Things to Read on the Evening of May 13, 2014

Should-Reads:

1. Daniel Kruger and Wes Goodman: In Gundlach’s ‘No Normal’ World, Treasuries Can’t Lose: “Jeffrey Gundlach… has a simpler explanation for why investors have gotten the bond market so wrong this year: the aging of America…. This helps explain why the best and brightest erred in calling for a bear market in U.S. bonds–and why benchmark Treasury yields may stay low for years to come, according to Gundlach. ‘That’s one of the reasons why yields are not just going to explode on the upside’, Gundlach, who oversees $50 billion as the co-founder and chief executive officer of DoubleLine Capital LP, said in a May 7 interview with Tom Keene from Bloomberg’s headquarters in New York. ‘Part of this equation is the demand for income from the growing number of retirees.’…”

2. Alec Phillips: Obamacare is good for the economy, Goldman Sachs researcher says: “Alec Phillips, economic researcher at Goldman Sachs, said in a note issued late last week to clients that subsidies from the Affordable Care Act boosted gross domestic product during the first quarter and are likely to do the same during the second quarter…. ‘While we were initially skeptical of the large estimated effect of the new subsidies on personal income, these now look more reasonable to us in light of revisions, greater enrollment than expected several months ago, and the fact that states are likely contributing to the subsidies on top of the well-known estimates of federal costs’, Phillips said…”

Should Be Aware of:

1. John Cassidy: The Great Hedge-Fund Mystery: Why Do They Make So Much?: “I’ll believe that Washington is getting serious about rising inequality the day it consigns the carried-interest deduction to history. But my point here is different, and it receives rather less attention: How the heck do these guys make so much money, year in and year out?… Years ago, defenders of hedge funds argued that they earned their money by delivering above-market returns on a consistent basis, but this argument is much harder to make these days…. Because of their hefty management fees and the fact that they have billions of dollars of investments under management, some hedgies can make handsome returns even when they are generating what is known in the industry as ‘negative alpha’…. So how do they get away with it? In carrying out their normal business, institutional investors are eager to get a break on the fees they pay…. How has the hedge-fund industry escaped this cost-cutting trend?… Competition and entry should drive down prices. At the very least, you would think that there would be a movement to change the performance fees so they are assessed relative to the market return, rather than relative to zero…”

2. Ann Leckie and Charles Stross: Some news about the Hugo voters packet: “This year, Orbit—the publisher of Mira Grant’s Parasite, Ann Leckie’s Ancillary Justice, and Charles Stross’s Neptune’s Brood—have decided that for policy reasons they can’t permit the shortlisted novels to be distributed for free in their entirety. Instead, substantial extracts from the books will be included in the Hugo voters packet. We feel your disappointment keenly and regret any misunderstandings that may have arisen about the availability of our work to Hugo voters, but we are bound by the terms of our publishing contracts. The decision to give away free copies of our novels is simply not ours to take. However, we are discussing the matter with other interested parties, and working towards finding a solution that will satisfy the needs of the WSFS voters and our publishers in future years. Finally, please do not pester our editors: the decision was taken above their level…. Ann Leckie, Charlie Stross.”

3. John Holbo: Makessense Stop!: “What are students doing, when they aren’t making arguments? Here’s one helpful diagnosis, via Jonathan Haidt…. ‘When people are given difficult questions to think about–for example, whether the minimum wage should be raised–they generally lean one way or the other right away, and then put a call in to reasoning to see whether support for that position is forthcoming…. Deanna Kuhn… found that most people readily offered “pseudoevidence”… gave no real evidence for their positions, and most made no effort to look for evidence opposing their initial positions…. Thinking generally uses the “makessense” stopping rule. We take a position… and if we find some evidence–enough so that our position “makes sense”–we stop….’ This isn’t rocket science, but it’s better than teaching fallacies because it’s closer to how the actual wheels turn. Students confront a topic…. Point out to your students that, psychologically, they often don’t investigate what they should say…. They just pick an answer…. Then they write in defense of whatever they picked. This isn’t necessarily a bad method. Just picking a side and seeing how much can be said for it is one way to tackle a many-sided issue…. But if you do this without a sense of how basically arbitrary your ‘pick’ was, you distort your own thinking in predictable ways…. What does this endowment effect do to your writing? It turns you into a kind of public relations officer for your thesis statement. It’s easy to start spinning and story-telling…. One way to fight this, which is very traditional, is to tell students that they have to counter-argue against their own argument…. This is good advice. But it often fails. What you get, instead of solid counter-argument, which really ought to shape up the argument, is a kind of… Rashomon fu, with dueling ‘makesense stop’ narratives circling around each other, trying to sound impressive and convincing…. Here’s something that I tried…. Ask them what their thesis is. Then assign them to compose the most attractive-distractorish sort of bad, ‘makessense stop’ argument for their thesis they can think of…. Telling people to offer a bad argument is more likely to get shy students to talk than asking for good arguments…. There are lots of interesting, related issues about storytelling vs. argument, which can be profitably discussed at this point. It isn’t clear where the line is between story and argument–or even that there is one. But, before getting on to that more advanced issue, keep it simple. Mostly students don’t write bad arguments because they are superadvanced students of Richard Rorty…”

And:

• Benjamin Wallace-Wells: Thomas Piketty and Our New Economic Worldview
• Moody’s AnalyticsEconomic Outlook Conference
• Brenda Cronin: If Debt Caused the Last Crash, Boosting Risk for Lenders Might Soften the Next
• Michele Piccione and Ariel Rubinstein: Equilibrium in the Jungle
• Isaiah Berlin: Two Concepts of Liberty
• Amartya Sen: Development as Freedom
• Libby Nelson: Boosting school funding 20 percent erased the graduation gap between rich and poor students
• MattBruenig: Initial Appropriation: A Dialogue | Anti-liberty economic regulations: a dialogue

Already-Noted Must-Reads:

1. Bob Reich: Robert Reich (How to Shrink Inequality): “Some inequality of income and wealth is inevitable if not necessary. If an economy is to function well, people need incentives to work hard and innovate. The pertinent question is… at what point do these inequalities… pose a serious threat to our economy… equal opportunity and our democracy. We are near or have already reached that tipping point…. But a return to the Gilded Age is not inevitable. It is incumbent on us to dedicate ourselves to reversing this diabolical trend…. 1) Make work pay…. 2) Unionize low-wage workers…. 3) Invest in education…. 4) Invest in infrastructure…. 5) Pay for these investments with higher taxes on the wealthy…. 6) Make the payroll tax progressive…. 7) Raise the estate tax and eliminate the “stepped-up basis” for determining capital gains at death…. 8) Constrain Wall Street…. 9) Give all Americans a share in future economic gains…. 10) Get big money out of politics…. We need a movement for shared prosperity—a movement on a scale similar to the Progressive movement at the turn of the last century…. Time and again, when the situation demands it, America has saved capitalism from its own excesses. We put ideology aside and do what’s necessary. No other nation is as fundamentally pragmatic…. But we must organize and mobilize…”

2. Paul Krugman: : Inflation Targets Reconsidered “For a time 2 percent seemed to make both economic and political sense… high enough to render concerns about hitting the zero lower bound mostly moot… was low enough to satisfy most of those worried about the distortionary effects of inflation… [and] those who wanted true price stability… could be deflected with the argument that official price statistics understated quality change…. The 2 percent target also, of course, acquired the great advantage of conventionality…. More recently, however, the 2 percent target has come under much more scrutiny… advanced economies are far more likely to hit the zero lower bound than previously believed…. In response, a number of respected macroeconomists, notably Blanchard (2010) and, much more forcefully, Ball (2013), have argued for a sharply higher target, say 4 percent. But do even these critics go far enough? In this paper I will argue that they don’t–that the case for a higher inflation target is in fact even stronger than the critics have argued, for at least three reasons…. Secular stagnation…. [The] two zeroes [of] downward nominal wage rigidity… [and] the interest rate ZLB…. [A]n economic and political trap… [of] a self-perpetuating feedback loop between economic weakness and low inflation…”

3. Noah Smith: Does trend-chasing explain financial markets?: “Why do stock prices mean-revert in the long run?… Some people say that it’s because of time-varying risk premia with Rational Expectations; others say that it’s because of people’s incorrect information processing, and expectations are non-rational…. Andrei Shleifer and Robin Greenwood… take an extremely simple approach toward measuring people expectations: Just ask people what they think is going to happen!… Survey [expectations] measures are… strongly correlated… consistent with investors’ actions…. What causes people to expect higher stock returns?… Trend-chasing… seems to fit the facts very well…. Extrapolative Expectations beat Rational Expectations. That result would imply that trend-chasing by quasi-rational investors is the big force behind long-term stock return predictability…. But… [this] leaves the turning points unexplained…. There must be a role for hetergeneous investor expectations…. The refinement that Greenwood and Shleifer make in this 2013 paper, in which they team up with Nicholas Barberis and Lawrence Jin. They make a theoretical model where some investors are extrapolative trend-chasers and some are rational…”

4. John Holbo: Occam’s Phaser?: “I’m rereading Nozick’s Anarchy, State and Utopia because I got to thinking: what’s wrong with good old fashioned ‘force and fraud’ anyway? Isn’t the Night Watchman state just creeping Soft Tyranny, in Tocqueville’s sense? Plus it’s obviously a moral hazard and generally destructive to private virtue…. He spends a great deal of time answering my question. 150 pages. Why have even a minimal state that secures everyone against force and fraud? I know now that his answer is… really quite complicated and ultimately not altogether clear, despite the fact that Nozick is generally a clear writer. I’m not convinced Nozick really has any right, by his lights, to a full-fledged Night Watchman state. Something more minimal would be more respectful of the individual rights that we are, supposedly, respecting at all costs, seems to me…”