## Dennis Perrin on Christopher Hitchins: Ten Years Ago on the Internet

Dennis Perrin: Obit For A Former Contrarian:

Bright spring afternoon. Hitch and I spend it in his fave D.C. pub just down the street from his spacious apartment. At the long polished bar, he sips a martini, I swig Tanqueray on ice offset by pints of ale. The pub's TV is flashing golf highlights while the jukebox blasts classic rock. We're chatting about nothing in particular when the juke begins playing "Moonshadow" by Cat Stevens. Hitch stops talking. His face tightens. Eyes narrow. I know this look--I saw it on Crossfire when he nearly slugged a Muslim supporter of the Ayatollah's fatwa against Salman Rushdie. I saw it during a Gulf War panel discussion at Georgetown when he responded to some pro-war hack with a precision barrage of invective, followed by the slamming down of the mike, causing a brief reverb in the speakers. And here it was again.

Continue reading "Dennis Perrin on Christopher Hitchins: Ten Years Ago on the Internet" »

## Getting an Earful on Obamacare: Live from **La Farine** the Roasterie LXIV: December 31, 2013

Brian Francisco: Getting an earful on Obamacare:

A health insurance consultant said his own insurance premiums are climbing because of the Patient Protection and Affordable Care Act. But a meat market owner said the health care law will cut his insurance rates by more than half. Rep. Marlin Stutzman, R-3rd, had asked for input on the Affordable Care Act during an open house Monday at his office in the E. Ross Adair Federal Building, and he got it. Nearly 20 people showed up to speak individually with him, and most wanted to talk about the law that is requiring most Americans to obtain medical coverage from private insurers.

The experiences and opinions of Matt Hatfield, the insurance consultant and seller, and Lee Albright, owner of the south-side meat market carrying his last name, were drastically different. Hatfield, a past president of the Northeast Indiana Association of Health Underwriters, told Stutzman his insurance premiums are increasing 50 percent and his medical provider network is shrinking because of changes in his policy prompted by President Barack Obama’s signature legislation. He predicted even greater sticker shock for insurance consumers starting next summer, when policies come up for renewal. “The sooner people get the bad news, especially in an election year, the better” for voters to express their displeasure in the 2014 congressional elections, Hatfield said. “I think Priority One is getting the current (law) tossed out,” he said. “But you also have to come back with, what are you proposing?”

Stutzman replied: “What are you replacing it with? That’s what everybody is asking right now.”

Albright doesn’t want the Affordable Care Act repealed, which Stutzman and the Republican-controlled House have voted to do numerous times. Albright told his congressman that his monthly payment for family health coverage will drop from $3,800 to$1,700 by enrolling in a plan offered through the much-maligned law. Albright said most of his dozen employees also are enrolling in Affordable Care Act plans and will have coverage for the first time. “If the Republican Party thinks they’re going to kill Obamacare, you guys need to realize that those nine people that I add on, are they going to vote Republican ever again if you take their health care from them?”

Stutzman responded: “No, probably not.”...

James Hamilton, of Spencerville... had earlier said to Stutzman, “I’m really disappointed that the Republicans haven’t come forward with an alternative plan,” adding that he would “like to see something that is very different” from the Affordable Care Act.

Stutzman replied: “There’s several Republican plans that are competing with each other right now just internally. After the first of the year, we are going to try to sort through that.”

## Why Aren't the 90% More Vocal for Policies That Would Support Them?: Project Syndicate: Tuesday Focus (December 31, 2013)

At Project Syndicate: Brad DeLong: Why Aren't the 90% More Vocal for Policies That Would Support Them?: Unless something goes unexpectedly wrong in 2014, the level of real per capita GDP in the United States will match and exceed its 2007 level. That is not good news.

To see why, consider that, during the two business cycles that preceded the 2007 downturn, the US economy’s real per capita GDP grew at a 2% average annual pace; indeed, for a century or so, the US economy’s real per capita GDP grew at that rate. So US output is now seven years--14%--below the level that was reasonably expected back in 2007. And there is nothing on the horizon that would return the US economy to--or even near--its growth path before the 2008 financial crisis erupted. The only consolation--and it is a bleak consolation indeed--is that Europe and Japan are doing considerably worse relative to the 2007 benchmark.

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## It Is Very Difficult to Have a Technocratic Conversation with This Generation's Republican Officeholders: Barney Frank and Dick Cheney Edition

What is the right way for Barney Frank to deal with this? Indeed, what is the right way for all of us to deal with things like this?:

Recently, while waiting to be interviewed by the Huffington Post, I read something that gave me a very odd sensation. I knew what it must have felt like to be an alleged Iraqi weapon of mass destruction: Dick Cheney had lied about us both.

A copy of Cheney’s autobiography was on the table, and I gave it what is known as a “Washington read”--I went to the index and found my name--and read one of the most inaccurate criticisms ever made of my public record. Cheney wrote that in 2003 the Bush administration had sent legislation to reform Fannie Mae and Freddie Mac to Congress, but “it was killed by Financial Services Committee Chairman Barney Frank.”

Continue reading "It Is Very Difficult to Have a Technocratic Conversation with This Generation's Republican Officeholders: Barney Frank and Dick Cheney Edition" »

## George Orwell Liveblogs World War II: December 31, 1943

Reading the discussion of "war guilt" which reverberates in the correspondence columns of the newspapers, I note the surprise with which many people seem to discover that war is not a crime. Hitler, it appears, has not done anything actionable. He has not raped anybody, nor carried off any pieces of loot with his own hands, nor personally flogged any prisoners, buried any wounded men alive, thrown any babies into the air and spitted them on his bayonet, dipped any nuns in petrol and touched them off with church tapers--in fact he has not done any of the things which enemy nationals are usually credited with doing in war-time.

He has merely precipitated a world war which will perhaps have cost twenty-million lives before it ends. And there is nothing illegal in that. How could there be, when legality implies authority and there is no authority with the power to transcend national frontiers?

At the recent trials in Kharkov some attempt was made to fix on Hitler, Himmler and the rest the responsibility for their subordinates' crimes, but the mere fact that this had to be done shows that Hitlers's guilt is not self-evident. His crime, it is implied, was not to build up an army for the purpose of aggressive war, but to instruct that army to torture its prisoners. So far as it goes, the distinction between an atrocity and an act of war is valid. An atrocity means an act of terrorism which has no genuine military purpose. One must accept such distinctions if one accepts war at all, which in practice everyone does.

Nevertheless, a world in which it is wrong to murder an individual civilian and right to drop a thousand tons of high explosive on a residential area does sometimes make me wonder whether this earth of ours is not a loony bin made use of by some other planet.

*<#sourceHomeURL>#

## Morning Must-Read: Rand Ghayad: No, Rand Paul, There's No Reason to Cut Unemployment Benefits

Rand Paul says he cares about the unemployed.... So why does he want to end unemployment benefits for people who have been out of work for 6 months or longer? Well, Paul cites my work on long-term unemployment as a justification—--which surprised me, because it implies the opposite of what he says it does.... Paul says... extending unemployment benefits does a "disservice" to the unemployed by encouraging them to stay unemployed for too long. And as a "big-hearted" member of a party that cares about the jobless, he wants to protect them... by cutting their benefits, of course. But Paul misreads my work to try to back up his argument. He says my paper, which shows that companies don't want to hire people who have been unemployed for more than 6 months, proves his point.... But just because companies discriminate against the long-term unemployed doesn't mean long-term benefits are to blame. Paul might know that if he read beyond the first line of my paper's abstract.

## Morning Should Be Aware of: Owen Zidar Sends Us to David Card's Notes on Local Labor Markets

David Card: Notes on Local Labor Markets:

No, not all of you should read this. Most of you, in fact, should not. But some of you should read, and all should be aware of these lines of thinking...

## Evan Soltas Says That Swiss Monetary Policy Is in Need of More Attention: Monday Focus (December 30, 2013)

That upstart stripling whippersnapper Evan Soltas poses macroeconomists an interesting puzzle:

Evan Soltas: How Did We Miss the Swiss?:

We have ignored another economy [besides Japan] that has spent decades with extraordinarily and persistently low nominal growth and overnight interest rates: Switzerland... [where] NGDP growth has averaged 2.7 percent per year and CPI inflation has averaged 0.7 percent per year.... The Swiss National Bank's monetary policy instrument, the 3-month LIBOR in Swiss francs... hasn't been lifted above 3.5 percent in... fifteen years... has been perpetually at or just above the zero lower bound.

Continue reading "Evan Soltas Says That Swiss Monetary Policy Is in Need of More Attention: Monday Focus (December 30, 2013)" »

## Tim Duy: What Is the Fed Going to Do?

Writing from the land of tall fir trees, mandatory Pendleton wool shirts, and constant rain, the thoughtful Tim Duy notes that neither he nor the markets believe what the Federal Reserve is currently saying

Tim Duy: On Challenging the Fed: "Bond yields... breach[ed] the three percent mark at the end of last week. Mortgage rates have been pulled along... the sustainability of the housing recovery will again be questioned.... This very much looks like a challenge to the Federal Reserve's forward guidance....

Continue reading "Tim Duy: What Is the Fed Going to Do?" »

## Morning Must-Read: Benefits of ObamaCare

Lena H. Sun and Amy Goldstein: Beneath health law’s botched rollout is basic benefit for millions of uninsured Americans:

Adam Peterson’s life is about to change. For the first time in years, he is planning to do things he could not have imagined. He intends to have surgery to remove his gallbladder, an operation he needs to avoid another trip to the emergency room.... These plans are possible, says Peterson, who turned 50 this year and co-manages a financial services firm in Champaign, Ill., because of a piece of plastic the size of a credit card that arrived in the mail the other day: a health insurance card.... Peterson is among the millions of uninsured Americans who are benefiting from the Affordable Care Act.... 'I get these messages from acquaintances on Facebook saying, "Let me keep my doctor"', Peterson said. 'Well, what about those of us who didn’t have health insurance before?... I have been walking a tightrope and have had some twists and falls off of it. To not have to worry about this anymore is a tremendous relief'.

## A Pick-Up Mini Internet Symposium: **More Than** Five Posts on BitCoin Triggered by a Question from Adrienne Jeffries of The Verge...

Tyler Cowen: On the future of Dogecoin, BitCoin, and other cryptocurrencies of the non-realm: "An email query from Brad DeLong reminds me of this old Bart Taub paper, “Private Fiat Money with Many Suppliers” (jstor):

A dynamic rational expectations model of money is used to investigate whether a Nash equilibrium of many firms, each supplying its own brand-name currency, will optimally deflate their currencies in Friedman’s (1969) sense. The optimal deflation does arise under an open loop dynamic structure, but the equilibrium breaks down under a more realistic feedback control structure.

