Musings by James Kwak on Some Cognitive Biases of ThirdWayism...
Lunchtime Must-Read: Robert Greenstein, President of CBPP: On the Murray-Ryan Budget Agreement

Things to Read on the Morning of December 11, 2013


  1. John Podesta: Income Inequality’s Ripple Effect: "Last week, Barack Obama, delivering the clearest and most powerful economic policy speech of his presidency at an event sponsored by the Center for American Progress, identified 'the combined trends of increased inequality and decreasing mobility' as 'the defining challenge of our time'. The week before, in his first papal exhortation, Pope Francis robustly criticized 'trickle-down theories' of economic growth as having 'never been confirmed by the facts'.... Soon after being awarded the Nobel Prize in Economics, Robert Shiller told the Associated Press that inequality was 'the most important problem that we are facing now today'....

    "The fact is that we don’t know nearly enough about what high inequality means for economic growth and stability. We need a better understanding of how inequality affects demand for goods and services and macroeconomic and financial imbalances. We are in the dark on whether and how inequality affects entrepreneurship, or whether it alters the effectiveness of our economic and political institutions, or how it affects individuals’ ability to access education and productively employ their skills and talents. That’s why we’ve established the new Washington Center for Equitable Growth (WCEG), a long-term effort to support serious, sustained inquiry into structural challenges facing our economy. Our aim is to enable rigorous research on the relationship between inequality and growth through a competitive, peer-reviewed, academic grant program; to elevate the work of young scholars and new voices; and to help make sure cutting-edge research is relevant and informative to policymaking debates.

    "The basic facts bear repeating. Income inequality in the United States today has reached levels last seen during the Roaring ’20s. Over the last three decades, the top 1 percent of incomes have risen by 279 percent, while the bottom fifth of workers have seen an increase of less than 20 percent. In 1979, the middle 60 percent of households took home 50 percent of U.S. income. By 2007, their share was just 43 percent. These trends have continued since the end of the Great Recession... are aided and abetted by a dominant narrative defining how the economy grows. According to conventional wisdom, inequality may upset or offend us, but it’s a necessary part of a competitive economy.... 'Over the years, as I’ve looked for the evidence behind this story, I’ve found it to be flimsy', Nobel Prize laureate Robert Solow says in a video that premiered last month at WCEG’s launch. 'Sometimes there’s not much evidence there at all.'"

    "This tough-love, winner-take-all narrative dominating policymaking is far too limited a way to think about how a complex, modern, diverse economy like ours expands and thrives. The strongest periods of economic growth in the 20th century were also times when incomes rose across the board..."

  2. Alan Blinder: The Fed Plan to Revive High-Powered Money: "Don't only drop the interest paid rate paid on banks' excess reserves, charge them:** Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of 'excess reserves' buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: '[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.' As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that "most" members of its policy committee think a change 'could be worth considering', that's almost like saying they love the idea. That's news because they haven't loved it before..."

  3. Via Jason Kottke, Adrian Hon: A History of the Future in 100 Objects: Every century is extraordinary.... Some may be the bloodiest or the darkest; others encompass momentous social revolutions... scientific advances... religious and philosophical movements. The 21st century... [was] the first time in our history that we have truly had to question what it means to be human. It is the stories of our collective humanity that I hope to tell... how we became more connected... with objects like Babel, Silent Messaging, the Nautilus-3, and the Brain Bubble--and how we became fragmented... physically and culturally, with the Fourth Great Awakening, and the Biomes. With the Braid Collective, the Loop, the Steward Medal, and the Rechartered Cities, we made tremendous steps forward... but the Locked Simulation Interrogations, the Sudan-Shanghai Letter, the Collingwood Meteor, and the Downvoted all showed how easy it was for us to lapse back into horror and atrocity. We automated our economy with the UCS Deliverbots, the Mimic Scripts, the Negotiation Agents, and the Old Drones, destroying the entire notion of work and employment in the process; and we transformed our politics with Jorge Alvarez's Presidential Campaign, and the Constitutional Blueprints...

