Category: Equitablog

Should-Read: Secular stagnation as the result of a collapse in the financial sector’s risk-bearing capacity. Calls for a “somewhat comprehensive socialization of investment”, no? If the private sector cannot figure out a way to mobilize society’s collective risk-bearing capacity to bear the risks of enterprise, then the public sector is all we got, no?

Ricardo Caballero, Alp Simsek: Risk intolerance and the global economy: A new macroeconomic framework: “Interest rates continue to decline across the globe, while returns to capital remain constant or increasing…

…The reasons for this widening risky-safe gap are wide-ranging…. The secular rise of risk intolerance… [needs] a new macroeconomic framework suitable for this environment… to discuss the current global macroeconomic context, its underlying fragility, and the coexistence of low equilibrium interest rates and high speculation….

While there are a variety of contributing factors behind this widening risky-safe return gap, ranging from reduced competition in goods markets to technological changes, the dominant one is a steady rise in the equity risk premium since 2000, which was exacerbated by the Subprime Crisis and has only recently began to recede in the US, but has continued its rise in the rest of the G5 economies (see Figure 1). This rise in the degree of risk intolerance is a global phenomenon with significant macroeconomic implications…. In the current risk-intolerant environment it is important to… highlight… two potential gaps…. [O]utput but also risks.. need corresponding demands. If the demand for risk is insufficient, output and risk gaps emerge. These gaps feed into each other and have the potential to cause deep contractions….

Imagine… macroeconomic uncertainty rises… a reduction in economic agents’ desire to hold the risk produced by the productive capacity, embodied in… financial assets…. In this context, monetary policy works by reducing the opportunity cost of risky investments…. But what if interest rates cannot be adjusted enough to fully offset the rise in increased volatility? In developed economies… the zero lower bound…. In emerging market economies… concerns with sharp depreciations or inflationary spikes. Then a risk gap develops… reduces consumption through a wealth effect and investment through a standard valuation (marginal-Q) channel. This causes an output gap, which lowers profits and asset prices, and further increases the risk gap. This potentially deadly embrace between risk and output gaps can only be stopped by enough optimism….

This risk intolerant environment and perspective also permeates normal (non-recessionary) low-volatility times…. Depressed rates fuel speculation by relatively optimistic agents. When there is more speculation, the economy is even more exposed to a spike in volatility, as this could now wipe out optimists and lead to a deeper crisis due to lack of optimism…. Thus, speculation adds to the uncertainty perceived by the median agent and further lowers the natural rate…. In this environment, there is clear scope for macroprudential policy, because optimists’ risk taking (and the resulting speculation) is associated with aggregate demand externalities…. Macroprudential policy that restricts optimists’ risk taking can lead to a Pareto improvement (that is, we evaluate investors’ welfare according to their own beliefs). Moreover, the policy is naturally procyclical as the tightening of prudential regulation always has a negative impact on current aggregate demand–but this effect can be easily offset with interest rate policy when volatility is low, but not when there is a severe volatility spike and the effective lower bound is binding….

The world economy is currently ‘bipolar’, in the sense that there is a very short distance (in volatility space) between the current (good momentum, low volatility, high speculation) environment, and a global recession induced by a risk perception spike.

Must-Read: Jennifer Rubin: Ending DACA would be Trump’s most evil act: “the GOP under Trump has defined itself as the white grievance party… https://www.washingtonpost.com/blogs/right-turn/wp/2017/09/04/trump-ending-daca-would-be-cruelty-wrapped-in-a-web-of-lies/

…bluntly, a party fueled by concocted white resentment aimed at minorities. Of all the actions Trump has taken, none has been as cruel, thoughtless or divisive as deporting hundreds of thousands of young people who’ve done nothing but go to school, work hard and present themselves to the government. The party of Lincoln has become the party of Charlottesville, Arpaio, DACA repeal and the Muslim ban. Embodying the very worst sentiments and driven by irrational anger, it deserves not defense but extinction.

Must-Read: Paul Krugman: Why Can’t We Get Cities Right?: “Greater Houston still has less than a third as many people as greater New York… https://www.nytimes.com/2017/09/04/opinion/houston-harvey-infrastructure-development.html

…but it covers roughly the same area… has a smaller percentage of land that hasn’t been paved… terrible traffic and an outsized pollution footprint even before the hurricane. When the rains came, the vast paved-over area meant that rising waters had nowhere to go. So is Houston’s disaster a lesson in the importance of urban land-use regulation, of not letting developers build whatever they want, wherever they want? Yes, but….

