Things to Read on the Morning of April 22, 2014

April 22, 2014

Must-Reads:

  1. David G. Blanchflower and Adam S. Posen: Wages and Labor Market Slack: Making the Dual Mandate Operational: “We undertake the first econometric analysis of the impact of rises in inactivity (1-LFPR) on wages in the US economy. To the degree that the rise in unemployment in the US is structural… wages should increase because of the negative shock to labor supply…. In contrast, if the rise in inactivity is largely cyclical, labor markets will see downward pressure on wages…. We find… inactives exert additional downward pressure on wages over and above the unemployment rate itself…. This pattern holds across recent decades in the US data, and the relationship strengthens in recent years when variation in participation increases. Our analysis is based on observations by state and year…. The implication… is two-fold. First, low participation is indeed an additional measure of labor market slack…. A substantial portion of those American workers who became inactive should… be expected to spring back into the labor market if demand rises to create jobs…. Second, wage inflation should be considered as the primary target of FOMC policy with respect to the employment stabilization side of the Fed’s dual mandate, at least for now…”

  2. Even Soltas: Yes, the Pay Gap Persists: “Mark Perry and Andrew Biggs… at the American Enterprise Institute argued… that no pay gap exists between men and women after you control for the different choices they make…. I took issue…. I found a persistent pay gap on the order of 4 to 10%…. And I also wrote that it’s probably wrong to take all these [controls] as unaffected by pressure or discrimination. Perry responded… that the pay gap might persist because of gender differences in risk tolerance…. [and] because professional athletes and musicians are paid well and tend to be men. Sadly, his argument makes no sense…. 1. My regression has ‘fixed effects’ for occupation. This means that it fully accounts for any occupation-level compensating differentials for risk. So everything Perry and Biggs write about men dying in forestry, or what have you–yeah, my analysis accounts for that. That’s what a fixed effect is. 2. My analysis is of workers paid hourly wages. Professional athletes and musicians are not hourly workers…. Look, I understand why Perry and Biggs have to respond…. They misrepresented the research consensus on the gender pay gap in a major newspaper, and I called them out on it…. The 23-percent number reflects more than discrimination. But if they are going to try to explain away the pay gap, they’re going to need to try a bit harder than this…”

  3. Ryan Avent: Inequality: “Capital” and its discontents: “Piketty’s magnum opus is certainly not without its weaknesses, but the quality of the criticism it has attracted provides a sense of the strength of the argument he makes. Consider Clive Crook…. He writes: ‘There’s a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws.’ The line doubles as a pleasingly apt description of Mr Crook’s review. He is unhappy…. Why… doesn’t Mr Piketty say that r must be significantly above g to generate the expected divergence, Mr Crook complains…. You don’t even have to read hundreds of pages to get the qualification Mr Crook wants; you can start with the page on which r>g is first mentioned…. Crook then goes on to present his evidence: ‘The trouble is… capital-to-output ratios in Britain and France in the 18th and 19th centuries… were stable’…. Piketty is not arguing that r>g means that rising inequality is inevitable. Indeed, that is close to the precise opposite of his argument, which is that r>g is a force for divergence… which has at times been countered… and which can and should be similarly countered in future. Presumably, if charts of stable capital-income ratios in the 19th century provided a devastating rebuttal to his story, Mr Piketty would not have included them so prominently in the book. I think he must have imagined that readers would look at the text around them as well…”

Should-Reads:

  1. Neil Irwin: How Underpaid German Workers Helped Cause Europe’s Debt Crisis: “People (especially Germans) often view the crisis through this frame: Profligate, free-spending nations along Europe’s southern coast (we’re looking at you, Greece, Italy and Spain) borrowed more money than they could possibly repay; then, when the bill came due, they nearly caused the collapse of the common euro currency before being bailed out by their more responsible Northern European neighbors. That’s… incomplete. The run-up in debt in Spain and Greece and Italy was the flip side of Germany’s success in containing workers’ wages and improving exports. Germany sold more stuff to Southern Europe than it bought. It took the profits and, in effect, lent the money back to those same Southern European countries. In Greece and Italy, it showed up as government borrowing, and in Spain as a housing bubble fueled by bank loans. It all fell apart once the indebtedness of the Southern European countries became too much to bear. Because all these countries use the same currency, the euro, none could relieve the pressure by devaluing their currency as they might have with their own lira, drachma or peseta…. The approach so far has largely been one of forcing steep cuts in wages and benefits on the Southern European countries…. But there’s an easier way (or what should be an easier way). Middle-income German workers could be paid more…”

