NY Theater

My family and I have spent the past several days in New York City enjoying some theater (and fine dining). We much enjoyed A Gentleman's Guide to Love and Murder. But the revival of Cabaret with Emma Stone as Sally Bowles and Alan Cumming as the Emcee was amazing. It is open only for a few more months. I strongly recommend you see it if you can.

Getting a Raise from Vladimir Putin

An American expat reflects on the falling value of the ruble.

The Peltzman Effect

My friend Allen Sanderson points out these headlines in today's Wall Street Journal:

Safety Gear Helps Reduce U.S. Traffic Deaths

and

Cities Target Elevated Levels of Pedestrian Deaths

As Sam Peltzman pointed out years ago, when cars get safer, drivers are less careful, increasing externalities on pedestrians.

The Affair

The best new TV show this year, at least among those I have seen, is Showtime's The Affair. It is a compellingly written and acted drama and crime story told, alternately, from two perspectives. If you want to check out the first episode, you can do so here. (One of the lead actors is Dominic West, who played McNulty in The Wire, another of the all-time great TV shows.)

From the Harvard Holiday/Skit Party

After Obamacare

Republicans in Congress talk regularly about repealing the Affordable Care Act, aka Obamacare.  They have not, however, said much about what they will replace it with. One possibility is the plan described here.

Who pays for government?

Source. Click on graphic to enlarge.

Trash Talking at the Harvard-Yale Game

McCloskey on Piketty

A long, discursive, and compelling review essay.

Elmendorf for CBO Director

Roll Call speculates about who the next director of the Congressional Budget Office might be. This is a key decision facing the newly elected GOP-controlled Congress. After giving a talk at CBO on Thursday and participating in its Academic Advisers Panel on Friday, I am reminded how impressive the CBO staff is and how important the institution is to the policy process. (FYI, my own affiliation with CBO dates back to the summer of 1978, when I was an intern there.)

So who should the next CBO director be? There are a lot of reputable economists on the Roll Call list. Many are friends of mine. All things considered, however, I believe there is a clear choice: Doug Elmendorf.

Someone recently said to me that the CBO director is not really a player in the political game. He is more like the referee. That analogy sheds light on why Doug is the right person for the job. What do you want in a good referee? Competence and impartiality. Doug has demonstrated both. He is a superb economist and, over the past six years as CBO director, has shown himself to be scrupulously non-partisan.

I understand that GOP leaders may be tempted to put their own stamp on the Congressional Budget Office. But sometimes the benefits of continuity transcend ideology and political affiliation. Ronald Reagan reappointed Paul Volcker, and Barack Obama reappointed Ben Bernanke, despite the fact that both Fed chairs were initially appointed by a president of the other party. In the same spirit, I would encourage the GOP congressional leaders to reappoint Doug Elmendorf as CBO director.

Tax Fact of the Day

Source. Click on graphic to enlarge.

A Textbook Example of Arbitrage

From NPR.

The Coase Theorem in Action

Job vacancy rate is back to pre-crisis level

The Latest from Merle Hazard

National Economists Club

If you are in the DC area, you can hear me speak on November 13.  Click here for more information.

Profile of an Ec 10 Student

An amazing story, from the NY Times.

Charles Murray on Ayn Rand

A great and balanced essay.  Thanks to Alex Tabarrok for the pointer.

Head Section Leader in Ec 10

Love teaching introductory economics?  Want to live in the Boston area?  Well, then, I have a job for you.

Mean Comments

Inequality and Parenting

Click on graphic to enlarge. Source.

Congrats!

Congratulations to the recipients of the 2014 Economist Educators Best in Class Teaching Award. These three were chosen by the Board of the National Economics Teaching Association (NETA) from numerous submissions. Prizes are provided by Cengage Learning.

1^st Place       Michael Enz, Roanoke College 

               Self Grading

 2^nd Place       Sherri Wall, University of Alaska-Fairbanks

                Team Based Learning (TBL) - Econ Style!

