Academic Bloggers

The NY Times profiles a few.

Capping Tax Expenditures

A proposal from Martin Feldstein, Daniel Feenberg, and Maya MacGuineas:

This paper analyzes a new way of reducing the major individual tax expenditures: capping the total amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, we examine the effect of limiting the total value of the tax reduction resulting from tax expenditures to two percent of the individual's adjusted gross income. Each individual can benefit from the full range of tax expenditures but can receive tax reduction only up to 2 percent of his AGI.

Simulations using the NBER TAXSIM model project that a 2 percent cap would raise $278 billion in 2011. The paper analyzes the revenue increases by AGI class. The 2 percent cap would also cause substantial simplification by inducing more than 35 million taxpayers to shift from itemizing their deductions to using the standard deduction. For any taxpayer for whom the 2 percent cap is binding, a cap would reduce the volume of wasteful spending and the associated deadweight loss. Even for those taxpayers for whom the cap is not binding but who are induced by the cap to shift from itemizing to using the standard deduction, the deadweight loss associated with deductible expenditures would be completely eliminated.

No Grand Bargain on the Horizon

Keith Hennessey is the most astute observer of the inside baseball of Washington economic policy that I know.  Here is his bottom line on President Obama's speech from yesterday:

The President’s proposal could be the opening bid in a negotiation with Congressional Republicans. When you combine this substance with the President’s aggressive partisan attacks and framing of the Ryan budget, however, it’s hard to see how this leads to a big fiscal deal this year or next....the chances of a long-term grand bargain in the next two years just plummeted from an already low starting point.

I am afraid that Keith might be right.

President Obama certainly has the ability to disagree without being disagreeable.  But yesterday he decided, I presume quite consciously, that demonizing the opposition was the right strategy for him.  Perhaps this decision suggests that the speech was written to be the beginning of a heated reelection campaign rather than an invitation for negotiation and compromise.  I hope this interpretation is wrong.  If it is right, then my hypothetical 2026 speech may have be given a few years earlier than planned.

Two Visions for Medicare

I must applaud the President for today's speech in which he finally and at long last takes the long-term budget imbalance seriously.  There was a surprising amount of finger pointing for a person who claims to be transcending partisanship.  That is especially true in light of the fact that President Obama's proposed policies, as put forth in his own annual budgets, have never shown how he would put the economy on a path with a declining debt-GDP ratio, even after the economy fully recovers from the recession.

But let's put that inconvenient truth aside for the moment.  I am delighted that these fiscal issues are now squarely on the national agenda.  If only someone could lock President Obama and Congressman Ryan in a seedy hotel room, turn off their access to cable, give them an endless supply of coffee and cold sandwiches, and not let them leave until they come to agreement, the nation could take a large step forward.

What I found most interesting is the contrast between the President's vision for Medicare and Congressman Ryan's.  There are two major issues:

• How quickly should Medicare spending rise?
• What happens if health care costs rise faster than the limit on spending?

As to the first question, the President proposes to set "a new target of Medicare growth per beneficiary growing with GDP per capita plus 0.5 percent."*  By contrast, Ryan proposes growth at the rate of inflation. The difference is probably about 2 percent per year.

As to the second question, the President gives authority to the "Independent Payment Advisory Board (IPAB)."  By contrast, Ryan proposes that seniors use their "premium support" to shop among competing private insurers.

Here we see the fundamental differences between the parties: One believes in spending more and allocating that spending via central planning.  The other believes in spending less and harnessing individual choice and competition to ensure that the money is spent wisely.

To be sure, there is room for compromise, especially on the first question, but the issues are not just numerical.  The parties start with fundamentally different visions of markets and government.

----
*The quotation is from an administration fact sheet I was emailed.

The Ryan Plan

As I have pointed out before, a bipartisan group of ten former CEA chairs (including your humble blog host) has endorsed the Bowles-Simpson commission report as a starting point for dealing with the long-run fiscal imbalance.  So readers might like to know that Bowles and Simpson themselves have called the Ryan plan a positive step.

