A new poll from NBC News/Wall Street Journal (conducted Dec. 14-17, 2007):
"Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labor?"
28 % of the American public said globalization is good, while 58 % said it is bad.
Note that even the pro-trade part of the question presumes a mercantilist approach to the issue. In actuality, trade is not primarily about more or fewer jobs but about allocating labor among industries toward those in which we have a comparative advantage. I doubt, however, that a more economically literate rewording of the question would have found the American public sympathetic to globalization.
Monday, December 31, 2007
The economic isolationists are winning
A new poll from NBC News/Wall Street Journal (conducted Dec. 14-17, 2007):
"Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labor?"
28 % of the American public said globalization is good, while 58 % said it is bad.
Note that even the pro-trade part of the question presumes a mercantilist approach to the issue. In actuality, trade is not primarily about more or fewer jobs but about allocating labor among industries toward those in which we have a comparative advantage. I doubt, however, that a more economically literate rewording of the question would have found the American public sympathetic to globalization.
"Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labor?"
28 % of the American public said globalization is good, while 58 % said it is bad.
Note that even the pro-trade part of the question presumes a mercantilist approach to the issue. In actuality, trade is not primarily about more or fewer jobs but about allocating labor among industries toward those in which we have a comparative advantage. I doubt, however, that a more economically literate rewording of the question would have found the American public sympathetic to globalization.
Career Advice from David Brooks
NY Times columnist David Brooks writes:
I wonder how different the economics profession would be if economists were expected to do a year of service outside of academia or, at the very least, if university hiring committees rewarded a year of real-world experience as the equivalent of, say, a couple of academic publications. My conjecture is that the profession would be less creative but more useful.
One of the best pieces of career advice I ever got is: Interview three people every day. If you try to write about politics without interviewing policy makers, you’ll wind up spewing all sorts of nonsense.Brooks was not talking about economists in particular, but this piece of wisdom can be taken as a critique of much of the economics profession. Many economists who write about policy rarely, if ever, encounter actual policymakers. Instead, they prefer to sit in the comfort of their ivory tower offices. (I know I do.)
I wonder how different the economics profession would be if economists were expected to do a year of service outside of academia or, at the very least, if university hiring committees rewarded a year of real-world experience as the equivalent of, say, a couple of academic publications. My conjecture is that the profession would be less creative but more useful.
Career Advice from David Brooks
NY Times columnist David Brooks writes:
I wonder how different the economics profession would be if economists were expected to do a year of service outside of academia or, at the very least, if university hiring committees rewarded a year of real-world experience as the equivalent of, say, a couple of academic publications. My conjecture is that the profession would be less creative but more useful.
One of the best pieces of career advice I ever got is: Interview three people every day. If you try to write about politics without interviewing policy makers, you’ll wind up spewing all sorts of nonsense.Brooks was not talking about economists in particular, but this piece of wisdom can be taken as a critique of much of the economics profession. Many economists who write about policy rarely, if ever, encounter actual policymakers. Instead, they prefer to sit in the comfort of their ivory tower offices. (I know I do.)
I wonder how different the economics profession would be if economists were expected to do a year of service outside of academia or, at the very least, if university hiring committees rewarded a year of real-world experience as the equivalent of, say, a couple of academic publications. My conjecture is that the profession would be less creative but more useful.
Sunday, December 30, 2007
A Homework Problem from China
Chapter 9 of my favorite textbook presents the standard analysis of a tariff (a tax on imports) and shows that it reduces economic welfare as measured by the sum of producer surplus, consumer surplus, and tax revenue. Even though the tariff makes domestic producers better off and raises some revenue for the government, these gains are more than offset by losses to consumers, leading to a deadweight loss.
This news story suggests a good homework problem extending the analysis:
This news story suggests a good homework problem extending the analysis:
China, the world's biggest grain producer, will tax exports of wheat, corn and rice to increase domestic supply and control rising food prices. Exporters of wheat will start paying a 20 percent tax on Jan. 1, while the tax for corn and rice was set at 5 percent, the Finance Ministry said.Draw the graph that describes the market for grain in an exporting country. Use your graph to answer the following questions.
- How does an export tax affect domestic grain prices?
- How does it affect the welfare of domestic consumers?
- How does it affect the welfare of domestic producers?
- How does it affect government revenue?
- What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?
A Homework Problem from China
Chapter 9 of my favorite textbook presents the standard analysis of a tariff (a tax on imports) and shows that it reduces economic welfare as measured by the sum of producer surplus, consumer surplus, and tax revenue. Even though the tariff makes domestic producers better off and raises some revenue for the government, these gains are more than offset by losses to consumers, leading to a deadweight loss.
This news story suggests a good homework problem extending the analysis:
This news story suggests a good homework problem extending the analysis:
China, the world's biggest grain producer, will tax exports of wheat, corn and rice to increase domestic supply and control rising food prices. Exporters of wheat will start paying a 20 percent tax on Jan. 1, while the tax for corn and rice was set at 5 percent, the Finance Ministry said.Draw the graph that describes the market for grain in an exporting country. Use your graph to answer the following questions.
- How does an export tax affect domestic grain prices?
- How does it affect the welfare of domestic consumers?
- How does it affect the welfare of domestic producers?
- How does it affect government revenue?
- What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?
Friday, December 28, 2007
Krugman on Trade
Together with Larry Summers and Doug Elmendorf, I have recently become an editor of the Brookings Papers on Economic Activity. Our first conference will be held in the spring of 2008, and we have a blockbuster lineup. One of the papers is by Paul Krugman, who will be writing about trade and inequality. I was delighted to get Paul thinking about economics again, hoping the project might distract him from his compulsion to tell the world how much he hates Republicans. (In case you missed it, the answer is, A LOT.)
In today's Times, Paul gives us a hint about what his paper will be about. The column is well worth reading. He suggests that trade makes the United States richer overall but reduces the incomes of a majority of workers. In essence, he is saying that the gains from trade are concentrated at the top of the income distribution. That is certainly a theoretical possibility. The Times column, however, leaves that conclusion more as an assertion than as an established fact. Presumably, the Brookings Paper will give the numbers to back up the claim.
It seems to me that Paul is still struggling with the implications of this view. He concludes the column by saying, twice, that he is not a protectionist, but he also says that we should respect "those who are worried about trade." But what if those who are worried about trade are protectionists? Should we still respect them?
In today's Times, Paul gives us a hint about what his paper will be about. The column is well worth reading. He suggests that trade makes the United States richer overall but reduces the incomes of a majority of workers. In essence, he is saying that the gains from trade are concentrated at the top of the income distribution. That is certainly a theoretical possibility. The Times column, however, leaves that conclusion more as an assertion than as an established fact. Presumably, the Brookings Paper will give the numbers to back up the claim.
It seems to me that Paul is still struggling with the implications of this view. He concludes the column by saying, twice, that he is not a protectionist, but he also says that we should respect "those who are worried about trade." But what if those who are worried about trade are protectionists? Should we still respect them?
Krugman on Trade
Together with Larry Summers and Doug Elmendorf, I have recently become an editor of the Brookings Papers on Economic Activity. Our first conference will be held in the spring of 2008, and we have a blockbuster lineup. One of the papers is by Paul Krugman, who will be writing about trade and inequality. I was delighted to get Paul thinking about economics again, hoping the project might distract him from his compulsion to tell the world how much he hates Republicans. (In case you missed it, the answer is, A LOT.)
In today's Times, Paul gives us a hint about what his paper will be about. The column is well worth reading. He suggests that trade makes the United States richer overall but reduces the incomes of a majority of workers. In essence, he is saying that the gains from trade are concentrated at the top of the income distribution. That is certainly a theoretical possibility. The Times column, however, leaves that conclusion more as an assertion than as an established fact. Presumably, the Brookings Paper will give the numbers to back up the claim.
