Grasping Reality on TypePad, by Brad DeLong

New Economist writes:

New Economist: Has Barro solved the equity premium puzzle? : A new paper by Robert Barro to this year's Minnesota Workshop in Macroeconomic Theory attempts to answer the puzzle: Rare Events and the Equity Premium (PDF). Barro's paper builds upon a 1988 JME article by Thomas Rietz entitled "The equity premium: A solution" (sorry, no PDF available), which argued that the premium could be explained by infrequent but very large falls in consumption (i.e. wars, depressions or disasters), if the intertemporal elasticity of substitution of consumption is low.

Len Moss as reported by his son: 18 September 1944: Second parachute drop into Arnhem meets deadly reception:

Somehow, he managed to untangle the lines and get the parachute canopy deployed, just in time, but…

…he landed very awkwardly, stiff legged on the ground.

That really, really hurt!

Over at Equitable Growth--The Equitablog

• Nick Bunker: Flexible repayment options for debt: Is liquidity or solvency the issue? - Washington Center for Equitable Growth
• Evening Must-Read: Ezra Klein: Area Pundit Tom Frank Angry at Political Science for Proving Him Wrong - Washington Center for Equitable Growth
• Simon Wren-Lewis: Afternoon Must-Read: Keynes and the Macmillan committee - Washington Center for Equitable Growth
• Federal Reserve Statement Time! - Washington Center for Equitable Growth
• Afternoon Must-Read: Wall Street Journal Federal Reserve Statement Tracker - Washington Center for Equitable Growth
• Afternoon Must-Watch: Scott Gottlieb: Ebola - Washington Center for Equitable Growth
• Ignorant Night Thoughts on Regional Medical Cost Disparities: Wednesday Focus for September 17, 2014 - Washington Center for Equitable Growth
• I Am a Sad Puppy: No Apple iPhone 6s to Play with Until Friday - Washington Center for Equitable Growth
• Morning Must-Read: Matthew Yglesias: Failure to Nominate: The Federal Reserve and Obama's Biggest Economic Policy Mistake - Washington Center for Equitable Growth

Plus:

• Things to Read on the Morning of September 18, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

• Ezra Klein: Salon columnist Thomas Frank does not like political science, and he particularly dislikes my column arguing that political science is improving political journalism. In riposte, he's written an article demonstrating the need for political journalists to ground their ideas in political science...

Ezra Klein: Area Pundit Tom Frank Angry at Political Science for Proving Him Wrong: "Watching congressional Democrats who were more conservative than Republicans become Republicans...

...is not a story that tracks very well with [Tom] Frank's story of a populist electorate being turned off by Clinton's triangulations. Indeed, Clinton was much more liberal than many of the congressional Democrats who lost their seats in 1994. But Frank wants to see the Democratic Party move leftward, and so this isn't an analysis of the period that he finds very helpful.... I rely on political science research... because politics, in my experience, is thick with the 'allow me to drop a single, disturbing data point' approach to analysis. Skilled writers can make anything sound convincing in 24 column inches....

Political science has its problems, but... is more than capable of weeding out this kind of nonsense. It forces a much higher evidentiary standard.... The biggest problem any of us face trying to learn about American politics is the natural tendency to believe arguments we like and dismiss the ones we don't. Poli-sci research is, for me, a helpful check.... I need to ground my political commentary in something beyond my own opinions. Political science research isn't perfect or infallible, but it's a start. So yes, Frank is right: politics is full of experts who don't deserve the trust they're given and retain prominence even after their theories are shredded. The problem is he's one of them.

Simon Wren-Lewis: Keynes and the Macmillan committee "When I was younger, I drew the wrong inference about the Great Depression...

...If only the General Theory had been written 10 years earlier, I reasoned, much of the agony of the Great Depression could have been avoided. Instead I should have focused on the gold standard... because of what it tells you about the influences on macroeconomic policy. Montagu Norman said to the committee 'I have never been able to see myself why for the last few years it should have been impossible for industry, starting from within, to have readjusted its own position'. This was a few years after the General Strike of 1926! This was not someone lacking a coherent theory, but someone blind to the evidence and human nature, and enthralled to the ideology of the gold standard. No doubt being a central banker rather than a worker, or even an industrialist, helped this blindness. The lesson I should have drawn from the Great Depression is that a powerful ideology, in the hands of people remote from those adversely affected by it, can overcome common sense and evidence.

Cheryl K. Chumley: The Problem with Being John Boehner: "Speaker John Boehner [explains] why...

the Republican majority in the House looks good on paper but doesn’t always pan out with votes. 'On any given day, 16 of my members decide they’re going to go this way, and all of the sudden, I have nothing. You might notice I have a few knuckleheads in my conference.... Dealing with Democrats is one thing. Dealing with the knuckleheads is another.'... In April, Mr. Boehner mocked some of his Republican colleagues for failing to support immigration reform, describing their attitudes as: 'Ohhh, don’t make me do this. Ohhhh. This is too hard...'

Wall Street Journal Federal Reserve Statement Tracker:

Comparing July 30 and September 17, 2014:

Do note that end of the current statement:

Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.

I very much hope that when the 2009 transcripts are released both President Fisher and President Plosser will take advantage of the opportunity to give major speeches explaining why they advocated the policy actions they did in 2009, to what degree they see in retrospect that there advocacy was based on expectations of the then-future that turned out to be erroneous, and how marking their beliefs to market in response to the events of 2009 and thereafter has changed their views on what monetary policy should be in circumstances like today.

Scott Gotlieb: Ebola:

Over at Equitable Growth: What I think of as the Louise Sheiner fact, as set out by David Cutler (paraphrasing from memory):

Q: How much of regional variation in real health-care (Medicare) costs is due to the fact that some regions have sicker populations than others?

A1 (micro): If we examine how much sicker people in different regions are, and multiply the difference in average sickness by how much extra treatment sicker people get on average, we get an incremental regional R² ~ 0.1: an extra 10%-points of the regional real cost variation can be accounted for because some regions are sicker than others.

A2 (macro): If we just regress regional real costs on some plausible indicator of regional average sickness, we get an incremental regional R² ~ 0.5: an extra 50%-points of the regional real cost variation can be accounted for because some regions are sicker than others. READ MOAR

Apple iPhone 6

Claims that Barack Obama is actually up to the job of being president--both when I make them and when they are made to me--have, since early 2009, run up against the problem that the low-hanging economic policy fruit is and always has been keeping the Federal Reserve Governor pipeline filled. That means (a) nominating candidates for vacant governorships and (b) doing the congressional outreach to solidify at least Democratic senators behind the candidates you intend to nominate.

