Should-Read: Dylan Matthews: Larry Summers on the Midwest and South: the case for a government bailout of the heartland: “In 2016, only 5 percent of men ages 25 to 54 in Alexandria, Virginia (a rich DC suburb), were not working…

…In Flint, Michigan, the share was 51 percent. That staggering fact frames a new paper by three Harvard economists—Benjamin Austin, Ed Glaeser, and former Treasury secretary/chief Obama economic adviser Larry Summers…. it’s notable that Glaeser and Summers are now embracing an active government role in revitalizing struggling parts of the country, and trying to work through the best way to do it.

While the idea that Youngstown, Ohio, needs more help than San Francisco might seem intuitive to a non-economist, the economic case for policies targeting certain areas, rather than certain kinds of individuals, is somewhat shakier…. Most variation in incomes is within regions, not between them…. Why implement policies to boost specific geographic areas when you could just direct money to poor individuals instead?… Austin, Glaeser, and Summers argue that place-based policies are necessary because different regions respond to various public policies differently…. The authors roughly estimate how responsive workers in different areas are to employment subsidies that boost their wages by estimating how employment changes in different areas as wages rise and fall. Sure enough, they find that West Virginians are more than three times as sensitive to changes in the rewards to work as Wyoming residents are. That is: Employment subsidies targeted at struggling states like West Virginia are likely to be considerably more effective than subsidies to better-off states like Wyoming…

Should-Read: Josh Barro and Isaac Chotiner: Policy without politics, immigration, and Trump’s self-awareness: Isaac Chotiner: “Are you enjoying this moment? By ‘this moment’, I mean the last 14 to 15 months of being a political commentator?…

…Josh Barro: No, I’m not. I worked in public policy think tanks for a few years before I did [political commentary], and I wrote specifically on state and local government finance. So the reason I got into writing about politics was to be able to write about some of those issues, where I felt like I was able to explain things more clearly than people might otherwise hear them explained, help them understand relatively complicated areas of policy and what’s a good idea or a bad idea. And our politics are just not very much about policy right now…. The news that we’ve had on the tariffs over the last week or so, if the president actually goes through with this policy, will have important economic effects, but there’s been a lot of time spent on, frankly, bullshit…. I go crazy when people debate the ins and outs of what Trump said about DACA policy. It just seems irrelevant to understanding how Washington, over these last 14 months, is actually working….

Isaac Chotiner: If I’ve ever read anyone who I’ve considered kind of a centrist technocrat, it would be you, which I would assume you would view as somewhat of a badge of honor, to be referred to as that. Or not. What do you think?

Josh Barro: I think centrist technocracy has not had a great decade…. And we’re still reckoning with this. A lot of the big mistakes were in monetary policy, especially in Europe. The eurozone, which was absolutely seen as a technocratic project, has been a disaster, especially for Southern Europe, and it’s been fueling a lot of these populist movements….

Isaac Chotiner: Is there something inherent in centrist technocracy that you’re likely to have these kinds of problems? For example, in the case of immigration, I guess you could say that the reason that no one wanted to enforce these things was because the interests involved didn’t want them to. I guess what I’m wondering is: Does this change your larger analysis of whether centrist technocracy can work, rather than just think, “Oh, various bureaucrats made stupid choices or choices that were politically unfortunate”?

Josh Barro: Why did you not have robust immigration enforcement? It’s partly because interest groups on both sides didn’t really want it. Businesses wanted to have cheap labor available to them, both legally and then also illegally. Part of the advantage of illegal immigration is that they don’t have to pay people minimum wage. They don’t have to follow labor laws. And then on the left, you had various reasons for wanting higher levels of immigration. Often, the people who might immigrate are relatives and associates of people who are already here. It’s perfectly reasonable that they want those people to be able to immigrate. There are also political effects. Democrats benefit from demographic change in the country. So basically you had two sides of the issue that were not motivated to enforce, and those interest group voices, especially the business community, are overrepresented in Washington…. As for whether a centrist technocratic government is possible that works well, we’ve seen some countries that have avoided these problems. Canada and Australia are good examples.
Canada has managed their immigration system very well, and they have a large number of immigrants….

