Grasping Reality on TypePad, by Brad DeLong

you will read about econometrics and empirical statistical research in general:

You are testing a theory you came up with, but the data are uncooperative and say you are wrong. But instead of accepting that, you tell yourself 'My theory is right, I just haven't found the right econometric specification yet. I need to add variables, remove variables, take a log, add an interaction, square a term, do a different correction for misspecification, try a different sample period, etc., etc., etc.' Then, after finally digging out that one specification of the econometric model that confirms your hypothesis, you declare victory, write it up, and send it off (somehow never mentioning the intense specification mining that produced the result). Too much econometric work proceeds along these lines. Not quite this blatantly, but that is, in effect, what happens in too many cases. I think it is often best to think of econometric results as the best case the researcher could make for a particular theory rather than a true test of the model.

...is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.... To the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality.... Society faces difficult questions of how best to fairly and justly promote equal opportunity. My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion.... I will review trends... then identify and discuss four sources of economic opportunity in America.... The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education. The second two may come as more of a surprise: business ownership and inheritances.... In focusing on these four building blocks, I do not mean to suggest that they account for all economic opportunity, but I do believe they are all significant sources of opportunity for individuals and their families to improve their economic circumstances...

...a politically powerless and disenfranchised primary user base... to... the working poor [who] will never have as much power as the non-working rich, but they have some.... Post 1: 'A friend from Minnesota asks if I have heard of the ‘old’ Medicaid rules on child support assignment being applied to  ‘new’ Medicaid ACA-expanded  beneficiaries….. Does this mean Medicaid’s more draconian aspects will finally see the light of day in public debate? Will the inclusion of working poor people create a constituency for a Medicaid program... [not] apparently premised on the idea that Medicaid beneficiaries are getting something for nothing and payback is our mission?' Post 2: 'As I have discussed elsewhere, we are conflicted about Medicaid so it is no surprise that the ACA is conflicted... does nothing to alter state discretion to seek state recoupment of Medicaid costs from Medicaid beneficiaries who received basic medical services... after the age of 55....' These types of rules have been put in place as part of the favorite American game of determing who is and is not part of the deserving poor.  Those rules applied to Medicaid when it was truly the poor person’s program and not a broad based payer of last resort.  To some, anyone who qualifies for Medicaid, even with the income eligiblity expansion is a ‘loser’ who deserves random harrassment, but beyond those assholes and sociopaths, it is harder for the American voting  public (which is quite different and generally more privileged than the general public on a variety of measures) to see the value of harrassing people who they either know or could have seen themselves to be.

...at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination.... In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face. In normal times, fiscal policy would support monetary policy, including by playing a redistributive role. But these are not normal times.... As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity... affluent households spend a smaller share... high levels of inequality also impede the structural reforms needed to boost productivity... erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda. Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity. But waiting will only make the problem more difficult to resolve...

lift[ed] 39 million people — including more than 8 million children — out of poverty... Social Security, non-cash benefits such as rent subsidies and SNAP (formerly food stamps), and tax credits for working families like the Earned Income Tax Credit (EITC).... Accounting for government assistance programs and taxes cuts the poverty rate for 2013 from 28.1 percent to 15.5 percent.... Safety net programs cut the poverty rate for children from 27.5 percent to 16.4 percent...

...have failed. And yet conservative opposition... has not diminished. If you want to know why this is, listen to... Joni Ernst....

We’re looking at Obamacare right now. Once we start with those benefits in January, how are we going to get people off of those? READ MOAR

Victoria Cross: No. 6092111 Private (acting Sergeant) George Harold Eardley, The King’s Shropshire Light Infantry (Congleton, Cheshire).

In North-West Europe, on 16th October, 1944, during an attack on the wooded area East of Overloon, strong opposition was met from well sited defensive positions in orchards. The enemy were paratroops and well equipped with machine guns. A Platoon of the King’s Shropshire Light Infantry was ordered to clear these orchards and so restore the momentum of the advance, but was halted some 80 yards from its objective by automatic fire from enemy machine gun posts. This fire was so heavy that it appeared impossible for any man to expose himself and remain unscathed.

