How to meet me in Denver

If you are going to the Denver ASSA meeting next week, and if you would like to meet me for a discussion of the challenges facing economic policy, you might be interested to know that my publisher is arranging a couple of events. Click here to sign up.

I look forward to seeing you!

Econ Education at the ASSA Meeting

If you teach economics and are going to the upcoming ASSA meeting in Denver, you might find this list of the pedagogical sessions helpful.

One of the sessions includes an analysis of the leading economics textbooks.

Voting with Your Feet II

Ed Glaeser on regional population trends:

The future shape of America is being driven not by quality of life or economic success but by the obscure rules regulating local land use.  In a sense, the anti-regulation crowd is right that the laissez-faire attitude of the South and West explains their recent growth. But the usual argument focuses on the wrong regulations. Housing regulations, more than those that bind standard businesses, explain the Sun Belt’s population growth. If New York and Massachusetts want to stop losing Congressional seats, then they must revisit the rules that make it so difficult to build.

Malkiel's Recommended Asset Allocation

Source.

Economists on Ebenezer Scrooge

• Paul Krugman
• David Henderson
• Steven Landsburg
• Joel Waldfogel

Voting with Your Feet

A fact from Michael Barone:

[Population] growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average [over the past 10 years]. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England.  Altogether, 35 percent of the nation's total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade.

Advances in Inflation Measurement

Chapter 24 of my favorite textbook discusses how economists measure the cost of living.  This article in Slate would provide a good supplementary reading.

An Occupational Hazard

The Value of Good Teachers

From Eric Hanushek:

A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion.

The Charitable Deduction

Richard Thaler takes on the tax deduction for charitable giving.  He suggests that there is little reason for it and that a refundable tax credit would be more justified.

I think there is a bit more logic to current policy than Thaler does.  Suppose you believe, as I do, that consumption is a better tax base than is income.  Then, starting with a measurement of income, it makes sense to allow deductions for "non-consumed income"--specifically, saving such as IRA and 401k contributions and charitable giving.

Some may argue that giving to charity is itself a form of consumption.  After all, the person who gives is doing so voluntarily, so there must be some utility to the giver.  Perhaps, but there seems something fundmentally different about consumption in the form of charitable giving and consumption in the form of large homes and fast cars.  But maybe that is the puritan, rather than the economist, inside me speaking.

Econ Books for Young Children

Click here for five recommendations.  Just in time for Christmas.

I must confess that I have not read any of them with my kids, which makes me start to question my parenting skills.  (I have, however, read all seven volumes of the Harry Potter series out loud.)   By the way, here are some of my favorite childrens' books, which are not economics-related.

Menu Costs during Hyperinflation

A reader sends this photo along, with the following explanation:

In January of 2009 I traveled to Africa and we took a side trip to Victoria Falls in Zimbabwe.  I snapped the attached photo at the entry to the falls.  Notice how the price of entry in Zimbabwe Dollars is written in chalk.  This was so that they could change the price throughout the day as the ZW Dollar lost value.

The Economics of Seinfeld

Linda Ghent, author of the instructor's manual to accompany my favorite textbook, is also coauthor of an intriguing website that uses one of the best sitcoms ever to help teach the principles of economics. Check it out.

Avinash Dixit

A profile of the great economist.

An Economists' Hanukkah Song

On Editing an Economics Journal

Reflections from Preston McAfee.

The Daily Show: Printing Money

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
The Big Bank Theory
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog</a> The Daily Show on Facebook

The White House reads this blog

and cites it in a recent press release.

Fairness and Tax Policy

Readers of this blog may recall my recent essay Spreading the Wealth Around: Reflections Inspired by Joe the Plumber. 

For anyone interested in this topic, I recommend a new commentary on my paper by Northwestern University's Jonathan Weinstein.  Professor Weinstein makes some very thoughtful and thought-provoking observations.

Simon Johnson and Me on NPR

How Economics Saved Christmas

Art Carden retells the story of the Grinch and, in the process, reviews some basic lessons about Pigovian taxation and the Coase Theorem.

Gift Books for Econ Lovers

Recommendations from the University of Chicago's Allen Sanderson.

Hear Me Squawk

More on the Tax Deal

David Leonhardt says that, quantitatively, the President got a good deal:

Of its estimated $900 billion-plus cost over two years, roughly $120 billion covers the high-end tax cuts and the estate tax cut, $450 billion covers Mr. Obama’s wish list and $360 billion covers the tax cut extensions both parties favored.

CBO says that the payroll tax cut would be more stimulative if it went to employers rather than employees (an issue I discussed here):

A temporary reduction in payroll taxes—especially in the share of taxes paid by employers—would also have a significant positive short-term effect on the economy. This approach would boost output and employment both by increasing demand for goods and services and by providing an incentive for additional hiring.

Thanks to Felix Salmon for the pointer.

The Distribution of the Tax Deal

• Compared to current policy (that is, with 2009 tax law continued).
• Compared to current law (that is, with all the Bush tax cuts expired).

