Category: Equitablog

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.

Should-Reads:

1. Andrew Sullivan: Our Cold Civil War Intensifies: “I spent last night again watching Fox News…. The president is a lawless dictator, abetting America’s Islamist foes around the world, releasing Taliban prisoners to aid in his own jihad on America, fomenting a new caliphate in Iraq, and encouraging children to rush the Mexican border to up his vote-count, while effectively leaving those borders open to achieve his ‘fundamental transformation of America.’… Megyn Kelly… regarded as more centrist than Sean Hannity… Brent Bozell, far right veteran, and Andy McCarthy, pro-torture activist touting his book calling for Obama’s impeachment. The only pushback Kelly provided to a relentless stream of hysteria was to ask whether the president sincerely wanted another terror attack on America–since it would hurt his approval ratings…. The ‘chaos’ at the border and the emerging caliphate in Iraq may have been merely the unintended consequences of fecklessness rather than a deliberate attempt to destroy everything valuable in the United States…”

2. Mark Thoma: “As someone who had a series called ‘Market Failures in Everything’ when this blog first started over nine years ago, and as someone who believes market failures remain important even when the economy is operating at full capacity, I’m glad to see views evolving. Market failures and business cycles form the basis for my calls for government intervention, though as I have written many times, I am coming around to the idea the intervention may also be needed to redistribute income as an offset for those who reap where they never sowed…. Markets have had 40 years to solve the inequality problem…. A ‘hands off’ policy when the economy is operating at full capacity, a capacity that can be limited by market failures, is not helpful in this regard…”

3. Paul Krugman (2010): “It’s possible to be both a conservative and a Keynesian; after all, Keynes himself described his work as ‘moderately conservative’…. But in practice, conservatives have always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge…. William Buckley[‘s]… key complaint… was that the Yale faculty taught–horrors!–Keynesian economics. I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities…. Friedman was saying… we need policy to stabilize the economy–but we can make that policy technical and largely mechanical…. When monetarism failed… it was replaced by the cult of the independent central bank…. And this worked for a while… in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too. If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way…”

• Arvind Subramanian: Readings to Understand Economic Development
• Adam L. Silverman: “The Islamic State in Iraq and the Levant (ISIL)… is… capitalizing on Sunni discontent and disenfranchisement… settling scores. It is true that the Sunnis are outnumbered and I have had conversations with informed observers who argue the Iraqi Sunnis know they cannot win, unfortunately no one seems to have told the Iraqi Sunnis that!…”
• Bill Black: “Friedrich von Hayek is so popular among libertarians because of his denial of the legitimacy of democratic government and his claims that it is inherently monstrous and murderous to its own citizens…”
• Warren Rojas: Cantor Staff Self Medicates, Spending $6,500 at Tune Inn
• Maximilian Auffhammer

And:

1. Martin Hackmann et al: What are the Welfare Gains of the Individual Mandate: Evidence from MA | owenzidar: “We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. Using data from Massachusetts, we estimate the parameters of the model. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate. We find an annual welfare gain of 4.1% per person or $51.1 million annually in Massachusetts as a result of the reduction in adverse selection. We also find smaller post-reform markups.”

2. Ramesh Ponnuru: John Goodman Knows Wehbycare Won’t Work: “John Goodman, until recently the president of the National Center for Policy Analysis, has a post at Forbes attempting to defend Dr. Monica Wehby’s proposed ‘fixes’ to Obamacare from my charge that her plan won’t work… what he’s really saying is that… he agrees with me that as presented it won’t…. One last peculiarity of Goodman’s post…. Here’s where Wehby has stood on replace vs. fix, in chronological order: On the campaign website it outlined a plan of ‘fixes’… the campaign manager then said that Wehby was for replacement; and now the campaign is approvingly tweeting an article that commends her for not wanting a replacement. The tweet itself describes her plan as ‘reforming Obamacare’. All clear?… NCPA[‘s]… board had unanimously voted to dismiss Goodman because of ‘serious’ misconduct…. Goodman [says]… ‘I’m afraid the NCPA is engaged in serious misconduct… a legal struggle…. Pete duPont and I are leaving…. There was a fight on the board, we had board members threatening to sue each other, board members threatening to sue me, it’s been a whirlwind. These things happen.’… Goodman called back again to say, first, that the organization is now being run by a board that does not know how think tanks work and, second, that the underlying dispute involves illegal activities by NCPA ‘which I don’t want to get into right now’. So it sounds like the lawyers will be busy…”

3. Charlie Stross: “I’ll be voting ‘yes’ for an independence Scotland in September. Not with great enthusiasm (as I noted earlier, if Devo Max was on the ballot I’d be voting for that) but because everything I see around me suggests that there is some very bad craziness in the near future of England, and I don’t want the little country I live in to be dragged down the rabbit hole by the same dark forces of reaction that are cropping up across Europe, from Hungary to Greece. The failure modes of democracy, it seems to me, are less damaging the smaller the democracy…”

