Friday Art Fun

Totally off topic. It's Friday, time to relax.

Source: Nina Katchadourian

15th Century Flemish Style Portraits Recreated In Airplane Lavatory Click the link for the full set.

From the artist:

While in the lavatory on a domestic flight in March 2010, I spontaneously put a tissue paper toilet cover seat cover over my head and took a picture in the mirror using my cellphone. The image evoked 15th-century Flemish portraiture. <…> I made several forays to the bathroom from my aisle seat, and by the time we landed I had a large group of new photographs entitled Lavatory Self-Portraits in the Flemish Style

From the art critic (Sally Cochrane)

What no one's saying, though, is that she was hogging the bathroom while a line of antsy people held their bladders! 

In related art news, the street artist Banksy is prowling New York. A group of Brooklyn locals, seeing people coming in to photograph the stencil, promptly covered it with cardboard and starting charging $5 per shot. Entrepreneurship and property rights are still alive.

Krugtron parts 2 and 3

Niall Ferguson has completed his Krugtron trilogy, with Part 2 and Part 3, (Part 1 here FYI, which I blogged about earlier.)

Part 2 continues Part 1. In fact, Krugman is as human as the rest of us, and the future is hard to see. Niall compiles a long record of what Krugman actually said at the time. As before, those of us on the sharp end of Krugman's insults enjoy seeing at least his own record set straight.

But Niall admits what I said last time: we don't really learn much from anyone's prognostication

In the past few days, I have pointed out that he has no right at all to castigate me or anyone else for real or imagined mistakes of prognostication. But the fact that Paul Krugman is often wrong is not the most important thing. ..

What Niall is really mad at are the insults, the lying and slandering (I'm sorry, that's what it is and there are no polite words for impolite behavior), and the lack of scholarship -- Krugman does not read the things he castigates people for.

And it matters.

Mulligan on Obamacare Marginal Tax Rates

Casey Mulligan wrote a nice Wall Street Journal Oped last week, summarizing his recent NBER Working Paper (also here on Casey's webpage) on marginal tax rates.

What do I mean, tax, you might ask. Obamacare is about giving people stuff, not taxing. Sadly, no. Obamacare gives subsidies that are dependent on income. As you earn more, you receive fewer subsidies for health care, reducing the incentive to earn more. Casey tots this sort of thing up, along with the actual taxes people will pay.

Economists use the word "tax" here and we know what we mean, but it would be better to call it "disincentives" so it's clearer what the problem is, and just how painful we make it for poor people in this country to rise out of that poverty.

As you can see, the average marginal "tax" rate went up 10 percentage points since 2007, and about 5 percentage points due to Obamacare alone.

Going back to the working paper, I think this is actually an understatement. (Probably the first time Casey or I have ever been accused of that!)

Margins on Exchanges

A nice Bloomberg View by David Goldhill offers an Econ 101 lesson in incentives. Though the average subsidy rate to health insurance is limited, the marginal subsidy rate is 100% once consumers hit the income limits -- so many consumers have no incentive at all to shop for lower prices. In turn, this greatly lowers the chance that insurers will compete on price.

David:

Let’s take an example. A family of four at 138 percent of the poverty level ($32,499) has its premium capped at 3.29 percent of income or $1,071. The rest is subsidy. So, if the cost of a silver plan is $10,000, the subsidy for this family is $8,929. A family at 400 percent of the poverty level ($94,200) has to pay up to 9.5 percent of its income for a plan, or $8,949. So the same $10,000 premium carries a subsidy of only $1,051.

But now look at those two families from the insurer’s perspective. A $10,000 plan already costs more than the maximum amount either family would pay. If the insurer raises the premium to $10,001, both families get $1 in additional subsidy. If it raises premiums to $11,000, both families get $1,000 in additional subsidy. In other words, no matter how much an insurer raises rates, a subsidized household pays zero more.

Ferguson on Krugtron

A fun show is breaking out. Niall Ferguson on "Krugtron the invincible."

Paul Krugman, for a while now, has been lambasting those he disagrees with by trumpeting their supposed "predictions" which came out wrong, and using words like "knaves and fools" to describe them -- when he's feeling polite. These claims often are based on a rather superficial, if any, study of what the people involved actually wrote, mirroring the sudden narcolepsy of Times fact-checkers any time Krugman steps in to the room. Niall has lately been a particular target of this calumnious campaign.

Niall's fighting back. "Oh yeah? Let's see how your "predictions" worked out!" Don't mess with a historian. He knows how to check the facts. This is only "part 1!" Ken Rogoff seems to be on a similar tear. (and a new item here.) This will be worth watching.

Dupor and Li on the Missing Inflation in the New-Keynesian Stimulus

Bill Dupor and Rong Li have a very nice new paper on fiscal stimulus: "The 2009 Recovery Act and the Expected Inflation Channel of Government Spending" available here.