Isaac Chotiner: I think the one that’s more shocking to me than the snobbiness—and I agree, there was a certain snobbiness to some of that—is the cruelty, which I still can’t quite get over, has not registered more with people. He’s just not nice.

Josh Barro: The weird thing about this, though, is he’s been like that forever. And yet, in his contexts, in business and entertainment, he was able to be like this and then turn on a dime and act like your friend again, and people would go along with it. It’s like he’s clearly having fun, and it’s like people halfway feel like they’re in on the joke. So obviously, I don’t think Mexican immigrants feel this way. But if you’re some celebrity who was feuding with Donald Trump, and he said horrible things about you, you didn’t take it quite as seriously as you would with some other people. And frankly, I think some voters have felt that way. He did about as well with the Hispanic community as Mitt Romney had done, which is not great, but it’s millions and millions of Hispanics went out there and voted for Donald Trump after all the things that he said. There’s something about him that allows him to be nasty and for people to not react in the same way that they would react if a normal person was that nasty.

Isaac Chotiner: Before the campaign especially, there was a twinkle in his eye about some stuff. If you ever go back and listen to him on Howard Stern, there’s some sense that he has an understanding of himself as a character and could find humor in that. I find that to be less and less the case now. I don’t feel like he looks like he’s having fun. Occasionally, like with his tweet about the Oscars, saying I’m the only star…. It was funny and self-aware, exactly. And I find the self-awareness aspect of himself as a character to be less and less a part of him now.

Josh Barro: I think it’s two things. One is that the cruelty appeals to some people, and it fits in with the message of basically, “They’ve been taking advantage of you, and I’m not going to let them take advantage of you anymore.” He demonstrates strength through cruelty, which I think is ridiculous, but it appeals to some number of people. But then the other thing to remember is that Donald Trump is not popular. So I think most people do have the reaction to this that you have to it. So if you’re asking, “Am I taking crazy pills?,” it’s no. Most people agree with you…

Should-Read: Ernest Liu (2016): INDUSTRIAL POLICIES IN PRODUCTION NETWORKS: “Many developing countries adopt industrial policies that push resources towards selected economic sectors…

…How should countries choose which sectors to promote? I answer this question by characterizing optimal industrial policy in production networks embedded with market imperfections. My key finding is that effects of market imperfections accumulate through backward demand linkages, thereby generating aggregate sales distortions that are largest in the most upstream sectors. The distortion in sectoral sales is a sufficient statistic for the ratio between social and private marginal product of sectoral inputs; therefore, there is an incentive for a well-meaning government to subsidize upstream sectors. My sufficient statistic predicts the sectors targeted by government interventions in South Korea in the 1970s and in modern day China…

Should-Read: Dani Rodrik: Trump’s Trade Gimmickry: “The imbalances and inequities generated by the global economy cannot be tackled by protecting a few politically well-connected industries, using manifestly ridiculous national security considerations as an excuse…

…Trump’s trade measures to date amount to small potatoes. In particular, they pale in comparison to the scale and scope of the protectionist policies of President Ronald Reagan’s administration in the 1980s. Reagan raised tariffs and tightened restrictions on a wide range of industries, including textiles, automobiles, motorcycles, steel, lumber, sugar, and electronics. He famously pressured Japan to accept “voluntary” restraints on car exports. He imposed 100% tariffs on selected Japanese electronics products when Japan allegedly failed to keep exported microchip prices high….

Trump’s protectionism may well have very different consequences; history need not repeat itself. For one thing, even though their overall impact remains limited, Trump’s trade restrictions have more of a unilateral, in-your-face quality…. The voluntary export restraints (VERs) of the 1980s in autos and steel, for example, were administered by the exporting countries. This allowed Japanese and European companies to collude in raising their export prices for the US market…. Another contrast with the Reagan-era measures is that we are living in a more advanced stage of globalization, and the problems that have accompanied it are greater….

