Must- and Shall-Reads:

• Tim Duy:
  Fed Watch: Asked and Answered. Mostly.)
• Barry Eichengreen and Petra Geraats:
  The Bank [of England] currently provides a drip-feed of releases… replacing a drip feed with a deluge will make the information provided harder to digest… leave most observers less well informed… indeed, the Bank itself will no longer be able to identify the separate impact of the policy decision..
• Peter F. Drucker (20040:
  What Makes an Effective Executive
• Martin Wolf:
  Let us enjoy the greatest human escape of all
• Miles Kimball:
  Righting Rogoff on Japan’s Monetary Policy
• Jesse Livermore:
  A Critique of John Hussman’s Chart of Estimated Future Equity Returns
• Cullen Roche:
  “John Cochrane… ‘An Autopsy for the Keynesians’… doesn’t ever define ‘Keynesian’, and because he doesn’t he’s able to engage in a series of dishonest generalizations…. I am mad at myself for even wasting the time to respond to such an obviously misleading article.”

1. James Heckman (1995);
   Cracked Bell:
   “The same remarks apply to [Herrnstein and Murray’s Bell Curve’s] study of racial and ethnic differentials in socioeconomic outcomes…. Evidence that racial differentials weaken when ability is controlled for using regression methods does not rule out an important role for the environment…. In the presence of measurement error in the environment, the authors’ analysis will overstate the ‘true’ effect of ability on those outcomes. There are methods for addressing these problems, but Murray and Herrnstein do not use them…. By its very construction… the ‘two-standard deviation’ range in measured IQ… [covers] 95 percent of the population. A ‘two-standard deviation’ range of their family background index does not include 95 percent of the population, because that measure does not come from a bell curve…. By restricting the range of the environmental variable they understate the role of the environment in affecting outcomes relative to the role allocated to IQ…”
   

2. Paul Krugman:
   Recession, Recovery, and Gold:
   “Dave Weigel notes that when President Obama get reelected, the usual suspects told us to run for the hills, buying gold along the way. Zimbabwe! Or, actually, not…. Gold prices are down…. Why they were high in the first place[:] Gold is not, in fact, a hedge against inflation. It’s something people buy when real returns on alternative assets are low…. Gold went up as real interest rates turned negative, thanks to a depressed economy…. As recovery has gathered strength, real rates have gone up and gold has gone down…”
   

3. Matt O’Brien:
   Now that the Dow has hit 18,000, let us remember the worst op-ed in history:
   “The stock market… isn’t the best barometer…. And the Dow isn’t even the best barometer of the stock market…. But if arbitrary round numbers are your thing, the Dow… above 18,000 for the first time. And that brings us to the worst op-ed in history. On March 6, 2009, former George W. Bush adviser Michael Boskin offered whatever the opposite of a prophecy is when he said that ‘Obama’s Radicalism Is Killing the Dow.’… Boskin… didn’t think that this once-in-three-generations financial crisis was to blame for the market meltdown. Instead, he blamed it on Obama for… talking about raising taxes? ‘It’s hard not to see the continued sell-off on Wall Street and the growing fear on Main Street,’ Boskin philosophized, ‘as a product, at least in part, of the realization that our new president’s policies are designed to radically re-engineer the market-based U.S. economy.’ What followed was the usual conservative jeremiad against higher taxes on the rich, lower taxes on the poor, and deficit spending. Obama’s trying to turn us into Europe, and that’s why markets are pricing in the possibility of a Great Depression—not the dying economy he inherited. It was… extraordinarily ill-timed…. Obama’s radicalism has killed the Dow to the tune of a 171 percent return since Boskin’s op-ed.
   

4. David Weigel:
   Republicans Block Reappointment of CBO Chief Doug Elmendorf:
   “Incoming Republican leaders in Congress won’t reappoint Doug Elmendorf to another term as head of the Congressional Budget Office, according to a party aide…. Elmendorf, 52, an economist with experience at the Treasury Department and the Federal Reserve, was appointed to run the CBO in 2009 when then-director Peter Orszag was picked by President Barack Obama to run the White House Office of Management and Budget. In 2011, Elmendorf won a full four-year term, after Republicans took control of the House while Democrats retained the Senate. A CBO conclusion that Obama’s signature domestic achievement — the 2010 Affordable Care Act — was cutting costs pleased Democrats, while Republicans appreciated the office’s finding that the health-care law and a proposed minimum wage increase would cost jobs…”
   

5. Duncan Black (2004):
   Minitrue Sullivan:
   “Not to beat a dead horse which no one much cares about anyway, but I was a bit puzzled earlier when I was having some trouble hunting down a particular story with a mention of [Andrew] Sullivan’s 5th column nonsense. A reader reminds me why–Sullivan, as he tends to do, edited the article he had publishsed in the Times of London before posting it in his ‘best of’ section on his website. On his site: ‘The decadent Left in its enclaves on the coasts is not dead–and may well mount what amounts to a fifth column…’ Original quote: ‘The decadent left in its enclaves on the coasts is not dead -and may well mount a fifth column…’ The former at least has one little toe in the land of metaphor, the latter doesn’t. Sullivan literally and explicitly suggested that the ‘decadent Left’ and their soulmates, Muslims advocating theocracy, would join hand in hand.”
   