3^rd Place       Amy Cramer, Pima Community College

                Voices on the Economy, or VOTE.

 
Winners will receive a cash award for themselves and for their departments as well as a trip to the 10^th Annual Economics Teaching Conference next month in San Diego.

You can see their submissions HERE.

Where danger lurks

A nice essay by Olivier Blanchard on the lessons we should learn from the financial crisis and Great Recession.

On Textbook Prices

NPR takes a look.  Generally, a good and balanced treatment. But they play a bit too fast and loose with the difference between high and rising.  Some of the hypotheses they suggest can explain high prices but not rising prices.

A VoxEU Course Companion

Teachers of intermediate macroeconomics will find this new book of interest:

This Vox EU Course Companion, the first in the series, is a collection of carefully selected Vox columns designed to supplement Mankiw’s Macroeconomics textbook. Vox Course Companions provide relevant examples of economic theory in action and offer thought-provoking perspectives on arguments that come up time and again in exam-style questions. They bring together analyses of economic phenomena by leading economists as they happened, while applying and comparing the suitability of competing economic theories.

The IMF on Infrastructure

The IMF endorses the free-lunch view of infrastructure spending. That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. 

Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts).  The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.

Predicting the Nobel

Science Watch offers their choices.

Monetary Policy Rules

Here is a website that gives up-to-date graphs of several policy rules.

Grading in Ec 10

An instructor in introductory economics asks:

I have a question that may be of interest to the students and faculty who read your blog. In searching the archives of your blog, I did not see a blog post on the following: 

How do you assess and evaluate those students? 

I have a colleague who administers only one assessment - a final. Most of the rest of my department uses a variety of activities, assessments and evaluations - homework sets, reading quizzes, writing, midterm and final.

 

Here is the weighting we use to grade each semester in ec 10 at Harvard: 40 percent on the final exam, 20 percent on each of two midterm exams, and 20 percent on work done with section leader (mostly grades on problem sets done as homework, though class participation may be given some weight as well).  In addition, we have an optional "unit test program" in which students can take practice tests throughout the semester and, if they pass, earn extra credit.

Correlation is not causation

Fun examples.

Follow or Break the Rule?

Lars Christensen plots with recent data a version of the Taylor rule I proposed some years ago (published here).  I suggested this rule as an approximate description of Alan Greenspan's monetary policy in the 1990s. Here is Lars's plot:

Click on graphic to enlarge 

 

I based this rule (the green line) on data only from the 1990s, but notice that it does reasonably well until 2009.  The red line is the rule with parameters estimated from the later period.

Taken at face value, the rule suggests that it is time for the Fed to start raising the federal funds rate.  If you believe this rule was reasonably good during the period of the Great Moderation, does this mean the Fed should start tightening now, as the economy gets back to normal? 

Maybe, but not necessarily. There are two problems with interpreting such rules today.

The first and most obvious problem is that odd things have been happening in the labor market for the past several years. The unemployment rate (one of the right hand side variables in this rule) may not be a reliable indicator of slack.

The second and more subtle problem is the nagging issue of the zero lower bound.  For several years, the rule suggested a target federal funds rate deeply in the negative territory.  We are out of that range now, but should the past "errors" influence our target today?  An argument can be made that because the Fed kept the target rate "too high" for so long (that is, at zero rather than negative), it should commit itself now to keeping the target "too low" as compensation (that is, at zero for longer than the rule recommends).  By systematically doing so, the Fed encourages long rates to fall by more whenever the economy hits the zero lower bound. Such a policy might lead to greater stability than strict adherence to the rule as soon as we leave negative territory.

The time for the Fed to raise the target rate may be soon, but I don't think we are quite there.

Update: Ricardo Reis writes to me the following useful observation:

There is another (related) argument for not raising rates now to offset shortfalls in the past. It is not about the interest rate. It is about the price level, the ultimate goal of monetary policy and measure of its performance.

