Things to Read at Nighttime on May 21, 2014

Should-Reads:

1. Tim Duy: Dudley Revisits Exit Strategy: “William Dudley gave what was both an interesting and depressing speech.  Interesting in that he provides some new thoughts on the exit strategy. Depressing in that he outlines a case for persistently low interest rates. One wonders why, given such an outlook, the Fed is so firmly focused on the exit strategy to begin with, rather than accelerating the pace of the recovery…. Three percent growth is not exactly anything to write home about; the only thing exciting about 3 percent is that we just can’t seem to get there…. Trend productivity growth of just 1 to 1.5 percent is very, very low and feeds into the Fed’s belief that potential growth is in the 2.2 to 2.3 percent range…. Dudley anticipates that the tapering process will continue, and thus turns his attention to the lift-off from the zero bound. Here he admits the reality of the situation. They really have no idea when the first rate increase will occur…. He too expects rates will be subdued over the longer term…. Dudley is saying that the Fed can reduce accommodation via raising rates or reducing the balance sheet, and  they should should begin with the former to normalize policy. This reveals his confidence in being able to manage the balance sheet while raising rates…. Dudley reinforces expectations that the low rate environment will persist long into the future. The data flow is not providing reason to think otherwise at this point…. It remains interesting that the Fed does not view their own outlook as reason to accelerate the pace of activity. They seem relatively content to accept what they themselves acknowledge is an ongoing disappointment…”

2. Jesse Eisinger: The Buck Stops With Obama on Tepid Financial Reform: “These were Mr. Geithner’s failures, but they were more deeply Mr. Obama’s. The flaws we thought we were seeing during Mr. Geithner’s tenure turn out to have replicated themselves in other Obama departments. And they have persisted after Mr. Geithner left. Why, it’s almost as if the Treasury secretary wasn’t the one making decisions and setting the tone after all…. Eric H. Holder Jr…. Mary L. Schapiro… oversaw the inadequate enforcement response to the crisis…. Ben S. Bernanke… didn’t push for more aggressive regulatory and financial reform. Mr. Geithner didn’t run those shops. And Geithner-like characters keep popping up, while appointees who are unlike the president get ousted. At the Federal Deposit Insurance Corporation, the outspoken Sheila Bair was replaced with the low-profile Martin J. Gruenberg. Gary S. Gensler… didn’t get nominated to a second term. In his place, we got a Treasury official whose cipher of a record was almost treated as a virtue by the Obama administration…. Mary Jo White, has been disappointing on regulatory questions…. Reform health care? Take the right-of-center Heritage plan, hopeful of bipartisan support that never materializes. Reform the financial markets? Don’t do anything that someone could deride as simplistic and unsophisticated…. The biggest disappointments were failing to be more aggressive on housing policy and failing to hold wrongdoers accountable in the aftermath of the crisis. But the Obama administration’s failure on financial regulatory reform may be the most emblematic of the president’s halting leadership qualities…. Give credit to Mr. Geithner: He was consistent in his hostility to significant action. In his book, Mr. Geithner reveals that he undercut the support of the British prime minister, Gordon Brown, for a financial transaction tax, knowing that such a global tax, which is backed by respected economists and is politically popular, had ‘no chance without our support’. Even today, he doesn’t believe we can–or should–solve ‘too big to fail’, calling it a ‘Moby-Dick’ policy. But if he ever steered a path too middling for Mr. Obama, the president never made it clear…. President Obama could consider financial regulatory reform a signature achievement and work to consolidate it. But he doesn’t appear to. It’s not surprising his appointees don’t either…”