The Tax Deal

I am generally pleased with the compromise over taxes the President and Republicans struck yesterday.  (The President should be too, but he seemed dejected at his news conference.  Buck up, Mr President!  You don't want anyone to start thinking of the word "malaise.")

One aspect of the deal struck me as worth discussing with econ students: The compromise includes a one-year cut in the payroll tax by 2 percentage points.  The tax cut will be entirely in the employees' share.  Why do you think they designed the policy in this way?  Was it the right choice?

One basic lesson of microeconomics is that it doesn't matter which side of a market the government taxes.  As a result, you might think it doesn't really matter which side of the payroll tax is cut.

But this standard analysis assumes that wages are flexible and thus can reach equilibrium of supply and demand.  This assumption might not hold in the short run.  Over the course of a year (the time horizon over which this policy is in effect), it may be better to think of the wage as given.  In that case, it matters which side of the market gets the tax cut.

As the policy was described yesterday, this payroll tax cut goes entirely to the worker.  This increases work incentives, but the main motivation is probably to increase take-home pay, consumer spending, and aggregate demand.  CEA chair Austan Goolsbee recently said, “We’re not saying that our long-term recovery ought to be built on trying to increase consumer spending.”  Maybe not, but the plans for short-run recovery are very definitely consumption-based.

An alternative would have been to reduce the employer's share of the payroll tax, at least to some degree.  Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment.  It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

I should note that, as part of the deal, the President also got his proposal to allow businesses to expense investment spending.  As I have said previously, this is a good idea, but the impact is likely to be modest.

200 Countries and 200 Years in 4 Minutes

My Agnosticism about UI

A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits.  I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI.  But perhaps it would be useful to explain my agnosticism.

UI has pros and cons.  The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn.  The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed.  To me, all these pros and cons seem significant.  I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.

So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks?  If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?

It is plausible to me that UI benefits should last longer when the economy is weak.  The need for increased aggregate demand is greater, and the impact on job search may be weaker.  But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right.  It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.

I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general.  I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around."  That issue is, as I tell my students, more a matter of political philosophy than it is of economics.

Grading Econ Textbooks on Climate Change

A report card from Yoram Bauman.  One book "shakes [his] faith in capitalism."  Can you guess which?

1/2 Math + 1/2 Faith = ???

Click on graphic to enlarge.  Source.

A Mono Mandate for the Fed?

Along with Congressman Paul Ryan, economist John Taylor calls for a revision of the Federal Reserve's mandate:

Quantitative easing is part of a recent Fed trend toward discretionary and away from rules-based monetary actions. The consequences of this trend are clear: The Fed's decision to hold interest rates too low for too long from 2002 to 2004 exacerbated the formation of the housing bubble. And while the Fed did help to arrest the ensuing panic in the fall of 2008, its subsequent interventions have done more long-run harm than good....

Congress should reform the Federal Reserve Act, particularly the section of the act that establishes the Fed's dual mandate. The Fed should be tasked with the single goal of long-run price stability within a clear framework of overall economic stability. Such a reform would not prevent the Fed from providing liquidity, serving as lender of last resort, or cutting interest rates in a financial crisis or a recession.

I am skeptical. If the Fed's mandate were different, monetary policy today might well be the same. That is, with inflation now below its target, the Fed could be pursuing QE2 even if it were operating under the proposed mono mandate. Looking ahead, the Fed believes that inflation too low, even deflation, is a larger risk than inflation too high, so it is engaging in expansionary policy to get inflation back on target.

The Simpson-Bowles Social Security Plan

Chuck Blahous identifies the winners and losers.  The three main groups of winners:

1) Low-income workers (and their advocates);
2) Fiscal conservatives concerned about the growth of system costs;
3) Advocates of bipartisan accomplishment.

And three main groups of losers:

1) Advocates of making substantial tax increases inevitable through prolonged inaction;
2) Advocates of improving intergenerational equity via personal accounts;
3) Senior-scaring political opportunists.

How to Improve Dodd-Frank

Oliver Hart and Luigi Zingales have a suggestion about how to improve the financial reform law.  Their goal is to "spare the most vibrant financial institutions from the rigidities and bureaucratization that a strict application of the Dodd-Frank bill would entail."

Barro on QE2

Via the Economist.

Department of "Huh"? (Why Oh Why Can't We Have a Better Blogosphere? Brad DeLong Edition)

Brad DeLong objects to my recent NY Times column by displaying some Tax Policy Center data that, he says, shows the Bowles-Simpson tax plan is hard on the poor and easy on the rich.  Progressives, he concludes, should oppose the plan.

The problem, however, is the benchmark used in this particular table: current law as of 2015.  Under current law, all of the Bush tax cuts expire, and millions of new taxpayers are hit by the AMT.  That is an outcome that has never been in effect and that neither political party endorses.  It is an artifact of legislative history.

