Must-Read: John Authers: Yield on 10-Yr U.S. Treasury…

Must-Read: That the Brexit vote would deliver a substantial leftward IS shock to the global economy was not very foreseeable. But that something could deliver such a shock was very foreseeable indeed.

S P 500© FRED St Louis Fed 30 Year Treasury Constant Maturity Rate FRED St Louis Fed 30 Year Treasury Constant Maturity Rate FRED St Louis Fed

Do not be reassured by the recovery of the stock market: P = D/(r-g). That the stock market has not gone up as a result of Brexit indicates that the lower interest rates expected in the long run (r) have been offset by the lower growth rate of profit due to additional expected economic weakness (g).

By now Yellen and Bernanke before her have had three full Reserve Bank president-appointment cycles–2006, 2011, and 2016–to get the non-Governor members of the FOMC on the page. It is no longer credible to claim that technocratic imperatives of ideal monetary policy have to bow to the requirements of maintaining committee consensus to promote banking-sector confidence with the Fed.

If financial markets were going to scream any louder that a régime shift to a less deflationary monetary policy régime is called for, how would they do that?

John Authers : On Twitter:

U.S. democracy stuck in an “inequality trap”

Economic inequality in the United States appears to be trapped in a vicious cycle, as shown by several new working papers published today by the Washington Center for Equitable Growth alongside other recent research. Non-white, lower-income Americans are far less likely to vote than wealthier white citizens, and much of this participation gap is due to discriminatory practices at the ballot box. As a result, the political interests of lower-income minorities are not well-represented, and these interests are vastly different than those of their voting counterparts. This in turn means that policy decisions are made that exacerbate economic inequality and the inequalities that limit citizens’ voices in the first place.

To figure out how to break this cycle, social scientists need to understand what is happening at various points along the political continuum. So, let’s first examine new and existing research on the vote.

Voting inequalities are entrenched in existing inequalities

The disgraceful history of voter disenfranchisement is no secret. For more than a century, African Americans (and other marginalized groups) were restricted or even disqualified from voting. Today these practices are formally outlawed, yet we still see patterns in voter turnout that indicate that voting discrimination is alive and well. When looking across race and ethnicity, for example, data demonstrates that non-voters are predominantly African American, Hispanic, Asian, and other ethnic minorities. Non-voters also tend to be younger, less educated, and less affluent than their voting counterparts.

These trends are, in part, related to deep-seated institutional marginalization through practices including ballot access restriction—long lines, voter identification laws, and changes to polling sites—and voting dilution. But individual behaviors may play an important a role in generating voter turnout disparities, too. Recent research shows that attitudes toward civic engagement may be developed long before a citizen reaches voting age.

According to a new working paper by Sarah Bruch from the University of Iowa and Joe Soss from the University of Minnesota, enduring negative peer-to-peer relationships and authoritative interactions between 7th through 12th grades lowers the odds of civic engagement and electoral participation later in life, and also reduces future trust in government. Non-white students are disproportionately more likely than others to endure these negative interactions, suggesting that school environments may not only add to existing social inequalities but also contribute to inequalities in civic engagement and democratic participation.

Without a vote, the voice of diversity goes unheard

The absence of equal political participation translates into unequal policy voice. If wealthier white citizens had similar policy preferences to their lower-income, minority counterparts, then the participation gap would not necessarily be so troubling. Yet evidence suggests that voters’ policy preferences in the United States continue to vary sharply by race and income in ways that imply that a functional democracy needs to give equal voice to these various groups in order to be truly representative.

Just how different are these preferences? A recent report from Demos unpacks how net support for policy changes based on a variety of demographic characteristics. Using 2012 election data from the American National Election Study, Demos finds large discrepancies between the public opinions of white voters and non-white non-voters and between rich voters and poor non-voters. White voters supported more spending on the poor by a margin of 5 percentage points, for example, while non-white non-voters and poor non-voters supported these same measures by a margin of 50 percentage points. On the question about whether the government should reduce inequality, there were diametric oppositions between the two groups, respectively.