Obama's failure to do this--and the failure of his economic policy staff to yell at him every day it is not done--is and always has been totally bewildering to me...

Anybody have any explanations?

**Matthew Yglesias: Obama's biggest economic policy mistake: "Barack Obama has not accomplished nearly as much as his most fervent supporters--or, indeed, the president himself--had hoped.... This has led... to a litany of back-biting complaints... corruption or incompetence... tactical failings or ideological betrayals. The truth is... he has accomplished an enormous amount.... But as the country waits to hear the latest announcement from the Fed about how rapidly it will end its Quantitative Easing programs, we are witnessing the biggest mistake of Obama's presidency: the systematic neglect of the Federal Reserve... a failure that... has likely doomed millions of people to needlessly long spells of unemployment, permanently reduced the structural capacity of the American economy, and through poor macroeconomic performance reduced his political ability to drive change in environmental policy, bank regulation, and other areas....

Obama's neglect of Federal Reserve appointments is, in some ways, mysterious. Nobody denies that the Fed is an extremely important institution.... When it comes to other important independent institutions such as the federal judiciary, it's broadly acknowledged that the presidential appointment powers are among his most important powers.... [But[ bolstering the left flank on the FOMC so that Yellen's consensus-building efforts would land in a more stimulative spot isn't on the agenda.... The current vacancies are not a new phenomenon. When Obama first took office in 2009, he allowed Fed vacancies to linger for years, only putting forth candidates in 2011. When he did put two names into play, one was a Republican and the other--Jeremy Stein--is a Democrat who holds to an eccentric view that tight money is sometimes appropriate even when unemployment is high....

How much good could have been done if Obama had listened to Romer, Scott Sumner, Joseph Gagnon, or others and placed a higher priority on appointing unemployment-fighters to the Fed? Nobody can say for sure. But the experience of the United Kingdom is illustrative.... FDR's long-term impact on American policy comes from the structural reforms of the New Deal. But as Romer showed... 'nearly all the observed recovery of the US economy prior to 1942 was due to monetary expansion'. That recovery--driven by Roosevelt's pursuit of aggressive monetary policy in the form of ditching the gold standard--is what gave him the political clout to pursue those structural reforms. Had Obama been as attuned to monetary matters as FDR, he could have secured a better result for the country and a firmer legacy for himself.

Over at Equitable Growth--The Equitablog

• Nick Bunker: How rising income inequality affects state tax revenue - Washington Center for Equitable Growth
• Morning Must-Read: Martin Wolf: The Creation of Weimar Russia - Washington Center for Equitable Growth
• Morning Must-Read: Andrew Flowers: Martin Wolf’s Grand Theory Of Global Financial Disorder - Washington Center for Equitable Growth
• Morning Must-Read: Mark Thoma: Can New Economic Thinking Solve the Next Crisis? - Washington Center for Equitable Growth
• Afternoon Must-Read: Bill Janeway: Doing Capitalism in the Innovation Economy - Washington Center for Equitable Growth
• Morning Must-Read: Jonathan Chait: Have Nerds Betrayed the Left? - Washington Center for Equitable Growth

Plus:

• Things to Read on the Morning of September 17, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

• Pew: Data Visualization: The Distribution of Select Federal Tax Deductions and Credits Across the States
• Barclays: The Rise of the Global Citizen?
• Jeff Goodell: China, the Climate and the Fate of the Planet
• David Dayen: Remember This Moment When the Next Financial Crisis Strikes. The SEC could have fixed our broken rating agencies. It whiffed
• Robin Harding: Money Supply: A “considerable” challenge

On Twitter:

• R these the Eurozone fiscal authorities? "@NickBaumann: @ObsoleteDogma @delong It could always be worse http://twitter.com/NickBaumann/status/511531023192969217/photo/1"
• .@StephanieKelton Hicks (1937) is not interpretation of Keynes. Id bridge from Classicism so that ex-Clas. can start understanding Keynes…

And Over Here:

World War II Today: 17 September 1944: Market Garden: Allied airborne attack into Holland:

Landing at Arnhem, the objective deepest into German occupied territory, were the British First Airborne Division. John Frost, commanding 2nd Parachute Battalion who were to spearhead the attack, was pleased to find that the landings had gone nearly as well as could be expected. He and the Parachute Regiment had come a long way since the Bruneval Raid in 1942. It was a warm Sunday afternoon and he reflected how the countryside and the neat Dutch houses were not so very different from the outskirts of Aldershot, home town of the British Army. He describes the early stages in the operation as the paratroopers collected together at their rendezvous point in a wood:

During the 1990s I used to say that after the "End of History" there would be smooth sailing as long as we avoided the creation of four things:

• The Islamic Reformation (i.e., another outburst of wars of religion like those that happened in 16th and 17th century Europe when a Holy Book met growing mass literacy and political and economic development).

• National Hinduist India (i.e., India replaying the "national unification via aggressive nationalism directed at an internal other", with India's Muslims cast in the role traditionally reserved for Europe's Jews).

• Wilhelmine China (i.e., a social caste that has lost both its practical role and its ideological legitimation still somehow dominating the fastest-growing industrial economy in the world and attempting to hang on to power the aggressive nationalism directed at external others).

• Weimar Russia (i.e., a superpower that regards itself as not just defeated but humiliated, and not welcomed and assisted with its reforms but rather kicked to keep it down, and that then reacts in unpredictable and very dangerous ways).

Well.. National Hinduist India is still only a threat rather than a reality--albeit a threat that is much more visible than it was a decade ago...

Martin Wolf reviews the creation of Weimar Russia:

Martin Wolf: Russia is our most dangerous neighbour: "Russia is both a tragedy and a menace...

...the blend of self-pity and braggadocio currently at work in Moscow... is as depressing as it is disturbing.... For Europe and, I believe, the US, there is no greater foreign policy question than how to deal with today’s Russia.... A defensive alliance defeated the Soviet Union because it offered a better way of life.... Yet President Vladimir Putin, the latest in a long line of Russian autocrats, has stated, instead: 'The collapse of the Soviet Union was a major geopolitical disaster of the century'. It was, in fact, an opportunity, one that many in central and eastern Europe seized with both hands. The transition to a new way of life proved unavoidably difficult. The world they now inhabit is highly imperfect. But they have mostly joined the world of civilised modernity. What does this mean? It means intellectual and economic freedom. It means the right to engage freely in public life. It means governments subject to the rule of law and accountable to their people. The west has too often failed to live up to these ideals. But they remain beacons.

