Must-Read: Heidi Roizen: How to Build a Unicorn From Scratch–and Walk Away with Nothing

Posted on by Brad DeLong

Live from Silicon Valley: Heidi Roizen: How to Build a Unicorn From Scratch–and Walk Away with Nothing: “Liquidation preferences, participation, ratchets…

…even the very term preferred shares (they are called ‘preferred’ for a reason) are things every entrepreneur needs to understand. Most terms are there because venture capitalists have created them, and they have created them because over time they have learned that terms are valuable ways to recover capital in downside outcomes and improve their share of the returns in moderate outcomes–which more than half the deals they do in normal markets will turn out to be. There is nothing inherently evil… standard procedure for high risk investing.  But for you the entrepreneur to be surprised after the fact about what the terms entitle the venture firm to is just bad business–on your part. For any private company with different classes of stock, the capitalization table is not-at-all the full picture of who gets what in an outcome…

Must-Read: Stephen Breyer (2010): NLRB v. Canning

Posted on by Brad DeLong

Must-Read: Stephen Breyer (2014): NLRB v. Canning: “Ordinarily the President must obtain “the Advice and Consent of the Senate”…

…before appointing an “Office[r] of the United States.” U. S. Const., Art. II, §2, cl. 2. But the Recess Appointments Clause creates an exception. It gives the President alone the power “to fill up all Vacan cies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.” Art. II, §2, cl. 3. We here consider three questions about the application of this Clause.

The first concerns the scope of the words “recess of the Senate.” Does that phrase refer only to an inter-session recess (i.e., a break between formal sessions of Congress), or does it also include an intra-session recess, such as a summer recess in the midst of a session? We conclude that the Clause applies to both kinds of recess.
The second question concerns the scope of the words “vacancies that may happen.” Does that phrase refer only to vacancies that first come into existence during a recess, or does it also include vacancies that arise prior to a recess but continue to exist during the recess? We conclude that the Clause applies to both kinds of vacancy.

The third question concerns calculation of the length of a “recess.” The President made the appointments here at issue on January 4, 2012. At that time the Senate was in recess pursuant to a December 17, 2011, resolution providing for a series of brief recesses punctuated by “pro forma session[s],” with “no business… transacted,” every Tuesday and Friday through January 20, 2012. S. J., 112th Cong., 1st Sess., 923 (2011) (hereinafter 2011 S. J.). In calculating the length of a recess are we to ignore the pro forma sessions, thereby treating the series of brief recesses as a single, month-long recess? We conclude that we cannot ignore these pro forma sessions.

Our answer to the third question means that, when the appointments before us took place, the Senate was in the midst of a 3-day recess. Three days is too short a time to bring a recess within the scope of the Clause. Thus we conclude that the President lacked the power to make the recess appointments here at issue…

An intersession recess on January 3, 2016, no? Seems to me that there should be some hard bargaining going on right now between Obama and McConnell on getting appointments done under threat of inter-session recess appointments at noon next January 3. For example, Obama should be offering McConnell a Romer-Clarida deal on Fed Governors, under threat of inter-session recess Romer-Gagnon…

Must-Read: Martin Sandbu: Mutiny at the Fed

Posted on by Brad DeLong

Martin Sandbu: Mutiny at the Fed: “Two governors, Lael Brainard and Daniel Tarullo…

…have publicly spoken out against the rush to raise US interest rates. This is significant for a number of reasons. First, because most noises from individual Fed interest-rate setters have been in the hawkish direction. Chair Janet Yellen herself, while not a hawk, has unwisely tied herself to the calendar…. Tim Duy, the most perceptive Fed-watcher out there….On his reading, Brainard lays down a clear marker….Jared Bernstein, too, annotates the key parts of Brainard’s speech…. She judges the risks of things going worse than expected as more weighty than the chance of things going better…. She takes seriously that it is easier to wait too long and then tighten sharply if necessary, than to make up for the damage caused by a premature rate rise. That is because with very low interest rates it is challenging to make policy much looser…. This ‘option value of waiting’ argument is explained by Brad DeLong in a recent comment on Brainard and Duy…. Tarullo relied on the same two points….