There is also Marimon, Nicolini, and Teles (pdf) and the work of Berentsen., all building on Ben Klein’s piece from 1974.  This literature has been read a few different ways, but I take the upshot to be that a) a monopolized private fiat money might be stable in supply, to protect the stream of future quasi-rents, and b) private competing fiat monies will not be stable in overall supply, for reasons of time consistency and also the competitive erosion of available rents.  In other words, when it comes to the proliferation of cryptocurrencies, the more the merrier but not for those holding them.

Tyler Cowen: How and why Bitcoin will plummet in price: "My post from yesterday was perhaps not specific enough, so let me outline one possible scenario in which the value of Bitcoin (and other cryptocurrencies) would fall apart.  For purposes of argument, let’s say that a year from now Bitcoin is priced at $500. Then you want some Bitcoin, let’s say to buy some drugs. And you find someone willing to sell you Bitcoin for about$500.

But then the QuitCoin company comes along, with its algorithm, offering to sell you QuitCoin for $400. Will you ever accept such an offer? Well, QuitCoin is “cheaper,” but of course it may buy you less on the other side of the transaction as well. The QuitCoin merchants realize this, and so they have built deflationary pressures into the algorithm, so you expect QuitCoin to rise in value over time, enough to make you want to hold it. So you buy some newly minted QuitCoin for$400, and its price springs up pretty quickly,  at which point you buy the drugs with it.  (Note that the cryptocurrency creators will, for reasons of profit maximization, exempt themselves from upfront mining costs and thus reap initial seigniorage, which will be some fraction of the total new value they create, and make a market by sharing some of that seigniorage with early adopters.)

Let’s say it costs the QuitCoin company $50 in per unit marketing costs for each arbitrage of this nature. (Alternatively you can think of that sum as representing the natural monopoly reserve currency advantage of Bitcoin.) In that case both the company and the buyers of QuitCoin are better off at the initial transfer price of$400 and people will prefer that new medium.  Over time the price of Bitcoin will have to fall to about $450 in response to competition. But of course the story doesn’t end there. Along comes SpitCoin, offering to sell you some payment media for$300.  Rat-FacedGitCoin offers you a deal for $200. ZitCoin is cheaper yet. And so on. Once the market becomes contestable, it seems the price of the dominant cryptocurrency is set at about$50, or the marketing costs faced by its potential competitors.  And so are the available rents on the supply-side exhausted.

There is thus a new theorem: the value of WitCoin should, in equilibrium, be equal to the marketing costs of its potential competitors.

This theorem will hold even if you are very optimistic about market demand and think that grannies will get in on it.  In fact the larger the network of demanders, the lower the marginal marketing cost may be — a bit like cellphones — and that means even lower valuations for the dominant cryptocurrency.

(It is an interesting question what fixed, marginal, and average cost look like here.  Arguably market participants will not accept any cryptocurrency which is not ultimately and credibly fixed in supply, so for a given cryptocurrency the marginal cost of marketing more at some point becomes infinite.  Marginal cost of supply for the market as a whole is perhaps the (mostly) fixed cost of setting up a new cryptocurrency-generating firm, which issues blocks of cryptocurrency, and that we can think of as roughly constant as the total supply of cryptocurrency expands through further entry.  In any case this issue deserves further consideration.)

Note that the more “optimistic” you are about Bitcoin, presumably you should also be more optimistic about its future competitors too.  Which means the theorem will kick in and you should be a bear on Bitcoin price.  Arguably it’s the bears on the general workability of cryptocurrencies who should be bullish on Bitcoin price because a) we know Bitcoin already exists, and b) we would have to consider that existence an unexpected and unreplicable outlier of some sort.  Yet the usual demon of mood affiliation denies us such a consistency of reasoning, and the cryptocurrency bulls are often also bulls on Bitcoin price, as too many of us prefer a consistency of mood!

In theory

Now, theoretically, you might believe that the current price of Bitcoin already reflects exactly those marketing costs of potential competitors and thus the current equilibrium is stable or semi-stable.  Maybe so, but I doubt that.  The current value of outstanding Bitcoin is about $20 billion or so, and it doesn’t seem it cost nearly that much to launch the idea. And now that we know cryptocurrencies can in some way “work,” it seems marketing a competitor might be easier yet. (You will note that by its nature, there are some Bitcoin imperfections permanently built into the system, imperfections which a competitor could improve upon. Furthermore the longer Bitcoin stays in the public eye, the more likely that an established institution will label its new and improved product LegitCoin and give it a big boost.) You can think of that$20 billion — or perhaps just some chunk of that? — as a very rough measure of the prize to be won if you can come up with a successful Bitcoin competitor.  Even a fraction of that sum will spur some real effort.

In short, we are still in a situation where supply-side arbitrage has not worked its way through the value of Bitcoin.  And that is one reason — among others — why I expect the value of Bitcoin to fall — a lot.

Nick Rowe: BackedCoin vs UnbackedCoin: "Imagine there is competition between two currencies. The two currencies are identical in every respect, except one is backed by assets and the other isn't. Which one would win the competition to become the preferred medium of exchange?

I think the one that is backed by assets would win. For two reasons:

1. The issuer of the backed coin could use those assets to help stabilise the value of the coins in response to fluctuations in demand. If demand falls, the issuer could use the assets to buy back some of the coins in circulation. If demand rises, the issuer could sell more coins in exchange for more assets. The issuer can make the supply curve of the coins more elastic, so that fluctuations in demand cause smaller fluctuations in price. Other things equal, people prefer a safer asset to a less safe asset.

2. The issuer of the backed coin could use the returns on those assets to pay interest on the coins. Or to buy back coins so the owners of the coins would see capital gains. Other things equal, people prefer an asset that pays a higher rate of return to one that pays a lower rate of return.

Other things equal, we would therefore expect to see competition between currencies lead to issuers of those currencies having assets backing those currencies, and paying out all the returns from those assets (minus administrative costs) to those who own those currencies. Free entry and competition drives down the profits from issuing currency to zero. Only currencies with 100% backing would survive.

But are other things equal?

There could be network externalities and a first mover advantage. Like Microsoft, VHS vs BetaMax, and the English language. If UnbackedCoin got on the market first, and if everyone wants to use the same coins as everyone else, and translation costs are high enough, it could survive against competition from BackedCoin. Customers cannot coordinate their simultaneous switch from UnbackedCoin to BackedCoin.

Nick Rowe: BackedCoin vs UnbackedCoin: "Imagine there is competition between two currencies. The two currencies are identical in every respect, except one is backed by assets and the other isn't. Which one would win the competition to become the preferred medium of exchange?

I think the one that is backed by assets would win. For two reasons:

1. The issuer of the backed coin could use those assets to help stabilise the value of the coins in response to fluctuations in demand. If demand falls, the issuer could use the assets to buy back some of the coins in circulation. If demand rises, the issuer could sell more coins in exchange for more assets. The issuer can make the supply curve of the coins more elastic, so that fluctuations in demand cause smaller fluctuations in price. Other things equal, people prefer a safer asset to a less safe asset.

2. The issuer of the backed coin could use the returns on those assets to pay interest on the coins. Or to buy back coins so the owners of the coins would see capital gains. Other things equal, people prefer an asset that pays a higher rate of return to one that pays a lower rate of return.

Other things equal, we would therefore expect to see competition between currencies lead to issuers of those currencies having assets backing those currencies, and paying out all the returns from those assets (minus administrative costs) to those who own those currencies. Free entry and competition drives down the profits from issuing currency to zero. Only currencies with 100% backing would survive.

But are other things equal?

There could be network externalities and a first mover advantage. Like Microsoft, VHS vs BetaMax, and the English language. If UnbackedCoin got on the market first, and if everyone wants to use the same coins as everyone else, and translation costs are high enough, it could survive against competition from BackedCoin. Customers cannot coordinate their simultaneous switch from UnbackedCoin to BackedCoin.

Hal Varian (2004): Economic Scene: Why Is That Dollar Bill in Your Pocket Worth Anything?: "One answer is that it's valuable because it says it is. To the left of the portrait of George Washington, the dollar proclaims: 'This note is legal tender for all debts, public and private'.

Dollar bills are "fiat" money - they are valuable because the government in power says so. People can, however, write contracts that specify payment in other currencies. If a contract specifies payment in euros, dollars will not fulfill the contract, despite what is printed on them.

A more profound, and perhaps slightly unsettling, reason that a dollar has value is simply that lots of people are willing to accept it as payment. In this view, the value of a dollar comes not so much from government mandate as from social convention.

In the jargon of economists, the value of a dollar is a result of "network effects." Just as a fax machine is valuable to you only if lots of other people you correspond with also have fax machines, a currency is valuable to you only if a lot of people you transact with are willing to accept it as payment.

Indeed, one can have currencies that have no government backing. Gold has been used for centuries as a medium of exchange; cigarettes were used for payment in prisoner-of-war camps in World War II; and countless other goods, including cowrie shells and peacock feathers, have functioned as money throughout history. They were money because people were willing to accept them as payment for debts, public and private. Gold, cigarettes, cowrie shells and peacock feathers all have "use value" in addition to their "exchange value." These items were originally valued for their utility or their beauty, and they became used as currency. It is rare to see a purely paper currency functioning as money without the backing of some government or financial institution.

Rare, perhaps, but not unheard of. Mervyn A. King, governor of the Bank of England, cited an interesting example - the Iraqi dinar - in the Ely Lecture delivered at the recent American Economics Association meeting in San Diego. (Mr. King's speech can be downloaded from http://www.bankofenglandco.uk/speeches/speech208.pdf.)

Here is the story Mr. King told:

After the gulf war of 1991, Iraq was divided in two: the south ruled by Saddam Hussein, the north governed by the local Kurds. Mr. Hussein needed money to finance government spending, and in the time-honored tradition of dictators, created it himself.

The government could not import more of the bank notes then in use, because of United Nations sanctions, so Mr. Hussein ordered the local printing of a new currency. In May 1993, the Central Bank of Iraq announced that citizens had three weeks to exchange their old 25-dinar notes for the new "Saddam dinars," which bore his portrait.

During the next few years, so many Saddam dinars were printed in southern Iraq that they became virtually worthless. The face value of cash in circulation rose from 22 billion dinars in 1991 to 584 billion in four years, and inflation averaged about 250 percent a year over that period.

Residents of northern Iraq could not exchange their notes. The 25-dinar notes continued to circulate and became known as the "Swiss dinars," because they were printed with plates made in Switzerland.

The fact that the Swiss dinars continued to be used at all speaks to the power of social conventions. The Kurds in the north despised the Baghdad government, and would have much preferred to have their own currency. But there was no government in place powerful enough to mandate a currency change, so they kept using the old Swiss dinars by default.

