June 2014

Yifan Cao and Adam Shapiro:Will Inflation Remain Low?: "The well-known Phillips curve suggests that future inflation depends...

...on current and past inflation and a measure of economic slack or resource utilization. Using the unemployment gap to measure slack, a simple Phillips curve currently predicts that inflation will remain quite low through 2015. Two variations of the model, which impose a higher anchor for inflation expectations or focus only on a short-term unemployment gap, still predict that inflation will remain low, albeit higher than implied by the basic model.

Afternoon Must-Read: Unlearning Economics: Capital in Pikettys Capital

Unlearning Economics: Capital in Pikettys Capital: "Although Piketty relates his framework back to the neoclassical production function...

...it plays only a supporting role (he refers to Cobb-Douglas somewhat disparagingly as a 'simple story'), and his conception of 'capital', as defined above, is far more general than a literal interpretation of the production function might suggest.... Rognlie's argument takes the estimates of the elasticity as central.... Piketty only references elasticity estimates for support, and actually stakes most of his claim that diminishing returns will not become a problem on historical observation: 'On the basis of historical data, one can estimate an elasticity between 1.3 and 1.6. But not only is this estimate uncertain and imprecise. More than that, there is no reason why the technologies of the future should exhibit the same elasticity as those of the past. The only thing that appears to be relatively well established is that the tendency for the capital/income ratio β to rise.... To be sure, it is likely that the return on capital, r, will decrease as β increases. But on the basis of historical experience, the most likely outcome is that the volume effect will outweigh the price effect, which means that the accumulation effect will outweigh the decrease in the return on capital.' This is not to say that Rognlie's arguments are not worth considering, and he makes some good points... that the returns to new, IT-based technologies are not especially high... that, absent housing housing bubbles, capital's share of income has declined in many countries over the past few decades..."

Ryan Avent: Monetary policy: Dead economies blow no bubbles: "The stopped clock that is the Bank for International Settlements...

...is showing the same face.... In 2011... the BIS argued that global growth needed to slow in order to reduce inflationary pressure. In 2012 it warned that central banks shouldn't do any more to boost growth lest they create financial instability and discourage structural reform.... In its latest annual report, it argues that what the world needs now is higher interest rates. One of these days the BIS may just turn out to be right. Not this year.... Low rates are not doing much to help the real economy, BIS says, but are contributing to another worrying credit boom.... Because it knows the result it wants (higher interest rates) it misreads the particular risks of the moment.... It was until very recently taken for granted that loose money meant policy that allows for excessively fast demand growth.... Rich economies currently suffer from none of those ailments. One could conclude then that policy is not too loose. Instead, the BIS, which is pretty sure that it is, finds a different measure of policy looseness with which to justify its call for higher rates: the financial cycle.... Raising rates now would almost certainly be counterproductive.... As markets priced in a perpetual slump (and lower inflation or deflation) long-term interest rates would edge even lower. Weak demand would also reduce the growth boost to structural forms, making them a harder sell, and would lead to still more deterioration in public balance sheets...

Ralph Nader: October 20, 2000: "The only difference between Al Gore and George W. Bush...

...is the velocity with which their knees hit the floor when corporations knock.... George W. Bush we can dismiss with a summary comment: nothing more than a corporation disguised as a human being. There's no end to [Gore's] betrayal.... All I can see is this Pinocchio nose coming.... He exudes a lack of credibility.... If it were a choice between a provocateur and an 'anesthetizer', I'd rather have a provocateur. It would mobilize us...

Monday DeLong Smackdown Watch: Cosma Shalizi Has Serious Doubts About My Claim That We at Berkeley "Broadly, Manage to Accomplish This"

No sooner do I manage to get my act together to deal with the shortage of high-quality DeLong Smackdowns by starting a close reading of David Graeber's Debt but Cosma Shalizi manages to show up with a high-quality DeLong smackdown. So the reading of the first text page of Graeber's chapter 11--which is, I think, thorough in chapter 11, if not chapter 7--and the first five historical errors he commits must wait until next week.

