What to Read on July 18, 2009

• Views Differ on Shape of Macroeconomics -- Paul Krugman - This is actually an important point: Development and trade economists were warning well before this crisis; it's mostly the "domestic macro" ones who were caught off-guard.
• Michael Lewis: It Is Time to Serve Your Country -- Ezra Klein - I second this motion.
• Zwicky's Trifecta of Illusions -- Less Wrong - These are all pernicious, ubiquitous, and applicable to many debates on this blog.
• Does Income Inequality Explain the Boom? -- Zubin Jelveh & Ezra Klein - It's all connected...as I'll show in my forthcoming book.
• What to Do with the Fed -- Willem Buiter - This is a brilliant, if lengthy, explanation of the issues surrounding the unprecedented escalation of the Fed's operations and responsibilities over the last couple years. If nothing else, read the last paragraph. It is the best summary that I've seen, and it highlights the crux of the matter that most non-economists, especially politicians and activists, fail to realize. I side firmly with the empirically demonstrated necessity of central bank independence.
• The Worst Solution to the Financial Crisis -- Arnold Kling - Question for Dr. Kling: I don't disagree that re-defaults are a problem, but "more than one quarter of mortgage loan modifications are redefaulting" means almost 75% are successful, no? About what rate of re-default, would you say, suggests the costs of the modification program are outweighing the benefits? No program is perfect. We knew there would be re-defaults, but how many is too many?
• More Multipliers (Double Super Wonkish) -- Paul Krugman - This is really complicated stuff (so complicated that a Nobel Prize winner is having trouble sorting it out), but Krugman's conclusion is valid in the abstract: Much of recent economic theories about fiscal stimulus rely on Milton Friedman's "permanent income hypothesis," which roughly says that consumers decide how much to consume in the present by accounting for their entire future expected income (that is, they maximize their lifetime consumption). This, as you might expect, is rather difficult. In fact, behavioral economics suggest we are very bad at doing this and are so blind to the long run (it's an evolutionary thing) as to be very sensitive to short-term fluctuations in income. (Hence the overconsumption and overleveraging of the last 30 years.) In other words, a temporary fiscal stimulus will have a greater effect than assumed by models that take the permanent income hypothesis to extremes.
• The Joy of Sachs -- Paul Krugman - Every single sentence here is worth reading. This is Krugman at his finest, explaining exactly what happened on Wall Street succinctly and down-to-earth, albeit with a bit of hyperbole. (For the longer version, check out my forthcoming book.) Money quote: "[By] rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely."
• Help for the (One-Time) Homeowners -- Ezra Klein - Let's keep our fingers crossed for this one.
• How Osama Bin Laden Ruined Health Care -- Newsweek - Provocative title but valid argument. The psychology of public perception is one of our biggest challenges to real reform on many political fronts.
• Moon Struck -- Don Boudreaux - Few economists have Boudreaux's ability to explain the virtues of capitalism so elegantly and succinctly. NASA is a tricky one though, as its investments have yielded quite a few very valuable inventions for society. It would be worthwhile for a good economic historian to analyze whether the benefits have outweighed the costs; that'll be the only way to know for certain whether we should continue the program.