My Freshman Seminar

Sadly, my freshman seminar is now over. Above is a group shot from our last meeting, held over dinner at my house. (Note the shirts, which the seminar participants arranged.)

I took a poll of the students' favorite readings. The winners were

1. Capitalism and Freedom by Milton Friedman
2. Nudge by Richard Thaler and Cass Sunstein
3. The Worldly Philosophers by Robert Heilbroner

Click here for the full reading list.

I also asked the students how their views had changed over the course of the semester. Those who started out liberal said they came to appreciate market mechanisms more. Those who started out conservative said they came to appreciate the market's limitations. In other words, after a few months of reading and discussing economics and public policy, most of them moved toward the political center and closer to agreement.

The Pigou Club talks to the Senate

Club Member Ted Gayer makes five points:

1. Either a carbon tax or a cap-and-trade program will result in substantially lower economic costs than command-and-control regulations that mandate technologies, fuels, or energy efficiency standards.

2. Given the uncertainty of the future costs of climate policy, a carbon tax is more economically efficient than cap-and-trade.

3. Carbon allowances in a cap-and-trade program would be susceptible to price volatility. Price volatility causes economic disruptions and complicates investment decisions. It also could lead to political pressure on Congress to repeal or substantially loosen the cap.

4. A carbon tax, in which the revenues are used to offset economically harmful taxes or to pay down our deficit, would substantially lower the cost of climate policy compared to a cap-and-trade program that gives away allowances for free.

5. The currently proposed climate bills rely heavily on offsets to reduce the overall costs of cap-and-trade. Given the substantial potential value of offsets, there is a very real concern that offset integrity will not be maintained. This would result in a weakening of the cap, undermining its environmental benefits.

Continue reading here.

What I've been listening to

I am bit embarrassed to admit this, but the answer is Lady Gaga. Her music reminds me Blondie, which I enjoyed back in my student days. I particularly like the Lady Gaga song Bad Romance.

Update: If you wonder about my comparison, listen to Gaga's Summerboy and Blondie's Heart of Glass.

What responsibilities should the Fed have?

Vincent Reinhart opines:

As a result of legislative convenience, bureaucratic imperative and historical happenstance, a variety of responsibilities have accreted to the Fed over the years. In addition to conducting monetary policy, the Fed also distributes currency, runs the system through which banks transfer funds, supervises financial holding companies and some banks, and writes rules to protect consumers in financial transactions. Mr. Bernanke argues that preserving this mélange is not only efficient but crucial to protecting the Fed's independence.

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed's role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don't think they will be able to do so.

The biggest threat to the Fed's independence is doubt about its competence. The more the Congress expects the Fed to do, the more likely will such doubts blemish its reputation.

Glaeser on Financial Regulation

My Harvard colleague Ed Glaeser looks at the way forward.

Take Out Your Pencils 4

This week's problem:

A friend of yours is considering two providers of cell phone services. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for minutes of calling is given by the equation Qd= 150 – 50 P, where P is the price of a minute.

a. With each provider, what is the cost to your friend of an extra minute on the phone?

b. In light of your answer to (a), how many minutes would your friend spend on the phone with each provider?

c. How much would he end up paying each provider every month?

d. How much consumer surplus would he obtain with each provider? (Hint: Graph the demand curve and recall the formula for the area of a triangle.)

e. Which provider would you recommend that your friend choose? Why?

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If you enjoy this kind of thing, click here for the previous installment in this series. As always, I will not post the answer, so instructors can use the problem as homework.

Predicting Honors

In a new NBER working paper, Daniel Hamermesh and Gerard Pfann estimate the probability that an economist will be honored by his peers (by receiving a Nobel Prize, being elected President of the American Economic Association, being named a Distinguished Fellow of the AEA, or winning the AEA's Clark Medal).

The bottom line: An economist's citation ranking is a strong predictor. Given citations, an economist's number of publications has no additional predictive value for whether he will obtain such an honor.

FYI, here is an up-to-date citation ranking of more than 20,000 economists.