The Swiss dinar was in fixed supply, while the Saddam dinar was flying off the printing presses, so it is not surprising that the Swiss dinar quickly became more valuable. By spring 2003, it took 300 Saddam dinars to buy one Swiss dinar.

The more interesting economic effect was the behavior of the Swiss dinar against the dollar. In fall 2002, as it became more and more likely that the United States would invade, the Swiss dinar became more and more valuable.

This appreciation was driven by expectations. If the Kurds had expected that they would once again fall under Saddam's sway, the Swiss dinar would have quickly become worthless. As this became less likely, and the belief that future governments would accept the Swiss dinar became more widespread, the local currency became more valuable. Of course, every exchange rate movement can be interpreted in two ways: in the north, the Kurdish regional government initially interpreted the rise in the Swiss dinar against the dollar as a fall in the value of the dollar.

The government soon realized, however, that since the dollar was stable against other currencies, the correct explanation was that recounted above: the increasing belief that the Swiss dinars would, in fact, be honored by future governments.

The government was right. On July 7, 2003, the American occupation administrator, L. Paul Bremer III, announced the creation of a new Iraqi dinar that would be exchanged for the two existing currencies at a rate that implied that one Swiss dinar would be worth 150 Saddam dinars.

Interestingly, the currency markets valued the Swiss dinars somewhat higher than the official 150 exchange rate, primarily because many counterfeit 10,000-dinar Saddam notes were in circulation.

This story illustrates that paper currency can take on a life of its own, even in the absence of government backing. At the same time, it is clear that government backing makes a significant contribution to the value of paper currency: the more likely it became that the Swiss dinars would be valued by a subsequent government, the more valuable they became.

Okay. Suppose that you're on the island of Yap and it is the late 18th century...

You want to get richer. You can either work on Yap doing something useful, or catamaran over to Palau where the limestone is, carve a big piece of limestone into a disk, catamaran it back, and use it as money. If the value of stone money is too low, it won't be worth anyone's while to catamaran over to Palau. Thus the stone money supply will stop growing if the price dips. As long as the relative desire to use stone money does not shrink faster than per-capita income on Yap plus the population of Yap grows, the value of stone money on Yap will be determined by its cost of production--that is, the cost of catamaraning it over to Palau, carving the limestone disk, and bringing it back...

We can see this at work come the late 19th century. Europeans show up with steel tools that make it a lot easier to carve limestone disks on Palau. Thus there is a huge boom in the limestone disk-carving stone money-mining industry. And the value of stone money on Yap Falls as the money supply grows...

Now suppose that you were on the Internet and it is the early 21st century...

You want to get richer. You can either work doing something useful, or you can set up a botnet to mine BitCoins, or you can fork the code behind BitCoin and set up your own slightly-tweaked virtual cryptographic money network. Setting up a new, alternative network is really cheap. Thus unless BitCoin going can somehow successfully differentiate itself from the latecomers who are about to emerge, the money supply of BitCoin-like things is infinite because the cost of production of them is infinitesimal.

How can BitCoin successfully keep itself differentiated from the latecomer copiers?

1. By asserting, over and over again, simply that it was first. And this might work. But I am skeptical.

2. By stressing that it has a trustworthy track record of being a safe store of value--and thus appealing to a history that the latecomers do not have. This works until someday, for some reason, demand for BitCoins falls. Then supply and demand drives the value down. BitCoin is then no longer differentiated as a safe store of value. Then the people who were holding BitCoin because they thought it was a safe store of value dump it, its price falls even more, and so it becomes even more questionable as safe store of value. And the downward spiral continues.

Note that in these respects--unless it can successfully and permanently differentiate itself from other virtual cryptographic money networks--BitCoin is like fiat money, and unlike 18th and 19th century Yap stone money, in that its cost of production is zero.

So how do actual fiat moneys maintain their value? Well, they don't always do so--cough Zimbabwe, cough Weimar Germany. When they do so, it is because a government (a) accepts its money in payment of taxes, thus giving people a reason to hold it, (b) doesn't want the financial chaos that hyperinflation would generate, and so (c) sets its central bank the mission of being a currency sink--of maintaining the value of the currency by buying it back and burning it up if necessary. Thus I tend to be a "chartalist": commodity moneys can maintain their value via their cost of production, but fiat moneys maintain their value when some very large too-big-to-fail entity backs them.

In my view, BitCoin's chances would be a lot better if there were some large and durable entity that promised to be a BitCoin sink if necessary. If, say, Google Cayman Islands were to start GoogleCoin, and announce that it would always stand ready to buy back GoogleCoins at a fixed real value, it could make a (small) fortune and, I think, eliminate BitCoin's business in a month...

And John Levine weighs in:

John Levine: An Ubernerd Weighs In: "It occurs to me that part of the disconnect is that Bitcoin solved a major technical problem, one that people had been thinking about for about 20 years, and we nerds just can’t believe that it doesn’t also solve an economic problem. The technical problem is double spending–if I have some digital money, it’s easy enough to verify cryptographically that it’s real, but if I give it to you, how can you tell that I haven’t also given it to someone else?

Until Bitcoin, the answer was to have a bank that knew which coins were valid, so you’d present my coin to the bank, which would check its database and if it’s valid, cancel it and give you a new one. Bitcoin has its decentralized blockchain which is a very clever recasting of the problem so that the state of the “bank” is whatever the majority of bitcoin miners agree that it is. Getting enough of the miners to agree is known as the Byzantine Generals problem, and has a technical history of its own.

So with this breakthrough, we must have an economic breakthrough? We don’t? Well, then you just don’t understand/are in the pocket of the illuminati/whatever. If you belive that Bitcoin is a lot like paying for stuff with little bags of gold dust where every grain of dust has a publicly recorded serial number, well, then, uh.

My current guess is that the Bitcoin bubble will collapse when there is some bad news, e.g., a regulator demands registration of Bitcoin wallets, people try and cash out, and find that that while it’s easy to buy bitcoins, it’s much harder to find people willing to buy back nontrivial amounts, very hard to collect the sales proceeds, and completely impossible without revealing exactly who you are.

And Joe Wesenthal weighs in:

Joe Weisenthal: Why Bitcoin Has Value: "Paul Krugman set off a new firestorm this weekend with a post about Bitcoin that asked a fairly simple question: What gives a bitcoin its worth? The post drew a ton of angry reaction from the internet and tech people for a couple of reasons.

One is that this question — why is a Bitcoin worth anything — is a difficult question to answer. The other is that the post is bizarrely titled "Bticoin Is Evil" even though the post doesn't say that. But on the internet, people don't read past the headline and so, outrage!

But back to the question of trying to establish an "intrinsic value" for Bitcoin. It's not simple. The dollar has intrinsic value because you need dollars to pay taxes in the United States. The government accepts no other currency. So if you're going to engage in any kind of commerce whatsoever, you need to use dollars. This creates real value for the currency. Gold has real value because it's shiny and can be used for jewelry. Other commodities get their value from industrial purposes.

But what about Bitcoin? If you ask Bitcoin believers why a Bitcoin is worth anything at all, they will tell you about how amazing the technology is, and how it's "programmable" and how cryptography and pseudoanonymity are so great. But none of these are very satisfying answers. For one thing, these features mainly explain why Bitcoin as a payment platform are so intriguing. They don't explain price. And as Krugman even notes in his original post, most of the techie Bitcoin bulls usually talk about Bitcoin as a platform (something that's easy to defend), rather than Bitcoin as an asset.... Furthermore, if Bitcoin's value were simply a function of all of the technological aspects, then there's no reason that Bitcoin wouldn't easily be supplanted by another crypto-currency that has better features (even the Bitcoin bulls will acknowledge that the technology could be better, particularly on the mining side and the confirmation time). For example Litecoin, the second biggest player in the game advertises that if you transact in Litecoin you can faster confirmation times and that the whole system can handle more volume than Bitcoin. So the usual arguments aren't that compelling.

Now in the Bitcoin-sphere, there's a lot of debate about what Bitcoin is. People go round and round in circles about whether Bitcoin is a currency or a commodity or a platform or a protocol or an equity or whatever. These squabbles frequently get semantic (what is a currency? Must it be a stable store of value?) and usually they suffer from an inclination to plug Bitcoin into a category where it never quite fits. I think Bitcoin is a hybrid of three things with which we're all pretty familiar: A currency, an equity, and a social network.

The currency part is pretty easy to understand. Someone is offering something for sale like a bike or a month's rent, and they might give you a quote in dollars, yen and Bitcoin. Bitcoin basically acts like a currency then. Bitcoin also has equity-like characteristics in that the value seems to grow as the whole Bitcoin ecosystem grows. The value of a Bitcoin is up about 50x this year, which is an insane swing for a currency, but if you think about it as equity in a hot startup, it's not that preposterous whhen coming off of a low base. Bitcoins also have market cap (see: CoinMarketCap). And most crucially, there's a social networking element.... Bitcoin is something that's valued because lots of people use it.... It got a lot of people using it, and suddenly the platform became tremendously valuable. Strong, robust network effects are crucial for making the whole thing work.... Without the network effects, the technology is nothing. It's just a theoretical amusement.

The question then becomes: Can the social network last? If it can, then the value can be maintained, or might grow by even a lot. But history is not on Bitcoin's side on this question. For one thing, no social network seems to have much lasting power... especially not the first in a given category (Napster, MySpace, ICQ, etc)....

Bringing it all back home: A lot of Bitcoin skeptics are willing to accept that there's something technologically interesting going on here (Paul Krugman even posted a followup to his "evil" post talking about what kinds of problems the Bitcoin technology solves). But the economics of it are more tenuous. But if the network of people remains, Bitcoin may keep solving problems, like the problem of getting money out of a restrictive country.

4795 words

## Afternoon Must-Read: Mike Konczal: 2013 Financial Reform Went Surprisingly Well

2013 was a not-awful year for financial reform. If you aren’t terrified of jinxing even the smallest good news, you might even say it was pretty good. The multi-year implementation of 2010’s Dodd-Frank bill made several final advancements this year, and compared to where people thought we’d be a year ago, we are in a pretty solid place. Last year, nobody thought that banks would face tougher holding requirements for capital, that regulations of the financial derivatives markets would advance, or that the final Volcker would be a pretty good start instead of an incoherent mess. Yet that is what appears to have happened in 2013. So what caused it? And how it might apply to future political goals?... The multi-billion dollar trading losses from JPMorgan Chase known as the “London Whale” changed the dynamics.... JPMorgan had been leading the charge against reform, arguing that the effort was over-harsh and destructive, and that Wall Street had already cleaned up its act on its own.... An intellectual movement that argued high capital requirements would both be an excellent way to stabilize the financial system at a minimal cost to society.... The last reason reform worked in 2013 was the result of insider and outsider actors committed to pushing reform on the agenda. Senator Warren.... The CFTC’s Bart Chilton.... Meanwhile, outside groups kept up the pressure through the democratic rule-writing process.