If you want to learn more about the Ryan plan, you can look at this side-by-side comparison of two plans or read this CBO report. 

CBO makes clear that it believes there are substantial budgetary savings in the Ryan plan, but to a large extent these are because "the government’s contribution [to Medicare] would grow more slowly than health care costs, leaving more for beneficiaries to pay."  Many on the left view such a change in entitlements as too draconian, but they have not offered a real alternative.  If they did, it would have to include substantial, broad-based tax increases, which those on the right would view as draconian.

That is, the choice we face is between historically high taxes (the left's unspoken preference) and a fundamental rethinking of the social safety net (such as the plan proposed by Congressman Ryan).

Increases in Top Incomes: Baseball Edition

Mark Perry reports:

For the 2011 season in Major League Baseball, the average salary for the top 25 highest-paid baseball players is $19,751,000, with Alex Rodriguez of the New York Yankees leading MLB at a salary of $32 million, according to the USA Today Salaries Database. In comparison, during the 1988 season the average salary for the top 25 highest-paid players was $1.955 million, or $3.657 million in today's dollars. The highest paid player that year was New York Mets catcher Gary Carter, who made $2.36 million that year, or $4.41 million in 2011 dollars.

An Upcoming Webcast

I will be speaking at the University of Cincinnati this Friday at 12:30 pm. If you would like to hear me via an online webcast, click here and then click on the webcast button at the top of the page to sign up.

Jeff Miron on Healthcare

Does GDP buy happiness?

The University of Chicago's Allen Sanderson looks at the topic.

By the way, Allen mentions the famous Easterlin paradox.  The facts behind this paradox have been called into question by Betsey Stevenson and Justin Wolfers.

Things I did not say

I have long been what might be called a moderate supply sider (as well as a new Keynesian on various issues of macro theory).  I believe that tax rates have important influences on behavior and, as a result, tax hikes do not generate as much revenue as static estimates suggest.  However, I have long been skeptical that the United States is on the wrong side of the Laffer curve, except perhaps in a few special cases.

So imagine my surprise when I read this headline over at Bloomberg:

Mankiw Says Higher Taxes Won’t Increase Revenue

The brief article alleges to summarize what I said in an interview. My first reaction was, I didn't say that. My second reaction was, did I misspeak?  Fortunately, the audio of the interview is right there.  So I listened to myself (always a painful experience), and I think I said what I really believe--that tax hikes do not generate as much revenue as you might think.  The Bloomberg headline is an unfortunate misrepresentation.

A Conference for Economics Instructors

If you, like me, teach introductory economics, or expect to do so soon, you might be interested in attending this conference. It is a one-day meeting I am running at Harvard on Friday, April 29, with the generous support of my publisher (Southwestern, a part of Cengage Learning).

The conference includes the following presentations from five Harvard faculty:

• Greg Mankiw, The Challenges Facing U.S. Monetary and Fiscal Policy
• Alberto Alesina, Social Policies in the U.S. and Europe: Why So Different?
• Eric Mazur, Confessions of a Converted Lecturer
• Ben Friedman, Religious Influences on Economic Thinking: Where Did the Economics We Teach Come From?
• Jeremy Stein, Lessons from the Financial Crisis

In addition, after lunch, participants will have the opportunity to tour Harvard, and the day will end with a party at my home.

Interested? Click through the above link to learn more. (Please note that space is limited. We may not be able to accommodate everyone who expresses interest, and for that, I apologize in advance.) If you have any questions, feel free to contact John Carey at john.carey@cengage.com.

A Comic for Chapter 4

click on graphic to enlarge

A Profile of Al Roth

Today's Boston Globe has an article about my market-designing Harvard colleague.

A V, 2 Us, and an L

click on graphic to enlarge

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.

Barro on Unions

Robert doesn't like them.  An excerpt:

There is evidence that right-to-work laws—or, more broadly, the pro-business policies offered by right-to-work states—matter for economic growth. In research published in 2000, economist Thomas Holmes of the University of Minnesota compared counties close to the border between states with and without right-to-work laws (thereby holding constant an array of factors related to geography and climate). He found that the cumulative growth of employment in manufacturing (the traditional area of union strength prior to the rise of public-employee unions) in the right-to-work states was 26 percentage points greater than that in the non-right-to-work states.