  4. Joe Romm: Arctic Warming Drives More Extreme Summer Heat Waves, Droughts And Deluges: "A new study links the past decade’s “exceptional number of unprecedented summer extreme weather events” in the U.S. and Europe with the “record declines in both summer Arctic sea ice and snow cover on high-latitude land.” Researchers at the Chinese Academy of Sciences, along with Rutgers Prof. Jennifer Francis, make the case in a Nature Climate Change study, “Extreme summer weather in northern mid-latitudes linked to a vanishing cryosphere”. Scientists predicted a decade ago that Arctic ice loss would shift storm tracks and bring on worse western droughts of the kind we are now seeing. Recent studies find that Arctic sea ice loss may well usher changes in the jet stream that lead to more U.S. extreme weather events…. Global warming melts highly reflective white ice and snow, which is replaced by the dark blue sea or dark land, both of which absorb far more sunlight and hence far more solar energy. That is one of the many sources of “polar amplification,” whereby the Arctic warms much faster than other parts of the globe. Now it seems increasingly clear that the amplified Arctic warming in turn amplifies extreme weather by shifting and weakening the jetstream…"


  1. John Maynard Keynes (1926): Microfoundations: "The atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity--the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of."

  2. Thomas Piketty and Emmanuel Saez: Rethinking capital and wealth taxation: "We emphasize three main rationales for capital taxation. First, the frontier between capital and labor income flows is often fuzzy, thereby lending support to a broad-based, comprehensive income tax. Next, the very notions of income and consumption flows are difficult to define and measure for top wealth holders. Therefore the proper way to tax billionaires is a progressive wealth tax. Finally, there are strong meritocratic reasons why we should tax inherited wealth more than earned income or self-made wealth (for which individuals can be held responsible, at least in part). This implies that the ideal fiscal system should also entail a progressive inheritance tax, in addition to progressive income and wealth taxes. We then confront our prescriptions with historical experience..."

  3. Via Joe Weisenthal, Matthew Hornbach: Stop Talking About Tapering: "Investors should stop talking about tapering and start talking about potential changes to the rate guidance framework. In our view, the exact timing of tapering should be a secondary concern. What matters is whether the Fed combines tapering with a reduction in the Unemployment Rate Threshold or an introduction in a new inflation floor. The thresholds are all about credibility, so the Fed must understand how each option will impact the market’s perception of its commitments to remain on hold. Our economist's base case is that the Fed pairs a modest tapering with a 50bp cut in the URT. In our view, the risk to that base case is a more aggressive 100bp cut paired with a larger taper."

  4. Joan McCarter: Daily Kos: Third Way head admits Elizabeth Warren scares them: "Here's a stunning admission from Third Way's senior vice president, Jim Kessler. They are scared s---less of Elizabeth Warren and the power she can bring to the movement to expand Social Security.... 'She is a very compelling elected official and national figure', he said. 'Her involvement in that particular bill, we just looked at it and said "okay, this seems to be starting to get out of hand"'. They also just admitted that expanding Social Security is a viable plan. Good job, guys. If the original editorial that caused this black-eye for Third Way wasn't loathsome enough, we now have this admission. Because God forbid a popular senator make a populist proposal—an extremely popular proposal 'viable!' Clearly, the big brains at Third Way have never read any public polling on Social Security. And just as clearly, the big brains at Third Way really don't have any interest in saving the Democratic party. Or Social Security, for that matter. Convenient for us that they keep making that abundantly evident."

Should Be Aware of:

  1. Matthew O'Brien: The Most Important Economic Stories of 2013—in 37 Graphs: "Maybe it's just me, but the last few years are getting tough to tell apart. Imagine a quiz question: Name that year where we threw obstacles in the recovery's way, but kept growing slowly; where Europe avoided both a disaster and a solution to its mess; and where China kept growing over 7 percent, but didn't rebalance its economy like it said it wants. You'd be right to guess 2013. You'd also be right to guess 2012, 2011, or 2010. So, to remind ourselves what did change in the last 12 months, we asked our favorite economists, journalists, and think-tankers for their favorite charts of the year..."

In which MIT decided [in the 1970s] to teach micro first so as to make economics more relevant | Alan Pyke: The Fine Print In The Coming Bipartisan Agreement For Cutting Food Stamps | Ed Kilgore: The Persistent Temptation of Insurance Exchanges | Jared Bernstein: Structural Stagnation, Bubbles, and the Volcker Rule | Molly Jackman: We Need More Spending, not Cutting | Igor Volsky: No, Obamacare Won't Cover Every Drug--Just Like Every Other Insurance Policy | Antonio Fatas: Debt and secular stagnation | Sy Mukherjee: Iowa's Alternative To Obamacare's Medicaid Expansion Wins Federal Approval | Joe Weisenthal: Here's Paul Krugman's Plan To Grow The Economy Without Bubbles |