Must-Read: Larry Summers: Voters Sour on Traditional Economic Policy: “It is untenable to ignore public sentiment…

…60 years of experience with populist policy cycles in Latin America demonstrates… [that] economic nationalism [is not] a viable strategy…. [The] path forward… should focus on the concerns of a broad middle class rather than of global elites… rejecting austerity economics in favour of investment economics… central bankers need to spur demand and co-operate with governments. Enhancing infrastructure investment in the public and private sector should be a fiscal policy priority. And the focus of international economic co-operation more generally needs to shift from opportunities for capital to better outcomes for labour… [and dealing with] the dark side of capital mobility–money laundering, regulatory arbitrage, and tax avoidance and evasion…. Few things will be as important for the success of the next president as the restoration of confidence in the global economy.

Must-Read: Pretty much everybody’s marginal product these days is vastly less than their average product: only those among the high paid who are lucky enough to be essential and irreplaceable cogs in machines that produce things for which rich people have a strong irrational jones can claim that if they weren’t there the total value of useful stuff produced would fall by anything close to their high pay. Much more likely is that somebody else could fill their slot in the global division of labor and receive the rents they receive with a reduction in useful stuff of only a small proportion of their high pay. And as time passes, the fact that our knowledge and our institutions have grown to the point where our average product vastly exceeds our marginal product will have strange, subtle, and unforeseeable consequences:

Ryan Avent: Welcome to a World without Work: “The digital revolution alters work in three ways… automation… globalisation… productivity…

…Automation, globalisation and the rising productivity of a highly skilled few… are combining to generate an abundance of labour: a wealth of humans…. The global economy is misfiring in worrying ways…. The institution of work… can no longer be counted on to fulfil its many crucial roles, from the ordering of our days, to the allocation of purchasing power, to the strengthening of the social ties that are nurtured when individuals feel as though they are contributing positively to the community. Workers are unlikely to take these woes lying down. Something has to give. Either society will find ways to shore up work or develop substitutes for it or workers will use the political system to undermine the forces disrupting their world….

The value-generating pieces of successful companies were once satisfyingly tangible, consisting of buildings and machines, patents and people. That is ever less the case…. Today, more than 80% of the value of Standard & Poor’s 500 firms is “dark matter”: the intangible secret sauce of success; the physical stuff companies own and their wage bill account for less than 20%, a reversal of the pattern that prevailed in the 1970s. A large proportion of that dark matter is an amorphous “know-how”: the culture, incentives and tacit knowledge that make a modern company tick…. As social wealth becomes more important, fights about who belongs within particular societies–and can therefore share in that social wealth–will intensify. To take full advantage of its promise, countries must become better at sharing social wealth. Yet the better countries become at sharing social wealth among members, the greater the pressure to shrink the circle of social membership….

We should… anticipate that voters in many countries, rich and poor alike, will want something more predictable than life governed by supply-and-demand matching apps; more structured than life on the perpetual dole; more comfortable and familiar than life surrounded by people who do things in different ways, speak different languages and worship different deities…. People of all backgrounds… value narratives of personal ambition and responsibility… wish to have control over their economic lives and to be seen as contributing…. People desire agency. They do not wish to be forced into unpleasant work by the need to feed their families, but neither do they want to be written off…. The conflict between what people want and what economic and political systems are able to provide will play out in the political arena….

Some time in the future, a wonderful new politics might well emerge that provides a robust minimum standard of living to all regardless of race or nationality, which supports a multitude of different conceptions of the “good life” and which does not rely on some underlying fear of some outside other to maintain its popularity. We are not yet able to conceive of such a system or to understand what balance of political forces needs to emerge to bring it into existence and sustain it…

Must-Read: Noah Smith: Freedom of Speech in the Digital Age: “Speech that disseminates ideas is more valuable than speech whose purpose is to intimidate others…

…Twitter, as a technology, is unusually conducive to face-screeching…. The sheer volume of harassment on Twitter comes from the fact that there are roving mobs of harassers who spend all day going from target to target. One minute you’re talking to your friends and colleagues, the next minute there are a hundred pseudonymous accounts screeching at you. Two hours later they’re screeching at someone else, but now you know, if you say the wrong thing, the mob will be back in a heartbeat. If you’re a really unlucky high-profile person like Leslie Jones (who committed the unpardonable sin of being a black woman and being alive), you become a perennial target, and the mob never goes away until you quit Twitter….

I’m guessing the Twitter Nazis’ total population… to be only a couple thousand at most–to intimidate and silence enormous numbers of people who only wanted to say their ideas out loud (or, in Jones’ case, just wanted to be there, period). Twitter knows it has these problems…. But it’s possible… the non-screechers. That could lead to Twitter becoming a ghost-town…. Twitter, fun and useful as it is, might not be something that works out…. More broadly, internet technologies are forcing us to face a sharper conflict between freedom of idea-expression and freedom of targeted disapproval. The tradeoff faced by Twitter is just an acute version of the tradeoffs faced by Facebook, Google, and any other communication technology with a global network effect….

So what do I think about the banning of Milo, Ricky, and other prominent alt-righters? I’m not at all upset about it….

Banning and corporate censorship seem to be the only way (so far) to create an online world where people who mainly value freedom of idea-expression can coexist with people who mainly value the freedom to yell mean things at other people. That’s probably going to lead to a “two-tiered” internet… a “top layer” where everyone plays nice, and a “bottom layer” where genocide jokes and death threats are the order of the day…

Must-Read: Jason Furman: The New View of Fiscal Policy and Its Application: “A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles…

1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points…. Although the New View is increasingly found in research by academics, policy-oriented economists, and international institutions…. many policymakers still shy away from implementing it in practice…. One reason for the disconnect is that some policymakers still have not accepted the substantive theory and evidence behind the New View. But the disconnect is partly institutional in origin. In the United States… weak automatic stabilizers. In the case of the Europe, the institutional issues run deeper. Most notable among them is the fact that macroeconomic institutions have been built in accord with the Old View….

In stylized form, the five principles of this [New] View [of fiscal policy] are:

1. Fiscal policy is often beneficial for effective countercyclical policy as a complement to monetary policy.
2. Discretionary fiscal stimulus can be very effective and in some circumstances can even crowd in private investment. To the degree that it leads to higher interest rates, that may be a plus, not a minus.
3. Fiscal space is larger than generally appreciated because stimulus may pay for itself or may have a lower cost than headline estimates would suggest; countries have more space today than in the past; and stimulus can be combined with longer-term consolidation.
4. More sustained stimulus, especially if it is in the form of effectively targeted investments that expand aggregate supply, may be desirable in many contexts.
5. There may be larger benefits to undertaking coordinated fiscal action across countries.
   I will discuss each of these five in turn.

Must-Read: Robert Waldmann: Benchmark, Model, and Hypothesis:

I imagine hopes followed by disappointments in the following order…

P might be true…. P isn’t true, but P might still be a useful approximation…. All the attempts to use P to approximate reality have failed, because each implication is far from the truth…. Work starting with P shares the fault of totally undisciplined empiricism which can describe but not forecast. However, P is a useful benchmark….

Macroeconomics is reaching the 4th stage [with respect to] the DSGE models which have dominated academic work for decades…. My view is that… the claim that a something is a useful benchmark… is similar to the claim that a model is a useful approximation…. The choice of a benchmark is important because one modification is considered at a time. If implications were… linear… it wouldn’t matter…. But they aren’t. The way in which an unrealistic DSGE model differs from the same model with a financial friction can be completely different from the way in which the real world would be different if a financial friction were eliminated….

A more important problem…. The vast majority of models in the literature share many of the implications of the benchmark…. So, for example, if the benchmark model has Ricardian equivalence, so do most of the modified models…. [When] temporary lump sum tax cuts… were proposed in the USA in 2009… many economists argued that policy makers were ignoring the results of decades of academic research. In fact, they were ignoring the implication of the standard benchmark model….

The more diplomatic critics of mainstream academic macroeconomics insist that the models, which they find unsatisfactory, are useful benchmarks…. [But] a simple example illustrat[es] the danger…. [Consider] the original Lucas supply function… [leads to] the policy ineffectiveness proposition which lead Sargent and Wallace to note that, in their model, the optimal policy was to set the inflation rate to some desired target and ignore everything else. Notably this is the policy mandate of the European Central Bank….

The repeated use of the word “hypothesis” in the 50s, 60s, and 70s strongly suggests that the equations in question were not originally considered parts of models which were false by definition. Thomas Sargent’s phrase “take a model seriously” sure seems to imply “treat a model as a null hypothesis.”… Lucas and Prescott were enthusiastic about hypothesis testing until it falsified too many of their hypotheses, and both independently said exactly that:

My recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expetations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests on rational expectations models, I recall Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models. The idea of calibration is to ignore some of the probabilistic implications of your model but to retain others…