Already-Noted Must-Reads:

1. Victor Fleischer: How Obama Can Increase Taxes on Carried Interest: “President Obama could change the tax treatment of carried interest with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court…. Managers of private equity, venture capital and other private investment funds receive a share of the profits, known as carried interest, in exchange for the services they provide. Under current law, the income they earn is often taxed at the long-term capital gains rate of 20 percent…. less than half the rate most would pay if their income were taxed as ordinary income…. Every year, the Obama administration proposes a budget that would close the loophole; every year, Congress fails to act…. Fund managers… put in just 1 percent of the financial capital and reap 20 percent of the profits…. So one may reasonably question whether the fund manager really ought to be taxed as a partner and not as a service provider. § 707(a)(2)(A)… directs the Treasury Department to write regulations addressing this kind of compensatory arrangement…. The Treasury has broad discretion to recharacterize transactions where the partner is not acting in one’s capacity as a partner but, rather, as a service provider. Remarkably, the Treasury has never issued these regulations in… 30 years…. If the administration should follow this path, fund managers would pay tax at ordinary rates, just like lawyers, accountants, bankers and other service providers…”

2. Malcolm Gladwell: Black Like Them: “Things changed when I left for Toronto…. The infamous Jane-Finch projects… were considered the Jamaican projects. The drug trade then taking off was said to be the Jamaican drug trade. In the popular imagination, Jamaicans were–and are–welfare queens and gun-toting gangsters and dissolute youths…. After I had moved to the United States, I puzzled over this seeming contradiction–how West Indians celebrated in New York for their industry and drive could represent, just five hundred miles northwest, crime and dissipation. Didn’t Torontonians see what was special and different in West Indian culture? But that was a naïve question. The West Indians were the first significant brush with blackness that white, smug, comfortable Torontonians had ever had. They had no bad blacks to contrast with the newcomers, no African-Americans to serve as a safety valve for their prejudices, no way to perform America’s crude racial triage. Not long ago, I sat in a coffee shop with someone I knew vaguely from college…. He began to speak of the threat that he felt Toronto now faced. It was the Jamaicans, he said. They were a bad seed… he launched into a long explanation of how, in slave times, Jamaica was the island where all the most troublesome and obstreperous slaves were sent, and how that accounted for their particularly nasty disposition today. I have told that story many times since, usually as a joke, because it was funny in an appalling way–particularly when I informed him much, much later that my mother was Jamaican. I tell the story that way because otherwise it is too painful. There must be people in Toronto just like Rosie and Noel, with the same attitudes and aspirations, who want to live in a neighborhood as nice as Argyle Avenue, who want to build a new garage and renovate their basement and set up their own business downstairs. But it is not completely up to them, is it? What has happened to Jamaicans in Toronto is proof that what has happened to Jamaicans here is not the end of racism, or even the beginning of the end of racism, but an accident of history and geography. In America, there is someone else to despise. In Canada, there is not. In the new racism, as in the old, somebody always has to be the nigger…”

3. Billmon: The Syria/Iraq Situation: Not Only Stranger Than We Imagine…: “Tangle of enemies & allies notwithstanding, decision 4 Obama is actually simple: Should US provide air cover for Iranian Quds Force in Iraq? Which is kind of mind-blowing to contemplate, but if ISIS & Co. are going to be stopped, Iranian ground forces will have to be the core.”

4. Mark Thoma: Why income redistribution doesn’t hurt growth: “Until recently, most economists believed there’s a trade-off between equity and efficiency and that the redistribution of income would lower economic growth…. The main reason is that taking income away from the wealthy reduces the incentive to implement innovative ideas. In its most extreme form, where redistribution is used to ensure that everyone has the same income, why bother to work hard, or work at all? But… Ostry [et al.]… there are also reasons to believe the redistribution of income can enhance economic growth…. Their paper’s main finding is that ‘redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects’… ‘the combined direct and indirect effects… are on average pro-growth’…. Economics does not tell us what the distribution of income ought to be. That involves a value judgment, and individuals will differ on what is fair and equitable. But economics can tell us about the consequences of redistribution, and the best evidence we have suggests that modest redistribution, if anything, enhances growth.”

Mark Thoma: Why income redistribution doesn’t hurt growth: “Until recently, most economists believed there’s a trade-off between equity and efficiency…

…and that the redistribution of income would lower economic growth…. The main reason is that taking income away from the wealthy reduces the incentive to implement innovative ideas. In its most extreme form, where redistribution is used to ensure that everyone has the same income, why bother to work hard, or work at all? But… Ostry [et al.]… there are also reasons to believe the redistribution of income can enhance economic growth…. Their paper’s main finding is that ‘redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects’… ‘the combined direct and indirect effects… are on average pro-growth’…. Economics does not tell us what the distribution of income ought to be. That involves a value judgment, and individuals will differ on what is fair and equitable. But economics can tell us about the consequences of redistribution, and the best evidence we have suggests that modest redistribution, if anything, enhances growth.