It seems to me that Paul is still struggling with the implications of this view. He concludes the column by saying, twice, that he is not a protectionist, but he also says that we should respect "those who are worried about trade." But what if those who are worried about trade are protectionists? Should we still respect them?
In today's Times, Paul gives us a hint about what his paper will be about. The column is well worth reading. He suggests that trade makes the United States richer overall but reduces the incomes of a majority of workers. In essence, he is saying that the gains from trade are concentrated at the top of the income distribution. That is certainly a theoretical possibility. The Times column, however, leaves that conclusion more as an assertion than as an established fact. Presumably, the Brookings Paper will give the numbers to back up the claim.
It seems to me that Paul is still struggling with the implications of this view. He concludes the column by saying, twice, that he is not a protectionist, but he also says that we should respect "those who are worried about trade." But what if those who are worried about trade are protectionists? Should we still respect them?
Wednesday, December 26, 2007
The Default Mortgage
My Harvard colleague Sendhil Mullainathan and his coauthors opine on how to fix the mortgage market.
The Default Mortgage
My Harvard colleague Sendhil Mullainathan and his coauthors opine on how to fix the mortgage market.
Tuesday, December 25, 2007
Sunday, December 23, 2007
Damning with faint praise?
A compliment, perhaps, from Lew Rockwell:
Of all the establishment economists, I like Greg Mankiw the best. Not because he isn't a statist and an inflationist and a centralist; but he has some knowledger of the Austrian School. He is a clear writer, and Joe Salerno tells me Greg's bestselling textbook is the least-bad of them all.
Damning with faint praise?
A compliment, perhaps, from Lew Rockwell:
Of all the establishment economists, I like Greg Mankiw the best. Not because he isn't a statist and an inflationist and a centralist; but he has some knowledger of the Austrian School. He is a clear writer, and Joe Salerno tells me Greg's bestselling textbook is the least-bad of them all.
Saturday, December 22, 2007
Friday, December 21, 2007
Wishful Thinking
The Washington Post gets my old friend and Harvard colleague Larry Summers to answer questions from the public. This exchange intrigued me:
Raising the issue, however, makes it sound like Larry believes this outcome is likely. From my perspective, this is just wishful thinking. Debate over health reform typically centers around covering the uninsured. I doubt that this goal is going to be achieved with reduced government spending.
Some on the left want a single-payer system, which would in effect use the monopsony power of the state to reduce payments to suppliers of health products. But I would be surprised if Larry, with his generally sensible market-oriented views, favored those kind of health systems.
I wonder: Might this idea--that a tax cut can be financed by comprehensive health reform--become a new meme of the left? If so, I would encourage Larry to record this moment in intellectual history, perhaps by writing the theory down on a napkin.
Update: On my invitation, Larry responds:
Larry is right: Comprehensive health care reform could lower government spending, much as lowering tax rates could increase tax revenue. Theoretically, many things are possible.New York: Which government spending should be cut to pay for a tax cut?
Lawrence H. Summers: comprehensive health care reform could ultimately lower government spending.
Raising the issue, however, makes it sound like Larry believes this outcome is likely. From my perspective, this is just wishful thinking. Debate over health reform typically centers around covering the uninsured. I doubt that this goal is going to be achieved with reduced government spending.
Some on the left want a single-payer system, which would in effect use the monopsony power of the state to reduce payments to suppliers of health products. But I would be surprised if Larry, with his generally sensible market-oriented views, favored those kind of health systems.
I wonder: Might this idea--that a tax cut can be financed by comprehensive health reform--become a new meme of the left? If so, I would encourage Larry to record this moment in intellectual history, perhaps by writing the theory down on a napkin.
Update: On my invitation, Larry responds:
Dear Greg--The answer to Larry's question can be found here, where I write, "In the second edition of the text, I took out the phrase 'charlatans and cranks' because an editor and some readers of the first edition said (correctly) that it was too inflammatory for a textbook description of a policy debate. But the substantive analysis of tax policy stayed about the same. This old post includes an excerpt from the current edition."
Thanks for asking if I have any comment on your blog entry today.
I am flattered to see you following my internet chats so closely. You got me. The passage you quote is as you suggest technically accurate but misleading. It is very likely that at least for a long time comprehensive health care reform done properly would raise total government spending. Much as some might wish otherwise, there is no health care Laffer curve. The right answer to the question is that the increment to debt should be paid over time through whatever combination of spending and tax measures congress chooses and that in the health care space there is room for measures that would save money. My answer was much too telegraphic.
While we are on the subject of fiscal truths, I was a great admirer of the way the first edition of your textbook treated the idea that tax cuts could raise revenue. If I recall you used the word "charlatan" to describe economists who subscribe to this view. Such memorable language does not appear in subsequent editions. Does this reflect a) your view that you exaggerated the first time b) your changing you mind on the substance c) your view that the whole matter is uninteresting d) your concern that your readers do not know what a charlatan is e) your desire to make sure your book does not annoy charlatans who teach introductory economics?
Happy holidays.
Larry
Wishful Thinking
The Washington Post gets my old friend and Harvard colleague Larry Summers to answer questions from the public. This exchange intrigued me:
Raising the issue, however, makes it sound like Larry believes this outcome is likely. From my perspective, this is just wishful thinking. Debate over health reform typically centers around covering the uninsured. I doubt that this goal is going to be achieved with reduced government spending.
Some on the left want a single-payer system, which would in effect use the monopsony power of the state to reduce payments to suppliers of health products. But I would be surprised if Larry, with his generally sensible market-oriented views, favored those kind of health systems.
I wonder: Might this idea--that a tax cut can be financed by comprehensive health reform--become a new meme of the left? If so, I would encourage Larry to record this moment in intellectual history, perhaps by writing the theory down on a napkin.
Update: On my invitation, Larry responds:
Larry is right: Comprehensive health care reform could lower government spending, much as lowering tax rates could increase tax revenue. Theoretically, many things are possible.New York: Which government spending should be cut to pay for a tax cut?
Lawrence H. Summers: comprehensive health care reform could ultimately lower government spending.
Raising the issue, however, makes it sound like Larry believes this outcome is likely. From my perspective, this is just wishful thinking. Debate over health reform typically centers around covering the uninsured. I doubt that this goal is going to be achieved with reduced government spending.
Some on the left want a single-payer system, which would in effect use the monopsony power of the state to reduce payments to suppliers of health products. But I would be surprised if Larry, with his generally sensible market-oriented views, favored those kind of health systems.
I wonder: Might this idea--that a tax cut can be financed by comprehensive health reform--become a new meme of the left? If so, I would encourage Larry to record this moment in intellectual history, perhaps by writing the theory down on a napkin.
Update: On my invitation, Larry responds:
Dear Greg--The answer to Larry's question can be found here, where I write, "In the second edition of the text, I took out the phrase 'charlatans and cranks' because an editor and some readers of the first edition said (correctly) that it was too inflammatory for a textbook description of a policy debate. But the substantive analysis of tax policy stayed about the same. This old post includes an excerpt from the current edition."
Thanks for asking if I have any comment on your blog entry today.
I am flattered to see you following my internet chats so closely. You got me. The passage you quote is as you suggest technically accurate but misleading. It is very likely that at least for a long time comprehensive health care reform done properly would raise total government spending. Much as some might wish otherwise, there is no health care Laffer curve. The right answer to the question is that the increment to debt should be paid over time through whatever combination of spending and tax measures congress chooses and that in the health care space there is room for measures that would save money. My answer was much too telegraphic.
While we are on the subject of fiscal truths, I was a great admirer of the way the first edition of your textbook treated the idea that tax cuts could raise revenue. If I recall you used the word "charlatan" to describe economists who subscribe to this view. Such memorable language does not appear in subsequent editions. Does this reflect a) your view that you exaggerated the first time b) your changing you mind on the substance c) your view that the whole matter is uninteresting d) your concern that your readers do not know what a charlatan is e) your desire to make sure your book does not annoy charlatans who teach introductory economics?