In the early 1990s they were beacons to many Russians. As a great admirer of Russian culture and Russian courage, I hoped, fondly perhaps, that the country would find a way.... The alternative of continuing the cycle of despotism was too depressing. With the selection of Mr Putin, a former KGB colonel, as his successor, Boris Yeltsin delivered that outcome.... The west is partly responsible for this tragic outcome. It failed to offer the support Russia needed quickly enough in the early 1990s. Instead it focused, ludicrously, on who would pay the Soviet debt. It acquiesced in the larceny of Russian wealth for the benefit of a few. But more important was the refusal of Russia’s elite to address the reasons for the collapse, then to start afresh.... Today’s Russia feels it is the victim of a historic injustice and rejects core western values. It also feels strong enough to act. Today’s Russian leader also sees these potent emotions as a way to secure power. He is not the first such ruler. His Russia is a perilous neighbour. The west must shed its last post-cold war illusions.

Andrew Flowers: Martin Wolf’s Grand Theory Of Global Financial Disorder: "As the saying goes (sort of)...

...They had a favorite hammer, so every problem looked like a nail. For Martin Wolf... his hammer is 'global imbalances'.... The Shifts and the Shocks: What We’ve Learned--and Have Still to Learn--from the Financial Crisis... is a great read... will be unsettling to anyone who thinks the financial system is any more stable.... Global imbalances are the patient zero of financial crises, according to Wolf. And Wolf has swung this hammer before.... Wolf does argue smartly for other reforms, but you get the feeling that global imbalances explain everything. Might financial regulation at the domestic level, or China’s investment-heavy mercantilist model, or the skewed incentives of corporate managers, or the Federal Reserve’s monetary policy, or... any number of other factors also play a role? Perhaps.

Martin would say– correctly–the global imbalances have been an important part of every story in and by which things have gone badly wrong. Without global imbalances, either things would not have gone wrong or things would've gone wrong in a different, and probably less serious, Way.

That does not mean that there is any easy way to resolve global imbalances. Nevertheless, what Larry Summers said 15 years ago is still true: with global imbalances, they will be resolved, but they can be resolved in either of two ways--by balancing up, or bouncing down.

Mark Thoma: Can New Economic Thinking Solve the Next Crisis?: "It is certainly true that mainstream, modern macroeconomic models failed us...

...prior to and during the Great Recession.... But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use... and far too little attention on... the questions that economists ask.... Why did macroeconomists adopt a representative agent framework that made financial meltdowns so difficult to incorporate into their models?.... Because macroeconomists, for the most part, did not think questions about financial meltdowns were worth asking, so why bother with those theoretical complications?... The questions that macroeconomists ask are dictated, in large part, by current macroeconomic events.... Presently, for example, questions about the international flow of financial assets and the balance of trade have all but disappeared from the economics discourse.... Does that mean such questions will never be important and research into these topics should be dismissed as uninteresting?... The problem is the sociology within the economics profession that prevents some questions from being asked. Why, for example, were the very questions we needed to ask prior to the Great Recession ridiculed by important voices within the profession? The key to a better economics is to ask better questions, and that will require a much more open mind--particularly from those in charge of what gets published in economic journals--about the kinds of questions economists are allowed to ask.

This is, I think, why whenever things get interesting the only people who have something to say are the economic historians--all the other macroeconomists have been part of the swarm of 20 six-year-olds in a mass scrum around the soccer ball, have not been playing their positions, and thus have little to say when reality makes the ball squirt out and go someplace else...

The twenty-our year old Michael DeLong, Campaign Manager for Lianne Thompson in the Clatsop County, OR special election, reports last night:

I am pleased to report that Lianne Thompson was elected County Commissioner for Clatsop County, District 5, over Dale Barrett... 59% to... 40%.

We are very happy, and I am quite tired, so I am heading off to bed. I will be moving back to Portland in the next couple of days.

Rick Hasen: Live Blogging #KSSEN Taylor v. Kobach: Analysis:

Oral argument in the Kansas Supreme Court has now completed in the case of Kobach v. Taylor, on the question whether Taylor’s name can be removed from the Kansas U.S. Senate ballot. The issue is especially important with incumbent Republican Senator Pat Roberts now trailing independent Greg Orman in recent polling and with the fate of the Senate potentially hanging in the balance. While it is always hazardous to predict outcomes from oral argument (because Justices sometimes ask rhetorical questions or minds change after argument), I think it is likely the Justices will quickly issue an order removing Taylor’s name from the ballot.... Much of the discussion at oral argument concerned other letters of withdrawal which the SOS had received.... The Justices seemed to get Kobach’s lawyer to admit that substantial compliance may sometimes be enough. With that concession, there is a relatively easy path to finding the letter substantially complied...

**Jo Walton: "In dialogue with his century":

I was getting a book off the shelf last night and I came eye to eye with the hardcover of Patterson's biography of Heinlein: Robert A Heinlein: In Dialogue With His Century.

And I realised what a stupid title it is.

Especially for Heinlein, who seemed to write things that went straight from the nineteenth century to the future without pausing for the present:

Twentieth Century: Cars, planes, electricity!

Robert A. Heinlein: The nineteenth century is over! Soon we will be going to the stars!

Twentieth Century: The depression, WWII!

Robert A. Heinlein: To the stars! First we'll settle the solar system. Martians!

Twentieth Century: Cold War.

Robert A. Heinlein: Bomb shelters!

Twentieth Century: Boop, be doop, be doop, be doodle-ooo, boop, be boop, be boop, be doodle-ooo, boop, be doop, be doop, be doodle-eye-doo!

Robert A. Heinlein: The nineteenth century is over! Soon we can have sex with our mothers and our clones! Also, come on, hey, we haven't even got to the moon yet, and I want to have sex with Martians!

Twentieth Century: Apollo XI. Done with space now. Boop be doop be doop...

Robert A. Heinlein: The stars!

Twentieth Century: Computers!

Robert A Heinlein: The stars! Also, more hot competent red-heads, are you listening?

Twentieth Century: If one of us isn't listening, are you sure it's me?

