties are better for students, but also because an attentive district knows a great deal about which teachers are good and bad after just two years, and waiting longer provides little additional information…. With lower dismissal rates, marginal teachers are much worse than the average new recruit, and it is more important to get rid of them quickly than to get the decision exactly right…. Tenure laws can usefully tie your hands, forcing you to do that…. While the notion of ‘clearing the stables’ of bad teachers seems attractive, it is almost impossible to get right in practice…”

3. Jonathan Chait: GOP Health Plan Has Died Along With Eric Cantor: “House Republicans have been promising to unify around an alternative health-care plan since the health-care debate started in 2009, yet they somehow keep failing to get around it. At their caucus retreat in January, the vowed that this time, seriously, for real, they’re totally going to vote on an official Republican plan to replace Obamacare. There appeared to be no wiggle room in this solemn promise: ‘House Republicans will rally around and pass an alternative to Obamacare this year’…. Now Jennifer Haberkorn reports, ‘House Majority Leader Eric Cantor’s shocking primary loss Tuesday night all but kills any chance of the House voting on an Obamacare replacement bill this year’. Wait–why would Cantor’s defeat nullify the Party’s promise to vote on a replacement plan for Obamacare?… One Republican explains to Haberkorn: ‘He’s the guy who made the commitment’, said Rep. Phil Roe (R-Tenn.), and a strong advocate of a House floor vote…”

4. Jared Bernstein: Damn the Dysfunction: Let’s Talk Policy Reform!: “Everywhere I turn these days, people are asking me (and, I presume, others like me): what should we be doing to help the middle class, push back on inequality, and improve the quantity and quality of jobs?  In other words, interested parties are looking past the present (and the entrails of political shockers just down the road in VA’s seventh district) and thinking in terms of rolling good policy ideas out of the hangers, onto the tarmac, and lining them up before a very long runway. I think that makes sense, and anyway, what’s the alternative?  Sit on your hands for the next how-ever-many years?…”

Should Be Aware of:

• Doktor Zoom: “‘Sad Thad’ Cochran Reminisces About Simple Joys Of Childhood, Like Sexing Animals: Well gosh darn it, Thad Cochran, you are just a good ol’ fountain of fine video clips today, now aren’t you?”
• Jim Edwards: The Little-Known Scientific Reason Your iPhone Earbuds Always Get Tangled
• Margaret Somers and Fred Block: “In this sense, free-market rhetoric is a giant smokescreen designed to hide the dependence of business profits on conditions secured by government…”
• Bud Myers: Long-Term Unemployed Baby Boomers in 2013

And:

1. Alyssa Rosenberg: Ta-Nehisi Coates and the boundaries of legitimate debate: “We have tons of academic research on the impact of redlining, on the impact of not being able to get the G.I. Bill, on the impact of lynching, on the impact of terrorism. We have tons of research on what that did and what that does to community. Culture not so much. Not so much. It’s a little harder to quantify. So why do we spend so much time talking about the thing that we have the hardest time quantifying, and so little time talking about the thing that we know?”

2. Barry Ritholtz: What’s the Penalty for Pundits Who Get It Wrong?: “Five years ago, Arthur Laffer… wrote an op-ed… opposition to Federal Reserve policies in response to the financial crisis and concern about the ‘unfunded liabilities’ of… Social Security and Medicare… decried deficits… in large part are the result of his thesis that tax cuts often increase revenue. As it turns out, for the most part, they don’t…. The article?… ‘Get Ready for Inflation and Higher Interest Rates’…. At the time, the yield on the 10-year Treasury was 3.86 percent, and we were in a crisis-driven deflationary environment of negative 1.4 percent inflation. Today, the 10-year yields 2.65 percent and inflation is running at less than 2 percent…. Pretty much every single warning, every data point, every item Laffer complained about was wrong. Why does this happen, and why are there no penalties for being so inaccurate?”

