Things to Read on the Afternoon of August 8, 2014

Must- and Shall-Reads:

1. Robert Solow (2012): Hayek, Friedman, and the Illusions of Conservative Economics: “There was a Good Hayek and a Bad Hayek… a serious scholar who was particularly interested in the role of knowledge in the economy… [the] system of competitive markets is a remarkably efficient way to aggregate all that knowledge while preserving decentralization. But the Good Hayek also knew that unrestricted laissez-faire is unworkable… monopoly power… better-informed actors can exploit the relatively ignorant… distribution of income… grossly unequal and… unfair… unemployment and underutilized capacity… environmental damage…. Half of Angus Burgin’s book is about the Good Hayek’s attempts to formulate and to propagate a modified version of laissez-faire that would work better and meet his standards for a liberal society…. The Bad Hayek emerged when he aimed to convert a wider public… overreach[ed]…. The Road to Serfdom was a popular success but was not a good book…. Sixty-five years later, Hayek’s implicit prediction is a failure, rather like Marx’s forecast of the coming ‘immiserization of the working class’….

   “The source of their alarm was not the danger from Soviet communism or Nazi Germany, but rather the rash of interventionist economic policies everywhere, the New Deal here and the Labor Party there, designed to ameliorate and to reverse the ravages of falling incomes and rising unemployment…. Lionel Robbins… Friedrich von Hayek… Frank Knight… Jacob Viner… Henry Simons… [all] wanted both to propagate ideas and to change the world. (It is worth mentioning that both Knight and Viner were later privately critical of The Road to Serfdom.) What seems off-key (at least now, at least to me) is that they all felt themselves to be in a struggle between free markets and collectivism (or socialism) with no possible intermediate stopping point. That is the meaning of ‘the road to serfdom’…. This apocalyptic tone survived into the period dominated by Milton Friedman, who is the subject of the second half of Burgin’s book. It is the language of the Tea Party Hayekians…”

2. Julie L. Hotchkiss: Adjusted Employment-to-Population Ratio as an Indicator of Labor Market Strength: “There have been calls to pay closer attention to the movement in the employment-to-population ratio (EPOP), as opposed to the UR, as a measure of labor market strength…. Since the end of the Great Recession… the UR has fallen dramatically… but the EPOP has barely budged…. The purpose of this paper is… to… propose a methodology for adjusting the EPOP in a way that accounts for individual willingness to work…. The basic strategy… is to estimate individual probability of employment as a function of month/year indicators, then to enhance the model… with individual characteristics and… the individual’s propensity to be in the labor force…. The adjusted EPOP has regained its prerecession level of nearly 63 percent. Youth have regained even more, and those 25 to 54 regained 71 percent of their loss over the sample period. As a point of reference, by the end of 2013 the UR had recovered roughly 66 percent of the climb to its peak of 10 percent…”

3. Jared Bernstein: Inequality and Growth: What I Think We Know and Don’t Know “This new S&P study on inequality and growth is creating a bit a buzz, mostly because it’s from a firm we associate with financial markets, not inequality analysis…. Though in an earlier study I raised some questions about the claim that high inequality dampens growth, I clearly think there’s something there, especially as regards mobility barriers…. What follows is my brief overview of the basic channels by which economists think inequality hurts growth…. Ours is a 70% consumer spending economy…. Evidence: This is a solid theory but the evidence is weaker than you’d expect…. Our historically high levels of inequality threaten to undermine both parents’ and society’s ability to invest…. Evidence: Again, solid theory but not a lot of proof…. Regressive tax and transfer policies…. Evidence: This is a well-known development and it makes sense…. But how is this a drag on macroeconomic growth? S&P doesn’t say and it’s not obvious….. Leverage, bubbles, and busts: OTEers know that I think this one is big. The chain of events is simple and empirically plausible…. Evidence: I found this paper by Cynamon and Fazzari to be the most systematic and compelling analysis…. Money in politics… my other top candidate…. Evidence: The linkages here include dysfunctional politics that hurt growth in obvious and visible ways from government shutdowns, under-regulation of financial markets, threats to default, and underinvestment in public goods, from medical research to transportation to education…. So that’s the skinny on what I think we know…”

4. John Quiggin: Reagan and the Great Man in History: “The outsize Republican idolatry of Reagan is explained in part by the fact that there’s no one else in their history of whom they can really approve…. Eisenhower looks pretty good on most historical rankings, but he’s anathema to movement conservatives…. Theodore Roosevelt is problematic for related but different reasons…. The ‘party of Lincoln’… doesn’t pass the laugh test…. So they have little choice but to present Reagan as the savior of the nation…”

5. Sarah Kliff: How Arkansas used Obamacare to cut its uninsured rate by 45 percent “Count this as a big Obamacare win for Arkansas: the state drove down its uninsured rate faster than any other, according to new Gallup data. Since the law’s open enrollment period, the state’s uninsured rate has fallen from 22.5 to 12.4 percent. That works out to 45 percent fewer uninsured Arkansans.”