Should Be Aware of:

• Salami by Creminelli
• Paul Krugman:
  Putin, Neocons and the Great Illusion
  
• Ricardo Hausmann:
  The Productivity of Trust
• Adam Gopnik:
  “The insight that one is not obliged to enroll in a perpetual cycle of violence and reprisal is not apolitical or escapist”

1. Barkley Rosser:
   The People the Wall Street Journal Put on Its Op-Ed Page… Get Less Hinged as Time Passe[s]:
   “It has never been clear that Cochrane is even all that good at studying asset pricing. Even to this day, his famous grad textbook, called, well, Asset Pricing, does not have any of the following words in its index (or enywhere in the book, for that matter): kurtosis, leptokurtosis, fat tails. Nowhere, nada, even though supposedly financial traders all know that most financial returns exhibit those characteristics, which came home to roost big time in 2008. Of course at that time he publicly declared that… Fama would talk about them in his classes, having first heard of them in from Benoit Mandelbrot of all people. But, that has somehow still not gotten Cochrane to mention them himself anywhere in his supposedly wonderful textbook.”
   

2. Duncan Black:
   Eschaton: Innumeracy):
   “Silly [Andrew] Sully[van] is back on his Bell Curve kick because Coates wrote some hurtful things which failed to realize the overall importance of being incredibly civil in the high minded intellectual debate about whether black people are, in fact, stupid, and whether the innumerate editor of a prominent magazine might have some responsibility for catapulting racist pseudoscience he’s incapable of understanding into the discourse…. I’d often try to find an excuse to sneak a Bell Curve lecture into my courses. By the end of my teaching career none of my students had actually heard of it, which was good, but it still provided a way of teaching various lessons…. And I knew it was a zombie superhero, destined to return again and again no matter how many bullets we put into its brain.”
   

The very sharp and smart Stephen Roach is seriously alarmed–and I think he is wrong.

Stephen Roach:

A financial crisis happens when something leads to a sharp fall in the risk tolerance of the market; that fall in risk tolerance reduces the price of risky assets in such a way that highly-leveraged financial intermediaries become illiquid and possible insolvent; that possible insolvency produces a sharp shift in the riskiness of assets as many previously classified as safe are no longer so; thus the fall in the demand for risky assets (and the rise in the demand for safe assets) triggers a huge rise in the supply of risky assets (and a huge fall in the supply of safe assets), and the downward spiral commences.

Those of us watching financial markets in 2005 worried about such a financial crisis triggered by a full-scale run on the dollar. See, for example, me from March to May:

• Dials Moving Into the Red Zone
  http://delong.typepad.com/sdj/2005/07/dials_moving_in.html
  2005-07-13
• A Short Dialogue on the Price of the Long Treasury Bond
  http://delong.typepad.com/sdj/2005/06/_a_short_dialog.html
  2005-06-08
• Paul Krugman Gets in Touch with His Inner Friedrich Hayek
  http://delong.typepad.com/sdj/2005/05/paul_krugman_ge.html
  2005-05-27
• The Global Savings Glut Argument
  http://delong.typepad.com/sdj/2005/05/the_global_savi.html
  2005-05-22
• Hard Landings II…
  http://delong.typepad.com/sdj/2005/04/hard_landings_i.html
  2005-04-20
• Our Twin Financial Puzzles: The Long Run May Come Like a Thief in the Night
  http://delong.typepad.com/sdj/2005/04/our_twin_financ.html
  2005-04-13
• The “Hard Landing” Scenario…
  http://delong.typepad.com/sdj/2005/03/the_hard_landin.html
  2005-03-30

Perhaps the clearest statement I made is this: Our Twin Financial Puzzles: The Long Run May Come Like a Thief in the Night:

The optimists… have only one economic argument: long-term interest rates are relatively low, and are not pricing the dollar-collapse and the U.S.-interest-rates-spike scenarios as having any substantial probability at all. The pessimists on Wall Street are puzzled at why this economic argument is supposed to have force. From their perspective, demand for long-duration dollar-denominated securities is high because the Asian central banks are buying as if there were no tomorrow in order to keep the value of their currencies down, the U.S. Treasury is borrowing short (it is not issuing that many long-duration securities), and U.S. companies are cautious and are not undertaking the kinds of investments that would lead them to issue lots of long-duration bonds.

