Grasping Reality on TypePad, by Brad DeLong

It was back in 1924 that it was first generally recognized that diversification was the equity investor's biggest friend. A properly-diversified portfolio of equities would outperform bonds by huge amounts with very high provability over long-enough horizons. The problem is that while "diversification" might have been reasonably accomplished with ten well-chosen stocks back in the mid-twentieth century, in the past generation it has required more like fifty. And if we truly are moving into more of a winner-take all economy, in the future it may take 100: Terry Smith: Busting the myths of investment: Do equities outperform bonds?: "The degree of concentration of returns is still startling. Just five companies out of the universe of 25,967 in the study account for 10 per cent of the total wealth creation over the 90 years, and just over 4 per cent of the companies account for all of the wealth created.... The study also looks at returns decade by decade and reaches more or less the same conclusion: that the decade returns for most equities are lower than those earned by investment in Treasury bills... #finance

Zack Beauchamp: Brexit Vote: Theresa May’s Defeat Reveals the Lies Behind Brexit: "UK Prime Minister Theresa May spent months negotiating a deal with the European Union on the terms of Brexit.... The UK Parliament voted to reject the deal by a resounding 432-202 margin.... May’s tenure in office... was premised on the lie that she could work out a Brexit deal palatable to all sides. Now, in the clarifying light of this vote’s failure, it’s time to be honest.... Either the UK exits the EU without a deal by the March 29 deadline, which virtually every expert agrees would result in economic catastrophe, or else the country pulls back from the brink and decides to remain in the EU. These options aren’t what the Brexiteers promise, but it’s difficult to envision any other ones after the failure of May’s deal... #globalization #orangehairedbaboons

Henry Farrell: The Material Power of Ideas and Knowledge: "For the last couple of weeks, I’ve been wanting to write a response to Aaron Major... [and] Jeremy Adelman.... These arguments come from radically different places, but they have one thing in common. They both substantially underestimate the role that ideas have played in getting us to where we are on the left, and what they they’re likely to do for us in the near future...

Ed Dolan (2012): What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives

My view has always been that (a) too many big lies were told by pro-"Leave the EU" advocates and that (b) too large a proportion of the pro-"Leave the EU" advocates were shady grifters sure that they would lose but who were maneuvering for political advantage—they wanted to denounce the Establishment for failing to give everybody a pet unicorn, rather than to actually take power and run a unicorn-breeding stable. My view has been that the British press committed grave malpractice in hiding (a) and (b) from the electorate. My view has been that the best way to deal with this shambles is (c) for the press to come clean and (d) hold an informed revote—and that politicians opposed to a revote given the illegitimacy of the "Leave" mandate are shady grifters, etc. The argument against a revote is that it will split the country. But the country is split already. Better to have a split more-prosperous country with a government with a genuine mandate for its policies than a split less-prosperous country with a government with a fake mandate. Martion Wolf agrees with me: Martin Wolf: The Risks of a Second Brexit Referendum Must Now Be Run: "Another vote will be divisive —but what is happening is already splitting the country.... I can say what should happen. The answer is a second referendum.... I do not take that view with enthusiasm... #orangehairedbaboons #globalization #brexit

Thomas Piketty, Emmanuel Saez, and Gabriel Zucman: Distributional National Accounts: Methods and Estimates for the United States Data Appendix: "This Data Appendix supplements our paper 'Distributional National Accounts: Methods and Estimates for the United States'. It provides complete details on the methodology, data, and programs...

Trying to blame poor nonwhite people and social democratic governance for the faults of Wall Street seemed to me several bridges too far back a decade ago. Yet Steve Moore and Larry Kudlow seem to have gained rather than lost influence on the right from their eagerness to do so. They very sharp Barry Ritholtz takes exception: Barry Ritholtz (2016): No, the CRA Did Not Cause the Financial Crisis: "Two of Donald Trump’s economic advisers, Lawrence Kudlow and Stephen Moore... lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor.... Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, 'Invert, always invert'...