  2. Barry Ritholtz: Why Investors Love Hedge Funds: “Some hedge funds generate a lot of alpha Given the underperformance of the industry, why do so many investors want to participate in hedge funds? The most likely answer is the enormous alpha generated by a handful of star managers…. The 9,500 new me-too funds are not, according to the most recent data, keeping up with the top hundred funds. Indeed, they are not even keeping up with their benchmarks. Beating the market is hard:… Outperformance is a rare and elusive thing…. Add in the standard 2 & 20 fee structure… we hunt for the rarest of creatures: Funds that earn their keep…. Cognitive bias and behavioral driven investing… people want more than just returns from their investments. They are also looking for the ‘status and esteem of hedge funds’…. That feeling of belonging to a special club…. We see this reflected in the mind share hedge funds occupy…. We are faced with a situation where fees are high, outperformance is rare, and our own biases undercut our ability to select managers. Note that we haven’t gotten to the issues of hedging, market timing and stock selection. I plan on visiting these topic in a future discussion…”

Should Be Aware of:

  1. Jack Ayer:* Underbelly: Reasonable Stalin: “HG Wells’ interview with Joseph Stalin, lately rescusitated by the New Statesman is a delight… Wells’ callow, self-admiring pomposity… an amusing nostalgia trip. What is perhaps surprising–startling to me–is Stalin. He sounds reasonable. Not just reasonable but as well-informed as… any contemporaneous leader… a sense of history remarkable in a former bank robber and seminary dropout…. I didn’t say he was reasonable; only that he seemed so…. I really don’t know quite what to make of all this…”

  2. Austin Frakt: We’re all a little wrong about Obamacare: “My set of metrics for judging [the] policy success [of ObamaCare]…. Enrollment. [Ross] Douthat draws on CBO projections of enrollment… as benchmarks of success… [but] CBO projections are not designed to be aspirational… [and] enrollment is a lousy benchmark, because it doesn’t tell you anything about the stability of… state-level markets…. For state-level insurance markets to function, what’s needed is a mix risk that’s not too far off what insurers expected and for which they priced products…. One would like to see a ‘good’ level of competition in exchanges…. The cost curve. Again, Douthat is right that claims were made about cost reductions. And, again, I think it was unwise to have made them… nobody knows how to, reliably and in a politically viable and sustainable way, reduce health care costs long-term. To its credit, the ACA is chock full of experiments… that… are worth a try…. Health outcomes…. I do expect insurance coverage to improve health, as the preponderance of credible evidence suggests it does. (I will have more to say about this next month.) In judging whether it does so, we should be careful to measure Obamacare’s effects relative to our best estimate of the counterfactual of no reform…. But notice that even if Obamacare does not reduce mortality (as studies suggest it will), it’s important to also consider morbidity more generally, including mental health. Broadly, I’m very confident health insurance does and will improve health outcomes…. I propose as a better metric achieving near universal access to affordable coverage of good quality…. Thanks to the Supreme Court’s ruling that states can decline to expand Medicaid without losing all federal Medicaid funding, the ACA has already failed in this regard (or states have failed it)…”

  3. Steven Ashley: Cornelius Drebble: The Vulgar Mechanic and His Magical Oven: “Drebbel had seen a widely circulated manuscript that contained a diagram of an ancient Greek feedback device, built by the mechanician Ktesibios around 250 B.C. This gadget closely resembled the oven’s float valve…. Drebbel may have reasoned that a similar principle could apply to heat flow…. With these observations, Drebbel created the first thermostat. It was an L-shaped glass tube filled with alcohol that was topped off by mercury. A metal rod floated in the quicksilver. When the heated alcohol expanded, it pushed up the quicksilver, and the rod rose in the tube. The rising rod then pressed on a lever arm, which adjusted the size of a vent at the top of the furnace…”

  4. Elon Green: Nate Silver’s frivolous failure: What FiveThirtyEight can learn from Grantland: “FiveThirtyEight, [Nate Silver] wrote, would apply data journalism — by which he meant ‘statistical analysis, but also data visualization, computer programming and data-literate reporting’ — to such broad topics as politics, economics and science…. My biggest problem with FiveThirtyEight… [is] its Frivolity Factor…. Not every story needs to be spinach or vegetables… but it’s to no one’s benefit to give your audience a plate of Mallomars…”

And:

April 22, 2014

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