A better benchmark, as noted by Howard Gleckman of the Tax Policy Center, is current policy.  Here are those results.  The implication is exactly the opposite.  All income groups take a hit, particularly those at the top of the distribution.

Taxes, Spending, and Semantics

Click here to read my column in Sunday's New York Times.

The Progressivity of Bowles-Simpson

Howard Gleckman reports,

The Tax Policy Center has taken a preliminary look at one version of the tax plan offered by Erskine Bowles and Alan Simpson. And Paul Krugman & friends can rest easy. The Bowles-Simpson proposal is indeed an across-the-board tax increase-- and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.

The TPC estimate comes with a number of caveats. It assumes essentially the law we had in 2009. The 2001 and 2003 tax cuts still apply in 2015, about 25 million middle-income households continue to be protected from the Alternative Minimum Tax, and the 2009 estate tax is back on the books. Given political realities these days, that guess is a good as any, but it is a guess....

The TPC estimate is also static, thus it assumes no behavioral response to the proposed tax law changes. However, thanks to lower marginal rates and the smaller deficit in the overall plan, the economy could grow faster than the co-chairs predict and generate more tax revenue....

Thus, Bowles and Simpson have a clear goal: They want to raise taxes across the board while lowering rates. And TPC’s preliminary projections suggest that’s pretty much what they’d do.

QE2

Several people have asked my opinion of the Federal Reserve's new round of quantitative easing.  In particular, some have noted that I did not sign the open letter by conservative economists critical of recent Fed actions.

My view is that QE2 is a modestly good idea.  I say it is a "good idea" because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation.  By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand.  I include the modifier "modestly" because I don't expect these actions to have a very large effect.

Moreover, I do see some potential downsides.  In particular, the Fed is making its portfolio riskier.  By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.  If future events require higher interest rates, the Fed will end up making losses on its portfolio.  And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds.  Such a cash-flow deficit could potentially undermine the Fed's political independence (which is already not very popular in some circles).  Yet if the Fed tries to avoid these losses by failing to raise rates when needed, inflation could indeed become a problem down the road.  I trust the team at the Fed enough to think they will avoid that mistake.

So, in the end, I judge QE2 to be a small but risky step in the right direction.

-----

Addendum: While I do not agree with its conclusion, I did find this video on QE2 amusing.

Hubbard on the Bowles-Simpson Tax Plan

Glenn likes it.

You Fix the Federal Budget

It takes about a minute.  Persuading your fellow citizens may take a bit longer.

Help me find the photographer

The above picture, taken in the midst of the Zimbabwe hyperinflation and posted around the internet, illustrates well how fiat money can become nearly worthless when the central bank creates too much of it.  I was hoping to put the photo in the next edition of my textbook, but my publisher is having trouble locating the photographer from whom to obtain reprint permission.  If you are photographer, or know his name and contact information, or have a similar picture for which you hold copyright, please contact me.

The Simpson-Bowles Social Security Plan

Chuck Blahous explains it.

Good Signs from the Deficit Commission

Early reports suggest the Bipartisan Deficit Commission is considering some good ideas: a higher retirement age, lower tax rates coupled with broader tax bases, eliminating tax expenditures such as the mortgage interest deduction, and a higher gasoline tax.

My regular readers will know that these are ideas I have long embraced.  I look forward to seeing more details.

Update: Some details are here.

Raise the Early Retirement Age

Says Andrew Biggs.

Thaler on the Estate Tax

He is in favor.  I am not.

Laura Tyson and Me on NPR

A QE2 Ditty

Reader Dave Stehman sends in the following:

It's Called Quantitative Easing

I heard it in the headlines
It's news all over town
We might be double dippin'
Green shoots have all turned brown

It's a balance sheet recession
With a housing overhang
But they've got a brand new program
And it will start you with a bang

And it's called, quantitative easing
They say results are always pleasing.
When liquidity all starts freezing
Just warm things up with quantitative easing

I will say it straight and simple
It's clear, just like a bell
There's some long term bonds to buy
There's some short term bonds to sell

Don't talk about the good times
Don't ask me where they went
Just move your inflation target
On up to three point five per cent

And it's called, quantitative easing
This ain't no joke, it ain't no teasing
When the GDP starts wheezing
Treat with a shot of quantitative easing

Good and magic things will happen
It might take a week or three
Unemployment plunging downward
Recovery shaped just like a V

You'll see Nobels at the Treasury
There'll be rock stars at the Fed
It'll take hair off of Krugman's face
Put it on top of Ken Rogoff's head

And it's called, quantitative easin'
This ain't no scam, so don't call no policeman
When the engine of commerce starts seizin'
Just add a quart or quantitative easin'

Show no mercy to the critics
Don't let no one stop your nerve
You can mock Ricardian Equivalence
You can laugh at the Laffer Curve

Tell that guy at the Minneapolis Fed
To shut up, or you'll break his legs
And if the Bond Vigilantes don't like it?
Well, they can go suck eggs

And it's called quantitative easin'
You know I say this for a reason
When the economy just sits there squeezing
Loosen things up with quantitative easing

Malkiel's Recommended Reading

Burt Malkiel, who taught me econ 101, suggests five books on investing.