*World War II Today: 16 September 1944: Peleliu: US Marines attack towards Bloody Nose Ridge:

It was already apparent that the landings on Peleliu were not going to be over within the four days originally anticipated. Despite the blasting that the entire island had received prior to the landings on the 15th most of the Japanese defenders had survived in their bunkers. Eugene B. Sledge, with the 3rd Battalion 5th Marines 1st Marine Division, was keeping notes of his experiences in his New Testament Bible. He was later to develop it into one of the classic memoirs of the war. After being selected for officer training he and many others had deliberately ‘flunked out’ so that they didn’t ‘miss the war’. So it was that he found himself as a Private in the middle of one of the bloodiest operations in the Pacific. After a sleepless night under shellfire they were all desperately thirsty, but men fell ill after drinking from a well. When water reached them in old oil drums it proved contaminated with rust and oil. That day it would reach 105 in the shade and, as Sledge points out, they were not in the shade. Their job was to attack across the airfield:

Bill Janeway: Doing Capitalism in the Innovation Economy: "This entails reconstruction of the core of macroeconomics...

...by drawing on innovative approaches to understanding behavior in the peripheral financial markets. Ricardo Caballero observes: 'In the context of the current economic and financial crisis, the periphery gave us frameworks to understand phenomena such as speculative bubbles, leverage cycles, fire sales, flight to quality, margin- and collateral-constrained spirals, liquidity runs, and so on--phenomena that played a central role in bringing the world economy to the brink of a great depression. This literature also provided the basis for the policy framework that was used to contain the crisis.' The challenge remains: to construct integrated models of a financial economy whose participants both are aware of the limits and fragility of their own knowledge and condition their behavior on that of others similarly aware. Whether it will prove possible to generate general equilibrium from such realistic microfoundations remains an open question. Perhaps frustration in that pursuit will encourage alternative efforts...

I find myself agreeing with Jonathan Chait here: Tom Frank's big problem is that he doesn't want his imagination limited by information about what policies would actually work...

Jonathan Chait: Have Nerds Betrayed the Left?: "I pointed out that [Tom] Frank... held...

...a lack of familiarity with even the basic concepts of political science, which can explain how structural limits (like divided government and polarization) constrain the domestic powers of a president in a way that cannot be broken with ideological willpower or inspirational speechmaking. Now Frank has written a column... assailing the influence of political science, which he views as a kind of corrupting force draining the left of its populist fervor.... A good chunk of Frank’s polemic is taken up with generalized experts of all kinds.... He distrusts them all as corrupt handmaidens of power....

After establishing his anti-academic-populist bona fides, Frank provides his readers with an example of the kind of political-science-driven analysis that so perturbs him: a column by New York Times election analyst Nate Cohn that explains why the House map is prohibitively tilted toward the Republican Party, making the race for control of the chamber essentially out of reach this fall. 'It is this kind of strikingly unoriginal thinking', responds Frank, 'which I am sure is shared by the blue team’s high command, that explains why the Democratic Party looks to be headed for another disaster this fall'. Of course, if you believe Cohn, it is not the Democratic Party’s awareness of the GOP's prohibitive structural advantage but the prohibitive structural advantage itself that explains why the Republicans are going to win the midterm elections....

At the end of his rant, Frank almost seems to concede that his problem with political science is that it leads to conclusions he finds inconvenient. 'The fatalism here may be science-driven', he concedes, 'but still it boggles the mind'. Let that phrase roll around in your head for a moment. Frank has just told you everything you need to know here.

Over at Equitable Growth--The Equitablog

• Nick Bunker: Does slower growth in the cost of health care help wage growth? - Washington Center for Equitable Growth
• Morning Must-Read: Jon Hilsenrath: Fed Chief Yellen Seeks Interest-Rate Consensus - Washington Center for Equitable Growth
• The Best Example of Why I Have Long Thought that the Washington Post Is Long-Past Its Sell-by Date: Hoisted from the Internet From Six Years Ago - Washington Center for Equitable Growth
• Morning Must-Read: Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple - Washington Center for Equitable Growth
• Morning Must-Read: Documents on Koch Intentions on FSU Econ Department Hiring - Washington Center for Equitable Growth

Plus:

• Things to Read on the Morning of September 15, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

• Megan Geuss: Why Apple Pay could succeed where others have had underwhelming results. Not because Apple is a huge and influential company, but because the timing is right
• Lance Taylor: Structuralist Response to Piketty's Capital in the Twenty-First Century
• Cardiff Garcia: The Fed can take its time, if it wants to
• Wei Gu: Almost Half of Wealthy Chinese Want to Leave, Study Shows

And Over Here:

When economic historians write about how it happened that under Fed Chair Ben Bernanke the U.S. economy performed worse than it had under any Fed Chair since Eugene Meyer 1930-1933--or maybe, if we are being strict, Arthur Burns 1970-1978--one important reason will be Ben Bernanke's desire to seek consensus within the FOMC instead of doing what his previous academic analyses suggested was the right thing to do.

In that context, one cannot but find this from Jon Hilsenrath very worrisome:

Jon Hilsenrath: Fed Chief Yellen Seeks Interest-Rate Consensus: "Chairwoman's Actions in Her First Six Months Confound View of Her as Strong Advocate of Easy Money....

...Many expected Ms. Yellen to steer the central bank toward extending its long period of superlow interest rates. But she has shown herself willing to move toward exiting from that policy as officials found the economy to be on stronger footing. Ms. Yellen has spent much of this year winding down a bond-buying program meant to hold down long-term interest rates and planning for an eventual increase in the short-term rate the Fed controls, a 'tapering' begun before her tenure started. With the bond program set to end next month, officials are turning to sensitive discussions about when to raise the short-term rate—and how to signal the move. Her next test is this week. Meeting on Tuesday and Wednesday, Fed officials will discuss whether to shift their guidance on the short-term rate. They also are seeking to complete a new plan for managing the mechanics of future rate changes....

Ms. Yellen spent much of the spring and summer formulating a plan to manage the mechanics of future rate increases. These mechanics have become more complicated because of all the money the central bank has pumped into the financial system since the financial crisis. Traditionally, the Fed has managed its benchmark rate by moving relatively small amounts of money into and out of the banking system. A new plan, which the Fed could unveil this week, emphasizes two new interest rates. One is a rate paid to banks on money they keep on reserve at the Fed. The other is a rate the Fed will pay money-market funds in trades conducted by the New York Federal Reserve Bank. Shifting these two rates is the planned new mechanism for changing the fed-funds rate.