Are our models filing systems to remind us in shorthand form of what we think we know—in which case "we" should distrust models that say debt is good—or are they intuition pumps? As I see it, Paul Krugman strongly argues for the first; Olivier Blanchard takes some steps toward the second—which is why there is some dissonance between the tone of and the models in his presidential ddress: Paul Krugman: "A mostly good summary of interesting papers presented at the ASSA https://www.bloomberg.com/news/articles/2019-01-07/a-new-urban-divide-and-other-gems-from-the-big-economics-shindig but tellingly misrepresents what the paper by @ojblanchard1 actually said.... It doesn't say anything like 'debt is bad but not catastrophic'. It notes that in simple models a situation like the one we're in, in which interest rates are below growth rates, is one in which debt is actually good https://www.aeaweb.org/aea/2019conference/program/pdf/14020_paper_etZgfbDr.pdf.... Olivier then asks whether realistic complications reverse that result, and finds it unclear—more debt may well actually be good, and in any case probably doesn't do much harm. It's really a radical repudiation of what the Serious People have been saying. So it's misreporting to imply that it's just about downplaying the catastrophic risk aspect; the chairman of the AEA is basically saying that the whole deficit scold enterprise that dominated so much political discourse was bad economics...

My view has always been that (a) too many big lies were told by pro-"Leave the EU" advocates and that (b) too large a proportion of the pro-"Leave the EU" advocates were shady grifters sure that they would lose but who were maneuvering for political advantage—they wanted to denounce the Establishment for failing to give everybody a pet unicorn, rather than to actually take power and run a unicorn-breeding stable. My view has been that the British press committed grave malpractice in hiding (a) and (b) from the electorate. My view has been that the best way to deal with this shambles is (c) for the press to come clean and (d) hold an informed revote—and that politicians opposed to a revote given the illegitimacy of the "Leave" mandate are shady grifters, etc. The argument against a revote is that it will split the country. But the country is split already. Better to have a split more-prosperous country with a government with a genuine mandate for its policies than a split less-prosperous country with a government with a fake mandate. Martion Wolf agrees with me: Martin Wolf: The Risks of a Second Brexit Referendum Must Now Be Run: "Another vote will be divisive —but what is happening is already splitting the country.... I can say what should happen. The answer is a second referendum.... I do not take that view with enthusiasm...

Paul Krugman: Lecture in Melbourne... in Honor of... Max Corden: "One of the things I'm revisiting is the 'China shock' issue, which I think remains widely misunderstood. The claim is not that rapid import growth cost the U.S. jobs on net. It is that the jobs created were different from the jobs lost, and in particular in different places. That is, economic geography played a crucial role. The forces of localization mean that many localities, especially smaller towns and cities, are highly specialized in particular industries—and get hit hard if those industries shrink for whatever reason...

Gian-Carlo Rota (1997): Ten Lessons I Wish I Had Learned Before I Started Teaching Differential Equations: "One of many mistakes of my youth was writing a textbook in ordinary differential equations.... It led me to realize that I had no idea what a differential equation is.... Some of my colleagues have publicly announced that they would rather resign from MIT than lecture in sophomore differential equations. No such threat is available to me, since I am incorrectly labeled as the one member of the department who is supposed to have some expertise in the subject, guilty of writing an elementary textbook still in print. The Administrative Director of the MIT mathematics department, who exercises supreme authority upon the faculty’s teaching, has only to wave a copy of my book at me, while staring at me in silence. At her prompting, I bow and fall into line; I will be the lecturer in the dreaded course for one more year, and I will repeat the mistakes I have been making every year since I first taught differential equations in 1958...

Andrew Prokup: Roger Stone Indictment: "The actual charges against... don’t allege that he committed any crimes during the 2016 campaign. They allege, instead, that he attempted to obstruct investigations into what happened afterward. By 2017, Stone was putting forward with an apparent cover story for whatever actually did happen in 2016. He was insisting that everything he heard about Assange and WikiLeaks came from just one person—talk radio host Randy Credico.... So when Stone went to testify before the House Intelligence Committee in closed session in September 2017, he stuck to that story. Mueller has indicted Stone for five counts of false statements during that testimony.... Stone was also charged with witness tampering his efforts to get Credico to stick to his false story. '"Stonewall it. Plead the fifth. Anything to save the plan"... Richard Nixon', Stone texted Credico at one point. 'If you turned over anything to the FBI you’re a fool', he later said. And eventually — when Credico wouldn’t stick to the story—Stone got angrier. 'You are a rat. A stoolie. You backstab your friends', Stone wrote Credico in April 2018...

