Links (6/23/19)

In a couple of days I’m going to be participating in an Economic Policy Institute conference on “excessive wealth disorder” — the problems and dangers created by extreme concentration of income and wealth at the top. I’ve been asked to give a short talk at the beginning of the conference, focusing on the political and policy distortions high inequality creates, and I’ve been trying to put my thoughts in order. So I thought I might as well write up those thoughts for broader dissemination.

President Trump believes we live in a zero-sum world in which one country’s gain is another’s loss. This is evident in his reaction to Mario Draghi’s comment this week that additional monetary stimulus will be needed if euro zone inflation doesn’t rise. Trump tweeted:

f you follow such things, you know that earlier this week, the U.S. central bank shifted its bias from patient waiting to a bias toward rate cuts. Here are three observations about this moment in monetary policy. …

The nature of global commerce has changed dramatically over the past 40 years, with the meteoric rise of global value chain trade. This column, taken from a recent Vox eBook, builds on insights from recent research to identify three critical dimensions of global value chain trade that promise to make today’s trade wars more economically costly and more politically complex than previous trade wars.

….here is a scatterplot of the Census 2017 homeless count per capita against mean January temperature by state:

In late 2015 then-candidate Donald Trump accused Janet Yellen, chair of the Federal Reserve, of being part of a political conspiracy. Yellen, he insisted, was keeping interest rates unjustifiably low in an attempt to help Hillary Clinton win the presidency. As it happens, there were very good reasons for the Fed to keep rates low at the time. Some measures of the job market, notably prime-age employment, were still well below precrisis levels, and business investment was going through a significant slump — a sort of mini-recession. Fast forward to the present. The employment picture is much stronger now than it was then. There are hints of an economic slowdown, partly because of the uncertainty created by Trump’s trade war, but they’re considerably fainter than those of 2015-16. And Trump himself keeps boasting about the economy’s strength. Yet he is openly pressuring the Fed to cut rates, and is reportedly looking for ways to demote Jay Powell, the man he himself chose to replace Yellen — declining to reappoint Yellen, according to some reports, because he didn’t think she was tall enough.

Yesterday Facebook released a While Paper (https://libra.org.en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf ) on their planned supposed cryptocurrency, Libra, which has apparently long been under development. This triggered two stories in the New York Times, as well as lots of commentary by lots of people, including several posts by Tyler Cowen at Marginal Revolution, who is moderately favorable to the proposal. This is supposed to become an international currency backed by a reserve account provided initially by 27 major corporations such as Uber and VISA, which will be tied in value to a basket of currencies. While tied to Facebook, it is supposed to have a firewall separating FB’s data on individuals from data arising from anybody’s activities in connection with Libra. It is to be overseen by an association based in Geneva and run by the 27 companies, each of which will have control over a node in the supposed blockchain of the currency. It is to use a new program, “Move,” and will have potential features that resemble Etherium, such as an ability to set up contracts.

Herbert Simon made paradigm-changing contributions to the theory of rational behavior, including particularly his treatment of “satisficing” as an alternative to “maximizing” economic rationality (link). It is therefore worthwhile examining his views of organizations and organizational decision-making and action — especially given how relevant those theories are to my current research interest in organizational dysfunction. His highly successful book Administrative Behavior went through four editions between 1947 and 1997 — more than fifty years of thinking about organizations and organizational behavior. The more recent editions consist of the original text and “commentary” chapters that Simon wrote to incorporate more recent thinking about the content of each of the chapters. Here I will pull out some of the highlights of Simon’s approach to organizations.

Libra, the cryptocurrency backed by Facebook (and the other members of the Libra association) was announced yesterday. The web site and the white paper refer to the new currency as a stable currency: … “Libra is designed to be a currency where any user will know that the value of a Libra today will be close to its value tomorrow and in the future.” The stability is guaranteed by the intrinsic value of the coin, a result of the assets that back the value of the currency. These assets are called the “Library Reserve”. The white paper refers to the similarities of this mechanism and the currency board that some currencies with fixed exchange rates use: “…the mechanics of interfacing with our reserve make our approach very similar to the way in which currency boards (e.g., of Hong Kong) have operated. Whereas central banks can print money at their own discretion, currency boards typically only print local currency when there are sufficient foreign exchange assets to fully back a new minting of notes and coins.” This reference to currency boards is confusing and misleading. In fact, it is surprising that given the vast knowledge we have about how fixed exchange rates work, the white paper does not present a more precise description of how the value of Libra will be managed. It also confuses the fact that there are assets backing the currency with the notion of fixed exchange rates and currency boards. And it does so by playing to the myth that traditional fiat currencies are not backed by any assets. Let me clarify each of these issues.

Gross domestic product is not the total amount of output produced; instead, it is a a measure of what is bought and sold in markets. Pretty much every intro class in economics will point out to students that when I clean my own house, cook my own meals, look after my children, or or mow my lawn, that “household production” doesn’t show up in GDP. But if I hire someone to do household production tasks, then that output gets counted as part of GDP. For a number of situations where the limitations of GDP are obvious, the US Bureau of Economic Analysis publishes “satellite” accounts, where it calculates what a different and broader measure of economic output would look like. …

… The study finds that an increase in the tax rate on these products depresses quantity demanded, leading firms with market power to reduce their prices in order to protect their profits. On net, this strategic response lowers and shifts the Laffer curve, reflecting not only less incremental tax revenue collected but also a higher optimal tax rate. A tax agency that fails to anticipate this pricing response will find that tax receipts under its chosen policy fall well short of its revenue objective. …

Central banks were often established in the past with the aim of bringing stability in the aftermath of historic episodes. The Bank of England was established during the sovereign debt crisis of 1690, when the government was unable to obtain funding in the market. The Federal Reserve was created after a series of panics that had rocked the US banking system in the late 19th and early 20th century. The euro was introduced 20 years ago in response to repeated episodes of exchange-rate instability and the need to secure the Single Market against competitive devaluations. The ECB was established as the keystone of the new Economic and Monetary Union (EMU). The first decade of the Monetary Union was characterised by calm macroeconomic conditions, with limited volatility and steady economic growth. The second decade, however, has seen profound shifts in the prevailing environment – including both financial and sovereign debt crises – and our monetary policy strategy has had to adapt with it. I would like to discuss this morning why this evolution came about and how it was achieved – and what the past twenty years can tell us about the ECB’s monetary policy in the future.