We economists respond by saying that for every market mispricing there is an open profit opportunity: if long-term interest rates are indeed too low–if long-term bonds are indeed priced too high–there is money to be made by shorting long-term U.S. bonds, parking the money in some other investment vehicle that is not underpriced [and] waiting for bond prices to return to fundamentals…. But the Wall Street types have a counterargument: For any one financial institution to make the international bet–to bet on the decline of the dollar against the yuan over the next five years in a very serious, leveraged way is to put its survival at risk should the trades somehow go wrong. And trades do go wrong….

We economists believe that market forces drive prices to fundamentals. But we are not careful enough to distinguish situations in which equilibrium-restoring forces are strong from those in which equilibrium-restoring forces are weak. At the moment those forces are weak. And this adds an additional danger: at any moment those forces may become strong. The long run in which the dollar falls and U.S. long-term interest rates rise may come like a thief in the night as a very sudden shock…. On that day the long run future will be, as football coach George Allen (not the “macaque” one) used to say, now…. Should that day come, keeping a financial crisis from becoming a major disaster may well require swift and rapid action by a Federal Reserve and a Treasury Department that have powerful and unconditional White House and Congressional support….

That is me back in 2005. Was I then sounding enough like Stephen Roach sounds now–in 2014?

So why am I so much more sanguine now?

Note what I said then: “Should that day come, keeping a financial crisis from becoming a major disaster may well require swift and rapid action by a Federal Reserve and a Treasury Department that have powerful and unconditional White House and Congressional support…” May well require–a full-blown run on the dollar could, I thought, be successfully managed by competent technocrats. In fact, I put the chances of a truly hard landing conditional on a major dollar crisis at only 10%. Why so low? Back then I wrote down the argument at an undergraduate level:

Some Simple Analytics for a Hard Landing:

I still think that looks pretty good as a thinking-through back in 2005 of how a financial crisis could be generated by a run on the dollar, and why it probably would not produce a hard landing.

What is the equivalent argument at the undergraduate or graduate level supporting Stephen Roach’s fears? I just do not see it.

Of course, we did not get the dollar-run crisis: we got a very different one…

Must- and Shall-Reads:

• Scott Lemieux:
  “The only two presidents who can even arguably been said to have presided over a more substantial body of progressive policy-making in the last century are FDR and LBJ, and both did so in significantly more favorable contexts…”
• Simon Wren-Lewis:
  Money Impotence in context
• Miles Kimball:
  Righting Rogoff on Japan’s Monetary Policy
• The Enlightened Economist:
  Inequality, Economics and Politics: Thomas Piketty at the Bank of England
• “Christopher Eppig and his colleagues… note that the brains of newly born children require 87% of those children’s metabolic energy…. five-year-olds… 44% and even in adults… a quarter…. Any competition for this energy is likely to damage the brain’s development, and parasites and pathogens compete for it in several ways…”

1. William Davidow and Michael S. Malone:
   What Happens to Society When Robots Replace Workers?:
   “Henry Adams… estimated that power output… between 1840 and 1900 [had] a compounded rate of progress of about 7% per year…. 1848… speed… 60 miles per hour. A century later… 600… a rate of progress of only about 2% per year. By contrast, progress today comes rapidly… semiconductor technology has been progressing at a 40% rate for more than 50 years. These rates of progress are embedded in the creation of intelligent machines, from robots to automobiles to drones, that will soon dominate the global economy…. We will soon be looking at hordes of citizens of zero economic value. Figuring out how to deal with the impacts of this development will be the greatest challenge facing free market economies in this century…”
   

2. Nauro Campos:
   The Riddle of Argentina:
   “Argentina is the only country in the world that was ‘developed’ in 1900 and ‘developing’ in 2000…. Financial development and institutional change are [probably] two main factors behind the unusual growth trajectory of Argentina over the last century…. Some argue that the decline started with the Great Depression (e.g. Diaz-Alejandro 1985)… Taylor (1992) argues for 1913…. Yet by 1947 Argentina was still ranked 10th in the world in terms of per capita income and della Paolera and Taylor (2003) estimate that the ratio of Argentina’s to the OECD’s income declined to 84% in 1950, to 65% in 1973, and then to 43% in 1987. It rebounded in the 1990s but with the run-up to the 2001 crisis again reverted…. The PGARCH multivariate analysis reveals a robust positive effect of the development of domestic financial institutions (private and savings bank deposits to GDP) as well as a negative growth effect from the instability of informal institutions (chiefly general strikes and guerilla warfare). As for the indirect effects on economic growth (through growth volatility), the results support negative roles for formal political instability (constitutional changes) and trade openness…. The main lesson… is one that economic historians already knew… institutions do matter but among them, political institutions and financial institutions seem fulcral…”
   

