Things to Read on the Afternoon of December 3, 2014
Must- and Shall-Reads:
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The 2015 Economic Outlook and the Implications for Monetary Policy - :
The Economic Consequences of the Peace, Chapter 3 | Library of Economics and Liberty - :
Why the Next Recession Will Be Different - :
Six Ways Health Reform Helps the Middle Class
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2014 Headed Toward Hottest Year On Record–Here’s Why That’s Remarkable | ThinkProgress:
“It is not remarkable that we keep setting new records for global temperatures–2005 and then 2010 and likely 2014. Humans are, after all, emitting record amounts of heat-trapping carbon pollution into the air, and carbon dioxide levels in the air are at levels not seen for millions of years… ‘Fourteen of the fifteen warmest years on record have all occurred in the 21st century…. There is no standstill in global warming.’… What is remarkable… is that we’re headed toward record high global temps ‘in the absence of a full El Niño’…. It’s usually the combination of the long-term manmade warming trend and the regional El Niño warming pattern that leads to new global temperature records. But not this year.”
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What’s the Matter with Economics?:
“Mainstream biologists are not blamed for creationism, and mainstream doctors are not held responsible for homeopathy…. John Cochrane, also of the University of Chicago… saying in 2009 that Keynesian economics is ‘not part of what anybody has taught graduate students since the 1960s. [Keynesian ideas] are fairy tales that have been proved false.’ The first statement is demonstrably false; the second is absurd…. Madrick’s second bad idea, Say’s Law… really is bad…. Madrick also tabs ‘low inflation is all that matters’ as a bad idea, which it is. But again, who believes it?… Perhaps you can imagine my surprise when I read that ‘economists in general are Friedman’s handmaidens.’… Eugene Fama…. As Madrick correctly states, the… strong form of the EMH… proved pernicious…. Madrick’s wonderful chapter on efficient markets should be required reading for everyone in the financial world…” -
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In Parched Bond Markets, Sparks Are Dangerous:
“According to the governor of the Bank of England, it now takes seven times as long for investors to liquidate bond portfolios as in 2008. The reason? Eight years ago investment banks and brokers held such large inventories of bonds and other assets that they were happy to act as market makers…. The ‘exits’ for trades, to use banking jargon, are crowded. And that means that while the markets might seem placid today, particularly given the easing announced by the Japanese and European central banks, this calm could come to a halt if investors try to sell en masse. ‘Fundamentally, liquidity has become more scarce,’ Mr Carney says…. The big question is what will happen when the US Federal Reserve starts raising rates. If investors rush to sell US government bonds, that will create one seriously crowded exit…. Is there a solution? Behind the scenes, there is plenty of brainstorming. For now regulators seem opposed to the step bankers most want: a relaxation of reforms such as the international Basel III regulations or America’s Dodd-Frank act…. Ever since the days of Walter Bagehot, the 19th century British economist, central banks have accepted that one of their roles is to lend freely to solvent institutions in a crisis. But they have generally shied away from acting as market makers or from rescuing non-banks. ‘Backstopping market liquidity directly risks structurally distorting economic incentives,’ the BIS paper notes. But the 2008 crisis and its aftermath have forced central banks to break many taboos. If a bond crisis erupts, this one may crumble too, forcing central banks to jump in. As Mr Carney observed in Singapore: ‘Bagehot will need to be updated for the 21st century.’ Watch this policy space, and that sevenfold statistic.”
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Two Relatively Painless Ways to Boost Growth:
“The first… greatly boost the numbers of permanent work visas (citizenship would be a plus) for high-skilled immigrants…. The second idea stems from the landmark decision by a California state court in June 2014, Vergara v. State of California, which held that the teacher unions’ tenure system violated the equal protection clause of the state’s constitution…. Students who are penalized by an educational system stacked against them virtually from the time they enter school until they graduate (or drop out, as all too many will), represent a huge waste of human capital…”
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: Am I unreasonable?: “To prevail, it’s not enough for the King challengers to show that it’s possible to read the ACA to eliminate tax credits from states that refused to set up their own exchanges. They must also demonstrate that the ACA does so unambiguously—and that the IRS’s contrary interpretation is therefore unreasonable. Under Chevron, if the ACA could be read in a couple of different ways, the courts owe deference to the IRS’s authoritative decision about how best to read it.”