If you plot the PCE deflator, there is a clear shortfall relative to a 2% price-level target. A 2% price level target fits very well during Greenspan's time.  By the end of 2008, we were exactly on the 1992-target. But when I look at that plot starting in 2009 until the most recent data I see a gap.

A price-level target rule is optimal in normal times (Ball, Mankiw, and Reis) but is also an optimal policy in response to the dangers of the zero lower bound (Woodford). We have to catch up for the shortfall in the price level right now. And if you look at inflation expectations from surveys or markets, there seems to be no catch up expected, indicating that policy is still too tight.

The Case for Civility

Noah Smith puts it well:

most of our arguments are over things like Obamacare, or antipoverty programs, or financial regulation-- issues on which reasonable people can and do disagree. If you’re uncivil in this sort of situation -- if you call your opponent an idiot, or a liar, or a nastier name simply because you think his or her argument is bad -- you’re basically being overconfident. You’re assuming that there’s essentially no chance that you’re in the wrong, so it’s in the public interest for you to rail against your opponent and score points with the crowd. If you do this, there’s no chance that you yourself will learn anything from the encounter.

Just for Fun

A friend sends the following puzzle.  Find the X that fits in this sequence:

16  06  68  88  X  98

For those who don't get it, I will post a hint in a few days.

Hint: Try looking at the problem upside down.

Grading Textbooks on Climate Change

Source

On Education

I much enjoyed this article by Steven Pinker.  An excerpt:

It seems to me that educated people should know something about the 13-billion-year prehistory of our species and the basic laws governing the physical and living world, including our bodies and brains. They should grasp the timeline of human history from the dawn of agriculture to the present. They should be exposed to the diversity of human cultures, and the major systems of belief and value with which they have made sense of their lives. They should know about the formative events in human history, including the blunders we can hope not to repeat. They should understand the principles behind democratic governance and the rule of law. They should know how to appreciate works of fiction and art as sources of aesthetic pleasure and as impetuses to reflect on the human condition.

On top of this knowledge, a liberal education should make certain habits of rationality second nature. Educated people should be able to express complex ideas in clear writing and speech. They should appreciate that objective knowledge is a precious commodity, and know how to distinguish vetted fact from superstition, rumor, and unexamined conventional wisdom. They should know how to reason logically and statistically, avoiding the fallacies and biases to which the untutored human mind is vulnerable. They should think causally rather than magically, and know what it takes to distinguish causation from correlation and coincidence. They should be acutely aware of human fallibility, most notably their own, and appreciate that people who disagree with them are not stupid or evil. Accordingly, they should appreciate the value of trying to change minds by persuasion rather than intimidation or demagoguery.

I believe (and believe I can persuade you) that the more deeply a society cultivates this knowledge and mindset, the more it will flourish. The conviction that they are teachable gets me out of bed in the morning.

Is inflation dead?

No, says Ken Rogoff.

A Nice Application of the Coase Theorem

From Josh Barro.

25 Brightest Young Economists

Here is a list.  By the way, six are at Harvard, more than any other school.

News from Amazon

In the Business & Money category:



Source

 

And in all books:

Source

To users of my favorite textbooks: Thank you!  Have a great semester.

What To Make of Corporate Tax Inversions

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

Teaching Conference

I will be speaking at the annual conference of the National Economics Teaching Association, which this year is being held on Thursday, November 6th and Friday, November 7th, 2014 in San Diego, CA.  If you want to consider attending, click here for more information.

 

You can potentially win a free trip to the conference, as well as some cash, by entering this contest.

Eric Posner and Glen Weyl on Piketty

In The New Republic.  A tidbit:

Only very extreme scenarios, where every wealthy individual does all of the following at the same time can lead to the sort of explosive inequality dynamics Piketty fears:

1. Marries someone at least as wealthy or bequeaths all wealth to one child.
2. Consumes very little.
3. Avoids paying most taxes.
4. Contributes little to charity or politics.
5. Invests optimally while avoiding Bernie Madoff and his ilk.