Happy holidays.
Larry
Thursday, December 20, 2007
The Age of Turbulence
I just finished Alan Greenspan's memoir, and I highly recommend it. It includes a lot of good stories, and a healthy dose of economic wisdom. It is a perfect Christmas gift for that econonerd in your life. (I suppose, if you're reading this blog, someone should be giving the book to you.)
The Age of Turbulence
I just finished Alan Greenspan's memoir, and I highly recommend it. It includes a lot of good stories, and a healthy dose of economic wisdom. It is a perfect Christmas gift for that econonerd in your life. (I suppose, if you're reading this blog, someone should be giving the book to you.)
Wednesday, December 19, 2007
Tuesday, December 18, 2007
On Health Insurance Mandates
Some analysts, when discussing health reform plans, make a big deal over the issue of insurance mandates. They suggest that it is crucial to have mandates to solve the adverse selection problem and that plans without mandates will not work. Paul Krugman, for example, has given Barack Obama a lot of grief over exactly this issue.
The more I think about it, the more I come to the view that much of the rhetoric over insurance mandates is overblown. A mandate is only as effective as the penalty backing it up. No one, as far as I know, is ready to make failure to be insured a criminal act punishable by jail time. Instead, if a person fails to follow the mandate, he merely pays a penalty. So the mandate is really just a financial incentive to have insurance.
To continue with this logic, consider two proposals:
The more I think about it, the more I come to the view that much of the rhetoric over insurance mandates is overblown. A mandate is only as effective as the penalty backing it up. No one, as far as I know, is ready to make failure to be insured a criminal act punishable by jail time. Instead, if a person fails to follow the mandate, he merely pays a penalty. So the mandate is really just a financial incentive to have insurance.
To continue with this logic, consider two proposals:
- A person is required to have health insurance. If a person is in violation, he pays a $1000 fine. The revenue from the fines is rebated lump-sum to all taxpayers.
- A person is not required to have health insurance, but those with health insurance receive a $1000 tax credit. The cost of the tax credit is financed with a lump-sum tax on all tax payers.
Notice that there is no economic difference between these two scenarios. The difference is purely semantic. In both cases, a person faces $1000 incentive to have health insurance. It does not matter whether we describe that incentive as a carrot (plan 2) or a stick (plan 1). The only real issue is the size of the incentive.
Update: A friend alerts me to the fact that Len Burman, Jason Furman, and Roberton Williams had already figured this out. Commenting on President Bush's health proposal, they write:
Well put.In fact, the administration’s proposal is very much like the Massachusetts mandate—in effect everyone would get a $7,500 or $15,000 deduction and the "punishment" for not getting health insurance would be to lose the deduction.
On Health Insurance Mandates
Some analysts, when discussing health reform plans, make a big deal over the issue of insurance mandates. They suggest that it is crucial to have mandates to solve the adverse selection problem and that plans without mandates will not work. Paul Krugman, for example, has given Barack Obama a lot of grief over exactly this issue.
The more I think about it, the more I come to the view that much of the rhetoric over insurance mandates is overblown. A mandate is only as effective as the penalty backing it up. No one, as far as I know, is ready to make failure to be insured a criminal act punishable by jail time. Instead, if a person fails to follow the mandate, he merely pays a penalty. So the mandate is really just a financial incentive to have insurance.
To continue with this logic, consider two proposals:
The more I think about it, the more I come to the view that much of the rhetoric over insurance mandates is overblown. A mandate is only as effective as the penalty backing it up. No one, as far as I know, is ready to make failure to be insured a criminal act punishable by jail time. Instead, if a person fails to follow the mandate, he merely pays a penalty. So the mandate is really just a financial incentive to have insurance.
To continue with this logic, consider two proposals:
- A person is required to have health insurance. If a person is in violation, he pays a $1000 fine. The revenue from the fines is rebated lump-sum to all taxpayers.
- A person is not required to have health insurance, but those with health insurance receive a $1000 tax credit. The cost of the tax credit is financed with a lump-sum tax on all tax payers.
Notice that there is no economic difference between these two scenarios. The difference is purely semantic. In both cases, a person faces $1000 incentive to have health insurance. It does not matter whether we describe that incentive as a carrot (plan 2) or a stick (plan 1). The only real issue is the size of the incentive.
Update: A friend alerts me to the fact that Len Burman, Jason Furman, and Roberton Williams had already figured this out. Commenting on President Bush's health proposal, they write:
Well put.In fact, the administration’s proposal is very much like the Massachusetts mandate—in effect everyone would get a $7,500 or $15,000 deduction and the "punishment" for not getting health insurance would be to lose the deduction.
Monday, December 17, 2007
From the Wall Street Journal.
Sunday, December 16, 2007
Should a carbon tax be border adjustable?
Judy Chevalier considers what Washington should do about climate change if China does not play along:
The Tyndall Center argues that carbon reduction policies should focus on carbon consumption, not emissions. That makes sense, especially in the absence of a binding global agreement.Applied to a carbon tax, this logic implies that the tax should be border adjustable. That is, a carbon tax would include a tax on imports from countries without a carbon tax based on the goods' carbon content and a similar tax rebate for exports. The policy would provide an incentive for Americans to reduce their carbon consumption, but it would not induce tradable goods industries to migrate toward nations without a carbon tax.
Should a carbon tax be border adjustable?
Judy Chevalier considers what Washington should do about climate change if China does not play along:
The Tyndall Center argues that carbon reduction policies should focus on carbon consumption, not emissions. That makes sense, especially in the absence of a binding global agreement.Applied to a carbon tax, this logic implies that the tax should be border adjustable. That is, a carbon tax would include a tax on imports from countries without a carbon tax based on the goods' carbon content and a similar tax rebate for exports. The policy would provide an incentive for Americans to reduce their carbon consumption, but it would not induce tradable goods industries to migrate toward nations without a carbon tax.
Friday, December 14, 2007
Bad Press for Ben
Bad Press for Ben
Thursday, December 13, 2007
Tax rates: Current vs Historical averages
A new CBO report gives the effective federal tax rate by income group. These numbers include all federal taxes, not just income taxes, and are expressed as a percentage of household income. (If you have questions about the CBO methodology, click here.)
The first number below is for 2005, the most recent year available. For comparison, I computed, and present in parentheses below, the average effective tax rate from 1979 to 2005, the time span covered in the report.
All households: 20.5 (21.6)
Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)
Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)
Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.
The first number below is for 2005, the most recent year available. For comparison, I computed, and present in parentheses below, the average effective tax rate from 1979 to 2005, the time span covered in the report.
All households: 20.5 (21.6)
Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)
Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)
Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.
Tax rates: Current vs Historical averages
A new CBO report gives the effective federal tax rate by income group. These numbers include all federal taxes, not just income taxes, and are expressed as a percentage of household income. (If you have questions about the CBO methodology, click here.)
The first number below is for 2005, the most recent year available. For comparison, I computed, and present in parentheses below, the average effective tax rate from 1979 to 2005, the time span covered in the report.
All households: 20.5 (21.6)
Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)
Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)
Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.
The first number below is for 2005, the most recent year available. For comparison, I computed, and present in parentheses below, the average effective tax rate from 1979 to 2005, the time span covered in the report.
All households: 20.5 (21.6)
Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)
Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)
Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.
Wednesday, December 12, 2007
How do the right and left differ?
The conclusion of today's ec 10 lecture:
In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary.
- The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
- The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
- The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
- The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
- The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
- There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.
An Endorsement for the Height Tax
GMU economist Robin Hanson must be an unabashed Utilitarian.
