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February 2016

Procrastinating on February 4, 2016


Over at Equitable Growth--The Equitablog:

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Live from La Farine: There is something gravely, deeply, morally wrong with anyone who is not looking at the Republican presidential candidate clown show, and not saying loudly and frequently: you owe it to your country to vote, and to vote for the Democrat in November:

Scott Lemieux: Today In Republican Anti-Anti-Racism: "Barack Obama did something today:

President Obama Wednesday delivered the comforting sermon to U.S. Muslims that their community leaders have been requesting for years, framing Islam as deeply American and its critics as violating the nation’s cherished value of religious freedom. Obama’s comments came in his first visit as president to a U.S. mosque.

Cue the Donald:

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Live from Evans Hall: Edgeworth Boxes and Production Possibility Frontiers

Edgeworth Boxes and Production Possibility Frontiers are two tools to help people grasp the excellences of a market economy in equilibrium. The Edgeworth box shows the possible gains from trade—and how a free market leads the economy to one of the possible allocations that exhausts those gains. The PPF shows how creating a price mechanism drives production to a Pareto-efficient point—and, in fact, to that particular Pareto-efficient point on the Pareto frontier that maximizes the value of output at the equilibrium price vector.

Question: Are either of these worth covering in an Econ 1 course?

I have, before, done the Edgeworth Box, and I have concluded that it is not worth covering (even though Rick Ericsson spent a bunch of time on it when I took Econ 1).

This year I did the PPF because Frank, Bernanke, Antonovics, and Heffetz do it. And I am concluding that it, too, is really not worth it.

It is better, I think, to: Start, on the supply side, with the idea that there are resources and property rights and people have capabilities and options. Then go through opportunity cost to the supply curve. And it is better, I think, to: Start, on the demand side, with preferences and incomes. Then go through willingness-to-pay to the demand curve. After that, back-and-fill and get to the value of the market system via consumer and producer surplus.

That, at least, is my current view…

Must-Read: That the Fed would be facing significant chances of recession and would be moving in the opposite policy direction than its peers over the winter was a serious risk of beginning a tightening cycle in December, and a risk that has now risen from a possibility to a probability.

What was the countervailing serious risk that starting the tightening cycle in December took off the table? I really do not see it...

Graph 5 Year 5 Year Forward Inflation Expectation Rate FRED St Louis Fed

Martin Sandbu: Four Takes on the Fed Fumble: "Remember September? Markets seemingly couldn’t wait for the Federal Reserve to raise interest rates...

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Must-Read: Two takeaways this morning from Stan Fischer, and from Tim Duy reading Stan Fischer:

  1. 1.4%-2% inflation "positive and broadly consistent with price stability" "not in another universe [from 2%]... not a negative number" is the new 2% inflation target.

  2. Because the Federal Reserve has no confidence in its ability to nudge the unemployment rate up to its long-run NAIRU level without overshooting and causing a recession, it must always attempt to glide down to the NAIRU from above--and must not follow policies that risk pushing unemployment below the NAIRU, whatever it really is:

Tim Duy and Friends: Stan Fischer Resisting Change?:

Lance Bachmeier: @kocherlakota009 @TimDuy: "Good post...

...SF/EG (inadvertently?) communicate that 1.5-2% inflation is 'good enough' for them.

NRKocherlakota: "@TimDuy Problem: if 2% is the true symmetric... of policy, the FOMC needs a U-Turn, not just a pause:

Tim Duy: "@kocherlakota009 So...

...I don't really believe the target is symmetric. Need to prove it to me.

NRKocherlakota: "@TimDuy Yes, and I worry that public/markets...

...have your same (reasonable!) doubts. SF's and EG's remarks don't help assuage those doubts.

Lance Bachmeier: "@kocherlakota009 @TimDuy The strange thing... that they're lowering the [inflation] target after we've learned 2% is too low already.

Lance Bachmeier: "@kocherlakota009 @TimDuy I'm not even sure 2% is a ceiling...

...they want to prevent inflation from [even] reaching 2%.

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Procrastinating on February 2, 2016


Over at Equitable Growth--The Equitablog:

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Must-Read: So I was teaching Acemoglu, Johnson, and Robinson's "Atlantic Trade" paper last week, and pointing out that (a) eighteenth-century England is a hugely-influential observation at the very edge of the range of the independent variables in the regression, and (b) it carries a huge residual even with a large estimated coefficient on Atlantic trade interacted with representative government. The huge residual, I said, means that the computer is saying: "I really do not like this model". The rejection of a null hypothesis on the coefficient of interest is the computer saying "even though the model with a large coefficient is very unlikely, the model with a zero coefficient is very very very unlikely". But, I said, Acemoglu, Johnson, and Robinson do not let their computer say the first statement, but only the second...

And so I thought of Cosma Shalizi and his:

Cosma Shalizi (2011): When Bayesians Can't Handle the Truth: "When should a frequentist expect Bayesian updating to work?...

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Procrastinating on February 1, 2016


Over at Equitable Growth--The Equitablog:

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Must-Read: The very-sharp Jed Graham has... strong views... about the Federal Reserve's rather counterintuitive decision to raise interest rates in a quarter at which nominal GDP grew at a rate of 1.5%/year, at the end of a year in which nominal GDP grew at 2.9%. The Fed is placing an awful lot of weight on the unemployment rate, and not on either non-labor market indicators or the employment-to-population ratio, in its decision to raise. I don't think we even have to reach for the (very true and powerful) arguments about asymmetric risks to find the interest-rate increase technocratically incomprehensible, and the failure to roll it back last month technocratically incomprehensible as well:

The Fed s Historic Rate Hike Goof In One Chart Stock News Stock Market Analysis IBD

Jed Graham: The Fed's Historic Rate-Hike Goof--in One Chart: "Janet Yellen’s Federal Reserve has done something that no other Fed has done since Paul Volcker...

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