Should-Read: Martin Wolf: Brexit has replaced the UK’s stiff upper lip with quivering rage: “In part, the UK is victim of its past successes…

…A small offshore island became, temporarily, a superpower… defined… against Europe and… any power wishing to dominate Europe…. Now, Europe is uniting while the UK is very much not a superpower. So what does it choose? Is it to be an irrelevant offshore island or a part of a united Europe? The choice has to be divisive. When divisions are so deep, nobody is considered neutral….

How will this end? The answer is that anything is possible. Could there still be a “no-deal Brexit”? Yes. Could there be another referendum? Yes. But the likelihood is that the UK will exit on terms laid down, in detail, by the EU. When a country is this divided and its political processes are in such disarray, someone else has to sort things out. The EU will do so, because that is in its interests. The EU will not let the UK have its cake and eat it. It is led by people who also have a historical goal: not to return to the past. Their history was not British history and their aims are not British aims. They will determine the terms of the separation. We will then see whether the UK’s civil war is resolved, or renewed in other, yet more bitter, ways.

Should-Read: Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez and Gabriel Zucman: Inequality is not inevitable–but the US ‘experiment’ is a recipe for divergence: “Income inequality has increased in nearly every country around the world since 1980–but at very different speeds…

…It is possible for institutions and policymakers to tame the unequalising forces of globalisation and technological change. And it is also possible to unleash those forces with renewed vigour, as in the case of the latest US tax plan. In 1980, both sides of the Atlantic showed similar levels of inequality. Since then, however, the gap between the richest and the rest has surged in the US, while in western Europe it has increased only moderately. In both regions, the top 1% of adults earned about 10% of national income in 1980. Today that cohort’s share has risen modestly to 12% in western Europe, but dramatically to 20% of all income in the US…. This boomtime at the very top has not benefited the rest of the American population in any measurable way…. What explains this dramatic divergence? The US has experienced a perfect storm of radical policy changes which have all contributed to this surge in inequality…. Many observers have been quick to blame globalisation, China and technology for the stagnation of working-class wages in the US. But… the US has run a unique experiment since the 1980s–and the results have been uniquely disastrous. Bad policy can have a real impact on millions of lives, for decades. But what governments have done, they can still undo…

Should-Read: If the Federal Reserve’s 2%/year PCE (2.5%/year CPI) inflation target were appropriate, there would be only a weak case for the proposition that the Federal Reserve is following an inappropriately tight monetary policy. Unfortunately, the Federal Reserve’s current inflation target is not appropriate: the zero lower bound, and the Federal Reserve’s limited power and willingness to do “what it takes” at the zero lower bound, means that a 2%/year PCE inflation target is almost surely inappropriately low. It runs enormous risks of prolonged, deep recession for no countervailing gain. Hence even with today’s inflation number, I still say that there is a strong case for the proposition that the Federal Reserve is following an inappropriately tight monetary policy: Katia Dmitrieva: U.S. Consumer Prices Top Forecasts, Sending Markets Tumbling: “Core gauge advances 0.3% from prior month, above projections. Apparel index rises 1.7%, most in almost three decades…

…U.S. consumer prices rose by more than projected in January as apparel costs jumped the most in nearly three decades. The report sent Treasuries and stocks tumbling, as it added to concerns about an inflation pickup that have roiled financial markets this month. The consumer price index rose 0.5 percent from the previous month, above the median estimate of economists for a 0.3 percent increase, a Labor Department report showed Wednesday. Excluding volatile food and energy costs, the so-called core gauge increased 0.3 percent, also above forecasts for 0.2 percent. It was up 1.8 percent from a year earlier, higher than the 1.7 percent estimate. The yield on 10-year Treasuries rose to 2.86 percent, while U.S. stock futures fell, as the figures renewed investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated…

Should-Read: Marta Lachowska, Alexandre Mas, Stephen Woodbury: Sources of displaced workers’ long-term earnings losses: “We estimate the earnings losses of a cohort of workers displaced during the Great Recession…

…decompose those long-term losses into components attributable to fewer work hours and to reduced hourly wage rates. We also examine the extent to which the reduced earnings, work hours, and wages of these displaced workers can be attributed to factors specific to pre- and post-displacement employers; that is, to employer-specific fixed effects. The analysis is based on employer-employee linked panel data from Washington State assembled from 2002-2014 administrative wage and unemployment insurance (UI) records.

Three main findings emerge from the empirical work. First, five years after job loss, the earnings of these displaced workers were 16 percent less than those of comparison groups of nondisplaced workers. Second, earnings losses within a year of displacement can be explained almost entirely by lost work hours; however, five years after displacement, the relative earnings deficit of displaced workers can be attributed roughly 40 percent to reduced hourly wages and 60 percent to reduced work hours. Third, for the average displaced worker, lost employer-specific premiums account for about 11 percent of long-term earnings losses and nearly 25 percent of lower long-term hourly wages. For workers displaced from employers paying top-quintile earnings premiums (about 60 percent of the displaced workers in the sample), lost employer specific premiums account for more than half of long-term earnings losses and 83 percent of lower long-term hourly wages…

Should-Read: Max’s Our World in Data is a highly cool information source: Max Roser: Economist: “What I’ve been up to during the last year…