## David Frum on the Death Knell of "Welfare Capitalism", and Where We Should Go Next

Back in the 1920s Edward Filene--among other things, founder of what was the Twentieth Century Fund and is now the Century Foundation--argued that America did not need any variety of European "socialism". Without bureaucratic rules to bind them, America's large, efficient corporations would create lots of jobs. And because the large, efficient corporations of America would would find themselves in a labor-scarcity environment and so would provide for their workers as a result of market pressures better outcomes than what the workers of Europe had to gain through the ballot and the threat of the bullet--high wages, reasonable hours, pensions, sick days, health insurance (cough). Edward Filene's vision did not rule America in the remainder of the twentieth century, but it did have a powerful influence on what America became.

Now David Frum is here to ring the curtain down on Edward Filene's "Welfare Capitalism" and its impact:

Continue reading "David Frum on the Death Knell of "Welfare Capitalism", and Where We Should Go Next" »

## Things to Read on the Evening of December 30, 2013

1. Lena H. Sun and Amy Goldstein: Beneath health law’s botched rollout is basic benefit for millions of uninsured Americans: "Adam Peterson’s life is about to change. For the first time in years, he is planning to do things he could not have imagined. He intends to have surgery to remove his gallbladder, an operation he needs to avoid another trip to the emergency room.... These plans are possible, says Peterson, who turned 50 this year and co-manages a financial services firm in Champaign, Ill., because of a piece of plastic the size of a credit card that arrived in the mail the other day: a health insurance card.... Peterson is among the millions of uninsured Americans who are benefiting from the Affordable Care Act.... 'I get these messages from acquaintances on Facebook saying, "Let me keep my doctor"', Peterson said. 'Well, what about those of us who didn’t have health insurance before?... I have been walking a tightrope and have had some twists and falls off of it. To not have to worry about this anymore is a tremendous relief'."

2. Jamelle Bouie: A Minimum Wage Increase is Great, but Full Employment Would be Better: "If we want to make a serious dent in income inequality, then the first step is a genuine push for full employment.... I’m skeptical that there’s any electoral utility to pushing for a higher minimum wage—the single biggest influence on voters is the short-term economy—but there’s no question that this is worth doing. At $7.25, the current minimum wage is at a relative low when you adjust for inflation. The congressional proposal, which would bring the wage to just over$10, is a modest boost that increases the value of the minimum wage to where it was in the 1960s and 70s. As for the GOP argument that this will harm small businesses? If Democrats were pushing for a larger increase—to $15 or$20 an hour—Republicans might have a case.... But it’s worth emphasizing the extent to which raising the minimum wage is a Band-Aid for wage stagnation and income inequality, to say nothing of the entrenched racial inequality that requires its own set of solutions.... If 2013 was the year that President Obama made the minimum wage a priority, then 2014 should finally be the year where he calls on Congress and the Federal Reserve to tackle mass unemployment and provide jobs for every American who wants to work. Since, overall, full employment is more than an important step towards reducing inequality—it’s a necessary one."

3. Gavyn Davies: The separation principle drives the Fed towards tapering: "A new 'separation principle' seems to be emerging, and it explains why the FOMC seems eager to begin winding down its asset purchases in the near future, while relying even more heavily than before on 'lower for longer' guidance on forward short rates. This could have important ramifications for markets.... The separation principle was spelled out more clearly than ever before in Ben Bernanke’s speech on communications policy.... Bernanke’s core point is that the Fed’s reading of monetary conditions now distinguishes sharply between two distinct factors, which are the expected forward path for short rates, and the term premium built into long term bond yields. Asset purchases by the central bank are intended to affect the second of these factors, the term premium, but are not intended to give any signal to the markets about the Fed’s willingness to keep short rates at zero for a prolonged period ahead..."

1. Felix Salmon: The non-scandal of Scott Irwin and Craig Pirrong: "Ostensibly Respectable Academic Is In Fact A Hack: it’s a hardy perennial, and an enjoyable one.... But here’s the thing: for this kind of article to carry any weight, it has to demonstrate the mendacity or venality of the academics in question.... Which is why David Kocieniewski’s article about Craig Pirrong and Scott Irwin this weekend is such a disappointment.... Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point..."

And:

Should Be Aware of:

1. Josh Barro: Here's Why I Don't Sweat The Haters: "I've gotten a number of messages in the last few days — from both supporters and opponents of gay rights — expressing sympathy over the rude and hateful messages I've been getting (and publishing) ever since I started writing about Phil Robertson. This is sweet, but misplaced. The worst of my problems from being openly gay is that I get some nasty email. That means I have it really easy. In a country where gay teenagers are being bullied at school and thrown out of their homes by their parents and told by their clergy that they're going to Hell, we should not count my inbox as a hardship. Rather than hurting me, these emails are a reminder that I have not just an opportunity but an obligation to be out of the closet — an obligation of which other people in my position should be mindful.

"Being openly gay has always been pretty easy for me. I came out in high school in an affluent suburb of Boston, where attitudes toward gays were fairly positive and upscale New England standards of decorum stopped people from expressing negative ones to my face. Then I went to Harvard, where being gay is practically encouraged. As far as I can tell, being open about my sexuality has never caused me any professional hardship.... I have friends and family who love and support me for who I am.... In that context, why should I react with anything other than derision when somebody tells me God created Adam and Eve, not Adam and Steve? (Seriously, some loser actually used that line in an email today.) What can that guy actually do to me? Nothing. I hold all the power here....

"The only reason these emailers make me angry is that I think about how their insults affect other people. I'm too arrogant for self-loathing, but that's not true of everyone. A lot of gay people still live in communities where these hateful attitudes are dominant. A lot of gay children and teenagers are at the mercy of parents, teachers and clergy who hold bigoted views. Being open and unashamed about being gay is just one small thing I can do to change the culture and make life easier for people who haven't had my luck. And that's why I'm mystified by prominent gay people in business and media and Hollywood who choose to be in the closet. They have the ability to help lots of people who don't have their advantages, and they're selfishly passing on it under the guise of 'privacy'. Often, they do this while living quite gaily in places like New York and Los Angeles and reaping the benefits of social acceptance in their non-professional lives.

"Imagine, for example, that you were a prominent daytime news anchor on a national cable news channel aimed at a conservative audience, and you were gay. You would have the potential, by coming out of the closet, to change millions' of viewers perspective on gay people for the better. You'd make it easier for your closeted gay viewers to love themselves, and easier for your viewers' gay children to come out. Or you could live a fabulous gay life with your boyfriend in New York City while staying closeted to the national audience. Wouldn't that be a pretty decadent choice?"

2. Paul Krugman: Fiscal Fever Breaks: "In 2012 President Obama, ever hopeful that reason would prevail, predicted that his re-election would finally break the G.O.P.’s 'fever'. It didn’t. But the intransigence of the right wasn’t the only disease troubling America’s body politic in 2012. We were also suffering from fiscal fever: the insistence by virtually the entire political and media establishment that budget deficits were our most important and urgent economic problem, even though the federal government could borrow at incredibly low interest rates. Instead of talking about mass unemployment and soaring inequality, Washington was almost exclusively focused on the alleged need to slash spending (which would worsen the jobs crisis) and hack away at the social safety net (which would worsen inequality). So the good news is that this fever, unlike the fever of the Tea Party, has finally broken.

"True, the fiscal scolds are still out there, and still getting worshipful treatment from some news organizations. As the Columbia Journalism Review recently noted, many reporters retain the habit of 'treating deficit-cutting as a non-ideological objective while portraying other points of view as partisan or political'. But the scolds are no longer able to define the bounds of respectable opinion. For example, when the usual suspects recently piled on Senator Elizabeth Warren over her call for an expansion of Social Security, they clearly ended up enhancing her stature. What changed? I’d suggest that at least four things happened....

"First, the political premise behind 'centrism' — that moderate Republicans would be willing to meet Democrats halfway in a Grand Bargain combining tax hikes and spending cuts — became untenable. There are no moderate Republicans.... Second, a combination of rising tax receipts and falling spending has caused federal borrowing to plunge. This is actually a bad thing, because premature deficit-cutting damages our still-weak economy — in fact, we’d probably be close to full employment now but for the unprecedented fiscal austerity of the past three years. But a falling deficit has undermined the scare tactics so central to the 'centrist' cause. Even longer-term projections of federal debt no longer look at all alarming.... 2013 was the year journalists and the public finally grew weary of the boys who cried wolf.... Finally, over the course of 2013 the intellectual case for debt panic collapsed.... Now, it’s not as if fiscal scolds really arrived at their position based on statistical evidence. As the old saying goes, they used Reinhart-Rogoff the way a drunk uses a lamppost — for support, not illumination. Still, they suddenly lost that support, and with it the ability to pretend that economic necessity justified their ideological agenda.

"Still, does any of this matter? You could argue that it doesn’t — that fiscal scolds may have lost control of the conversation, but that we’re still doing terrible things like cutting off benefits to the long-term unemployed. But while policy remains terrible, we’re finally starting to talk about real issues like inequality, not a fake fiscal crisis. And that has to be a move in the right direction."

And:

Hal Varian (2004): Why Is That Dollar Bill in Your Pocket Worth Anything? | Tim Duy: On Challenging the Fed | Nick Rowe: Worthwhile Canadian Initiative: BackedCoin vs UnbackedCoin | Tyler Cowen: How and why Bitcoin will plummet in price | Tyler Cowen: On the future of Dogecoin, BitCoin, and other cryptocurrencies of the non-realm | Jorge G. Castañeda: Mexico’s Second Revolution |

## Lunchtime Must-Watch: Spike Jonze's "Her"

Tyler Cowen has seen the thing, and writes:

Tyler Cowen: Her: "As I tend to find Jonze’s work contrived I didn’t expect much, but I was bowled over by what is a must-see movie for anyone interested in tech, or the social sciences, or--for that matter--cinema.

Two of its starting premises are a) we as humans now face shadow prices which lead us to deemphasize the physical world of things and live in a world of information, and b) if we are going to have AI, which consumes real resources, which Darwinian principles will govern what kinds of personal assistants survive or do not?  Will they enslave us, will they be our dogs, our friends, our trading partners, or something else altogether?  This movie is the single best place to start on that question.