In the conclusion of our paper on the height tax, Weinzierl and I write:
In the conclusion of our paper on the height tax, Weinzierl and I write:
Our results, therefore, leave readers with a menu of conclusions. You must either advocate a tax on height, or you must reject, or at least significantly amend, the conventional Utilitarian approach to optimal taxation. The choice is yours, but the choice cannot be avoided.Over at his blog, Hanson makes his choice:
Elite academics, including economists, seem to me to display a huge status-quo bias. All policies outside a certain range of familiar possibilities seem "silly" to ordinary people. So no matter how strong the supporting arguments, elite academics feel they must reject such proposals, so as not to seem silly themselves. Thus basically only eccentric academics, resigned to never becoming more elite, endorse such proposals. Since that describes me, let me state loudly and clearly: the economic theory is solid, so I support a revenue-neutral height tax as improving the status quo.
Tuesday, December 11, 2007
Moving toward Perfect Price Discrimination
A year ago on this blog, I let readers in on Harvard's secret plan:
In the future, Harvard will cost $1 billion a year, and only Bill Gates's children will pay full price. When anyone else walks through the door, the message will be "Special price, just for you."In today's Crimson, we can see the plan being carried out: New Aid Plan Targets More Affluent Families.
One Man, 20 Votes
An analysis of the primary system:
Two Brown University economists have, for the first time, quantified the substantial effects of winning early in the race for the presidential nomination. In a National Bureau of Economic Research working paper, Brian Knight and graduate student Nathan Schiff demonstrate that voters in early primary states such as Iowa and New Hampshire have up to 20 times the influence of voters in later states in the selection of candidates.You can find a free version of the paper here.
Munger on Economics
I just stumbled upon this old but still wise lecture by Charlie Munger, Warren Buffett's partner: Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs.
Monday, December 10, 2007
The bond market on Iraq
Bloomberg reports:
Holders of Iraqi bonds are giving President George W. Bush a vote of confidence. The country's $2.7 billion of 5.8 percent bonds due in 2028 returned 15.2 percent since July.
Economists go for the GOP
The Wall Street Journal reports on its survey of business economists:
Economists may not have picked a horse in the 2008 presidential race, but they do appear to prefer the Republican breed, according to the latest WSJ.com forecasting survey. Asked which presidential candidate would be best for the economy, only half responded but most threw their support behind Republicans. Thirty-five percent said Rudy Giuliani would be best, while 19% chose John McCain and 15% picked Mitt Romney. Hillary Clinton got the support of 8%, while John Edwards was the only other Democrat to register with 4% of the vote.The Democrats would likely have done better in a survey of academic economists, whose views are somewhere between those of business economists and those of most other professors.
Sunday, December 9, 2007
Interview with Maskin and Myerson
A good interview with two new Nobelists. (HT: AntiDismal.)
Update: Thoma points us to the new Nobel Lectures.
Update: Thoma points us to the new Nobel Lectures.
A New Member
The mayor of San Francisco joins the Pigou Club:
Mayor Gavin Newsom plans to ask voters next year to approve a "carbon tax" on businesses that he says would provide a financial incentive for conserving energy and motivating workers to use public transportation.
The ballot measure would increase the city's 5 percent commercial utilities tax by an as-yet-undetermined amount to encourage energy-saving steps by hotels, offices and other nonresidential buildings, Newsom said in a recent interview with The Associated Press.
To keep the higher rates from becoming an economic drag on the city, the initiative would carry a corresponding decrease in the 1.5 percent payroll tax on for-profit businesses in San Francisco, according to the mayor.
Must or Should?
One of the things we teach in introductory economics is the distinction between positive and normative statements. It is useful when reading (or writing) op-eds to keep the distinction in mind.
For example, in today's NY Times, Cornell economics professor Robert Frank writes:
Maybe Frank meant to write "should" rather than "must." In that case, the sentence would have conveyed a personal political opinion, rather than suggesting (incorrectly) a conclusion of economic science. It would have been more clearly labeled as a normative statement.
For example, in today's NY Times, Cornell economics professor Robert Frank writes:
Top earners have captured the big share of all income and wealth gains during the last three decades. They’re where the money is. If we’re to pay for public services they and others want, they must carry a disproportionate share of the tax burden.The first two sentences are correct statements of fact. The third sentence appears to draw a positive inference from them. Interpreted as such, the sentence is just wrong. Is there any reason to think it is impossible for the government to raise adequate revenue with a proportional tax? Not that I know of, and the article gives no indication of why Frank might think otherwise.
Maybe Frank meant to write "should" rather than "must." In that case, the sentence would have conveyed a personal political opinion, rather than suggesting (incorrectly) a conclusion of economic science. It would have been more clearly labeled as a normative statement.
Friedman on Clark
My Harvard colleague Ben Friedman reviews Gregory Clark's book A Farewell to Alms: A Brief Economic History of the World.
Saturday, December 8, 2007
The height tax gets noticed
In its annual "Year in Ideas" issue, the NY Times Magazine draws attention to my height tax paper with Matthew Weinzierl. The summary is crisp and fair.
The Times also quotes a critic:
It seems to me that if you are going to reject a logical inference from a model, you have to explain why. That is not so easy for a height tax, which is precisely the point of the paper.
The Times also quotes a critic:
Peter Diamond, an economist at M.I.T., says the paper’s basic mistake is the notion “that if you can draw a silly inference from an approach, then that discredits a model.” He comments: “I think there is probably no model that passes that test."I wonder what Peter's alternative approach is. If economic theorists are allowed to embrace inferences from a model that they like and cavalierly reject those that they consider "silly," what is the point of theory? That discretion gives the theorist the freedom to always confirm his priors. The economist ends up using theory like a drunk uses a light post--for support rather than illumination.
It seems to me that if you are going to reject a logical inference from a model, you have to explain why. That is not so easy for a height tax, which is precisely the point of the paper.
A Reading for the Pigou Club
A friend recommends a paper by Hans-Werner Sinn on Public Policies against Global Warming. The abstract:
Judged by the principle of intertemporal Pareto optimality, insecure property rights and the greenhouse effect both imply overly rapid extraction of fossil carbon resources. A gradual expansion of demand-reducing public policies – such as increasing ad-valorem taxes on carbon consumption or increasing subsidies for replacement technologies – may exacerbate the problem as it gives resource owners the incentive to avoid future price reductions by anticipating their sales. Useful policies instead involve sequestration, afforestation, stabilization of property rights and emissions trading. Among the public finance measures, constant unit carbon taxes and source taxes on capital income for resource owners stand out.
Friday, December 7, 2007
Never mind
"I've never said all tax cuts pay for themselves. I never even said Reagan's tax cuts would pay for themselves."Here is what I say about the Laffer curve in my textbook.
Arthur Laffer
Thursday, December 6, 2007
We have only just begun
Fed Governor Randy Kroszner (who, incidentally, got his PhD from Harvard econ) testifies on the subprime problem. He reports:
From now until the end of next year, each quarter roughly one out of ten borrowers with an adjustable-rate subprime mortgage is scheduled to experience the first rate reset.
Wednesday, December 5, 2007
CBO Blog
The Congressional Budget Office now has a director's blog.
I wonder: Will Peter Orszag follow in the footsteps of econoblogging pioneer Brad DeLong and offer nominations for the Stupidest Congressman Alive?
I wonder: Will Peter Orszag follow in the footsteps of econoblogging pioneer Brad DeLong and offer nominations for the Stupidest Congressman Alive?
"In the Hamptons"
Via a Fed watcher on the street, here's a song from "Merle Hazard," whose alter ego Jon Shayne is a 1980-81 alumnus of ec 10:
The Limits of Egalitarianism
From Argentina:
A utilitarian might try to argue that while the utility of ugly people is lower on average, their marginal utility of income is no different, so there is no reason to redistribute based on beauty. If, however, beauty is correlated with income, which it is, then like height, it should be taxed, even according to the logic of utilitarianism. Moreover, a social planner with egalitarian preferences (that is, who has a social welfare function that is concave over individual utilities) would want to further tax the beautiful to compensate the ugly in order to equalize, at least somewhat, the levels of utility.
