Taylor on the Fed's Mandate

John wants to end the dual mandate.

The President's New Tax Reform Proposal

You can read about it here. 

Disappointing, in my humble opinion, for reasons I discussed in this Times column. But not to worry: There is no chance it will become law in this congress. The proposal is about politics, not policy.

If the president were serious about tax reform, he would give his full-throated endorsement to the kind of tax reform ideas advanced by the Bowles-Simpson commission that he appointed, as I discussed in this column.

The Problem with Industrial Policy

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Harvard's Kindness Pledge

Virginia Postrel looks at the controversy.

Steve Levitt's Daughter

A moving talk from the Chicago economist.

Hayek and Keynes

An excerpt from Silvia Nasar's new book, The Grand Pursuit: The Story of Economic Genius.

Krugman on Barro

Paul's comment on Robert's latest column confuses me.  Paul shows a graph establishing that the investment share of GDP is procyclical, as if that refutes Robert's viewpoint about what ails the economy.  But that fact is hardly a surprise.  As I put it recently, "the most volatile component of G.D.P. over the business cycle is spending on investment goods."  Moreover, I know Robert well enough, having been his colleague for about a quarter century, to know that he knows the macroeconomic time series as well as anyone.

The problem that Paul glosses over is that correlation does not imply causation.  Paul appears to jump to the conclusion that this correlation establishes that the the business cycle is the driving force behind investment spending.  But it could just as easily be the opposite (or a third factor driving both).  I am completely confused as to why Paul thinks this graph establishes much of anything at all.

I should note, as an aside, that Robert is the second most cited living economist.  That fact does not imply that everything he says is correct. (And indeed Robert and I disagree often in Harvard seminars.)  But it does suggest that one should not be so glib in summarily rejecting his point of view.

We're number one!

Ec 10, that is.

Fixing Our Sick Economy

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

Update: My Harvard colleague Robert Barro has a related piece in the paper as well.

A Plan for Zero Unemployment

From economist Steve Allen:

There were 14m unemployed workers in August.  The $447b stimulus package could be used to generate a check of almost $32,000 to each and every one of them.  As a condition of receiving that check, they would be asked to work at some organization, for profit or nonprofit, for one year.  These jobs would last just as long as the stimulus package and some of them would no doubt turn into real jobs.  Isn't this a plan everyone could support?

Paul Samuelson on Social Security

A friend calls to my attention this quotation from Paul Samuelson.  It is from a Newsweek column written in 1967, but it has some modern relevance.  Of course, at the time, Samuelson was not focused on the large unfunded liabilities we now face.

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population.

More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.

Social Security is squarely based on what has been called the eighth wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived.

Warren Buffett's Taxes, again

I was disappointed to hear the President tonight raise the canard about Warren Buffett's allegedly low tax rate.  The story is, at the very least, deeply misleading.  I addressed the issue several years ago in this column.

Austan Goolsbee plays...

Wait, wait, don't tell me.  Very funny.

Economics Teaching Conference

I have mentioned this event before, but organizers tell me there are still a few open slots for this conference at the end of October.  I am among the keynote speakers.

Something for Nothing

Maybe it is narcissistic of me, but I have a soft spot for novels by and about economists (a small genre, to be sure).  I enjoyed this new one by Michael Klein.

Reflections of a Former Student

Ed Balls is a prominent British politician.  He is now the shadow chancellor, which means he is the chief economics spokesman for the opposition Labour Party.  Long ago, however, he was a student of mine, as he notes in this essay on the current global economy.

Theory versus Practice

Click on graphic to enlarge.

Ten Principles of Economics, in Limericks

From Dr. Goose.

The Economics of Paying for Disaster Relief

1. Paul Krugman discusses.


2. Steve Landsburg responds.

Glaeser on Mortgage Modification

Ed concludes,

A massive refinancing effort is likely to have little impact on the economy or foreclosures or housing prices. What it would do, however, is hurt our government’s already precarious balance sheet by reducing the payments on its vast mortgage portfolio.

Alan Krueger to chair CEA

Congratulations, Alan.  An excellent choice by President Obama.

Update: Some comments of mine on CNBC:

Finally, some good economic news

Manufacturers of Downward Arrows Post Record Profits

Auctioning Public Parking Spaces

A student alerts me to this article about a new app that connects suppliers and demanders of public parking spaces. 

How to interpret this story?  The student points out that it is a "fun example of technology making markets more efficient."  True enough.  But it also suggests that cities are underpricing public parking.  With many cities facing financial difficulties, a good way to raise revenue would be to increase the price of parking closer to the market-clearing level.

An Animated 4-Minute History of Econ

Jeff Miron on Capitalism

Split-Rated

Economics Teaching Conference

I will be speaking in New Orleans at this conference in October.  Click through if you are an economics instructor and may be interested in attending.

Showing Up in Unexpected Places

One of my textbooks appears in this music video. See if you can find it. If you need a hint, it is this edition.

A Reading for the Pigou Club

British Columbia institutes a carbon tax, cuts income taxes, and everybody is happy.  (If you are new to this blog and haven't heard me on this topic, click here.)

Coy or Nuanced?

This post from Noahpinion is amusing.  He ties himself in knots with the apparent goal of labeling me a hypocrite on the issue of fiscal stimulus.