The apparent recent lessening of labor-market progress has eased pressure on the Fed to move relatively quickly toward a higher fed-funds rate. But some officials are pushing, once again, for the Fed to shift its guidance to the public on that rate. Because of the uncertainty on how the job market will play out in the months ahead, more Fed officials want to stop offering assurances the Fed will wait a 'considerable time' to move on rates. Ms. Yellen, in her preparations for Tuesday's meeting, is looking for an approach on which her colleagues can agree.

Over at Equitable Growth: As best as I have been able to determine, the thinking among the executives and editors of the Washington Post who commissioned and published this piece back in September 2008 was roughly: "We need to publish an economy-is-actually-in-good-shape piece so that the McCain campaign and the Republicans won't be made at us". Whether the piece was true, whether the numbers quoted in it were accurate or representative, or even whether the author had a conceptually and analytically interesting perspective did not enter their thinking at all. For none of those conditions were satisfied.

I have been waiting ever since for somebody in the Washington Post to decide that they need to commission somebody to do a deep dive about how and why this piece got commissioned and published, and how they drifted so very very far away from the idea that a newspaper exists to inform its readers about the world.

I suppose I am going to have to keep waiting, and when the last piece of newsprint spins through the Washington Post presses and the last update is posted to the Washington Post servers, it will still not have dared to come clean with its readers about what went so wrong.

For your pleasure:

Donald Luskin (2008): Quit Doling Out That Bad-Economy Line | The Washington Post: "'It was the worst of times, and it was the worst of times'... READ MOAR

Paul Krugman: How to Get It Wrong: "The enormous intellectual failure of recent years took place at several levels...

...In what sense did economics go astray?... The widespread conviction among economists that such a crisis couldn’t happen... an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.... Assuming away irrationality and market failure meant assuming away the very possibility of the kind of catastrophe that overtook the developed world six years ago. Still, many applied economists retained a more realistic vision of the world, and textbook macroeconomics, while it didn’t predict the crisis, did a pretty good job of predicting how things would play out in the aftermath.... But while economic models didn’t perform all that badly after the crisis, all too many influential economists did--refusing to acknowledge error, letting naked partisanship trump analysis, or both: 'Hey, I claimed that another depression wasn’t possible, but I wasn’t wrong, it’s all because businesses are reacting to the future failure of Obamacare.'... Would it have mattered if economists had behaved better? Or would people in power have done the same thing regardless?...

The big problem with economic policy is not, however, that conventional economics doesn’t tell us what to do. In fact, the world would be in much better shape than it is if real-world policy had reflected the lessons of Econ 101. If we’ve made a hash of things--and we have--the fault lies not in our textbooks, but in ourselves.

Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple: "The route for making progress is to get outside of the profession...

...For this it is necessary to appeal to people in policy positions, to reporters, to the general public, or to people who might follow economic debates, but don’t have extensive backgrounds in economics. And it is important to recognize what you are asking these people to do. You are asking these people to accept your claims over the claims of the most prominent economists in the profession. This means that you better keep what you have to say simple.... To my mind the gold standard is a chart with two bars, where bar A is bigger than bar B.... The first, and perhaps best, example is the debate over the famous Reinhart-Rogoff 90 percent debt cliff.... President Bush said that he had just gained some political capital and that he intended to now use it. The task at hand was privatizing Social Security.... The big potential attraction to many people who were not especially political was the promise of getting a much higher benefit on average from investing their money in the stock market.... The problem with this assumption is the price to earnings ratios in the stock market were far above their historic average.... Arguing this point directly on its merits required more attention from reporters and people in policy positions than they were prepared to sacrifice; so we... developed the 'no economist left behind test'... write down decade by decade averages for dividend yields and capital gains that would add up to give their 7.0 percent real return over Social Security’s 75-year forecasting horizon.... Finally Paul Krugman blasted the test into the national debate with a column in early February...

Daniel Kuehn: Documents on Koch intentions on FSU econ department hiring here. Note, this is an internal memo...

...about the Koch's expectations. Because of the outrage this caused (even in the absence of these documents) the advisory group was eventually restricted in how much they could impact these decisions. This is really not good for anyone that cares about economics as an objective science and people who receive Koch money (which is not inherently bad at all of course), should be saying that.

Marines hit Peleliu"

Every day I get down on my knees and thank The One Who Is that I did not, back in 1982, and thereabouts sign up for the Republican team--as a liberal, technocratic Republican. I could easily have done it: Democrats back were as likely as not to be philosophically opposed to market-based mechanisms. Those of us of a neoliberal bent who back then thought that often market-based mechanisms were the best means of achieving social-democratic ends were not as unwelcome in the Democratic Party as it stood at the end of the 1970s as reality-based technocrats are in today's Republican Party. But it was clear in the early 1980s that the Democratic Party's activist base were not about to start slaughtering the fatted calf for us--let alone the ring, sandals, merriment, and best robe part. Besides, back then the Democratic Party's deformations back then seemed to be something that smart economists could help fix. The Republican Party's deformations back then, not so much.

No. That is not what Derek writes. But it is what he should write:

Derek Thompson: How the Rich and Poor Spend Money Today—and 30 Years Ago: "The biggest difference between the lowest- and highest-earning Americans...

...is what they spend on housing. Less than 40 percent of the bottom quintile owns a home, compared with 90 percent of Americans at the top. As a result, the top quintile outspends the bottom on housing by $21,000 a year (remember: that gap alone is basically the entire budget of a lower-income family) and $13,000 more on transportation. At just about every income level, we spend about half our income on living and getting around. But after houses and transportation, what are the biggest spending gaps between the top and bottom quintiles today? The poor spend nearly twice as much (as a share of their budget) on food at home and utilities; the rich spend more on entertainment and education.

Here we see one reason for the very different perceptions of how things are going held by the rich and the non-rich. Not only have the incomes and wealth of those who occupy the "rich" slots in the income and wealth distribution been vastly outstripping the "non-rich", but of the things that the rich differentially spend a large share on one--education--has become much more expensive but as its cost has gone up its monetary and class-marker benefit has gone up as well, and the other--entertainment--has seen its cost plummet extraordinarily.

Cheaper electronic toys are worth a great deal to the rich. There has been no similar price revolution in housing, transportation, food at home, and utilities; the rise in the cost of education is perceived to have put opportunity further out of reach; and the fear of medical bankruptcy has grown.