Victor Fleischer: How Obama Can Increase Taxes on Carried Interest: “President Obama could change the tax treatment of carried interest…

…with a phone call to the Treasury Department. But the White House will need a precise understanding of the regulatory landscape to make a change that is fair, easy to administer, and will hold up in court…. Managers of private equity, venture capital and other private investment funds receive a share of the profits, known as carried interest, in exchange for the services they provide. Under current law, the income they earn is often taxed at the long-term capital gains rate of 20 percent…. less than half the rate most would pay if their income were taxed as ordinary income…. Every year, the Obama administration proposes a budget that would close the loophole; every year, Congress fails to act…. Fund managers… put in just 1 percent of the financial capital and reap 20 percent of the profits…. So one may reasonably question whether the fund manager really ought to be taxed as a partner and not as a service provider. § 707(a)(2)(A)… directs the Treasury Department to write regulations addressing this kind of compensatory arrangement…. The Treasury has broad discretion to recharacterize transactions where the partner is not acting in one’s capacity as a partner but, rather, as a service provider. Remarkably, the Treasury has never issued these regulations in… 30 years…. If the administration should follow this path, fund managers would pay tax at ordinary rates, just like lawyers, accountants, bankers and other service providers…

Billmon: The Syria/Iraq Situation: Not Only Stranger Than We Imagine…: “Tangle of enemies & allies notwithstanding…

decision 4 Obama is actually simple: Should US provide air cover for Iranian Quds Force in Iraq? Which is kind of mind-blowing to contemplate, but if ISIS & Co. are going to be stopped, Iranian ground forces will have to be the core.

David Dayen: The Biggest Policy Mistake of the Great Recession: “The popular conception of the Great Recession explains that…

…it stemmed from a financial shock. Housing prices stopped going up, and then Lehman Brothers fell, triggering paralysis in the credit markets. This spilled onto Main Street, and the effects still linger in terms of elevated unemployment and sluggish economic growth. But this history of the recession can’t be right, say… Amir Sufi… and Atif Mian…. Consumer purchases dropped sharply well before the September 2008 Lehman bankruptcy, and most deeply in places where home prices fell the most…. Steeper declines in net worth… led to far sharper reductions in consumer spending, and bigger job losses. But even those with no debt suffer when fire-sale foreclosures drop home prices, and lower overall demand spreads out across the country…. The normal channels of fiscal and monetary policy have difficulty dealing with highly leveraged household balance sheets. House of Debt correlates these features of recessions, and really targets debt as the core problem, arguing that it needs to be restructured during crises and prevented during better times….

“When we pitched the book, one publisher said, this is the intellectual justification for Occupy Wall Street,” said Professor Sufi in an interview. “We didn’t set out with that agenda. But one of the points we make is that the position we’re taking is not that radical if you look at history.” Indeed, Sufi and Mian emphasize that the Great Recession response to debt forgiveness was a historic outlier. During the Panic of 1819, when falling commodity prices squeezed indebted farmers, state governments immediately put a moratorium on foreclosures, and Congress easily passed a debt-forgiveness law for farmers who had credit with the federal government. In the Depression, the Home Owners Loan Corporation bought up failing mortgages and restructured them so borrowers could make cheaper payments. Even the code of Hammurabi, with its eye-for-an-eye view of justice, decrees that in lean times, a debtor can “wash his debt-tablet” and pay nothing for a year. This actually helps debtors and creditors, mainly because it brings back the economy faster and reduces the vicious cycle of foreclosures lowering housing prices further….

It is, as Amir, Sufi, and Dayan say, obvious. Debt restructuring is one of the four things that you can do and should do to boost aggregate demand after a financial crisis–the other three are: expansionary monetary policy, expansionary fiscal policy, and I bank recapitalization.

So David asks the very obvious question:

Why did the Bush and Obama administrations break with this tradition, steering aid to insolvent banks over indebted households? Sufi and Mian pinpoint the growing belief, which has taken hold among economists and policymakers that saving the banks equals saving the economy…. A cultural bias against debt has crept into these debates too, blaming homeowners as “deadbeats” who bought “too much home” and ignored the risks…. But while a 40 percent drop in home prices spares nobody, responsible or otherwise, this perspective also ignores a simple fact: There are two sides to a debt contract. “We blame the homeowner because they paid the price, but the only way that can happen is if a lender lends to the borrower,” Sufi said. “There is responsibility on both sides of the contract.”… Mian and Sufi have been drawn into a debate with Timothy Geithner, whose memoir Stress Test… came out at the same time…

It is indeed a great mystery. In my view, the obvious thing to do–once the U.S. government had nationalized FNMA and FHLMC in the summer of 2008–was for the federal government to offer every homeowner in the country a conforming-loan-rate refi, with an equity kicker attached to the deal for those Americans whose homes would not pass the 20% appraisal margin test.