Feldstein on QE2

My Harvard colleague Marty Feldstein is skeptical about quantitative easing.

Is Obama a Keynesian?

From Saturday's DC Rally

Quantitative Easin'

A Rolling Stone gathers no taxes

For skeptics about the incentive effects of taxation:

The Stones are famously tax-averse. I broach the subject with Keith [Richards] in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn.

Source. (HT: Matthew Kahn)

The Colbert Effect

John Cochrane on Tim Geithner

The University of Chicago economist takes on the Treasury Secretary. (nonsubscription link to pdf)

Pricing in Venezuela

From my inbox:

Dear Professor,

I´m from Venezuela. And this picture shows the kind of things you find when you go to a Mercado Bicentenario in Venezuela (which is the new name of a chain of private markets -Cada and Exito- recently expropiated and now runned by the Government).

This one is from Mercado Bicentenario, in Centro Comercial Ciudad Tamanaco (CCCT), a mall, in Caracas, Venezuela.

It says:

Description of the product: Diana Oil.

Fair Price: 4,73 Bfs.

Capitalist Price: 7 Bfs.

% of savings: 32%.

My best regards, and congratulations for your blog, books and everything!

Christy's First Column

Christy Romer has joined the line-up of columnists for the Sunday NY Times Business section (along with Shiller, Thaler, Frank, Cowen, and me).  You can read her first column here.  It presents the case against fiscal austerity in the present economic situation.

Goolsbee, Deconstructed

Where's Peter going next?

Click on graphic to enlarge.

I find Stephen Colbert funny, even when it's at my expense

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Tax Shelter Skelter
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

Kinsley's Mistakes

Michael Kinsley, one of my favorite liberal journalists, says I got my math wrong in my latest NY Times column.  Let me take exception to four points he makes:

1.  Mike says, "Mankiw assumes that his investment earns 8 percent every year and is subject to the corporate income tax at 35 percent and then to the individual income tax at its full fury of 40 percent on whatever’s left."

No, I did not assume that at all.  If I had assumed that, then the after-tax return would be

8 x (1-.35) x (1-.4) = 3.19 percent.

In the article, I used “about 4 percent” as the after-tax return, recognizing that dividends and capital gains are taxed at a lower rate.

2. Mike says, "The top marginal tax rate on dividends and capital gains — the two main ways investors recoup their investments — is 15 percent."

No, it is not, at least under the current administration's policies.  President Obama has proposed raising the tax rate on dividends and capital gains to 20 percent. In addition, the healthcare bill applies the new 3.8 percent Medicare tax to investment income. Moreover, the state of Massachusetts (and many others) taxes that income as well. So my marginal tax rate on dividends and capital gains is really about 27 percent.

That would yield an after-tax return of

8 x (1-.35) x (1-.27) = 3.8 percent.

I rounded up to 4 percent, as a rough attempt to take into account the benefits of deferral.

3.  Mike says, "Mankiw’s assumption of an 8 percent return for 30 straight years seems optimistic."

No, I don't think so.  Recall that this is a rate of return before all taxes, including corporate income taxes.  Also, it is worth thinking for a moment about whether this return is best viewed as real or nominal.  (I skirted this issue in my column, for reasons of space.)  The tax code taxes nominal returns--that is, capital gains are not indexed for inflation.  As a result, for purposes of tax calculations such as these, the right return to use is arguably a nominal return.  A long-term before-all-tax nominal return of 8 percent seems, if anything, too low.

4.  Mike says, "If Mankiw’s marginal tax rate has actually been 80 percent for all these years, it doesn’t seem to have affected his incentives very much, and 90 percent won’t, either."

Mike might recall that he has, as an editor, several times tried to recruit me to write something for him.  I turned him down every time.  If he had offered me a reasonable fee, and somehow could have promised that this income and all the investment returns it subsequently generated would be free of all taxes, I might well have accepted the jobs.

---------

Addendum: Some blogger named Barry Ritholtz poses a bunch of questions for me, which I won't bother taking the time to answer.  Unless, of course, he offers to incentivize me sufficiently.  For free, however, I will answer one of them: "You teach at Harvard and live in 'Taxachusetts.' If state taxes are so important, have you considered teaching at Yale, and living in much lower state tax land of Connecticut?"

First of all, the top state income tax rate is higher in Connecticut than it is in Massachusetts.

Second, Yale?  Are you serious?  Yale?

Hear Me Squawk

Why do economists disagree?

Chapter 2 of my favorite textbook addresses this question.  So does today's Times.

The Myth of Shovel Ready

Me, January 2009:

People don’t usually spend their money buying things they don’t want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.

The way to avoid this problem is a rigorous cost-benefit analysis of each government project. Such analysis is hard to do quickly, however, especially when vast sums are at stake. But if it is not done quickly, the economic downturn may be over before the stimulus arrives.