Most people would reject a beauty tax as absurd, which only goes to show that that most people do not share the moral sentiments often assumed in the economic literature on optimal tax policy.
It's not fair, he said. The beautiful people get all the breaks. Beauty is a natural advantage and he wants the good-lookers to be taxed to finance compensation for the ugly people.A good topic for class discussion: What are the limits of government redistribution to achieve egalitarian goals?
A utilitarian might try to argue that while the utility of ugly people is lower on average, their marginal utility of income is no different, so there is no reason to redistribute based on beauty. If, however, beauty is correlated with income, which it is, then like height, it should be taxed, even according to the logic of utilitarianism. Moreover, a social planner with egalitarian preferences (that is, who has a social welfare function that is concave over individual utilities) would want to further tax the beautiful to compensate the ugly in order to equalize, at least somewhat, the levels of utility.
Most people would reject a beauty tax as absurd, which only goes to show that that most people do not share the moral sentiments often assumed in the economic literature on optimal tax policy.
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Tuesday, December 4, 2007
Is comparative advantage obsolete?
In a new interview with the FT, Hillary Clinton invokes Paul Samuelson and says we live in a brave new world:
I am deeply impressed by the Senator's reading list, but I hope her advisers also give her some of the responses to the Samuelson piece. For example, here is an excerpt from Mankiw and Swagel (free version):
Paul Samuelson's (Misdirected) Salvo against Outsourcing
Outsourcing surged back into the news in the period just before the election [of 2004]. In part, this reflected the intense focus on the issue in democratic campaign ads in the battleground industrial states such as Ohio. An additional focus of coverage on outsourcing followed a September 9, 2004 article in the New York Times that reported on a remarkable new paper by Nobel Prize-winning economist Paul Samuelson that purported to cover outsourcing. The article in the Times informed readers that:
Samuelson’s paper, which was eventually published in the Summer 2004 issue of the Journal of Economic Perspectives, showed that technical progress in a developing country such as China had the potential to reduce welfare in the United States. As the above quotations illustrate, outside the economics profession, this work was viewed as providing a rebuttal to those who had claimed that trade, globalization, outsourcing, and related phenomena would benefit Americans. The idea that this was a rebuttal appears to have been spurred by Professor Samuelson himself in discussions with journalists (as recounted in turn to us). The actual point of the paper, however, was that changes in China that led to less trade would lower U.S. welfare—a development that came about because the United States was losing some of the benefits it derived from free trade in the first place!
As explained by Bhagwati, Panagariya, and Srinivasan (2004) and in more detail by Panagariya on his website, Samuelson’s paper involved three stages. First, starting from autarky, China and the United States open up to trade and experience the usual benefits of trade based on comparative advantage. Second, China has a productivity gain in its export good, which improves the U.S. terms of trade and further benefits the United States. Samuelson’s third stage (or second “Act” as he put it) involves a Chinese productivity gain in its import good. This narrows the differences between the countries and thus reduces the scope for trade, potentially so much that all trade disappears. As trade diminishes, so too do the gains from trade.
As Panagariya points out, the potential for productivity changes to reduce the gains from trade has long been understood (Panagariya has Harry Johnson teaching this at the University of Chicago in the 1950’s). The harm in Samuelson’s setup comes from having less trade, not more. This is light-years removed from the usual concerns of people about globalization giving rise to too much economic integration, not too little. Dixit and Grossman (2005) further point out that the U.S. terms of trade if anything have improved since 1990, rendering moot even Samuelson’s theoretical scenario. And in any case, all of this has nothing to do with outsourcing, despite strained interpretations of such by Samuelson.
The underlying substance was largely lost in media discussions of Samuelson’s paper. One possible reason is that the Journal of Economic Perspectives published Samuelson’s cryptic paper by itself and then the explanation and gentle rebuttal by Bhagwati, Panagariya, and Srinivasan only later, in the Fall 2004 issue. This issue of the journal, however, came out after the November election, when media attention to outsourcing had fallen off from the pre-election peak.
We have benefited through most of the 20th century from trade. It has helped to raise American standards of living, it has helped to create jobs. And I agree with Paul Samuelson, the very famous economist, who has recently spoken and written about how comparative advantage as it is classically understood may not be descriptive of the 21st century economy in which we find ourselves.I believe that Senator Clinton is referring to Paul's paper in the Journal of Economic Perspectives.
I am deeply impressed by the Senator's reading list, but I hope her advisers also give her some of the responses to the Samuelson piece. For example, here is an excerpt from Mankiw and Swagel (free version):
Paul Samuelson's (Misdirected) Salvo against Outsourcing
Outsourcing surged back into the news in the period just before the election [of 2004]. In part, this reflected the intense focus on the issue in democratic campaign ads in the battleground industrial states such as Ohio. An additional focus of coverage on outsourcing followed a September 9, 2004 article in the New York Times that reported on a remarkable new paper by Nobel Prize-winning economist Paul Samuelson that purported to cover outsourcing. The article in the Times informed readers that:
In an interview last week, Mr. Samuelson said he wrote the article to "set the record straight" because "the mainstream defenses of globalization were much too simple a statement of the problem." Mr. Samuelson, who calls himself a "centrist Democrat," said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures.BusinessWeek (December 6, 2004) well summarized many people’s (mis)interpretation of the Samuelson article:
BusinessWeek answered the final question in the negative, but many with the opposite view embraced Samuelson’s contribution as intellectual support, without understanding what it really said. The headline of the Pittsburgh Post-Gazette on September 23, 2004 put the reaction succinctly: “Nobelist Samuelson says Outsourcing May Not Be a Plus.”So unprecedented, so colossal, and so fast is this change [in the world economy] that eminent economists such as Paul A. Samuelson are beginning to question the basic tenets of free-trade theory. Is it possible that David Ricardo's economic analysis doesn't work for the 21st century? Can the theory of comparative advantage operate when China and India compete not only with low-cost labor but also with highly educated, highly skilled workers who have access to broadband and the Internet? What is the U.S. supposed to specialize in when Asia competes across the board in manufacturing and services in both low-end and high-tech jobs? Is the future prosperity of America in jeopardy?
Samuelson’s paper, which was eventually published in the Summer 2004 issue of the Journal of Economic Perspectives, showed that technical progress in a developing country such as China had the potential to reduce welfare in the United States. As the above quotations illustrate, outside the economics profession, this work was viewed as providing a rebuttal to those who had claimed that trade, globalization, outsourcing, and related phenomena would benefit Americans. The idea that this was a rebuttal appears to have been spurred by Professor Samuelson himself in discussions with journalists (as recounted in turn to us). The actual point of the paper, however, was that changes in China that led to less trade would lower U.S. welfare—a development that came about because the United States was losing some of the benefits it derived from free trade in the first place!
As explained by Bhagwati, Panagariya, and Srinivasan (2004) and in more detail by Panagariya on his website, Samuelson’s paper involved three stages. First, starting from autarky, China and the United States open up to trade and experience the usual benefits of trade based on comparative advantage. Second, China has a productivity gain in its export good, which improves the U.S. terms of trade and further benefits the United States. Samuelson’s third stage (or second “Act” as he put it) involves a Chinese productivity gain in its import good. This narrows the differences between the countries and thus reduces the scope for trade, potentially so much that all trade disappears. As trade diminishes, so too do the gains from trade.
As Panagariya points out, the potential for productivity changes to reduce the gains from trade has long been understood (Panagariya has Harry Johnson teaching this at the University of Chicago in the 1950’s). The harm in Samuelson’s setup comes from having less trade, not more. This is light-years removed from the usual concerns of people about globalization giving rise to too much economic integration, not too little. Dixit and Grossman (2005) further point out that the U.S. terms of trade if anything have improved since 1990, rendering moot even Samuelson’s theoretical scenario. And in any case, all of this has nothing to do with outsourcing, despite strained interpretations of such by Samuelson.