In fact, if you read my recent writings about fiscal stimulus (in order, here, here, here, here, and here), you will find that I have never asserted that the Obama stimulus was a complete failure in expanding aggregate demand.  Instead, I have suggested that there might well have been much better ways to promote recovery. The last article in the list above, soon to be published in the Brookings Papers on Economic Activity, concludes that from a welfare standpoint, "conventional fiscal policy is the demand management tool of last resort."  In other words, in that model, conventional fiscal policy is effective, but it is still not the best tool to take off the shelf when facing a collapse in aggregate demand.

Some may think I am being coy.  I consider myself nuanced and open-minded.  Read the articles at the links above and judge for yourself.

I talk to Larry Kudlow

You can watch me here.

I talk to Reuters

You can watch me here.

Former Fed Officials Opine

Federal Nondefense Spending (% of GDP)

Click on graphic in enlarge.  Source.

Rogoff on the Great Contraction

Ken says it is time for the Fed to spend some of its credibility.

An Externality

I am spending a few days at the Jersey shore, where my mother lives. Sitting on the beach with my younger son this afternoon, I watched a small prop plane fly by parallel to the coastline. As is common around here, it was dragging a sign behind it. Usually, these aerial signs are advertisements for restaurants and other local attractions. This one, however, read as follows:

Lacy, Will you marry me? Kyle.

My first thought: How charming!

My second thought: I hope there is not another couple named Lacy and Kyle sitting on the beach this afternoon.

In Defense of Ben

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

Mark Thoma vs Larry Summers

Mark and Larry discuss whether academic economists should listen more to practitioners.

The discussion is interesting, but unfortunately devoid of much evidence.  Let me note the following fact: If you look at the most influential economics research, you will find that relatively little of it came from interactions between academics and practitioners.  For example, Larry has eight articles on this list of greatest hits (an impressive achievement), but they were all written before his substantial "real world" experiences.

The Rainbow Fish, Revised

If you are familiar with the classic children's story The Rainbow Fish, you might enjoy this revised version. If you aren't, you might click here first to listen to the story in its original version.

A Question About Tax Incidence

A reader alerts me to this story:

The expiration of the FAA reauthorization on Friday means some aviation taxes are no longer being collected. These include a 7.5 percent sales tax on U.S. air transportation and a 7.5 percent sales tax on the purchase of air miles, said fare watcher FareCompare.com. Additionally, taxes on jet fuel are also reduced.

"Friday evening we adjusted prices so the bottom line price of a ticket remains the same as it was prior to the expiration of federal excise taxes, etc.," [said] American Airlines spokesman Tim Smith.

The reader asks how to reconcile this story with the basic theory of tax incidence, according to which consumers and producers share the burden of taxes.

What a good exam question!  Stop and answer the question yourself before proceeding.  If you need help, click through and read the article.  It provides some clues.

-----
My answer: It appears that the supply of airline seats is perfectly inelastic.  With inelastic supply, the incidence of the tax falls entirely on producers; conversely, all the benefit of the tax cut is enjoyed by producers.

Is the assumption of inelastic supply realistic?  Not generally, but here the situation might be different.  The story goes on to say:

Neidl also said the benefit to airlines would be minimized if Congress reached a deal soon to resolve the partial FAA shutdown.

"It looks to me like it's going to be very temporary," Neidl said. "So whatever effect it has, it's going to be very minor."

In response to a change that is expected to be very temporary, airlines might be reluctant to adjust the quantity of seats supplied.  That is, the assumption of inelastic supply might not be so bad.

If the tax cut were to persist, however, the larger profit margins would encourage a supply response.  In that case, some of the tax cut, perhaps most of it, would be passed on to consumers.

The Light Bulb Ban

Virginia Postrel is making a lot of sense.

Spending in Disguise

Donald Marron on tax expenditures.

The Subprime Mortgage Crisis

Alternative theories, discussed by Boston Fed economists Chris Foote and Paul Willen. (I am told this article will eventually go behind a paywall, but it will be open access for a couple weeks.)

The European Debt Crisis

As seen by economists Francesco Giavazzi and Anil Kashyap.

The Always Quotable Larry Summers

A reader alerts me to this interview of Larry Summers on the Charlie Rose show.  He finds this quotation (starting around 21:50) particularly provocative:

Never forget, never forget, and I think it’s very important for Democrats especially to remember this, that if Hitler had not come along, Franklin Roosevelt would have left office in 1941 with an unemployment rate in excess of 15 percent and an economic recovery strategy that had basically failed.

Size Matters

These may be the least expected sentences I have read lately:

This paper explores the link between economic development and penile length.... The GDP maximizing size is around 13.5 centimetres.

Those are from the abstract.  Click here to read the paper.

The Latest from the Standup Economist

Why aren't businesses hiring?

University of Chicago economist Steve Davis suggests some answers.

Reinhart and Rogoff on the Debt Problem

They write:

In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth.

Why there is no budget deal

Keith Hennessey says that the reason Republicans are rejecting the President's budget proposal is that it is distinctly to the left of the one recommended by the bipartisan Bowles-Simpson commission.

Update: Ezra Klein disagrees.