Michelle Goldberg.: Who Needs a Paycheck Anyway?: "Who Needs a Paycheck Anyway? The shutdown reveals the administration's callous elitism...

Why do people do this? Because it gets you invited back on to CNN. Why does it get you invited back on to CNN? That remains a mystery to me, and to others: Brad Reed: Trump-Loving Economist Caught Red-Handed 'Making Up Numbers' by Ann Guest: "Washington Post columnist Catherine Rampell busted Trump-loving economist Stephen Moore on Friday when he falsely claimed that we are seeing vast 'deflation' in the United States economy thanks to interest rate hikes by the Federal Reserve.... 'Wait, wait, wait!' interjected Rampell. 'There is no deflation!' 'Yeah there is', Moore replied. 'No there is not', she shot back. 'Look at the Consumer Price Index!'... Rampell then nailed Moore for his false warnings during the Obama presidency that it was unwise for the Fed to keep interest rates low because it would lead to hyperinflation—despite the fact that the economy at the time was deeply depressed and much more in need of easy money... #orangehariedbaboons #publicsphere #moralresponsibility

Greg Mankiw: The Bad Economics Behind Trump's Policies: "Moore and Laffer... learned the importance of flattering the boss... Trump is a 'gifted orator' who is always 'dressed immaculately'. He is 'shrewd',” 'open-minded', 'no-nonsense', and 'bigger than life'.... The book quotes Trump as claiming... his tax plan... would not increase the budget deficit because it would raise growth rates to 'three, or four, five, or even six percent'. The authors offer no credible evidence that the tax changes passed will lead to such high growth.... The Congressional Budget Office estimates that the Trump tax cuts will increase growth rates by 0.2 percentage points per year over the first five years [and then give all of that back in the next five years]... a long way from the one- to four-percentage-point boost that the president and his associates have bragged of, and that Moore and Laffer quote without explanation, caveat, or apology... #orangehairedbaboons #publicsphere

ProGrowthLiberal (2015): Stephen Moore Tries to Claim There Is a "Debate" About North Carolina Employment Statistics: "Stephen Moore has another silly parade of disinformation.... Moore wants to claim employment has soared... says there was a 'debate' about how many people dropped out of the workforce. Paul Krugman addressed this last year...

My read is that (1) Putin has something on Trump that Trump regards as either highly embarrassing or fatal (although what it could be is at this stage hard to imagine: what could embarrass Trump? what could lead McDonnell and company to stop defending Trump?); (2) Putin has said that he will keep quiet as long as Trump is "agreeable"; (3) Putin has left it up to Trump to define what "agreeable" is; (4) Trump is neither sophisticated nor wise as he attempts to do Putin's bidding: Edward Luce: The Unpalatable Truth About Trump’s Embrace of the Russian Bear: "Otherwise cautious former CIA directors, senior retired generals and other seasoned operatives talk of Russian kompromat as the best explanation for Mr Trump’s actions.... That judgment has hardened in the past three weeks. On top of the FBI’s inquiry are reports that Mr Trump has repeatedly tried to withdraw the US from Nato.... All of which presents the US public with a horribly binary choice. On the one hand, Mr Trump claims... [he] is the victim of a vast leftwing conspiracy... [and] the FBI and other branches of government had betrayed their oaths by working for one political faction. On the other hand... America’s commander-in-chief is working for a foreign adversary. Either account would break all historic precedent. The question is which of the two is less unlikely... #orangehairedbaboons

Jeffrey A. Sachs: The SJWs Are Winning and You're All Just Going to Have to Deal With It: A thread: "Reading this @JohnHMcWhorter piece is an exercise in vertigo. The central claim is that "third wave anti-racism" (i.e. the broad nexus of PC, social justice, and ID politics) is doomed to failure. That the aims are good, but strategically it's a dead end. This is a common view among centrist liberals and libertarians: 'Yes, racism and sexism are serious problems and must be addressed, but the SJW Left is going about it all wrong. In fact, its tactics are actually making these problems worse, not better'...