The underlying substance was largely lost in media discussions of Samuelson’s paper. One possible reason is that the Journal of Economic Perspectives published Samuelson’s cryptic paper by itself and then the explanation and gentle rebuttal by Bhagwati, Panagariya, and Srinivasan only later, in the Fall 2004 issue. This issue of the journal, however, came out after the November election, when media attention to outsourcing had fallen off from the pre-election peak.
Monday, December 3, 2007
Autism and Economics
After reading a previous post, a father (who happens also to be an economist) registers a complaint:
Addendum: For those interested in the topic of actual autism, let me recommend the book A Different Kind of Boy, written by economist Daniel Mont about his autistic and mathematically gifted son Alex. It may be the most moving book I have ever read written by an economist. I also recommend the novel The Curious Incident of the Dog in the Nighttime, which is written in the first person from the standpoint of a character with autism.
The French students who coined the term "post-autistic economics" chose it because they feel that mainstream economists share some of the deficiencies associated with the condition of autism. But I agree with the letter writer that use of the term indicates a lack of empathy and understanding for those who live with actual, severe autism.Greg,
I enjoy reading your blog. But I have a complaint today.
I am not one of those who is perpetually offended by incorrect words or descriptions. In fact, I find most such people to be petty totalitarians-in-training.
I did do a full stop, however, when I ran into the phrase "post-autistic economics." As the father of two daughters with autism, it strikes me as a particularly odious phrase.
People with autism have enough difficulties without having their problems used as a punchline by intellectuals.
I fully understand that you did not invent the term, but a word of reproach for its inventors might be in order.
Thank you.
[name withheld]
Addendum: For those interested in the topic of actual autism, let me recommend the book A Different Kind of Boy, written by economist Daniel Mont about his autistic and mathematically gifted son Alex. It may be the most moving book I have ever read written by an economist. I also recommend the novel The Curious Incident of the Dog in the Nighttime, which is written in the first person from the standpoint of a character with autism.
Sunday, December 2, 2007
The Elusive Phillips Curve
Nobelist George Akerlof once said, "Probably the single most important macroeconomic relationship is the Phillips curve." Unfortunately, it is a relationship that we still don't fully understand. The San Francisco Fed offers a nice summary of where things stand in Fixing the New Keynesian Phillips Curve.
HT: Thoma.
HT: Thoma.
Saturday, December 1, 2007
Friday, November 30, 2007
Anti-Mankiw
When I was an undergraduate learning basic economics from Paul Samuelson's classic textbook, I ran across a book by Marc Linder called Anti-Samuelson. Linder's book was a leftist critique of Samuelson's presentation of the field.
Samuelson was the ostensible target of the attack, but as the author of the leading economics textbook, he was really only a proxy. Linder's actual target, it seemed to me, was the mainstream of the economics profession and the way almost all economists teach undergraduates. He thought we economists preached too much reverence for market mechanisms. (Linder is now a law professor: On his webpage, he sports a t-shirt that says "people before profits.")
I now know how Paul must have felt when Linder's book came out. A friend recently called to my attention an article called Economic Indoctrination, which takes a similar approach to my principles text. The author, a cofounder of the "post-autistic economics movement," tries to portray my book as right-wing propaganda.
This is not the first time my text has been criticized for being biased. When President Bush appointed me to be CEA chair, some members of the political right opposed the nomination because my textbook was too Keynesian and not sufficiently sympathetic to their supply-side views. I suppose the symmetry in the attacks suggests I am getting things about right.
When I teach introductory economics, either in the classroom or in my textbook, I view myself as an ambassador for the economics profession. I try to represent the economic mainstream, not my personal political views. Some students may view the economic mainstream as right of center. That assessment is probably correct, at least as judged by the universe of college professors. But the job of an introductory course is to present, as honestly as possible, the consensus of the profession. If the typical economist is more market-friendly than the typical literature professor, then that point of view will likely be reflected in the leading textbooks.
I was most surprised to read that the author of this critique was once a member of the army of teaching fellows I oversee in ec 10. I wish he had come to talk with me about his views while he was involved in the course. I have long been intrigued by the post-autistic economics movement. A conversation on the topic would have been edifying for both of us.
Samuelson was the ostensible target of the attack, but as the author of the leading economics textbook, he was really only a proxy. Linder's actual target, it seemed to me, was the mainstream of the economics profession and the way almost all economists teach undergraduates. He thought we economists preached too much reverence for market mechanisms. (Linder is now a law professor: On his webpage, he sports a t-shirt that says "people before profits.")
I now know how Paul must have felt when Linder's book came out. A friend recently called to my attention an article called Economic Indoctrination, which takes a similar approach to my principles text. The author, a cofounder of the "post-autistic economics movement," tries to portray my book as right-wing propaganda.
This is not the first time my text has been criticized for being biased. When President Bush appointed me to be CEA chair, some members of the political right opposed the nomination because my textbook was too Keynesian and not sufficiently sympathetic to their supply-side views. I suppose the symmetry in the attacks suggests I am getting things about right.
When I teach introductory economics, either in the classroom or in my textbook, I view myself as an ambassador for the economics profession. I try to represent the economic mainstream, not my personal political views. Some students may view the economic mainstream as right of center. That assessment is probably correct, at least as judged by the universe of college professors. But the job of an introductory course is to present, as honestly as possible, the consensus of the profession. If the typical economist is more market-friendly than the typical literature professor, then that point of view will likely be reflected in the leading textbooks.
I was most surprised to read that the author of this critique was once a member of the army of teaching fellows I oversee in ec 10. I wish he had come to talk with me about his views while he was involved in the course. I have long been intrigued by the post-autistic economics movement. A conversation on the topic would have been edifying for both of us.
Ambitious or Quixotic?
Economist Nicholas Stern opines on the challenge of climate change. He writes:
The overall targets of 50% reductions in emissions by 2050 (relative to 1990) agreed at the G8 summit in Heiligendamm last June are essential if we are to have a reasonable chance of keeping temperature increases below 2C or 3C.... For a 50% reduction in global emissions by 2050, the world average per capita must drop from seven tonnes to two or three. Within these global targets, even a minimal view of equity demands that the rich countries' reductions should be at least 80% - either made directly or purchased.
Thursday, November 29, 2007
Your preferences are in your genes
New findings from the study of twins show how genes influence economic choices:
We find strong evidence that economic preferences are heritable. For altruism as well as risk preferences the genetic effect is significantly different from zero. In our best fitting models, the point estimates suggest that 35 percent of the variation in altruism and 27 percent of variation in risk preferences is explained by genetic influences. Furthermore, our results suggest only a modest role for common environment as a source of phenotypic variation. We argue that the significance of these results extends well beyond documenting an important, but hitherto largely ignored, source of preference heterogeneity. For example, although it is widely accepted that parent-offspring correlations in isolation cannot be used to discriminate between theories of genetic and cultural transmission, much economic research is carried out under the presumption that genetic transmission is small enough that it can be ignored. Such an assumption is not consistent with our findings.
Wednesday, November 28, 2007
Congratulations, Keith
President Bush has appointed Keith Hennessey to replace Al Hubbard, who recently resigned as the head of the National Economic Council. I worked closely with Keith for two years, when he was the #2 person at the NEC, and I can attest that he is an excellent choice.Keith has spent most of his career as a Washington policy wonk, after getting a math degree at Stanford and a public policy degree at Harvard's Kennedy School. But, like most readers of this blog, in his heart he is an econonerd. I recall that in his spare time (a precious commodity for those working in the White House), Keith was reading David Romer's graduate-level textbook, Advanced Macroeconomics, just for fun.
I also remember some advice Keith gave me as I left my Washington post to return to Harvard: Start a blog.
The Sock Market
A former ec 10 student recommends listening to this NPR story on U.S. trade policy and the sock industry.
