Martin Wolf’s column this week contains a very nice precis of the main argument of his recent The Shifts and the Shocks:

The deep-seated ailments that Wolf identifies are, I think, sixfold:

1. In economic reality: the great rise in income and wealth inequality, with its consequent pressures for (i) overleverage and (ii) volatility of demand–the non-rich are pressured to spend by their needs for the necessities and their desires for the conveniences of life, while the rich are not.
2. In economic reality: the emergence of the emerging-market liberalization, technological globalization, and first-world aging-driven “global savings glut”–or perhaps the global investment shortage–with its consequent extraordinary rise in global demand for assets perceived to be safe.
3. In economic theory: the “insouciance” generated by the rational-expectations and efficient-markets hypotheses that produced a deep skepticism of pragmatic regulation to minimize systemic risk, a skepticism apparently and temporarily confirmed by the fact of the Great Moderation.
4. In economic policy: the resulting production of both the deregulation of the 2000s that made it easy to sell assets perceived to be safe that were not in fact so, and the policy-making climate in which it apparently made sense in 2008 and since to do what was but no more than necessary to handle the crisis.
5. In finance: the fact that tail risks had not been realized for generations meant that they were underweighted and portfolios were not properly hedged: as Minsky said, the fact of past stability destabilizes the future.
6. In economic policy: the hubris of settling on a 2%/year inflation target as providing enough sea-room, and the greater hubris of the euro–the creation of a single currency over an area vastly greater than any optimum currency area, especially when coupled with the absence of the fiscal-union and banking-union supports that might have provided safety valves and with the assignment of a leading role in the eurozone to a Germany hag-ridden by an economic episteme that made the maintenance of aggregate demand always somebody else’s problem.

The financial crisis that hit the North Atlantic in 2008 hit a world economy that had just undergone these six shifts, and the consequence was a disaster that looks like it has permanently robbed the North Atlantic of about 10% of its wealth.

As to what ought to be done right now in the short run to try to recoup at least part of that permanent wealth-destruction, my reading of Martin Wolf’s book leads me to believe that he sees, as I see:

• A North Atlantic desperately short of both public and other long-term investment spending.
• A North Atlantic in which a continued shortage of supply of safe assets relative to demand at full employment puts downward pressure on spending.
• A North Atlantic in which the sub-2%/year trend of inflation creates unjustifiable risks of the ZLB trap, and even worse, unjustifiable risks of deflation.

These seem to me at least to call for easy solutions:

• Reserve-currency issuing governments that increase their investment spending and increase their guarantees of long-term investments.
• Reserve-currency issuing governments that finance these increased spending projects by issuing high-quality debt to resolve the safe asset shortage.
• Reserve-currency issuing governments that monetize enough of this debt to raise the trend inflation rate from 2%/year to 3%/year or 4%/year.

As to what ought to be done in the medium run, Martin calls for:

• “The Eurozone [to] confront an existential challenge… decide either to break up… or to create a minimum set of institutions and policies that would make it work…”
• Strong regulatory mandates to greatly diminish leverage and the use of debt.

I certainly agree with the first–but I see no political road to the creation of even the minimum set of institutions and policies in the eurozone.

I am less sure about the second. Debt is a very useful social instrumentality: we do not want everyone to have to pay all the attention all the time to all of their investments that we demand of prudent equity-holders. A focus on making sure that debts are good via aggressive stress-testing coupled with prudent government backstops via resolution mechanisms, guarantees, and aggregate spending targeting feels better to me. Yes, I know that this means that at times the government will wind up paying money out to feckless lenders and the government will thus provide business opportunities to feckless borrowers. But this ain’t a morality play: credit card companies do not attempt to eliminate credit card fraud but simply to balance its costs against the provision of convenience to their customers. Governments should have the same attitude toward the regulation of debt and risk.