But next to nothing was done–and Obama’s commitment to spend between $50 billion and $100 billion on mortgage relief was simply not kept.

Perhaps the most annoying and misleading thing in Timothy Geithner’s Stress Test is this evasion of responsibility:

We also tried to push the Federal Housing Finance Agency to pursue a similarly targeted program for loans backed by Fannie and Freddie. But acting FHFA director Edward DeMarco, a competent but cautious civil servant who did not want to inflame our Republican critics, refused to allow any principal reductions, even though FHFA’s own analysis showed they would save the government money in about half a million cases. It was amazing how little actual authority we had over Fannie and Freddie, considering they were entirely dependent on Treasury’s cash to stay alive.

Some liberals later blamed the President for their failure to provide relief, since he could have fired DeMarco at any time. But we couldn’t just appoint a new director on our own. The President did nominate well-respected North Carolina Banking Commissioner Joe Smith to replace DeMarco, but Senator Shelby blocked him, claiming he would be an administration “lapdog,” even after North Carolina Senator Richard Burr, a Republican who actually knew Smith, endorsed him as “the best nominee” and “a perfect choice.” After that experience, we had a hard time finding any willing candidates…

This was frustrating, but I don’t think a more compliant FHFA would have produced a dramatically different result. And while our numerous expansions of housing programs helped many Americans, they were still modest relative to the size of the problem. They certainly didn’t change the widespread perception that after embracing a strategy of dramatic force and creativity to save greedy financiers, we left innocent victims of the crisis adrift, vulnerable to the predations of the very banks and investors who had benefited most from our largesse. I once played a prank on Gene Sperling, pretending I had told a reporter he was the secret architect of HAMP—not just the substance, but the communications and messaging strategy. My press secretary got so worried that Gene would have a heart attack that she called to spill the beans; that’s how universally reviled HAMP was. HAMP would end up permanently modifying about 1.3 million mortgages…

I remember having conversations in 2008 with a rather large number of people–some of whom were later to work in the Obama White House–about how (a) at some point in the future it might well be in the public interest to use FHFA as an aggressive tool of macroeconomic policy, (b) the likely interim director Ed DeMarco was much too cautious to be good in this role, (c) opinions as to DeMarco’s competence and his degree of capture by those he was supposed to regulate differed widely, and (d) given FHFA’s effective independence, vetting and then managing the confirmation of a first-class director who understood the policy dilemmas and the administration’s objectives was one of the most important tasks of the U.S. Treasury. If Tim Geithner really was “amazed” to find out how little authority Treasury had over FHFA, he was the only one: the rest of us had known this from the moment of FHFA’s creation,

In that context, Geithner’s paragraphs about FHFA and DeMarco should have begun with: “My and Barack Obama’s failure to even nominate a director for FHFA before the political defeats of the 2010 election was an extraordinary act of political malpractice: we dropped the ball bigtime.”

That’s not what we get: we get evasion–a very careful tiptoeing around how this was a very big deal–distraction–no hint that getting people confirmed by the Senate was much easier in late 2009 than in 2011–and deception–“I don’t think a more compliant FHFA would have produced a dramatically different result” and “HAMP would end up permanently modifying about 1.3 million mortgages…”

Matt Rognlie has a first-rate exposition of his critique of Piketty:

Matt Rognlie: A note on Piketty and diminishing returns to capital: “Capital in the Twenty-First Century predicts…

…a rise in capital’s share of income and the gap r – g between capital returns and growth…. Neither outcome is likely given realistically diminishing returns to capital accumulation. Instead–all else equal–more capital will erode the economywide return on capital…. Piketty (2014)’s inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio. Recent trends in both capital wealth and income are driven almost entirely by housing, with underlying mechanisms quite different from those emphasized in Capital….

In Piketty (2014)’s framework, slower growth will produce a rise in the ratio of capital to income. This, in turn, will bring about an expansion in capital’s share of income…. This will aggravate inequality in the wealth distribution. In short, a key message of Capital in the Twenty-First Century is that capital’s role in the economy will grow in the twenty-first century…. As Piketty (2014) readily acknowledges, diminishing returns may be problematic for this thesis. If the return on capital falls quickly enough when more capital is accumulated, capital’s share of income will fall rather than rise–so that even as the balance sheets of capital owners expand, their claim on aggregate output will shrink…. Most evidence suggests diminishing returns powerful enough that further capital accumulation will cause a decline in net capital income, rather than an expansion…. These conclusions are not definite–there are many obstacles to empirical certainty here–but they do counsel skepticism about Piketty (2014)’s central outlook…

Matt is 100% correct–if all other things are equal, “all other things equal” meaning that the rate of profit is the marginal product of capital from some reasonable neoclassical aggregate production function. As I wrote in my The Honest Broker: Mr. Piketty and the “Neoclassicists”: A Suggested Interpretation, Piketty needs the λ elasticity of the rate of profit with respect to the capital-output ratio to be significantly less than one, and conceptualizing “capital” as a factor of production whose return is determined by its marginal product in a standard neoclassical production function will not get you there.