Continue reading "Lunchtime Must-Watch: Spike Jonze's "Her"" »

## Things to Read at Lunchtime on December 29, 2013

1. James Pethokoukis: 3 key ideas from what will be one of the most important books of 2014: "Here is an excerpt of that excerpt.... 'We’re living in a time of astonishing progress with digital technologies—those that have computer hardware, software, and networks at their core.... Just as it took generations to improve the steam engine to the point that it could power the Industrial Revolution, it’s also taken time to refine our digital engines.... The transformations brought about... will be profoundly beneficial.... [But] digitization is going to... leave behind some people, perhaps even a lot of people, as it races ahead.... There’s never been a better time to be a worker with special skills or the right education... there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.'"

2. Paul Krugman: The Year of the Weasel: Just a brief thought about what didn’t happen in 2013, and what did. What didn’t happen was the same as what didn’t happen in 2012, or 2011, or 2010. Inflation didn’t take off; bond vigilantes didn’t turn America (or any nation that borrows in its own currency) into Greece, Greece I tell you. What did happen was a significant change in what the usual suspects--the people who have been predicting soaring inflation and interest rates, year after year--were saying. Did they admit having been wrong? No, of course not. But their excuses shifted. Through 2011 and even through 2012, it was still mainly “just you wait!”--inflation was coming any day now, or maybe it was already here but sinister statisticians were faking the numbers. In 2013, however, it became “I never said that!”--declarations that they only said that inflation was a risk, not that it would necessarily happen, so the failure of inflation to materialize was no big deal.

"This is, I’d argue, a significant development, because it gives us a new window into the nature of the disagreement. As late as last year you could view this as a legitimate contest between rival models. But we’ve now seen that one side of the debate not only refuses to take evidence into account, but tries to dodge personal responsibility for getting it wrong. This has gone from a test of ideas to a test of character, and a lot of people failed."

3. Tyler Cowen: Her: "As I tend to find Jonze’s work contrived I didn’t expect much, but I was bowled over by what is a must-see movie for anyone interested in tech, or the social sciences, or--for that matter--cinema. Two of its starting premises are a) we as humans now face shadow prices which lead us to deemphasize the physical world of things and live in a world of information, and b) if we are going to have AI, which consumes real resources, which Darwinian principles will govern what kinds of personal assistants survive or do not?  Will they enslave us, will they be our dogs, our friends, our trading partners, or something else altogether?  This movie is the single best place to start on that question."

Continue reading "Things to Read at Lunchtime on December 29, 2013" »

## Must-Read: James Pethokoukis Says Erik Brynjolfsson and Andrew McAfee'a "Second Machine Age" Will Be One of the Most Important Books of 2014

James Pethokoukis: 3 key ideas from what will be one of the most important books of 2014:

Here is an excerpt of that excerpt....

We’re living in a time of astonishing progress with digital technologies—those that have computer hardware, software, and networks at their core.... Just as it took generations to improve the steam engine to the point that it could power the Industrial Revolution, it’s also taken time to refine our digital engines.... The transformations brought about... will be profoundly beneficial.... [But] digitization is going to... leave behind some people, perhaps even a lot of people, as it races ahead.... There’s never been a better time to be a worker with special skills or the right education... there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.

Image Credit: Cleveland Fed

In Race Against the Machine, Brynjolfsson and McAfee offered a numbers of ideas — there are even more in the new book — to help carbon-based lifeforms compete. Among them: 1) pay teachers more so better students want to become teachers; 2) hold teachers more accountable for performance by eliminating tenure; 3) encourage more high-skill immigration; 4) create special visas for entrepreneurs; 5) teach entrepreneurship throughout higher education; 6) create a database of “startup-in-a-box” templates; 7) lower governmental barriers to starting a business; 8) upgrade the nation’s transportation, energy, and communication infrastructure; 9) increase government funding for basic research such as that carried out by DARPA and NIH; 10) resist efforts to regulate hiring and firing; 11) lower payroll taxes; 12) decouple benefits, such as health insurance, from jobs; 13) don’t rush to regulate new innovation business structures such as crowdsourcing; 14) eliminate inefficient, crony capitalist distortions such as the home mortgage deduction and the Too Big To Fail big bank subsidy; 15) shorten copyright periods and increase the flexibility of fair use.

Here is the key thing: Even if you  are a technopessimist, that list of policy ideas makes pretty good sense anyway as way of boosting growth and helping more Americans flourish and prosper.

*<#sourceHomeURL>#

## Afternoon Must-Read: Paul Krugman vs. The Hax of Sol III: Inflation Forecasts Department

Paul Krugman: The Year of the Weasel:

Just a brief thought about what didn’t happen in 2013, and what did. What didn’t happen was the same as what didn’t happen in 2012, or 2011, or 2010. Inflation didn’t take off; bond vigilantes didn’t turn America (or any nation that borrows in its own currency) into Greece, Greece I tell you. What did happen was a significant change in what the usual suspects--the people who have been predicting soaring inflation and interest rates, year after year--were saying. Did they admit having been wrong? No, of course not. But their excuses shifted. Through 2011 and even through 2012, it was still mainly “just you wait!”--inflation was coming any day now, or maybe it was already here but sinister statisticians were faking the numbers. In 2013, however, it became “I never said that!”--declarations that they only said that inflation was a risk, not that it would necessarily happen, so the failure of inflation to materialize was no big deal.

This is, I’d argue, a significant development, because it gives us a new window into the nature of the disagreement. As late as last year you could view this as a legitimate contest between rival models. But we’ve now seen that one side of the debate not only refuses to take evidence into account, but tries to dodge personal responsibility for getting it wrong. This has gone from a test of ideas to a test of character, and a lot of people failed.

## Watching Bitcoin, Dogecoin, Etc...

Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2%/year (yes, I know).

Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve's role as actual dollar source, and its commitment not to allow deflation to happen.

Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function... until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is... what, exactly?

At the moment, it's only a $10 billion bubble--or, if you are going to convince me that it is not a bubble, you are going to have to find me a market player willing to become a bitcoin sink... Timothy B. Lee has smart things to say: Continue reading "Watching Bitcoin, Dogecoin, Etc..." » ## Things to Read on the Evening of December 27, 2013 ### Must-Reads: 1. Wonkblog: Emily Oster’s graph of the year: Why is the U.S. falling behind in life expectancy?: Emily Oster: "Amidst all the focus on health insurance, I think it’s crucial not to lose focus on the fact that--insurance or not--the United States is lagging behind in health status. This chart--from a broader report--demonstrates not only how low our life expectancy is relative to other developed countries, but also how far we have fallen even in the last 30 years. Why are we not realizing the same gains that countries with comparable incomes are?" 2. Menzie Chinn: British Economic Triumphalism in Perspective: "Prime Minister Osborne has lauded the recent UK growth numbers as validation for the policy of austerity (recently relaxed, although he doesn't mention that). Paul Krugman refers to the the Three Stooges in explaining the deficiencies of this logic. And Richard Portes (head of CEPR) states: 'The current policies have been disastrous.... My view is pretty much the view I had a little over three years ago when I said the austerity program would be a disaster. And it has been. It has been responsible for the painfully slow recovery.' So who is right? Well, I think it useful to compare the US and the UK. The former embarked upon a policy of fiscal stimulus, and then retrenchment, but nothing compared to the retrenchment implemented in the latter. And in the US, per capita GDP growth was much more rapid than in the UK." 3. George Zornick: The dark money in climate change: "Robert J. Brulle... [finds] that climate-denial money has largely been driven underground to dark-money sources. About 75 percent... untraceable, primarily via conservative foundations and shadowy tax-exempt groups that obscure their funding sources.... ExxonMobil and Koch Industries... have withdrawn their publicly traceable funding in recent years, and that withdrawal tracked closely with an increase in untraceable funding. You don’t have to be a genius to figure out what’s happening there. So why is industry money going underground?... Environmentalists have been able to achieve in the past decade or so is making climate denialism (1) seem increasingly kooky and unfounded, and (2) seem like the efforts of an industry that is protecting itself rather than one that wants an honest debate about the science.... The rush by ExxonMobil and other industry funders to obscure their funding of climate denialism could be a confirmation of those vulnerabilities.... If you force transparency into the system, corporate giving could at least moderate. The trends in climate denial funding suggest again that’s probably the case." Continue reading "Things to Read on the Evening of December 27, 2013" » ## Lunchtime Must-Read: Emily Oster: Why is the U.S. falling behind in life expectancy? Emily Oster: Amidst all the focus on health insurance, I think it’s crucial not to lose focus on the fact that -- insurance or not -- the United States is lagging behind in health status. This chart -- from a broader report -- demonstrates not only how low our life expectancy is relative to other developed countries, but also how far we have fallen even in the last 30 years. Why are we not realizing the same gains that countries with comparable incomes are? ## Things to Read on the Evening of December 26, 2013 ### Must-Reads: 1. Angus Deaton: US inequality and the Pareto Criterion: "There is much to be said for equality of opportunity, and for not penalizing people for the success that comes from their own hard work. Yet... the United States is in fact not particularly good at actually delivering equal opportunities.... Look at the correlation between earnings of fathers and sons.... In the United States, the correlation is 0.5, which is the highest of the OECD countries and is exceeded only by those of China and a handful of countries where there appears to be the least equality of opportunity. Even if we believe that equality of opportunity is what we want, and don't care about inequality of outcomes, the two tend to go together, which suggests that inequality itself is a barrier to equal opportunity." 2. Bob Forester: Daily Kos: I signed up for health insurance, told my GOP Congressman about it, and made the local news: "My healthcare saga began in 2002.... No longer did I have a group plan selected by an employer. I had to shop for my own coverage. At first it was easy.... But each year the dreaded renewal letter arrived, and the premiums increased by leaps and bounds.... But the big shock was yet to come... renewal letter...$756 instead of $463--a staggering 63% increase.... I applied for a very-high-deductible plan that would keep my monthly payment in the$400 range. Given that I was still insured, the insurance folks got a copy of the blood test, which they proceeded to search line by line.... Out of two pages of data, there was a single thyroid reading was outside of “normal” range (side note: there’s nothing wrong with my thyroid; it was simply their excuse to make me pay that outrageous premium). They’d found their so-called preexisting condition, and denied me access to the new plan with the lower premium. With the help of my doctor, who wrote a letter on my behalf, I appealed.... 'It wasn’t a government bureaucrat that came between me and my doctor; it was an insurance-company bureaucrat.'..."

3. Erik Brynjolfsson and Andrew McAfee: The Second Machine Age: "Now comes the second machine age. Computers and one digital advances are doing for mental power... what the steam engine and its descendants did for muscle power... to blow past previous limitations.... Whether or not the new machine age bends the curve as dramatically as Watt's steam engine, it is a very big deal indeed..."