An Econ Conference for Undergrads

Conferences for econ profs are too common to mention here, but conferences for undergrads are more rare.  So let me call attention this conference at Georgetown. Application deadline is just a couple weeks away.

Empiricists versus Theorists

Christy Romer on the monetary policy debate.

MIT Symposium

A few weeks ago, I spoke at an MIT symposium along with several other macroeoconomists (some of whom you will surely recognize).  If you have a spare couple of hours, you can watch it here.  I start at about 1:05.

Tax Fact of the Day

"The U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries. The average OECD rate was 18.6 percent, and the average rate for 83 countries was 17.7 percent."

Source.

Econ Summer Camp

Grad students with an interest in the history of economic thought might want to consider this summer program.

Update: Here is a summer program for undergrads.

Tax Fact of the Day

"The worst place to die is New Jersey with a combined effective estate and inheritance tax rate of 54.1%."

Source.

Gita Gopinath

A profile of my Harvard colleague.

The Ec10-mobile is dead!

Over the past decade, Harvard students have seen me tooling around campus in my light blue 2002 BMW 3-series with the Ec 10  license plate.  How I loved that car!  But sadly, it is now gone. 

On Friday evening, as I was driving straight through an intersection, a 17-year old driver in an SUV heading the opposite direction made a left turn right in front of me.  We crashed head-on.  Fortunately, no one was hurt, but the car is most likely beyond repair. :(

Is the Fed printing money?

Yes and no.  Jim Hamilton explains.

Reinhardt on Trade

Princeton economist Uwe Reinhardt has some observations about free trade, picking up where I left off in my recent Times column.

President Obama's Budget

Via Keith Hennessey (Click on graphic to enlarge.)

Ed Glaeser on The Daily Show

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Edward Glaeser
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

Death by Price Control

Chapter 7 of my favorite textbook has a case study about whether there should be a market for kidneys. A similar issue is now making its way through the U.S. court system.

Smog-Eating Roof Tiles

Here is a cute example of a positive externality:

A California company is selling a “smog-eating” concrete tile roof that it says neutralizes the nitrogen oxides spewed by automobiles.

Boral Roofing says each year, one of its concrete tile roofs on a typical 2,000-square-foot house can break down the same amount of nitrogen oxides as a car’s engine typically produces during 10,800 miles of driving.

When sunlight hits the roof, it activates titanium dioxide, which breaks down the nitrogen oxides in the air into oxygen and nitrates, the company say. The tiles’ smog-fighting ability was proved in extensive laboratory testing and field studies conducted by a European Union consortium of academic and industry experts from 2002 to 2006.

The tile adds about $800 to the cost of the average 2,000-square-foot house.

Question for class discussion: What should government policy be regarding these new roof tiles?

The new edition is here!

The 6th edition of my favorite textbook has now rolled off the presses.  You can buy at it Amazon here. (Amazon appears not to have it in stock just yet, but it should very soon.) If you are an instructor considering it for one of your courses, you can get information about the new edition by contacting John Carey.

Just in time for Valentine's day.  Order it now, and you can tell your Valentine that the world's best economics textbook is on its way!

The Case against "Winning the Future"

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

Jobs, Jobs, Jobs

In this article, Allen Sanderson, who teaches introductory economics at the University of Chicago (using my favorite textbook, of course), takes on the political rhetoric about job creation.

A Portrait

From The Pixelite

Incentivizing Customers to Monitor Workers

A blog reader sends in this photo, taken in a souvenir shop in Kruger National Park in South Africa.

Economics Video Contest

The St. Louis Fed is running a video contest on the importance of an independent central bank.  Winner gets a free lunch with Ron Paul.

Actually, $1,000.

Update: If fiscal rather than monetary policy is your thing, check out this video contest.