To quote myself:

The neoclassical assumption that, roughly, that λ=1, damps dynamics in inequality…. Breaking the neoclassical presumption that λ=1 is even more important when we look at the wealthholder share of income S: If λ=1, then S = ρ. Full stop. All of the n (population growth) and g (per capita output growth) and ω (accumulation wedge) terms drop out. And nothing other than shifts in the raw wealth share of income can drive shifts in inequality. Thus there is an even stronger urgent need to break with the default vanilla neoclassical presumptions for Piketty’s argument to go through…. Should it happen to be that λ>1, things are even worse for Piketty. That is the scenario in which accumulation leads to the euthanasia of the rentier. As wealth accumulates–as n + g + ω falls–the wealthholder share of income falls as well. Piketty needs 1>λ for his arguments to be relevant, and 1>λ by a substantial margin for his arguments to be interesting. To further increase the size of the rock that Piketty-as-Sisyphus must roll uphill… focus on the level of real wages…. The things that Piketty says raise inequality–low n, g, and ω–are also the very things that raise real wages. The coming of the plutocrats and a very high societal wealth-to-annual-income ratio is then an unmitigated boon to the working class. If we are to get any form of immiserization argument out of Piketty, we need to break λ=1 and push it far lower.

How to break the neoclassical presumption that λ=1?

Piketty does not seem to see this as a significant difficulty. He is, after all, working primarily off of the history of France–and in large part off of the history of the late Belle Époque French Third Republic. His reference case is thus a universal (male) suffrage democracy with a strong egalitarian, anti-aristocratic, and anti-clerical ethos. Third Republic France had gone through the demographic transition: n was low. Third Republic France did not yet have the industrial research lab: g was relatively low too. Peace and good order and the absence of a culture of either extraordinary conspicuous consumption or philanthropic liturgies among the rising bourgeoisie kept ω low. And the memory of the suppression of the Paris Commune meant that the police could be relied on to keep ρ high on the shop floor.

Piketty thus assumes almost as a matter of course that the wealthier are the wealthy, the more they successfully manage the politics of the political system, even one that is in constitutional-legal terms radically egalitarian and democratic, in order to enhance the bargaining power of wealthholders. The way Piketty sees it, neoclassical economists claim that theory tells them that increasing capital-output ratios must exert strong downward pressure on the rate of profit, but experience tells us that it does not. The neoclassical assumption that λ=1 was adopted to make sense of a world in which the wealthholder share of income did not move. But that is not the world we live in….

Moreover, there is another way to break the neoclassical presumption that λ=1. Humans used to have five ways of creating economic value: through backs, through fingers, through routine control, through smiles, and through creative insight:

1. Strong backs–usually those bathed in the steroid testosterone–could do the heavy lifting.
2. Nimble fingers could do the fine manipulating.
3. Cybernetic control loops could keep the lifting and manipulating on their proper tracks.
4. Smiles–in fact, an entire universe of human social interactions–could keep us as a group all pulling in roughly the same direction, playing positive-sum rather than negative-sum economic games, and could also provide the personal services from which we derive so much of our human well-being.
5. Genuine creative insight could think up new ways of doing things and new things to do that would be useful: luxurious or convenient, and over the course of time could transform conveniences into necessities, luxuries into conveniences, and invent yet new dimensions of luxury.

The coal, steam, and metal technologies of the First Industrial Revolution devalued the strong backs. The second and third generations of the assembly lines of the Second Industrial Revolution devalued the nimble fingers. But that was okay because every machine and every process still needed a cybernetic controller. And no alternative cybernetic controller could fit in a shoebox and run on 50 W of power. Human brains remain a unique resource, one strongly complementary with capital. With labor a complement to capital the rate of profit could not but fall with an increasing wealth-to-annual-income ratio to the extent that increasing wealth took the form of increasing numbers and sophistication of machines and processes. But now rapidly-exploding information and communications technologies are severely reducing the need for human brains as blue-collar or white-collar cybernetic controllers of machines, processes, and accounting and distribution systems. Rather than just substituting for backs and fingers and leaving brains as complements to capital, now increasing capital substitutes for brains as well. What will be left are smiles–services that are inherently and necessarily personal, “face time”–and genuine creative insight. That is the world we are moving into. And is that world still a world in which labor and capital are complements?

Big questions, all. Unresolved questions, all.

