Morning Must-Read: Ways Out of Secular Stagnation
The Moral Indignity of Social Democracy: Monday Focus (January 20, 2014)

Things to Read on the Morning of January 21, 2014


  1. Martin Luther King: Letter from a Birmingham Jail [King, Jr.]: "My Dear Fellow Clergymen: While confined here in the Birmingham city jail, I came across your recent statement calling my present activities 'unwise and untimely'. Seldom do I pause to answer criticism of my work and ideas. If I sought to answer all the criticisms that cross my desk, my secretaries would have little time for anything other than such correspondence in the course of the day, and I would have no time for constructive work. But since I feel that you are men of genuine good will and that your criticisms are sincerely set forth, I want to try to answer your statement in what I hope will be patient and reasonable terms..."

  2. Alan Fernihough and Kevin Hjortshøj O'Rourke: Coal and the European Industrial Revolution: "We examine the importance of geographical proximity to coal as a factor underpinning comparative European economic development during the Industrial Revolution. Our analysis exploits geographical variation in city and coalfield locations, alongside temporal variation in the availability of coal-powered technologies, to quantify the effect of coal availability on historic city population sizes. Since we suspect that our coal measure could be endogenous, we use a geologically derived measure as an instrumental variable: proximity to rock strata from the Carboniferous era. Consistent with traditional historical accounts of the Industrial Revolution, we find that coal had a strong influence on city population size from 1800 onward. Counterfactual estimates of city population sizes indicate that our estimated coal effect explains at least 60% of the growth in European city populations from 1750 to 1900. This result is robust to a number of alternative modelling assumptions regarding missing historical population data, spatially lagged effects, and the exclusion of the United Kingdom from the estimation sample."

  3. Wolfgang Munchau: The real scandal is France’s stagnant economic thinking: "If you want to understand the financial crisis and the subsequent recession, Say’s Law is of no help whatsoever.... When you try to solve a shortage of aggregate demand through supply-side policies, the results are not going to be any different in France than they were elsewhere.... Do not romanticise his U-turn two years into his term and compare it with François Mitterrand’s similarly-timed adoption of the “franc fort” policy in 1983. The purpose of the Mitterrand’s decision was to allow France to coexist in a semi-fixed exchange rate regime with West Germany. It was a political choice of macroeconomic adjustment, not one of supply-side voodoo and ideological convergence...."

  4. Jonathan Chait: Deficit Scolds Holding the Unemployed Hostage: "The main reason for the stalemate is the combination of strategic obstruction and ideological radicalism that dominates Congressional Republican thinking. But a second and nontrivial reason is that the deficit scolds have given the Republicans cover at every turn. The deficit scolds are a loose amalgamation of business executives, activists, and pundits, often centered around Pete Peterson and his network of activist groups, allied around the goal of bringing both parties together to agree on a plan to reduce the long-term budget deficit.... I don’t find their policy goals terrible.... The long-term deficit, while hard to predict... is probably too high. A bipartisan agreement along the lines suggested by the deficit scolds might be a positive thing.... The deficit scolds have proven to be completely impotent to bring about the changes they say they want, but surprisingly powerful allies in support of gridlock."


  1. Mark Thoma: What's the best way to help the poor?: "There has been a recent debate among economists about whether the minimum wage and the Earned Income Tax Credit (EITC) are 'complements' or 'substitutes'.... Arin Dube... says[:]... 'The minimum wage can also increase the efficacy of a policy that is sometimes pushed as a substitute: the earned-income tax credit. This encourages more people to seek work, but can push wages down; a minimum wage ameliorates this. Of course, many families under the poverty line simply have no workers, making any work-based policy of limited help. This is why raising and indexing the minimum wage is just a part of the portfolio of policies we need to enact to ensure a decent living standard.... Finally, apart from the economics, the politics of the minimum wage versus the EITC are also important.... If we want to help low-income households, and if increasing both the EITC and the minimum wage is not politically possible, an increase in just one of these two legs of support--in this case an increase in the minimum wage--is better than doing nothing at all."

  2. Jeff Frankel: Market Mechanisms for Regulation in Retreat: Cap-and-Trade and Obamacare: "Market-based mechanisms such as cap-and-trade can tackle externality problems more efficiently than command-and-control regulations. However, politicians in the US and Europe have retreated from cap-and-trade in recent years. This column draws a parallel between Republicans’ abandonment of market-based environmental regulation and their recent disavowal of mandatory health insurance. The author argues that in practice, the alternative to market-based regulation is not an absence of regulation, but rather the return of inefficient mandates and subsidies."