Paul Krugman lived up to his lifelong motto of 'stay classy'... lesser lights of the Keynesian firmament have also jumped in (collectivists, of course, excel at sharing a meme). Responding to Krugman is as productive as smacking a skunk with a tennis racket.... Paul's screeds.... I'll put our collective record up against Krugman's (and the Krug-Tone back-up dancers) any day of the week and twice on days he publishes... chicanery (silly Paul, you are no Rabbit)... never-uncertain-but-usually-wrong like Paul... malpractice... honest Paul Krugman (we will use this term again below but this is something called a "counter-factual")... former economists turned partisan pundits....

Much like when the Germans bombed Pearl Harbor, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases...

...may be the biggest dove on the Federal Reserve, but his interest-rate projections would make him just an ordinary trader on Wall Street. The current Fed funds futures contract is pricing in interest rates of 2% at the end of the third quarter of 2017. The lowest “dot” on the Fed’s dot plot of interest rates is for rates of 2% at the end of 2017. And the next lowest dot is at 2.63%. It’s not known for certain that the 2% dot for 2017 comes from Kocherlakota, but his speeches are consistent with such a view. For example, unlike his colleagues, he doesn’t think any rate hike would be appropriate next year. He doesn’t expect inflation as measured by the PCE price index to get back to 2% until 2018. And he doesn’t want any reduction in accommodation unless the outlook is for inflation to be at 2% in two years time...

Battery Sergeant Major Ernest Powdrill describes life on the front line in Holland.

The weather was appalling, the drenching rain was intense and the days were permanently dark. It was bitterly cold. The locality was wooded and gloomy, the enemy were around us in some considerable numbers and the area was extensively mined. South of Oploo was not a comfortable position to be in, but there was no alternative.

On the night of 14th – 15th October Powdrill had to go forward with supplies for the Forward Observation tank, referred to as the RDon, which was concealed on the edge of woods, much closer to the enemy. He went forward in a carrier with Driver Smith:

...in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms...

But what was the point of this? We saw from the Piketty quote up at the top that Piketty does not think that "r>g" has been driving the rise in American inequality. Why is it an interesting question to ask?

Justin, in my view, buries the lead, for he does indeed point out later on in his article:

If surveyed, it is likely that he would have joined the majority view in disagreeing with the claim the survey asked about. In Mr. Piketty’s telling, rising incomes among the super-rich are responsible for the recent rise in wealth inequality...

...I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.... The concern is the next steps that [the ECB] may need. That worries me a little bit. Will their policy response be as timely and aggressive as needed?... The markets are pricing in a lot of other things that might happen and a lot of those are negative. The cross currents are really the story.

...with an unprecedented level of loose monetary policy... created a risk of serious inflation....Paul Krugman lived up to his lifelong motto of "stay classy" with a piece on the subject entitled Knaves, Fools, and Quantitative Easing. Some lesser lights of the Keynesian firmament have also jumped in.... Responding to Krugman is as productive as smacking a skunk with a tennis racket. But, sometimes, like many unpleasant tasks, it's necessary....

We did not make a prediction.... We warned of a risk....

...can look at 15+ years of the earth not warming and feel his beliefs need no modification or explanation...

What next, Cliff? ShadowStats? Queen Elizabeth a secret lizard-person? Moon landing faked?

...that any acute care facility capable of implementing strict infection control procedures should be capable of caring for an Ebola Virus case? Well, if you know anything at all about infection control success at U.S. acute care hospitals, this should have given you pause. Strict infection control in U.S. acute care facilities has not been our long suit.

...Stimulating the economy at that point requires central banks to raise expected inflation. Disinflation, by contrast, results in passive tightening, since the central bank can't lower its policy rate.... In this world, the downside risks are much larger than those to the upside. There is infinite room to raise interest rates if inflation runs uncomfortably high.... But there is no room to reduce interest rates if inflation is running to low. That, in turn, forces central banks to use unconventional policy or run psychological operations to try to boost expectations. Central banks are not very good at those sorts of things. You need to overshoot, in other words, because undershooting feeds on itself.... READ MOAR

...Factory output across the 18 countries that use the euro slumped in August, driven by the largest decline in the manufacture of capital goods since the months following the collapse of Lehman Brothers, and possibly reflecting a similar decline in global business confidence. The European Union’s statistics agency Tuesday said production by factories, mines and utilities during August was 1.8% lower than in July, and 1.9% lower than in the same month of 2013.... The decline more than reversed a 0.9% gain in July, and suggests it is possible output for the third quarter as a whole will be lower than for the second quarter...