The eminent Cosma Shalizi writes:

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Monday DeLong Smackdown Watch: Cosma Shalizi Has Serious Doubts About How Well We in Berkeley Economics Are Doing at Our Broad Educational Mission...

Cosma Shalizi Has Serious Doubts About How Well We in Berkeley Economics Are Doing at Our Broad Educational Mission...: The eminent Cosma Shalizi writes:

Cosma Shalizi: "Respectfully, I just looked over the requirements for the Berkeley econ. major https://www.econ.berkeley.edu/undergrad/current/major-requirements, and it seems like it's entirely possible to get through it with nothing but the core econ courses, finance and econometrics. Of course the mere course titles don't give a lot of insight into their content--maybe UGBA 180 "Real Estate and Urban Land Economics" incorporates all the history and moral philosophy one could hope for (no sarcasm intended!)--there'd certainly be scope for it. But how well do you know what your students are actually being taught? How well do you know what they are learning?...

Touché...

Morning Must Read: James Surowiecki: Why Are the Super-Rich So Angry?

James Surowiecki: Why Are the Super-Rich So Angry?: "The past few years have been very good to Stephen Schwarzman...

...the chairman and C.E.O. of... Blackstone.... Schwarzman is now worth more than ten billion dollars. You wouldn’t think he’d have much to complain about. But, to hear him tell it, he’s beset by a meddlesome, tax-happy government and a whiny, envious populace. He recently grumbled that the U.S. middle class has taken to 'blaming wealthy people' for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had 'skin in the game', and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland....

That’s not how it’s always been. A century ago, industrial magnates played a central role in the Progressive movement, working with unions, supporting workmen’s compensation laws and laws against child labor, and often pushing for more government regulation... to co-opt public pressure.... Still, they materially improved the lives of ordinary workers.... If today’s corporate kvetchers are more concerned with the state of their egos than with the state of the nation, it’s in part because their own fortunes aren’t tied to those of the nation the way they once were.... Today, by contrast, corporate chieftains have little to fear, other than mildly higher taxes and the complaints of people who have read Thomas Piketty. Moguls complain about their feelings because that’s all anyone can really threaten.

James Surowiecki: Why Are the Super-Rich So Angry?

James Surowiecki: Why Are the Super-Rich So Angry?: "The past few years have been very good to Stephen Schwarzman, the chairman and C.E.O. of... Blackstone.... Schwarzman is now worth more than ten billion dollars. You wouldn’t think he’d have much to complain about. But, to hear him tell it, he’s beset by a meddlesome, tax-happy government and a whiny, envious populace. He recently grumbled that the U.S. middle class has taken to 'blaming wealthy people' for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had 'skin in the game', and that proposals to repeal the carried-interest tax loophole—from which he personally benefits—were akin to the German invasion of Poland...

Schwarzman isn’t alone. In the past year, the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews. All three eventually apologized, but the basic sentiment is surprisingly common. Although the Obama years have been boom times for America’s super-rich—recent work by the economists Emmanuel Saez and Thomas Piketty showed that ninety-five per cent of income gains in the first three years of the recovery went to the top one per cent—a lot of them believe that they’re a persecuted minority. As Mark Mizruchi, a sociologist at the University of Michigan and the author of a book called “The Fracturing of the American Corporate Elite,” told me, “These guys think, We’re the job creators, we keep the markets running, and yet the public doesn’t like us. How can that be?” Business leaders were upset at the criticism that followed the financial crisis and, for many of them, it’s an article of faith that people succeed or fail because that’s what they deserve. Schwarzman recently said that Americans “always like to blame somebody other than themselves for a failure.” If you believe that net worth is a reflection of merit, then any attempt to curb inequality looks unfair.