On Comparative Advantage, Imperfect Markets, and Boston Weather

Seth Gitter asks, very sensibly, why did I spend time shoveling snow from my own roof a few days ago, rather than relying on the invisible hand to do it for me?  Shoveling is, after all, not my comparative advantage. 

His speculation is right: I could not immediately find someone else to do it.  Everyone my wife and I called had a queue of roof work to do.  (Question for class discussion: Why didn't the price rise to clear the market?)  Eventually, however, we did get to the front of the queue, so I could get off the roof and return to teaching and writing.  But not before the huge ice dams pulled down a gutter on one side of my house.

By the way, as I look out the window right now, it is snowing again.  Anyone know of any job openings for middle-aged economists in warm climates?  Maui would be nice.

A Behavioral Econ Business Plan

Chapter 22 of my favorite textbook includes a discussion of behavioral economics, and ec 10 students enjoy a guest lecture on the topic by David Laibson.  This article describes how some recent Harvard students are using the ideas of behavioral economics to design a better type of gym membership.

The State of U.S. Manufacturing

A nice piece by Jeff Jacoby.

The Lucky Break of Rent Control

For those instructors teaching about the economics of rent control (Chapter 6 of my favorite textbook) or the Coase Theorem (Chapter 10), this article about buyouts of rent stabilized tenants should generate a good class discussion.

The Jobs Report

One for My Photo Album

From last week's conference at MIT:

Photo by Dominick Reuter for MIT

Update: One of my Harvard colleagues suggests a caption contest and proposes the first two entries.  Readers should feel free to email me others, and I will add them to the list.  My favorite in in bold.

1. "He really is a socialist!"
2. "I'm thinking of writing a principles text."
3. "Freshmen really are a faster study than Presidents."
4. "Goolsbee wanted me to ask you how to adjust the lumbar support on his office chair."
5. "Buy GE."
6. "I voted for Obama."
7. "Your tie hasn't matched my outfit this well since your wedding."
8. "CDO's were my idea...."
9. CR: "Lend me twenty bucks for cab fare home."  GM:"I'll give you 15. You can model the other 5."
10. "I'm sorry, Greg, but I just don't think Brad wants to be friends."
11. "'Mr. President,' I said, 'if I were you, I wouldn't sign this thing into a law'. 'Really? Then I won't sign it!', he answered." Christina Romer tells her dream of how she stopped the President from signing the Healthcare Bill.
12. “I was wondering, Greg, where does that bottled water fit in your ten principles?”
13. "Water or diamonds, Greg?"
14. "I'm going green. I use cap-less bottles now and assume away the spills!"
15. "Greg, hasn't the government increased taxes enough to prevent you from attending these conferences?"
16. "I understand what you're saying, but let me show you the supply side of things."
17. “And then I told him WTF doesn’t stand for Win the Future.”
18. "Really, snow on your roof?  We don't get that in Berkeley."
19. "Seriously, the weather in Boston is not REALLY that bad. So, the job swap is still on?"
20. "I wish we had hired you to explain our policies in plain English.  Instead, Paul Krugman is the closest thing we have to a spokesman."

Donald Marron on Tax Reform

Some very sensible congressional testimony.

Moral Hazard

With the tremendous amount of snow we have had lately, my roof has started to develop some ice dams.  So a little while ago, I climbed out onto the roof to shovel off as much snow as I could.  The conversation as I exited through the window went something like this:

My wife: Be careful.

Me: I will.

My wife: It's slippery out there.  I don't want you to fall.

Me: Well, remember that I have a lot of life insurance.

My wife: Ha. Ha.

Me: But I don't have nearly as much disability insurance.  So if I do have an accident, make sure the fall kills me.

Fix the Economy, Win $15,000

The Hamilton Project is running a contest for good economic policy ideas.

Would you call Gary Becker for marital advice?

Here is someone who did.

A Teachable Moment Wasted

Robert Samuelson on the budget problem.

Tax Justice

Watch the full episode. See more Religion & Ethics NewsWeekly.

NPR reports...

on a meeting of economists at MIT.

