Bitcoin, the South Sea Bubble, and Chartalism: Thursday Focus
Afternoon Must-Read: David Cutler: Lessons From the ACA Crash

Things to Read on the Evening of December 4, 2013


  1. Ken Rogoff: Kenneth Rogoff Calls for Expansionary Fiscal Policy via Infrastructure Investment: "Summers is certainly right that productive infrastructure investment is the low-hanging fruit.... Productive infrastructure investment that generates long-term growth pays for itself, so there need not be any conflict between short-term stabilization and risks to long-term debt sustainability. With today’s ultra-low interest rates and high unemployment, public investment is cheap and plenty of projects offer high returns: fixing bridges and roads, updating badly outmoded electricity grids, and improving mass-transportation systems, to take just a few notable examples.... Those... [with] faith that Keynesian multipliers are much bigger than one... [think] even wasteful government spending is productive. But... with so many options for the productive use of resources, this seems like a titanic ideological distraction.... Barack Obama suggested the creation of an infrastructure bank to help promote public-private partnerships. It is still a good idea, particularly if the bank maintained a professional staff to help guide public choice.... Even if Keynesian multipliers are truly at the upper end of consensus, mobilizing private capital for investment has most of the advantages of issuing public debt.... The case for expanding productive infrastructure investment does not rest on one narrow ideological viewpoint or economic theory.... it is time to break the political gridlock and restore growth."

  2. Ashok Rao: Inflation as Insurance: "A liquidity trap is not perfectly analogous, but it’s not hard to see its similarity with a heart attack.... We get risky and untested asset purchase programs as well as forward guidance which suffers from time inconsistency and relies heavily on the credibility of a decentralized institution. We get political dysfunction and immobility. The Tea Party and Occupy Movements are at least second cousins of the liquidity trap.... My point here is that including political and social costs of mass unemployment, it is not enough to say the [economic] costs of inflation outweigh the benefits. The Fed understands this, to some extent, considering its heroic effort.... I don’t think the costs of inflation outweigh the benefits, but I can’t construct a fancy model to prove that. It is worth asking why we target a lowly 2% to begin with. Because New Zealand did it?"

  3. David Cutler: JAMA Forum: Lessons From the ACA Crash « news@JAMA: "The Affordable Care Act (ACA) had a rough October and November... the federal health insurance exchange website did not work... a number of people received insurance cancellation notices that they were not expecting. Insurance cancellation is common this time of year, but these notices were particularly troubling because people were told to look for replacements on the (nonfunctioning) exchange website.... The failure of the ACA rollout has many ramifications.... Two are particularly central to physicians and their patients: the future of the insurance exchanges and the lessons for running complex enterprises. The immediate danger from the rollout fiasco is to the health insurance exchanges....

    "The potential problem with the president allowing insurers to opt out of the ACA rules is that it creates a 2-tiered system for individuals getting insurance outside of an employer’s plan. One tier includes young and healthy individuals who can buy outside the exchanges; the second includes people who are older and those with preexisting conditions, for whom the exchange is the only option. Such an outcome could be very damaging. One immediate concern about the 2-tiered option is that insurers who have chosen to enter the exchanges will lose money.... It will be incumbent on the administration to watch out for these vulnerable plans. Having some of the most innovative plans fail in the first year would not be a good way to start reform.... The administration needs to develop a plan to merge the exchange and nonexchange populations in short order. In this case, “in short order” means a deadline of late spring 2014, when insurers will set premiums for 2015....

    "The second lesson from the rollout debacle is about the importance of good management.... All of the most admired health care systems—the Mayo Clinic, the Cleveland Clinic, Geisinger Health System, Virginia Mason Medical Center, Kaiser Permanente, and so on—have first-rate IT systems. Outside health care, Walmart became the largest company in the world in large part because of its good IT system.... Good companies promote those who do well and let go or counsel those who do not.... People in charge are familiar with the problems and able to focus effort, and operational employees are empowered to identify and solve problems. The Obama Administration failed in this last task.... Fixing the administration’s implementation efforts will require more than just fixing the website. It will mean changing the entire organization of the government’s ACA efforts..."