Perhaps unsurprisingly, the policy preferences of non-white, lower-income non-voters—economic policies that address on poverty and inequality—are already seldom the focus of congressional attention. Analyzing mentions of terms such as economic growth, inflation, poverty, inequality, deficit, and unemployment in the Congressional Record between 1995 and 2012, researchers Peter Enns at Cornell University, Nathan Kelly and Jana Morgan at the University of Tennessee, and Christopher Witko at the University of South Carolina find in their new working paper that Congress prioritizes the interests of the upper-class largely because they dole out political resources in the form of the all-important political campaign contributions necessary for re-election.

The four political scientists note that economic inequality increased during the period of their study while over the same time period congressional “nonresponse” to inequality or redistribution also increased. In fact, the term inequality was mentioned only 80 times in a year at its highest point compared to 30,000 mentions of “deficit,” an issue the authors note is of much greater concern to the wealthy than to the working-class.

Without a voice represented through the vote, the likelihood that issues of economic inequality are elevated in this skewed congressional climate is slim.

When the voice goes unheard, the policies that could change that go unheard, too

With Congress evidently uninterested in issues of economic inequality, it should come as no shock that the actual policies that have a tangible impact on minority and low-income voters struggle to pass. Take the minimum wage. William Franko of Auburn University and his co-authors Kelly and Witko find that changes in election rules at the state level, particularly those that limit the voice of already-marginalized voters, are associated with economic inequality. Specifically, the researchers observe that high levels of class-biases in voting make states less likely to pass minimum wage increases, and as these class-skews in voter turnout grow, states become less prone to pursuing other policies that could reduce inequality.

The same pattern is apparent when it comes to the issue of taxes. Christopher Faricy of Syracuse University finds in his new working paper that increases in public conservatism—ideologies that often don’t represent the voice of minorities—correlates with a reduction in tax progressivity. In other words, there are lower levels of social spending and lower taxes on the rich.

Without policies such as the minimum wage or progressive taxation put into practice, the tools we have to combat the economic inequalities that disproportionately burden minorities and other vulnerable groups are limited.

How do we break the inequality trap?

These recent findings suggest that inequalities seem to beget inequality writ large. As University of Oregon economist and Equitable Growth grantee John Voorheis, along with Princeton University’s Nolan McCarty and Georgetown University’s Boris Shor, show in their paper, increasing income inequality in the United States is associated with even more political polarization and gridlock, which, in turn, makes addressing inequality through public policy more challenging, too. As Faricy puts it, we’re witnessing an “inequality trap.”

So, how do we break the cycle and escape the trap? That’s a complicated question with an even more complex answer.

Expanding the franchise might be a good step. Through measures such as automatic registration, weekend voting, voting by post, reduced I.D. requirements, increased language accessibility at polling sites, and same-day registration, we can reduce the barriers to accessing the polls. Early interventions programs in schools may also play a role in changing the culture around disparate civic participation. But an equally important step, as Nick Carnes of Duke University points out in his new working paper, is reducing political gatekeeper biases and recruiting more working-class and minority candidates to be on the ballot in the first place.

In conjunction, all these efforts may work to ensure more people can voice their vote and vote their voice for the people and policies that help promote equity.

Photo by Jeff Chiu, Associated Press

Must-Read: Jamie Chisholm: Treasury Yields Hit Record Lows

Must-Read: May I please have a theory from the Federal Reserve–I am not asking for much: just a theory–as to why they continue to be confident that their models are a better guide to likely futures than financial markets, and as to why they continue to regard the lower tail of outcomes as something that can be handled if and when it happens rather than something they need to be desperately clawing away from as fast as they can?