Over at Equitable Growth--The Equitablog

• Nick Bunker: Weekend reading - Washington Center for Equitable Growth
• Lunchtime Must-Read: Dietz Volrath: Taxes and Growth - Washington Center for Equitable Growth
• What, Theoretically, Is a "Recession"? (Early) Monday Focus for September 15, 2014 - Washington Center for Equitable Growth
• Morning Must-Read: Nick Rowe: What's Special About Monetary Coordination Failures? - Washington Center for Equitable Growth
• Lunchtime Must-Watch: Rethinking Economics - Washington Center for Equitable Growth
• Morning Must-Read: Bryan Caplan: The Case for Open Borders - Washington Center for Equitable Growth

Plus:

• Things to Read on the Afternoon of September 14, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

• Richard Mayhew: Healthcare 2020
• Barry Eichengreen: Restructuring Debt Restructuring
• Kahn-Rich Productivity Model Update (August 2014)
• Bill McBride: Calculated Risk FOMC Preview

American Progress on Twitter: ".@EconomicPolicy sets the record straight on who would benefit if we #RaiseTheWage http://t.co/5sIQL2GXIU:

Dietz Vollrath: Taxes and Growth: "William Gale and Andy Samwick have a new Brookings paper out...

...on the relationship of tax rates and economic growth.... They do not identify any change in the trend growth rate of real GDP per capita with changes in marginal income tax rates, capital gains tax rates, or any changes in federal tax rules.... Stokey and Rebelo (1995).... You can see that the introduction of very high tax rates during WWII, which effectively became permanent features of the economy after that, did not change the trend growth rate of GDP per capita in the slightest. The only difference after 1940 in the lower panel is that the fluctuations in the economy are less severe.... Taxes as a percent of GDP don’t appear to have any relevant relationship to growth rates.... Hungerford (2012)... looks at whether the fluctuations in top marginal tax rates (on either income or capital gains) are related to growth rates. You can see in the figure that they are not. If anything, higher capital gains rates are associated with faster growth.... There is no evidence that you can change the growth rate of the economy--up or down--by changing tax rates--up or down. Their conclusion is more coherent than anything I could gin up, so here goes: 'The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.'"

Daniel Kuehn administers the smackdown:

Daniel Kuehn: Facts & Other Stubborn Things: Kuehn Smackdown Watch: Bastiat Edition" "Brad DeLong thinks that Bastiat would be a modern liberal...

...(I had said the other day that he likely would be a libertarian but that Smith, Jefferson, Locke, Paine, etc. were classical liberals that would very plausibly be left-liberals today). I think he makes a good case. I've discussed many of the passages he presents to make the claim here, and I think they are important for libertarian fans of Bastiat especially to be aware of. And anyone that's followed the blog for a few years know that I think most modern invocations of the broken window are God-awful and that Bastiat's understanding of general equilibrium is far more sophisticated and closer to people like me or Krugman who make important distinctions between stocks and flows (wealth and income) in arbitrating the effects of, for example, a disaster.

I would only say this in my defense (because I still think he would be more of a libertarian, simply due to the center of gravity of his commentary): he would certainly be more of a libertarian in the vein of Hayek of the Constitution of Liberty or Law, Legislation, and Liberty than a libertarian like Bob Murphy (for example).

Over at Equitable Growth: The very smart Nick Rowe produces an explanation of his point of view with which I can have only linguistic quibbles:

**Nick Rowe: What's special about monetary coordination failures?: "This is a response to Brad DeLong's and David Glasner's good posts...

...[that] forced me to think.... Apples and bananas are perishable, but gold lasts forever. One apple tree produces 100 apples per year, regardless. One banana tree produces 100 bananas per year, regardless. Trees cannot be produced. Gold cannot be produced. Gold is the medium of account. Apples and bananas are priced in gold. Those prices may be sticky.... There are two parallel economies... a barter economy... a monetary exchange economy.... READ MOAR

I do indeed think that Nick Rowe's thought is 100% correct here--with perhaps the proviso that other people might not like his definition of what a 'recession' is...

**Nick Rowe: What's special about monetary coordination failures?: "This is a response to Brad DeLong's and David Glasner's good posts...

...[that] forced me to think.... Apples and bananas are perishable, but gold lasts forever. One apple tree produces 100 apples per year, regardless. One banana tree produces 100 bananas per year, regardless. Trees cannot be produced. Gold cannot be produced. Gold is the medium of account. Apples and bananas are priced in gold. Those prices may be sticky....

There are two parallel economies... a barter economy... a monetary exchange economy.... For the second shock (a change in preferences away from apples towards bananas), we get the same reduction in the volume of trade whether we are in a barter or a monetary economy. Monetary coordination failures play no role in this sort of 'recession'. But would we call that a 'recession'? Well, it doesn't look like a normal recession, because there is an excess demand for bananas. For both the first and third shocks, we get a reduction in the volume of trade in a monetary economy, and none in the barter economy. Monetary coordination failures play a decisive role in these sorts of recessions, even though the third shock that caused the recession was not a monetary shock. It was simply... because agents became more patient. And these sorts of recessions do look like recessions, because there is an excess supply of both apples and bananas....

P.S.: I think this is all in Benassy, somewhere. P.P.S.: If you said 'this is all ISLM, only ISLM with and without barter', you would be basically right...

Rethinking Economics Conference on Livestream:

Dylan Matthews:

...that said that blacks couldn’t get a job without the government’s permission, or women couldn’t get a job without the government’s permission, or gays or Christians or anyone else?

George Mason economist Bryan Caplan asks. It's a pretty easy question. Obviously, such a law is discriminatory on its face, serves no rational purpose, and is unacceptable in a liberal democracy. But Caplan continues:

So why, exactly, is it that people who are born on the wrong side of the border have to get government permission just to get a job?

This is Caplan's elevator pitch for open borders, an idea that for years was treated as deeply unserious, as an extreme straw man that nativists could beat up in the course of resisting more modest efforts to help immigrants. It had its defenders--philosopher Joseph Carens primary among them--but they were relatively lonely voices...