Spending Hidden in the Tax Code

The blue line is total discretionary outlays of the federal government, and the brown line is the sum of tax expenditures.  Both are in constant dollars.  Note that these two categories of spending are about equal in magnitude.  It is just as important to focus on stealth spending implemented through the tax code as on explicit spending.

Source.

Addendum: David Leonhardt has a related article in the Times today.

GSE Fact of the Day

From Peter Wallison:

Edward Pinto (a former chief credit officer of Fannie Mae, and now a colleague at the American Enterprise Institute) presented the evidence to the commission showing that by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs.

Choices for Greece

Tyler Cowen tells us not to expect much happy news.

The Disappointing Recovery

Rogoff on Inequality

Ken suggests that rising inequality may be self-correcting.

I was scooped

...by Scott Sumner.

A Good Exam Question

Dean Baker endorses and expands upon an idea of Ron Paul's.  I think the idea is crazy, but at least it is crazy in an interesting way.  Here it is, in a nutshell:

1. According to Congressman Paul, to deal with the debt-ceiling impasse, we should tell the Federal Reserve to destroy its vast holding of government bonds.
2. Because the Fed might have planned on selling those bonds in open-market operations to drain the banking system of the currently high level of excess reserves, the Fed should (according to Baker) substantially increase reserve requirements.

This would be a great exam question:  What are the effects of this policy? Who wins and who loses if this proposal is adopted?

STOP READING.  Think about the question yourself for a few minutes.

-----
DID YOU REALLY ANSWER THE QUESTION?
-----

Okay.  Here is my answer:

Part 1 is just an accounting gimmick. Since the Fed is really part of the government, the bonds it holds are liabilities the government owes to itself. Destroying the bonds has no direct economic effect. It is just like an increase in the debt ceiling, without any other policy changes attached.

Part 2 is a form of financial repression. Assuming the Fed does not pay market interest rates on those newly required reserves, it is like a tax on bank financing. The initial impact is on those small businesses that rely on banks to raise funds for investment. The policy will therefore impede the financial system's ability to intermediate between savers and investors. As a result, the economy's capital stock will be allocated less efficiently. In the long run, there will be lower growth in productivity and real wages.

Housing Tax Subsidies

Here is something for tax reformers to keep in mind:

Investment in owner-occupied housing faces an effective marginal tax rate of just 3.5 percent. In contrast, investment in the business sector faces an effective tax rate of 25.5 percent. This leads to a tax-induced bias for capital to flow into housing-related uses rather than other types of projects. As a result, businesses are less likely to purchase new equipment and less likely to incorporate new technologies than otherwise might be the case. Less business investment results in lower worker productivity and ultimately lower real wages and living standards. While the housing sector provides employment and has other positive effects on the overall economy and on society, the resources employed in the housing sector displace investment that would otherwise occur in the business sector were it not for the favored tax treatment of housing. The resulting distortion in the allocation of capital likely lowers overall output, because resources are allocated based on tax considerations rather than economic merit. In effect, the United States has chosen as a society to live in larger, debt-financed homes while accepting a lower standard of living in other regards.

Economist as Movie Reviewer

Phill Swagel reviews Too Big to Fail and Inside Job.

Some Advice for the GOP

In the current debate over fiscal policy and the debt ceiling, Republicans have drawn a line in the sand: No tax increases.  But I fear they have lost sight of a key issue: As I discussed in this column, the distinction between spending and taxation is often murky and sometimes meaningless.

My advice: Amend your line in the sand to NO INCREASES IN TAX RATES.  Be willing to give up on tax expenditures if we simultaneously make current tax rates permanent--or, better yet, if we lower rates, as the Bowles-Simpson commission suggested.

Addendum: A phase-out of deductions for high-income taxpayers would count as an increase in tax rates, as the Wall Street Journal notes today on its editorial page.

The Rate of Return on Human Capital

David Leonhardt reports:

The Hamilton Project, a research group in Washington, has just finished a comparison of college with other investments. It found that college tuition in recent decades has delivered an inflation-adjusted annual return of more than 15 percent. For stocks, the historical return is 7 percent. For real estate, it’s less than 1 percent.

How To Waste $600 Million

From NPR:

On today's Planet Money, we visit an underground vault that's full of money nobody wants.

The money — bags and bags of dollar coins — is the result of a 2005 law that requires the U.S. Mint to print a series of coins bearing the likeness of each U.S. president.

The problem is, people don't really like dollar coins. And there aren't enough people who are fired up about, say, Rutherford B. Hayes, to make much of a difference.

So more than 1 billion dollar coins are now sitting, unwanted, in Federal Reserve vaults around the country. By the time the program wraps up in 2016, the Fed will be sitting on 2 billion unwanted coins, according to the Fed's own estimates.

The total cost to manufacture those unwanted coins: $600 million.

Crazy Public Policy: A Case Study

Everything you need to know about ethanol.

Health Inequality

Via Peter Orszag:

Americans are living longer than ever -- but, as documented in a recent National Academy of Sciences report (“Explaining Divergent Levels of Longevity in High-Income Countries”), people with more education and income are enjoying much more rapid increases in longevity than others are. Among 50-year-old men, for example, those in the highest education group are now projected to live almost six years longer on average than those in the lowest education group -- and this differential has been rising sharply....