And it is hard to imagine why anyone would care about the existence of such an inbred, self-denying, and politically-removed class, if it could ever exist.

Wisdom from Thomas Sowell

Larry Kotlikoff's comment on Paul Krugman's debating style in my previous post reminded me of an email I received earlier this summer:

Hi Professor Mankiw,
 

I'm an entering graduate student at [withheld] and a long-time reader (reading your blog when I was in high school introduced me to and got me interested in economics). I was reading Thomas Sowell's A Conflict of Visions and stumbled upon a passage that immediately reminded me of you, and your debates with Professor Krugman. I think it accurately describes a lot of disputes I've seen among intellectuals.

 

If you're familiar with the basic premise of the book, you can skip this paragraph. If you aren't (or need a refresher) Sowell creates a spectrum of political visions. At one end, there is the unconstrained vision, which sees a more malleable human nature in which the reason of experts has great efficacy in solving society's problems. At the other end, there is the constrained vision, which sees man's reason as inherently limited to narrow fields, with the best social progress coming through less deliberate and more evolutionary means. Sowell would see you as closer to the perfectly constrained vision, and Professor Krugman as closer to the perfectly unconstrained vision.

 

Here is the passage that reminded me of your debates with him. I think you'll see what I mean:

 

Sincerity is so central to the unconstrained vision that it is not readily conceded to adversaries, who are often depicted as apologists, if not venal. It is not uncommon in this tradition to find references to their adversaries' "real" reasons, which must be "unmasked." Even where sincerity is conceded to adversaries, it is often accompanied by references to those adversaries' "blindness," "prejudice," or narrow inability to transcend the status quo. Within the unconstrained vision, sincerity is a great concession to make, while those with the constrained vision can more readily make that concession, since it means so much less to them. Nor need adversaries be depicted as stupid by those with the constrained vision, for they conceive of the social process as so complex that it is easy, even for wise and moral individuals, to be mistaken -- and dangerously so. They 'may do the worst of things without being the worst of man,' according to Burke. (pg 59-60)

 

You may have already​ seen this and had similar thoughts, but if you hadn't, I thought you would find it interesting.

 

Best,

[name withheld]

A Plea for Civility

From Larry Kotlikoff. A noble effort that is likely to be in vain.

Interview with Larry Summers

In The New Republic.

What makes a good economist?

Commodity Money

Some ACA Readings

1. Kate Ho and Ariel Pakes
2. Chuck Blahous
3. James Capretta 

NFF

Sorry that I have been out of touch with regular blog readers.  I have moved to Nantucket for the summer, and the weather here has been too great to spend much time in front of a keyboard.  (The three best reasons to be a professor: June, July, and August.)

The past few days I have been attending the Nantucket Film Festival.  I have had a chance to see some great movies before they are in general release.  Two are worth mentioning: Arlo and Julie, a small quirky comedy/mystery that is a bit Woody Allen-esque. Also, Happiness, a documentary about a boy and his family in Bhutan. 

This morning I am off to see Begin Again, which won the award for Best of Festival.

The Saddest Chart I've Seen Today

On Inherited Wealth

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

How much has the Affordable Care Act reduced potential GDP?

The Affordable Care Act added "about six percentage points to the marginal tax rate faced, on average, by workers in the economy."  So estimates the University of Chicago economist Casey Mulligan. 

Given that labor income was already taxed by income and payroll taxes, that figure indicates the return to working fell by about 10 percent. If we apply a plausible aggregate labor supply elasticity of 0.5, this in turn suggests a decline in labor supply of about 5 percent. In the long run, as the capital stock adjusts, a fall in labor supply leads to a proportionate fall in output. So we end up with a 5 percent fall in long-run potential output.

That calculation is very, very rough, but it does indicate that the ACA could well be a significant reason why the economy is not returning to its old growth path.