3. Steve M.: One More Thing About David Brat: “Cantor-slayer David Brat…. Here’s a detail… I think got overlooked…. ‘Nordvig saw Brat speak at a fundraiser for E.W. Jackson, the conservative minister who nabbed the state GOP’s nomination for lieutenant governor last year…’. Please note that this wasn’t a fundraiser for the Virginia GOP ticket–it was a fundraiser for E.W. Jackson…. Brat went out of his way to back the guy who wrote that yoga is Satanic, said that President Obama sees the world ‘from a Muslim perspective’, and asserted that Democrats have an ‘agenda worthy of the Antichrist’…. ‘I had a crisis of conscience in the late 1970s. Massachusetts Democrat Barney Frank was pushing the homosexual agenda. How could I, as a Christian, be committed to a party led by Mr. Frank? In the end, I could not…. My wife and I, then Massachusetts residents, left the Democratic Party in 1980 and never looked back. Democrats now have fully embraced an abortion policy that amounts to infanticide. They have also made the lesbian-homosexual-bisexual-transgender agenda their vision for America…. The Democrat Party has created an unholy alliance between certain so-called civil rights leaders and Planned Parenthood, which has killed unborn black babies by the tens of millions. Planned Parenthood has been far more lethal to black lives than the KKK ever was.’ That was a guy David Brat really wanted to get elected…”

4. Brian Buetler: Eric Cantor Lost Because He Exploited Conservatives, Not Immigration: “The great irony of this year’s primary season, and indeed of conservative politics going back years now, is that the two Republican leaders most responsible for the party’s insurgent-like opposition to the Obama agenda—Cantor, and Senate Minority Leader Mitch McConnell—are the base’s most reviled. McConnell defeated his primary challenger last month, at great expense. Cantor fell short. There’s a kernel of truth to the idea that Cantor was a Frankenstein, devoured by his own creation. But it would be more accurate to say that by doing the right’s bidding and thus drawing its energy and investment into the party, he created expectations that almost nobody serving at a high level of congressional leadership could meet. Without Cantor and McConnell, the Obama opposition strategy would have been much less organized, but by organizing it, they absorbed a disproportionate degree of the right’s frustration when the strategy failed. But Cantor was particularly ill-suited to managing the inherent tension…”

Already-Noted Must-Reads:

1. Barry Eichengreen: Monetary Policy Should Not Be the First Line of Defense Against Bubbles: “There is a clear victor in the “lean versus clean” debate. Central banks cannot concentrate only on cleaning up after crises; the costs of financial instability are too high. Rather, as recent events have amply shown, the monetary authority must lean against excesses as they develop…. [In the 1920s] George Harrison of the Federal Reserve Bank of New York… worried about the impact on the broader economy and preferred to use other instruments to address financial imbalances. Harrison’s alternative was “direct pressure”… using the Fed’s regulatory powers and moral suasion to persuade member banks to curtail their lending…. Central banks should focus on developing more effective macro-prudential instruments…. They should adjust monetary policy to address potential financial risks as a last resort, not as their first line of defense.”

2. Dani Rodrik: Root Causes of Political Malaise in Advanced and Developing Countries: “Today’s democratic governments perform poorly…. In the advanced countries, dissatisfaction with government stems from its inability to deliver effective economic policies for growth and inclusion. In the newer democracies of the developing world, failure to safeguard civil liberties and political freedom is an additional source of discontent. A true democracy… combines majority rule with respect for minority rights [and] requires… institutions of representation… to elicit popular preferences and turn them into policy action… [and] institutions of restraint, such as an independent judiciary and media, to uphold fundamental rights…. Economic globalization has blunted the instruments of national economic policy and weakened the traditional mechanisms of transfers and redistribution that strengthened social inclusion…. In developing countries, it is more often the institutions of restraint that are failing…. When democracy fails to deliver economically or politically, perhaps it is to be expected that some people will look for authoritarian solutions…. If democracy is to have a future, it will need to be rethought.”

3. Robert Waldmann: Thoughts on Brad’s Thoughts on Economic Theology: “So why is the Keynes-Friedman-Samuelson position unstable? I definitely do not believe in the neoclassical synthesis…. I don’t think that, even given full employment, markets are efficient. I tend to advocate leaving the market alone except for 1) redistribution from rich to poor 2) mandatory insurance is market insurance is prevented by the adverse selection death spiral 3) Pigouvian taxes to internalize externalities 4) aggregate demand management 5) Anti discrimination legislation and 6) I’m sure there are lots of other exceptions which don’t come to mind…. The market is the worst possible way to organize economic interactions except for all of the others that have ever been invented. My inclination to leave markets along (except for 1-6) is based on mistrust of the state, not trust in markets… meddling will lead to interest-group gridlock, advantages for the well-connected (that is rich) captured regulators and so forth and so on…”

