Things to Read on the Evening of September 5, 2014

September 5, 2014

Must- and Shall-Reads:

 

  1. Reassessing the Beveridge Curve Shift Four Years Later Murat Tasci and Jessica Ice Economic Trends 09 05 14 Federal Reserve Bank of ClevelandMurat Tasci and Jessica Ice: Reassessing the Beveridge Curve “Shift” Four Years Later: “Early on in the current recovery, economists and policymakers were worried about a potential shift in the Beveridge curve…. Job vacancies were rising, but the unemployment rate was not declining, fueling a debate about a structural problem in the labor markets. Exactly four years ago, we… argued that it was too early to call what had happened a shift…. We concluded that the Beveridge curve behavior we were seeing in this recovery was typical of recoveries in general, and that the curve would likely follow its historical business-cycle pattern going forward, erasing any evidence of a shift. Well, four years later, we have 16 more quarterly data points to inform us…. It is safe to say that what seemed like a shift in the Beveridge curve ended up being another manifestation of the ‘normal’ dynamics of unemployment and vacancies in the United States…”

  2. Noah Smith: Job Shortage or Stagnation Vacation?: “Are Americans working less because the government is paying them not to work? A large number of people seem to think this. Obviously the idea is popular on the right–recall Mitt Romney’s infamous ’47 percent’ speech in 2012. But a surprising number… have picked up the idea…. Casey Mulligan…. Kurt Mitman…. Jordan Weissmann…. Economists… like simple stories… like effects that they understand… the idea that taxes are an incentive not to work is a simple, uncontroversial idea….But… if government programs are paying people not to work, then that should put upward pressure on real wages…. But when we look at the data, that’s not what we see happening…. When you break up the wage data by percentile, it looks even worse for the vacation thesis…. Economics 101 says that when the price of something and the quantity produced both fall, demand, not supply, has fallen. In America, the price of labor and the quantity of labor have both fallen and stayed low since 2009. That is a hint that the government’s welfare programs are having only a minimal impact on the number of Americans with jobs. Whatever caused us to stagnate for five years and counting, it probably wasn’t welfare.”

  3. Chris Blattman: What The Economist should have read before suggesting that US slavery wasn’t always so bad: “Here’s the jawdropping finale: ‘Slave owners surely had a vested interest in keeping their “hands” ever fitter and stronger to pick more cotton. Some of the rise in productivity could have come from better treatment. Unlike Mr Thomas, Mr Baptist has not written an objective history of slavery. Almost all the blacks in his book are victims, almost all the whites villains. This is not history; it is advocacy.’ What could have shed light on this, had The Economist writer bothered to read?… Violence and pain work better in labor markets where people have really poor options, and are easily controlled, like children or the least educated. You see this in child labor during British industrialization, or even in child soldiering in Uganda…. Adults will tend to escape if you use violence, so slavery and serfdom work best when the overlords control the legal system or can hunt you down. You see this with servants in 19th century Britain or with European feudalism and US slavery. When you make it harder for employers to use force, wages go up. You see this in 19th century Puerto Rico coffee growing, or in the Emirates today. It’s not unusual to see a mix…. And when you turn the entire system against them, yes, whipped people work harder…. Suresh Naidu… yes, rewards can be a substitute for violence, but in a coercive labor market, better pay or food is just service to your larger evil plan to enslave more people more profitably…. Places in Peru and Bolivia with forced labor several hundred years ago are now poorer than other parts of the country…. Racially hostile attitudes also get passed down generation to generation in the US…. Is anyone else feeling depressed and hopeless?”

