Noted for January 9, 2013
Ezra Klein: We don’t have a spending problem, we have a military spending problem: "Have you read Brad Plumer’s terrific, chart-heavy primer on America’s insane defense budget? If not, I’ll wait while you do. Done? Good. The numbers there should shock you. In particular, this one: “Since 2001, the base defense budget has soared from $287 billion to $530 billion — and that’s before accounting for the primary costs of the Iraq and Afghanistan wars.”"
Richard Crump, Stefano Eusepi, and Emanuel Moench: Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement?
Simon Wren-Lewis: mainly macro: Avoiding the B word: "I heard the new head of the TUC (Trades Union Congress) talking about macroeconomic policy. She said the government’s policy of austerity has failed…. The interviewer asked whether… [we needed] more borrowing by the government. She avoided answering the question. Unfortunately I have heard exactly the same from many UK public figures who are critical of austerity. It is as if a memo has gone round with the following instruction: whatever you do, do not say your alternative policy will involve more government borrowing."
Mark Thoma sends us to Matthew Yglesias: Economist's View: 'Romer and Romer on Monetary Policy Complacency': "Perhaps my favorite paper delivered at the American Economics Association meeting… was a historical essay from Christina Romer and David Romer…. The most dangerous idea, they say, is excessive pessimism about monetary policy. If you look back at the two key eras where we say monetary policy went awry—during the deflation of the 1930s and the inflation of the 1970s—the interesting thing that Romer and Romer find is that if you dig into the archives of the Federal Reserve minutes there weren't really "mistakes" as you might think of it. Policymakers in the '30s knew there was a deflationary slump, and they knew it was bad, just as policymakers in the '70s knew there was an inflationary spiral, and they knew it was bad. But in the '30s, policymakers persuaded themselves that with interest rates already low there was nothing more they could do, while policymakers in the '70s persuaded themselves that inflation represented a purely structural phenomenon that they couldn't cure. So you got a lot of talk about how other people need to step up. The funny thing, they say, is that in both cases it turned out the problems could actually be solved quite quickly once you put someone in office who thought it was possible to solve them."
Suzy Khimm: >Before you talk about the deficit, take a look at these charts: "The fiscal cliff deal… included $750 billion in deficit reduction, a far cry from the $1.8 trillion to $2.5 trillion deficit proposals that the White House and House Speaker John Boehner had put forward earlier in the debate…. But the Jan. 1 fiscal cliff deal represented just one portion of the deficit reduction that’s been going on since 2011. The Center for American Progress calculates that President Obama and Congress have successfully enacted $2.4 trillion in deficit reduction since the beginning of fiscal year 2011…. About one-quarter of that comes from revenues (primarily the fiscal cliff deal) and almost two-thirds from spending cuts."
Greg Sargent: The centrist dodge: "Self-styled “centrist” columnists have a perennial problem on their hands. They have built reputations by calling for middle-of-the-road solutions to our problems. Yet they can’t acknowledge that Obama and Democrats are the ones who are offering solutions that are genuinely centrist, because that would constitute “taking sides.” This would imperil their “brand,” which rests heavily on transcending partisanship, and on their ongoing insistence that the future depends on following a middle ground between the parties. These commentators have found several routes around this problem. One is to continually call for a third party without admitting that the solutions they themselves envision any third party advancing have a good deal in common with what Dems are offering. Another is to simply pretend that Obama and Dems have not offered the solutions they have, in fact, offered. Case in point… Tom Friedman."
James J. Choi, Li Jin, and Hongjun Yan: Informed Trading and Expected Returns: "Does information asymmetry affect the cross-section of expected stock returns? Using institutional ownership data from the Shanghai Stock Exchange, we show that institutions have a strong information advantage over individual investors. We then show that the aggressiveness of institutional trading in a stock—measured by the average absolute weekly change in institutional ownership during the past year—is an ex ante predictor of future information asymmetry in this stock. Sorting stocks on this information asymmetry predictor, we find that the top quintile outperforms the bottom quintile next month by 10.8% annualized, suggesting that information asymmetry raises the cost of capital."
Barry Eichengreen, Donghyun Park, and Kwanho Shin: Growth Slowdowns Redux: New Evidence on the Middle-Income Trap: "We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find dispersion in the per capita income at which slowdowns occur. But in contrast to our earlier analysis which pointed to the existence of a single mode at which slowdowns occur in the neighborhood of $15,000-$16,000 2005 purchasing power parity dollars, new data point to two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000. A number of countries appear to have experienced two slowdowns, consistent with the existence of multiple modes. We conclude that high growth in middle-income countries may decelerate in steps rather than at a single point in time. This implies that a larger group of countries is at risk of a growth slowdown and that middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates. We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap."
Jonathan Chait: The Eternal Folly of the Bipartisan Debt Fetish: "Gerald Seib has a column in today’s Wall Street Journal about how sad and disappointing it is that the two parties cannot come together and solve problems…. That is the same point of a recent column by the Washington Post’s David Ignatius, an editorial in The Economist, and vast swaths of commentary by the most respectable members of the mainstream media…. The drone of right-thinking sentiment has certain distinct qualities. One is that it is, in almost the purest sense of the term, a meme — a way of looking at the world that individuals pass one to one another without a great deal of conscious thought, even though thoughtfulness, or the appearance of thoughtfulness, is one of the qualities the opinion imbues upon its proponents. They don’t engage with alternative analyses. They seem to have no idea that their own ideas even could be contested. They are merely performing the opinion journalism equivalent of wishing passersby a Merry Christmas."
Jim Hamilton: Econbrowser: Understanding risk aversion in financial markets: Researchers Tobias Adrian of the Federal Reserve Bank of New York, Erkko Etula of the Federal Reserve Bank of New York (now at Goldman Sachs), and Tyler Muir of Northwestern University have a very interesting paper that will soon be appearing in the Journal of Finance that offers another perspective on what ultimately drives the market price of risk. They argue that the key economic agents whose arbitrage ensures that risk is priced consistently across assets are broker-dealers…. Broker-dealers are perhaps the closest entity to act as rational, forward looking and continuously well informed economic agents. In contrast, rational inattention or behavioral biases on the part of households might partially explain the failure of consumption-based models or CAPM. The leverage of broker-dealers varies substantially over time. When leverage is high, it is easy for them to use their assets to meet margin requirements. That means that an asset that pays off big in times of high leverage is less useful to broker-dealers (and so must offer a higher expected return in compensation) compared to an asset that does better in times of lower leverage."
Joan Walsh: Cracks in the GOP debt-ceiling wall: "The leadership is showing jitters about a default apocalypse, but Tea Party crazies could still force it anyway"
Cardiff Garcia: Letting the payroll tax cut expire was a terrible idea; extent of terribleness unclear
John Sides: What If the Obama Campaign Didn’t Win Him the Election?: "If the Obama campaign really beat Romney that badly, you’d expect the battleground states to be “higher” on the vertical axis than the other states. That is, you’d expect them to stand out as states where Obama did better relative to 2008. But that’s not really true. He lost 2.05 points in the battleground states relative to 2008 and 2.24 points in the other states—a difference of less than two-tenths of one percentage point (0.19). A simple regression model confirms that, once you’ve taken Obama’s 2008 margin into account, his 2012 margin was no better or worse in the battleground states compared to the other states."
