I make the big time

My first appearance, as far as I know, in The Onion.

Update: I am wrong.  A reader points out a previous brief appearance.

Should the United States depend on foreign suppliers for vital resources?

The University of Chicago's Allen Sanderson takes up the question.

A Striking Scatterplot

This graphic is from John Taylor, who plots it using quarterly seasonally adjusted data from 1990Q1 to 2010Q3.  Investment here is fixed investment. 

Of course, causality goes in both directions: Strong investment demand leads to lower unemployment, and a stronger economy, reflected in lower unemployment, encourages investment spending.   As a result, the interpretation of this scatterplot can be debated.  But there is no doubt that the strength of the correlation is impressive.

Updates: Justin Wolfers takes John Taylor to task. John responds.

Scott Sumner to the rescue

Life is too short to defend myself against all the silly, groundless attacks I run across in the blogosphere.  So I am delighted when smart commentators like econ prof Scott Sumner help with the job.  For Scott's latest effort, click here.  Thank you, Scott.  Unfortunately, Scott has announced that he is taking a break from blogging.

Stiglitz on the Deficit

Readers of this blog have a pretty good understanding of my view of the long-run fiscal situation.  (If not, click here, here, and here.)  Joe Stiglitz has a very different view.

Our Children's Financial Crisis

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

Even terrorists have downward-sloping demand curves

The AP reports:

When an admitted al-Qaida operative planned his itinerary for a Christmas 2009 airline bombing, he considered launching the strike in the skies above Houston or Chicago, The Associated Press has learned. But tickets were too expensive, so he refocused the mission on a cheaper destination: Detroit.

The Citation Impact of Open Access

I pointed out in a recent post that the Brookings Papers has become open access.  Common sense suggests that this change should increase readership and thus citations to articles published in the journal.  Indeed, some recent research on law journals confirms this:

Open access legal scholarship – which today appears to account for almost half of the output of law faculties – can expect to receive 50% more citations than non-open access writings of similar age from the same venue.

The bottom line: If a professor is interested in raising his or her citation ranking, he or she should should prefer a journal with open access.

CEA Chairs on the Budget Deficit

Click here to read an important article signed by a bipartisan group of ten former chairmen and chairwomen of the Council of Economic Advisers.  I have never before had such a large and distinguished group of coauthors.

BPEA is open access

Here is some interesting news.  The Brookings Papers on Economic Activity, one of the best applied macro journals around, is making all journal issues available to the public without charge.  Click here for the recent conference papers and here for back issues.

What nation has the most progressive tax system?

Click here for the answer.

Update: Wow.  This brief post--really just a link to another blog--proved more controversial than I expected.  Matthew Yglesias accuses me of irresponsibly misleading America's youth.  Scott Sumner responds to Yglesias, pointing out "if you are going to argue that people who make mistakes should be ostracized, it’s best not to make a serious mistake in your attack." 

The issue is what to make of this table:

Click on graphic to enlarge.

Over at the Yglesias blog, a commentor named Peter Whiteford very usefully explains the table as follows:

I am the person who wrote the chapter in the OECD report that is the basis of these figures. It is part of a report on the distribution of income to households, so it doesn’t include taxes that are not directly paid by households, since these are not included in income surveys....[T]he table also calculates the distribution of taxes for the household as whole after adjusting for the number of people in the household, so it will differ from data calculated on income tax returns which are not adjusted for household size.

As others have pointed out this measure includes all direct taxes on individuals so it includes income taxes and employee social security contributions, but not employer payroll taxes. It also doesn’t include sales taxes, but these are much heavier in most other OECD countries, and not as progressive as direct taxes, so if you added indirect taxes in through some sort of modelling it is almost certain that the USA would still have the most progressive overall tax system.

However, as the OECD report points out, progressivity is not the same as redistribution. Progressivity measures how the distribution of the tax burden is shared, while redistribution measures how much the tax system reduces inequality. Redistribution is influenced both by the progressivity of taxes and the level of taxes collected.

In fact, the US system of direct taxes actually reduces inequality more than any other country as well. But overall, the USA reduces inequality a lot less than most other countries, because the other thing that you need to take into account is what taxes get spent on.

Now the US system of social security and cash benefits reduces inequality by less than any other OECD country except Korea. The US social security system is marginally less progressive then the OECD average, but the level of spending is very low – only Mexico and Korea spend less in the OECD.

So while the US tax system is progressive and reduces inequality, the US welfare state is much less effective at reducing inequality. And because the US has a very unequal distribution of income from capital and a much wider wage distribution than many other OECD countries, it ends up as a relatively unequal country after taxes and benefits.

If you look at Nordic countries, they all have much less progressive tax systems than the USA, but they collect a lot more in taxes (including in VAT). They then spend this much higher tax revenue on social security and services, and it is this side of the equation that is most important in reducing inequality.

So the implication is not that the USA either needs to increase or reduce the progressivity of the tax system. If you want to reduce inequality, you need to increase the level of taxes collected and spend it more effectively.

CBO on the President's Budget

The bottom line from the CBO report:

Compared with the Administration's estimates, CBO's estimates of the deficit under the President's budget are lower for 2011 (by $220 billion) but higher for each year thereafter (by a total of $2.3 trillion over the 2012–2021 period).

The Nerdiest Ripple Effect

...of the Tiger Woods scandal.

Some Commentary

A couple bloggers I follow have posted comments on my new paper with Matthew Weinzierl on optimal stabilization policy.   Scott Sumner likes it.  Paul Krugman is predictably snarky.

Update: Greg Ip of The Economist weighs in.

The Coase Theorem in Action

Click on graphic to enlarge.