A serious reform agenda would instead rein in the protection of drug companies and skilled professionals such as physicians… address concerns about social dumping and policy autonomy… target areas where the gains from trade are still very large, such as international worker mobility…. But it is in the domestic arena that the bulk of the work needs to be done. Repairing the domestic social contract requires a range of social, taxation, and innovation policies to lay the groundwork for a twenty-first-century version of the New Deal…

Should-Read: Noah Smith: California Affordable Housing Is No Mystery: Just Build More: “Urban California should emulate Tokyo, which ensured the supply of dwellings stayed ahead of population growth.
By Noah Smith…

…After years of dithering and hoping the problem would go away, California is finally taking steps to address its housing crisis…. Californians have only to gaze across the Pacific, to the city of Tokyo…. As of 2015, the average residential rent in Tokyo was about $2.53 a square foot at current exchange rates. That’s about half the level for San Francisco…. Why is Tokyo housing so affordable? It’s not because Japan’s population is shrinking. More people crowd into the capital city every year…. Tokyo rent is cheaper because it builds lots of housing… building more and building up….

The national government revised regulations to allow more density. Combined with Japan’s famously simple zoning regulations, this resulted in a nation full of dense yet pleasant cities that offer decent, affordable living space. A key part of the equation, of course, is Japan’s efficient, convenient networks of public transportation….

California… is on the right track. The idea of building dense housing around transit hubs—a very Japan-like development pattern—is an especially good one. Simplified zoning codes, curbs on repeated administrative challenges to housing projects and less severe height restrictions would also be great ideas. Government-subsidized housing—which Japan also provides for its low-income citizens—is an important part of the mix…

Should-Read: So is it now time to shift to the prime-age employment rate as our principal thumbnail shorthand gauge for the state of the labor market?: Nick Bunker: Just how tight is the U.S. labor market?: “Spoiler: There’s room for the job market to improve…

…If the current unemployment rate is indicative of a very tight labor market, then why does wage growth continue to be so tepid? If the supply of potentially employable workers is tapped out, then the price of labor—wages—should grow at an increasingly faster pace. Yet as the unemployment rate declined and hit levels many associate with “full employment,” wage growth has yet to break out of the range of 2 percent to 2.5 percent per year. One simple explanation of this anomaly of a tight labor market with weak wage growth is that the labor market is not actually that tight. Indeed, the unemployment rate currently does not do a good job of predicting wage growth. What the data show is that a given unemployment rate can be associated with a wide range of wage-growth levels….

The unemployment rate is still a useful measure of the health of the labor market. But it should be taken in the context of other measures. Even if two labor markets have the same unemployment rate, one will be tighter than the other if their employment rates vary significantly. When assessing the health of the labor market, policymakers have to look at both unemployment and employment. If the U.S. labor market still has room to run, then policymakers should look favorably at monetary and fiscal policies that would increase aggregate demand. This information is particularly important for policymakers at the Federal Reserve as they consider the pace at which they raise interest rates…

Should-Read: Michael Kremer (1993): The O-Ring Theory of Economic Development: “This paper proposes a production function describing processes subject to mistakes in any of several tasks…

…It shows that high-skill workers-those who make few mistakes-will be matched together in equilibrium, and that wages and output will rise steeply in skill. The model is consistent with large income differences between countries, the predominance of small firms in poor countries, and the positive correlation between the wages of workers in different occupations within enterprises. Imperfect observability of skill leads to imperfect matching and thus to spillovers, strategic complementarity, and multiple equilibria in education….

Quantity cannot be substituted for quality… workers of similar skill will be matched together… schedule of wages as a function of worker skill. Under this production function, small differences in worker skill lead to large differences in wages and output, so wage and productivity differentials between countries with different skill levels are enormous…. Firms will offer jobs to only some workers rather than paying all workers their estimated marginal product. If tasks are performed sequentially, high-skill workers will be allocated to later stages of production…. If firms can choose among technologies with different numbers of tasks, the highest skill workers will use the highest n technology…. These predictions of the model match stylized facts about the world, and although each of these facts may be due to a variety of causes, together they suggest that O-ring production functions are empirically relevant.