3. Nick Rowe: How long is the short run?: “The answer we normally give… is: ‘It depends on price stickiness; if prices are very flexible it will be short, and if prices are very sticky it will be long’. A better answer would be: ‘It depends on monetary policy; if monetary policy is very good it will be short, and if monetary policy is very bad it will last forever’…. In the AD-AS framework. Put the price level (P) on the vertical axis, and real output (Y) on the horizontal axis. Draw a downward-sloping AD curve, a vertical LRAS curve, and an upward-sloping (or horizontal) SRAS curve…. A shock shifts the AD curve to the left… there is a recession. But eventually, prices (including wages) adjust, the SRAS curve slowly shifts down/right, and the economy eventually returns to (a new) long run equilibrium at point C. And the time it takes for prices to adjust determines how long it takes for the economy to get to point C. We then say it might be better for the central bank to respond to the shock by loosening monetary policy and shifting the AD curve back to the original red curve, so the economy returns to long run equilibrium at point A more quickly…. We then talk about lags in monetary policy, and compare the speed of the central bank’s response to the speed of price adjustment. And we discuss the difficulties the central bank may face in identifying shocks and responding appropriately, and discuss rules vs discretion, etc. It all makes for a nice little essay question…. But it does set up a false dichotomy between using the discretionary actions of the central bank vs relying on the ‘natural’ self-equilibrating properties of the economy…. If the central bank ‘did nothing’… how long would it take for the economy to… return to long run equilibrium? That depends on what we mean by ‘doing nothing’. And it could mean almost anything…. It makes no sense to say that the length of the short run depends on the degree of price stickiness, without mentioning monetary policy…”

4. Ezra Klein: The simple reason Republicans don’t have an answer on the minimum wage: “Ramesh Ponnuru… thinks there are better policies Republicans could propose that would help the same people… expanding the Earned Income Tax Credit…. There’s only one problem: Republicans oppose expanding the Earned Income Tax Credit. In fact, they’re trying to cut it. The most recent Republican budget lets a stimulus-era boost in the EITC to expire and, on top of that, includes huge cuts to the part of the budget… that houses the EITC. Meanwhile, President Obama and the Democrats do have a position on the EITC. They want to increase it, just like Ponnuru suggests. But they have not found Republican partners…. Ponnuru obviously doesn’t answer for the Republican Party. But… his column [is] a bit odd. At no point does he mention that pretty much the entirety of the Republican Party is on record, within the last few months, voting to cut the EITC and refusing to join Democrats in their effort to expand it. Of late, the Republican Party is trying to figure out how to show they care more about people in and near poverty. That’s led to a lot of good ideas about policies Republicans could support if they want to help people in or near poverty. In particular, it’s led to a lot of praise for the EITC. The problem is that the Ryan budget has put almost all Republicans on record cutting spending on those policies. This has placed Republicans and their allies in a really difficult position. That includes [Paul] Ryan himself, who recently told Buzzfeed’s McKay Coppins that he shouldn’t have to answer for the budget he’s written: ‘I’ve got two roles’, he says. ‘I’m chairman of the House Budget Committee representing my conference… and I’m a House member representing Wisconsin doing my own thing. I can’t speak for everybody and put my stuff in their budget. My work on poverty is a separate thing’…. Republican reformers… write or talk as if the problem is that the Republican Party has somehow just missed all these great programs that would show the American people they really care about the poor. But the GOP’s problem is harder… they’re on record trying to cut almost all those programs, and the main cutter is also the guy who’s trying to present himself as the GOP’s new face on poverty.”

Should Be Aware of:

• John Aziz: Could a robot do my job?
• Adam J. Levitin: The Politics of Financial Regulation and the Regulation of Financial Politics: A Review Essay
• Jared Bernstein: Talking Manufacturing and Its Wage Premium
• Ashok Rao: Declining Consumption and Secular Stagnation
• James Kwak: Incentives and Ideology: Financial regulation is constrained by politics as well as bureaucracy

And:

1. Annalee Newitz: In Jo Walton’s My Real Children, Two Believable Versions of the 20th Century: “Tricia’s involvement with local politics deeply affects her city, and possibly even the world… a long era of peace, expanded civil liberties, and space colonization. But in Pat’s world, limited nuclear strikes have seeded the world with radioactive particles and authoritarian governments… and early deaths among their loved ones from radiation-induced cancers and terrorist bombings. We’re asked to weigh the two women’s fates in our minds, wondering whether domestic bliss in an authoritarian regime is better than personal unhappiness in a future where humanity isn’t threatened by war. Lurking beneath these overlapping memories is the aged Patricia’s slowly waning sanity. She’s forgetting crucial parts of her life, even as she’s remembering lives she isn’t sure she ever lived. One way to read this novel is as the compensatory fantasy of a brilliant woman who is losing her memories to Alzheimers. To make up for her lost memories, she may be inventing new ones. Ultimately, however, this novel is a complicated, nuanced mediation on the question of how the personal and political intertwine to create a single life. We get the sense that Tricia’s greater political freedoms have afforded her a form of happiness that Pat can never have…. Would you rather have a slightly sad life in a happy world, or a happy life in a world on the brink of disaster? Perhaps the most challenging part of My Real Children is trying to figure out of these two possibilities are equivalent–or if one is the better place, where you’d want your real children to live. With its finely-observed treatment of human interpersonal relationships, this novel is as good as Walton’s previous alternate historical masterworks Farthing and Tooth and Claw…. You may find yourself in tears by the end of My Real Children, but you won’t regret a single second you spend engrossed in its pages…”

2. Leemore Dafny, Jonathan Gruber, Christopher Ody: More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces: “First-year insurer participation in the Health Insurance Marketplaces (HIMs) established by the Affordable Care Act is limited in many areas of the country. There are 3.9 participants, on (population-weighted) average, in the 395 ratings areas spanning the 34 states with federally facilitated marketplaces (FFMs). Using data on the plans offered in the FFMs, together with predicted market shares for exchange participants (estimated using 2011 insurer-state market shares in the individual insurance market), we study the impact of competition on premiums. We exploit variation in ratings-area-level competition induced by United Healthcare’s decision not to participate in any of the FFMs. We estimate that United’s nonparticipation decision raised the second-lowest-price silver premium (which is directly linked to federal subsidies) by 5.4 percent, on average. If all insurers active in each state’s individual insurance market in 2011 had participated in all ratings areas in that state’s HIM, we estimate this key premium would be 11.1% lower and 2014 federal subsidies would be reduced by $1.7 billion.”

Already-Noted Must-Reads:

1. Mark Thoma sends us to William Dudley: What Kinds of Jobs Have Been Created During the Recovery?: “A feature of the Great Recession and indeed the prior two recessions, is that the middle-skill jobs that were lost don’t all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers…. While there’s been a good number of both higher-skill and lower-skill jobs created in the region during the recovery, opportunities for middle-skilled workers have continued to shrink…. There have been significant and long-lasting changes to the nature of work… many middle-skilled workers displaced during the recession are likely to find that their old jobs will never come back… and workers are increasingly facing higher skill requirements in order to land a good job…. One thing is clear: workers will need more education, training and skills…”

2. Ezra Klein: Does David Brooks know that Simpson-Bowles failed?: “In a mighty odd column, David Brooks pens a paean to technocratic autocracies like Singapore and suggests that the US needs to “make democracy dynamic again” if it’s going to keep up. How will it make democracy dynamic again? Glad you asked: ‘The quickest way around all this is to use elite Simpson-Bowles-type commissions to push populist reforms. The process of change would be unapologetically elitist. Gather small groups of the great and the good together to hammer out bipartisan reforms–on immigration, entitlement reform, a social mobility agenda, etc.–and then rally establishment opinion to browbeat the plans through.’Of course, there already was a Simpson-Bowles-type commission that overwhelmingly rallied establishment opinion to its side. It was called the Simpson-Bowles commission. And it failed. So did its descendants like the Senate’s Gang of Six and the Supercommittee. Whatever you think of the Simpson-Bowles plan, the outcome proved that these kinds of elite committees aren’t able to browbeat their plans through Congress. The outcome of Simpson-Bowles is a big part of the reason some in Washington have begun envying the decisiveness of East Asian autocracies, not a model for how the US can mimic their decisiveness…”