And for the long run, Martin calls for:

• A more equal distribution of income and wealth.
• A better economics–one less in thrall to rational-expectations and efficient-market ideologues.
• “More globalization and less–more global regulation and cooperation, and more freedom for individual countries to craft their own responses to the pressures of a globalizing world…”
• Additional reforms of finance that diminish “its role in generating property bubbles… [as] the leveraging up of the stock of land is a consistently destabilizing phenomenon…”

I suspect that the fourth of these looms large in Martin’s mental universe simply because he is based in London. I am not sure it is that big a deal for the world as a whole–my reading of 2008- is that the property booms and busts did not create systemic risk any more than the dot-com boom and bust of the previous decade did, but rather that the critical flaws were elsewhere in high finance.

And as for the other three, the question is: How do we get there? If 2005-2014 does not create a new and very different economics in the universities and among the policy-making community, what would? Today’s superrich and even rich have a very strong material interest in not having a more equal distribution of wealth and income, and they hold a great deal of political power. And when Wolf call for both “more globalization and less” what I hear is a disheartened cry for better policymaking. But we will get that only when we live in Platonis πολιτείᾳ, non in Romuli faece–when we live in the republic of Plato, not in the shit of Romulus.

1275 words

tom: Hoisted from the Internet from One Year Ago:

Re: “Automatically signing people up for low-cost default insurance”

Yet another instance of conservatives proposing ideas based purely on how they sound as slogans, and purely as a moving the bar trick: it is not intended as a replacement, only to sound like a plausible replacement, but only until when what it is proposed to replace is no longer in effect….

Yesterday James Capretta, today Megan McArdle trot out supposedly more palatable alternatives to Obamacare that are in fact rephrased versions of single payer or a public option. Why? Because there is no room to the right of Obamacare, except for nothing. That is why the Republican agenda sloganized as ‘repeal and replace’ amounts in practice to ‘repeal.’

Hoisted from the Internet from One Year Ago: Please read:

• Richard Epstein
• John Cochrane

and tell me what is going on here. Anyone have any plausible answers for me?

The lack of any public or even private willingness to mark one’s beliefs to market is amazing. As is the inexorable and irresistible desire to call the pitch a strike before the pitcher has even walked to the mound.

It’s not as though either Cochrane or Epstein has the confidence that would have been created by a lifetime of calling the balls and strikes more accurately than anyone else that might have motivated such hubris.

Nor do either of them have any standing other than that that comes from a perception of being smart.

Must- and Shall-Reads:

• Sam Fleming: BoE’s Mark Carney urges banker bonus overhaul
• Gavyn Davies: Japan’s latest recession spells trouble for Abe | Large global benefits from the 2014 oil shock | Gavyn Davies | The very long run equity bull market | Gavyn Davies
• Mark Thoma: Why the Great Recession may be with us for years
• Ryan Avent: Japan’s economy: About that debt
• Brian Kahn: NASA, Other Data Show Globe Had Warmest October

1. Mark Thoma: When Piketty Argued for Income Redistribution, He Changed Economics: “Thomas Piketty’s Capital in the Twenty-First Century… has it changed anything within economics?… Piketty has… revive[d] the study of the distribution of wealth without violating the positive and normative distinction that economists hold so dear…. Whether or not Piketty is correct about the fundamental determinants of these distributions remains to be seen, but he deserves much credit…. Another thing Piketty deserves credit for is the revival of the historical, narrative methodology…. In his 1919 presidential address to the American Economic Association, Irving Fisher said, ‘The real scientific study of the distribution of wealth has, we must confess, scarcely begun as yet.’ Nearly a hundred years later that, along with a revival of historical methods and perspective, may finally be changing.”

2. Robert F. Martin et al.: Potential Output and Recessions: Are We Fooling Ourselves?: “The economic collapse in the wake of the global financial crises (GFC) and the weaker-than-expected recovery in many countries have led to questions about the impact of severe downturns on economic potential. Indeed, for several major economies, the level of output is nowhere near returning to pre-crisis trend (figure 1). Such developments have resulted in repeated downward revisions to estimates of potential output by private- and public-sector forecasters. In addition, this disappointment in post-recession growth has contributed to concerns that the U.S. economy, among others, is entering an era of secular stagnation. However, the historical experience of advanced economies around recessions indicates that the current experience is less unusual than one might think. First, output typically does not return to pre-crisis trend following recessions, especially deep ones. Second, in response, forecasters repeatedly revise down measures of trend…”