President Obama, Now:

In the magazine article, Mr. Obama reflects on his presidency, admitting that he let himself look too much like “the same old tax-and-spend Democrat,” realized too late that “there’s no such thing as shovel-ready projects.”

Barney Frank, Then and Now

A news story from 2003:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

A news story from yesterday:

In a sharp-edged debut debate, US Representative Barney Frank, a Democrat, and Sean Bielat, his Republican challenger, squared off yesterday over national security, illegal immigration, and the roots of the mortgage crisis....

Bielat, a former Marine officer from Brookline, said Frank had contributed to the downfall and subsequent recession by supporting lenient lending standards for prospective home buyers.

“He has long been an advocate for extending homeownership, even to those who couldn’t afford it, regardless of the cost to the American people,’’ said Bielat, 35.

Frank, a leading liberal who has represented the state’s Fourth Congressional District for nearly 30 years and became chairman of the House Financial Services Committee in 2007, said he and other Democrats fought to curb predatory lending practices before the recession but were thwarted by Republicans. He said he had supported efforts to help low-income families rent homes, rather than buy them.

“Low-income home ownership has been a mistake, and I have been a consistent critic of it,’’ said Frank, 70. Republicans, he said, were principally responsible for failing to reform Fannie Mae and Freddie Mac, the mortgage giants the government seized in September 2008.

Response to Queries

My recent Times column generated more email and blogosphere commentary than usual.  While it is impossible for me to answer all the questions raised, I thought it might be useful to address three of the more common ones.

If no one is proposing eliminating taxes, why compare the Obama policy to a world without taxes?  Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources.  It is crucial to know how far we are from that optimum.  To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate.  Thus, increasing or decreasing a tax rate by 1 percentage point has a small effect on economic well-being if the initial tax rate is low, but it has large effect if the initial tax rate is high.  For the margin of adjustment I was discussing (work more now, let your kids consume the proceeds in 30 years) the distortion is very high once all taxes are taken into account.  As a result, every change in this tax wedge has a large impact on the size of the economic pie.

Aren't there ways to avoid some of these taxes, such as IRAs and life insurance trusts?   Yes, and I use such tax avoidance mechanisms to the extent they are legal and practical.  But there are limits to how much they can be used.  Thus, while they lower my average tax rate, they do not affect my marginal tax rate.  That is, for any incremental income, I cannot do more, so I am facing the full tax bite.

Aren't you motivated by more than money?  Of course. I have never suggested that money is my, or anyone's, sole motivation in choosing a lifestyle.  In economic models, we often simplify things by assuming that there are only two activities: work and leisure.  Work has a pecuniary benefit, whereas leisure has a non-pecuniary benefit.  Reality is more complicated.  I face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits.  Absent taxes, I would choose an optimal mix of these activities.  When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits.  Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work."  Blogging, for instance, or writing op-eds that particularly inflame the left-wing blogosphere.

Woodford on Monetary Policy

Mike argues for "catch-up" inflation.

Ec 10 Nobel Trivia

From my inbox:

Professor Mankiw,

I took Ec 10 during my freshman year, 1979-1980. It may not be obvious from his profile, but today’s Nobel Prize winner Chris Pissarides taught my Ec 10 section that year during his one-year visit to Harvard. So tell your current students that the section leader they are struggling to understand through accented English may someday be a Nobel prize winner.

I read your blog and my son’s college class uses your textbook.

Regards,

[name withheld] ‘83

The Nobel Prize

Congratulations to Peter Diamond, Dale Mortensen, and Christopher Pissarides

My Marginal Tax Rate

Click here to read my column in today's New York Times.

Betting on the Nobel

Here.  A few of my Harvard colleagues are supposedly in the running.  Thanks to Tyler Cowen for the pointer.

Also, by the way, here is a shot from a recent episode of The Simpsons, sent in by a reader:

Update: More prognostication from Northwestern and Chicago and Harvard.

Rogoff on Gold

Ken looks at its soaring price.

Harvard Undergrads, Real and Imagined

I saw The Social Network over the week.  Like every reviewer, I enjoyed it.  In style and tone, it reminded me of Shattered Glass, another excellent docudrama, but one that received much less attention when it came out.

There was one thing that bothered me about the movie, however.  Every Harvard undergrad portrayed in the film was a pompous snob, an annoying social climber, or an antisocial nerd (or some combination of the three).  In short, they were all unlikable. The only really likable student in the movie was a character named Erica Albright, who apparently was attending BU.

After teaching at Harvard for 25 years, I can report that this depiction does not ring true to me.  Most Harvard undergrads are in fact quite likable.  If they were as unpleasant as the film made out, I would have left here long ago. It made me wonder about the veracity of the movie more generally.

Addendum: A former Harvard student informs me that Eduardo Saverin, one of Facebook's cofounders and a major character in the film, was not only a Harvard economics major but also an ec 10 unit test grader.