Tuesday, November 27, 2007
Inequality vs Injustice
Herb Gintis (via Free Exchange) writes:
The whole theory of optimal taxation and redistribution, best exemplified by the literature that follows Mirrlees, assumes that the social planner cares about inequality in itself. Government policy in the model is driven by a utilitarian calculus, which in turn is based on the axiom of diminishing marginal utility. The planner would, if he could achieve the goal without blunting incentives and diminishing efficiency, use the system of taxes and transfers to equalize incomes.
There is no room in the model for the concept of injustice beyond inequality of ability, the distribution of which the model takes as inherent and immutable. The model also maintains the neoclassical conclusion that, given ability, people are paid the value of their marginal product. That is, people are paid what they contribute to society.
I agree with Gintis that people care more about injustice than about inequality. For example, greater outrage is directed at highly paid CEOs than at highly paid athletes. People sense that athletes earn their high income by being highly talented, whereas they feel (correctly or not) that CEOs are paid a lot because they have manipulated the system.
If Gintis is right, then the standard model is barking up the wrong tree.
no one cares about inequality. People care about injustice, unfairness, poverty, sexual predators, family values, gay marriage, terrorism, and many other problems of everyday life. People don't care about Gini distributions.This passage was written about Paul Krugman's new book, but it can be taken as a much broader critique of the conventional economic approach to inequality.
The whole theory of optimal taxation and redistribution, best exemplified by the literature that follows Mirrlees, assumes that the social planner cares about inequality in itself. Government policy in the model is driven by a utilitarian calculus, which in turn is based on the axiom of diminishing marginal utility. The planner would, if he could achieve the goal without blunting incentives and diminishing efficiency, use the system of taxes and transfers to equalize incomes.
There is no room in the model for the concept of injustice beyond inequality of ability, the distribution of which the model takes as inherent and immutable. The model also maintains the neoclassical conclusion that, given ability, people are paid the value of their marginal product. That is, people are paid what they contribute to society.
I agree with Gintis that people care more about injustice than about inequality. For example, greater outrage is directed at highly paid CEOs than at highly paid athletes. People sense that athletes earn their high income by being highly talented, whereas they feel (correctly or not) that CEOs are paid a lot because they have manipulated the system.
If Gintis is right, then the standard model is barking up the wrong tree.
Monday, November 26, 2007
The U.S. Budget Balance
This graph from Econbrowser shows the budget surplus or deficit of the U.S. federal government as a share of GDP (blue, left scale).
Sunday, November 25, 2007
Larry says a recession is coming
Larry Summers writes,
the odds now favour a US recession.By contrast, the betting over at Intrade indicates that the probability of a recession starting over the next year is still under 50 percent, although just barely.
Shiller on Housing Problems
Bob Shiller calls for bold thinking. For example,
We might create a new consumer-oriented regulatory authority, like the Financial Products Safety Commission that Elizabeth Warren, a professor at Harvard Law School, has been advocating. It would monitor financial products for consumers and draft regulations to prevent practices like the recent widespread issuance of adjustable-rate mortgages to low-income borrowers who couldn’t afford the rate resets.
Saturday, November 24, 2007
Moving Down the NX Curve
For teachers of introductory macroeconomics, the recent fall in the dollar is a great case study of how exchange rates influence trade patterns. Today's Boston Globe has a vivid story on the topic: With dollar low, US is one big outlet: Europeans arriving in droves for bargains.
Friday, November 23, 2007
Does your neighbor's BMW make you feel bad?
Some economists, such as Cornell's Robert Frank, have pushed the argument that higher tax rates are good because they discourage people from working too hard. This argument makes sense if a person's hard work and resulting high consumption conveys a negative externality on his neighbors.
David Henderson dissects the argument.
Meanwhile, neuroeconomists offer some support.
Here is a previous post on the topic.
David Henderson dissects the argument.
Meanwhile, neuroeconomists offer some support.
Here is a previous post on the topic.
Wednesday, November 21, 2007
Life's Inequities
Women live longer than men, and now we know how they spend their extra endowment of time: waiting at Starbucks.
How long does it take to grab a cup of coffee? If you happen to be a woman, plan on adding 20 seconds to your morning ritual. That’s how much longer women wait to get their coffee compared to men, according to a study by Middlebury College economics professor Caitlin Knowles Myers, Myers and five of her students timed 295 transactions at eight Boston-area coffee shops. Her study controlled for complicating factors, including the complexity of the drink order (skinny? soy? 3 percent milk?), the appearance of the customer, and the length of the line. But even after accounting for these factors, women waited about 20 seconds longer.Via The Crimson.
On Selling Votes
This morning Jeff Miron and I were guests in Michael Sandel's Justice course, discussing the role of free markets in society. Toward the end, Professor Sandel asked a fascinating question (and I am paraphrasing), "If you economists are so in favor of voluntary exchange, would you extend that conclusion to letting a person sell his right to vote to another person?"
I said No. It is true that both parties in the transaction must be better off if they agreed to the deal. Nonetheless, the standard argument for unfettered voluntary exchange does not apply because there are externalities. That is, when one person sells his vote to another, that transaction may affect unrelated third parties through the electoral process.
Here is an example of what I had in mind. Suppose three voters are deciding whether to provide a public good that costs $9, which would be financed by a $3 tax on each voter. Andy values the public good at $8, while Ben and Carl do not value it at all.
Under majority voting, Ben and Carl vote against, and the public good does not get provided, which is the efficient outcome.
Suppose, however, that Andy could buy Ben's vote for $4. He could then ensure the project gets passed. Andy is better off by $1 (the $8 benefit minus the $3 tax and the $4 price of the vote), Ben is better off by $1 (the $4 price of the vote minus the $3 tax), and Carl is worse off by $3 (the $3 tax). The Andy-Ben vote deal has negative externalities on Carl.
One can concoct examples in which selling votes enhances efficiency. (Increase Andy's valuation from $8 to $10). So I do not mean to suggest that vote trading is always inefficient. The purpose of this example is only to show that externalities abound. Standard conclusions about the benefits of voluntary exchange do not readily apply to the vastly complicated situation of democratic voting.
Update: Michael Sandel emails me some commentary on this post:
I said No. It is true that both parties in the transaction must be better off if they agreed to the deal. Nonetheless, the standard argument for unfettered voluntary exchange does not apply because there are externalities. That is, when one person sells his vote to another, that transaction may affect unrelated third parties through the electoral process.
Here is an example of what I had in mind. Suppose three voters are deciding whether to provide a public good that costs $9, which would be financed by a $3 tax on each voter. Andy values the public good at $8, while Ben and Carl do not value it at all.
Under majority voting, Ben and Carl vote against, and the public good does not get provided, which is the efficient outcome.
Suppose, however, that Andy could buy Ben's vote for $4. He could then ensure the project gets passed. Andy is better off by $1 (the $8 benefit minus the $3 tax and the $4 price of the vote), Ben is better off by $1 (the $4 price of the vote minus the $3 tax), and Carl is worse off by $3 (the $3 tax). The Andy-Ben vote deal has negative externalities on Carl.
One can concoct examples in which selling votes enhances efficiency. (Increase Andy's valuation from $8 to $10). So I do not mean to suggest that vote trading is always inefficient. The purpose of this example is only to show that externalities abound. Standard conclusions about the benefits of voluntary exchange do not readily apply to the vastly complicated situation of democratic voting.
Update: Michael Sandel emails me some commentary on this post:
Professor Mankiw argues that we should not allow the buying and selling of votes, despite the fact that both buyer and seller would be better off, because such exchanges create externalities. I agree that we should not allow a market in votes. But the reason cannot be that vote-selling creates externalities. Persuading people to change their minds about which candidate or policy to support also creates externalities. But I doubt Professor Mankiw would say that we should therefore prohibit political persuasion.