Brainard and Tarullo now echo the dovish arguments of outsiders from the left such as Lawrence Summers, when those arguments have seemingly fallen on deaf ears in the rest of the FOMC…. Both the grumbling governors hail from that political milieu… of the Obama administration. Duy’s explanation is… that Yellen’s professional formative years were the high-inflation period of the 1970s (the same is true for vice-chair Stanley Fischer); Brainard’s experience, meanwhile, ‘is dominated by the Great Moderation’…. Paul Krugman offers a nuance: rather than the Great Moderation, he suggests what most shapes Brainard’s economic world view is… ‘internationally oriented macro types were aware earlier than most that Depression-type issues never went away’…. Hawks are now encountering more determined opposition at the Fed. That is a good thing.

Noted for the Morning of October 16, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Ben Thompson: Venture Capital and the Internet’s Impact

Posted on by Brad DeLong

Ben Thompson: Venture Capital and the Internet’s Impact: “Because a company pays for AWS resources as they use them…

…it is possible to create an entirely new app for basically $0 in your spare time. Or, alternately, if you want to make a real go of it, a founder’s only costs are his or her forgone salary and the cost of hiring whomever he or she deems necessary to get a minimum viable product out the door. In dollar terms that means the cost of building a new idea has plummeted from the millions to the (low) hundreds of thousands…

Must-Read: Greg Sargent: Freedom Frauds

Posted on by Brad DeLong

Must-Read: Greg Sargent: Freedom Frauds: “David Brooks is getting a lot of positive attention today for this column…

…in which he dissolves into despair and anxiety over what has become of today’s ‘radical’ and ‘ungovernable’ Republican Party…. All of this is well and good as far as it goes. But I think it neglects one of the most plausible explanations for what’s happening: A lot of what we’re seeing today may not be the result of the radicalized faction’s ‘incompetence,’ but rather the result of its fraudulence and hucksterism…. It isn’t that [the Tea Party are] too incompetent to realize that these [shutdown-threatening] tactics [will] fail. Rather… they [keep] alive the charade for far too long that these tactics would ultimately force Democrats to surrender… not… frauds… getting… to continue telling the story they want to tell.

The importance of low U.S. interest rates in the long run

Posted on by Bridget Ansel

Mention U.S. interest rates today, and the focus will almost certainly turn to the short term. The Federal Reserve is having an important debate about when to raise the federal funds rate, the central bank’s key short-term interest rate, from zero percent. The debate is incredibly important as it will help determine our expectations for the pace of U.S. economic growth, how low the nation’s unemployment rate can go, and the strength of U.S. wage growth.

With that said, it’s also helpful to step back and take a look at how the trajectory of long-term interest rates has shifted, why that has happened, and what it means for the U.S. economy.

While short-term interest rates have been incredibly low in recent years, long-term rates have been on the decline for several decades. Many economists have interpreted this as a decline in the “natural rate of interest,” or the long-run interest rate that would have the economy fully utilizing both labor and capital.

A few months ago, the President’s Council of Economic Advisers released a report looking through potential reasons why the long-term rates have declined so much. The council notes that some of the forces currently pushing down long-term rates are fleeting and should dissipate. They include the fiscal and monetary policies taken to fight the Great Recession, and the private-sector pull back on debt in the wake of that sharp 2007-2009 downturn.

But there are also forces that appear to be more permanent—forces that all result in the supply of savings growing faster than the demand for investment. (The interest rate, remember, is the “price” of loanable funds that balances the amount of funds that savers supply and that investors demand.) These forces include declining long-run productivity growth, slower population growth across the globe, and increasing savings rates by developing and now developed countries—the so-called “global savings glut.”

As University of Chicago economist John Cochrane points out, economics has a good grasp on how these different factors can push down long-term interest rates. What the field isn’t good at, however, is understanding just how much each factor contributes to the decline. Cochrane notes that the Council of Economic Advisers report cites many estimates of the different effects, and they can differ by quite a bit. While there’s strong evidence for the importance of these different effects, the precision just isn’t there. There’s a reason why the report notes that the question of why rates are so low is “one of the most difficult questions facing macroeconomists today.”

This question about the long run actually has implications for the short run as well. Vasco Cúrdia of the Federal Reserve Bank of San Francisco took a look at estimates of short-run and long-run natural rates of interest. His model shows that the current short-term rate, while zero, is still above its natural rate, which is closer to negative 2.5 percent. And looking at how the model projected the path of natural rates with previous data, Cúrdia shows that the model has expected the rate to jump up to its long-run level soon. But it hasn’t yet.