But if this neoclassical presumption that λ=1 is true, Piketty’s argument largely falls apart. And if this neoclassical presumption that λ=1 is not broken in the minds of economists, Piketty’s intellectual influence will be small.

In the framework in which Matt using, the fall in the wealth-to-annual-net-income ratio from 700% in the late Belle Époque Era to 300% in the post-World War II Social Democratic Era ought to hav greatly increased the salience of capital and its ownership in income. As best as I can quickly calculate on the back of my envelope , if we calibrate the Belle Époque to Rognlie’s model, the model sees income from capital back then as roughly 18% of net total income–less than half of its actual value–and sees a sharp rise in the capital share of net income to 25% in the post-WWII Social Democratic Era. That did not happen. Something else is going on that Matt is not modeling…

Malcolm Gladwell: Black Like Them: Tthings changed when I left for Toronto…. The infamous Jane-Finch projects…

…were considered the Jamaican projects. The drug trade then taking off was said to be the Jamaican drug trade. In the popular imagination, Jamaicans were–and are–welfare queens and gun-toting gangsters and dissolute youths…. After I had moved to the United States, I puzzled over this seeming contradiction–how West Indians celebrated in New York for their industry and drive could represent, just five hundred miles northwest, crime and dissipation. Didn’t Torontonians see what was special and different in West Indian culture? But that was a naïve question. The West Indians were the first significant brush with blackness that white, smug, comfortable Torontonians had ever had. They had no bad blacks to contrast with the newcomers, no African-Americans to serve as a safety valve for their prejudices, no way to perform America’s crude racial triage. Not long ago, I sat in a coffee shop with someone I knew vaguely from college…. He began to speak of the threat that he felt Toronto now faced. It was the Jamaicans, he said. They were a bad seed… he launched into a long explanation of how, in slave times, Jamaica was the island where all the most troublesome and obstreperous slaves were sent, and how that accounted for their particularly nasty disposition today. I have told that story many times since, usually as a joke, because it was funny in an appalling way–particularly when I informed him much, much later that my mother was Jamaican. I tell the story that way because otherwise it is too painful. There must be people in Toronto just like Rosie and Noel, with the same attitudes and aspirations, who want to live in a neighborhood as nice as Argyle Avenue, who want to build a new garage and renovate their basement and set up their own business downstairs. But it is not completely up to them, is it? What has happened to Jamaicans in Toronto is proof that what has happened to Jamaicans here is not the end of racism, or even the beginning of the end of racism, but an accident of history and geography. In America, there is someone else to despise. In Canada, there is not. In the new racism, as in the old, somebody always has to be the nigger…

Should-Reads:

1. Dara Lind: Poll: Most voters in Cantor’s district actually like immigration reform: “Public Policy Polling went into Eric Cantor’s district…. They found that Cantor himself was unpopular among registered voters: 63 percent of all registered voters disapproved of his job performance, and his net approval among registered Republicans was -6 percentage points. But the poll also described an immigration reform proposal… and asked voters whether they supported it…. ‘About 72 percent of registered voters in Cantor’s district polled on Tuesday said they either “strongly” or “somewhat” support immigration reform that would secure the borders, block employers from hiring those here illegally, and allow undocumented residents without criminal backgrounds to gain legal status–three key tenets of an overhaul…. Looking just at Republicans in Cantor’s district, the poll found that 70 percent of GOP registered voters would support such a plan, while 27 percent would oppose.’… Public Policy Polling was talking to all registered voters. The voters who booted Cantor out yesterday were the ones motivated enough to show up for a Republican primary–that’s definitely a self-selecting group, and one likely to have stronger (and more conservative) feelings than other voters…”

2. Sarah Kliff: How Obama completed Mitt Romney’s work in Massachusetts: “The Bay State appears to have pulled off an impressive feat: it appears to have lowered the uninsured rate to nearly zero. Martha Bebinger of local radio station WBUR reports: ‘Between December 2013 and March of this year, the number of Massachusetts residents signed up for health coverage increased by more than 215,000. If that number holds true over time, it will mean the percentage of Massachusetts residents who lack coverage has dropped to less than 1 percent.’ Massachusetts has long had the lowest uninsured rate in the nation since it passed its universal coverage law in 2006. But its always hovered a few percentage-points above zero. In 2011, 3.9 percent of Massachusetts residents lacked insurance coverage…”

3. Carlos A. Vegh and Guillermo Vuletin: Fiscal policy responses to crises: The social impacts | vox: “The question of whether fiscal policy should be pro- or countercyclical has become increasingly relevant during the recession. This column provides causal evidence from South American countries showing the success of countercyclical policy in improving social indicators of economic success, combined with correlative evidence from Europe. This represents a strike against the case for austerity-led growth…”

Should Be Aware of:

