Afternoon Must-Read: Tyler Cowen (2008): Keynes’s General Theory, Chapter Four, *The Choice of Units*
Noted for Your Afternoon Procrastination for April 16, 2014

Things to Read on the Afternoon of April 16, 2014


  1. Ben Casselman: Losing Benefits Isn’t Prodding Unemployed Back to Work: "More than a million Americans saw their unemployment benefits expire at the start of the year, after Congress failed to renew the Emergency Unemployment Compensation program.... Some economists had argued that the program was doing more harm than good by discouraging recipients from looking for work or taking jobs. They said that because the job market was improving, the time had come to cut off benefits. That would prod the unemployed to get back to work, perhaps leading them to accept offers that seem less than ideal. So far, however, the evidence doesn’t seem to support that theory. Rather than finding jobs, the long-term unemployed continue to be out of luck. We now have three months’ worth of job market data since the benefits program expired..."

  2. Thomas Piketty: Capital in the Twenty-First Century: "What are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In Capital in the Twenty-First Century, economist Thomas Piketty analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality..."

  3. Jared Bernstein: Summers on Infrastructure Needs: "If there’s something awry in the logic of Larry Summers’ argument here for more infrastructure investment, I certainly can’t see it. Based on low real interest rates, still high unemployment particularly among blue-collar production and construction workers, and most of all, the need for productivity-enhancing investments in our aging public goods, Larry is very much correct to ask 'if not now, when?'.... We are, at some point, going to wise up and start engaging in the needed maintenance of our depreciating stock of public goods.... So given the confluence of factors Larry identifies, shouldn’t we start now? There are many 'two-fers' in this space.... Larry doesn’t get much into the politics, but they’re of course central.  One could historically count on bipartisan support for this type of investment.  I mean, business interests might oppose the minimum wage and unions, but of course they want and need adequate ports, roads, airports, and so on, not to mention a skilled work force.  No firm can supply these public goods. But in a sign of how different these times are, not only is bipartisan support for infrastructure investment far from forthcoming, Rep. Paul Ryan’s new budget significantly cuts transportation funding..."

  4. Martin Wolf: Review of ‘Capital in the Twenty-First Century’, by Thomas Piketty: "Yet the book also has clear weaknesses. Much the most important is that it does not deal with why soaring inequality... matters. Piketty essentially simply assumes that it does. One argument for inequality is that it is a spur to (or product of) innovation. The contrary evidence is clear: contemporary inequality and, above all, inherited wealth are unnecessary for this purpose. Yet another argument is that the product of just processes must be just. Yet even if the processes driving inequality were themselves just (which is highly doubtful), this is not the only principle of distributive justice. Another--to me more plausible--argument against Piketty’s is that inequality is less important in an economy now 20 times as productive as those of two centuries ago.... To me the most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power. Inequality cannot be eliminated. It is inevitable and to a degree even desirable. But, as the Greeks argued, there needs to be moderation in all things. We are not seeing moderate rises in inequality. We should take notice."

  5. Tyler Cowen (2008): Keynes’s General Theory, chapter four, The Choice of Units: "This chapter may seem cryptic but the key is the tiny footnote to Hayek; this chapter is Keynes obsessing over capital theory and the Austrians. Hayek argued that an economic downturn should be understood as a discombobulation of the capital structure and here is Keynes arguing against that approach.  When you cut through the terminology, Keynes says that capital heterogeneity isn’t needed to generate aggregate demand analysis and that his core mechanisms will operate in any case. Keynes admits that with economic development labor gets very specialized, or very closely connected to particular capital goods, so yes there are capital complementarities of the Austrian kind.  But Keynes thinks such fragilities will only help his argument, while rendering the analytics too messy.  He declares his intention to proceed with homogeneous magnitudes of capital and labor. This chapter often fails to receive its proper due; it is very important for understanding the location of Keynes in the history of economic thought. With this one chapter, Austrian capital theory falls off the map..."