Imperfect matching of workers due to imperfect information about worker skill leads to positive spillovers and strategic complementarity in investment in human capital. Thus, subsidies to investment in human capital may be Pareto optimal. Small differences between countries in such subsidies or in exogenous factors such as geography or the quality of the educational system lead to multiplier effects that create large differences in worker skill. If strategic complementarity is sufficiently strong, microeconomically identical nations or groups within nations could settle into equilibria with different levels of human capital.

Michael Kremer (1993): The O-Ring Theory of Economic Development: Quarterly Journal of Economics 100:3 (August), pp. 551-575

https://www.icloud.com/keynote/065s1qQKHgBP90nMshrWmh3sg

Should-Read: Lots to think about about how statistics and economics should be being taught these days: Drew Conway (2013): The Data Science Venn Diagram: “The primary colors of data: hacking skills, math and stats knowledge, and substantive expertise…

…On Monday we spent a lot of time talking about “where” a course on data science might exist at a university. The conversation was largely rhetorical, as everyone was well aware of the inherent interdisciplinary nature of the these skills; but then, why have I highlighted these three? First, none is discipline specific, but more importantly, each of these skills are on their own very valuable, but when combined with only one other are at best simply not data science, or at worst downright dangerous.

For better or worse, data is a commodity traded electronically; therefore, in order to be in this market you need to speak hacker…. Being able to manipulate text files at the command-line, understanding vectorized operations, thinking algorithmically; these are the hacking skills that make for a successful data hacker. Once you have acquired and cleaned the data, the next step is to actually extract insight from it. In order to do this, you need to apply appropriate math and statistics methods, which requires at least a baseline familiarity with these tools. This is not to say that a PhD in statistics in required to be a competent data scientist, but it does require knowing what an ordinary least squares regression is and how to interpret it.

In the third critical piece—substance—is where my thoughts on data science diverge from most of what has already been written on the topic. To me, data plus math and statistics only gets you machine learning…. [But] science is about discovery and building knowledge, which requires some motivating questions about the world and hypotheses that can be brought to data and tested with statistical methods….

Finally, a word on the hacking skills plus substantive expertise danger zone. This is where I place people who, “know enough to be dangerous,” and is the most problematic area of the diagram. In this area people who are perfectly capable of extracting and structuring data, likely related to a field they know quite a bit about, and probably even know enough R to run a linear regression and report the coefficients; but they lack any understanding of what those coefficients mean. It is from this part of the diagram that the phrase “lies, damned lies, and statistics” emanates, because either through ignorance or malice this overlap of skills gives people the ability to create what appears to be a legitimate analysis without any understanding of how they got there or what they have created. Fortunately, it requires near willful ignorance to acquire hacking skills and substantive expertise without also learning some math and statistics along the way. As such, the danger zone is sparsely populated, however, it does not take many to produce a lot of damage.

Should-Read: *Anatole Kaletsky *: The Market Dogs That Didn’t Bark: “The bond market’s complacency about US interest rates and inflation may be surprising… [may] turn out to be an expensive mistake… but it is a fact…

…The 30-year US bond yield is still only 3.2% – exactly where it was a year ago and in most of 2015 and 2016. It is almost a full percentage point lower than in 2013 and two full points below the level in 2007…. The bond market believes that the long-term outlook for growth and inflation is more or less the same as it was in the period from 2015 until early last year – and much weaker than it was a decade ago…. For the moment, however, the behavior of long-term US interest rates implies an almost unshakeable confidence among investors that inflation will never again become a serious threat, despite President Donald Trump’s decision to slash taxes, boost government spending, and abandon deficit limits in a US economy already nearing full employment.

This points our investigation toward the third dog that didn’t bark. Currencies were almost completely unmoved by the stock-market commotion. This quiescence makes sense: If investors are unperturbed by inflationary pressures in the US economy, they can surely be much more confident about the rest of the world. In Europe, Japan, and many emerging markets, cyclical upswings are more recent, inflation is lower, and economic management is sounder than in the US. The implication is obvious: The global expansion and bull market will continue, but leadership will move from America to the more promising economies of Europe, Japan, and the emerging world.