Continue reading "Things to Read on the Evening of December 26, 2013" »

## Morning Must-Read: Bob Forester: I signed up for health insurance, told my GOP Congressman about it...

My healthcare saga began in 2002.... No longer did I have a group plan selected by an employer. I had to shop for my own coverage. At first it was easy.... But each year the dreaded renewal letter arrived, and the premiums increased by leaps and bounds.... But the big shock was yet to come... renewal letter... $756 instead of$463--a staggering 63% increase.... I applied for a very-high-deductible plan that would keep my monthly payment in the $400 range. Given that I was still insured, the insurance folks got a copy of the blood test, which they proceeded to search line by line.... Out of two pages of data, there was a single thyroid reading was outside of “normal” range (side note: there’s nothing wrong with my thyroid; it was simply their excuse to make me pay that outrageous premium). They’d found their so-called preexisting condition, and denied me access to the new plan with the lower premium. With the help of my doctor, who wrote a letter on my behalf, I appealed.... "It wasn’t a government bureaucrat that came between me and my doctor; it was an insurance-company bureaucrat...." Continue reading "Morning Must-Read: Bob Forester: I signed up for health insurance, told my GOP Congressman about it..." » ## Morning Must-Read: Erik Brynjolfsson and Andrew McAfee: The Second Machine Age Erik Brynjolfsson and Andrew McAfee: The Second Machine Age: Now comes the second machine age. Computers and one digital advances are doing for mental power... what the steam engine and its descendants did for muscle power... to blow past previous limitations.... Whether or not the new machine age bends the curve as dramatically as Watt's steam engine, it is a very big deal indeed... ## John Podesta as Lamplighter in the Obama White House?: Monday Focus (December 23, 2013) So the Fearless Leader of the Washington Center for Equitable Growth, John Podesta, has departed for the Obama White House. In the late 1990s John Podesta stabilized and made effective the nine-ring-circus that was the late-Clinton White House. In the 2000s he built the Center for American Progress into a politically-influential progressive think tank that outpunched the sum of Cato, AEI, Heritage, CEI, AAF, and five more Republican-oriented thinktanks (no, I went call them "conservative" until they do some shaping up and acquire some spine vis-a-vis their political masters) on one-twentieth the budget. Having accomplished two miracles of organization and institution-building and -management in little more than a decade, I thought his next project was going to be Equitable Growth: the WCEG--refocusing the public sphere's economic policy debate around what really matters, growth and equity, and playing our position so that, when the politics once again makes technocratic economic policy possible, we will be ready. But no. Continue reading "John Podesta as Lamplighter in the Obama White House?: Monday Focus (December 23, 2013)" » ## Things to Read on the Evening of December 23, 2013 ### Must-Reads: 1. Mike Konczal: It’s still too early for Congress to stop worrying about unemployment: "This is the month that unemployment officially fell off the agenda in Washington, D.C.... There are three major levers that policymakers can use to push for full employment... additional deficits... monetary stimulus... fix the broken housing market to allow for quicker deleveraging and to prevent destabilizing foreclosures. But policymakers are now easing up on all three levers... “taper”... emergency unemployment insurance is unlikely to be extended in 2014. But there are other, less-noticed ways.... One example: There's the looming expiration of the Mortgage Forgiveness Debt Relief Act.... Is this pullback justified? Some economists have suggested that broad-based unemployment is no longer the nation’s biggest problem.... But I find this story incomplete, and too narrow. For one: The economy isn’t just terrible for people who have been out of work for a long time. It’s still terrible even for people with jobs. Quit rates, for instance, are still much lower than they were on the eve of the Great Recession. The rate at which people are voluntarily quitting their jobs has only recovered approximately half of its value. It dropped a point from 2.2 percent, and it stands at only roughly 1.7 percent. Wage growth is also still anemic..." 2. Paul Krugman: Bits and Barbarism: "This is a tale of three money pits... of monetary regress... the strange determination of many people to turn the clock back.... The first money pit is an actual pit--the Porgera open-pit gold mine in Papua New Guinea.... The mine has a terrible reputation.... But gold prices... are still three times what they were a decade ago, so dig they must. The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because... well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it.... The third money pit is hypothetical. Back in 1936 the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal. So Keynes whimsically suggested an alternative: have the government bury bottles full of cash in disused coal mines, and let the private sector spend its own money to dig the cash back up. It would be better, he agreed, to have the government build roads, ports and other useful things--but even perfectly useless spending would give the economy a much-needed boost. Clever stuff--but Keynes wasn’t finished. He went on to point out that the real-life activity of gold mining was a lot like his thought experiment..." Continue reading "Things to Read on the Evening of December 23, 2013" » ## Morning Must-Read: Paul Krugman's Take on the History of Macroeconomic Thought Paul Krugman: Microfoundations and the Parting of the Waters: Phelps... [made] two observations... nominal shocks had large real effects... [and] with everyone acting rationally, money should have been neutral even in the short run. Traditional Keynesian analyses... [only provided] ex-post rationalizations.... So the Phelps crowd came up with a lovely story.... Individuals and firms couldn’t tell... whether a rise in the price... represented a shock specific to them... or a general change in demand... confusion could explain why short-run aggregate supply seemed upward-sloping.... This meant that the apparent tradeoff between unemployment and inflation would be unstable.... The stagflation of the 70s seemed to confirm this prediction, and brought the microfoundations project immense prestige.... Freshwater economists gleefully proclaimed Keynes dead, the subject of nothing but 'giggles and whispers'. But... Phelps-Lucas/type microfoundations quickly collapsed both intellectually and empirically. Intellectually... rational individuals simply should not have been confused in [that] way.... Empirically... slumps last too long.... Microfoundations in macroeconomics... failed utterly at the one thing it was sold, above all, as being able to do.... Time, you might think, to reconsider.... But many... had so committed themselves to the idea that Keynes was dead and rationality roolz that they simply dug in deeper.... Now we have people debating whether models with microfoundations lead to better predictions... [even though] the microfoundations are wrong.... But what you want to realize is that this isn’t going to convince the microfoundations crowd. After all, more than thirty years ago they decided that the joy of microfoundations trumped the utter failure of microfounded models to work... and... have now trained successive cohorts of students in this view. There are, it’s true, some hints of a guilty conscience... the odd tendency of freshwater types to immediately accuse anyone with saltwater ideas of being dishonest. (I’m not a nice guy, but if look at what I said about, say, Cochrane, it was that he was ignorant, not corrupt.)... The notion that there had been a convergence of views by 2007, which was then ruptured by the crisis, was a saltwater delusion. People like Olivier Blanchard convinced themselves that the other side was listening; it wasn’t. The hysterical reaction to the notion that fiscal policy is effective at the zero lower bound demonstrated that the freshwater types had never bothered to learn... Continue reading "Morning Must-Read: Paul Krugman's Take on the History of Macroeconomic Thought" » ## Thomas Piketty: Capital in the Twenty-First Century: Evidence That the English-Language Physical Book Is Almost Here Simply carrying it through the Berkeley Economics Department in the afternoon of the Friday before Christmas--a time when the building is close to dead because they are about to turn off what heat there is--gets me stopped for four conversations: "It's the anti-Kuznets!" "It's the updated Marx!" "It's the anti-Summers!" "It's the anti-Marx!"... Really, I gotta either finish my painfully-slow reading of the French edition and write a review of that, or figure out how long this thing is under embargo... ## Morning Must-Read: Duncan Black: All Buses Are Good Things Duncan Black: Eschaton: Buses Are Good Things: I do think the "tech buses" in San Francisco should be paying an appropriate impact fee if they're going to be using public bus stops, but the alternative to the buses is, you know, many many more road clogging cars. Basically the Bay Area just needs more housing, especially where there are decent transportation options.... I don't worry about poor people being driven out of the city [of Philadelphia] anytime soon, but I do worry that the neighborhoods with better public transit (high frequency bus routes, trolleys, subway) might, eventually, become unaffordable. ## Things to Read on the Morning of December 21, 2013 ### Must-Reads: 1. Duncan Black: Eschaton: Buses Are Good Things: "I do think the 'tech buses' in San Francisco should be paying an appropriate impact fee if they're going to be using public bus stops, but the alternative to the buses is, you know, many many more road clogging cars. Basically the Bay Area just needs more housing, especially where there are decent transportation options.... I don't worry about poor people being driven out of the city [of Philadelphia] anytime soon, but I do worry that the neighborhoods with better public transit (high frequency bus routes, trolleys, subway) might, eventually, become unaffordable." 2. Martin Wolf: We still need to learn the real lessons of the crisis: "Everybody could see the glare of the fiscal deficits left by the crisis. It was easy to agree that this was where the government needed to look for its priorities.... But the real story is of the impact of the financial crisis on output and productivity. The correct focus is on how to recover the lost output and productivity. Fiscal irresponsibility was not the cause of these disasters; eliminating it cannot be the cure..." 3. Michael Darda: How is Abenomics Doing?: "Leading indicators in Japan have been on the upswing.... Abeonomics is working. One reason that the previous round of QE in Japan didn’t lift growth much is that it was expected to be temporary and proved to be temporary as occasioned by a 20% collapse in the monetary base in 2006. This time, however, at least part of the increase in the base is expected to be permanent, hence the new 2% inflation target. In short, the BoJ has to do enough to satiate a broad money demand function that has been growing 2-3% per annum.... Reflation should help to ease Japan’s debt and fiscal burden... restoring at least moderate NGDP growth should help Japan’s budgetary fortunes. This is one reason that the rise in Japan’s inflation breakeven spreads has been inversely related to credit default swap spreads on Japan’s debt. Broad money growth in Japan has begun to recover convincingly, which should also be bullish for the equity market.... We believe Japan equities have 20-40% upside..." 4. Paul Krugman: Microfoundations and the Parting of the Waters: "Phelps... [made] two observations... nominal shocks had large real effects... [and] with everyone acting rationally, money should have been neutral even in the short run. Traditional Keynesian analyses... [only provided] ex-post rationalizations.... So the Phelps crowd came up with a lovely story.... Individuals and firms couldn’t tell... whether a rise in the price... represented a shock specific to them... or a general change in demand... confusion could explain why short-run aggregate supply seemed upward-sloping.... This meant that the apparent tradeoff between unemployment and inflation would be unstable.... The stagflation of the 70s seemed to confirm this prediction, and brought the microfoundations project immense prestige.... Freshwater economists gleefully proclaimed Keynes dead, the subject of nothing but 'giggles and whispers'. "But... Phelps-Lucas/type microfoundations quickly collapsed both intellectually and empirically. Intellectually... rational individuals simply should not have been confused in [that] way.... Empirically... slumps last too long.... Microfoundations in macroeconomics... failed utterly at the one thing it was sold, above all, as being able to do.... Time, you might think, to reconsider.... But many... had so committed themselves to the idea that Keynes was dead and rationality roolz that they simply dug in deeper.... "Now we have people debating whether models with microfoundations lead to better predictions... [even though] the microfoundations are wrong.... But what you want to realize is that this isn’t going to convince the microfoundations crowd. After all, more than thirty years ago they decided that the joy of microfoundations trumped the utter failure of microfounded models to work... and... have now trained successive cohorts of students in this view. There are, it’s true, some hints of a guilty conscience... the odd tendency of freshwater types to immediately accuse anyone with saltwater ideas of being dishonest. (I’m not a nice guy, but if look at what I said about, say, Cochrane, it was that he was ignorant, not corrupt.)... "The notion that there had been a convergence of views by 2007, which was then ruptured by the crisis, was a saltwater delusion. People like Olivier Blanchard convinced themselves that the other side was listening; it wasn’t. The hysterical reaction to the notion that fiscal policy is effective at the zero lower bound demonstrated that the freshwater types had never bothered to learn..." Continue reading "Things to Read on the Morning of December 21, 2013" » ## Senate Votes for Federal Reserve Chair: 83 Volcker, 84 Volcker Reppointment, 91 Greenspan, 100 Greenspan Reppointment, 91 Greenspan Third, 89 Greenspan Fourth, 100 Greenspan Fifth, 99 Bernanke, 77 Bernanke Reppointment, 59 Yellen WASHINGTON (AP)--The Senate has cleared the way for Janet Yellen to succeed Ben Bernanke as head of the Federal Reserve. Senators voted 59-34 Friday to end debate on the president's nomination of Yellen. Approval is expected Jan. 6, the day the Senate returns from winter recess. But... But... But... I was told last summer that a big argument for Janet Yellen was that she was clearly so well-qualified that lots of Republicans would vote for cloture, and she would clear the 60-vote cloture threshold easily... Not so. ## Morning Must-Read: Lane Kenworthy: America’s Social Democratic Future Lane Kenworthy: America’s social democratic future: Since March 2010... the Affordable Care Act... has been at the center of American politics. Tea Party activists and their allies in the Republican Party have tried to stymie the law at nearly every turn. The Republican-controlled House of Representatives has voted more than 40 times in favor of repealing or defunding it, and last October the House allowed a partial shutdown of the federal government in an attempt to block or delay the law. The controversy surrounding the ACA shows no sign of ending anytime soon.... The ACA represents another step on a long, slow, but steady journey away from the classical liberal capitalist state and toward a peculiarly American version of social democracy.... Powerful forces will continue to fight those efforts, and the resulting social insurance policies will emerge more gradually and be less universal, less efficient, and less effective than they would otherwise have been. But the opponents are fighting a losing battle and can only slow down and distort the final outcome rather than stop it. Thanks to a combination of popular demand, technocratic supply, and gradually increasing national wealth, social democracy is the future of the United States. ## Things to Read on the Morning of December 19, 2013 Must-Reads: 1. Lane Kenworthy: America’s social democratic future: "The controversy surrounding the ACA shows no sign of ending.... The ACA represents another step on a long, slow, but steady journey away from the classical liberal capitalist state and toward a peculiarly American version of social democracy.... Powerful forces will continue to fight.. the resulting social insurance policies will emerge more gradually and be less universal, less efficient, and less effective.... But the opponents are fighting a losing battle and can only slow down and distort the final outcome.... Thanks to a combination of popular demand, technocratic supply, and gradually increasing national wealth, social democracy is the future of the United States." 2. Nick Rowe: Worthwhile Canadian Initiative: Microfoundations we like vs microfoundations we can solve: "Take just one example... Calvo pricing.... Make one very small change.... Assume she visits... each firm once every n periods.... That's a different model... a nightmare to solve. Both those models are equally microfounded. Or equally not microfounded, because the fairy herself is, well, just... an ad hoc fairy... a metaphor for our ignorance about why the price of money (the reciprocal of the price level) doesn't behave like the prices of other financial assets.... The non-random fairy generates inflation-inertia and the random fairy doesn't. You get a sticky inflation rate, and not just a sticky price level, with the non-random fairy.... I can solve the first model, but I can't solve the second model.... I have three options... assume microfoundations I don't like... assume microfoundations I like... and wave my hands... write down an equation for an ad hoc Phillips Curve with inflation inertia, wave my hands..." 3. Even from Maui, Mark Thoma * continues to direct me to very interesting things--in this case: *Simon Wren Lewis: More on the illusion of superiority: "An ad hoc but data-inspired modification to a microfounded model (what I call an eclectic model) can produce a better model than a fully microfounded model.... A misspecified model can produce bad policy. These misspecification errors may far outweigh any errors due to the Lucas critique.... Tony’s position is that policymakers in a hurry can do this eclectic stuff, but we academics should just focus on building better microfoundations.... First, building better microfoundations can take a very long time. Second, there is a great deal that academics can say using... useful models.... Go back to the 1970s.... [If] policymakers in the 1970s... wanted to devalue their currency because they felt it had become overvalued after a temporary burst of domestic inflation... microfounded models would have said there was no point.... Those using eclectic models with ad hoc price rigidities would have known better.... Should academic macroeconomists in the 1970s have left these policymakers to their own devices?..." 4. Dean Baker: Assessing Neil Irwin's Assessment of Ben Bernanke: "Irwin... downplays... [how] Bernanke failed to appreciate the disaster... as it was unfolding.... failed to recognize that the loss of more than$1 trillion in annual demand from the collapse of the housing bubble could not be easily replaced... missed the depth of the financial crisis. For example, after Bear Stearns collapsed in March of 2008, he testified to Congress that he didn't see another Bear Stearns out there. Of course there were plenty more Bear Stearns out there with names like Lehman, AIG, Fannie Mae, Freddie Mac, Goldman Sachs etc. The whole gang would have gone belly up by the end of the year were it not for massive intervention by the government.... The claim that Bernanke could not have rescued Lehman because they lacked the legal authority is also dubious. Bernanke did many things in the crisis with questionable legal authority. Suppose that the Fed and Treasury had rescued Lehman, who would have taken them to court? This one might fool little kids and Washington Post reporters, it is not the sort of thing that adults need to take seriously."