3. Heather Boushey:
   You can’t help today’s middle class with 1930s-era policies:
   “America’s families look very different today than a generation or two ago. Too many families fear they are falling out of the middle class or will never get there due to a combination of stagnating wages, rising and high levels of income and wealth inequality, and an increase in jobs with unpredictable schedules and too few benefits. Yet, our workplaces are matched to a very different time. The foundation for labor standards in the United States are grounded in a set of policies implemented in the 1930s. They include the minimum wage, overtime provisions and unemployment insurance. This basket of social insurance programs presumes a specific kind of work and family structure that was prevalent then, but is not the norm now…”
   

4. Nick Bunker:
   Weekend reading:
   “Cardiff Garcia asks whether household formation… will pick up…. Matt O’Brien argues that the bad news [for the Russian economy] won’t end any time soon…. Paul Krugman points to the large private-sector debts that Russia ran up…. Neil Irwin… countries with large social insurance states have the highest employment rates. Danielle Kurtzleben… the stark gender divide in low-wage work…. Dietz Vollrath… [on] the difficulty of calculating productivity growth in the service sector…”
   

5. Karl Whelan:
   Thoughts on “Teaching Economics After the Crash”:
   “This is a long post on the state of economics and how it is taught to undergraduates. The world is not crying out for another such discussion, so blame Tony Yates, via whom I ended up listening to Aditya Chakrabortty’s documentary…. Like Tony, I viewed the programme as a hopelessly one-sided critique of the economics profession. Still, it was useful in the sense that it packed all the regular criticisms about economics into one short piece. I agree with most of what Tony wrote but I want to take a different approach because I think it’s worth engaging a bit more positively with the criticisms raised…”

6. Miles Kimball:
   John Stuart Mill on Being Offended at Other…:
   “In On Liberty, Chapter IV, ‘Of the Limits to the Authority of Society over the Individual’ paragraph 12, John Stuart Mill effectively downplays the problem of direct preferences over others’ conduct or opinions by arguing that preferences over others’ self-regarding conduct or others’ opinions tend to be weak compared to the strength of preferences over one’s own conduct or opinions: ‘There are many who consider as an injury to themselves any conduct which they have a distaste for, and resent it as an outrage to their feelings; as a religious bigot, when charged with disregarding the religious feelings of others, has been known to retort that they disregard his feelings, by persisting in their abominable worship or creed. But there is no parity between the feeling of a person for his own opinion, and the feeling of another who is offended at his holding it; no more than between the desire of a thief to take a purse, and the desire of the right owner to keep it…'”

Should Be Aware of:

• Joyce Miller:
  “In fact, The Invisible Backpack [of White Privilege] contains the complete works of F. Scott Fitzgerald, along with the Western Canon… It’s handy to have a rich literary tradition to provide a validation of selfhood verging on the grandiose… with a detachable Gore-Tex underdog mentality that serves to justify the backpack’s pathological egotism, it often makes me consider writing a novel of my own…”

1. Chad Orzel:
   Method and Its Discontents:
   “I have a lot of sympathy for the defenders of method… calls to scrap falsifiability are mostly in service of the multiverse variants of string theory. And I find that particular argument kind of silly and pointless…. I’m sort of at a loss as to why ‘There are an infinite number of universes out there and one of them was bound to have the parameters we observe’ is supposed to be better than ‘Well, these just happen to be the values we ended up with, whatcha gonna do?’ I mean, I guess you get to go one step further before throw up your hands and say ‘go figure,’ but it’s not a terribly useful step…. I’m probably most sympathetic with the view expressed by Sabine Hossenfelder in her post at Starts With a Bang…. ‘It is beyond me that funding agencies invest money into developing a theory of quantum gravity, but not into its experimental test. Yes, experimental tests of quantum gravity are farfetched. But if you think that you can’t test it, you shouldn’t put money into the theory either.’…I just don’t really believe we’ve exhausted all the options for testing theories, just because one particular approach has hit a bit of a dry spell. There are almost certainly other paths to getting the information we want, if people put a bit more effort into looking for them…”
   