SOTU

A couple weeks ago, the recently departed CEA chairwoman Christy Romer wrote a good piece explaining what the President should say in the State of the Union.  Here is what the President in fact said a couple days ago.

Question for class discussion: Did the President do what his former economic adviser recommended?

Book Recommendations

From Yale economist Bob Shiller.

Reflections on Graduate Education

I thought my blog readers might enjoy reading my observations about PhD programs in economics, which are included in some discussant comments I gave at the ASSA meeting earlier this month.  Here they are.

Comments on “Completion Rates and Time-to-Degree in Economics PhD Programs” by Wendy A Stock, John J. Siegfried, and T. Aldrich Finegan

This paper is a contribution to an important line of work. As economists, we often remind policymakers that their decisions should be based on objective, empirical research rather than uninformed supposition. Yet when we are the decision makers, as we are when we run our own educational programs, we often have little data-driven analysis on which to base on our judgments. This kind of research should, over time, lead to a better educational system.

I would like to take note of two facts highlighted in this study and to tentatively discuss what they might mean. The first fact is that it is taking longer for students to earn their PhDs in economics. The second fact is that a sizeable percentage of students who start PhD programs do not finish.

It is tempting to interpret these facts as a sign of educational failure. After all, students enter these graduate programs to earn a PhD. If the successful ones are taking longer to finish, and many others are not getting their degrees at all, then it might seem that we are doing something wrong.

But it is far from obvious that these facts are symptoms of a problem. Perhaps longer times to completion and some amount of dropping out are optimal.

Consider time to completion. There is no doubt that economics is still a young science and there is much we do not know. But there is also no doubt that research is continually adding to our stock of knowledge. Perhaps students are taking longer to earn PhDs because there is more for them to learn. It may well be optimal to spend six rather than five years in graduate school before our profession releases students into the world with our highest level of certification.

Another relevant fact is that most students, when they get their first academic jobs, end up at colleges and universities with lower ranked departments than where they earned their PhDs. Why hurry the process of moving to a less vibrant intellectual environment? It may well be better for the professional development of the candidate to spend an extra year or so in graduate school.

Consider now the fact that many students drop out of graduate school without a PhD in hand. While many of these students are disappointed by this outcome, it is likely that in many cases their choice to drop out is optimal. They entered graduate school without fully knowing what it was like and whether it was a good match for them. After a couple of years, they decided it wasn’t. In light of the inherent uncertainty when choosing a path in life, a bit of experimentation is desirable.

My own life is a case in point. When I left college, I was unsure what career path I wanted to take. I therefore enrolled in two graduate programs—the PhD program in economics at MIT and the law program at Harvard Law School—thinking I might finish both. In the end, however, I dropped out of law school after three semesters. Looking back, the decisions to enter and drop out of law school were the right choices. I started because I thought a legal career might be best path for me, and I stopped when I learned it wasn’t.

The question we face as designers of educational programs is how to structure them in light of the longer times that PhDs take and the fact that some students who start these programs may rationally choose not to complete them. The answer may be to divide current PhD programs into two chunks. The first chunk would be a two-year master’s degree focused on taking advanced courses. The second chunk—appropriate for only a subset of master’s students—would be a research degree culminating in the PhD.

Many programs in effect already do that. But the master’s degree is too often viewed as a consolation prize for a PhD dropout. Perhaps we should instead encourage people to view the master’s degree in economics as a fully respectable terminal degree. Moreover, having finished a master’s degree, PhD candidates would be treated as professionals—more like the most junior faculty and less like the most senior students.

Many students leave college wanting to learn a bit more economics. But a PhD may be more than they want or need for their careers. An expansion of master’s programs in U.S. economics departments may offer many students the stepping stone they need.

Yet Another Ranking

A new ranking of economics departments, based on online voting.  Thanks to Tyler Cowen for the pointer.

