Things to Read on the Afternoon of November 12, 2014
Must- and Shall-Reads:
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: Employment Report, Yellen Speech: “I am wondering what the Fed will do if the unemployment rate touches 5% and wage growth and inflation remain anemic? Not my baseline scenario, but I am wondering how patient they will be…. Yellen made some interesting remarks…. ‘As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries…. This normalization could lead to some heightened financial volatility…. The Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy….’ Take note of the specific emphasis on financial volatility. The message is that market participants should not expect the Fed to react to every twist and turn in equity markets. More to the point, they expect volatility…. They are signalling that market participants misread the likely path of the Federal Reserve when 2 year yields collapsed last month. That said, I am fairly concerned that the Fed is not taking the flattening of the yield curve seriously enough. I see that as a signal that they have less room for normalization than they might think they have.” -
: Getting the Germany Argument Right: “As the Eurozone experiences a prolonged demand-deficient recession, and given Germany’s pivotal role in making that happen, it is important to get the argument against current German policy right…. There are two wrong directions… to argue that Germany needs to undertake fiscal expansion because it has more ‘fiscal space’… to argue that Germany needs to expand to help its Eurozone neighbours…. The first… legitimises the fiscal rules which are ultimately the source of the Eurozone’s current difficulties…. The second… tunes in with the popular sentiment in Germany that the country is yet again being asked to ‘bail out’ its Eurozone neighbours… suggests that the current German macroeconomic position is appropriate…. The uncomfortable truth for Germany, which both the previous arguments can miss, is that the appropriate macroeconomic position for Germany at the moment is a boom, with inflation running well above 2%…. From the perspective of the Eurozone as a whole, the efficient solution would be above 2% inflation in Germany, and below 2% inflation elsewhere…. If your starting point is what happened in Germany from 2000 to 2007, then current German arguments can look incredibly self-centred. They seem to say: we suffered a recession from 2000 to 2007 which led to a beggar my neighbour outcome, now you have to suffer a worse recession to put right the problem we created. But… I think the German position is more about ignorance than greed…. The ultimate problem is that what Germany sees at virtue is pre-Keynesian macroeconomic nonsense, nonsense that is doing other countries a great deal of harm..” -
Steven Johnson: We’re living the dream; we just don’t realize it: “Over the past two decades, what have the U.S. trends been for the following important measures of social health: high school dropout rates, college enrollment, juvenile crime, drunken driving, traffic deaths, infant mortality, life expectancy, per capita gasoline consumption, workplace injuries, air pollution, divorce, male-female wage equality, charitable giving, voter turnout, per capita GDP and teen pregnancy? The answer for all of them is the same: The trend is positive…. The quality-of-life and civic health trends in the developing world are even more dramatic…. We are much more likely to hear about these negative trends than the positive ones for two primary reasons. First… the positive trends in our social health are coming from a… complex network of forces…. The public sector doesn’t have billions of dollars to spend on marketing campaigns to trumpet its successes…. We underestimate the amount of steady progress that continues around us, and we misunderstand where that progress comes from. We should celebrate these stories of progress, not so we can rest on our laurels but instead so we can inspire the next generation to build on that success.”