  3. Simon Wren-Lewis: Will the financial crisis lead to another revolution in macroeconomics?: "That the [Great] Depression led to Keynesian economics, and that this revolutionised macroeconomics, cannot be disputed.... The great inflation of the 1970s... greatly increased, for a while, the popularity of monetarism, but in theoretical terms that was hardly revolutionary (it used IS-LM), and its popularity died out.... There was a revolution in macroeconomics in the 1970s and 1980s, but... a revolution inspired by theory (rational expectations, and microfoundations more generally), rather than external events. There is no obvious link with the great inflation of the 1970s. Indeed, the RBC model that embodied most of the ideas of that revolution had essentially nothing to say about inflation.... This suggests that there is no inevitability that the financial crisis will lead to any revolution in macroeconomics. Everyone admits that mainstream macro analysis took finance for granted before the crash, and those economists that did worry about such things were marginalised.... But now ‘financial frictions modelling’ is the growth area within the discipline..."

Chris Giles: IMF warns on threat of income inequality| Jared Bernstein: The Limits of Marriage as a Path out of Poverty | Jérémie Cohen-Setton: Blogs review: Getting rid of the Euler equation | Robert Reich: David Brooks' Utter Ignorance About Inequality

Should Be Aware of:

  1. Bill Janeway: "The need to stimulate demand in the United States and other developed economies has provoked a debate that goes beyond economic technicalities to questions about government’s overarching responsibilities.... But the justification for such a policy must transcend economic logic if it is to win political support. A greater role for government requires an overriding mission.... [In the 1930s,] despite his impeccable economic logic, Keynes lost the policy debate.... Policymakers argued that unproductive, debt-financed government spending would panic businessmen and bankers into reducing further their already-low support of economic activity (and this at a time when Britain’s unemployment rate was triple its current level).... Two years later, a rueful Keynes wrote: 'It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiment which would prove my case--except in war conditions.'... We do not have to look far for such a mission. The case for acting on a massive scale to combat climate change has been made in Europe, and even in China. Why has there been such little debate in the US? Is it because those who oppose such discussions reject the science of climate change? Or do they deny the science because accepting it would legitimize an economically activist state?"

  2. :Adrianna Macintyre How does the mini-med loophole work?: "Bucket B captures the large-group market and self-insured plans (usually only large employers self-insure, but small businesses are increasingly looking to self-insurance to ease regulatory pressures).... Employers with plans that fall into Bucket B essentially have three options. (1) Offer compliant coverage.... (2) Offer 'loophole' coverage... that don’t comply with all of the ACA’s intended protections.... The employer could be slapped with... $3,000 per employee who opts into the exchange. Individuals who carry subpar coverage might also be subject to the individual mandate penalty. (3) Offer coverage that doesn’t even meet loophole standards... [and pay] $2,000... per full-time worker.... This week’s WSJ story introduces a new twist: employers could get around the employer penalty associated with skimpy coverage if they offer a compliant plan alongside a mini-med option. Because employees are offered minimum essential coverage through their employer, they’re ineligible for tax credits; those are the trigger mechanism for the employer penalties."

  3. Henry Farrell: The Liberal Surveillance State: "Long time readers of Sean Wilentz will remember him for greatest hits like his notorious piece on the 'cutthroat, fraudulent politics that lie at the foundation of Obama’s supposedly uplifting campaign', involving 'the most outrageous deployment of racial politics since the Willie Horton ad campaign in 1988 and the most insidious since Ronald Reagan kicked off his 1980 campaign in Philadelphia, Mississippi, praising states’ rights', or his claim that not only was Obama’s 'most obvious change to liberal politics' the color of his skin, but Obama was the second coming of Jimmy Carter and a starry-eyed Russia-hugger to boot. So it’s very, very weird to see Wilentz criticizing Edward Snowden on the grounds that his 'disgruntlement with Obama… was fueled by a deep disdain for progressive politics'--given his own track record on Obama’s brand of progressivism, why on earth would he believe this to be a problem? But then the whole article--an attempted hack job on Snowden, Greenwald, Assange and the liberals who like them--is weird like that. In one sense, I can understand why the New Republic went for it--it’s perhaps the purest exercise in even~the~liberal~New Republicism that the magazine has published since its change in ownership. Yet it’s also so obviously intellectually shoddy and incoherently argued that you’d have thought that any half-way competent editor would have decided that no amount of contrarianism was worth the damage to the magazine’s brand..."


Tim Duy: Economist's View: Fed Watch: The Week That Was |