Give me $1 billion to cut the budget deficit

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

Healthcare reform, its advocates tell us, is fiscal reform.  The healthcare reform bill passed last year increased government spending to cover the uninsured, but it also reduced the budget deficit by increasing various taxes as well.  Because of this bill, the advocates say, the federal government is on a sounder fiscal footing.  Repealing it, they say, would make the budget deficit worse.

So, by that logic, giving me $1 billion is fiscal reform as well.  To be honest, I don't really need the money.  But if I can help promote long-term fiscal sustainability, I am ready to do my part.

What would repeal of Obamacare do to the budget deficit?

Here is the answer.

What I've Been Reading

I have spent the past few days in Key Biscayne with my family, temporarily avoiding the dreary winter weather of Boston. My vacation read was The Man Who Invented the Computer: The Biography of John Atanasoff, Digital Pioneer by Jane Smiley. 

The book is not perfect.  The prose is wooden at times (which is surprising, as Smiley is an accomplished novelist), and the description of some of the technical stuff is a bit hard to follow, but the story told is interesting and new (to me, as least).  I gather, however, that Smiley's take on the history is controversial, and I am certainly in no position to judge whether or not she gives Atanasoff more credit than he is due.

An Interview with Burt Malkiel

A good video to show students while teaching about index funds and the efficient markets hypothesis:

The Half-Full Glass of Economic Mobility

When people look at data on economic mobility, they see different things.  For example, it is well known that if your father had high income, you are more likely to have high income than if you father had low income.  According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son's income with respect to father's income is about 0.5 in the United States.  How do you interpret this fact?

Some people might be tempted to see it as evidence against equality of opportunity.  After all, it shows that it matters where you started.  Rich parents can buy better schools, expensive tutors, fancy summer camps, and all sort of other great stuff for their kids.  How fair is that?

But what strikes me about that 0.5 number is not how large it is but how small it is.  As I understand it, that 0.5 estimate is roughly the correlation between father and son income.  That means that the fraction of variance of son's income explained by father's income--that is, R-squared--is only 0.25.  This last number is sometimes called the "heritability" of a characteristic.

By contrast, the heritability of IQ is usually estimated to be much larger than that.  At least some of the heritability of income must come not from inequality of opportunity but from the genetic transmission of talent.  Other aspects of talent, such as drive, energy, and spunk, might well have a genetic component as well, but they are harder to measure and thus we know less about them.  But the one that has been studied extensively, IQ, seems more heritable than income.

The bottom line: In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income.  And that would be true even if equality of opportunity were perfect.

One further thought: The study cited above points out that economic mobility is greater in some European countries.  That fact does not surprise me, as those are nations with less inequality.  Moving up and down a short ladder is a lot easier than moving up and down a tall one.

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For a related previous post and links to a couple relevant studies, click here.  See also this survey of the literature.

On Violent Metaphors

Paul Krugman in today's NY Times:

The point is that there’s room in a democracy for people who ridicule and denounce those who disagree with them; there isn’t any place for eliminationist rhetoric, for suggestions that those on the other side of a debate must be removed from that debate by whatever means necessary.

And it’s the saturation of our political discourse — and especially our airwaves — with eliminationist rhetoric that lies behind the rising tide of violence.

Where’s that toxic rhetoric coming from? Let’s not make a false pretense of balance: it’s coming, overwhelmingly, from the right. It’s hard to imagine a Democratic member of Congress urging constituents to be “armed and dangerous” without being ostracized.

On the other hand, the Wall Street Journal reported back in 2008:

Mobster wisdom tells us never to bring a knife to a gun fight. But what does political wisdom say about bringing a gun to a knife fight?

That’s exactly what Barack Obama said he would do to counter Republican attacks “If they bring a knife to the fight, we bring a gun,” Obama said at a Philadelphia fundraiser Friday night. “Because from what I understand folks in Philly like a good brawl.”

Whatever happened to that Obama guy? Did he get ostracized, as Paul suggests he would?  My view: We should and do condemn people for their crimes, not for their metaphors.

How much unemployment is structural?

Raghu Rajan cites the work of Erik Hurst:

As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have had the greatest contraction in that industry in 2006-2009. These states also tended to have the largest rise in unemployment rates between 2006 and 2009.