A fourteenth-century Old Norse text called Hemings þáttr, which tells the story of a (fictional) Norwegian named Heming who becomes involved in the English battles of 1066.... In this text the story of Hastings is a story about loyalty and fidelity: Harold inspires the love and loyalty of his men (and especially of Heming, the saga's main character), even after his death - loyalty of a kind which William, in every other way so successful, can never obtain.

...for countries with infrastructure needs, the combination of low interest rates and mediocre growth mean that it’s time for an investment push. What’s at stake: For countries with infrastructure needs, the combination of low interest rates and mediocre growth mean that it’s time for an investment push. While Brad DeLong and Lawrence Summers already laid out the theoretical case in a 2012 Brookings paper, the empirical case was laid out this week in Chapter 3 of the latest IMF World Economic Outlook.

Lawrence Summers writes that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. Greg Mankiw writes that the free-lunch view is certainly theoretically possible (just like self-financing tax cuts), but we should be skeptical about whether it can occur in practice (just like self-financing tax cuts).

Abiad and al. write on the IMF blog that the evolution of the stock of public capital suggests rising inadequacies in infrastructure provision. Public capital has declined significantly as a share of output over the past three decades in both advanced and developing countries. In advanced economies, public investment was scaled back from about 4 percent of GDP in the 1980s to 3 percent of GDP at present (maintenance spending has also fallen, especially since the financial crisis).

This makes a very strong case for sharply increasing public investment in a depressed economy

Paul Krugman writes that this is disinvestment madness. Real interest rates are extremely low, indicating that the private sector sees very little opportunity cost in using funds for public investment. There has been a lot of slack in the labor market, so that many of the workers one would employ in public investment would otherwise have been idle--so very little opportunity cost there either. This makes a very strong case for sharply increasing public investment in a depressed economy; a case that doesn’t rely on claims that there is a large multiplier, although there’s every reason to believe that this is also true.

The authors of the WEO’s chapter 3 write that in contrast to the large body of literature that has focused on estimating the long term elasticity of output to public and infrastructure capital using a production function approach, the IMF analysis adopts a novel empirical strategy that allows estimation of both the short- and medium-term effects of public investment on a range of macroeconomic variables. Specifically, it isolates shocks to public investment that can plausibly be deemed exogenous by following the approach of smooth transition VARs of Auerbach and Gorodnichenko (2012, 2013), where the shocks are identified as the difference between forecast and actual investment. In the WEO chapter, the forecasts of investment spending are those reported in the fall issue of the OECD’s Economic Outlook for the same year.

The positive effects of increased public infrastructure investment are particularly strong when public investment is undertaken during periods of economic slack and monetary policy accommodation

The authors of the WEO’s chapter 3 write that a problem in the identification of public investment shocks is that they may be endogenous to output growth surprises. But the public investment innovations identified are only weakly correlated (about –0.11) with output growth surprises. Another possible problem in identifying public investment shocks is a potential systematic bias in the forecasts concerning economic variables other than public investment, with the result that the forecast errors for public investment are correlated with those for other macroeconomic variables. To address this concern, the measure of public investment shocks has been regressed on the forecast errors of other components of government spending, private investment, and private consumption.

Abiad and al. write on the IMF blog that the benefits depend on a number of factors. The authors find that the positive effects of increased public infrastructure investment are particularly strong when public investment is undertaken during periods of economic slack and monetary policy accommodation, where additional public investment spending is not wasted and is allocated to projects with high rates of return and when it is financed by issuing debt has larger output effects than when it is financed by raising taxes or cutting other spending.

Mario Monti writes that while a simplistic stability pact may have been the right choice when the euro was in its infancy, Europe can no longer afford to stick with such a rudimentary instrument. By failing to recognize the proper role of public investment, it has pushed governments to stop building infrastructure just when they should have built more. What is needed is not the flexibility to deviate from the rules, but rules that are economically and morally rigorous. The new Commission should announce a proposal for updating the rules on fiscal discipline, to reflect the role of productive public investment. The commission would then enforce the existing stability pact while allowing for the favorable treatment of public investment within the limits set out in 2013.

Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps

Lawrence Summers writes that Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.

...That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts).  The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking."