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A critique of Powell, Woods, and Murphy on the 1920–1921 depression: “A series of recent reviews of the depression of 1920–1921 by Austrian School and libertarian economists have argued that the downturn demonstrates the poverty of Keynesian policy recommendations. However, these writers misrepresent important characteristics of the 1920–1921 downturn, understating the actions of the Federal Reserve and overestimating the relevance of the Harding administration’s fiscal policy. They also engage a caricatured version of Keynesian theory and policy, which ignores Keynes’s views on the efficacy of nominal wage reductions and the preconditions for monetary and fiscal intervention. This paper argues that the government’s response to the 1920–1921 depression was consistent with Keynesian recommendations. It offers suggestions for when Austrian School and Keynesian economics share common ground and argues that the two schools come into conflict primarily in downturns where nominal interest rates are low and demand is depressed. Neither of these conditions held true in the 1920–1921 depression.”
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Structural Destruction:
“Researchers at the Federal Reserve recently produced a fascinating article in which they argued that severe recessions such as that in 2008-9 leave permanent economic scars…. A significant drop in trend RGDP for all four economic areas: Canada, which had neither a property market crash nor a banking crisis, shows the smallest fall…. Both the UK and the Euro area appear to have suffered a worse fall in trend RGDP directly attributable to the crisis than the USA did…. Canada–which did not do QE but maintained fiscal spending… has recovered better than the other three…. But Canada’s headache is nothing like as bad as that suffered by the other three. The US, UK and Euro area have not only failed to recover previous trend growth, they have actually slowed down again since the crisis. The US’s recovery slowed from 2011 onwards despite continual QE. It is hard to establish any cause for this other than misguided fiscal policy: the shenanigans over the fiscal cliff and the ridiculous sequester have taken their toll. It’s an entirely self-inflicted wound and now, thankfully, over…. Really shocking… is… the Euro area…. Like the UK, the Euro area suffered a second demand shock. But the response was very different. I criticise the UK government for inappropriate fiscal tightening, but at least it offset it with monetary easing…. I am frankly astounded at the tolerance of the young people, in particular, whose futures are being systematically wrecked. They will bear the scars for life. Why they are not rioting in the streets is a mystery…. Eventually, I suppose, the Euro area will recover, because economies always do. But by then an entire generation of Europeans will have been sacrificed to appease the gods of ordoliberalism and hard money…. The ‘Great Recession’ is no longer an adequate name for the time we are living through. As Brad DeLong said, it should now be known as the Greater Depression.”
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A Phillips Curve with Anchored Expectations and Short-Term Unemployment: “We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of short-term unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.”
Should Be Aware of:
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The Need to Address Noncognitive Skills in the Education Policy Agenda | Economic Policy Institute - :
An Urban Agenda for Economic Growth | Cato Institute - :
The Lee-Rubio Family-Friendly Tax Is a Disappointment | Brookings Institution
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Dear Ed [Balls] and George [Osborne]:
“The two of you make an excellent case for delegating more control over fiscal policy to technocrats…. I don’t know how such delegation… could be made politically acceptable. Especially when our economics profession is licking its wounds after largely failing to realise that the financial system was going to explode. But some way has to be found so that your successors can have a better conversation… about the average size of the state, the strength of the automatic stabilisers, whether discretionary fiscal policy is needed on top of that… and, if so, on menus of latent measures…. Such a conversation would involve you setting out explicit and different positions on how much risk sharing the state should be doing across regions, income groups and generations, which spring out of your different political philosophies. I hope at least that Ed’s proposal that the OBR should be tasked with vetting your manifestos will prove hard to resist, and that this might be a first step along the way to the utopia I and other economists are seeking.”
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: Angela Merkel on Vladimir Putin: “As the dog approached and sniffed her, Merkel froze, visibly frightened. She’d been bitten once, in 1995, and her fear of dogs couldn’t have escaped Putin, who sat back and enjoyed the moment, legs spread wide. ‘I’m sure it will behave itself,’ he said. Merkel had the presence of mind to reply, in Russian, ‘It doesn’t eat journalists, after all.’ The German press corps was furious on her behalf—‘ready to hit Putin,’ according to a reporter who was present. Later, Merkel interpreted Putin’s behavior. ‘I understand why he has to do this—to prove he’s a man,’ she told a group of reporters. ‘He’s afraid of his own weakness. Russia has nothing, no successful politics or economy. All they have is this.’”