Continue reading "Things to Read on the Morning of December 19, 2013" »

## Joe Gagnon Responds to Michael Woodford, Ben Bernanke, and Others on the Risks and Power of Quantitative Easing: Friday Focus (December 20, 2013)

One way to think about things is that there are three important macroeconomically-relevant prices in financial markets. (1) There is the liquidity discount: how much you have to pay in order to hold your investible wealth in a form in which you can spend rather them in the form in which it grows. (2) There is the slope of the intertemporal price system: the real interest rate at which safe invested wealth grows. (3) And there is the risk premium: how much extra you get on average for being willing to bear the risks of enterprise and battle the forces of time and ignorance.

Conventional monetary policy tools focus on the first. But in so doing, they may create distortions in the second as they try to correct problems with the first. And what if the root cause of financial distress is the third: the combination of a collapse in the investor willingness to hold risky assets coupled with a collapse in the financial intermediaries ability to credibly promise to create safe assets?

It is in those situations that nonstandard monetary policy tools--interest on reserves, quantitative easing, and other things--come into their own. But what do they do? How do they work? Do they work?

Let me turn the microphone over to one of the smartest and most thoughtful analysts today, Joe Gagnon:

Continue reading "Joe Gagnon Responds to Michael Woodford, Ben Bernanke, and Others on the Risks and Power of Quantitative Easing: Friday Focus (December 20, 2013)" »

## May I Suggest...

...that all of you seeking to provide proper Cass Sunstein "nudges" to sleepy members of your family making oatmeal in the morning not put the ground habenero chiles next to the cinnamon in the spice rack?

## Yet Another Note on Understanding the Terrain of the Macroeconomics Debate

Paul Krugman attributes the healthier state of international macroeconomics (i.e. him, Ken Rogoff, and company) than non-international macroeconomics (i.e. Ed Prescott, Robert Lucas, and company) to (a) the fact that reality in international macro had more of a Keynesian bias, and (b) the influence of Rudi Dornbusch. I actually think Paul understates the contribution of Rudi Dornbusch...

Paul's point is that the Post-Modern Chicago-Minnesota New-Classial "monetary policy doesn't matter" view was obviously and ridiculously inadequate in international macroeconomics because there was a very important real price--the real exchange rate--that clearly jumped far and fast in response to changes in monetary policy. Thus it was prima facie ludicrous to claim that monetary policy did not have important real effects.

But non-international macroeconomics also has an important real price that clearly jumps far and fast in response to changes in monetary policy: the real value of the stock market--monetary policy affects the terms on which old capital trades for consumption goods. Thus it was similarly prima facie ludicrous to claim that monetary policy did not have important, systematic, and persistent real effects. But that did not stop them...

Continue reading "Yet Another Note on Understanding the Terrain of the Macroeconomics Debate" »

## Robert Solow Reviews Alan Greenspan's 'The Map and the Territory'

When the stock market collapsed by almost a third one day in October 1987, the Fed... stood ready to provide every bit of the liquidity that might be needed to keep the financial system functioning, so that anyone who acted in panic would probably live to regret it.... Score one for Greenspan. During the long Clinton-era upswing from 1992 to 2000, Greenspan and the Fed faced a much more complex problem, and again did the right thing. Nearly all... believed that the key inflation-safe unemployment rate... was something like 6.5–7.0 percent. As the upswing continued and the unemployment rate drifted down below that level (and, you may remember, budget surpluses appeared), the Fed was beset with urgent reminders that the time had come, and maybe passed, to tighten credit.... Greenspan looked at the data... and persuaded his colleagues to let the expansion go on. In the end the unemployment rate dipped briefly below 4.0 percent without trauma. Greenspan thought that productivity was improving faster than anyone or the conventional measurements realized, and that was what provided the room for further expansion. He was right.... It was an exhibition of pragmatism and cool that saved the economy from wasting trillions of dollars of output in unnecessary unemployment and idle capacity. There ends the plus side of the Greenspan ledger.

Continue reading "Robert Solow Reviews Alan Greenspan's 'The Map and the Territory'" »

## Morning Must-Read: Nick Rowe: Microfoundations we like vs microfoundations we can solve

Take just one example... Calvo pricing.... The Calvo fairy visits each firm at random, taps it with her wand, and lets it change its price. The probability of her visiting in any period is 1/n.... Make one very small change.... Assume she visits... each firm once every n periods.... That's a different model... a nightmare to solve. Both those models are equally microfounded. Or equally not microfounded, because the fairy herself is, well, just a fairy, and not a real person. She's an ad hoc fairy, who is just a metaphor for our ignorance about why the price of money (the reciprocal of the price level) doesn't behave like the prices of other financial assets.... The non-random fairy generates inflation-inertia and the random fairy doesn't. You get a sticky inflation rate, and not just a sticky price level, with the non-random fairy. Trouble is, I can solve the first model, but I can't solve the second model.... I have three options: 1. I can assume microfoundations I don't like.... 2. I can assume microfoundations I like... and wave my hands.... 3. I can write down an equation for an ad hoc Phillips Curve with inflation inertia, wave my hands...