The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. So, the job losses extend far beyond those in the construction industry.

It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. Hurst estimates that this "structural" unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today.

Update: Erik sends me the following email.

Greg,

I saw that you linked to Raghu’s writings which described some of my work in progress assessing labor market mismatch and its potential effects on current unemployment rates (joint with Kerwin Charles and Laura Pilossoph). There was, however, an error in Raghu’s assessment of our work. I am emailing Raghu as well. Raghu reported that we are finding that upwards of 3 percentage points of total U.S. unemployment can be explained by structural forces. That is not what we have found. Preliminary back of the envelop calculations suggest that upwards of 3 percentage points of the unemployment rate in high unemployment rate states like Nevada or Arizona may be due to structural forces – not 3 percentage points of total U.S. unemployment. The amount of total U.S. unemployment explained by structural forces will almost certainly be much less. For many states, back of the envelop calculations suggest that structural forces are much less important. I have not yet computed a back of the envelope calculation of the total unemployment rate that potentially can be explained by structural forces. While we are definitely finding results that structural forces are at play, we are not finding that 3 percentage points of the current total U.S. unemployment rate is due to structural forces. As the research evolves, however , our conclusions may change.

I want to stress that the work is still in its early stages. We are in the process of formalizing everything now. We are still a month or so away from having a preliminary version of the paper. I will keep you posted when we have something that we feel comfortable sharing for public consumption.

If you can post this message to your readers, it would be much appreciated. Based on your post, I have received lots of emails about our preliminary (and not yet ready for prime time) work. Hopefully, the correction will help to focus people’s queries and questions accordingly.

Erik

What I've Been Reading

Occupying me on the plane rides to and from Denver was the new book Privilege: The Making of an Adolescent Elite at St. Paul's School.  Part memoir, part sociology, it is a fun read.

Say Hi in Denver

I will be leaving for the Denver ASSA meetings shortly.  If you are a regular blog reader and happen to see me there over the next few days, don't hesitate to introduce yourself and say hello.

What does a trillion dollars look like?

A fun way to visualize large numbers.

Another Cost of Hyperinflation

A lesson from Zimbabwe:

Teachers reported the printing of bank notes from millions to billions and then trillions skewed their pupils' sense of numeracy, making them fail to grasp the realities of numbers.  On one geography field trip, students scoffed at being told granite rocks swept over Zimbabwe by ancient glaciers were 700 million years old. That time frame seemed insignificant.  Back then in 2008, 700 million Zimbabwe dollars bought a loaf of bread.

Commanding Attention

One of the things I have learned over my career is that I am very bad at predicting how much attention something I write will get.

Among my academic writings, my most cited paper is an article coauthored with David Romer and David Weil on the empirics of economic growth.  It has more than six times as many cites in google-scholar as my second most cited paper, an article coauthored with Ricardo Reis proposing the sticky-information Phillips curve.  When I was writing the paper with Romer and Weil, I had no idea it would get so much attention.

Similarly, when I write a column for the New York Times, I am not good at predicting how much it will get people talking.  As a result, I monitor the subsequent blogosphere commentary to judge if the article is a snore (like most things that get published) or if it is commanding attention.  At the very least, I expect my articles to be noteworthy enough that within a few days Brad DeLong will call me a moronic hypocrite.  I hope my articles incite some wider commentary as well, but I never know in advance.

A case in point.  According to the Times ranking, my most recent column is the 4th most blogged-about article that the Times has published in the past week.   I did not expect such as reaction, as the point of the column--an explanation of Republican economic philosophy--did not strike me as particularly novel or controversial.  The lesson, I suppose, is to keep writing what I think needs to be said, without trying to forecast public reaction.

Natural Resources and the Limits to Growth

The economic growth chapter of my favorite textbook (that is, Chapter 25) has a case study on whether natural resources provide a limit to growth. Instructors might find this article by John Tierney of interest when teaching that chapter.

Letter to the President

To read my column in Sunday's NY Times, click here.