The leading explanations for this involve health behavior -- including diet, exercise and smoking. For example, men 50 and older without a high-school education are more than twice as likely to smoke as those with a college degree. Exercise behavior also varies substantially. Among 45- to 54-year-olds in one study, only 16 percent of those without a high-school degree exercised vigorously at least once a week, whereas 56 percent of college graduates did.

Preaching to the Choir

Paul Krugman says there was no Reagan revenue-growth miracle.

Actually, I tend to agree with Paul on this one.  I am also skeptical that across-the-board tax cuts increase tax revenue (although, unlike Paul, I think that tax cuts do generate significant dynamic effects and therefore are not as costly as static estimates suggest).

What strikes me about Paul's blog post, however, is how completely unconvincing it is.  He uses a chart that starts the Reagan era in 1979, arguing we need to correct for the business cycle.  But would or should this persuade anyone?

The null hypothesis being tested is that Reagan policies had a significant effect on revenue growth.  But would any believer in that null hypothesis include the last couple years of the Carter administration as part of the Reagan era?  Weren't the policies of those years precisely what Reagan was trying to reverse?  Maybe Paul's chart might appeal to someone who already agrees with him, but I thought economists turned to data to try to persuade those who are truly undecided. It is hard to see how this presentation of the data would move someone who is yet to make up his mind.

One more thing: What Paul calls "the Clinton miracle" might also be called "the Internet bubble."

Update: In response to the above post, Paul says I was "pretending to be stupid."  That is not how I see it.  Instead, I was pretending that I started with a different prior worldview on this matter than I (and Paul) in fact have.  I am reluctant to view people who disagree with me as "stupid."  Instead, I prefer to try to see things from others' perspectives when presenting arguments and evidence. I believe that this less dogmatic approach is more likely to win friends and influence people.

A Few, Unwitting Agreements about Healthcare

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

A Bit Too Much Gratitude

This caught my eye:

A 2009 study of the EDA [Economic Development Administration] by the nonpartisan Cato Institute collected numerous government oversight reports and documented widespread abuse of taxpayer dollars. The study noted that Senate Majority Leader Harry Reid is familiar with the EDA process. In 2008, he hand- delivered a $2 million EDA check to the University of Nevada, Las Vegas (UNLV) Research Foundation to begin construction of the "UNLV Harry Reid Research and Technology Park."

As any university fund-raiser can tell you, a "naming opportunity" is a valuable resource.  People are willing to pay big bucks to have buildings and other things named after them.  In light of this fact, isn't it fair to say that Senator Reid received some nonpecuniary compensation from this recipient of government funding?  Why should this transaction be legal when more explicit pecuniary kick-backs are not?

Let me propose that Congress adopt the following rule: No institution receiving government funds should be able to name itself (or any part of itself) after any government official who had a hand in providing those funds.

Parenthood

A Look at QE2

From the University of Chicago's John Cochrane.  An excerpt:

All QE2 does is to slightly restructure the maturity of U.S. government debt in private hands.  Now, of all the stories we've heard to explain our sluggish recovery, how plausible is this one: “Our big problem is the maturity structure of Treasury debt. If only those goofballs at Treasury had issued $600 billion more three-month bills instead of all these five-year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this tragic mistake.” That makes no sense.  For the same reason, when money is the same thing as debt, it doesn’t cause inflation....

Moreover, QE2 distracts us from the real microeconomic, tax, and regulatory barriers to growth. Unemployment isn't high because the maturity structure of U.S. government debt is a bit too long, nor from any lack of “liquidity” in a banking system with $1.5 trillion extra reserves.  Mostly, it is dangerous for the Fed to claim immense power, and for us to trust that power, when it is basically helpless. If Bernanke had admitted to Congress, “there’s nothing the Fed can do. You’d better clean this mess up fast,” he might have had a much more salutary effect.

George Akerlof

A profile of the great economist.

How to Grow the Economy

Bruce Bartlett takes on Tim Pawlenty.

Rajan on Monetary Policy

Raghu thinks monetary policy is too easy.

Are emerging and developed economies switching place?

Alan Taylor ponders the question.

Austan Goolsbee steps down

He is going back to the University of Chicago.

To replace him, can I suggest Jason Furman, my old friend and former student who is now #2 at the NEC?

My Favorite Textbook: The Next Generation

I am old fashioned: I still like reading books with real paper pages. However, watching my own kids, I know that the next generation is different. My publisher is making my favorite textbook available in a way that will appeal to those more tech-savvy than I am. To learn more, watch the video below, or click here and here for more information.

The Next Step on the Road to Serfdom

Paul Krugman writes:

But nobody is proposing that the government deny you the right to have whatever medical care you want at your own expense. We’re only talking about what medical care will be paid for by the government.

I wish that Paul were correct, but I am not convinced that he is. Chills went down my spine a few days ago when I read the following proposal from the Center for American Progress, a think tank with strong ties to the Democratic party:

Thus we also include a failsafe mechanism that would ensure significant savings. Our failsafe would be triggered if, starting in 2020, total economywide health care expenditures grow at a rate faster than the economy. Should that happen, we would empower the IPAB [the panel of experts set up by President Obama's health care law] to extend successful reforms in Medicare and other public programs to insurance plans offered in the health care exchanges and then potentially to all health care plans, such that the target is met. This will ensure that costs are constrained across the health care sector, preventing cost-shifting and maintaining access for all.*

That is, under the likely scenario that healthcare spending keeps rising faster than GDP, the Center for American Progress would give government the power to prohibit people from buying expensive health plans with their own money. That is not my idea of progress.