## Noise Trading, Bubbles, and Excess Stock Market Volatility: Noah Smith and Robert Shiller and Andrei Shleifer and Jeremy Greenwood vs. John Cochrane and Gene Fama and Company: Progressive vs. Degenerative Research Programs in Finance: The Honest Broker fo

Noah Smith has a very nice post this morning:

Noah Smith: Risk premia or behavioral craziness?:

John Cochrane is quite critical of Robert Shiller.... He... thinks that Shiller is trying to make finance less quantitative and more literary (I somehow doubt this, given that Shiller is first and foremost an econometrician, and not that literary of a guy).

But the most interesting criticism is about Shiller's interpretation of his own work. Shiller showed... stock prices mean-revert. He interprets this as meaning that the market is inefficient and irrational... "behavioral craziness". But others--such as Gene Fama--interpret long-run predictability as being due to predictable, slow swings in risk premia.

Who is right? As Cochrane astutely notes, we can't tell who is right just by looking at the markets themselves. We have to have some other kind of corroborating evidence. If it's behavioral craziness, then we should be able to observe evidence of the craziness elsewhere in the world. If it's predictably varying risk premia, then we should be able to measure risk premia using some independent data source...

Continue reading "Noise Trading, Bubbles, and Excess Stock Market Volatility: Noah Smith and Robert Shiller and Andrei Shleifer and Jeremy Greenwood vs. John Cochrane and Gene Fama and Company: Progressive vs. Degenerative Research Programs in Finance: The Honest Broker fo" »

## Macroeconomic Forecasting and Macroeconomic Methodology: Thursday Focus

Was it Larry Meyer or somebody else who said that the Chicago turn in graduate macroeconomics in the 1980s had made him rich--by destroying the inflow into the profession of people competent to compete with him in the private-sector microeconomic forecasting business? A nice piece from Matthew Yglesias this morning:

Matthew Yglesias: Freshwater macroeconomics has failed the market test.:

One curiosity that economists seem too polite to note is that... 'freshwater' macroeconomics that focuses heavily on the idea of a "real" business cycle and disparages the notion of either fiscal or monetary stimulus... flopped in the marketplace... [but] lives, instead, sheltered from market forces at a variety of Midwestern nonprofit[s].... Stephen Williamson, a proponent of freshwater views, reminded me of this recently when he contended that macroeconomics is divided into schools of thought primarily because there's no money at stake. In financial economics, according to Williamson, "All the Wall Street people care about is making money, so good science gets rewarded." But in macroeconomics you have all kinds of political entrepreneurs looking for hucksters who'll back their theory....

It seems very important to freshwater types to contend that their saltwater antagonists aren't just mistaken or even stupid but actually fraudulent in their views (see Robert Lucas on 'schlock economics' or John Cochrane saying Robert Shiller is trying to take the science out of economics)... politically-motivated cheap talk....

Continue reading "Macroeconomic Forecasting and Macroeconomic Methodology: Thursday Focus" »

## The Federal Reserve Puzzles Ryan Avent

Let me endorse this:

Ryan Avent: Monetary policy: Sneaky stimulus:

I wrote that the Fed was unlikely to taper because inflation is so low; the choice to go ahead and taper anyway certainly looks like evidence that they're not that worried about prices. But it has also been clear that the Fed is trying to rely more heavily on forward guidance so as to free themselves from the need to continue with QE. And guidance about inflation changed yesterday in what looks to me like a subtle but important way. The first change comes at the top of the statement, where in October the FOMC said:

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Yesterday this became:

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Continue reading "The Federal Reserve Puzzles Ryan Avent" »

## Evening Must Read: Simon Wren-Lewis: More on the "Microfoundations" Dialogue

Even from Maui, Mark Thoma * continues to direct me to very interesting things--in this case: *Simon Wren Lewis: More on the illusion of superiority:

An ad hoc but data-inspired modification to a microfounded model (what I call an eclectic model) can produce a better model than a fully microfounded model.... But what about the Lucas critique? Surely that says that only a microfounded model can avoid the Lucas critique.... A misspecified model can produce bad policy. These misspecification errors may far outweigh any errors due to the Lucas critique.... Tony’s position is that policymakers in a hurry can do this eclectic stuff, but we academics should just focus on building better microfoundations.... First, building better microfoundations can take a very long time. Second, there is a great deal that academics can say using eclectic, or useful, models.... Go back to the 1970s.... Microfoundations modellers... said price rigidity should not be in macromodels because it was not microfounded.... [If] policymakers in the 1970s... wanted to devalue their currency because they felt it had become overvalued after a temporary burst of domestic inflation... microfounded models would have said there was no point.... Those using eclectic models with ad hoc price rigidities would have known better.... Should academic macroeconomists in the 1970s have left these policymakers to their own devices?... The idea that the only proper way to do macro that involves theory is to work with fully microfounded DSGE models is simply wrong.... If our DSGE models were pretty good descriptions of the world then this misconception might not matter too much, but the real world keeps reminding us that they are not."

## Larry Summers Says "Stagnation Might Prove to Be the New Normal"; But I Say: "Only If We Make It So": Wednesday Focus (December 18, 2013)

Larry Summers: Why stagnation might prove to be the new normal:

Is it possible that the US and other major global economies might not return to full employment and strong growth without the help of unconventional policy support? I raised that notion....

Continue reading "Larry Summers Says "Stagnation Might Prove to Be the New Normal"; But I Say: "Only If We Make It So": Wednesday Focus (December 18, 2013)" »

## Morning Must-Read: Noah Smith: Another Contribution to the "Microfoundations" Debate...

Noah Smith: I love microfoundations. Just not yours:

Check out the debate between Tony Yates and Simon Wren-Lewis.... It was kind of cute that Yates singled out Calvo pricing as an unrealistic, kludgey, hold-your-nose sort of microfoundation.... Lagos-Wright (2005)... is every bit as unrealistic as Calvo pricing, but you don't hear Freshwater guys like Yates kvetching about that.... In the comments to Wren-Lewis' post, I wrote "YES YES A THOUSAND TIMES YES". In a follow-up post, Yates caricatures my comment as "NO NO GET RID OF ALL THE MOTHER&&&&&&G MICROFOUNDATIONS WHILE YOU ARE AT IT." But let us ignore that particular flerp-o'-derp for now, and focus on why Wren-Lewis is so very very right....

Yates says I just want to get rid of all the microfoundations. But that is precisely, exactly, 180 degrees wrong! I think microfoundations are a great idea! I think they're the dog's bollocks! I think that macro time-series data is so uninformative that microfoundations are our only hope for really figuring out the macroeconomy. I think Robert Lucas was 100% on the right track when he called for us to use microfounded models. But that's precisely why I want us to get the microfoundations right. Many of microfoundations we use now (not all, but many) are just wrong...

C. Northcote Parkinson: Parkinson's Law:

When first examined under the microscope, the cabinet council usually appears--to comitologists, historians, and even to the people who appoint cabinets--to consist ideally of five. With that number the plant is viable, allowing for two members to be absent or sick at any one time. Five members are easy to collect and, when collected, can act with competence, secrecy, and speed. Of these original members four may well be versed, respectively, in finance, foreign policy, defense, and law. The fifth, who has failed to master any of these subjects, usually becomes the chairman or prime minister...

## Assessing Ben Bernanke's Tenure...

Christina Romer, I think, gets it right:

Christina Romer: Summerlin Lecture:

Let me close with a final, more general lesson for monetary policy from history. That lesson is: Don’t fight the last war. Just as generals sometimes go very wrong by focusing too strongly on not repeating past mistakes, so do monetary policymakers.... Monetary policymakers in 2009 and 2010 were so worried about not repeating the inflation of the 1970s, that they almost repeated the 1930s.

The current generation of policymakers came of age when inflation was the greatest problem. Though central bankers throughout the world took dramatic action in 2008 to stop the financial panic, by the summer of 2009, they were ready to be done.

I remember vividly being at a meeting of central bankers at the Jackson Hole Symposium in September 2009. All of the talk was:

We have stopped the crisis. Now what we need to do is go back to prudent monetary and fiscal policy, and to worrying about inflation.

Yet unemployment was still rising—it would hit 10% in October of 2009. Every inch of my body wanted to scream to the monetary policymakers at the symposium: “Oh no, you are not done!” Monetary policymakers, unfortunately, did take a break from aggressive action in 2010 and 2011. And this likely slowed the economy’s return to normal.

Today, I worry that guilt over letting asset prices reach the stratosphere in 2006 and 2007 has made some policymakers irrationally afraid of bubbles. As a result, they focus on the slim chance that another bubble may be brewing, rather than on the problems we know we face—like slow recovery, falling inflation, and hesitancy on the part of firms to borrow and invest...

Continue reading "Assessing Ben Bernanke's Tenure..." »

## Tomas Piketty: Capital in the Twenty-First Century/Inequality and Capitalism in the Long Run: The Honest Broker

The hawk-eyed Cardiff Garcia writes:

Piketty previews Piketty: A hat tip to reader @zapatique for sending us to Thomas Picketty’s recent lecture, which previews the forthcoming English-language edition of his new book...

and so reminds me that the English-language translation (by Arthur Goldhammer) of Tomas Piketty's Capital in the Twenty-First Century is coming out in March. And Tomas gave a talk on it in Helsinki.

And the esteemed and eminent Kevin Drum writes:

New French Book Will Become Important When It's In English: Tyler Cowen says today that "The forthcoming Thomas Piketty book will be very important." That "will be" is sort of interesting. You see, the name of the book is Le capital au xxie siècle, and it was published three months ago. But no one is talking about it. Presumably, it will become very important—and very talked about—only next March, when Capital in the 21st Century hits the shelves.

I don't have any grand point to make. It's just interesting that fluent French is now so rarely spoken among American academics that an important French book can't even get the time of day until its English translation comes out. It makes sense that widespread conversation would have to wait, since you can't very well have that until lots of people have read the book, but you'd think there would be at least a few reviews out there along with a bit of discussion. But if there has been, I've missed it.

Well, you would need somebody who is:

1. interested in communicating with a mass audience among les Anglo-Saxons;
2. tooled-up to evaluate and discuss a work of macroeconomic history;
3. tooled-up and evaluate a work in the ongoing inequality debate; and
4. who at least reads something written in Französisch Sprache...

Why is everybody all of a sudden looking at me?

Continue reading "Tomas Piketty: Capital in the Twenty-First Century/Inequality and Capitalism in the Long Run: The Honest Broker" »