6. Matt O’Brien: Europe’s low inflation is sending it into a lost decade “They had one job. The European Central Bank (ECB) was supposed to keep inflation close to, but below, its 2 percent target. It’s failed miserably, and it’s not going to stop anytime soon…. Europe’s inflation is already too low, and it’s going to stay that way for too long—even if everything goes according to plan. It needs a better plan. It needs to do more.”

7. John Quiggin: Reagan and the Great Man in History: “A lot of the discussion is based on an implicit or explicit assumption that the shift to the right in the US since the 1970s can be explained by the successful organizing efforts of movement conservatism, culminating in Reagan’s 1980 election victory. That’s an explanation with a lot of contingency attached…. [But] other English-speaking countries, with very different political histories followed much the same route…. I don’t want to overstate the determinism here. Individuals matter, and national circumstances differ. Still, I think we are talking about variations on a common theme, driven by global economic events, rather than a US-specific story beginning with Reagan’s 1964 address in support of Goldwater.”

8. Paul Krugman: On Reaganolatry “The truly vile attack on Rick Perlstein’s new book has been revealing in a number of ways… supposedly reasonable, civilized conservatives have contorted themselves to support the party line (which they always do when it matters, no matter how much open-mindedness they seem to display when it doesn’t). And why this determination to quash Perlstein? It’s all about Reaganolatry…. I’d just add that the economic myth of Reagan is truly remarkable. Everyone on the right knows that Reagan presided over job creation on a scale never seen before or since; but it just isn’t so…. You may have known that Clinton was a better ‘job creator’ than Reagan, but did you know that over the course of the Carter administration… the economy actually added jobs faster than it did under Reagan?… The supposed awesomeness of Reagan’s economic record just doesn’t pop out of the data. But don’t expect the Reaganlators to acknowledge that…”

And:

• Ambrose Evans-Pritchard: Germany close to recession as ECB admits recovery is weak
• Jonathan Chait: “Advocacy organizations routinely sponsor polls that show the public supportive of their own position. Reason is the only magazine I know of that uses this tactic…”
• Brad DeLong (2009): Do Not Adjust Your TV Set…: The Puzzle of Sam Tanenhaus
• Federal Reserve: Report on the Economic Well-Being of American Households in 2013
• Catherine Weinberger: The Increasing Complementarity between Cognitive and Social Skills
• Max Fisher: The US bombing its own guns perfectly sums up America’s total failure in Iraq

Should Be Aware of:

1. Dean Baquet: The Executive Editor on the Word ‘Torture’ “When the first revelations emerged a decade ago, the situation was murky…. The Justice Department insisted that the techniques did not rise to the legal definition of ‘torture’. The Times… avoided a label that was still in dispute, instead using terms like harsh or brutal interrogation methods. But… reporters and editors have revisited the issue…. The Justice Department… has made clear that it will not prosecute…. The result is that today, the debate is focused less on whether the methods violated a statute or treaty… the disputed legal meaning of the word ‘torture’ is secondary to the common meaning: the intentional infliction of pain to make someone talk. Given those changes, reporters urged that The Times recalibrate its language. I agreed…”

2. K.M. Harris and D.K. Remler: Who is the marginal patient? Understanding instrumental variables estimates of treatment effects: “We generate Monte Carlo data designed to resemble typical data sets where detailed health-status information is unavailable and the treatment-assignment process is unobserved. The model used to generate our data makes the realistic assumption that unobservable health status characteristics of patients influence the treatment assignment process and the effectiveness of treatment…. IV estimates are useful… when the subpopulation to which the IV estimate refers is the same or very similar to the population whose treatment status is affected by the policy change…. Health services researchers cannot take for granted that IV estimates generalize to the same population represented by the sample… must rely on their knowledge of clinical practice and theory regarding the treatment assignment process in interpreting their results…”

3. Tim Duy: On That ECI Number “I understand why market participants might be a little hypersensitive to anything related to wages. Indeed, wage growth is the missing link in the tight labor market story.  But I don’t think the Fed will react much to these numbers; they will place them in context of recent behavior, and in that context they are not much different than current trends.  Watch the upcoming employment reports for signs of diminishing underutilization of labor – that is where the Fed will be looking.”