Over at Equitable Growth--The Equitablog

• Nick Bunker: Weekend reading - Washington Center for Equitable Growth
• Morning Must-Read: MaxSpeak: In Defense of Social Insurance - Washington Center for Equitable Growth
• Morning Must-Read: Stephanie Aaronson et al.: Labor Force Participation: Recent Developments and Future Prospects - Washington Center for Equitable Growth
• Morning Must-Read: Simon Wren-Lewis: Scotland and the SNP: Fooling yourselves and deceiving others - Washington Center for Equitable Growth
• Is "Part-Time for Economic Reasons" the Labor Market Time Series (Save for Employment-to-Population) That Has Recovered Least? - Washington Center for Equitable Growth
• Morning Must-Read: Luigi Guiso, Paola Sapienza and Luigi Zingales: Monnet's Error? - Washington Center for Equitable Growth

Plus:

• Things to Read on the Morning of September 13, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

• Richard Mayhew: Healthcare 2020
• Paul Krugman: Maastricht in a Kilt
• Stephanie Kelton: Rethinking Economics
• Chris Blattman: What the Economist Should Have Read Before Suggesting That U.S. Slavery Wasn't All That Bad

1. Luigi Guiso, Paola Sapienza and Luigi Zingales: Monnet's Error?: "Do partial steps toward European integration generate support for further steps or do they create a political backlash? We try to answer this question by analyzing the cross sectional and time series variation in pro-European sentiment in the EU 15 countries. The two major steps forward (the 1992 Maastricht Treaty and the 2004 enlargement) seem to have reduced the pro-Europe sentiment as does the 2010 Eurozone crisis. Yet, in spite of the worst recession in recent history, the Europeans still support the common currency. Europe seems trapped in catch-22: there is no desire to go backward, no interest in going forward, but it is economically unsustainable to stay still."

2. Simon Wren-Lewis: Scotland and the SNP: Fooling yourselves and deceiving others: "Scotland’s fiscal position would be worse as a result of leaving the UK for two main reasons. First, demographic trends are less favourable. Second, revenues from the North Sea are expected to decline.... The SNP do not agree.... The main reason in the near term is that they have more optimistic projections for North Sea Oil.... So how do the Scottish government get more optimistic numbers? John McDermott examines the detail here, but perhaps I can paraphrase his findings: whenever there is room for doubt, assume whatever gives you a higher number.... Governments that try to borrow today in the hope of a more optimistic future are not behaving very responsibly.... Is this a knock down argument in favour of voting No? Of course not: there is nothing wrong in making a short term economic sacrifice for the hope of longer term benefits or for political goals. But that is not the SNP’s case.... I kept thinking I had seen this kind of thing before: being in denial about macroeconomic fundamentals because they interfered with a major institutional change that was driven by politics. Then I realised what it was: the formation of the Euro in 2000.... So maybe that also explains why I feel so strongly this time around. I have no political skin in this game: a certain affection for the concept of the union, but nothing strong enough to make me even tempted to distort my macroeconomics in its favour. If Scotland wants to make a short term economic sacrifice in the hope of longer term gains and political freedom that is their choice. But they should make that choice knowing what it is, and not be deceived into believing that these costs do not exist."

3. Stephanie Aaronson et al.: Labor Force Participation: Recent Developments and Future Prospects: "More than five years after the Great Recession ended, the labor market has, by many metrics, finally shown substantial improvement. The unemployment rate is now nearly 4 percentage points below the peak reached in late 2009.... However, one lingering concern is the ongoing decline in the labor force participation rate and the concomitant absence of a significant rise in the percentage of the working-age population who are employed.... To an important extent, this decline in the labor force participation rate likely reflects the ongoing influence of the aging population.... Our overall assessment is that much--but not all--of the decline in the labor force participation rate since 2007 is structural in nature.... Policymakers can view some of the current low level of the participation rate as indicative of labor market slack beyond that indicated by the unemployment rate alone, they should not expect the participation rate to show a substantial increase from current levels as labor market conditions continue to improve..."

4. MaxSpeak: In Defense of Social Insurance: "It’s true that we have non-insurance programs providing means-tested benefits: anti-poverty programs. These programs are under attack. This is not a sea-worthy vessel you would want everyone else to board. I have urged UBI partisans to direct their attention to the atrocity of welfare reform. The biggest hole in the U.S. safety net is the misery of families with children whose wage-earners are unable, often for reasons beyond their control, to solidify an attachment to the labor market and the social insurance provided to wage-earners. In 1972 Senator George McGovern proposed a demogrant of $2,000 as part of his electoral campaign for president. He received 17 electoral votes, winning Massachusetts and the District of Columbia, to cheatin’ Dick Nixon’s 520 votes. We still live in Nixonland."

5. Clay Shirky: Publishing and Reading "Bezos... wants to increase access to ebooks in order to make money, of course, just as the publishers want to restrict access in order to make money. Bezos doesn’t love books (something his critics never fail to note, as if selling things designed to be sold is an atrocity) but his motivations are producing better outcomes than those of the dominant cartel. If we have to pick between two corporate strategies for making money, the one offering more access is better."

6. The Economist: Economic convergence: Headwinds Return: "NOWHERE are the consequences of different rates of growth clearer than on a trip up the Pearl River Delta.... Hong Kong... Shenzhen... Guangzhou, capital of Guangdong.... Average incomes in Guangdong are just a quarter of those in Hong Kong, equivalent to Algeria or Costa Rica. Finally... the tributaries reach across Guangxi into Yunnan.... Incomes there are but a tenth of those in Hong Kong, on a par with those in Angola or the Republic of the Congo. Over the past 15 years the currents that take people from such hinterlands of poverty to the broad open reaches of wealth have been flowing at an unprecedented rate.... This burst of growth struck an extraordinary blow against deprivation.... [But] since 2008 growth rates across the emerging world have slipped back toward those in advanced economies. When the new ICP estimates are applied, the average GDP per head in the emerging world, measured on a purchasing-power-parity (PPP) basis, grew just 2.6 percentage points faster than American GDP in 2013. If China is excluded from the calculations the difference is just 1.1 percentage points. At that pace convergence with rich-economy incomes happens over a period of time more like a century than a generation.... In 1997, just before the great catch-up got into its swing, the World Bank’s senior economist, Lant Pritchett, described a widening income gap between rich and poor countries as 'the dominant feature of modern economic history'. Its dominance was rendered particularly galling by the fact that orthodox economics struggled to explain it.... [But] the world shifted beneath economists’ feet as growth in the developing world shot up from the end of the 1990s. A great deal of this was due to the rise of China as a manufacturing superpower, but that was far from being the whole story.... It looks like the world is now being reminded that catching up is hard to do."

7. William G. Gale and Andrew Samwick: Effects of Income Tax Changes on Economic Growth: "The structure and financing of a tax change are critical to achieving economic growth. Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates. The net impact on growth is uncertain, but many estimates suggest it is either small or negative. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits... at the same time they also reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth. However, they also reallocate resources across sectors... resulting in increased efficiency.... Not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency."