4. Jared Bernstein: Is the Macro-Economy Really That Much of a Muddle?: “I come away from Bin Appelbaum’s (fine) piece in today’s NYT scratching the old head…. It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average…. Here’s a typology of the different views expressed in the piece, as I understand them: –The economy’s potential growth rate has been slowing down for a while.  Stuff happens…. –Bunk.  We’ll be fine…. –Sorry, but the fact is we’re going to be growing slower post-great-recession. But that’s because of the recession, or, more precisely, because of the policy mistakes we made that kept us down for so long that we’ve bent the trend. –Well, yeah… but if you can bend the trend you can mend the trend.  Aggressive policy to close gaps in output and jobs could at least partially reverse the damage. No one knows which of these is right, of course.  But would not a shave with Occam’s razor lead you to the last one?… So where’s the big, freakin’ puzzle here?  Investing in public infrastructure, helping the long-term unemployed with extended benefits or direct job creation, targeting the trade deficit to help our manufacturers, pressing on the fiscal and monetary accelerators–I know there are those who will disagree, but these are well-established and well-understood responses, or at least they used to be, to demand contractions, including the one that persists as we speak…. Of course, the constraints are political and I’ll immediately grant you that the politicians are more confused than the economists.  But granting the not-that-interesting truth that the future is uncertain, I simply don’t understand the apparent confusion about the present, including the necessary prescription to get back on track… even if we don’t know the precise measurements of that particular track.

5. Matthew Yglesias: The US recovery has been a disaster; the eurozone’s has been much worse: “As this chart from the OECD’s new report on the US economy shows, the economic recovery in the United States has been incredibly weak. But it’s also been enormously stronger than the recovery in the eurozone. If you want to know whether things like the 2009 stimulus bill and the various iterations of quantitative easing have worked, this is the comparison you need to look at. Have they worked to make the economy healthy? No. Have they worked to make the economy healthier than it’s been in the place where they didn’t do that stuff? Absolutely…”

6. Ryan Avent: Economic potential: In search of lost time: “IN JANUARY of 2008 there were 138,365,000 people employed in the American economy…. The fact that it took 76 months to top the previous record high is astounding; it should be considered one of the great policy failures of modern times–rivalled in recent history only by parallel performances in Europe and Japan…. Larry Ball: ‘A few rich countries, like Australia and Switzerland, came through the past seven years largely unharmed. Most paid the macroeconomic equivalent of an arm or a leg… potential output was 4.7% below the pre-crisis trend in America and 11% below trend in Britain… Greece… 30% below trend. By 2015 the weighted average loss among rich countries as a whole is projected to reach 8.4%–as if the entire German economy had evaporated..’… First… governments responded insufficiently to crisis, cut budgets for the wrong reasons in the wrong ways at the wrong times, and allowed central banks to fail utterly at their tasks…. Second, rich-world governments are failing to take the steps necessary to restore lost potential… rich economies could use much more public investment in infrastructure, education, and retraining, as well as in support for basic science and technology research, governments cannot seem to muster the political will…. Obvious labour market reforms go unmade…. Third, the rich world is still allowing itself to operate with a substantial demand shortfall!… Fourth, the rich world is setting itself up to suffer through future events like the crisis…. Because there has been no urgency about moving back to full economic capacity, both interest rates and inflation rates remain at rock-bottom levels… very little cushion in the system against future shocks…. There are millions of people who want to be working but who can’t find jobs, and tens of millions who could benefit enormously from pay rises and increases in living standards they’re not getting. These things matter tremendously. And you have packs of policy-makers going around congratulating themselves on having averted disaster even as the costs of this catastrophe continue to mount. It’s shameful.”

7. Jose Scheinkman: Bubbles and Finance: “One question left unanswered in this lecture is whether one could use the signals associated with bubbles such as inordinate trading volume or high leverage, to detect and perhaps stop bubbles. One of the difficulties in using these signals is that we know next to nothing about false positives…. Even if we could effectively detect bubbles, it is not obvious that we should try to stop all bubbles. Although credit bubbles have proven to have devastating consequences, the relationship between bubbles and technological innovation suggests that some of these episodes may play a positive role in economic growth. The increase in the price of assets during a bubble makes it easier to finance investments related to the new technologies. The most straightforward policy recommendation that arises from the bubble models discussed in this lecture, is that to avoid bubbles, policy makers should limit leverage and facilitate, instead of impede, short-selling. In the panic that followed the implosion of the credit bubble, the SEC banned short-sales of financial stocks. In August 2011, as the markets questioned the health and funding needs of European financial institutions, France, Italy, Spain and Belgium imposed bans on short-sales of financial stocks. Each of these interventions may have have given a temporary respite to the markets for these assets, but caused losses to investors that were short these assets and had to cover their positions. Investors learned one more time that it is dangerous to bet against overvalued assets–a lesson that they will surely keep in mind in the next bubble.”