  1. David Bowers: Sceptics underestimate Japan’s policy shift: "The BoJ has gone far beyond Draghi-style promises: it has presided over a 25 per cent depreciation of the yen during the past 18 months; it is in the process of doubling the money base in just two years; and it is actively committed to 2 per cent inflation. If the ECB did this, the markets would regard it as a major paradigm shift; but because Japan has done it, somehow it does not “count”. Indeed, looking at the relative performance of Japanese equities (in dollar terms) versus the MSCI World Index, it is as though Prime Minister Shinzo Abe’s initiatives never happened: the trend of Japanese equity underperformance remains intact. Year to date (in local currency terms), Japanese equities have done worse than the Russian stock market. The extent of the regime shift at the world’s third largest central bank continues to be underestimated. The BoJ has abandoned a creditor-friendly policy stance and adopted one that is more debtor-friendly..."

  2. Felix Salmon: Private equity math, Nuveen edition: "Here’s my back-of-the-envelope math: you buy a company for $2.7 billion in cash, plus debt which you refinance a few times. While you’re running the company, it loses a total of $2.4 billion. And then you sell the company for $1.75 billion in cash. Total going out the door: $5.1 billion. Total coming in, at exit: $1.75 billion. Net loss: some $3.35 billion, give or take. All of which raises some big questions about the WSJ’s claim that Madison Dearborn 'will have at least broken even'.... If that claim is even close to being true, then at the very least we can’t take Nuveen’s public filings at face value at all.... Somehow, Madison Dearborn will need to have turned losses for Nuveen into substantial profits for itself--the classic strip-and-flip strategy. This is worth remembering, when private-equity types (think Mitt Romney) claim that their interests are aligned with the interests of the companies they buy. That certainly doesn’t seem to have been the case here. Nuveen is being sold with about $1.5 billion more debt than it started with, and with cumulative losses under Madison Dearborn’s ownership of some $2.4 billion. That’s not a great legacy for TIAA-CREF to inherit. If Madison Dearborn really is breaking even on this deal, that only goes to show the enormous disconnect between the economics of private equity companies--the wealthy rentiers of society — versus the economics of the real-world companies they buy and sell..."

  3. Olivier Coibion et al.: Does Greater Inequality Lead to More Household Borrowing?: New Evidence from Household Data: "One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to 'keep up' with higher-income households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants’ incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period..."

Should Be Aware of:

  1. Eric Chaney: Revolt on the Nile: Economic Shocks, Religion, and Political Power: "Using centuries of Nile flood data, I document that during deviant Nile floods, Egypt’s highest-ranking religious authority was less likely to be replaced and relative allocations to religious structures increased. These findings are consistent with historical evidence that Nile shocks increased this authority’s political influence by raising the probability he could coordinate a revolt. I find that the available data provide support for this interpretation and weigh against some of the most plausible alternatives. For example, I show that while Nile shocks increased historical references to social unrest, deviant floods did not increase a proxy for popular religiosity. Together, the results suggest an increase in the political power of religious leaders during periods of economic downturn."

  2. John Cook: Passover Greetings from the Editor: "Hello. My name is John Cook, and as of three weeks ago I became the editor-in-chief of The Intercept.... The site launched in February with an announcement from co-founders Glenn Greenwald, Laura Poitras, and Jeremy Scahill.... The decision to begin publishing at that point was based on a commitment to continue the work of reporting on, publishing, and explicating those documents.... Until we have completed the work of getting staffed up and conceptually prepared for the launch of a full-bore news operation that will be producing a steady stream of shit-kicking stories, The Intercept will be narrowly focusing on one thing and one thing only: Reporting out stories from the NSA archive as quickly and responsibly as is practicable. We will do so at a tempo that suits the material. When we are prepared to publish those stories, we will publish them. When we are not, we will be silent for a time, unless Glenn Greenwald has some blogging he wants to do, because no one can stop Glenn Greenwald from blogging..."