New-Keynesian models are really utterly different from Old-Keynesian stories. In the old-Keynesian account, more government spending raises income directly (Y=C+I+G); income Y then raises consumption, so you get a second round of income increases.

New-Keynesian models act entirely through the real interest rate.  Higher government spending means more inflation. More inflation reduces real interest rates when the nominal rate is stuck at zero, or when the Fed chooses not to respond with higher nominal rates. A higher real interest rate depresses consumption and output today relative to the future, when they are expected to return to trend. Making the economy deliberately more inefficient also raises inflation, lowers the real rate and stimulates output today. (Bill and Rong's introduction gives a better explanation, recommended.)

So, the key proposition of new-Keynesian multipliers is that they work by increasing expected inflation. Bill and Rong look at that mechanism: did the ARRA stimulus in 2009 increase inflation or expected inflation?  Their answer: No.

Eight young stars

Eight of the World’s Top Young Economists Discuss Where Their Field Is Going is a interesting post, interviewing a few of economics' young stars. It's about a year old, but a correspondent just sent it to me and I think it's still good reading.

It's particularly good reading for PhD students. These are better models to emulate than older economists, as they tell you a bit more what directions are going well now -- at least what gets you baptized a star! Here are a few things I noticed.

Rogoff on UK Defaults

Ken Rogoff wrote a very interesting FT oped on UK finances (FT original, Rogoff webpage if you can't see FT.)

The issue: Should we worry about huge sovereign debts of advanced countries? Or was the only problem with fiscal stimulus that it was not big enough?

Financial Reform in 12 Minutes

I was on a panel yesterday at a fascinating conference, "The US Financial System–Five Years after the Crisis."  The conference was run simultaneously at Hooover and Brookings, with a live video link. Which went dead exactly as I was proclaiming the wonders of modern technology, but otherwise worked remarkably well. Alas, the conference was run under "Chatham house rules" so I can't tell you all the remarkable things that the Very Important People said. I can pass on surprise that there was so little disagreement between the Brookings and Hoover sides. I was expecting a spirited defense of Dodd-Frank from the East. Instead, they piled on it, if anything more eloquently that the West, with only one very thoughtful but still lukewarm defense.  I hope the presentations will eventually be made public, as they were uniformly interesting -- even the ones I disagreed with I thought were wrong in very interesting and thoughtful ways.

I was given 12 minutes to comment on the state of financial reform, is too big to fail over, are we ready for the next crisis. My answer follows. Yes, faithful readers will recognize something of a moving average, which will continue both to move and to average.

Have fun

Financial Reform in 12 Minutes

Is too big to fail over? No. Are we ready for the next crisis? Absolutely not. 

Miron and Rigol go after a classic

Jeff Miron and Natalia Rigol have a provocative working paper, "Bank Failures and Output During the Great Depression." They take on one of Ben Bernanke's most famous papers.

Is QE contractionary?

I ran across a fascinating blog post by Peter Stella at Vox-Eu on exit strategies and QE. 

Peter points out that only banks can hold reserves, while anyone can hold short term Treasuries. And you can easily use Treasuries for collateral.  That means that short term Treasuries are in some sense more liquid than reserves, and that by buying huge amounts of Treasuries and issuing reserves, the Fed may be actually contracting. 

Asset Pricing MOOC Open

My Coursera Asset Pricing MOOC is now open. The direct link is here -- but you may need to register to see it. 

I recommend browsing the week 1 videos, especially the theory preview videos, if you want a sense of what it's all about. Week 0 is background material on continuous time math.

Week 0 (background) and week 1 are up now, 2 and 3 should be up later this week.

Warning, this is a PhD level asset pricing class, designed to get you in to the theory used for research-level asset pricing. It pretty much follows my textbook "Asset Pricing" (and supplementary material) You don't have to buy the text to take the Coursera class. People who just want to watch the videos are also welcome.

The New-Keynesian Liquidity Trap

I just finished a draft of an academic article, "The New-Keynesian Liquidity Trap"  that might be of interest to blog readers, especially those of you who follow the stimulus wars. 

New-Keynesian models produce some stunning predictions of what happens in a "liquidity trap" when interest rates are stuck at zero.  They predict a deep recession. They predict that promises work: "forward guidance," and commitments to keep interest rates low for long periods, with no current action, stimulate the current level of consumption.  Fully-expected future inflation is a good thing. Growth is bad. Deliberate destruction of output, capital, and productivity raise GDP. Throw away the bulldozers, let them use shovels. Or, better, spoons. Hurricanes are good. Government spending, even if financed by current taxation, and even if completely wasted, of the digging ditches and filling them up type, can have huge output multipliers.