2. Paul Krugman:
   The Dr. Oz Effect:
   “There are a lot of [Dr.] Ozzes out there, including in areas you might not consider the entertainment business…. Conference planners tried to recruit me for an event in which I would be presenting the alternative view to the main experts–Arthur Laffer… who among other things warned about soaring inflation and interest rates thanks to the rapid growth in the monetary base… and the Stephen Moore who was caught using fake numbers to promote state-level tax cuts…. These ‘experts’ appeal to the political prejudices of a business audience, but taking their advice would have cost you a lot of money. So why isn’t their popularity dented by the repeated pratfalls? Are they, also, in the entertainment business? To some extent… yes. Simon Wren-Lewis… [says] the financial sector buys into really bad macroeconomics… [because] economists working for financial institutions… earn their money by telling stories that interest and impress their clients. To do that it helps if they have the same worldview as their clients. Thinking about Dr. Oz also… helps explain… [why] the right wants alleged experts who toe the ideological line, why can’t it get guys… recruit[s] and continue[s] to employ people who can’t do basic job calculations, or read their own tables and notice that they’re making ridiculous unemployment projections…. Anyone competent enough to avoid these mistakes would also be unreliable…. I now also suspect that the personality traits you need to be an effective entertainer on inherently not-so-much-fun subjects like health or monetary policy are inherently at odds with the traits you need to be even halfway competent…. A hired-gun economist who actually knows how to download charts from FRED probably wouldn’t have the kind of blithe certainty in right-wing dogma his employers want. So how do those of us who aren’t so glib respond? With ridicule, obviously. It’s not cruelty; it’s strategy.”
   

3. Simon Wren-Lewis:
   Bond Market Fairy Tales:
   “When it comes to an issue involving financial markets, then it seems obvious who mediamacro should believe. Those close to the markets surely must know more about how those markets work than some unworldly academic. This post will suggest a more nuanced view…. Are we talking about what may happen over the next few days or weeks, or are we talking about what will happen over the next few years? In terms of very short term prediction, financial market economists beat academic economists…. Those working in the markets are not as concerned about the longer term…. Money is made in predicting short term movements, and knowledge of where things are going over the next few years is a relatively weak guide to what might happen over the next few days…. Economists working for financial institutions spend rather more time talking to their institution’s clients than to market traders. They earn their money by telling stories that interest and impress their clients. To do that it helps if they have the same worldview as their clients. Getting things right over the longer term seems less important…. It is also useful if they leave their clients with the impression that they have some unique insight…. So instead of suggesting… markets are governed by basic principles, it is better to suggest that the market is like some capricious god, and they are one of a few high priests who can detect its mood…. The incentive system for academics is very different…”
   

4. Benjamin Schwartz:
   The American Conservative’s Christmas Reading:
   “I’d read the cuboid book (848 pages) The Making of the English Working Class, by E.P. Thompson… the way that undergraduates too often read—too rapidly, for the purpose of regurgitating arguments in a seminar and to root out facts…. Revisiting it now… the book has given me the most exhilarating experience of my reading life this year…. How between 1780 and 1832 the culture, traditions, and economy of artisans, small producers, tradesmen, and the yeomanry gave way to wage labor, the factory system, and mass industrialization…. Thompson summoned up the causes, arguments, and stratagems of a nearly wholly forgotten political culture… industrial capitalism was uprooting communities, devaluing purposeful work, corroding family life, and concentrating wealth, resources, and production into… ‘but two classes of men, masters and abject dependents.’ Lost were the traditional values of liberty, independence, and individualism—and the open, confident, and generous approach to life those values engender. Won was a steely and resilient class consciousness…. This is a work, Thompson unabashedly makes clear, about history’s losers, and in its embrace of the losers, as well as in other ways, The Making of the English Working Class is a profoundly anti-progressive book…. Thompson’s historical imagination and sympathy allowed him to see the value, and the tragedy, of lost causes: ‘I am seeking to rescue the poor stockinger, the Luddite cropper, the ‘obsolete’ hand-loom weaver, the ‘utopian’ artisan… from the enormous condescension of posterity. Their crafts and traditions may have been dying. Their hostility to the new industrialism may have been backward-looking. Their communitarian ideals may have been fantasies. Their insurrectionary conspiracies may have been foolhardy. But they lived through these times of acute social disturbance, and we did not. Their aspirations were valid in terms of their own experience; and, if they were casualties of history, they remain, condemned in their own lives, as casualties. Our only criterion of judgement should not be whether or not a man’s actions are justified in the light subsequent evolution. After all, we are not at the end of social evolution ourselves. In some of the lost causes of the people of the Industrial Revolution we may discover insights into social evils which we have yet to cure.'”