And Over Here:

Keith Humphreys: Weekend Film Recommendation: The Spy Who Came in From the Cold:

What the hell do you think spies are? Moral philosophers measuring everything they do against the word of God or Karl Marx? They’re not! They’re just a bunch of seedy, squalid bastards like me: little men, drunkards, queers, hen-pecked husbands, civil servants playing cowboys and Indians to brighten their rotten little lives.

So says disillusioned British secret agent Alec Leamas (Richard Burton) in perhaps the best effort to adapt a John le Carré novel to the big screen: 1965′s The Spy Who Came in From the Cold. The serpentine plot concerns a burnt-out espionage agent who enters a downward spiral of booze, self-hatred and lost faith after a disastrous mission in Berlin. But then it turns out that Leamas’ decline and despair is a ruse (?) play-acted at the behest of his superiors. As planned, he is recruited by the other side and ends up trying to discredit East German intelligence head Hans-Dieter Mundt (A cold, effective Peter van Eyck). Leamas undermines the ex-Nazi by feeding false (??) information to Mundt’s ambitious, Jewish deputy (Oskar Werner, very strong here). It’s a difficult, high-risk mission, but Leamas knows that his boss back home is 100% behind him (???).

Noah Smith: Austrian Economists, 9/11 Truthers, and Brain Worms: "In the film Star Trek II: The Wrath of Khan...

...the super-genius villain puts alien worms into people’s brains in order to subvert them to his demented cause. I think Khan could have been an Austrian economist. To those of you who have run afoul of the defenders of Austrianism on the Internet, the analogy will be clear. The Austrian worldview is like a brain worm that has infected large swathes of our financial industry, commentariat and general public. Even you, dear reader, may carry one or two of its wriggling larva inside your gray matter.

From Sewell Tyng: The Campaign of the Marne:

Despite minor frictions, the German armies at last arrived upon the positions which they were destined to hold without substantial change until the spring of 1918; but Von Moltke had still to drain the dregs of his cup of humiliation, for this day was his last as Chief of the German General Staff. At the suggestion, it is said, of the younger officers of von Moltke's own Operations Section who had lost all confidence in their chief, and impelled by the officers of the Imperial military household, the Emperor summoned von Moltke and informed him that the state of his health was too precarious for the heavy responsibilities devolving upon him. The same day von Falkenhayn, the Prussian Minister of War, assumed the duties of the Chief of the General Staff, and von Stein, superseded by von Freytag-Loringhoven as Quartermaster-General, was sent to command an army corps.

MaxSpeak: In Defense of Social Insurance: "It’s true that we have non-insurance programs...

...providing means-tested benefits: anti-poverty programs. These programs are under attack. This is not a sea-worthy vessel you would want everyone else to board. I have urged UBI partisans to direct their attention to the atrocity of welfare reform. The biggest hole in the U.S. safety net is the misery of families with children whose wage-earners are unable, often for reasons beyond their control, to solidify an attachment to the labor market and the social insurance provided to wage-earners. In 1972 Senator George McGovern proposed a demogrant of $2,000 as part of his electoral campaign for president. He received 17 electoral votes, winning Massachusetts and the District of Columbia, to cheatin’ Dick Nixon’s 520 votes. We still live in Nixonland.

Stephanie Aaronson: Labor Force Participation: Recent Developments and Future Prospects: "More than five years after the Great Recession ended...

...the labor market has, by many metrics, finally shown substantial improvement. The unemployment rate is now nearly 4 percentage points below the peak reached in late 2009.... However, one lingering concern is the ongoing decline in the labor force participation rate and the concomitant absence of a significant rise in the percentage of the working-age population who are employed.... To an important extent, this decline in the labor force participation rate likely reflects the ongoing influence of the aging population.... Our overall assessment is that much--but not all--of the decline in the labor force participation rate since 2007 is structural in nature.... Policymakers can view some of the current low level of the participation rate as indicative of labor market slack beyond that indicated by the unemployment rate alone, they should not expect the participation rate to show a substantial increase from current levels as labor market conditions continue to improve...

Simon Wren-Lewis: Scotland and the SNP: Fooling yourselves and deceiving others: "Scotland’s fiscal position would be worse...

...as a result of leaving the UK for two main reasons. First, demographic trends are less favourable. Second, revenues from the North Sea are expected to decline.... The SNP do not agree.... The main reason in the near term is that they have more optimistic projections for North Sea Oil.... So how do the Scottish government get more optimistic numbers? John McDermott examines the detail here, but perhaps I can paraphrase his findings: whenever there is room for doubt, assume whatever gives you a higher number.... Governments that try to borrow today in the hope of a more optimistic future are not behaving very responsibly.... Is this a knock down argument in favour of voting No? Of course not: there is nothing wrong in making a short term economic sacrifice for the hope of longer term benefits or for political goals. But that is not the SNP’s case.... I kept thinking I had seen this kind of thing before: being in denial about macroeconomic fundamentals because they interfered with a major institutional change that was driven by politics. Then I realised what it was: the formation of the Euro in 2000.... So maybe that also explains why I feel so strongly this time around. I have no political skin in this game: a certain affection for the concept of the union, but nothing strong enough to make me even tempted to distort my macroeconomics in its favour. If Scotland wants to make a short term economic sacrifice in the hope of longer term gains and political freedom that is their choice. But they should make that choice knowing what it is, and not be deceived into believing that these costs do not exist.

Luigi Guiso, Paola Sapienza and Luigi Zingales: Monnet's Error?: "Do partial steps toward European integration generate support for further steps...

...or do they create a political backlash? We try to answer this question by analyzing the cross sectional and time series variation in pro-European sentiment in the EU 15 countries. The two major steps forward (the 1992 Maastricht Treaty and the 2004 enlargement) seem to have reduced the pro-Europe sentiment as does the 2010 Eurozone crisis. Yet, in spite of the worst recession in recent history, the Europeans still support the common currency. Europe seems trapped in catch-22: there is no desire to go backward, no interest in going forward, but it is economically unsustainable to stay still.

I just wanted to push back a little against the claim that the Eurocrisis was an unexpected perfect storm, and praise Pierre-Olivier Gourinchas and even more Marty Feldstein for warning us of this fifteen years ago, but I won't because I think Mervyn King's should be the last word here.