Jose Scheinkman: Bubbles: “One question left unanswered in this lecture…

…is whether one could use the signals associated with bubbles such as inordinate trading volume or high leverage, to detect and perhaps stop bubbles. One of the difficulties in using these signals is that we know next to nothing about false positives…. Even if we could effectively detect bubbles, it is not obvious that we should try to stop all bubbles. Although credit bubbles have proven to have devastating consequences, the relationship between bubbles and technological innovation suggests that some of these episodes may play a positive role in economic growth. The increase in the price of assets during a bubble makes it easier to finance investments related to the new technologies.

The most straightforward policy recommendation that arises from the bubble models discussed in this lecture, is that to avoid bubbles, policy makers should limit leverage and facilitate, instead of impede, short-selling. In the panic that followed the implosion of the credit bubble, the SEC banned short-sales of financial stocks. In August 2011, as the markets questioned the health and funding needs of European financial institutions, France, Italy, Spain and Belgium imposed bans on short-sales of financial stocks. Each of these interventions may have have given a temporary respite to the markets for these assets, but caused losses to investors that were short these assets and had to cover their positions. Investors learned one more time that it is dangerous to bet against overvalued assets–a lesson that they will surely keep in mind in the next bubble.

We are informed by the estimable Mark Thoma:

Mark Thoma: Economist’s View: Another 180 on Piketty: “Since we are looking at models of how to respond to one’s own errors…

…[Francis X. Diebold] Another 180 on Piketty’s Measurement:

…yes, I’m doing another 180. It seems clear that the bulk of the evidence suggests that the FT, not Piketty, is guilty of sloppiness. Piketty’s response is convincing, and all-told, his book (with its thoughtful discussion, meticulous footnotes, detailed online technical appendix, freely-available datasets, etc. — see his fine website) remains a model of careful social-science measurement as reported for a lay audience. …

Honorable and impressive. Waiting for Chris Giles to act as a model……”

Ryan Avent: Economic potential: In search of lost time: “IN JANUARY of 2008 there were 138,365,000 people…

…employed in the American economy…. The fact that it took 76 months to top the previous record high is astounding; it should be considered one of the great policy failures of modern times–rivalled in recent history only by parallel performances in Europe and Japan…. Larry Ball: ‘A few rich countries, like Australia and Switzerland, came through the past seven years largely unharmed. Most paid the macroeconomic equivalent of an arm or a leg… potential output was 4.7% below the pre-crisis trend in America and 11% below trend in Britain… Greece… 30% below trend. By 2015 the weighted average loss among rich countries as a whole is projected to reach 8.4%–as if the entire German economy had evaporated..’… First… governments responded insufficiently to crisis, cut budgets for the wrong reasons in the wrong ways at the wrong times, and allowed central banks to fail utterly at their tasks…. Second, rich-world governments are failing to take the steps necessary to restore lost potential… rich economies could use much more public investment in infrastructure, education, and retraining, as well as in support for basic science and technology research, governments cannot seem to muster the political will…. Obvious labour market reforms go unmade…. Third, the rich world is still allowing itself to operate with a substantial demand shortfall!… Fourth, the rich world is setting itself up to suffer through future events like the crisis…. Because there has been no urgency about moving back to full economic capacity, both interest rates and inflation rates remain at rock-bottom levels… very little cushion in the system against future shocks…. There are millions of people who want to be working but who can’t find jobs, and tens of millions who could benefit enormously from pay rises and increases in living standards they’re not getting. These things matter tremendously. And you have packs of policy-makers going around congratulating themselves on having averted disaster even as the costs of this catastrophe continue to mount. It’s shameful.

