Things to Read on the Morning of September 23, 2014

September 23, 2014

Must- and Shall-Reads:

 

  1. David M. Byrne, Stephen D. Oliner, and Daniel E. Sichel: Is the Information Technology Revolution Over?: “Given the slowdown in labor productivity growth in the mid-2000s, some have argued that the boost to labor productivity from IT may have run its course. This paper contributes three types of evidence to this debate. First, we show that since 2004, IT has continued to make a significant contribution to labor productivity growth in the United States, though it is no longer providing the boost it did during the productivity resurgence from 1995 to 2004. Second, we present evidence that semiconductor technology, a key ingredient of the IT revolution, has continued to advance at a rapid pace and that the BLS price index for microprocesssors may have substantially understated the rate of decline in prices in recent years. Finally, we develop projections of growth in trend labor productivity in the nonfarm business sector. The baseline projection of about 13⁄4 percent a year is better than recent history but is still below the long-run average of 21⁄4 percent. However, we see a reasonable prospect — particularly given the ongoing advance in semiconductors — that the pace of labor productivity growth could rise back up to or exceed the long-run average. While the evidence is far from conclusive, we judge that ‘No, the IT revolution is not over’.”

  2. Paul Krugman: The Temporary-Equilibrium Method: “David Glasner has some thoughts… that I mostly agree with, but not entirely. So, a bit more. Glasner is right to say that the Hicksian IS-LM analysis comes most directly not out of Keynes but out of Hicks’s own Value and Capital, which introduced the concept of ‘temporary equilibrium’… using quasi-static methods to analyze a dynamic economy… simply as a tool…. So is IS-LM really Keynesian? I think yes–there is a lot of temporary equilibrium in The General Theory, even if there’s other stuff too. As I wrote in the last post, one key thing that distinguished TGT from earlier business cycle theorizing was precisely that it stopped trying to tell a dynamic story…. The real question is whether the method of temporary equilibrium is useful. What are the alternatives? One… is to do intertemporal equilibrium all the way… DSGE–and I think Glasner and I agree that this hasn’t worked out too well…. Economists who never learned temporary-equiibrium-style modeling have had a strong tendency to reinvent pre-Keynesian fallacies (cough-Say’s Law-cough), because they don’t know how to think out of the forever-equilibrium straitjacket…. Disequilibrium dynamics all the way?… I have never seen anyone pull this off…. Hicks… often seems to hit a sweet spot between rigorous irrelevance and would-be realism that ends up being just confused…. Glasner says that temporary equilibrium must involve disappointed expectations, and fails to take account of the dynamics that must result as expectations are revised…. I’m not sure that this is always true. Hicks did indeed assume static expectations… but in Keynes’s vision of an economy stuck in sustained depression, such static expectations will be more or less right. It’s true that you need some wage stickiness to explain what you see… but that isn’t necessarily about false expectations…. In the end, I wouldn’t say that temporary equilibrium is either right or wrong; what it is, is useful…”

  3. Lemin Wu et al.: Entertaining Malthus: Bread, Circuses and Economic Growth: “We augment a simple Malthusian model by allowing agents to consume something besides food. Whereas food (in our case: bread) is both enjoyable and necessary for survival, the other good, circuses, is pure entertainment: it has absolutely no impact on survival, but does enhance the quality of life. With this very simple modification, we show that, whereas food supply may remain at subsistence, technological change will have a great impact on the consumption of everything else. Most strikingly, though the population remains bound by a Malthusian constraint, sustained improvements to living standards can no longer be ruled out. We also argue that our model better fits the known historical facts–the widely-held belief that growth prior to the Industrial Revolution was flat is based largely on historical measures of food production. Although food supply throughout history may have been (and for most individuals still is) at or near subsistence levels technological advancements have brought greater convenience and comfort to wealthy and poor alike, a possibility that Malthus himself conceded in his later (and often ignored) work. Therefore, our model not only describes historical growth patterns and demographic transitions better than traditional ‘Malthusian’ models, but is also more in line with Malthus’ later thinking.”

