Things to Read on the Morning of June 4, 2014

Should-Reads:

1. Terry J. Fitzgerald and Juan Pablo Nicolini: Is There a Stable Relationship between Unemployment and Future Inflation? Evidence from U.S. Cities: “This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a roughly 0.3 percentage point decline in inflation over the next year.”

2. Mike Albertus and Victor Menaldo: How democracies are gamed for power and profit: an addendum to Piketty: “We find that some countries adopt policies that systematically tend to favor the majority of the population and thus reduce inequality, whereas others instead create policies that favor elites and the wealthy more broadly. The chief determinant of this broad difference… is political institutions. Democracy can… be the great equalizer… when transition occurs in the wake of revolution or, alternatively, when elites are unable to impose a constitution that persists…. If, by contrast, economic elites are strong on the eve of democratization, this result reverses. Less redistributive policies that allow inequality to grow ensue…. Capitalism need not churn inexorably toward spiraling inequality. Indeed, we find that in democracies where elites have little say in writing the social contract, redistribution is more likely…. Most countries inherit elite biases from former periods of autocratic rule that hobble their capacity to counteract increasing inequality…. Elite influence can choke off egalitarian policies even in well-established democracies such as the United States and Great Britain that democratized gradually and were never quite able to tame the disproportionate power of elites. Recent work by Gilens and Page makes this point abundantly clear–even going so far as suggesting that the United States looks more like an oligarchy in democratic clothing.”

3. Marshall Steinbaum: Missing the Point on Income Inequality in the 1920s and Today: “Gary Burtless… takes issue with widely publicized findings that income inequality in the United States has reached the level that prevailed in the 1920s…. According to Burtless, that conclusion ignores the creation of the welfare state, consisting of Social Security, Medicare, Medicaid, and other government programs that aim to redistribute disposable income and goods and services…. The potential for policies to rectify income inequality and boost economic growth is very high, which by itself invalidates long-term conservative arguments that government is powerless or ineffective in the face of ‘the market’s’ inexorable force. Burtless’ claim is correct, but [should have noted that] some conservative critics… are using the welfare state they… [seek to] dismantl[e] to… argu[e] that inequality either doesn’t really exist or is at least not as bad…”

4. Nick Bunker: When does health insurance count as income?: “The debate over growing income inequality… involves… what exactly constitutes income…. Prior to 2012, CBO valued Medicare, Medicaid and the Children’s Health Insurance Program based on how much money these health insurance programs freed up for the household….Starting in 2012, CBO… simply impute[s] the average cost… [so] any increase in the cost of the program—an increase in payments to doctors, for example—would register as an increase in household income…. As health economist Uwe Reinhardt at Princeton University points out, CBO can’t be blamed for muddling through with these data issues. Economists really don’t have a consensus on how to measure the value of these programs…”

Should Be Aware of:

• Jonathan Chait: New Conservative Reasons Not to Save Planet
• Maximilian Auffhammer et al.: Specification and Estimation of the Transfer Function in Paleoclimatic Reconstructions
• Ai Weiwei: What China Loses by Forgetting
• “Obamacare architect David Cutler asks whether healing our wasteful healthcare system could be as simple as treating patients well…”

And:

1. Jim Tankersley: 50 Shades of Fed: “Several dozen economists and one-third of the regional Federal Reserve Bank presidents gathered in the California sunshine last week, and they spent two days talking about how and why to rein in a central bank that, in many of their eyes, has been acting awfully naughty lately…. The word of the week was ‘rules’. The Fed isn’t following them faithfully enough, speaker after speaker said in an auditorium at Stanford University’s Hoover Institution. In particular, they said, Fed officials need to be following a rule named for the economist who hosted the group, Stanford’s John Taylor…. A Fed following the Taylor Rule would have raised rates by now, and it would not have exposed the nation to inflation risks by buying so many trillions of dollars of bonds and mortgage-backed securities over the past few years…. By straying from that rule, many economists said, the Fed is hurting the economy and courting high inflation. So perhaps it’s time for some discipline. And if the Fed won’t take it on itself, they said, then Congress should shackle it…. Fed officials have argued that it’s necessary, because the economy, post-recession, is stuck in something called a Liquidity Trap, where there’s no room left to cut interest rates and inflation isn’t much of a threat. The attendees didn’t talk much about unemployment in their presentations. They focused mostly on inflation risks–which, to be fair, many of them have been warning about for years, even as the inflation rate stayed below the Fed’s 2 percent target. It was left to… John Williams, who heads the San Francisco Fed, to offer the only strong dissent of the week. ‘The way you lose your independence is not by taking the bold actions the Fed has taken to combat low inflation and deflation’, he said. ‘The way you lose your independence is by failing at your job’…”