That’s not how it’s always been. A century ago, industrial magnates played a central role in the Progressive movement, working with unions, supporting workmen’s compensation laws and laws against child labor, and often pushing for more government regulation. This wasn’t altruism; as a classic analysis by the historian James Weinstein showed, the reforms were intended to co-opt public pressure and avert more radical measures. Still, they materially improved the lives of ordinary workers. And they sprang from a pragmatic belief that the robustness of capitalism as a whole depended on wide distribution of the fruits of the system.

Similar attitudes prevailed in the postwar era, as Mizruchi has documented. Corporate leaders formed an organization called the Committee for Economic Development, which played a central role in the forging of postwar consensus politics, accepting strong unions, bigger government, and the rise of the welfare state. “At the very top, corporate leaders were much more moderate and pragmatic, and, because that’s where national politics were, they were very influential,” Mizruchi said. Corporations supported policies that might have been costly in the short term in order to strengthen the system as a whole. The C.E.D. called for tax increases to pay for the Korean War and it supported some of L.B.J.’s Great Society. As Mizruchi put it, “They believed that in order to maintain their privileges, they had to insure that ordinary Americans were having their needs met.”

FROM THE ISSUEBUY AS A PRINTE-MAIL THIS That all changed beginning in the seventies, when the business community, wrestling with shrinking profits and tougher foreign competition, lurched to the right. Today, there are no centrist business organizations with any real political clout, and the only business lobbies that matter in Washington are those pushing an agenda of lower taxes and less regulation. Corporate profits and C.E.O. salaries have in recent years reached record levels, but there’s no sign of a return to the corporate statesmanship of the past (the occasional outlier like Warren Buffett notwithstanding). And that’s one big reason that it’s become impossible for Washington to get things done, even on issues of bipartisan interest.

If today’s corporate kvetchers are more concerned with the state of their egos than with the state of the nation, it’s in part because their own fortunes aren’t tied to those of the nation the way they once were. In the postwar years, American companies depended largely on American consumers. Globalization has changed that—foreign sales account for almost half the revenue of the S&P 500—as has the rise of financial services (where the most important clients are the wealthy and other corporations). The well-being of the American middle class just doesn’t matter as much to companies’ bottom lines. And there’s another change. Early in the past century, there was a true socialist movement in the United States, and in the postwar years the Soviet Union seemed to offer the possibility of a meaningful alternative to capitalism. Small wonder that the tycoons of those days were so eager to channel populist agitation into reform. Today, by contrast, corporate chieftains have little to fear, other than mildly higher taxes and the complaints of people who have read Thomas Piketty. Moguls complain about their feelings because that’s all anyone can really threaten.

What's Going On: Monday Focus for June 30, 2014

Attention Conservation:

• 1/4 I find myself frustrated with usually-reliable Gerald Seib. Our political disruption problems today are driven by 3 factors: the
• 2/4 Reagan-Thatcher bet on inequality in 1990, the Gingrich bet on obstructionism in 1993 (and doubling-down on it in 2009), and the Obama
• 3/4 bet in late 2009 that the macroeconomic dog would go to sleep and should be let to lie as a strong recovery took hold. Our political
• 4/4 disruption problems not driven by "globalization, alienation, populism". That framing doesn't tell us what needs to be and can be done.

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Charlie Jane Anders: Brad DeLong, Carol Queen and Farhad Manjoo at Writers With Drinks!: Live from La Farine CCVII: June 30, 2014

Charlie Jane Anders: Brad DeLong, Carol Queen and Farhad Manjoo at Writers With Drinks!:

We bring you "An Evening of Oversharing About Money"!

When: Saturday, July 12, from 7:30 PM to 9:30 PM, doors open 6:30 PM
Who: J. Bradford DeLong, Carol Queen, Farhad Manjoo, Frances Lefkowitz and Charlie Jane Anders
How much: $5 to$20, all proceeds benefit the Center for Sex and Culture.
Where: The Make Out Room, 3225 22nd. St., San Francisco

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Liveblogging World War II: June 30, 1944: The Aldwych V-1 Blast

The V-1 tore across southern England at over 350 miles per hour, faster than almost anything the British could put in the air against it, skipping past the barrage balloons’ steel cables that were intended to tear off its wings, outpacing all the efforts of the anti-aircraft gunners to traverse their guns fast enough to blow it out of the sky.