  4. djw: The predatory, broken municipal governments of St. Louis County: “[Radley] Balko is doing some extraordinary and important work here: ‘”She was crying as I explained the situation to her”, Voss says. “So then I started to cry as I explained it her. One of the really frustrating things about what’s happening here is that this system is breaking good people. These are people just trying to get by, just trying to take care of their families”. Voss’s eyes well up as he talks about Bolden. This isn’t just an attorney defending his client. It’s a guy who is concerned about what’s happening to another human being. Bolden is a single black woman with four kids. She has several tattoos. It’s easy to see how cops might target her, or court officials might dismiss her. But Voss points out that she had already earned an associate’s degree in medical assistance. And while dealing with all of the arrests and the harassment, she earned another in paralegal studies. The Foristell warrant stemmed from a speeding ticket in 2011. As mentioned before, Bolden didn’t show up in court because she didn’t have the money to pay it and feared they’d put her jail. It’s a common and unfortunate misconception among St. Louis County residents, especially those who don’t have an attorney to tell them otherwise. A town can’t put you in jail for lacking the money to pay a fine. But you can be jailed not appearing in court to tell the judge you can’t pay…. While in jail, she missed a job interview. She fell behind in her paralegal studies. When she finally got her day in court, she was told to change out of her jail jumpsuit into the same clothes she had worn for three days straight, and that had been sitting in a bag for the previous two weeks.’ It’s long, but read the whole thing. I confess I was actually surprised when the ‘three outstanding warrants per household’ in Ferguson fact first came to light; it’s now clear in St. Louis County, this is par for the course, and there are far worse examples–the extremely misleadingly named ‘Country Club Hills’ has 26 outstanding warrants per resident… a long piece filled with rage-inducing anecdotes…. In the short run, a democratic revival is clearly and badly needed, and one simply has to hope that perhaps this moment of sunshine on these governments will produce something of that sort…”

  5. Kent Daniel and Tobias J. Moskowitz: Momentum Crashes: “Despite their strong positive average returns across numerous asset classes, momentum strategies can experience infrequent and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in “panic” states – following market declines and when market volatility is high – and are contemporaneous with market rebounds. We show that the low ex-ante expected returns in panic states are consistent with a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of momentum’s mean and variance approximately doubles the alpha and Sharpe Ratio of a static momentum strategy, and is not explained by other factors. These results are robust across multiple time periods, international equity markets, and other asset classes.”

  6. Myles Udland: Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious: “If you want good investment performance, forget you have an account…. O’Shaughnessy relays one anecdote from an employee who recently joined his firm that really makes your head spin. O’Shaughnessy: ‘Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was…’ Ritholtz: ‘They were dead.’ O’Shaughnessy: ‘…No, that’s close though! They were the accounts people who forgot they had an account at Fidelity.’… Due to our behavioral biases, we often find ourselves buying high and selling low…”

  7. Robert Waldmann (2012): “Here we go a second time. Neither the Beveridge curve nor the quasi-Beveridge curve show how much employment can increase without ‘truly massive and successful public active labor market policies to better match workers to jobs’. It is more useful to look at the matching function showing hires as a function of vacancies and unemployed workers (or, to be quasi-, the peak minus the current employment to population ratio). If the matching function is stable, then the lowest sustainable unemployment rate is stable. However when there is a recession the Beveridge curve will show a huge ugly (as you graph it) clockwise pattern causing alarmed reports of worsened matching. It looked much worse in the UK in the late 90s just before the UK switched from being a high unemployment to low unemployment country.”

Should Be Aware of:

 

  1. Iván Werning: Positive Long Run Capital Taxation: Chamley-Judd Revisited: “According to the Chamley-Judd result, capital should not be taxed in the long run. In this paper, we overturn this conclusion, showing that it does not follow from the very models used to derive them. For the model in Judd (1985), we prove that the long run tax on capital is positive and significant, whenever the intertemporal elasticity of substitution is below one. For higher elasticities, the tax converges to zero but may do so at a slow rate, after centuries of high capital taxation. The model in Chamley (1986) imposes an upper bound on capital taxation and we prove that the tax rate may end up at this bound indefinitely. When, instead, the bounds do not bind forever, the long run tax is indeed zero; however, when preferences are recursive but non-additive across time, the zero-capital-tax limit comes accompanied by zero private wealth (zero tax base) or by zero labor taxes (first best). Finally, we explain why the equivalence of a positive capital tax with ever rising consumption taxes does not provide a firm rationale against capital taxation.”