3. James Pethokoukis: The GOP needs to rethink its approach to tax cuts: “Steve Moore… doesn’t like the conservative idea of cutting the tax burden and increasing take-home pay of American parents by expanding the child tax credit…. So the Republican Party — tagged as the ‘party of the rich’–should head into 2016 with a plan to cut taxes on the rich and raise them on working class Americans? Hmm. (And by the way, there doesn’t seem to be any evidence that turning people into non-income taxpayers nudges them into greater support for expanding government.) Anyway, what should the GOP pitch to the middle-class be, according to Moore? This: cutting the top income tax rate would boost GDP growth, which in turn would broadly boost middle-class incomes…. When incomes for the top 1% have risen by 200% over the past three decades vs. for 40% for the middle class, it’s not surprising that Americans wonder about the wisdom of cutting top tax rates…”

4. Ed O’Keefe: Samuel Alito Fails to Quote Straight: “‘Some of the columns that are written, you know, are another story,’ Alito said, in a rare public lecture on Constitutional history and law presented by the New York Historical Society on Saturday. ‘Some of them are written by people who are not very knowledgeable…. I was reading one, actually, reading one this morning that was complaining about the current membership of the Court, because unlike in past days, according to this columnist, we don’t have a representation of drunks, philanderers, and a few, you know, a few other n’er do wells.’… [Dahlia Lithwick’s] column…. ‘Compared with the political operators, philanderers, and alcoholics of bygone eras, they are almost completely devoid of bad habits or scandalous secrets. This is, of course, not a bad thing.’ American legal scholar and Yale University professor Akhil Reed Amar, who moderated the discussion and referred to Alito by his first name throughout the event, politely described the column as ‘interesting’, and quickly moved on to other topics…”

5. Charles Pierce: Here’s Some Stupid For Lunch: “The editorial board of The Washington Post [serves up] the absolutely perfect Beltway word-souffle: ‘[Obama] has tried compromise, and the Republicans spurned him. We will not relitigate that last contention except to note that behind the legislative disappointments of the past six years lies fault on both sides.’ Wow.”

6. Scott Lemieux: Today In People Insulting Your Intelligence – Lawyers, Guns & Money : Lawyers, Guns & Money: “Shorter David Brooks: ‘If Obama takes unilateral action on immigration, congressional Republicans will stop cooperating with his initiatives!’ Shorter Lambert Strether: ‘We would totally have had single-payer if it wasn’t for the meddling of President, Speaker of the House, Senate Majority Leader, Secretary of State, Chief Justice of the United States, and longtime don of the Gambino crime family Jonathan Gruber.  Also, I have no idea what was actually in the Heritage health care proposal, and think that governors rule Massachusetts like kings.’ Shorter Verbatim Megan McArdle: ‘So what would I have done, when Obamacare was tanking in the polls and Scott Brown was elected to the Senate on an anti-Obamacare platform? I would have passed something more modest that still significantly expanded coverage, expanding Medicaid to 150 to 200 percent of the poverty line and creating a national high-risk pool to insure anyone who’d been turned down for coverage more than twice in the past 12 months, at prices comparable to what a healthy person of their age would pay in the insurance market. Again, much cheaper, much less intrusive, no blowback from people who lost their policies, and very unlikely to have been tampered with by the Supreme Court.‘ Oh, yes, the Supreme Court tampering with an expansion of Medicaid–that’s unpossible!” :: Postmodulator says: “I liked this even better: ‘creating a national high-risk pool to insure anyone who’d been turned down for coverage more than twice in the past 12 months, at prices comparable to what a healthy person of their age would pay in the insurance market.’ So, make the bill more palatable by putting the public option back in. I genuinely refuse to believe this woman is the same species as me.”