  4. Mark Thoma: Is There One Economic Model to Rule Them All?: "Models are built to answer specific questions. We don’t have one grand model that can explain everything.... The best map to use to drive from Seattle to Los Angeles is a lot different from the best map to find out if it is safe to dig a deep hole in someone’s yard.... And if we try to stuff even more information onto the map so that it can answer all of our questions, telephone poles, roads, elevation, every side road, every house and every store, all the bus routes, rainfall, the types of vegetation, etc. etc. the map becomes too complicated to be useful. Economic models are no different. The trick in modeling is to pare away all the inessential features so that there can be a sharp focus on the question of interest. The best maps are very specialized and highlight only what we need to know. The best economic models do the same.... Where I disagree with many of my colleagues is in the assertion that we should limit ourselves to a single class of models, e.g. variations on the New Keynesian model... built to explain a world of moderate fluctuations in GDP... featur[ing] temporary price rigidities... [with] aggregates... consistent with the optimizing behavior of individual consumers and producers. For certain types of questions – how should policymakers behave to stabilize an economy with mild fluctuations induced by price rigidities--it is the best model to use.... When a different world emerged, a large financial shock and the ensuing Great Recession, the model was of little use.... The IS-LM model, on the other hand, was built in the aftermath of the Great Depression to examine precisely the kinds of questions we faced throughout the Great Recession, issues such as a liquidity trap, the paradox of thrift, and how policymakers should react in such an environment. Why is it surprising that a model built to explain a particular set of questions does better than a model built to explain other things?"


  1. Martin Wolf: Wincott Lecture: "The economics establishment failed. It failed to understand how the economy worked, at the macroeconomic level, because it failed to understand financial risk, and it failed to understand financial risk partly because it failed to understand how the economy worked at the macroeconomic level. The work of economists who did understand these sources of fragility was ignored because it did not fit into the imagined world of rational agents, efficient markets and general equilibrium these professors Pangloss had made up.... I focus on just five transformations... economic performance, the fiscal situation, monetary conditions, the financial system, and economic ideas.... The crisis has lowered economic output vastly below the pre-crisis trend.... The crisis has had dramatically adverse fiscal consequences.... Third, the crisis has also had a dramatically adverse impact on the operation of the monetary system.... Fourth, the crisis has revealed the extreme fragility of the contemporary financial system and so of the economy with which it is intimately intertwined.... Finally, the crisis puts into question the pre-crisis conventional wisdom, particularly on monetary policy. The notion of a “great moderation” stands revealed as vainglorious. This has--or should--lead to a ferment of new (and recovered old) ideas. The idea that monetary policy should ignore what is happening in the financial sector has had to be (or at least should be) abandoned. The least that is required is a new concept of 'macro-prudential policy', buttressed by far higher capital requirements. But more radical ideas are also being advanced, as they should be. The case for a radical transformation of the banking sector is strong..."

  2. Robert Skidelsky: Comment on the Wincott Lecture: "[Martin Wolf's] argument ignores the loss of productive capacity through hysteresis.... [And] I’m not sure there wasn’t after all, something illusory, or unsustainable, about GDP growth in the pre-recession years. Four features need to be noticed: 1. Growth (and employment) seems to have been driven disproportionately by the financial services and the public sector.... 2. Relative to other countries, UK productivity growth pre-recession was unimpressive.... 3. Not enough attention has been given to the fact that a sizeable proportion of British jobs depend on ‘in work’ benefits.... 4. One should not ignore the increasing difficulty of the British economy in creating ‘good jobs’, by which I mean jobs which pay a decent wage; or more precisely, reverse the growing gap between mean and median incomes..."

Things You Should Be Aware of:

  1. Harold Meyerson: The 40-Year Slump: "If Volcker’s and Carter’s attacks on unions were indirect, Reagan’s was altogether frontal. In the 1980 election, the union of air-traffic controllers was one of a handful of labor organizations that endorsed Reagan’s candidacy. Nevertheless, they could not reach an accord with the government, and when they opted to strike in violation of federal law, Reagan fired them all..."