Optimal Stabilization Policy

Here is my latest research paper, An Exploration of Optimal Stabilization Policy, coauthored with Matthew Weinzierl.  We are presenting it this afternoon at a Brookings conference.

March Madness, Econ-Style

If basketball teams were replaced by economics departments....

Broadway Producers as Risk-taking Entrepreneurs

"six out of seven musicals fail to recoup their investment."
Source.

What's new in the new edition?

As I have noted in a previous post, the sixth edition of my principles text has recently been released.  Finding things to update was easy.  When the last edition was sent to the printer, President Obama had not yet clinched the Democratic nomination!  Just think of everything that has happened in the economy and economic policy since then.

If you wonder more specifically what you will find in the new edition that was not in the last one, here is a list.

Chapter 1
New Case Study: The Incentive Effects of Gasoline Prices
New paragraph on the recent downturn added under Principle 10
Two new problems

Chapter 2
New In the News box: The Economics of President Obama
Table 1 updated and substantially expanded
New Cartoon in Appendix

Chapter 3
Tiger Woods changed to Tom Brady in in-text example.
New Question for Review
New problem

Chapter 4
New article for the In the News box: Price Increases After Disasters

Chapter 5
New FYI box: A Few Elasticities from the Real World

Chapter 6
New In the News box: Should Unpaid Internships Be Allowed?

Chapter 7
New problem

Chapter 8
New In the News box: New Research on Taxation

Chapter 9
New In the News box: Trade Skirmishes, about U.S. tariffs on Chinese tires and the retaliatory response
New problem

Chapter 10
New In the New box: The Externalities of Country Living
New In the News box: Cap and Trade
New problem

Chapter 11
Introduce new term: Club goods.
New In the News box: The Case for Toll Roads
Two new problems

Chapter 12
New In the News box: The Temporarily Disappearing Estate Tax
New In the News box: The Value Added Tax

Chapter 13
New problem

Chapter 14
New problem

Chapter 15
New In the News box: President Obama’s Antitrust Policy
Two new problems

Chapter 16
Two new problems

Chapter 17
New In the News box: The Next Big Antitrust Target?
New problem

Chapter 18
New problem

Chapter 20
New In the News box: What’s Wrong with the Poverty Rate?
New In the News box: The Root Cause of a Financial Crisis
New problem

Chapter 21
New In the News box: Backward-sloping Labor Supply in Kiribati
Three new problems

Chapter 22
New In the News box: Arrow’s Problem in Practice
New In the News box: Sin Taxes

Chapter 23
New In the News box: Beyond Gross Domestic Product
New problem

Chapter 24
New In the News box: Shopping for the CPI
New problem

Chapter 25
New In the News box: One Economist’s Answer (to what makes a nation rich)

Chapter 26
New FYI box: Financial Crises
Two new problems

Chapter 27
New In the News box: A Cartoonist’s Guide to Stock Picking
New In the News box: Is the Efficient Markets Hypothesis Kaput?
Two new problems

Chapter 28
New In the News box: The Rise of Long-term Unemployment
New In the News box: How Much Do the Unemployed Respond to Incentives?

Chapter 29
New In the News box: Mackereleconomics
New Section on Bank Capital, Leverage, and the Financial Crisis of 2008-2009
Much revised section on the tools of monetary policy. It now includes a discussion of the Term Auction Facility and the Fed’s payment of interest on reserves.
New In the News box: Bernanke on the Fed’s Toolbox
New Question for Review
New problem

Chapter 30
New FYI box: Hyperinflation in Zimbabwe
New section: Inflation is Bad, But Deflation May Be Worse
New In the News box: Inflationary Threats

Chapter 31
Box on Euro updated to discuss problems in Greece
New problem

Chapter 32
New In the News box: Alternative Exchange-Rate Regimes

Chapter 33
New In the News box: The Social Influences of Economic Downturns
New Case Study: The Recession of 2008-2009
New In the News box: Modern Parallels to the Great Depression

Chapter 34
New FYI box on the Zero Lower Bound
New In the News box: How Large is the Fiscal Policy Multiplier?

Chapter 35
New In the News box: Do We Need More Inflation?

Chapter 36
New (sixth) debate added on spending hikes vs tax cuts to fight recessions
New FYI box on inflation targeting
New In the News box: What is the Optimal Inflation Rate?
New In the News box: Dealing with Debt and Deficits

Fed News

Senator Shelby blocks Peter Diamond.

I am personally saddened by this decision, for Peter is a very smart guy and a highly accomplished economist, as well as a former teacher of mine.  There is no doubt in my mind that Peter was fully deserving of the Nobel Prize.  But I have to admit that, given Senator Shelby's political preferences regarding economic policy, his reasons for blocking the nomination to the Federal Reserve Board are not wholly unreasonable.  Click through to the link above (or here) to read the Senator's explanation.

Striking Fact of the Day

From the Political Calculations blog:

in percentage terms of the change in total employment level from 2006 to 2010, jobs affected by the federal minimum wage hikes of 2007, 2008 and 2009 account for 41.8% of the total reduction in jobs seen since 2006.

A Shoutout

From a book review of Spousonomics:

If you've taken an Econ 101 course in the past decade or so, there's a good chance that somewhere on your bookshelf is a dog–earred copy of Gregory Mankiw's Principles of Economics. The Harvard professor's textbook has become a classic, thanks to its simplicity and clarity — two qualities appreciated by gawky undergrads facing first–year distractions. After all, the dismal science never looks more dismal than when there's a choice between staying in to study Keynes or going out to flirt with strangers at a party.

Richard Freeman on Unions

An interview and book recommendations from my Harvard colleague.

Tobin's Q

Click on graphic to enlarge.
Source.