Can Economics Change Your Mind?
Economics is sometimes dismissed as more art than science. In this skeptical view, economists and those who read economics are locked into ideologically motivated beliefs—liberals versus conservatives, for example—and just pick whatever empirical evidence supports those pre-conceived positions. I say this is wrong and solid empirical evidence, even of the complicated econometric sort, changes plenty of minds.
For one thing, it's changed my mind. Work from David Autor, David Dorn, and Gordon Hanson has convinced me that in some local areas the job losses from free trade can be substantial, and that these communities have been slower to adjust than I expected. Importantly, the study is not simple and utilizes instrumental variables, representing the kind of econometrics that skeptics think can't convince anyone.
Another example is, Mark Zandi, chief economist of Moody's Analytics, who tells me the paper "Potential Output and Recessions: Are We Fooling Ourselves?" by Robert Martin, Teyanna Munyan, and Beth Anne Wilson changed his mind recently. This study suggests that recessions tend to have a permanent negative effect on output, which was previously not thought to be the case. As a result Moody's Analytics is undertaking more research on this.
Researchers also frequently set out to test a hypothesis they think is right, only to find it was wrong. Harvard economists Raj Chetty and John Friedman were skeptical of standardized test based measures of teacher performance, and they set off to do research, along with Jonah Rockoff, which they thought was "going to show that these measures don’t work, that this has to do with student motivation or principal selection or something else." Instead, their evidence convinced them they were wrong, and their results showed that value-added measures were good measures of teacher quality, and the authors argue that school districts should use them in teacher evaluations.

Tyler Cowen's version here.
Overall I find that history and theory-laden observation tend to be the forms of evidence which have convinced me the most.  #3 and #8 are examples of “sheer econometrics,” but that is not usually how minds are changed, mine included.  

Subject of the post is the etablisment (CB) aversion to price level targeting. Post ends with two issues I have pushed on these pages before.
Last time there was a big gap between central banks and leading theorists was during the 1920s, when the leading theorists favored price level targeting (or NGDP targeting in a few cases) and the central banks favored the gold standard. We now know that the leading theorists were correct. It will be interesting to see who ends up being right this time.
"I wasn't at the recent AEA meetings, but I'm told there was lots of discussion of how income inequality reduces aggregate demand. Combine that depressing tidbit with the fact that grad schools no longer teach macroeconomic history."

“The crisis is over,” declared Spanish prime minister Mariano Rajoy earlier this summer. We’ve heard this kind of announcements before. In fact, it seems like every September since the global financial crisis hit Spain in 2008, politicians of all colors and affiliations have promised an end to the prolonged economic grievances of the country. Perhaps what’s new this time is that politicians were not the only ones saying it: Major world think tanks have forecasted that Spain would increase its job market and have a positive growth rate of 3% by the end of the year.
Quartz (reproduced in its entireity)
With general elections set for Dec. 20, politicians are celebrating the economic forecast. The old-establishment parties are worried about losing the de facto bipartisan system; new parties are emerging criticizing the status quo and the ingrained corruption of the Spanish political system. Recent debates have focused on the welfare state model, labor reforms and the secessionist movement in Catalonia.

But no one is talking about the potentially one million (or more) Spaniards between the ages of 15 and 24 who can’t find a job. Or about those, like me, who have fled the country looking for better opportunities abroad.

Growing up is scary, but it’s even scarier when it feels like there are no job prospects—no matter how hard you study or how committed you are to the search. Or when your parents are fighting eviction, or moving back to their grandparents’ house because they can’t afford to pay their mortgage any more.

The impact of the crisis on the social fabric of Spain is undeniable. More than three million jobs have been destroyed since 2008 and most of these people still aren’t back on track; one in every four people in Spain remains unemployed toady. The numbers are even more dire for the country’s young people, with one in every two Spaniards in that critical 15 to 24 age group still unemployed.

I was just starting college when the crisis hit. My younger brother was about to enter high school. For the next six years, we saw both our parents lose their jobs; our aunts and uncles were laid-off; our friends, with their fresh university degrees, couldn’t find a place to work—not even for free. In just a few years, we found ourselves pushed two or three steps down the economic ladder and deprived of any sense of financial security. And our story was not unique, not by any means.