On Aldwych, at the eastern end of the Strand, dozens of people queuing outside the Post Office on the ground floor of Bush House looked skywards. Girls on their lunch break at the Air Ministry at Adastral House opposite, sunbathing on the roof, hurriedly covered up.

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Afternoon Must-Read: Paul Krugman: Stagflation and Macroeconomics

Paul Krugman: Stagflation and Macroeconomics: "Simon [Wren-Lewis]... dismisses the stagflation of the 1970s...

...on the grounds that IS-LM macroeconomics quickly adapted to the new information.... (Compare this with new classical macro, which failed decisively in the 1980s, but never adjusted at all.) Nonetheless... stagflation did indeed play a role.... Stagflation had in effect been predicted by Friedman and Phelps... by taking a step in the direction of microfoundations.... What this did was to give immense prestige to the notion that you could use the assumption of rationality to make better predictions than you could using historical experience alone.... In the 80s, as I said, this was proved wrong, and the whole enterprise should have been reconsidered. But by then you already had a self-perpetuating clique that cared very little about evidence.... New classicals shrugged off the 80s, just as they are shrugging off the Great Recession...

Morning Must-Read: Scott Westerfeld: Just Realized How Far in the Future We Are...

ScottWesterfeld: Twitter: "Just realized how far in the future we are: The first day of World War 2 is now closer to the Civil War than to the present..."

Morning Must-Read: Lee Sandlin: Book Review: 'Robert A. Heinlein' by William H. Patterson Jr.

Lee Sandlin: Book Review: 'Robert A. Heinlein' by William H. Patterson Jr.: "Heinlein was the best sci-fi writer of all time and then mysteriously he became the worst:...

...Conviction... an intensely persuasive optimism... a radiantly hopeful vision of human prospects.... The novels for adults that followed were just as emotionally compelling.... 'Starship Troopers'... hurls the reader into its midst with such imaginative force that its rationale seems not only inevitable but somehow desirable. Many readers have been deeply moved... others have felt that they're being bullied by a brilliant piece of fascist propaganda... the most bitterly divisive book in the history of sci-fi.... 'The Moon Is a Harsh Mistress' is a visionary epic of a lunar colony breaking free... and establishing an anarchist-libertarian utopia.... 'Stranger in a Strange Land'. Heinlein... was both amused and appalled when the hippies took it up, enchanted by his luxuriantly sybaritic portrait of a Martian free-love commune....

The novels he wrote in the 1970s and 1980s wholly lack his old persuasiveness. Nothing in them is real, nothing is at stake and nobody takes anything seriously... adolescent ribaldry and reams of metafictional banter, for which Heinlein has approximately zero gift.... The overall effect is so low-energy and stupefying that it's hard to believe it isn't somehow deliberate—as though Heinlein is out to... make sure no reader is inspired to take any action whatever...

Morning Must-Read: Joe Stiglitz: The Myth of America’s Golden Age

Joe Stiglitz: The Myth of America’s Golden Age: "I hadn’t realized when I was growing up in Gary, Indiana...

...that I was living in the golden era.... Smokestacks poured poisons into the air. Periodic layoffs left many families living hand to mouth. Even as a kid, it seemed clear to me that the free market as we knew it was hardly a formula for sustaining a prosperous, happy and healthy society.... The standard economic texts... seemed to be unrelated to the reality I had witnessed growing up in Gary. They said that unemployment shouldn’t exist and that the market led to the best of all possible worlds.... I focused a lot of my work on why markets fail, and I devoted much of my Ph.D. thesis at MIT to understanding the causes of inequality.... Most disturbing is the realization that the American dream—the notion that we are living in the land of opportunity—is a myth.... During the period from World War II to 1980... the fortunes of the wealthy and the middle class rose together. But the evidence of the last third of a century suggests this period was an aberration.... a time of war-induced solidarity when the government kept the playing field level, and the GI Bill of Rights and subsequent civil rights advances meant that there was something to the American dream....