San Francisco… famous for its NIMBYism—that is, the power of “not in my backyard” sentiment to prevent new housing construction… soaring rents and home prices. The median monthly rent on a one-bedroom apartment in San Francisco is more than $3,000, the highest in the nation and roughly triple the rent in Houston; the median price of a single-family home is more than $800,000…. San Francisco housing is now quite a lot more expensive than New York housing, so why not have more tall buildings?… Politics has blocked that kind of construction, and the result is housing that’s out of reach for ordinary working families….

America’s big metropolitan areas are pretty sharply divided between Sunbelt cities where anything goes, like Houston or Atlanta, and those on the East or West Coast where nothing goes, like San Francisco or, to a lesser extent, New York. (Chicago is a huge city with dense development but relatively low housing prices; maybe it has some lessons to teach the rest of us?)… This is one policy area where “both sides get it wrong”—a claim I usually despise—turns out to be right….

It’s not hard to see what we should be doing…. Regulation that prevents clear hazards, like exploding chemical plants in the middle of residential neighborhoods, preserves a fair amount of open land, but allows housing construction. In particular, we should encourage construction that takes advantage of the most effective mass transit technology yet devised: the elevator. In practice, however, policy all too often ends up being captured by interest groups… real-estate developers… affluent homeowners… less willing to let newcomers in…

http://delong.typepad.com/2017-09-04-cbsa-report-chapter-3-data.csv

Should-Read: All of Mark Thoma’s links are worth reading today:

Mark Thoma: Economist’s View: Links for 09-04-17: “America needs its unions more than ever  – Larry Summers… http://economistsview.typepad.com/economistsview/2017/09/links-for-09-04-17.html

…Could independent central banks be advisory? – mainly macro. The integration of economic history into economics – VoxEU. Teachers and Authors, Students and Readers – Economic Principals. Me On Leveraged WTFs- I Mean, ETFs… – Jodi Beggs. Innovation in Economics Pedagogy and Publishing – Rajiv Sethi. Get Ready for Technological Upheaval by Expecting the Unimagined – NYTimes. A Serf on Google’s Farm – Josh Marshall.

Should-Read: Nicole Belle: Sunday Morning Bobblehead Thread: “It is a sad statement on the state of cable news today that a smarter conversation on climate change can be had in Teen Vogue than on any one of the shows… http://crooksandliars.com/2017/09/sunday-morning-bobblehead-thread

…There can be no more shortcuts to savings and profit as we invest in the skeletons that support our civilization. As we mourn for Houston, we must go beyond thoughts, prayers, and donations—which is not to say all of these are not necessary. But we must also insist on having a mind for future prevention. The nonsense political debate will continue to rage with regard to how much man is to blame in the undeniable trend toward climate change, but science guarantees us that the sort of extreme weather unfolding in Houston is our new normal, regardless of its root cause. Working toward adaptation through preparation is not a choice, but an inevitability. Our current approach is like sitting next to a sandcastle, pretending we had no idea it was going to get swept away—only the sandcastle is civilization, and we know damn well that the waves are coming in…

Must-Read: Brink Lindsey: The End of the Working Class: “The nightmare of the industrial age was that the dependence of technological civilization on brute labor was never-ending… https://www.the-american-interest.com/2017/08/30/end-working-class/

…Those old nightmares are gone—and for that we owe a prayer of thanks. Never has there been a source of human conflict more incendiary than the reliance of mass progress on mass misery…. But the old nightmare, alas, has been replaced with a new one…. Now it is feelings of uselessness that threaten to leach away people’s humanity. Anchored in their unquestioned usefulness, industrial workers could struggle personally to endure their lot for the sake of their families, and they could struggle collectively to better their lot. The working class’s struggle was the source of working-class identity and pride.

For today’s post-working-class “precariat,” though, the anchor is gone, and people drift aimlessly from one dead-end job to the next…. The scale of the challenge facing us is immense. What valuable and respected contributions to society can ordinary people not flush with abstract analytical skills make? How can we mend fraying attachments to work, family, and community?

There are volumes to write on these subjects, but there is at least one reason for hope. We can hope for something better because, for the first time in history, we are free to choose something better. The low productivity of traditional agriculture meant that mass oppression was unavoidable; the social surplus was so meager that the fruits of civilization were available only to a tiny elite, and the specter of Malthusian catastrophe was never far from view. Once the possibilities of a productivity revolution through energy-intensive mass production were glimpsed, the creation of urban proletariats in one country after another was likewise driven by historical necessity. The economic incentives for industrializing were obvious and powerful, but the political incentives were truly decisive. When military might hinged on industrial success, geopolitical competition ensured that mass mobilizations of working classes would ensue.