Jamie Chisholm: Treasury Yields Hit Record Lows: “The 10-year Treasury yield is down 7 basis points to 1.39 per cent…

…earlier touching 1.377 per cent, its most meagre offering on record. The 30-year Treasury yield also hit an all-time low of 2.14 per cent. Equivalent maturity German Bunds and UK gilts are down 3bp to minus 0.17 per cent and off 4bp to 0.80 per cent, respectively — also flirting with record lows. The Bank of England has already said it is likely to loosen policy further in coming months, and governor Mark Carney on Tuesday said banks could stop building up rainy-day funds in an attempt to support lending. Shares in real estate companies, life insurers and housebuilders are leading declines in London, following the Standard Life news. Miners are under pressure too, as the ‘risk off’ mood batters commodities, with base metals lower and Brent crude down 3.6 per cent to $48.31 a barrel.

Must-Read: Kieran Healy: The Moral Economy of Technology

Must-Read: When I think of the standard uses of “moral economy”, I think not of “fairness” and “justice” but rather of tradition and hierarchy. I think of the Odyssey, in which the fact that Laertes looks like a badly-treated garden slave rather than like a prince is a violation of the moral-economic order:

Indeed your face and figure have nothing of the slave about them, and proclaim you of noble birth. I should have said that you were one of those who should wash well, eat well, and lie soft at night…

The market can and very often does produce pressure for outcomes that violate “moral economy” understood as tradition and hierarchy, but they may or may not violate “moral economy” understood as reasonable and humane notions of justice and fairness. Indeed, Prometheus the fire-bringer’s and the disruptions he causes have an alternative and stronger claim to “moral economy”:

Kieran Healy: The Moral Economy of Technology: “‘moral economy’ refers to some kind of informal but forceful collective control over the market…

…justice over efficiency, fairness over freedom, and community expectations over individual opportunity…. Technologies are counting and classifying your actions constantly in an effort to make you a better person. Their promoters and investors constantly moralize about their products, too…. This kind of moral economy is not about justice or fairness. Instead it evangelizes social progress through technological disruption. This vision has deep historical roots that are uncomfortably entwined with the origins of the social sciences…. The Saint-Simonian vision became what Hayek called ‘the religion of the engineers’, full of faith in the power of rational expertise. That religion is very much still with us….

Consider two basic experiences of our new world of smart devices and internet-enabled things. The first is the nice one… the lives of people who live in Apple advertisements… a computer or device knows what you want it to do, or has anticipated a need that you have and acted on it in a pleasing way. It is a feeling of magic and delight, or at least a sense of ease and convenience…. The second basic experience is the bad one. I associate it with a parade of malfunctioning, misconceived or badly-designed software and smart devices…. Most recently I’ve experienced it with allegedly smart devices that pretend they can talk with and understand you, but which are really just verbal command lines operating on the narrowest of gauges. If you stray from the expected path at all, the illusion of both interactivity and smartness is destroyed….

Social theorists consistently underestimate the value of technology’s delightful aspects… want to say your Fitbit or Apple Watch is exercising a subtle form of control over you by encouraging you not just to meet your step count for the day but also encouraging you to value the act of meeting your step count for the day, and most perniciously by arranging things so that you experience your valuation of the act of meeting your step count for the day as a satisfying personal choice, rather than an instrument of neoliberal governmentality. Conversely, though, the same theorists also consistently overestimate how often software and hardware actually works properly…. They reverse left and right, so that cheerful hype becomes a harsh critique of the all-consuming power of technology. But… they do not reverse up and down. The technology is still assumed to work, even though it probably doesn’t, most of the time. It matters which technologies are going to work, and which ones are just going to be billion dollar cargo-cults…

Must-Read: Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer (2013): Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive

Must-Read: Very good. Mind you, I am not sure that it is right–while the risk premium ought to be linear in units of fundamental operating risk, and while requiring banks to maintain larger capital reserves ought to be irrelevant (save for the small financial-repression taxes involved) to costs of financing for Modigliani-Miller reasons, it is not clear to me that that is how things actually work in reality:

Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer (2013): Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive: “We examine the pervasive view that ‘equity is expensive’…

…which leads to claims that high capital requirements are costly for society and would affect credit markets adversely. We find that arguments made to support this view are fallacious, irrelevant to the policy debate by confusing private and social costs, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. And while debt’s informational insensitivity may provide valuable liquidity, increased capital (and reduced leverage) can enhance this benefit. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support.