The Debate over Fiscal Adjustment

1. The IMF and the Economist take on Alesina and Ardagna.
2. My Harvard colleague Alberto Alesina responds.

Jack of All Trades

The Latest from the Standup Economist

Economic Education Video Competition

Sponsored by the St. Louis Fed.  For college students.

New NRC Rankings

The National Research Council has released updated rankings of PhD graduate programs.   You can find the ranking of economics departments here.

Bill Clinton channels Friedrich Hayek

Friedrich Hayek, The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Bill Clinton, 9/21: "Do you know how many political and economic decisions are made in this world by people who don't know what in the living daylights they are talking about?"

HT: Newmark's Door.

The Harvard Nobel Prize Pool

is up and running.

A New Approach to Intermediate Macroeconomics

I have a new intermediate macroeconomics textbook coming out.  Coauthored with my old friend Larry Ball, it is aimed at those instructors who want to include more material on the financial system than is traditional in macro courses.  Click here for more information, and click here to read a sample chapter.

The book is being printed now and will be available for next semester's classes.

Best Congressional Testimony Ever

Smart Athletes

A reader points out to me that Sporting News has named the 20 smartest athletes in sports. Two of them are graduates of the Harvard economics department.

Me on All Things Considered

Larry and Harvard

A reader asks the following about Larry Summers:

The media is saying that Larry is leaving the White House in part because his leave from Harvard is almost up and if he stayed away longer, he'd have to reapply for tenure. From your own experience, is that probably true? I thought universities routinely relaxed such policies for star academics like you and Larry. Also, how prestigious is it to be a university professor?

Different universities have different policies regarding faculty leave for policy jobs, and different degrees of enforcement. Harvard allows two years of leave, and it has the reputation of enforcing the rule rather strictly. I can imagine that Larry could have negotiated an extra semester of leave, but I would have been surprised if the university had extended his leave much beyond that. (FYI, I left my CEA job in February 2005 after being in Washington for precisely two years.)

Also, being a university professor is quite a good deal.  Top pay with maximum flexibility regarding teaching etc.  As I understand it, you do pretty much whatever you want.

Would Larry have been rehired by Harvard if he resigned and stayed another couple of years in Washington?  Unclear.  The pro case for rehiring would be that Larry is one of the smartest guys around and has a great deal of fascinating experience to share with students.  The con case would be that he has been out of the academic research game for quite a while and that in a time of reduced financial resources, faculty slots should be devoted to younger scholars rather than potentially extinct volcanoes.  Ironically, if Larry were on the faculty voting on this matter, the con case is the kind of argument he might have made.

So, while I am sure that Larry's decision had various inputs, Harvard's leave policy was very plausibly one of them.

I can also say that ec 10 students will likely be among the beneficiaries of Larry's return.  Larry was a regular guest lecturer in the course, and his lectures were always well received.   He does a great job illustrating the connections between economic theory and economic reality.

Predicting the Nobel

The good folk at Thomson-Reuters have updated their list of Citation Laureates, which they believe is a good predictor of future Nobel Prizes.  Closely related: the REPEC ranking of most cited economists.

FYI, the economics prize will be announced on October 11.

Krugman versus Rajan

1. Paul on Raghu
2. Raghu on Paul

Inside Job

In a couple weeks, a movie called Inside Job will be coming to a big screen near you.  Apparently, several prominent members of the economics profession play leading roles.  Click here for the trailer and some clips.

Glaeser on Goolsbee

Ed's take on Austan.

The Tourist Platter of Economics

Nick Rowe is a convert to Chapter One.

Classroom Games

Many instructors in introductory economics like to use classroom games as a teaching tool.  If you are one of them, you will find this resource useful.

How much would the President raise the top tax rate?

Here's the answer:

In 2010, the top income tax rate bracket for ordinary income is 35 percent. Besides wages and interest income, this income category includes profits from pass-through business firms—sole proprietorships, partnerships, and S-corporations.

Under the president’s proposal, the top bracket will rise to 39.6 percent. A stealth provision that phases out high-income taxpayers’ itemized deductions will also be reinstated, adding another 1.2 percentage points to the effective tax rate, bringing it to 40.8 percent. Wages and some of the pass-through income will also remain subject to a 2.9 percent Medicare tax. These 40.8 and 43.7 percent tax rates, which will apply in 2011 and 2012, match the 1994 to 2000 rates—the same top bracket, stealth provision, and Medicare tax were in place then.

But the picture changes in 2013. Under the healthcare law adopted in March, the Medicare tax will rise that year, from 2.9 to 3.8 percent. Also, a new 3.8 percent tax, called the Unearned Income Medicare Contribution (UIMC), will be imposed on high-income taxpayers’ interest income and most of their pass-through business income that’s not subject to Medicare tax. So, under the president’s proposal, virtually all of top earners’ ordinary income will be taxed at 44.6 percent, starting in 2013.

Take into account state income taxes, and the top rate will be about 50 percent.