  2. Anna Orlik and Laura Veldkamp: Understanding Uncertainty Shocks and the Role of Black Swans: “A fruitful emerging literature reveals that shocks to uncertainty can explain asset returns, business cycles and financial crises. The literature equates uncertainty shocks with changes in the variance of an innovation whose distribution is common knowledge. But how do such shocks arise? This paper argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Using real-time GDP data, we measure uncertainty as the conditional standard deviation of GDP growth, which captures uncertainty about the distributions estimated parameters. When the forecasting model admits only normally-distributed outcomes, we find small, acyclical changes in uncertainty. But when agents can also estimate parameters that regulate skewness, uncertainty fluctuations become large and counter-cyclical. The reason is that small changes in estimated skewness whip around probabilities of unobserved tail events (black swans). The resulting forecasts resemble those of professional forecasters. Our uncertainty estimates reveal that revisions in parameter estimates, especially those that affect the risk of a black swan, explain most of the shocks to uncertainty.”

  3. Paul Krugman: Obamacare Life Spiral: “Ezra Klein directs us to… the Kaiser Family Foundation, which asks what the average Obamacare 2015 premium increase will be…. Ezra tries to get us to appreciate just how good the Obamacare news has been with a thought experiment: ‘Imagine taking a time machine back to 2010 and… [bet] Republicans in Congress… that the law would be cheaper… and… cover more people than the CBO thought…. What odds do you think Obamacare’s critics would have offered? 2:1? 5:1? 10:1?’ But you don’t have to go back to 2010. Look at John Cochrane in late 2013, taking it for granted that Obamacare would implode in a death spiral within a few months. Look at The Hill just four months ago, telling us that double-digit premium hikes were coming…. Is our conservatives learning? Are those who bought into the death spiral stories, who seized on every hint of bad news, asking themselves how they got it so wrong? Are they, maybe, considering the possibility that they’re listening to the wrong people, that maybe Jon Gruber knows what he’s talking about and John Goodman is a hack? Hahahaha.”

  4. Lorenzo from Oz: Ahistorical pomposity and gnostic sneering: why academics write deep crap about “neoliberalism”: “A nice example of such nonsense is provided in a post by philosopher Robin James: ‘neoliberals think everything in the universe works like a deregulated, competitive, financialized capitalist market.’ No one believes this. For a start, no ‘neoliberal’ believes the state works like that. Nor do they advocate abolition of the state–anarcho-capitalism is not a widely held position, particularly not among policy wonks, policy advisors or policy-setting politicians (what we might call policy makers). It is one thing to be struck by how remarkable it is that there is any economic order at all, it is quite another to think such is the template for all that there is…. To the extent the term has a useful meaning, neoliberalism is economic liberalisation in the context of an expansive state: either the welfare state (in the developed world) or the development state (in the developing world). Key underpinning ideas in the original ‘neoliberal turn’ include Milton Friedman’s rehabilitation of monetary economics (pdf) and his critique of (pdf) policy reliance on a presumed trade-off between inflation and unemployment, Friedrich Hayek’s analysis of the uses of knowledge in society, the development of public choice theory, feeding into (pdf) the analysis of rent-seeking (pdf), Ronald Coase’s development of (pdf) the concept of transaction costs and its application to property rights (pdf), and the development of supply-side ideas (pdf). The Lucas critique (plus rational expectations) and Fama’s efficient-market hypothesis came along a bit too late to have much influence on the original ‘neoliberal turn’. What these key ideas have in common is that they cast strong doubt on belief in the omni-competent state, either directly or by comparison with market-based alternatives. Hence the ‘neoliberal trifecta’ of corporatisation (restructuring of state institutions), privatisation (transfer or creation of property rights) and de-regulation (reduction of transaction costs). Plus the adoption of inflation-targeting by central banks…. The critique of the widely assumed omni-competence of the state also encouraged taking gains from trade more seriously, while the policy premium for economic efficiency (see below) put the issue of opportunity costs in sharper policy focus. The policy debates in which ‘neoliberals’ have been engaged in have been very much about boundaries between state and non-state action, but that is a very different matter than the sort of absolutist claim James [makes]…”

  5. Kurt Freiherr von Hammerstein-Equord: “I divide my officers into four groups:…. Some are clever and diligent–their place is the General Staff. The next lot are stupid and lazy–they make up 90 percent of every army and are suited to routine duties. Anyone who is both clever and lazy is qualified for the highest leadership duties, because he possesses the intellectual clarity and the composure necessary for difficult decisions. One must beware of anyone who is stupid and diligent–he must not be entrusted with any responsibility because he will always cause only mischief…”

September 5, 2014

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