Given this uncertainty about the current natural rate, perhaps the central bank could wait to get more certainty about the health of the economy. With the long-term rate much lower, perhaps the climb won’t be that long. Waiting might not mean such a steep hike.

Noted for the Evening of October 14, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Conventional, one-dimensional policies will not reverse U.S. income inequality growth

Posted on by Bridget Ansel

A new paper from Brookings highlights why the magnitude of inequality makes even a big move on taxes seem small

A recent paper from The Brookings Institution examines the effect that raising the top marginal U.S. personal income tax rate to 50 percent, and some variations on that theme, would have on income inequality. The authors, economists Bill Gale of Brookings, Melissa Kearney of the University of Maryland, and Peter Orszag, a non-resident fellow at Brookings and a vice chairman at Citigroup Inc., conclude that the effect on inequality would be “exceedingly modest.” They end their paper by suggesting that such results mean that we need to look outside tax policy if we want to address inequality. I take a different lesson from their analysis. What I see is that if one really wants to reverse the rise in inequality then the economic interventions will have to be very large, whether the lever is taxes or any other area.

Gale, Kearney, and Orszag don’t publish the change in the effective rate on the top 1 percent of their simulated tax change, but it is certainly in the single digits. In other words, it reduces the after-tax income for this top group by a few percent. Given that the gap in average income between the best-off 1 percent and the middle 20 percent has risen by over 300 percent since 1979, it isn’t surprising that taking 4 or 5 percent of the top group’s income through a tax hike isn’t going to put much of a dent in inequality. Gale, Kearney and Orszag characterize their modeled tax increase as “significant.” But that begs the question: “significant relative to what?”

The problem here isn’t necessarily the size of the dent, it’s the size of what they’re trying to put a dent in. Income inequality has gotten to the point where getting back to the distribution of income that existed in 1979 would require transferring more than $1 trillion from the top income groups to the rest of the income spectrum (a fact the authors allude to in a follow-up piece). To accomplish this just through the tax system would be a significant undertaking. The effective rate on the top 1 percent would need to rise by 40 percentage points—a cool tripling of their income tax burden—with all that revenue redistributed to the bottom 95 percent. Even getting back to the 1989 income distribution would require a 25 point increase in the top 1 percent effective rate. Getting to 1999 would require a 13-percentage point increase.

It’s easy to dismiss these tax increases as unrealistic. But using any other single policy faces the same hurdle. It may be more difficult to calculate what would be needed in terms of improved education, or building infrastructure, or profit sharing incentives, or Wall Street regulation, or job training, or apprenticeship programs to substantially reverse the rise in inequality over recent decades. But if the brute force method of redistributing through the tax system would require gargantuan change, then none of these other more indirect methods are likely to achieve results any easier.

Of course, there may be non-tax approaches that re-jigger the U.S. economy in a way to target the benefits of growth differently that would build on themselves over time more so than just after-tax redistribution—any of the list above might qualify. But given the magnitude of the undertaking, it’s hard to see how that could be successful with anything but a set of interventions that are, in total, very dramatic.

Bottom line? I’ve long thought that the solutions being offered to address income inequality in the United States are not at the scale needed to actually reverse the trends of recent decades. This little exercise convinces me of it.

—Michael Ettlinger is the director of the University of New Hampshire’s Carsey School of Public Policy and previously a senior director at The Pew Charitable Trusts and vice president of economic policy at the Center for American Progress.

A note on methodology

My calculations estimate what would be required to redistribute the 2007 distribution of income to match that of 1979, 1989 and 1999. I used the 2007 distribution because the Congressional Budget Office data only go to 2011, when the very top income earners were still suffering from the impact of the Great Recession. The Dow didn’t return to its pre-recession levels until 2013 and is now 20 percent higher. Also, other preliminary analyses have us approaching 2007 levels of inequality as of 2014. So 2007 is a good proxy for now. It’s worth noting that even as of 2011, the gap between the top 1 percent and the middle 20 percent of income earners had tripled since 1979, an effective tax rate increase of 26 percent on the top 1 percent would be required to get back to the 1979 distribution, which would result in $500 billion being redistributed.