-----
*Source: Page 43-44 of this document. I put the crucial phrase in bold.

Peter Diamond withdraws

MIT economist Peter Diamond is withdrawing his name from nomination to the Federal Reserve, now that it is clear that the Republicans in the Senate will  continue to block a vote on the nomination.  I am personally saddened by this outcome, as I was when the renomination of Randy Kroszner was similarly blocked by the Democrats a few years back.

Here is Peter's op-ed about the mattter.

The Demagoguing of Medicare Reform

I have been struck at the heated rhetoric surrounding Paul Ryan's Medicare reform proposal.  One thing is not often pointed out: Ryan's proposed "premium support" structure is in some ways similar to the plan put in place under President Obama's healthcare reform law.  In both cases, an individual would shop among competing private insurers, on an exchange overseen by the government regulators.  In both cases, the government would provide financial support for the "needy" (low-income households in the case of Obamacare, the elderly in the case of Ryancare).

Why don't we see this parallel pointed out more often?  The left wants to demonize Ryan, and the right wants to demonize Obama.  Pointing out the similarities of their plans might make each of them seem, well, reasonable.  The overwrought politics of health care makes it hard to recognize common ground.

By the way, the esteemed health economist Alain Enthoven had a column on the topic of Medicare reform in yesterday's Wall Street Journal that is well worth reading.

The Mistake of 1937

Gauti Eggertsson of the NY Fed examines an historic parallel to our current macro situation,

Kevin Warsh

An interview with the departing Fed governor.

Occupational Hazards

Click on graphic to enlarge.

Lucas on the Great Recession

Several bloggers have pointed out these slides, based on a talk Nobelist Robert Lucas recently gave.  I don't always agree with Lucas, but I almost always find him thoughtful and thought-provoking.  This time is no exception.

Household Expectations

The University of Michigan’s Survey of Consumers asks households about their future income prospects. They are asked: “By about what percent do you expect your (family) income to increase during the next 12 months?”  Here is the result:

Via the Cleveland Fed.  Thanks to Mark Thoma for the pointer.

The level of pessimism displayed here is striking.

How to Fix the Long-Term Fiscal Problem

A menu of plans, courtesy of the Peterson Foundation.

Advice for the Recently Tenured

From Bob Hall.  This is a couple years old, but I only just ran across it.  One tidbit from it:

Potomac fever is contagious and incurable. I know one economist who deliberately hired an undocumented nanny as a commitment device to avoid the temptation of government.

Feldstein on Greece

Marty suggests a temporary leave from the Euro.  How that would work, logistically, is unclear to me.  Introduce a new currency, devalue it, then go back to the Euro at the new exchange rate?  It seems that Marty is mainly trying to figure out a way to rewrite wage contracts with a new lower level of nominal wages.

Barney & Fannie

Perhaps because Barney Frank is my congressman, I took a special interest in this interview of Gretchen Morgenson, New York Times reporter and coauthor of Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon:

DAVIES: What's fascinating about this story is that you have this entity [Fannie Mae], which you said became the largest and most powerful financial organization in the world, you had this entity, which has government guarantees and government subsidies, although perhaps indirect, but it engages in major political contributions and lobbying expenses. How big a player were they in terms of contributing to politicians and lobbying?

Ms. MORGENSON: They were very large. The numbers might not seem large in today's terms, but they were extremely shrewd and, you know, took great care, especially of the congressmen that were on the House Financial Services Committee and the senators on the Banking Committee.

They knew that these were very important people to their livelihood and to maintaining the government perquisites as they were.

One of the really big beneficiaries, albeit indirectly, was Congressman Barney Frank of Massachusetts. Back in 1991, when Congress was writing the legislation that would, you know, enhance or improve the oversight of Fannie Mae, or so they thought, Frank actually called up the company and asked them to hire his companion, who had just gotten an MBA from the Amos Tuck School of Business.

Of course the company was happy to provide a job for his companion and rolled out the red carpet in a series of interviews with a variety of executives, and it ultimately did hire the man. And he stayed there for I believe seven years.

So that was an example of the kind of thing that Fannie Mae would do. Now, when I asked Mr. Frank about this, I asked him, did it have any impact on his approach to the company. You know, was it a conflict? Did he feel that it had been a conflicted, put him in a conflicted spot? And he said absolutely not, that he didn't really remember being interested or having much to do with the 1992 legislation.

But the record shows that he was very aggressive and really tough on those who were testifying in Congress about reining in Fannie Mae and Freddie Mac. He was very aggressive to, for instance, the head of the Congressional Budget Office at that time, who was trying to call for increased capital requirements and to call for a focus on safety and soundness at Fannie Mae, that Frank really took him apart in testimony.

DAVIES: Right, and you write there were a number of occasions on which he defended Fannie and their record of promoting home ownership but in the end had a different view of the company, right?

Ms. MORGENSON: Well, after the taxpayers had to take it over, he, you know, came around, finally. But by then it was too late. He said: Well, we should shut them down. But, you know, it really was far too late, and he had been such a vocal supporter for so long that it was sort of an odd turnabout.