No equivalent dynamics operate today. There is no iron law of history impelling us to treat the majority of our fellow citizens as superfluous afterthoughts. A more humane economy, and a more inclusive prosperity, is possible…. There is a land of milk and honey beyond this wilderness, if we have the vision and resolve to reach it.

Should-Read: Paul Krugman: @paulkrugman on Twitter: “Thinking more about why we mess up urban land use. Background: population-weighted density, from Census…” https://twitter.com/paulkrugman/status/904348528700530688 https://t.co/Up40gCypzw

Should-Read: Larry Summers: America needs its unions more than ever: “I suspect the most important factor… is that the bargaining power of… workers has decreased… https://www.ft.com/content/180127da-8e59-11e7-9580-c651950d3672

…Technology has given employers more scope for replacing Americans with foreign workers, or with technology, or by drawing on the gig economy. So their leverage to hold down wages has increased. On the other [side]… it is harder than it used to be to move to opportunity…. Consumers also appear more likely now to have to purchase from monopolies…. On this Labor Day we would do well to remember that unions have long played a crucial role in the American economy in evening out the bargaining power between employers and employees…. The shrinking of the union movement to the point where today only 6.4 per cent of private sector workers—a decline of nearly two-thirds since the late 1970s—are in unions is one important contributor to the decline in the relative position of labour in general and those who work with their hands in particular. The decline in the unions is also a contributor to the pervasive sense that too often our political system is for sale to the highest bidder….

In an era when the most valuable companies are the Apples and the Amazons rather than the General Motors and the General Electrics, the role of unions cannot go back to being what it was. But on this Labor Day any leader concerned with the American middle class needs to consider that the basic function of unions—balancing the power of employers and employees—is as important to our economy as it has ever been.

Must-Read: Because economic theory can be nothing but crystalized or distilled economic theory:

Robert M. Solow (1985): Economic History and Economics: “Economics is a social science… subject to Damon Runyon’s Law that nothing between human beings is more than three to one… http://www.jstor.org/stable/pdf/1805620.pdf?seq=1#page_scan_tab_contents

…Much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity. Moreover, all narrowly economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors…. As soon as time-series get long enough to offer hope of discriminating among complex hypotheses, the likelihood that they remain stationary dwindles away, and the noise level gets correspondingly high. Under these circumstances, a little cleverness and persistence can get you almost any result you want. I think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief. Indeed, some of Fortune’s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices.

If I am anywhere near right about this, the interests of scientific economics would be better served by a more modest approach. There is enough for us to do without pretending to a degree of completeness and precision which we cannot deliver…. The true functions of analytical economics are… to organize our necessarily incomplete perceptions about the economy, to see connections that the untutored eye would miss, to tell plausible-sometimes even convincing-causal stories with the help of a few central principles, and to make rough quantitative judgments about the consequences of economic policy and other exogenous events.

In this scheme of things, the end product of economic analysis is likely to be a collection of models contingent on society’s circumstances-on the historical context, you might say-and not a single monolithic model for all seasons….

What economic history offers… is more interesting. If the proper choice of a model depends on the institutional context-and it should-then economic history performs the nice function of widening the range of observation available to the theorist. Economic theory can only gain from being taught something about the range of possibilities in human societies. Few things should be more interesting to a civilized economic theorist than the opportunity to observe the interplay between social institutions and economic behavior over time and place….

If the project of turning economics into a hard science could succeed, it would surely be worth doing. No doubt some of us should keep trying….

There are, however… reasons for pessimism…. Hard sciences dealing with complex systems… less complex than the U.S. economy… succeed because they can isolate, they can experiment, and they can make repeated observations under controlled conditions[;]… or because they can make long series of observations under natural but essentially stationary conditions…. Neither of these… is open to economists….

A clear and productive division of labor between the economist and the economic historian… economist… concerned with making and testing models of the economic world as… we think it is[;]… economic historian… whether this or that story rings true when applied in earlier times or other places, and, if not, why not…. Economic history can offer the economist a sense of the variety and flexibility of social arrangements and thus, in particular, a shot at understanding a little better the interaction of economic behavior and other social institutions…