…I haven’t written much on this blog recently and so I thought it might make sense to just list–and link to–a couple of the projects that I’ve been working on during the last year…. What kept me busy mostly was the work on Our World in Data, the free online publication on global development that I started some years ago. Unfortunately quite a lot of time I spent on the search for funding. But there were also a lot of very positive developments! The publication grew quite a bit–we now have 87 entries on Our World in Data! You find them all listed on the landing page. Two of my favorite recent entries are: (1) The very long and quite detailed entry on global extreme poverty that Esteban Ortiz-Ospina and I wrote; (2) The still growing entry on yields and land use in agriculture that Hannah Ritchie and I are still working on. Jaiden Mispy, the web developer in our team, keeps making our own open source data visualization tool–the Our World in Data Grapher–more and more useful. Aibek Aldabergenov, our database developer, made it possible to access large development datasets directly (without uploading them manually) and that made the work of the authors much faster and more fun. And while I wasn’t active here on my personal blog, we actually now publish very regularly on the OWID-blog…

Max Roser: About: Our World in Data: “Our World in Data is an online publication that shows how living conditions are changing…

…The aim is to give a global overview and to show changes over the very long run, so that we can see where we are coming from and where we are today. We need to understand why living conditions improved so that we can seek more of what works. We cover a wide range of topics across many academic disciplines: Trends in health, food provision, the growth and distribution of incomes, violence, rights, wars, culture, energy use, education, and environmental changes are empirically analyzed and visualized in this web publication. For each topic the quality of the data is discussed and, by pointing the visitor to the sources, this website is also a database of databases. Covering all of these aspects in one resource makes it possible to understand how the observed long-run trends are interlinked. The project, produced at the University of Oxford, is made available in its entirety as a public good. Visualizations are licensed under CC BY-SA and may be freely adapted for any purpose. Data is available for download in CSV format. Code we write is open-sourced under the MIT license…

Should-Read: Our fearless leader Heather Boushey has a piece in the New Republic on why there are so many fewer female economists in America than one would expect. The thing that strikes me most comes from following Heather’s link to Bayer and Rouse: “gender-neutral policies to stop the tenure clock for new parents substantially reduce female tenure rates while substantially increasing male tenure rates…” A man who has a kid and stops the tenure clock for a year has many sleepless nights and has an extra year to polish journal submissions. A woman has those, and also has nine months growing a human being inside of her and three years eating for two. The two experiences are simply not analogous. Treating them as if they are is anti-female discrimination—in effect, if not in intent: Heather Boushey: Gaps in the Market: “it’s not about the math. Women account for more than 40 percent of undergraduate math majors…

…At this year’s annual economics conference, a number of scholars presented papers examining why there are so few women in economics and what we can do about it. A recent working paper by the University of North Carolina’s Anusha Chari and Paul Goldsmith-Pinkham of the New York Federal Reserve even found that the overall share of women participating in a prestigious annual economics conference hasn’t improved in over 15 years. But the profession has been slow to deliver real fixes. One reason for this may be that economists are predisposed to believe discrimination is nonsensical. Standard economic theory tells us that firms—and people—who favor one group over another irrespective of their productivity will be driven out by market competition….

Because the process is so market-driven, the question that economists need to ask is whether gender and racial bias in the profession indicates something more troubling about economics itself…. If the market for economists isn’t efficient, what market is? Amanda Bayer and Cecilia Elena Rouse tackled this issue in their 2016 article in the Journal of Economic Perspectives. They argue that “the social science discipline of economics will be strengthened if it is built on a broader segment of the population,” and outline steps the profession could take to address the problem. Some of these are simple, such as changing the way we teach undergraduate economics, and some will require more work, such as providing better early career support and breaking down implicit bias in the profession…. For any profession—but particularly for an academic discipline that describes itself as scientific—to reject its own core findings is stupid at best, deeply hypocritical at worst. This is the profession that established the fact that labor-market discrimination contributes to lower productivity, lower economic growth, and lower wage growth. Of all people, economists cannot fail to address discrimination in our own ranks…

Should-Read: Starting from a competitive benchmark and assuming one market failure is not enough to fit anything anymore. Oleg and Dmitry have three, if I can count: Oleg Itskhoki and Dmitry Mukhin: Exchange Rate Disconnect in General Eqilibrium: “We propose a dynamic general equilibrium model of exchange rate determination…

…which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogo disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith puzzle, and the UIP puzzle.

The model has two main building blocks—the driving force (or the exogenous shock process) and the transmission mechanism—both crucial for the quantitative success of the model. The transmission mechanism—which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption—is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the nancial sector to address the additional Mussa puzzle and Engel’s risk premium puzzle…

Should-Read: We are giving away a huge amount of fiscal space that we will in all likelihood very much want in the future, we are giving our income distribution another whack in a destructive direction, and we are getting very, very little in the way of effective economic stimulus for it. Neil Irwin of the Upshot may say that “this is the fiscal stimulus the left has been asking for”. That is false. He is totally wrong here: Paul Krugman: How Big a Bang for Trump’s Buck?: “I’m having a hard time figuring out exactly how big a stimulus we’re looking at…

…but it seems to be around 2 percent of GDP for fiscal 2019. With a multiplier of 0.5, that would add 1 percent to growth. That said, I’d suggest that this is a bit high. For one thing, it’s not clear how much impact corporate tax cuts, which are the biggest item, will really have on spending. Meanwhile, unemployment is only 4 percent; given Okun’s Law, the usual relationship between growth and changes in unemployment, an extra 1 percent growth would bring unemployment down to 3.5%, which is really low by historical standards, so that the Fed would probably lean especially hard against this stimulus. So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal…