Must-Read: Mark Thoma: Labor Compensation and Labor Productivity:

Just a quick reminder:

More here: Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend, B. Ravikumar and Lin Shao, St. Louis Fed

Must Read: Note the difference between wealth inequality and income inequality. Lowering interest rates raises wealth inequality (by boosting the value of old capital) and lowers income inequality (by reducing the rate of return earned on new capital). Cf: John Maynard Keynes, “euthanasia of the rentier*…

Dietrich Domanski et al.: Wealth Inequality and Monetary Policy:

Explor[ing] the recent evolution of household wealth inequality in advanced economies by looking at valuation effects on household assets and liabilities….

Using household survey data, we analyse the possible drivers of wealth inequality and the potential effect of monetary policy through its impact on interest rates and asset prices. Our simulation suggests that wealth inequality has risen since the Great Financial Crisis. While low interest rates and rising bond prices have had a negligible impact on wealth inequality, rising equity prices have been a key driver of inequality. A recovery in house prices has only partly offset this effect. Abstracting from general equilibrium effects on savings, borrowing and human wealth, this suggests that monetary policy may have added to inequality to the extent that it has boosted equity prices.

Must-Read: My late friend Susan Rasky was, in general, annoyed at William Grieder.

You see, she was covering Stockman and the budget in the New York Times in 1981. She was trying to tell as it happened the same story about David Stockman and his budget that William Grieder was going to tell in the Atlantic Monthly piece he published at the very end of the year.

But, she told me, she got substantial pushback from her New York Times editors, which hobbled her. Why? In part because the Washington Post reporters–being supervised by Grieder–were telling a very different story. And her editors said that if she were right the Post would be on board as well. Grieder, she thought, might not only have been keeping his own material from the reporters he supervised, but also may have been steering the reporters he supervised away from the real story–he certainly wasn’t dropping them any hints, and wasn’t doing them any favors as they tried to cover a complex situation–the real story that Grieder was saving for the Atlantic, and that Rasky was trying to tell as it was happening:

William Grieder (1981): The Education of David Stockman:

As budget director, [Stockman] intended to proceed against many of the programs…

…that fed money to the poor blacks of Benton Harbor, morally confident because he knew from personal observation that the federal revitalization money did not deliver what such programs promised. But he would also go after the Economic Development Administration (EDA) grants for the comfortable towns and the Farmers Home Administration loans for communities that could pay for their own sewers and the subsidized credit for farmers and business–the federal guarantees for economic interests that ought to take their own risks. He was confident of his theory, because, in terms of the Michigan countryside where he grew up, he saw it as equitable and fundamentally moral:

We are interested in curtailing weak claims rather than weak clients. The fear of the liberal remnant is that we will only attack weak clients. We have to show that we are willing to attack powerful clients with weak claims. I think that’s critical to our success—both political and economic success….

No President had balanced the budget in the past twelve years. Still, Stockman thought it could be done, by 1984, if the Reagan Administration adhered to the principle of equity, cutting weak claims, not merely weak clients, and if it shocked the system sufficiently to create a new political climate. He still believed that it was not a question of numbers. “It boils down to a political question, not of budget policy or economic policy, but whether we can change the habits of the political system.”…

This process of trading, vote by vote, injured Stockman in more profound ways, beyond the care or cautions of his fellow politicians. It was undermining his original moral premise—the idea that honest free-market conservatism could unshackle the government from the costly claims of interest-group politics in a way that was fair to both the weak and the strong. To reject weak claims from powerful clients–that was the intellectual credo that allowed him to hack away so confidently at wasteful social programs, believing that he was being equally tough-minded on the wasteful business subsidies. Now, as the final balance was being struck, he was forced to concede in private that the claim of equity in shrinking the government was significantly compromised if not obliterated…

Must-Read: An answer to a question from Robert Waldmann. Milton Friedman rejects rational expectations, seeing instead “quinquennia or decades” before “the public… [will have] adapted its attitudes or its institutions to a new monetary environment…”:

Milton Friedman (1976): Inflation and Unemployment:

A major factor in some countries and a contributing factor in others may be that they are in a transitional period…

…this time to be measured by quinquennia or decades not years. The public has not adapted its attitudes or its institutions to a new monetary environment. Inflation tends not only to be higher but also increasingly volatile and to be accompanied by widening government intervention into the setting of prices. The growing volatility of inflation and the growing departure of relative prices from the values that market forces alone would set combine to render the economic system less efficient, to introduce frictions in all markets, and, very likely, to raise the recorded rate of unemployment. On this analysis, the present situation cannot last. It will either degenerate into hyperinflation and radical change; or institutions will adjust to a situation of chronic inflation; or governments will adopt policies that will produce a low rate of inflation and less government intervention into the fixing of prices…

Must-Read: In retrospect, Robert Lucas’s solutions to the modeling problems left over from Milton Friedman and James Tobin–closing the model via specifying expectations, accounting for apparent wage and price inertia, and specifying the big business-cycle impulses–were, as Milton Friedman did warn, all intellectual value-subtracting. The three intellectual bets of requiring rational expectations first and above all, requiring market clearing second, and putting the Solow TFP residual on the right-hand side as a primitive third all force you into models that fail to fit the data and lack any true and useful implications:

Paul Krugman: Tobin Was Right:

Tobin’s 1972 presidential address to the American Economic Association…

That address was seen among my fellow grad students… as Tobin’s last stand, a desperate rearguard action in the debate with Milton Friedman over the natural rate hypothesis. And everyone knew that Friedman won that debate, vindicated by stagflation. Except if you read Tobin again now, he’s the one who looks vindicated…. The long-run Phillips curve… isn’t vertical at low inflation… downward nominal wage rigidity combined with churn… the framework [of] Daly and Hobijn… [and] Akerlof and Perry… the need to avoid

the empirically questionable implication of the usual natural rate hypothesis that unemployment rates only slightly higher than the critical rate will trigger ever-accelerating deflation….

Sure enough, the return of mass unemployment after 2008 didn’t produce much in the way of wage decline, except, finally, after years of Depression-level unemployment in Greece. When talking about the things an earlier generation got more right than all too many modern macroeconomists, I usually focus on the demand side… IS-LM…. But on the aggregate supply side, too, the oldies were goodies.

Must-Read: The estimable Mark Thoma tries, once again, to raise the level of the debate back toward reality. Everything he says is true:

Mark Thoma: Diverting Attention From the Real Issues:

Immigration is not the problem…. Immigrants do not lower the employment prospects for natives…

Short-run… adjustment costs [do] fall mainly on people with less than a high school education. But in the long-run, the employment prospects for Americans are enhanced by… immigrants…. Immigrants [do] lower wages for… previous immigrants, the people that newcomers are most likely to compete with for jobs. For everyone else the impact… is positive…. Low and high-paying jobs are complements….

Immigrants [do not] create an undue burden for social programs…. Both documented and undocumented workers… pay income, Social Security, sales, Medicare taxes, and so on. Undocumented immigrants are not allowed to participate in Medicaid, food stamps, welfare, CHIP, or SSI programs, and legal permanent residents must contribute to Social Security and Medicare for at least 10 years before they are eligible for benefits (the wait is five years on many other programs)…. “Communities with high concentrations of immigrants do not suffer from outsized levels of violence…. Violent crime tended to decrease when the population of foreign-born residents rose.” Study after study debunks the claim that immigrants commit crimes at a higher rate than natives….

If immigration isn’t the problem, then what is?… Globalization, technological change, and lack of bargaining power in wage negotiations…. We have two choices. We can close our doors to international trade… blame immigrants… ignore the impact that technological change has had on worker’s economic security, and do nothing to enhance worker’s ability to claim a fair share of the output they produce. Alternatively, we can move toward Bernie Sanders’s type of social insurance and redistribution to ensure that the gains from immigration, trade, and technological change are widely shared…