  4. Daniel Davies: Every single IT guy, every single manager…: “In the general debate on email spying and… NSA/Snowden… people who want to dismiss the whole thing as ‘no big deal’ are… totally underestimating the… blind trust… required of them…. Even opponents of ubiquitous surveillance… assume that the institution which has access to your information is the institution which collected it. But that’s not necessarily the case at all. The Leveson Inquiry… demonstrated that the Police National Computer could be accessed by more or less any tabloid journalist with a phone and an account with a crooked detective agency…. Manning and Snowden… have made it clear that mid-level employees can get access to huge amounts of top secret data as long as they’ve got the wit to smuggle it out on a thumb drive. So the question is not so much ‘do you trust the CIA/NSA/MI6/etc?’. It’s “Do you trust every single sysadmin… analyst… middle manager?”. The CIA might not be interested at all in my dull mobile phone conversation metadata, but someone else might–the Leveson inquiry was told how the UK’s PNC was used by one copper to check out his daughter’s new boyfriend…. The policies which might prevent [our data] from being accessed by blackmailers, tabloid journalists, nosey neighbours and basically anyone else, are themselves top secret and not subject to any sort of legal oversight. This isn’t a conspiracy theory…. It’s based on the fact that big and complicated systems are set up to malfunction, particularly if they are able to declare themselves above any regulation…. And the way in which this particular system is set up to malfunction is easily predictable and potentially very damaging to innocent people. I am personally not at the stage where I trust every single person who might be hired for a low level IT job in a security agency, and I’m not sure that I trust an entirely opaque set of safeguards with no accountability either.”

  5. Nick Bunker: How Rising Income Inequality Affects State Tax Revenue: “S&P’s job is to assess the risk of bonds or other fixed-income investments and the creditworthiness of the governments…. According to the new report, rising income inequality is a factor that affects the creditworthiness of state governments, and thus their cost of borrowing and the tax revenue required to pay off their bonds. Over the past several decades, incomes have shifted upward while the tax code hasn’t responded. The result: states are collecting less tax revenue…. [State] spending cutbacks don’t just affect growth and stability. They also have implications for economic inequality. A paper by economists Laurence Ball, of Johns Hopkins University, and Davide Furceri, Daniel Leigh, and Prakash Loungani—all at the International Monetary Fund—finds that fiscal consolidation, or attempts to reduce budget deficits, ends up raising inequality. Particularly noteworthy is their conclusion that focusing primarily on cutting government spending results in larger increases in economic inequality.”

  6. Dylan Scott: This Classic GOP Anti-Obamacare Meme Has Officially Imploded: “Last week… [was] the end of one of the GOP’s favorite anti-Obamacare memes…. It was just a few months ago that Republicans were… theorizing that a third or more of Obamacare sign-ups weren’t paying their bills…. ‘I don’t know how many have actually paid for it’, House Speaker John Boehner (R-OH) said… he believed that fewer people were now covered than before the law. ‘I actually do believe that to be the case’…. Boehner wasn’t alone…. ‘We don’t know how many have paid’… spokesman for Senate Minority Leader Mitch McConnell…. ’20 percent to 33 percent are signing up and then not paying’, Rep. Darrell Issa (R-CA) said…. ‘Im told a low %–perhaps as low as 15%–of people who “enrolled” in #Obamacare actually paid first premium. Will be A LOT of attrition’ — Scott Gottlieb, MD (@ScottGottliebMD) December 6, 2013…. ‘Report: 1/3 of #ObamaCare “enrollees” haven’t paid premiums. How does not paying the premium constitute enrollment? http://t.co/OkkUhsJGyt‘ — Reince Priebus (@Reince)…. Last week’s news, however, was effectively met with crickets…”

  7. Eric Wemple: Alessandra Stanley’s Contempt for New York Times Readers: “The piece launched a thousand tweets with a single-sentence lede: ‘When Shonda Rhimes writes her autobiography, it should be called “How to Get Away With Being an Angry Black Woman”‘…. New York Times Public Editor Margaret Sullivan… [wrote] that the piece was ‘astonishingly tone-deaf and out of touch’. No critique, however, was so damning as the one delivered by … Alessandra Stanley…. ‘I didn’t think Times readers would take the opening sentence literally because I so often write arch, provocative ledes that are then undercut or mitigated by the paragraphs that follow’. Only a gifted critic can pack so much sin into a single sentence. Sin No. 1: Over-healthy self-regard: What Stanley appears to be saying here is that Times readers read her stuff with such care and joy that they know her as the woman who writes self-mitigated ledes. Ahhh, yes, that’s her trademark! Sin No. 2: Deliberate obfuscation: Just what is the purpose of mitigating your own lede? That must be an art form that Stanley and her culture-critic pals delight in executing. From this point onward, the Erik Wemple Blog will start reading Stanley’s work from the third or fourth paragraph. Sin No. 3: Why write a lede at all if your goal in the body of the piece is to undercut it?…”