...(1) Mortgage lending was 1/3 of bank balance sheets about 100 years ago, but in the postwar era mortgage lending has now risen to 2/3, and rapidly so in recent decades. (2) Credit buildup is predictive of financial crisis events, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome. (3) Credit buildup in expansions is predictive of deeper recessions, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome as well...

...The root cause of the problem is the age-old over-reliance on exports--and on plant and machinery exports in particular.... There are no signs of a strong global recovery, let alone of a global investment boom. It is thus reasonable to expect a mediocre performance by the German economy for a while.... On top of that comes a demographic shock.... Now both the core and the periphery are weak. And policy is not responding sufficiently. Add the two together and it is not hard to conclude that secular stagnation is not so much a danger as the most probable scenario."

...since records began being kept in 1880, NASA reported Sunday. January through September data have 2014 already at the third warmest on record. Projections by NOAA make clear 2014 is taking aim at hottest year on record. Remarkably, this September record occurred even though we’re still waiting for the start of El Niño, which reveals just how strong the underlying trend of human-caused warming is. It’s usually the combination of the long-term manmade warming trend and the regional El Niño warming pattern that leads to new global temperature records. In this country, temperatures were quite hot in the West, and just ‘normal’ or very close to the 1951-1980 average in the East, as this NASA chart shows..."

...There’s just one problem.... Amazon is not a monopoly.... Foer waives this competitive pressure away.... Businesses compete. Very often the bigger one wins. Foer argues, however, that Amazon’s ‘big-footing necessitates a government response,’ without really explaining why.... He describes us all as complicit in... something. I’m not sure what: ‘We’ve all been seduced by the deep discounts, the monthly automatic diaper delivery, the free Prime movies, the gift wrapping, the free two-day shipping, the ability to buy shoes or books or pinto beans or a toilet all from the same place,’ he writes. ‘But it has gone beyond seduction, really. We expect these kinds of conveniences now, as if they were birthrights.’ Is that really such a bad thing? Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap.... None of this is to say that Amazon should not face new regulations to force it to treat its workers better.... None of this is to say that its harassment of Hachette is right or should be legal or should not face some serious pushback.... But Amazon being a shitty, vicious competitor and Amazon being a monopoly are hardly the same thing.

...Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up.... More often, debt relief takes place implicitly, through ‘financial repression’: government policies hold interest rates down, while inflation erodes the real value of debt. What’s striking about the past few years, however, is how little debt relief has actually taken place.... In major economies, very few debtors have received a break. And far from being inflated away, the burden of debt has been aggravated by falling inflation, which is running well below target in America and near zero in Europe.... But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves. Maybe, just maybe, bad news--say, a recession in Germany--will finally bring an end to this destructive reign of virtue. But don’t count on it.

...Your analysis is notably different from Paul Krugman's analysis of private sector employment.

This is not odd--notoriousl,y unemployment has returned to normal partly through a decline in labor force participation. But wait, he says this recovery is a lot like the last recovery.

The difference is that you impose the assumption that everything before 2008 was the same. In contrast, Krugman argues (and argued in 2008) that financial crisis recessions are different from inflation fighting recessions. Spring 91 through (at least) Spring 93 saw the "jobless recovery". In 1993 you were attempting to understand why things were different pre- and post-1991. The 2001 mini-recession was followed by recovery with declining employment--the "job-loss recovery". At the time, you wrote something was going very wrong with the US labor market. Now there is a desperate need for jobs and you don't see a pattern in jobless, job loss, and job lust.

...in the way most of us think we do.... The brain builds models... and those models are often not accurate.... How does the brain go beyond processing information to become subjectively aware of information? The answer is: It doesn’t.... When we introspect and seem to find... awareness, consciousness, the way green looks or pain feels... those models are providing information that is wrong.... You might object that this is a paradox. If awareness is an erroneous impression, isn’t it still an impression? And isn’t an impression a form of awareness?... Attention: a real, mechanistic phenomenon that can be programmed into a computer chip. Awareness: a cartoonish reconstruction of attention that is as physically inaccurate as the brain’s internal model of color.... Like the intuition that white light is pure, our intuitions about awareness come from information computed deep in the brain. But the brain computes models that are caricatures of real things. And as with color, so with consciousness: It’s best to be skeptical...