Economics Teaching Conference

I will be speaking at the Sixth Annual Economics Teaching Conference in Memphis, Tennessee, on Oct 21-22. If you are potentially interested in attending, click here for information.

Viard on Marginal Tax Rates

Alan says supporters of the Bush tax cuts have neglected the best arguments.

Miron on the Bush Tax Cuts

Jeff likes them.

A Dastardly Clever Scheme

At a faculty lunch yesterday, I heard about an ingenious scheme used by some universities in New York, where much rental housing is rent controlled.  Here are the three key elements, as it was described to me by one of my colleagues:

1. The university buys a rent-controlled building.  The purchase price is low, because the existing landlord cannot make much money renting it.

2. The university then rents the apartments to its own senior faculty, who view this as a great perk.  In essence, the difference between the free-market rent and the controlled rent is a form of compensation for the professor.  As a result, the university can reduce the professor's cash compensation by an equivalent amount.  The university is effectively earning the market rent for the apartment.

3. But it gets even better.  The implicit rental subsidy is a form of non-taxed compensation.  Normally, if an employer gives an employee a perk like this, the subsidy is taxable income (unless the perk is deemed a working condition required to do the job, like a hotel manager living in a hotel).  But here, the university can claim there is no subsidy: It is only charging what the rent-control law requires.  Because of this tax treatment, the implicit subsidy is worth even more to the professor than the equivalent cash compensation.  This fact allows the university to reduce the professor's cash compensation by an even greater amount.  Thus, the university effectively earns even more than the free-market rent on a real estate investment purchased much lower than the free-market price would have been.

In the end, the goal of the rent control laws is thwarted (the low rents are enjoyed by well-paid tenured faculty rather than the needy), the income tax laws are thwarted (a sizable part of compensation is untaxed), and all this is done by a nonprofit institution (the university) whose ostensible purpose is to serve the public interest.

Goolsbee to Chair CEA

Austan Goolsbee is going to become the next chairman of the Council of Economic Advisers.  A fine choice.

Economics in a Nutshell

Greg Ip's new book, The Little Book of Economics, provides a nice, brief overview of the field, with a an emphasis on macro topics.

A Small Step in the Right Direction

The Obama administration is now proposing that businesses be allowed to expense investment expenditures.  That is, for purposes of calculating taxable income, businesses would be able to fully and immediately deduct the cost of equipment, rather than having to gradually deduct the cost via depreciation allowances.

This is a good idea.  People are feeling poorer and more uncertain about the future.  The rational response is greater saving.  The trick to restoring aggregate demand and full employment is to channel that saving into investment.  Normally, the Fed can help by lowering interest rates.  But with interest rates at the zero lower bound, that option is not available.  Tax incentives for investment can help achieve what monetary policy would if it could.

However, the impact will be relatively modest. Notice that expensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.

One can imagine more aggressive policies along similar lines, such as an investment tax credit together with expensing.  But let's not make the best the enemy of the good.  This policy proposal is a step in the right direction.  I hope Congress passes it quickly and in a bipartisan fashion.

Bernanke on the Financial Crisis

Ben offers some very readable testimony on the causes of the financial crisis.

Advice for Frosh

Click here to read my column in Sunday's NY Times.

Should the Bush tax cuts be extended?

This seems to be the economic policy question of the hour.  It might be worth recalling that last month, the Wall Street Journal polled economists about this question.  Of those who expressed an opinion, here are the results:

• 6 percent said no, all the tax cuts should be allowed to expire,
• 24 percent said yes, but only for those making less than $250,000 a year,
• 70 percent said that all the tax cuts should be extended.

Counting Small Businesses

From Kevin Hassett and Alan Viard:

Recently, for example, Vice President Joe Biden harshly rejected House Minority Leader John Boehner's assertion that the hikes would harm small businesses, saying that "he has created this myth that a tax cut for millionaires is actually a tax cut for small business. There aren't 3% of small businesses in America that would qualify for that tax cut."... 

In fact, the sound bite about 3% of small businesses, which has been picked up by numerous pundits, is one of the more misleading statements in the long history of economic propaganda.

The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

Cash for Clunkers

One of my Harvard colleagues recommends this critique.

This year's Freshman Seminar

My freshman seminar starts today.  Here are the books we are reading this year (in this order):

• The Worldly Philosophers, by Robert Heilbronr
• Reinventing the Bazaar: A Natural History of Markets, by John McMillan
• Thinking Strategically, by Avinash Dixit and Barry Nalebuff
• Capitalism and Freedom, by Milton Friedman
• Equality and Efficiency: The Big Tradeoff, by Arthur Okun
• Nudge, by Richard Thaler and Cass Sunstein
• How the Economy Works, by Roger E.A. Farmer
• The Return of Depression Economics, by Paul Krugman
• The Road to Serfdom, Friedrich Hayek
• The Myth of the Rational Voter, by Bryan Caplan
• The Big Questions, by Steven Landsburg

Da Vinci, Updated

Check out his choice of textbook.

