Morning Must-Read: Ricardo Hausmann: The Real Raw Material of Wealth
Lunchtime Must-Read: Simon Wren-Lewis: Synthesis!? David Beckworth's Insurance Policy

Noted for Your Lunchtime Procrastination for July 26, 2014

Over at Equitable Growth--The Equitablog



  1. Emmanuel Saez: Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses: "When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support and a large phasing-out tax rate. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided..." Via Owen Zidar

  2. David Beckworth: A Surprising Look Back at the Fed's QE Programs: "If anything... QE programs raised long-term financing costs for the government. One way to explain this outcome is that the QE programs actually raised expected economic growth and that pushed up treasury yields.... It is as if the term premium needed QE to stay propped up. Here is one possible explanation. The QE programs increased the economic outlook and that, in turn, reduced the risk premium on other assets. Investors, therefore, were more willing to hold other higher-yielding assets and this meant they had to be compensated more to hold the low-yielding treasuries.... By failing to restore full employment to the economy, the Fed has allowed risk premiums to stay elevated and interest rates on safe assets to stay depressed.... Now one could conclude from this that the QE programs did not make that much difference. I disagree. The evidence above suggest the Fed at least put a floor under long-term interest rates (and by implication a floor under the economy) with its QE programs.... So goodbye QE. It was good knowing you..."

  3. Adair Turner: High tide for house prices is engulfing our economy: "A beach hut in Dorset is on sale for £250,000. The UK’s housing obsession is as great as ever.... In France, housing wealth grew from 120 per cent of national income in 1970 to 371 per cent in 2010. More than half of Canada’s wealth and all of the increase in its wealth-to-income ratio is explained by property prices.... Further technological progress, in particular in IT and telecoms, will continue to drive down the price of many goods and services. But paradoxically, an increasingly high-tech economy will be one in which the relative value of the oldest and most physical thing of all--land--will probably rise. Expectations of rising prices generate responses that make economies less stable.... Property will inevitably play a more important role in economies as incomes grow. We need to manage the consequences--and there is no silver bullet.... If the fundamental problem is that desirable property is scarce, the obvious answer is to lift planning constraints and build more houses. But more construction is no panacea: Ireland’s relaxed planning rules did not prevent a devastating property boom and bust. And the motivations that drive increased competition for desirable locations also produce strong opposition to unrestricted development.... Transport and environmental policies that enable people to live in more densely populated areas without jeopardising their quality of life could be as important to financial stability as bank capital requirements..."

  4. Scott Sumner: Jonathan Gruber on federal exchanges and subsidies: "Several commenters pointed to a statement made by Jonathan Gruber in 2012.... 'What’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits — but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.'... The quote was taken out of context, and that the comments immediately preceding the quote tells a very different story: 'Yes, so these health insurance exchanges... will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law it says if the states don’t provide them the federal backstop will. The federal government has been sort of slow in putting up its backstop in part because I think they want to sort of squeeze the states to do it.' That seems to imply the federal backstops would provide health subsidies. So how can we reconcile these two statements? I believe Gruber was trying to say that the federal government was being slow in setting up the exchanges, because until they did so, those states without state exchanges would get no subsidy. Once the federal exchanges were set up, they would all get the subsidy. What I don’t understand is why commenters were providing me with the quote on top, but not the second quote, which provides important context..."


And Over Here:

Should Be Aware of:

  1. Ed Kilgore: The Two Paul Ryans: "Ezra... probably feels he’s providing an incentive for the Good Ryan to subdue the Bad Ryan once and for all, and even hints that the Bad Ryan’s work was mainly a product of the days when deficits and debt were taken more seriously by everybody. But... there is a very long history of 'reform-minded' Republicans talking big and expressing compassion about poverty, and then screwing the poor the first opportunity they get.... It’s going to take a lot more than a 'poverty plan' to make me treat the Ryan Budget as anything less than his central enduring legacy..."

  2. Norman Ornstein: The Existential Battle for the Soul of the GOP: "What began as a ruthlessly pragmatic, take-no-prisoners parliamentary style opposition to Obama was linked to constant efforts to delegitimize his presidency, first by saying he was not born in the U.S., then by calling him a tyrant trying to turn the country into a Socialist or Communist paradise. These efforts were not condemned vigorously by party leaders in and out of office, but were instead deflected or encouraged, helping to create a monster: a large, vigorous radical movement that now has large numbers of adherents and true believers in office and in state party leadership.... A Rasmussen survey shows that 23 percent of Americans still believe Obama is not an American, while an additional 17 percent are not sure. Forty percent of Americans! This is no longer a fringe view. As for the radicals in elected office or in control of party organs, consider a small sampling of comments: 'Sex that doesn't produce people is deviate.'--Montana state Rep. Dave Hagstrom. 'It is not our job to see that anyone gets an education.'--Oklahoma state Rep. Mike Reynolds. 'I hear you loud and clear, Barack Obama. You don't represent the country that I grew up with. And your values is not going to save us. We're going to take this country back for the Lord. We're going to try to take this country back for conservatism. And we're not going to allow minorities to run roughshod over what you people believe in!'--Arkansas state Sen. Jason Rapert.... 'I don't want to get into the debate about climate change. But I'll simply point out that I think in academia we all agree that the temperature on Mars is exactly as it is here. Nobody will dispute that. Yet there are no coal mines on Mars. There's no factories on Mars that I'm aware of.'--Kentucky state Sen. Brandon Smith.... 'Although Islam had a religious component, it is much more than a simple religious ideology. It is a complete geo-political structure and, as such, does not deserve First Amendment protections.'--Georgia congressional candidate Jody Hice.... 'God's word is true. I've come to understand that. All that stuff I was taught about evolution and embryology and the big-bang theory, all that is lies straight from the pit of hell. It's lies to try to keep me and all the folks who were taught that from understanding that they need a savior.'--U.S. Rep. (and M.D.) Paul Broun of Georgia. 'Now I don't assert where he [Obama] was born, I will just tell you that we are all certain that he was not raised with an American experience. So these things that beat in our hearts when we hear the National Anthem and when we say the Pledge of Allegiance doesn't beat the same for him.'--U.S. Rep. Steve King of Iowa.... One might argue that these quotes are highly selective—-but they are only a tiny sampling.... Importantly, almost none were countered by party officials or legislative leaders, nor were the individuals quoted reprimanded in any way. What used to be widely seen as loony is now broadly accepted or tolerated..."