7. Jonathan Chait: Bush Official Flip-Flopping on Obamacare — NYMag: “Getting in his licks today is Tevi Troy, former Bush administration health official, who takes to the Wall Street Journal editorial page to denounce Obamacare’s ‘Cadillac tax’…. Troy’s column does not mention that the Cadillac tax–or, usually, even more stringent versions of it–have been a mainstay of Republican health-care plans as well…. Troy’s op-ed also fails to mention that he himself used to oppose the tax break for employer-sponsored health insurance. In a 2007 speech, he explained that Bush proposed to cap the health-insurance tax deduction to exclude the more expensive plans: ‘The President’s proposal would allow every taxpayer with health insurance that meets certain basic criteria… to deduct $15,000 for a family…. These numbers we’re pretty confident are large enough to cover all but the most expensive Cadillac-type plans.’… Obama’s Cadillac tax kicks in at a threshold of $30,000 per year, compared to the $15,000-per-year threshold Troy endorsed under Bush. Troy has more recently changed his thinking on the issue. As the president of the American Health Policy Institute, Troy’s work now focuses on warning America about the dangerous burdens of the Cadillac tax he once endorsed…. Troy’s op-ed doesn’t mention that either…”

Should Be Aware of:

• Ada Palmer: The Hollow Crown: Shakespeare’s Histories in the Age of Netflix
• Daniel Davies: The World Is Squared: Episode 4 – In Hot Places
• Chen Ning Yang: The conceptual origins of Maxwell’s equations and gauge theory
• CBO (2014): Update: Budget and Economic Outlook 2014-2024
• Open-Face Salmon Reuben Recipe : Emeril Lagasse : Food Network
• I Vespri Siciliani
• Cory Doctorow: How the Enigma code-machines worked)

1. Molly Redden: Catholic Church Argues It Doesn’t Have to Show Up in Court Because Religious Freedom: “When Emily Herx first took time off work for in vitro fertilization treatment, her boss offered what sounded like words of support: ‘You are in my prayers.’ Soon those words took on a more sinister meaning. The Indiana grade school where Herx was teaching English was Catholic. And after church officials were alerted that Herx was undergoing IVF—making her, in the words of one monsignor, ‘a grave, immoral sinner’—it took them less than two weeks to fire her. Herx filed a discrimination lawsuit in 2012. In response, St. Vincent de Paul School and the Fort Wayne-South Bend Diocese, her former employers, countered… [that] its religious liberty rights protect the school from having to go to court at all…”

2. Nicholas Carlson (2012): Romney Was So Proud Of His Universal Healthcare Law He Included It In His Official Portrait: “One of Republican presidential candidate Mitt Romney’s campaign promises is that he will do everything he can to repeal the Affordable Care Act, aka ‘Obamacare.’ But Romney hasn’t always been so opposed to the ideas behind ‘Obamacare,’ such as the act’s requirement that all individuals buy health insurance. While he was governor of Massachusetts, Romney’s own signature legislation was a healthcare reform act built around the idea of an individual mandate. In 2005, Romney even called it ‘the ultimate conservative idea.’ In materials from his 2008 campaign for President, Romney cited reports that the bill had ‘newly insured’ some 300,000 people. In fact, Romney was so proud of this legislation that he insisted his official governor’s portrait include a copy of the bill…”

3. Brian Buetler: Reihan Salam Obamacare Article Shows Why the Debate Will Never End: “The trick is to make the opposition look more sporting. Salam laments that Democrats tailored their health care legislation to obscure and delay transfers so that budget analysts wouldn’t treat the law as they might a single-payer program where… everything coming in is a tax, and everything going out is an expenditure…. The right’s memory has grown conveniently spotty…. In 2011, in a different context, Salam mocked the kind of scolding he’s now directing at Obama. ‘Ah, he made the program marginally less politically poisonous, which will make it harder for us to demonize him. Now let’s attack him for hypocrisy!’ he wrote, paraphrasing critics. The policy architect in that instance was Paul Ryan, who proposed phasing out the existing Medicare program, but only after 10 years, and only for future retirees. At the time, Salam didn’t believe his opponents’ rhetorical strategy had much merit. ‘I mean, I get it,’ he added. ‘But also: let’s move on’…”