Even more puzzling, new-Keynesian models predict that all of this gets worse as prices become more flexible.  Thus, although price stickiness is the central friction keeping the economy from achieving its optimal output, policies that reduce price stickiness would make matters worse.

In short, every law of economics seems to change sign at the zero bound. If gravity itself changed sign and we all started floating away, it would be no less surprising.

And of course, if you read the New York Times, people like me who have any doubts about all this are morons, evil, corrupt, and paid off by some vast right-wing conspiracy to transfer wealth from the poor to the secret conspiracy of hedge fund billionaires.

So I spent some time looking at all this.

McDonalds and the minimum wage

Recently, on a long car trip returning from a glider contest, I did something unusual among our liberal elite: I actually went to a McDonalds and ate there.

The lady who took my order must have been about 19, as were all the other employees I could see, and pretty clearly new on the job.  Getting the order right took some effort.  I made the mistake of paying cash. The bill was something like $7.62. I first offered a $10, and she rang it up. Then I found 12 cents in my pocket, and offered it. This was a big mistake, as the cash register had already computed my change, and adjusting to my offer of 12 cents was beyond her abilities.

Most people might have been annoyed, but as an economist and an educator, I'm happy to see human capital building. OK, I was a little annoyed.

Which brings me, of course, to the proposals for a sharply increased minimum wage.

Summers withdraws

You have undoubtedly seen the news by now. Chicago Tribune, and Wall Street Journal

I'm sad, actually. A Summers confirmation would have been a great focus for a national debate on the role of the Federal Reserve, the role and character of its Chair, proper relations between the Fed and Wall Street, where we are going with financial regulation, whether bailouts and stimulus are a good idea, and how macroeconomic and monetary policy should be conducted.

I mean that as a totally honest statement -- don't read any coded pro- or anti- Summers implications in it.

I don't see that happening with any of the remaining candidates. We are at a good moment to attract some lightning, and I'm sorry to see the lightning rod bow out.

Banking news

There are two interesting tidbits of banking news in today's (9/10/2013) papers.

The Wall Street Journal has a long page 1 article, "Life on Wall Street Gets Less Risky" describing what it's like at Morgan Stanley under the new regulatory regime. Two bits caught my eye

A Chicago economist runs a central bank

Raghu Rajan celebrated his first day on the job running India's central bank. Coverage from Financial Times and Wall Street Journal.

Did he.. Find the coffee machine? Test the sofas in his office? Dust off his desk? Tour the printing press? Or...

Sargent online

Tom Sargent and John Stachurski go online with a fascinating web based course in quantitative economic modeling.

Two thoughts.  The education world is going online, but we're all in version 1.0 at best. Tom and John's website is an interestingly different paradigm than the online courses such as the Coursera platform that I'm using for an online asset pricing course.  I'll be curious to see which elements of which paradigm survive. Or perhaps the Toms' webiste will become the "textbook" for Coursera type courses, which can then add videos, forums, a structured environment for plowing through the material, and  the carrot of certification at the end.

The website is just gorgeous. Producing economic (and scientific) articles for viewing online has so far been a headache. Our journals produce beautiful pdf representations of.. printed pages. They might as well show 3-d images of a papyrus scroll. Math and tables in html as presented on most journal websites is just pathetically ugly. As I looked through this website, I'm enthused that 1) I need to learn python and 2) I need to learn to write my papers and textbooks in this gorgeous format.

Fed Chair

My pick for Fed chair below. I don't have much to say on the choice between Janet Yellen and Larry Summers. Both are worthy economists, with well-discussed pluses and minuses on which I have no particular insight.

So, this post is about who else one might want to look at, and much more importantly the broader question about what makes a good Fed chair.

The press mostly  wants a soothsayer, who will foresee events the market does not see and calm the waters -- in practice,  basically operating the worlds largest contrarian hedge fund, or the commissariat of macroeconomic central planning. Such people don't exist, so that's a self-defeating job description. Let's talk about reality.

The Fed chair will not just have to pick the right course, but will also have to wade through the cacophony of advice and pressure he or she will receive, from politicians, powerful banks and businesses, outside critics – people like me – and the crosswinds of contradictory advice from Fed board members, staff and regions. And then guide a headstrong committee and a ponderous bureaucracy to those ends.

To do that, a chair needs a clear intellectual framework and a core set of principles.

Ronald Coase

Ronald Coase has died, inspiration and hope for those of us who don't write 10 papers a year. But they have to be good ones.

Two insightful retrospectives:

David Henderson, in the Wall Street Journal, also here at Hoover (no paywall)

Dylan Matthews in the Washington Post "Wonkblog" "Here are five of his papers you need to read"

When I got to Chicago, it seemed that people, especially graduate students, would shout "Coase theorem" at totally random moments. The pattern has since started to make some sense.