But whereas I was already in college, my brother and my cousins—just as most of my friends’ younger siblings—still had to decide what they would do with their future. But what’s to choose when there doesn’t seem to be any successful formula?

And if education doesn’t guarantee a job anymore, perhaps it is not surprising that Spain has the highest dropout rates in the European Union. A full 36% percent of 25 to 34 year olds haven’t finished their secondary education, compared to 11% of European Union citizens. And students from low socioeconomic background are twice as likely to be low performers or drop out.

So they choose to continue being children.

As Carles Ventura, a therapist in Spain who specializes in teenagers, put it, 16- and 17-years-olds especially are taking refuge in the crisis to cover up their fears of growing up. These young people are asking him how to find motivation in their studies. “At first, the easy thing to say is ‘the crisis is so big, I won’t find a job,’” Ventura tells Quartz. But he added there are wider, deeper issues that underpin these fears, including a systemic lack of confidence and a general fear of growing up.

“Young people know that the crisis makes it more difficult to them,” Ventura says. “They’ve been studying for a while, and they know it’s still going to be a while until they find a job, and now that is not even guaranteed.”

More than 25% of Spaniards in that 15 to 24 age group are actually doing nothing; they are not studying, training or employed—one of the highest rates in the developed world. This is very problematic: Researchshows that lack of employment during adolescence generally translates to lower employment rates in adulthood.

It’s not surprising then that a recent study (link in Spanish) conducted by IE University found that the defining characteristic for young adults in Spain is that they are “uncertain about their future”—as opposed to the ubiquitous “oriented to the digital world” used to define teenagers elsewhere.

Rajoy, who’s running for reelection on Sunday, said recently (link in Spanish) “before, unemployment was rising every day, now it is going down every day.” Never mind that this is not true, (link in Spanish) Spaniards have stopped believing in it. A Pew Research survey shows that 80% of the population sees the economic situation as “bad.”

Unfortunately for those who continued studying after 2008 and have finished college in the past few years, what the future holds looks grim—at best. And if moving out of your parents house is the first step into adulthood, young Spaniards are still very much children--eight in every ten (link in Spanish) Spaniards under 30 still live with their parents.

“Paro, exilio, o precariedad”—unemployment, exile, or precariousness—has become something of a mantra for many disillusioned young Spaniards. And there are efforts to try and change the narrative. In 2011, waves of anti-austerity movements expanded across Europe. In Madrid, they spawned collectives like Juventudes Sin Futuro (“Youngsters Without a Future”). Roughly translating to Futureless Youth, the collective has created campaigns like “No nos vamos, nos echan,” Spanish for “We are not leaving, we are being kicked out.”

And yet youth unemployment has been barely represented in the general elections debates (only mentioning the need to bring back researchers and educated people from abroad). Even the left-wing party Podemos (“We Can”), whose constituency is made up of many of those unemployed youth, hasn’t made the issue a central point of its campaign. Since it garnered an unexpectedly high result in the 2014 European elections, Podemos has threatened the status quo of the traditional parties in Spain, getting enough power to steer public debate. And yet, of the 215 measures (link in Spanish) in their political platform, only two mention youth unemployment, addressing the issue in a tangential way.

Politicians might think the worst of the crisis is coming to an end, but some of us still don’t know if we’ll be able to make it back home. Or if the years put into educations will pay off with dignifying job. The impact of more than seven years of sustained job destruction will loom for years to come. As Spanish economist Manuel de la Rocha put it in an interview with the Financial Times on June 25, “We will get out of this crisis but there will be a generation that has been left behind. A lot of young people have seen their dreams and aspirations evaporate.”

Follow Mireia on Twitter at @mireiatriguero. We welcome your comments at [email protected].

Economics for Public Policy post from Miles Croak(Thanks Brent)
3. Policies to turn to: How to make work pay
There is no one answer, and not all options involve governments tinkering with tax rates. But some do. One important step is to make work pay.
There is a grain of truth to the traditional storyline: a new economy requires a new way of supporting incomes. It is not simply unemployment insurance that Canadians need, but wage insurance; it is not simply a guaranteed income that Canadians need, but a participation income.
And we have precedents for delivering income support in these ways. The Working Income Tax Benefit is a good example. It can be thought of as a “social wage” that encourages a participation society by topping up wage rates, and offering a guaranteed income conditional on working. But in its current configuration is much too small to have significant bite for anything other than a small part of the population.