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: Keynes Derangement Syndrome: “Broadly speaking there were two views about what would happen when central banks hugely expanded the monetary base…. [The] Keynesian viewpoint saw this action as harmless at worst, possibly somewhat helpful…. On the other side, many people were quite sure that explosive inflation was just around the corner. So this was as clear a test as you’re ever likely to get. But the side that got it wrong refuses to take no for an answer…. The crudest level is that of the inflation truthers [like Niall Ferguson], who insist that the government is covering up real inflation. There’s also the ‘I never said that’ faction, claiming that they haven’t been refuted, because they only said there was a ‘risk’ of hyperinflation–I’m not sure which position is more contemptible. At a higher level are those [like Martin Feldstein] who claim that we would have had runaway inflation if only the Fed hadn’t decided to pay 0.25 percent, that’s right, 0.25 percent, interest on reserves. Aside from being highly implausible, this runs up against the example of Japan…. And at the highest level we have the neo-Fisherite claim [by John Cochrane and others] that everything we thought we knew about monetary policy is backwards, that low interest rates actually lead to lower inflation, not higher…. Nick Rowe has been working very hard to untangle the logic of these arguments, basically trying to figure out how the rabbit got stuffed into the hat; the meta-point here is that all of the papers making such claims involve some odd assumptions that are snuck by readers in a non-transparent way. And the question is, why? What motivation would you have for inventing complicated models to reject conventional wisdom about monetary policy? The right answer would be, if there is a major empirical puzzle. But you know, there isn’t…” -
: Six clues to whether a GOP Senate can move policy: “President Obama says he supports corporate reform. Cruz wants a flat tax. Paul Ryan, who wants to be the new chair of the House Ways & Means Committee, favors broad-based overhaul rather than corporate reform alone. House Speaker John Boehner says he favors tax reform but when presented with a plan by Ways and Means Chair Dave Camp earlier this year, Boehner ran…. Democrats and Republicans are completely at loggerheads over whether reform should cut taxes, raise them, or leave them roughly the same. Other than that, a deal is imminent…. The Affordable Care Act: Cruz wants to repeal it. McConnell says that’s a fool’s errand but vows to do what he can to hamstring the program…”
Should Be Aware of:
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: Thomas Piketty’s ‘Capital’ wins Business Book of the Year: “The £30,000 prize was awarded to Thomas Piketty’s controversial economics bestseller following what Lionel Barber, FT editor and chairman of judges, said was a ‘vigorous debate’ about ‘an incredibly strong field’ of six shortlisted titles…. ‘While not everyone agreed on the policy prescriptions, we recognised the quality of the scholarship,’ Mr Barber said on behalf of the judges. He called it ‘a challenging, but ultimately important book’…. Each of the other shortlisted authors will receive £10,000. They are: Nick Davies’s Hack Attack, about the phone-hacking scandal that embroiled Rupert Murdoch’s media empire; The Second Machine Age, by Erik Brynjolfsson and Andrew McAfee, about the promise of the digital revolution; Creativity, Inc., by Pixar co-founder Ed Catmull, with Amy Wallace, on how Mr Catmull manages the animation studio’s ‘smart creatives’; House of Debt, Atif Mian and Amir Sufi’s analysis of how to prevent future recessions; and Dragnet Nation, an investigation of the growth of the ‘surveillance economy’ by Julia Angwin…” -
: Blaming Easy Money for Alien Invasions: “Sometimes I feel like if aliens opened a wormhole and invaded the solar system tomorrow, there are people who would immediately start writing articles blaming the incursion on the Federal Reserve’s program of quantitative easing. Niall Ferguson… might be one of those people. On Oct. 24, Ferguson penned a column in the Wall Street Journal blaming QE for the stock market volatility of Oct. 15…. No doubt Ferguson sees Oct. 15 either as a delayed reaction to earlier indications of tightening, or a sign of a sudden shift in the market’s expectations regarding future tightening. But he presents no evidence for either of these…” -
: Making a mountain out of 7 million QHPs: “Critics of the Affordable Care Act… are screaming bloody murder about Obamacare ‘messing up everything for the whole country!’ On the other hand, they’re also trying to ridicule the law for ‘only enrolling 7 million people out of over 300 million!!’ (their inaccurate phrasing, not mine)…. Here’s the rough situation from just before the Affordable Care Act… 11 million people enrolled on the private individual market (i.e., signing up for Blue Cross/Aetna/etc. directly), and around 42 million not covered whatsoever. These… are the ones that the ACA has the most dramatic, obvious impact on, so let’s look…. Coverage through Medicaid has gone up from around 17.9 percent of the total to around 21.8 percent…. Coverage in the individual market has gone up from around 3.5 percent to around 4.9 percent…. The total number of uninsured in the U.S. has dropped from around 13.6 percent to around 9.9 percent.”