A regression I would like to see

In his column today, David Leonhardt writes the following about college admissions:

But all else equal, a low-income applicant was no more likely to get in than a high-income applicant with the same SAT score. It’s pretty hard to call that meritocracy.

When I first read this pair of sentences, they struck me as odd. But in the context of the whole article, they have some logic. David suggests that high-income applicants' SAT scores are, in some sense, an overstated measure of ability, because these applicants have the benefit of tutors, mulitiple testing opportunities, and so on. As a result, he says that we should correct for this by giving a preference to lower-income applicants.

Maybe David is right, but to convince me, here is what I would like to see.  Regress some measure of college success (such as GPA) on SAT scores and the student's family income.  If David is right, then the coefficient on family income should be negative.  That is, a lower-income student should do better in college, holding reported SAT score constant, because he managed to get that SAT score without all those extra benefits.  This is a regression that some enterprising college admissions committee could easily do.  (Maybe someone has already done it, and I am just not aware of the study.)

If the coefficient does turn out to be significantly negative, that finding would provide strong evidence for the thesis of David's article.  Right now, I would venture to guess that the data would not support David's story, but I am always ready to be proven wrong.

Update:Todd Stinebrickner, an economist at The University of Western Ontario, emails me this comment:

It does seem reasonable to believe that, if a low income student and a high income student have the same SAT scores at the time of college entrance, the low income student was probably born with higher "inherent" ability.  At the same time, SAT scores may not capture all of the educational benefits of being from a high income family that may continue to matter in college. For example, a student's score on the Math SAT may not capture whether the student had the opportunity to take a Calculus course in high school.  This suggests that, from a theoretical standpoint, the effect of family income on college grades conditional on SAT scores is ambiguous.  As part of an ongoing in-depth case study at one particular school (motivated particularly by an interest in college dropout), we discuss this issue and run the type of regression you suggest in Table 3 of a 2003 JHR paper "Understanding educational outcomes of students from low-income families."  It is worth noting that everyone in our sample is of moderate or low family income. Regardless, within the income groups we examine, students from higher income backgrounds have significantly higher grades throughout college conditional on college entrance exam (ACT) scores.

The finding in the last sentence (which I put in bold) is the opposite of what the Leonhardt story suggests. What this means is that if you are a college admissions officer trying to identify the students who will do best in college, as measured by grades, you would give positive rather than negative weight on family income. I am not proposing that they should do this, as colleges have many goals when putting together a class. But it does seem that the hypothesis implicit in Leonhardt's article is not supported by the data.

Strong Dollar = Strong Economy ?

An excellent column from Christy Romer.

A Profile of Marty Feldstein

From the Harvard Crimson, on the occasion of his 50th college reunion.

Markets in Everything

I bet this will prove to be a profitable business:

You've committed your life to Jesus. You know you're saved. But when the Rapture comes what's to become of your loving pets who are left behind? Eternal Earth-Bound Pets takes that burden off your mind.

We are a group of dedicated animal lovers, and atheists. Each Eternal Earth-Bound Pet representative is a confirmed atheist, and as such will still be here on Earth after you've received your reward. Our network of animal activists are committed to step in when you step up to Jesus.

We are currently active in 26 states, employing 40 pet rescuers. Our representatives have been screened to ensure that they are atheists, animal lovers, are moral/ethical with no criminal background, have the ability and desire to rescue your pet and the means to retrieve them and ensure their care for your pet's natural life.

We currently cover the following states: Maine,New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, Wisconsin, Minnesota, Michigan, Arkansas, Mississippi, Tennessee, Kentucky, West Virginia, Colorado, Oklahoma, Kansas, Washington, Oregon, Idaho, Montana, North Carolina, Georgia, Alabama, Illinois, Iowa.

Our service is plain and simple; our fee structure is reasonable. For $135.00 we will guarantee that should the Rapture occur within ten (10) years of receipt of payment, one pet per residence will be saved. Each additional pet at your residence will be saved for an additional $20.00 fee.

Being an economist is no defense

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Partisan Grading

Here is a fascinating finding:

We study grading outcomes associated with professors in an elite university in the United States who were identified using voter registration records from the county where the university is located as either Republicans or Democrats. The evidence suggests that student grades are linked to the political orientation of professors: relative to their Democratic colleagues, Republican professors are associated with a less egalitarian distribution of grades and with lower grades awarded to Black students relative to Whites.

Regarding the last result, the authors note:

An obvious question that arises regarding the second finding is whether and to what extent Democratic professors discriminate in favor of Black students or Republican professors discriminate against them. At this stage we only note that in the absence of an appropriate benchmark for comparison, this question cannot be credibly answered.

Thanks to Mark Perry for the pointer.

President Obama's Asset Allocation

This is surprising:

The Obamas reported total financial assets valued between $2.8 million and $11.8 million in 2010....They report having between $1.1 million-$5.25 million invested in Treasury bills and another $1 million to $5 million in Treasury notes....The Obamas report having between $200,000-$450,000 invested in the Vanguard 500 Index Fund.

In other words, it looks like the president has only a small percentage (about 10 percent) of his personal financial assets invested in equities.  This is far, far less than financial advisers would recommend.  (If you are curious, I am at 60 percent equities.)  Either the president is not very financially savvy, or he has reason to believe that the future of the U.S. economy is not very bright.