• The Onion: “More Office Workers Switching To Fetal Position Desks: Wellness experts say curling up in a ball on the floor is the healthiest way to deal with the non-stop agony of the workday…”
• Ryan Grim: “More than any other Republican leader, Cantor was aggressively committed to the strategy of all-out opposition to President Barack Obama…. Yet… the architect of the Party of No strategy had it turned against him… suspicions among grassroots activists that Cantor was an impure conservative. On Tuesday night, the tea party said no…”
• Claude Fischer: “Those concerned with closing the wag gap ask two questions: What is happening at the workplace that seems to be pressing people to overwork? What is not happening at home that discourages women from working long hours?”
• David Weigel: David Brat defeats Eric Cantor: How did the House majority leader lose to the Tea Party?
• Patrick Iber
• Amy R. Krosch1 and David M. Amodio: Economic scarcity alters the perception of race
• Alexis Madrigal: Brian the Mentally Ill Bonobo, and How He Healed: By 2001, after four hard years of therapy and improvement, Brian had begun to integrate…. He went off Paxil at some point, after he took to sharing it (!) with the other apes…”
• Francis Spufford: “while [Iain M. Banks] was a good novelist, he was a great SF writer: an iconoclast, a changer of the landscape of imagination, a once in a generation talent. Let me try and explain why, for those of you who happen not to have read him, who maybe haven’t seen reason to dip much into SF at all. In particular, let me try and explain why this part of his work ought to be cherished…”
• Barry Ritholtz: “Any opportunity to correct myself when I make an error is an opportunity that is always appreciated. It happens to everyone all the time. But as Bridgewater Associate’s Ray Dalio has so eloquently argued, it is much better to own up to a mistake, rather than pretend it never happened, or simply hope no one notices or mentions it again in public…”
• “Iraqi officials told the Guardian that two divisions of Iraqi soldiers–roughly 30,000 men–simply turned and ran in the face of the assault by an insurgent force of just 800 fighters…”
• David Weigel: “Frank Rich materializes and is asked to weigh in on the defeat of Eric Cantor. His reaction: How did you chuckleheads in the media miss this one?… Did he ever predict that Eric Cantor would be in trouble? No. He never wrote about Cantor’s race. The first mention in New York magazine of David Brat occurred on primary night, when Jonathan Chait covered the Cantor loss and suggested that the ‘shock contained by Cantor’s defeat is almost impossible to fully convey’…”

And:

1. Fabio Rojas: “In 2000, Elizabeth Armstrong and Ernest Abel published an article… arguing that fetal alcohol syndrome had become a moral panic.… In 2013, the economist Emily Oster published a book called Expecting Better…. Like Armstrong, Oster finds that the norm against moderate alcohol consumption is  not supported by the data…. Oster frames her work… as a morally neutral project…. ‘Statistics is hard, people may not have all the facts, and you might have a mistaken belief, but as an economist,  I am trained in statistics. I can help you make a better choice.’ Thus, the reader is morally blameless. In contrast, Armstrong’s approach… goes something like this: ‘The facts we believe reflect our underlying biases. These biases reflect our evaluations of certain types of people, who may not deserve that stigma.’ Thus, if the reader buys FAS, they are implicated in an immoral action–unfairly exercising gender prejudice…. Economists may advocate unpopular policies (e.g., they are often critical of minimum wage laws) but their moral framework is fairly neutral and technocratic. If you don’t buy my policy, it’s probably because you aren’t aware of all the factors involved. You haven’t calculate the social welfare function properly! In contrast, sociologists often make arguments that implicate the moral character of the audience. And that doesn’t buy you a lot of friends…”

2. Kathleen Geier et al.: Does Feminism Have a Class Problem?: “Welcome to The Curve, where feminists talk economics… with Kathleen Geier as your host…. We have long been frustrated by two phenomena. One is the way in which women’s voices are so frequently sidelined in economic debates…. The flipside of this problem is that, even amongst ourselves, feminists don’t talk enough about economics. Too often, discussions about so-called culture problems like abortion access and domestic violence lack the economic context necessary to appreciate their true causes and repercussions. When topics such as the pay gap or workplace discrimination come up, coverage is often superficial and focused on the experiences of a tiny elite. Meanwhile, the economic pressures on women are mounting: as inequality soars, women make up a growing proportion of the long-term unemployed, low-income women lead a growing majority of single-mother households, middle-income women struggle with few social supports, and even the progress being made by high-income women into the executive suites remains glacially slow. Hence The Curve—where feminists will hash out economic issues and intervene in feminist debates from an economic perspective…”