  8. Kevin Bryan: “Aggregation in Production Functions: What Applied Economists Should Know,” J. Felipe & F. Fisher (2003): “What conditions are required to construct an aggregated production function Y=F(K,L), or more broadly to aggregate across firms an economy-wide production function Y=F(K,L)? Note that the question is not about the definition of capital per se, since defining ‘labor’ is equally problematic when man-hours are clearly heterogeneous, and this question is also not about the more general capital controversy worries, like reswitching…. The conditions under which factors can be aggregated are ridiculously stringent… that the marginal rate of substitution between different types of factors in one aggregation, e.g. capital, does not depend on the level of factors not in that aggregation, e.g. labor. Surely this is a condition that rarely holds: how much I want to use… different types of trucks will depend on how much labor I have at hand…. Why, then, do empirical exercises using, say, aggregate Cobb-Douglas seem to give such reasonable parameters, even though the above theoretical results suggest that parameters like ‘aggregate elasticity of substitution between labor and capital’ don’t even exist?…. Since ex-post production Y must equal the wage bill plus the capital payments plus profits, Felipe notes that this identity can be algebraically manipulated to Y=AF(K,L) where the form of F depends on the nature of the factor shares. That is, the good fit of Cobb-Douglas or CES can simply reflect an accounting identity…. It doesn’t strike me that aggregate production functions are measuring arbitrary things. However, if we are using parameters from these functions to do counterfactual analysis, we really ought know better exactly what approximations or assumptions are being baked into the cake…”

  9. Alan Blinder: Behind the Fed’s Dovish Turn on Rates: “The battle at the Federal Open Market Committee is now on. Score the previous meeting in late July for the inflation hawks, but last week’s meeting went for the doves…. The committee’s hawks would like the phrase ‘significant underutilization of labor’ removed from the statement…. They want the FOMC to stop declaring that interest rates will remain at their current superlow levels ‘for a considerable time’…. The hawks want the Fed to stop saying that it expects to keep interest rates low ‘for some time’…. Plosser dissented again… this time Fisher joined him…. Yet another indicator of rampant disagreement appeared…. Opinions on where the [Federal Funeds] rate should be… for the end of 2016 [range] from 0.25-0.50% to 4%. This is a remarkable degree of disagreement…”

Should Be Aware of:

 

  1. Nick Bunker: Financing the rise in income inequality: “Joaane Lindley… and Steven McIntosh… show… a worker moving into… the U.K finance industry… sees their wages increase by 37 percent…. Finance executives make more than non-finance executives and customer service representatives for financial firms make more than representatives for non-financial firms…. The authors’ preferred explanation is the firm sharing ‘rents’ with its workers…. The large premium for finance workers… results in the industry’s overrepresentation at the very top…. In 2005, about 14 percent of taxpayers in the top 1 percent and 18 percent of those in the top 0.1 percent were employed in the finance industry, compared to just under 8 percent of the top 1 percent and 11 percent of the top 0.1 percent in 1979…”

  2. Jared Bernstein: If the lagging labor force rate doesn’t still embody considerable slack, then why does it increasingly predict wage growth?: “Most work suggests the cyclical part of the [output] gap is falling over time and is now quite minimal, as both the recovery takes hold and ‘scarring’ effects make it tougher for labor force exiters to find their way back into the job market. However, a look at the relationship between the LFPR and wage trends suggests this conclusion may be premature…. Goldman Sachs economists showed… using just unemployment [to forecast wage growth] leads to an upwardly biased forecast in recent data…. Add[ing] the labor force participation rate (LFPR) to the model… tracks the wage trends more closely…. LFPR coefficients… start out insignificant but gain significance as the weak recovery proceeds…”

September 23, 2014

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