We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient. Better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal. Except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks.

Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.

Must-Read: Dan Drezner: The Truth of Cosmopolitanism

Must-Read: Dan Drezner: The Truth of Cosmopolitanism: “Douthat’s column is a perfect cocktail consisting of one part insight, one part self-loathing and one part flagrant error…

…The insight… Chris Hayes…. “The problem was so deep and so tied to the entire social order and rising inequality in the American model of enlightened meritocratic rule that even competent leadership from President Obama, or a period in which there weren’t the same sort of succession of elite failures, wasn’t going to put Humpty Dumpty back together again.”… I’m not necessarily convinced that this is the defining cleavage of our era (see below), I’m convinced it’s a cleavage.

And yet, never underestimate the self-loathing contained in these kinds of essays…. By definition, cosmopolitans are supposed to be open to criticism–so any of them with any sense of self-doubt will seize upon this argument as an example of what’s what’s wrong with their lives.

The final point, however, is that the rooted/cosmopolitan divide is only one of many…. I’m not even sure it’s the most salient…. Replace ‘nativist’ with ‘old’ and ‘cosmopolitan’ with ‘young.’… Does talking about a young/old divide make things any different?… Douthat is no doubt correct to point out the biases that cosmopolitans possess. But his implicit counterpoint is that nativists possess some deep reservoir of local knowledge that cosmopolitans overlook. Except that if the cleavage is split by age, it suggests… older voters… fueled by a sense of nostalgia… that… may or may not be true….. George Saunders….

The Trump supporter might be best understood as a guy who wakes up one day in a lively, crowded house full of people, from a dream in which he was the only one living there, and then mistakes the dream for the past: a better time, manageable and orderly, during which privilege and respect came to him naturally, and he had the whole place to himself…. Spoiled Americans, imbued with unreasonable boomer expectations… grievances… more theoretical than actual, more media-induced than experience-related.

Indeed, Trump’s whole campaign shtick is predicated on this kind of nostalgia, which contains far more truthiness than truth.

Must-Reads: July 4, 2016


Should Reads:

Must-Read: Austin Smith: Don’t Punish Journalists for Software Problems

Must-Read: Austin Smith: Don’t Punish Journalists for Software Problems: “Editors are cornered by two problems…

…a hard job that gets harder by the month, and a media/social beast that feeds ravenously on every minor mistake.

No, wait, sorry, some editors are cornered by three problems, because their news organizations can’t get their damn CMS straight…. At the heart of any CMS is a text editor, which must offer writers and editors many different options for presenting an article correctly in every form factor. The text editor in the Daily News’s CMS stripped out formatting that declared blockquotes or hanging indents. Whoops! Of these three problems… one is actually possible to solve right now. It is absolutely possible to build a CMS that handles inbound formatting neatly…

Must-Read: Janet Currie and Hannes Schwandt: Mortality Inequality: The Good News from a County-Level Approach

Must-Read: Janet Currie and Hannes Schwandt: Mortality Inequality: The Good News from a County-Level Approach: “Inequality in mortality rates are a good indicator of economic wellbeing…

…but most of the existing literature does little to distinguish between developments in infants and adults. This column uses extensive US data to analyse mortality trends across all age groups. It finds that the health of the next generation in the poorest areas of the US has improved significantly and the race gap has declined significantly. Underlying explanations include declines in the prevalence of smoking and improved nutrition, and a major cause is social policies that target the most disadvantaged.