Source.

The CEA Chair Says Goodbye

Here is Christy Romer's farewell speech.

An Enlightening Example

Chapter 1 of my favorite textbook talks about how policies can have unintended consequences because of their effects on incentives.  One example I use is Sam Peltzman's famous study of seatbelt laws.  Here, from The Economist, is another example:

SOLID-STATE lighting, the latest idea to brighten up the world while saving the planet, promises illumination for a fraction of the energy used by incandescent or fluorescent bulbs. A win all round, then: lower electricity bills and...less climate-changing carbon dioxide belching from power stations.

Well, no. Not if history is any guide. Solid-state lamps, which use souped-up versions of the light-emitting diodes that shine from the faces of digital clocks and flash irritatingly on the front panels of audio and video equipment, will indeed make lighting better. But precedent suggests that this will serve merely to increase the demand for light. The consequence may not be just more light for the same amount of energy, but an actual increase in energy consumption.

Barro on Unemployment Insurance

Harvard's Robert Barro says the recent expansion of UI explains the persistently high unemployment rate.

Reinhardt on Efficiency

Princeton's Uwe Reinhardt offers a thoughtful and thought-provoking perspective on economists' use of the concept of efficiency.

I know that Uwe has used my Principles of Micro textbook in his introductory class.  So his commentary on "modern textbooks" is, at least to some extent, directed at me. (In particular, I suspect he has chapters 7, 8, and 9 in mind.)  Uwe also provides some useful links to handouts he gives to his class.

Update: Steven Landsburg responds.

The Latest from Merle Hazard

Krugman reestimates the Mankiw rule

This scatterplot is from Paul Krugman.  x is the core inflation rate minus the unemployment rate.  y is the federal funds rate.  It uses data from 1988 to 2008.

This graph is motivated by a version of the Taylor rule I once proposed.  Paul uses a different sample than I did, so he gets slightly different parameter values.  Nonetheless, I think Paul and I agree that this equation provides a reasonable first approximation to what the Fed will and should do in response to macroeconomic conditions.

Notes from the Sixth Row

Last week, my friend Phill Swagel attended an event to hear about the future of policy toward housing finance.  He sends along the following.  (By the way, here is Phill's own proposal for GSE reform.)

Notes from the Sixth Row: The Treasury-HUD GSE Conference

Phillip Swagel

I took away four main points from Tuesday's Treasury-HUD GSE conference:

Hints of reform. Treasury Secretary Timothy Geithner said that the administration supported fundamental GSE reform but with still a government guarantee for housing finance in some form. The GSE portfolios, however, would disappear. None of this is a surprise, but it was still novel—especially in contrast with past policy efforts such as stimulus and healthcare, where the administration allowed the Congress to take the lead on policy formation.

Industry participants love government guarantees. Conference participants from industries involved with the financing and construction of homes assert that no American will ever buy a home again if the government does not provide a full credit guarantee against the financial market consequences of people defaulting on their mortgages. And that guarantee needs a fair (that is, low) price. Bill Gross made some news in calling for full nationalization of housing finance and complete guarantees on mortgage capital. He prefaced this by saying that he was speaking on behalf of public policy and not his firm. Mr. Gross is smart and was exceedingly public-minded during the financial crisis (even, yes, while profiting from some astute investment calls). There is no doubt that he means well. But it’s scary to think about what he might suggest when he speaks for his book of business instead of the public interest.

Blowback from the left. The administration is scared of its own shadow with respect to flak from the left—the White House staffer’s introductory remarks were an awkward ode to inclusion and conference guidelines such as time limits went out the window when advocates of affordable housing subsidies were speaking (As a note, I very much support these subsidies and think that an important element of GSE reform is to make the subsidies more effective. But this still does not mean that the people making that point should have had carte blanche to long-talk while avoiding answering direct questions.) Amidst the long-talking, it turns out that there is good reason for the administration’s trembling. To the limited extent that advocates of affordable/low-income housing participated in the conference, they vehemently opposed scaling back any form of government support, including reducing the activities of the portfolios. It was impossible to tell what the affordable advocates were for other than “more.” The administration’s GSE reform plan could come down on stone tablets from Mt. Sinai – and still be attacked by the advocate community as "not enough." GSE reform thus represents yet another conflict brewing between the administration and its frenemies in the “professional” left. And yet the President's political tactics of late center on demonizing the moderate/responsible Republicans (“privatizers”) with whom he might form a centrist coalition to actually move forward with a housing finance overhaul. GSE reform could be a long ways off—until we have a President who seeks to lead in a bipartisan fashion.

Settle in; this is going to be a long process. Yesterday's conference was a show of attention to the issue but not more. And next on the agenda are several regional conferences—perhaps the hotel and travel spending is a form of stimulus (or better—it’s time for Congress to shut off Treasury’s unlimited authority to spend money through the Office of Financial Stability). The wheels of GSE reform are turning, but the vehicle is moving forward at a crawl.