Jennifer Ouelette: Economists Calculate the True Value of Facebook to Its Users in New Study: "Facebook users required more than $1000 to deactivate their account for one year...

Dietz Vollrath: The Deep Roots of Development: "Institutions versus geography?... Compare... Melissa Dell’s paper on the mining mita in Peru... forced labor... to provide work in the Potosi silver mine for Spain. Dell established in her paper that areas today that were once inside the mita have lower development levels.... Marcella Alsan’s paper on the effect of the TseTse fly on African development. She builds a measure of the natural geographic range of the TseTse fly.... Both... show that aspects of development are persistently affected by deep roots... the mita... continues to cast a shadow... historical shocks have persistent effects.... In Alsan, the deep root is the range of the TseTse fly, which affected how ethnic groups within Africa subsisted, with effects on the role of women and type of agriculture...

Next to nobody ever thought it would be a good idea for the British economy. Next to nobody wanted to govern a ship of state headed for the Brexit iceberg—they merely wanted to gain narrow career advantage by showing that they would stand up for Britain. Yet those claiming to support Brexit remain busy removing the brakes that could bring Britain to a not-disastrous policy outcome: Nick Crafts: Brexit: Blame It on the Banking Crisis: "Brexit in 2019 and the banking crisis in 2007 to 2009 are usually seen as unrelated events. This column argues that they are in fact closely connected. The austerity policies embarked on in response to the fiscal damage resulting from the banking crisis triggered the protest votes of left-behind voters, which at the margin allowed Leave to win the referendum vote. The implication is that the economic costs of the banking crisis are much larger than is usually supposed...

Leonidas Montes: Friedman’s Two visits to Chile in Context : "The Mont Pèlerin Society Meeting opened with a reception and dinner on Sunday, November 15, the same day the Friedmans arrived to Chile. During the last day of the meeting, on Thursday November 19, one presenter celebrated the condition of an authoritarian government in Chile that permitted the implementation of a free market economy. La Segunda reported that Friedman emphatically intervened during this presentation arguing that the same reforms could be implemented under a constitutional o parliamentary democracy. It is also reported that he received an applause and ovation from the public (La Segunda Thursday 19, 1981 and see also Hoy, November 25, 1981, p. 27).61...

We here at Equitable Growth are certainly doing a good job of picking them, so far: Corey Husak: "So excited and honored that 5 of the 8 Best Young Economists named by @TheEconomist are grantees of @equitablegrowth! Its great to work with and fund the best economic minds of our generation https://twitter.com/TheEconomist/status/1075370969789882368... #equitablegrowth