Or maybe he is just too busy to think about it.

A Bond Market Meme

There seems to be a conventional wisdom forming that long-term interest rates in the United States are as about as low as they can possibly be.  For example, this is from an article in today's Wall Street Journal:

"Rates are so low it's hard to see them going much lower, but it's easy to imagine them going higher," said Kevin March, chief financial officer of Texas Instruments.

And this is from a post at Brad DeLong's blog:

It is certainly true that most of the time when the yield spread is high the way to bet is that long-term bond rates are coming down and long-term bond prices are going up. But somehow I can't see U.S. nominal interest rates falling much lower than they are now.

I don't buy it.  Why? Note this fact: The U.S. ten-year Treasury bond pays 3.18 percent, whereas a ten-year Japanese government bond pays 1.16 percent.

No, I am not predicting the United States is about to become just like Japan.  But it is not inconceivable.  That is why buying long-term bonds now is not a crazy investment strategy, and selling them (as many companies are now doing) is not at all a sure thing.

Addendum: Another noteworthy fact about bonds is that they have recently been negative beta assets.  (You can verify this fact with this link.)  Their hedging properties also make buying bonds a reasonable investment strategy.

The Google Puzzle, Again

This time in Limerick form.

Good News

"Stanley Fischer candidate to replace Strauss-Kahn."

I have known Stan for many years. I first took a graduate course from him at MIT in 1980, and he was the main adviser for my PhD dissertation a few years later.  He also took the lead in 1987 in trying to recruit me, unsuccessfully, to leave Harvard to join the MIT faculty. Saying no to Stan was one of the hardest things I ever did.

Stan is a superb economist and international policymaker: smart, sensible, experienced, personable, and open-minded. He would be an ideal person to head the IMF.

Google Plays the Yield Curve

Click on graphic to enlarge.

I was fascinated a story in today's Wall Street Journal.  Apparently, Google is sitting on $37 billion in cash, but nonetheless decided to sell $3 billion worth of bonds.  Why?  To take advantage of low interest rates.

It is like reverse maturity transformation.  The banking system borrows short and lends long.  Google is borrowing long and lending short.  (Or maybe I should call it reverse quantitative easing, as Google is also doing exactly the opposite of what the Fed has been doing.)

Does this make sense for Google?  I have no idea, and I am ready to concede that those guys are a lot smarter (and financially successful) than I am.  But there is reason to be skeptical. 

The chart above shows the spread between the ten-year Treasury bond and the three-month Treasury bill.  The yield spread is now high by historical standards.  The empirical literature on the expectations theory of the term structure (in which I have sometimes played) suggests that this is a good time to borrow short and lend long--the opposite of what Google is doing.

Maybe this time is different, and past empirical regularities will not hold going forward.  But ponder this question: If you had a friend with a paid-up house, would you suggest that he now take out a long-term mortgage in order to deposit the proceeds in a money-market fund?  If not, does it make sense for Google to be doing much the same thing?

Updates:

1. A smart reader sends in the following plausible explanation:

While it's true that Google has $37 billion in cash and equivalents, almost all of that $37 billion is in non-U.S. accounts (an artifact of funneling most of their profits through low-tax Ireland). They cannot spend that $37 billion in the U.S. without incurring a tax rate of 35 percent; thus, the borrowing is to finance spending in the U.S. (as opposed to abroad). All the big tech companies do the same thing (Microsoft was in the news for the same thing some 6 months ago).  Thus, Google is not trying to play the yield curve so much as intertemporally arbitrage the U.S. tax code. By not repatriating the $37 billion now, they are betting that the U.S. corporate tax rate on repatriated foreign profits will be appreciably lower in the future than it is now.

2. On the other hand, another loyal reader points me toward this source, which says:

The firm doesn't have the same issue with overseas cash that many of its large-cap technology peers do. Of Google's $37 billion in cash, only about $17 billion is sitting outside the U.S. Microsoft, by contrast, has no net cash remaining in the U.S., while nearly 90% of Cisco's cash is sitting outside of the country.

Haikunomics

An offbeat link.

A Poll of Economists

Who are economists' favorite economists?

Click here to find out.

Evaluating ARRA

Tim Conley and Bill Dupor have a new paper on the American Recovery and Reinvestment Act (that is, the Obama stimulus bill).  Their empirical findings:

Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.

Fun Fact of the Day: California Edition

Here is a small clue that might help explain California's fiscal problems:

According to a [Newport Beach] city report on lifeguard pay for the calendar year 2010, of the 14 full-time lifeguards, 13 collected more than $120,000 in total compensation; one lifeguard collected $98,160.65. More than half the lifeguards collected more than $150,000 for 2010 with the two highest-paid collecting $211,451 and $203,481 in total compensation respectively....Lifeguards are able to retire with 90 percent of their salary, after only 30 years of work at as early as the age of 50.

Our Negative Bequest to Our Children

As calculatated by John Cogan:

Starting next year, this typical [66-year-old] couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.

According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending....

Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today's dollars) toward these benefits during their working careers.

But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.

Libertarian Paradise? Discuss.

Macroeconomic Uncertainties

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

I agree with Paul Krugman

As my regular blog readers know, Paul Krugman and I often do not see eye to eye.  So, once in a while, it might be useful to point out those times when we actually agree.