Benefits from the program begin to kick in once someone makes more than $3,000, then amount to 25 cents for every extra dollar earned, then top out at just under $1,000 for singles and about $1,800 for families. Benefits fall by 15 cents for every dollar a family earns beyond about $15,650, disappearing altogether at earnings of about $28,700.
Some parts of our Employment Insurance program also have a design of this sort, allowing Canadians to work while still collecting a fraction of their benefits.
This is smart income transfer policy for a jobs market that is more and more polarized, and it is not hard to imagine that an expansion of the Working Income Tax Benefit that folds into a restructured Employment Insurance program could become a social wage, offering Canadians both the kind of income support and wage insurance they need to stay engaged with a more polarized jobs market.
In other words with a more nuanced interpretation of the facts it is not hard to give credence to another storyline about income inequality that goes something like this. Inequality has increased; there is something that can be done about it; and if public policy has punch, the effort directed to fighting inequality contributes to solving other pressing problems, like poverty.

Value Walk
The prevailing mantra in many of today’s investment commentaries reminds me of the satirical plot to the 1964 Stanley Kubrick movie Dr. Strangelove, in which a deranged United States Air Force general orders a first strike nuclear attack on the Soviet Union, convinced that the Soviets have been adding fluoride to the United States’ water supplies to pollute the “precious bodily fluids” of Americans.

Today’s grumpy bears likewise allege that our central banks have been adding funny stuff to the world’s money supply via QE and have polluted the sanctity of the market pricing mechanism. As a result we have (too) high asset prices despite low growth and no inflation. In this pessimistic interpretation of the global economy the biggest complaint is the incapacity of central banks to raise interest rates; they have now been kept unchanged in the US for longer than during the Great Depression.
If only those dastardly public officials had not averted a 1930s style policy of mutually assured destruction, when the world’s monetary authorities stuck rigidly to the mantra of “hard-money” to the profound detriment of the real economy! Then, so they reason, we could have had the cathartic effects of a depression and by now, seven years later, a recovery would be in full swing, signs of inflation would be emerging and we could start raising interest rates…we would be saved! Strange days indeed…and now, like the mad Brigadier General Ripper, they pin their hopes on the first strike attack policy of creative destruction via unnecessary rate hikes, deluding themselves that such a disastrous course could possibly promote innovation, growth and prosperity.
Never mind that such a policy is most unlikely. To us, this is no way to build anything spectacular. An appropriate analogy perhaps is to compare the economy to the Amazonian rainforest – more complicated than we can possibly imagine. To us, the notion of not intervening, or worse the policy of pursuing tight monetary policy to ignite creative destruction is no way to protect and encourage a truly diverse ecosystem. Instead, we favour the modern orthodoxy whereby policy makers protect the system with their fire breaks allowing the disrupters like Uber and the explosion of free services ranging from Google Search to Skype to Wikipedia et al. to thrive and Forcibly redirect capital and labour elsewhere within the economy. Given enough time and a generous prescription of QE, and shorn of the tail risk of MAD policies, the global economy will eventually recover most of the diversity, durability and growth it once had.
But as it stands right now, macroeconomic presentations seem to have been lifted straight from the pages of religious pamphlets and science fiction novels which overwhelmingly present a future that is mainly worse than the present; a similar mood was evident in the first Jack Schwager Market Wizards book published, not surprisingly, after the calamity of the October 1987 crash. The best minds back then, like today, were convinced that our future was very bleak. We can only conclude that capital markets seem to hoard innately pessimistic desires and that therein lies the opportunity for risk takers like us.