Consider his example: Three voters are deciding whether to vote for a public good that costs $9, to be financed by a $3 tax on each voter. Andy values the public good at $8, while Ben and Carl do not value it at all. Suppose the policy in question is a tax override to support the public schools. Andy, who has two children in the public schools, strongly favors the override. Neither Ben nor Carl has children in the public schools, which explains their initial reluctance to assign any value to the lower class size, improved school library, and renovated science labs the override would finance.
Now suppose Andy persuades Ben that everyone in the community has a stake in the quality of the public schools, regardless of whether they have children who benefit directly. Perhaps Ben comes to believe that a well-educated citizenry will make for a more prosperous local economy, or a more healthy democracy. Or perhaps he is simply persuaded that strong public schools will bolster the local real estate market, and enhance his property's value. He now comes to value the public good associated with the override at $4. Since this is more than the $3 tax he will have to pay, he joins Andy in voting for the override.
Carl, who remains unpersuaded of the override's merits, votes against it and loses. His taxes go up by $3, for a public good he does not value. Andy's persuasion of Ben has negative externalities for Carl.
This example shows that Professor Mankiw's reason for opposing vote selling--that it imposes externalities on third parties--can't be right. Whether Andy buy's Ben's vote or wins it through persuasion, the effect on Carl (the "negative externality") is the same. In both cases, Carl loses a vote he would otherwise have won, and is saddled with the $3 tax. So unless Professor Mankiw would prohibit political persuasion, the negative externality on Carl does not explain why vote-selling should be prohibited.
Krugman vs Krugman
In today's Washington Post.
Update: More on the topic of Social Security from Paul Krugman's blog. See also these presentations from several experts.
Update: More on the topic of Social Security from Paul Krugman's blog. See also these presentations from several experts.
Tuesday, November 20, 2007
A Reading for the Pigou Club
New from the CBO: Issues in Climate Change.
An excerpt:
An excerpt:
Although both types of incentive-based approaches [to reducing carbon emissions] are significantly more efficient than command-and-control policies, studies typically find that over the next several decades, a well-designed and appropriately set tax would yield higher net benefits than a corresponding cap-and-trade approach.
"The situation is not hopeless"
Here is a surprisingly pessimistic view of current events, from Paul Samuelson, the great economics textbook author.HT: Thoma.
Monday, November 19, 2007
The Two-Year PhD
A reader emails me:
Yes, I managed to earn a PhD in two years of residence at MIT. Here is how:Dear Professor Mankiw,
I'm a student in an econ PhD program. I've read "JD vs PhD: My Story" on your blog. Correct me if I'm mistaken, but you finished your PhD in two years. (Lucky you, only 2 years of torture!!) How did you manage to finish the coursework and the research in just two years?
[name withheld]
- During my last year as an undergrad at Princeton, I took the standard graduate sequence in micro and macro. When I arrived at MIT, I was effectively a second-year PhD student.
- After my first year at MIT, I went for a year to Harvard Law School, where I was more concerned about writing economics articles than being a diligent law student.
- After the year in law school, I went to the CEA as a staff economist, where I worked for senior staff economist Larry Summers, who served also as an academic adviser. Because I worked on research between CEA tasks, when I returned to MIT for my second year, I had much of my dissertation already completed.
In Ec 10 Today
Susan Athey will be giving a guest lecture in Sanders Theatre at noon. This is her ec 10 debut. All students, including ec 10 students from previous years, are invited.FYI, I believe that ec 10 is the only introductory econ course in the world that features four winners of the John Bates Clark Award. Use that fact the next time someone tells you Harvard's star faculty ignores the undergrads.
Sunday, November 18, 2007
Generational Mobility
The distinguished Harvard scholar Henry Louis Gates Jr writes in today's NY Times:
As a general matter, the literature on intergenerational mobility finds a positive correlation between the economic success of parents and children, but the correlation is not sufficiently strong to persist substantially over three generations. I would venture the guess that over such a long time span, the correlation is only 10 to 20 percent. Maybe it is larger if the sample is restricted to the population of African-Americans, but I would bet against it.
I have been studying the family trees of 20 successful African-Americans, people in fields ranging from entertainment and sports (Oprah Winfrey, the track star Jackie Joyner-Kersee) to space travel and medicine (the astronaut Mae Jemison and Ben Carson, a pediatric neurosurgeon). And I’ve seen an astonishing pattern: 15 of the 20 descend from at least one line of former slaves who managed to obtain property by 1920 — a time when only 25 percent of all African-American families owned property.If I understand the empirical pattern Professor Gates is describing, then to me it does not seem astonishing at all. The time span is 87 years, which is about three generations. Everyone has 8 great-grandparents. It seems very possible that a vast majority of today's African-Americans descend from at least one of the fortunate 25 percent.
As a general matter, the literature on intergenerational mobility finds a positive correlation between the economic success of parents and children, but the correlation is not sufficiently strong to persist substantially over three generations. I would venture the guess that over such a long time span, the correlation is only 10 to 20 percent. Maybe it is larger if the sample is restricted to the population of African-Americans, but I would bet against it.
Macroeconomic Games
Grzegorz Holdys emails me about his new macroeconomics game called The economy, stupid!
As long as I am on the topic, here is the Presidential Game designed to accompany my intermediate macro textbook. (Scroll down after you click on the link.) The game has you set monetary and fiscal policy, and it embodies a short-run IS-LM model, a medium-run Phillips curve, and a long-run Solow growth model, just like the real world!
As long as I am on the topic, here is the Presidential Game designed to accompany my intermediate macro textbook. (Scroll down after you click on the link.) The game has you set monetary and fiscal policy, and it embodies a short-run IS-LM model, a medium-run Phillips curve, and a long-run Solow growth model, just like the real world!
Saturday, November 17, 2007
Inequality Everywhere You Look
Econ prof Mark Perry examines the incomes of professional football players and finds:the pattern of income distribution in the NFL is strikingly similar to the income inequality of the general population, and is actually slightly greater in the NFL....perhaps this pattern of income distribution is a natural and expected outcome of any extremely competitive environment where talent is scare, valuable and highly paid, whether it's the NFL or the overall economy.
Friday, November 16, 2007
In Search of Ideologues
In today's NY Times Paul Krugman berates Barack Obama for worrying about the future of Social Security. He thinks Obama has been misled by "decades of scare-mongering about Social Security’s future from conservative ideologues."
Paul's interpretation seems to be based on either a faulty memory or an especially inclusive definition of what constitutes a conservative ideologue. Here is President Bill Clinton in 1998:
The bottom line: Concern about social security's future comes not from decades of scare-mongering by conservative ideologues but from decades of dispassionate analysis by some of the best policy economists.
Paul's interpretation seems to be based on either a faulty memory or an especially inclusive definition of what constitutes a conservative ideologue. Here is President Bill Clinton in 1998:
This fiscal crisis in Social Security affects every generation. We now know that the Social Security trust fund is fine for another few decades. But if it gets in trouble and we don't deal with it, then it not only affects the generation of the baby boomers and whether they'll have enough to live on when they retire, it raises the question of whether they will have enough to live on by unfairly burdening their children and, therefore, unfairly burdening their children's ability to raise their grandchildren.... And if nothing is done by 2029, there will be a deficit in the Social Security trust fund, which will either require -- if you just wait until then -- a huge tax increase in the payroll tax, or just about a 25 percent cut in Social Security benefits.One might say that President Clinton, like Obama, was misled. So let's look at who he was getting advice from. Clinton's Advisory Council on Social Security told him:
While the Council has not found any short-term financing problems with the Old-Age, Survivors, and Disability (OASDI) program, there are serious problems in the long run. Because of the time required for workers to prepare for their retirement, and the greater fairness of gradual changes, even long-run problems require attention in the near term.(Source.) The Advisory Council was chaired by well-known economist Edward Gramlich, who was surely no conservative ideologue. Indeed, on other matters, Paul has praised him for being particularly prescient.
The bottom line: Concern about social security's future comes not from decades of scare-mongering by conservative ideologues but from decades of dispassionate analysis by some of the best policy economists.
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