Must- and Shall-Reads:

• Jeff Madrick: Inflation targeting–a singularly bad idea
• Peter Temin and David Vines: Why Keynes is Important Today

1. Mark Dow: The Second Wave of the Bubble Unwind is Upon Us: “A pre-crisis boom in commodities lifted gold and silver…. Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes. Macro tourists lined up to pile in. Big name guys wearing money halos. ETFs and electronic futures trading for the masses poured the gasoline. In short, they built a bubble. A bubble replete with charlatans hawking it on every medium…. The irony of the precious metals bubble is that it was the guys yelling ‘bubble’, bubbles of every stripe—bond, stock, credit—who sought refuge in the only asset class that was truly in a bubble. In other words, the fear of bubbles created its own bubble, trapping the bubblers. Karma really is running over dogma…. When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know…. The statute of limitations on ‘not wrong, just early’ ran out a long time ago. By the time this is over only Peter Schiff, Zerohedge and Jim Grant will be waving their arms…”

2. Cathy O’Neil: “Hand To Mouth” and the rationality of the poor: “I’ve long thought that the ‘marshmallow’ experiment is nearly universally misunderstood: kids wait for the marshmallow for exactly as long as it makes sense to them to wait. If they’ve been brought up in an environment where delayed gratification pays off, and where the rules don’t change in the meantime, and where they trust a complete stranger to tell them the truth, they wait, and otherwise they don’t–why would they? But since the researchers grew up in places where it made sense to go to grad school, and where they respect authority and authority is watching out for them, and where the rules once explained didn’t change, they never think about those assumptions. They just conclude that these kids have no will power. Similarly, this GoodBooksRadio interview with Linda Tirado is excellent in explaining the rational behavior of poor people. Tirado just came out with a book called Hand To Mouth: Living in Bootstrap America and was discussing it with Dr. John Cook, who was a fantastic interviewer. You might have come across Tirado’s writing–her essay on poverty that went viral, or the backlash against that essay. She’s clearly a tough cookie, a great writer, and an articulate speaker. Among the things she explains is why poor people eat McDonalds food (it’s fast, cheap, and filling), why they don’t get much stuff done (their lives are filled with logistics), why they make bad decisions (stress), and, what’s possibly the most important, how much harder work it is to be poor than it is to be rich. She defines someone as ‘rich’ if they don’t lease their furniture…. As the Financial Times review says, ‘Hand to Mouth – written with scorching flair–should be read by every person lucky enough to have a disposable income.’”

3. David Fiderer: A Review of Fragile By Design: “Fragile By Design: The Political Origins of Banking Crises and Scarce Credit is a tour de force, and not in a good way…. The narrative… is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods…. Calomiris… and… Haber[‘s] familiar narrative [is] identified as ‘The Big Lie’ by Joe Nocera, Barry Ritholtz…. Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN…. The lack of response to the critics of The Big Lie…. There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment…. The amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government…. Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG…”

4. Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy: “John Maynard Keynes in The General Theory offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned… because the subsequent simplifications and the bowdlerization of his model obliterated this detail…. This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.”

5. Paul de Grauwe: The ECB should stop fearing the Germans | The Economist: “From 2012 to 2014 the Fed added $1 trillion to its balance sheet…. Exactly the opposite occurred in the euro zone…. There can be little doubt that the decision of the ECB to reduce the money base by 30% at a time when the euro zone had not recovered from the sovereign-debt crisis contributed to pushing the euro zone into a deflationary dynamic, out of which it still tries to extricate itself…. The American monetary authorities, correctly, understood that the crisis had led to a balance-sheet recession…. The ECB, on the other hand, was caught in a narrative that the problem came from… too many rigidities on the supply side. If these were fixed by structural reforms output would increase by itself…. Only by the beginning of 2014, the ECB started to recognise that this narrative did not fit the facts…. However, in the face of the fierce opposition of German economists and media the ECB was caught in a double bind. German opposition made it impossible for the ECB to use the technically easiest way to increase the money base, i.e. buying government bonds…. The question that arises now is what the ECB should do. At a minimum it should take its responsibility of keeping inflation close to 2% seriously…. By not acting forcefully today the ECB risks unleashing the rejection of the monetary union. This is a much higher risk than the risk of German ire against the use of an instrument, the purchase of government bonds that in the rest of the world is considered to be standard practice.”

6. Paul Krugman: Business vs. Economics: “Business leaders often give remarkably bad economic advice, especially in troubled times…. Think of the hugely wealthy money managers who warned Ben Bernanke that the Fed’s efforts to boost the economy risked ‘currency debasement’; think of the many corporate chieftains who solemnly declared that budget deficits were the biggest threat facing America, and that fixing the debt would cause growth to soar…. And on the other side, the past few years have seen repeated vindication for policy makers who have never met a payroll, but do know a lot about economic theory and history. The Federal Reserve and the Bank of England have navigated their way through a once-in-three-generations economic crisis under the leadership of former college professors…. The answer… is that a country is not a company. National economic policy… needs to take into account kinds of feedback that rarely matter in business life…. A successful businessperson… sees the troubled economy as something like a troubled company, which needs to cut costs and become competitive…. And surely gimmicks like deficit spending or printing more money can’t solve what must be a fundamental problem…. In reality, however, cutting wages and spending in a depressed economy just aggravates the real problem, which is inadequate demand…. But how can this kind of logic be sold to business leaders, especially when it comes from pointy-headed academic types? The fate of the world economy may hinge on the answer…”