Matthew Yglesias: The US recovery has been a disaster; the eurozone’s has been much worse: “As this chart from the OECD’s new report on the US economy shows…

…the economic recovery in the United States has been incredibly weak. But it’s also been enormously stronger than the recovery in the eurozone. If you want to know whether things like the 2009 stimulus bill and the various iterations of quantitative easing have worked, this is the comparison you need to look at. Have they worked to make the economy healthy? No. Have they worked to make the economy healthier than it’s been in the place where they didn’t do that stuff? Absolutely….”

One thing I simply do not understand at all: a 2%/year inflation target ought to be more-or-less the same thing as a 4%/year nominal wage growth target. That has to be so, by arithmetic–unless, of course, you are envisioning still-further widening of the income distribution and a still-further upward leap in income inequality.

So why doesn’t the fact that nominal wage growth has been stuck at 2%/year since the collapse of the housing bubble lead everyone to conclude that monetary policy is too tight?

It is a great mystery to me, one of many..

Kevin Drum: There’s Still No Wage Pressure in the US Economy | Mother Jones: “This is just a reminder from Jared Bernstein…

…who analyzed five different measures of wage growth to produce the chart below. Ever since the end of the Great Recession, wage growth has been under 2 percent. It’s still under 2 percent, and shows no signs of increasing. This is yet another indication that the recovery is weak, the labor market has a lot of slack, and there’s no inflation in sight…

Jared Bernstein: Is the Macro-Economy Really That Much of a Muddle?: “I come away from Bin Appelbaum’s (fine) piece in today’s NYT…

… scratching the old head…. It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average…. Here’s a typology of the different views expressed in the piece, as I understand them: –The economy’s potential growth rate has been slowing down for a while.  Stuff happens…. –Bunk.  We’ll be fine…. –Sorry, but the fact is we’re going to be growing slower post-great-recession. But that’s because of the recession, or, more precisely, because of the policy mistakes we made that kept us down for so long that we’ve bent the trend. –Well, yeah… but if you can bend the trend you can mend the trend.  Aggressive policy to close gaps in output and jobs could at least partially reverse the damage. No one knows which of these is right, of course.  But would not a shave with Occam’s razor lead you to the last one?… So where’s the big, freakin’ puzzle here?  Investing in public infrastructure, helping the long-term unemployed with extended benefits or direct job creation, targeting the trade deficit to help our manufacturers, pressing on the fiscal and monetary accelerators–I know there are those who will disagree, but these are well-established and well-understood responses, or at least they used to be, to demand contractions, including the one that persists as we speak…. Of course, the constraints are political and I’ll immediately grant you that the politicians are more confused than the economists.  But granting the not-that-interesting truth that the future is uncertain, I simply don’t understand the apparent confusion about the present, including the necessary prescription to get back on track… even if we don’t know the precise measurements of that particular track.

Barry Eichengreen: Monetary Policy Should Not Be the First Line of Defense Against Bubbles: “There is a clear victor in the “lean versus clean” debate…

…Central banks cannot concentrate only on cleaning up after crises; the costs of financial instability are too high. Rather, as recent events have amply shown, the monetary authority must lean against excesses as they develop…. [In the 1920s] George Harrison of the Federal Reserve Bank of New York… worried about the impact on the broader economy and preferred to use other instruments to address financial imbalances. Harrison’s alternative was “direct pressure”… using the Fed’s regulatory powers and moral suasion to persuade member banks to curtail their lending…. Central banks should focus on developing more effective macro-prudential instruments…. They should adjust monetary policy to address potential financial risks as a last resort, not as their first line of defense.

Robert Waldmann: Thoughts on Brad’s Thoughts on Economic Theology: “So why is the Keynes-Friedman-Samuelson position unstable?…

…I definitely do not believe in the neoclassical synthesis…. I don’t think that, even given full employment, markets are efficient. I tend to advocate leaving the market alone except for 1) redistribution from rich to poor 2) mandatory insurance is market insurance is prevented by the adverse selection death spiral 3) Pigouvian taxes to internalize externalities 4) aggregate demand management 5) Anti discrimination legislation and 6) I’m sure there are lots of other exceptions which don’t come to mind…. The market is the worst possible way to organize economic interactions except for all of the others that have ever been invented. My inclination to leave markets along (except for 1-6) is based on mistrust of the state, not trust in markets… meddling will lead to interest-group gridlock, advantages for the well-connected (that is rich) captured regulators and so forth and so on…