In a recent post on commodity prices, Paul says, "Volatile prices are volatile, which is why they shouldn’t be used to determine monetary policy."  I agree, and I suspect many other macroeconomists would as well.

I once wrote a paper on this topic with Ricardo Reis, called "What Measure of Inflation Should a Central Bank Target?" (published link)  Here is the abstract:

This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.

As the graph below illustrates, the price of labor does not show any significant inflationary pressures right now:

Click on graphic to enlarge.

For more on this topic, see a recent post by MIT grad student Matt Rognlie.

The Inanity of Rent Control

A case study from San Francisco.

If Supermarkets Were Like Public Schools

A thought-provoking analogy from Donald Boudreaux:

Suppose that groceries were supplied in the same way as K-12 education. Residents of each county would pay taxes on their properties. Nearly half of those tax revenues would then be spent by government officials to build and operate supermarkets. Each family would be assigned to a particular supermarket according to its home address. And each family would get its weekly allotment of groceries—"for free"—from its neighborhood public supermarket.

No family would be permitted to get groceries from a public supermarket outside of its district. Fortunately, though, thanks to a Supreme Court decision, families would be free to shop at private supermarkets that charge directly for the groceries they offer. Private-supermarket families, however, would receive no reductions in their property taxes.

Of course, the quality of public supermarkets would play a major role in families' choices about where to live. Real-estate agents and chambers of commerce in prosperous neighborhoods would brag about the high quality of public supermarkets to which families in their cities and towns are assigned.

Being largely protected from consumer choice, almost all public supermarkets would be worse than private ones. In poor counties the quality of public supermarkets would be downright abysmal. Poor people—entitled in principle to excellent supermarkets—would in fact suffer unusually poor supermarket quality.

How could it be otherwise? Public supermarkets would have captive customers and revenues supplied not by customers but by the government. Of course they wouldn't organize themselves efficiently to meet customers' demands.

Responding to these failures, thoughtful souls would call for "supermarket choice" fueled by vouchers or tax credits. Those calls would be vigorously opposed by public-supermarket administrators and workers.

Opponents of supermarket choice would accuse its proponents of demonizing supermarket workers (who, after all, have no control over their customers' poor eating habits at home). Advocates of choice would also be accused of trying to deny ordinary families the food needed for survival. Such choice, it would be alleged, would drain precious resources from public supermarkets whose poor performance testifies to their overwhelming need for more public funds.

As for the handful of radicals who call for total separation of supermarket and state—well, they would be criticized by almost everyone as antisocial devils indifferent to the starvation that would haunt the land if the provision of groceries were governed exclusively by private market forces.

Increasing Inequality around the World

From the OECD, via The Economist:

With very few exceptions, the rich have done better over the past 30 years, even in highly egalitarian places like Scandinavia.

The Purple Tax Plan

Larry Kotlikoff and Andy Weiss propose a progressive consumption tax.

Goodnight Moon

Keynes vs. Hayek Round Two

Height over Time

From a fascinating article about economic historian Robert Fogel.

The World's Poor and Hungry

A great article by MIT's Abhijit Banerjee and Esther Duflo.

Thanks to Tyler Cowen for the pointer.

Shiller vs Siegel on Stock Market Valuation

Lunch?

I will take five ec 10 students to lunch at my favorite Chinese restaurant in the square, right after today's lecture.  My treat.  Send me an email asap, and I will let you know if you are among the first five to respond.

Alternative Fiscal Futures

Source: John Taylor.

People Talking Past Each Other

I am regularly struck by how bloggers so often want to pick fights with other bloggers.  Rather than giving others the benefit of the doubt, they often seem to interpret the writing of others in the worst possible light so they can then point out how foolish it is.  As an example, see

1. This Steve Landsburg post
2. Followed by this Brad DeLong critique
3. And this Paul Krugman critique
4. And Steve's two replies.

As far as I can tell, all Steve is saying is that the true incidence of a tax is not necessarily on the person who writes the check to pay the tax bill.  He just made the point in a particularly dramatic way.  At its heart, however, his point is pretty standard and hard to argue with.

FYI, more interesting to me is this Landsburg post, where Steve argues that a rich person who wants to raise taxes on the rich should be voluntarily paying more right now.  One example is the rich person who lives in very nice publicly-provided housing on Pennsylvania Avenue in Washington DC.

Price Controls for Limo Rides

A great video for chapter 6 of my favorite textbook:

My Greatest Honor Ever

From my inbox (with personal identifiers removed):

Dear Prof. Mankiw,

I am XXXXX, a PhD student majored in Economics at XXXXX University from this fall.

In fact, my son was born yesterday. I have been thinking of which name to give him for a long time, and decided to name him “Gregory” like your first name. The reason why is that I love your Macroeconomics textbook so much! Reading your book helped me see how interesting Economics is. And, you can see the consequence of your book by looking at my major at the moment. :D

I sincerely hope my son would become a great economist like you in the future.

Yours faithfully,

XXXXX

Winner in 2012

According to the betting over at Intrade, here are the probabilities for the leading presidential hopefuls:

Obama 59 percent
Romney 12 percent
Trump 6 percent
Pawlenty 6 percent
Daniels 4 percent
Huckabee 3 percent