Geithner’s attempts to justify what the administration did only reinforce my belief that the system is rigged. If those who are in charge of making the critical decisions are so 'cognitively captured' by the 1 percent, by the bankers, that they see that the only alternative is to give those who caused the crisis hundreds of billions of dollars while leaving workers and homeowners in the lurch, the system is unfair.... Inequality commands a high price: a weaker economy, marked by lower growth and more instability. It is not very complicated. None of this is the outcome of inexorable economic forces, either; it’s the result of policies and politics—what we did and didn’t do...

Morning Must-Read: Annie Lowrey: What’s the Matter With Eastern Kentucky?

Annie Lowrey: What’s the Matter With Eastern Kentucky?: "Clay County... median household income there is barely above the poverty line...

Morning Must Read: Amartya Sen 32 Years Ago Had the Last Word on "Just Deserts" Theories of Distribution

The brilliant and very thoughtful Amartya Sen (1982): Just Deserts: "The personal production view is difficult to sustain in cases of interdependent production...

...i.e., in almost all the usual cases.... A common method of attribution is according to 'marginal product'.... This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products only under some further special assumptions. But even when all these assumptions have been made... marginal product accounting, when consistent, is useful for deciding how to use additional resources... ut it does not “show” which resource has “produced” how much.... The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others....

The personal production view... confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources”... is richer in powerful rhetoric than in substance.... An Indian barber or circus performer may not be producing any less than a British barber or circus performer--just the opposite if I am any judge--but will certainly earn a great deal less.... The smaller earnings... need not, in fact, reflect only failure of what [P.T.] Bauer calls [the Indians'] “aptitudes and motivations for economic achievement...

Hoisted from the Internet Archives: The Last Word on the "Just Deserts" Theory of Distribution

I remember that I found this, by Amartya Sen, totally convincing when I first read it 32 years ago. And I still find it totally convincing today:

Amartya Sen: Just Deserts: "This book... a collection of [P.T.] Bauer’s essays...

...gives an excellent account of his main theses on development policy and international relations. It also presents his approach to economic equality and inequality in general, and places his discussions of development against the background of some of the broadest issues of political economy.... I shall argue that Bauer’s approach—in spite of its power and appeal—is fundamentally flawed, and that his analysis cannot bear the weight of the conclusions that he rests on it.

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Electricity!: Live from La Farine CCIV: June 25, 2014

The British fear electricity, and guard against it using giant red switches and a plug the size of the USS Missouri. http:://pic.twitter.com/EFWpOEF1Ra

Paweł Morski ‏@Pawelmorski: @kjhealy @delong if our kettles took an hour to boil, I wouldn't mention other people's electricity.

Ryan Avent ‏@ryanavent: @Pawelmorski @kjhealy @delong And yet the electric dryers here can run for 12 hours straight without managing to dry anything...

Paweł Morski ‏@Pawelmorski: @ryanavent @kjhealy @delong buy a washing line like normal people

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Liveblogging World War I: June 25, 2014: Edwardian Promenade

Evangeline Holland: Society: Edwardian Promenade: "The London Season remained in full swing...

...Like now, society had just attended Ascot Week, the “most fashionable race-meeting in the world,” as The Sketch duly noted in its weekly issue.... The cover of this issue featured a cheeky illustration about The Midnight Cocktail made special for the Midnight Ball held at the Savoy on June 25 to benefit the National Institute for the Blind: 1/3 French Vermouth, 1/3 Italian Vermouth, 1/3 Gin, add a few drops of Orange juice and one spot of Absinthe.

Here are some strange fashions on display at the races!

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