3. **Elizabeth StokerAn advisor to Pope Francis says Catholicism is incompatible with libertarianism. He’s right: “[Kevin] Williamson… pre-supposes that the production of wealth gives its producers some special entitlement to it…. The kernel of Maradiaga’s argument: when states are assembled in order to protect and enforce ownership to the exclusion of the poor, then a twofold error has been committed…. First, there is no divine right to private property in the eyes of the Church…. Augustine’s point is that property is a de-facto creation of the state… [and] property has a spiritual dimension: all things in common belong to the people of God. But in temporal matters that heavenly distribution isn’t honored, and so we rely on states to create institutions of property that are hopefully fair and just…. Second… Williamson says government simply has no moral dimension… But to deny the moral dimension of government is to suggest that there are realms of human life exempt, somehow, from moral judgment, and this is emphatically contrary to the Christian vision. A hammer may be a piece of technology, but there’s a decided moral distinction between using it to nail down a beam and using it to bash in a skull. Likewise, the state may be a tool, but the way it shapes property distribution–to either care for the poor, ill, and those in need or to ignore them–is absolutely subject to moral inquiry. This is the point Cardinal Maradiaga made, and it has been a powerful theme in Pope Francis’ ministry as well…”

Already-Noted Must-Reads:

1. Matt Bruenig: Fertility Rates and Government Intervention: ” I have been writing on the weird conservative tax plan to give money to every parent who isn’t poor (I, II, III). This is not how it was initially sold of course. My favorite in the genre of extreme deception about the plan came from Reihan Salam who wrote an entire piece… as if he wants to assist all parents: it’s costly to raise kids, kids are important for the future, etc. He never lets on that his actual plan is not a natalist policy… but a policy to give more money to all parents who aren’t poor. The exclusion of the poor from this massive welfare state expansion is curious on a number of grounds. The US has the highest child poverty rates in the developed world precisely because we have pathetic levels of family benefits. Excluding the poor from an expansion in family welfare benefits seems particularly cruel in that context…. The argument is that the government distorts incentives to have children by intervening in the economy via creating Social Security and Medicare. And so this plan to give money to every parent except the poor ones will correct that… hold all else equal in society, but then tick SS and Medicare off and guess as to how many more kids that ticking off would result in. But that does not tell us how many children there would be without government intervention. We should hold all else equal in society and then tick off property law, contract law, securities law, corporate law, commercial law, patent law, copyright law, and every single government economic institution. I’d guess that ticking off all of those institutions, and thereby bringing us to the world ‘without government intervention’… would cause national income to plummet and birth rates to massively spike, maybe to seven children per woman…. It’s such an out-of-left-field argument here that it is extremely difficult to imagine anyone started with ‘let’s end child-having distortions’ and then worked their way to this proposal. What’s more likely is they started with this proposal and then worked backwards towards some argument for it…”

2. Sean Trende: What Cantor’s Loss and Graham’s Win Mean: “Watch Dave Brat’s interview on Fox News here. He is not Tom Tancredo; immigration reform is not his main focus. He’s hitting a lot of the themes that… in many ways echo the Democratic Netroots’ discontent with “Wall Street Democrats” in the mid-2000s (a discontent that led, in part, to Obama’s victory in the 2008 primaries, to the discomfort of some in the Democratic Leadership Council)…. The GOP base is frustrated over the direction of the country… a large portion of that frustration is directed at the Democratic Party, and Barack Obama in particular.  But it is also directed at the party establishment…. When pundits say that the Tea Party seems like it is more interested in defeating Republicans than Democrats, they aren’t entirely off base. They just miss the reasoning behind that animus toward the GOP establishment…”

3. Noah Smith: Japan’s Abe Is the World’s Best Leader: “I was a Shinzo Abe skeptic. When Abe swept back into power in 2012, I thought he was just going to try to talk down the yen and give a little boost to stocks, increasing his public support just long enough to ram through a revision of Japan’s pacifist constitution. I thought he was going to ignore Japan’s moribund economy and long-festering social problems in order to throw red meat to his right-wing backers. Boy, was I wrong. I was wrong, wrong, wrong…. Shinzo Abe is the most effective national leader in the world right now… the biggest monetarist push in world history. He went the opposite direction of Europe, and–unlike the U.S.–he gave every indication that the shift toward [expansionary] monetarism was permanent. The result: Japan has escaped deflation. The stock market is up, growth is way up and even wages are finally starting to rise…. Unlike everyone else… Abe listened to Milton Friedman, and the results are looking good. As the Fed contemplates not whether to taper its quantitative easing but how fast, it might want to look at what’s happening in Japan. But monetary policy was just the beginning… the role of women… moving to cut Japan’s corporate tax rate… deregulation efforts… suggested bringing in 200,000 immigrants a year…. He has turned his nationalism into something that looks like liberal internationalism, standing up for the various small Asian countries… championing the rule of law and the freedom of the seas…. But where Abe really shines is in comparison with previous Japanese leaders… The rest of the world should be paying attention…”

4. David Wessel: “From @macroadvisers Q1-2014 GDP Tracking -2.1%; Q2-2014 GDP Tracking 3.7%…”