I think that this does not get what is going on, exactly. It's the Gingrich Rule and the Trump Rule. The Gingrich Rule is this: if the president of your party is not a success and not perceived to be a success, you might well lose your congressional seat at the next election. Those who follow the Gingrich Rule thus have one focus when the presidency is held by the opposite party: make the president look like a failure—and to hell with the well-being of the country. And those who follow the Gingrich Rule thus have one focus when the presidency is held by your own party: make the president look like a success—and to hell with the well-being of the country. But what if—as is the case with Trump—nothing you do can make him look like a success? Well, you might still squeak through if your voter base has a heavy partisan advantage as long as the party loyalists support you. And that means you have to at least appear to support the president, and make sure that the president never gets mad enough at you to make you a target. Want to understand Republican legislators right now? It's these two rules: (1) Try to make Trump look like a success. (2) Try not to make Trump mad at you. This is, however, not fear of Trump—it's fear of the voters you need in your corner next November—fear that the moderates will conclude that you are a loser because Trump looks like a loser, and fear that the base will conclude that you are a loser because you are not loyal enough to Trump. Actually, I would be surprised if we did not have a lot of Republican Senators refusing to run in 2020: it's much better for your future lobbying career to retire than to lose. Lamar Alexander (R-Tennessee), Shelley Moore Capito (R-West Virginia), Bill Cassidy (R-Louisiana), Susan Collins (R-Maine), John Cornyn (R-Texas), Tom Cotton (R-Arkansas), Steve Daines (R-Montana), Mike Enzi (R-Wyoming), Joni Ernst (R-Iowa), Cory Gardner (R-Colorado), Lindsey Graham (R-South Carolina), Cindy Hyde-Smith (R-Mississippi), James Inhofe (R-Oklahoma), Jon Kyl (R-Arizona), Mitch McConnell (R-Kentucky), David Perdue (R-GA), Jim Risch (R-Idaho), Pat Roberts (R-Kansas), Mike Rounds (R-South Dakota), Ben Sasse (R-Nebraska), Dan Sullivan (R-Alaska), Thom Tillis (R-North Carolina), take note: A.B. Stoddard: Trump's Loyal Senate Republicans: "Republican officeholders would rather cross the voters than cross Trump, even as the bottom is falling out on the numbers.... John Cornyn... up for re-election next year... complained about the damage being done by the shutdown, saying that it’s 'Outrageous that federal prosecutors at Department of Justice and investigators at FBI, who we depend on to enforce the law are missing paychecks because of shutdown'. Yet after years of expressing scepticism about the efficacy of a border wall, he tells the Washington Post that he now won’t vote for a bill to reopen government without wall funding because, he said, 'the president won’t sign it'.... McConnell... could put spending bills that have passed the House... up for a vote on the Senate floor. But since the bills might pass, embarrassing Trump and risking a presidential veto, he won’t. What’s driving this partisan unity is not ideological solidarity, but fear.... When Murkowski was asked by the Post if she believed her GOP colleagues were afraid of the president she replied, 'I think some are, absolutely'... #moralresponsibility #orangehairedbaboons #politics

The disjunction between market-community and policymakers beliefs is the feature of the situation that makes me most worried about the business cycle outlook. Market oesrrvers understanding how and what the Federal Reserve believe, but are right now betting that events will give it a shock and force it to reverse policy. Such confidence that reality will give a shock that olicymakers will not be able to ignore is worrisome: Muhammed El-Erian: Why Fed and Markets Don't Agree on Prospects for Interest Rates: "The markets, anticipating no hikes this year and cuts thereafter, estimate the fed funds rate in 2020 a full percentage point below the median of the central bank's dots.... There simply isn’t enough data as yet to point with a high degree of confidence to a dominating explanation or combination of explanations... historically based analytical models may not be sufficiently structurally robust to capture this moment...

As Karl Marx wrote in the middle of the nineteenth century: Imbalances in pre-capitalist economies do not produce aggregate demand crises and collapses. Why don't they? Because Pharaoh can always command that another pyramid be built, the king can always set out on another crusade, and the bishop can always build another cathedral. The expenditures that provide employment for those not producing the consumption-goods-in-demand only have to make profit-and-loss sense under the capitalist mode of production. Capitalist economies suffer Hayek-Minsky crises when deluded financial markets suddenly recognize that they have been overoptimistic, have over invested, and need to shift investment-goods production back down not to normal but way below normal. And the collapse comes as near-universal bankruptcy and financial disruption prevents any such smooth expenditure-shifting. That Hayek-Minsky overinvestment crisis is what Paul Krugman, I, and other China-pessimists haver been fearing for two decades now. But perhaps socialism with Chinese characteristics is insufficiently capitalist for that Hayek-Minsky logic to apply, and Paul and I and others should have been paying more attention to Uncle Karl: Paul Krugman: Will China’s Economy Hit a Great Wall?: "I issued a warning.... The Chinese economy... is, I wrote, 'emerging as a danger spot'.... Unfortunately, the other day was more than 6 years ago. And it’s not just me. Many people have been predicting a China crisis for a long time, and it has kept on not happening. But now China seems to be stumbling again. Is this the moment when all the prophecies of big trouble in big China finally come true? Honestly, I have no idea. On one side, China’s problems are real. On the other, the Chinese government... has repeatedly shown its ability and willingness to do whatever it takes...