Such anxiety has very much been to the fore again this year, something we found reassuring during the particularly tough months like August when the VIX spiked above 50 and again last month when we were subject to a vicious countertrend re-pricing of the year’s winners and losers. This angst is perhaps the true disease of the 21st century. Cancer and diabetes will most likely be cured in time (preferably by the European drug stocks that we own in our portfolio) but anxiety seems more deeply rooted in the human psyche. In markets, of course, it can be useful, especially if you become anxious before others; we have some good form here. Indeed, it is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!
For markets do not crash when we are collectively so worried; it is like Hyman Minsky’s adage that stability destabilises except that today the reverse is more apt. In our minds it is as though quantitative easing and the zero lower bound of policy rates have replaced the capital markets’ airbag with a dagger protruding from the steering column. Market participants are hugely uncomfortable with today’s elevated prices and the lack of an obvious orthodox policy response should the global economy weaken further. Unsurprisingly there is little appetite to drive fast and the brakes are applied at the merest hint of danger. In short, by withdrawing the “Greenspan put” and using their asset purchase schemes to eviscerate any notion of value, the authorities have paradoxically created a safer yet more paranoid market.
The market’s fear of crashing has seen it thrash around looking for the merest hint of danger. First it was Europe, then the high yield credit space with the vulnerabilities of the shale oil issuers, and then it was back to Greece and then the mother of them all, China, with its falling property and stock prices seemingly knocking economic growth and making a sizeable devaluation inevitable. And yet nada… the weeping prophets have failed to force a crisis after one hell of a go. There have been no observable widespread bankruptcies in China, the shale oil sector is still pumping and despite the huge EM devaluation we haven’t exposed large fragile dollar debts which can’t be repaid or rolled over.
Perhaps we are being premature and the cards are about to fall. Or perhaps there simply are no dead bodies in the system and the global economy has proven itself much more resilient to shocks. We certainly believe that if we had been forewarned two years ago that the dollar would rise versus selected EM currencies by 50% and that important commodities such as oil and iron ore would fall by 50% we would never have been able to predict just how orderly things have turned out at both the company and sovereign level. The turmoil it seems has remained contained within financial markets in a very curious way. Like we said earlier, perhaps it’s time to stop worrying and love the bomb?

Quartz (Brent I am thinking of our conversation in the back on the way to WroldCom)
We’re in an era of the cult of the entrepreneur. We analyze the Tory Burches and Evan Spiegels of the world looking for a magic formula orset of personality traits that lead to success. Entrepreneurship is on the rise, and more students coming out of business schools are choosing startup life over Wall Street.
But what often gets lost in these conversations is that the most common shared trait among entrepreneurs is access to financial capital—family money, an inheritance, or a pedigree and connections that allow for access to financial stability. While it seems that entrepreneurs tend to have an admirable penchant for risk, it’s usually that access to money which allows them to take risks.
And this is a key advantage: When basic needs are met, it’s easier to be creative; when you know you have a safety net, you are more willing to take risks. “Many other researchers have replicated the finding that entrepreneurship is more about cash than dash,” University of Warwick professor Andrew Oswald tells Quartz. “Genes probably matter, as in most things in life, but not much.”
​
University of California, Berkeley economists Ross Levine and Rona Rubenstein analyzed the shared traits of entrepreneurs in a 2013 paper, and found that most were white, male, and highly educated. “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit,” Levine tells Quartz.

The Guardian.
The Nobel committee continues to favour  economists who place inequality, limiting corporate power, executive excess and  the plutocracy and market design at the heart of their research.Click here, here and here for the winners of the previous three years. 

"A British-born Princeton professor, Angus Deaton, has won the Nobel prize in economics for his work charting global developments in health, wellbeing and inequality. 
The Nobel Committee said the economist’s work had a major influence, particularly in public policy where it has helped governments determine how different social groups react to specific tax changes.
“To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices,” the Royal Swedish Academy of Sciences said, announcing the 8m Swedish krona (£637,165) prize.
“By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.” 
His work complements studies by Thomas Piketty and Sir Tony Atkinson, who was also in the running for the prize, that focus on wealth and income inequality, by examining patterns of consumer spending to illustrate growing inequality in health and wellbeing..

He is perhaps best known for the Deaton Paradox – that sharp shocks to income do not appear to cause equally large shocks to consumption."

Quartz
Have you thought of “technological unemployment,” where machines take all our jobs?

The outcome will depend on how things are distributed. Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution. So far, the trend seems to be toward the second option, with technology driving ever-increasing inequality.


Here is an example via Business Insider or 3D Printing of Bridges in Amsterdam