Already-Noted Must-Reads:

  1. Matt Bruenig: How Reform Conservatives Like Reihan Salam and Paul Ryan Misunderstand Poverty: "Oh boy. Reihan Salam has a piece riddled with confusions, some conceptual, some technical, and some just downright strange.... Poverty measurement that also includes tax credits (like the EITC) and non-cash benefits (like SNAP) called the Supplemental Poverty Metric... the only thing that has reduced poverty since 1967 is non-market benefits. That's it. Those advocating non-market benefits to cut poverty are not the crazy ones. Those thinking the market will do it are.... Let's just make some things clear.... Market income is not distributed according to desert (i.e. each get what they produce). Nobody produces nature, yet its massive marginal productivity flows to random private owners.... The majority of the national output each year is attributable to inherited technology and knowledge (aka TFP) that nobody alive produced.... Nobody is economically independent from the government.... If you want to make people's flow of material resources independent of the government, you must repeal property law first and foremost, the biggest government welfare program in history.... More disposable income doesn't solve all of the problems in the society, but it does solve the problem of inadequate diposable income..."

  2. Barry Eichengreen: The ECB Tries Again: "In June the European Central Bank announced a series of new steps to counter deflation.... Rather than bemoaning the failure of President Draghi & Co. to move earlier, it is more productive at this stage to ask: are the central bank's measures now up to the task?... The ECB's conventional measures, reducing its benchmark interest rate from 0.25 to 0.15 per cent and charging commercial banks 0.1 per cent on the money they deposit with the central bank, will make little difference.... Conventional monetary policy has run its course.... Thus, if policy is going to make a difference, policy will have to be unconventional. Here the ECB unveiled... one and a half... initiatives in June... 'Targeted Long-Term Refinancing Operation'... €400 billion, or some US$550 billion, cumulatively over four months. Recall that the Federal Reserve, under QE3, had been injecting $85 billion a month into U.S. financial markets before starting to taper in December. This makes TLTRO look like a substantial commitment.... The additional 'half an initiative' announced in June was that the ECB would study the possibility of security purchases.... These cautions should not be taken as a council of despair. If ECB officials conclude that the impact of TLTRO and securities purchase will be marginal, they should not give up hope; rather, they should strive to do more..."

  3. Barry Ritholtz: Cognitive Dissonance: "Of all of the failings of human wetware, the one I find most intriguing is cognitive dissonance... [which] occurs in the mind of an individual when a theoretical belief system is confronted by factual evidence demonstrating outcomes contrary to what theories dictate should occur. Stated more plainly, when facts conflict with beliefs people find ways to ignore those facts, rationalizing them in a way that allows the disproven ideas to survive. John Kenneth Galbraith famously referenced cognitive dissonance before it was even called that, stating: 'Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof'....
    "Examples are many and varied.... Radical deregulation resulting in bad outcomes rather than the free market nirvana its believers espoused; Austrian economists warning of imminent hyperinflation and the collapse of the fiat dollar that never arrives. Rather than question the theory, the person suffering from cognitive dissonance ignores the facts in front of their very eyes and instead devises rationales for why any specific expected outcome never occurred. The blame is laid elsewhere.... It wasn't the wildly irresponsible behavior of non-bank lenders and junk mortgages securitized and rated AAA that caused the problems. Rather, it had to be something else, and if we can find a government entity to blame, so much the better.... There is a fine line between having confidence in your methodologies and living in your own private fantasy world. Like it or not, this is the human condition. Recognizing it at least gives us a chance to avoid getting caught in its pernicious grasp..."

  4. Ricardo Hausmann: The Real Raw Material of Wealth: "Poor countries export... materials such as cocoa, iron ore, and raw diamonds.... Rich countries export--often to those same poor countries... chocolate, cars, and jewels.... Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues--say, the availability of raw materials--and blinds societies to the more promising opportunities that may lie elsewhere.... Consider Finland.... A classical economist would argue that, given this, the country should export wood... a traditional development economist would argue that it should... add value by transforming the wood into paper or furniture.... But wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood.... From here, they went into other automated machines..."