7. Anne Seith: Monetary Fallacy?: Deep Divisions Emerge over ECB Quantitative Easing Plans: “Bundesbank President Jens Weidmann is opposed to most of these costly programs. They’re the reason he and ECB President Mario Draghi are now completely at odds. Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing…. It is a fundamental dispute that is becoming increasingly heated…. Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?… ‘Abenomics,’ worked only briefly…. Businesses and private households were simply too far in debt to borrow even more, no matter how cheap the monetary watchdogs had made it…. ‘For decades, the Japanese government did not institute the necessary structural reforms,’ says Michael Heise, chief economist at German insurance giant Allianz…”

8. Paul Krugman: Flattening Flattens: “As I see it, ‘hyperglobalization’–the big increase in trade relative to GDP in the two decades after 1990–was a one-off affair, driven by trade liberalization in developing countries and the rise of containerization, which led to a breakup of the value chain, with labor-intensive segments of production moving to China and other emerging economies. There wasn’t any comparable boom in trade or abolition of distance between economies at similar wage levels; if anything, interregional trade and specialization within the US may have declined. The flattening out of flattening is neither good nor bad, it’s just what happens when a particular trend reaches its limits. What is important to realize, however, is that trends do tend to do that.”

Should Be Aware of:

• Elira Karaja: The Rule of Karlowitz: Fiscal Change and Institutional Persistence
• Juliana Londono Velez: War and Progressive Income Taxation in the 20th Century
• Marvin Suesse: Breaking the Unbreakable Union: Nationalism, Trade Disintegration and the Soviet Economic Collapse
• Taras Kuzio: Muscovy Annexes Donbas but Loses Ukraine

1. Josh Marshall: Paulism Captured Perfectly: “In his on-going effort to appeal to DC elites as a different kind of Republican, Sen. Rand Paul (R-KY) says it’s ‘dumb’ of Republicans to emphasize their support for voter ID laws which have been shown repeatedly to cut voting rates for minorities and poorer voters. He still they’re awesome. But it’s ‘dumb’ to make a big deal out of them because black voters can get the wrong impression. Watch.”

2. Walter Scheidel: State revenue and expenditure in the Han and Roman empires: “Comparative analysis of the sources of income of the Han and Roman imperial states and of the ways in which these polities allocated state revenue reveals both similarities and differences. While it seems likely that the governments of both empires managed to capture a similar share of GDP, the Han state may have more heavily relied on direct taxation of agrarian output and people. By contrast, the mature Roman empire derived a large share of its income from domains and levies that concentrated on mining and trade. Collection of taxes on production probably fell far short of nominal rates. Hano fficialdom consistently absorbed more public spending than its Roman counterpart, whereas Roman rulers allocated a larger share of state revenue to agents drawn from the upper ruling class and to the military. This discrepancy was a function of different paths of state formation and may arguably have hadlong-term consequences beyond the fall of both empires.”

I must confess that I have not yet read Fragile by Design by the always-thoughtful Steve Haber and the very sharp Charlie Calamiris, but I have never understood how this line of argument is supposed to work:

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations…

Granted that that last part, “consistent with safe and sound operations”, has a tendency to become a dead letter under regulatory pressures, and that the depository institutions covered by the CRA come under pressure to make risky loans that they really should not. But that does not create risks of systemic distress or financial crisis. The depository institutions are insured by the FDIC, after all. You can complain that the CRA gets taxpayers onto the hook as insurers of loans that should not have been made. You cannot complain that the CRA forces overleveraged and undercapitalized systemically-important financial institutions to hold the lousy mortgages of low-income moochers–yet that, by all accounts, is what Haber and Calomiris’s argument is.

I don’t understand it. It just doesn’t seem to add up, arithmetically…

Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy: “John Maynard Keynes in The General Theory…

…offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned… because the subsequent simplifications and the bowdlerization of his model obliterated this detail…. This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.

Blog You Should read: The Growth Economics Blog Thinking About the Loss of Skill in the Industrial Revolution

Remember my six-part classification of things people do to add economic value?:

1. Backs.
2. Fingers.
3. Brains as (white collar and blue collar) cybernetic-control loops.
4. Mouths (and fingers) as information-communication devices.
5. Smiles (to provide personal services and keep us all pulling roughly in the same direction).
6. Minds (to think up genuinely new ideas and things we can do.

And remember my claims that the classic British Industrial Revolution greatly decreased (1) while greatly boosting (3) and boosting (2), (4), (5), and (6); that the Second Industrial Revolution further decreased (1) and greatly decreased (2) while further greatly increased (3) and increased (4), (5), and (6); and that the current cybernetic Information-Processing Revolution is going to greatly decrease our ability to make money by providing (3) and (4), reducing us to earning our money by providing (5) and (6) or by somehow figuring out how to own a share of the robots and computers that actually make and control stuff?

Now we have the estimable Dietrich Vollrath sending us to de Pleijt and Weisdorf saying that the classic British Industrial Revolution actually decreased (2) and decreased the amount of skill one needed to successfully perform (3). And the Growth Economics blog has some clever and interesting things to say:

You should be reading Dietrich–not just for this piece, but in general…