2. Paul Krugman: On Inequality Denial: “Chris Giles, the economics editor of The Financial Times… claimed that Mr. Piketty’s work made ‘a series of errors that skew his findings’, and that there is in fact no clear evidence of rising concentration of wealth…. The subsequent discussion has not gone well for Mr. Giles…. The crucial assertion that there is no clear trend toward increased concentration of wealth rested on a known fallacy, an apples-to-oranges comparison that experts have long warned about–and that I identified in that 1992 article…. We have two sources of evidence on both income and wealth: surveys, in which people are asked about their finances, and tax data. Survey data… notoriously understate top incomes and wealth…. So studies of the 1 percent, the 0.1 percent, and so on rely mainly on tax data. The Financial Times critique, however, compared older estimates of wealth concentration based on tax data with more recent estimates based on surveys; this produced an automatic bias against finding an upward trend…. This latest attempt to debunk the notion that we’ve become a vastly more unequal society has itself been debunked. And you should have expected that. There are so many independent indicators pointing to sharply rising inequality, from the soaring prices of high-end real estate to the booming markets for luxury goods, that any claim that inequality isn’t rising almost has to be based on faulty data analysis…. On politically charged issues, critics of the [technocratic] consensus need to be self-aware; they need to ask whether they’re really seeking intellectual honesty, or are effectively acting as concern trolls, professional debunkers of liberal pieties. (Strange to say, there are no trolls on the right debunking conservative pieties. Funny how that works.)”

3. Jared Bernstein: The Costs of Inequality to the Growth of Most Households’ Incomes: “Yesterday I pointed out that adding in federal taxes and transfers does not much alter the trend in inequality over the last few decades…. The lowest income households, those in the bottom fifth of the after-tax income scale, lost $1,500 [to rising inequality]…. Middle-income households lost $9,500. Households in the top 1%… gained a cool $482,000. Occasionally I run into people who want to argue that the increase in inequality is… [a] benign outcome…. It may boost those at the top, but not at the expense of others…. [But] he growth of unequal outcomes has been and will continue to be costly to those on the wrong side of the divide.”

4. CARDIAC paper computer emulator: “The recent post of the CARDIAC Unboxing [ed: the CARDIAC being a cardboard teaching computer that Bell Labs released in the late 60s] made me poke my father, who has written a CARDIAC emulator that actually looks like the real CARDIAC, to put together a webpage with the source of it. Both his childhood and mine were definitely influenced by this little wonder out of Bell Labs, so for those who can’t get the cardboard variant, here’s the software one, along with a scan of the original CARDIAC manual.”

Already-Noted Must-Reads:

1. Larry Ball: Long-Term Damage from the Great Recession in OECD Countries: “This paper estimates the long-term effects of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time.”

2. Max Auffhammer: It just doesn’t add up. Why I think not building Keystone XL will likely leave a billion barrels worth of bitumen in the ground: “Whenever oil sands come up in casual conversation, many of my economist friends argue that… ‘The Canadians are just going to build pipelines to the East and West and ship the stuff to Asia and elsewhere’…. Alberta’s oil sand reserves are estimated at 168.7 billion barrels, which eclipses the reserves of Iran, Iraq, Kuwait and Russia…. They are in the form of crude bitumen… well to wheel emissions from these oil sands are 14-20% higher than those of a weighted average of transportation fuels used in the United States…. Even if every pipeline project on record is built on time and rail capacity is expanded aggressively, there still is not enough transport capacity to meet industry projected supply. This means, of course, that Keystone XL matters…. I think that… not permitting Keystone XL will likely leave 1 billion barrels in the ground by 2030…. There is simply not sufficient transport capacity to realize the supply projections by Canadian Petroleum Producers out to 2030… regulatory uncertainty… currently oil sands enjoy an unfair advantage… in the absence of a carbon tax or other price based mechanism, its price is artificially lower than socially optimal… delaying extraction of oil sands now will lead to lower demand in the future… higher transport costs by rail… the very costly development of local refining capacity in Alberta…. Of course, globally speaking, 1 billion barrels sounds like a lot, but the US consumes that amount in about 50 days. As carbon is a stock pollutant as far as human time frames are concerned, not permitting Keystone ‘buys time’ for alternative transportation fuels and climate policies to develop…”

3. Raising America’s Pay Launch | Economic Policy Institute: “Please join the Economic Policy Institute on Wednesday, June 4th at 9:30 a.m. ET, for the launch of Raising America’s Pay, a new research and education initiative to make wage growth an urgent national policy priority. Secretary of Labor Thomas Perez will deliver the keynote address…”