  2. Daniel Little: Understanding Society: Who made economics?: "The discipline of economics has a high level of intellectual status, even hegemony, in today’s social sciences — especially in universities in the United States. It also has a very specific set of defining models and theories that distinguish between “good” and “bad” economics. This situation suggests two topics for research: how did political economy and its successors ascend to this position of prestige in the social sciences? And how did this particular mix of techniques, problems, mathematical methods, and exemplar theoretical papers come to define the mainstream discipline? How did this governing disciplinary matrix develop and win the field? One of the most interesting people taking on questions like these is Marion Fourcade. Her Economists and Societies: Discipline and Profession in the United States, Britain, and France, 1890s to 1990s.... Since the middle of the nineteenth century, the study of the economy has evolved... into a fully 'professionalized' enterprise, relying on both a coherent and formalized framework, and extensive practical claims in administrative, business, and mass media institutions. And she argues that this process was contingent, path-dependent, and only loosely guided by a compass of 'better' science... 'considerable cross-national variation in (1) the and nature of the institutionalization of an economic knowledge field, (2) the forms of professional action of economists, and (3) intellectual traditions in the of economics... the entrenchment of the economics profession was profoundly shaped by the relationship of its practitioners to the larger political institutions and culture of their country'..."

  3. Jonathan Chait:: Politico Stonewalls Mike Allen Payola Scandal: "VandeHei begins by calling the report 'nonsense' without explicitly denying it. He asserts that a reporter 'could find any pattern he wants to' in Allen's prodigious output. Really? Any pattern? A pattern of support for Russian strongmen? A pattern of furtive endorsements of anarcho-syndicalism?.... The only pattern that really matters is a pattern of giving favorable coverage to interests that are paying him. VandeiHei does not deny that Allen has done that.... VandeHei's final defense verges on parody: Allen, he argues, has 'no business interest' in giving favorable treatment to advertisers. There is the fact that advertisers pay him $35,000 a week, or up to $1.8 million a year. If those clients realize that their paid advertisements also buy them favorable coverage in Playbook, that would make them dramatically more interested in paying Allen's exorbitant rates."

  4. Yichuan Wang: Synthenomics: Why Dynamic Stories are Important: "Steve Williamson... helicopter drops in liquidity traps reduce the inflation rate.... 'What happens if there is an increase in the aggregate stock of liquid assets, say because the Treasury issues more debt? This will in general reduce liquidity premia on all assets, including money and short term debt. But we're in a liquidity trap, and the rates of return on money and short-term government debt are both minus the rate of inflation. Since the liquidity payoffs on money and short-term government debt have gone down, in order to induce asset-holders to hold the money and the short-term government debt, the rates of return on money and short-term government debt must go up. That is, the inflation rate must go down. Going in the other direction, a reduction in the aggregate stock of liquid assets makes the inflation rate go up.'... Steve's story is as follows: 1. The central bank prints more money. 2. People don't want to hold onto that money. 3. To make sure people hold onto that money, the inflation rate must fall (to make holding money more attractive). 4. Hence, printing money lowers the inflation rate. Any cursory scholar of monetary economics should find that counterintuitive. I would suggest that it's counterintuitive because it's, well, wrong.... A much more realistic view would be a 'monetary disequilibrium'... David Hume.... At the moment that people get more money, the inflation rate is fixed. Hence the rate of return isn't high enough to hold money, and so people spend that money. This causes prices to rise and generates inflation. Here's the fundamental problem with Steve's model: he acts as if equilibrium conditions are enough to explain causality. Sure, in equilibrium it must be that the inflation rate must equal the liquidity value of holding onto money. But that can happen in two ways. Either the inflation rate could fall (Steve's story), or people could hold less cash, thereby raising the marginal value of their liquidity holdings. Dynamic stories matter, and if you can't explain how you get to equilibrium, you may end up on the wrong side of truth."

Olivier Blanchard: Monetary policy will never be the same | David Callahan: The Single Best Argument Against Inequality | Scott Lemieux: Green Lanternism Yet Again: Post-Political Critiques of “Post-Political Politics” | Simon Wren-Lewis: Bertrand Russell’s chicken (and why it was not an economist) | Paul Krugman: Bubbles, Regulation, and Secular Stagnation | Dylan Scott: At Least 1.5 Million People Enrolled In Medicaid Since Obamacare Launch | Rachel Goldfarb: Youth Unemployment Is Leading to Tragedy |