Update: Casey emails me that he believes the GDP effect will be smaller than this (about 2 percent or a bit more) because the impact on less skilled workers is greater than that on more skilled workers.  As a result, the mix of skills will change, and GDP will fall by less than total hours worked.

Almost back to (the new) normal?

Torsten Slok of Deutsche Bank Research sends along the above graphic.  At face value, it indicates the labor market is almost back to normal. If so, this fact suggests that the Fed may soon need to back off its policy of near zero interest rates, and that the slow pace of economic growth experienced in recent years reflects slow growth in potential due to adverse structural forces rather than inadequate aggregate demand.

Monopsony

Retire the Penny

My long-time readers know that I have long favored getting rid of the penny.  If you agree, you can now let the White House know via this petition.

A Wonderfully Amusing Student Talk, from Princeton University Class Day 2014

From the Harvard Class of 2009

A video for their 5th year reunion, featuring a couple of econ profs.

Inequality in the UK

Christopher Pissarides

A profile of the Nobel laureate.

More Piketty Readings

1. Jim Hamilton
2. Per Krusell and Tony Smith
3. James Galbraith
4. Update: Debraj Ray
5. Update: Larry Kotlikoff
6. Update: Jason Furman
7. Update: Francis Diebold
8. Update: Ben Mathew
9. Update: Mervyn King
10. Update: Matt Rognlie

The FT takes on Piketty

The Financial Times headline: Piketty findings undercut by errors.
Update: Piketty responds to the FT.

David Autor on Inequality

From a recent interview of the MIT economist (discussing this article):

Q. You are focused on inequality among the so-called “99 percent,” not between the 1 percent and the 99 percent. Why?

A. There’s a real national debate about the significance and causes of inequality. This public debate is dominated by the discussion of the top 1 percent. And the top 1 percent is important, but focusing on the top 1 percent conveys the message that the game is all rigged, that if you’re not in the elite stratum, there’s nothing to shoot for. And that’s just not the case. The growth of skill differentials among the other 99 percent is arguably even more consequential than the rise of the 1 percent for the welfare of most citizens. 

Here’s a concrete way to see it: The earnings gap between the median college-educated two-income family and the median high school-educated two-income family rose by $28,000 between 1979 and 2012. This [shift] — which excludes the top 1 percent, since we’re focusing on medians — is four times as large as the redistribution that has taken place from the bottom 99 percent to the top 1 percent of households in the same period.

Improving Econ 101

Noah Smith says introductory economics needs to be more empirical. I understand his argument, and have some sympathy with it, but I wonder if the substantial change he seems to be proposing is practical.  Economists usually do empirical work with statistical tools that most college freshmen have not yet learned. 

We teachers of introductory economics can and should explain where and why economists disagree. That is part of helping students develop their critical thinking skills.  But I doubt students are in a position to try to evaluate the competing empirical work that shapes the differing views.

In the end, introductory economics is just that: an introduction to the economist's way of thinking.  That means giving students basic concepts--comparative advantage, supply and demand, market efficiency and market failure--that will make them more perceptive readers of the newspaper.

In Inequality Back to the 1920s Level?

Not really, says Gary Burtless, though some pundits would have you think otherwise.

A Defense of High Frequency Traders

By Cliff Asness et al.  Very cogent, in my view.  The bottom line:

In summary, we don't believe HFT profits are excessive or excessively consistent. We censure illegal front running as strongly as anyone, but it has near nothing to do with HFT per se. Canceling orders in the process of providing liquidity is key to any sort of market making, whether HFT or not. We support the right of HFTs, or anyone, to try to guess the direction of the market, using order flow or any other public information. We not only support the right, we celebrate the successful exercise of that right as it adds to public welfare by making markets more efficient and lowering the cost of investing. Lastly, we believe markets are "rigged" in favor of, not against, retail investors.

More on Piketty

1. A comment that questions the historical trends in the capital-income ratio.
2. A comment that questions the proposed tax on wealth.
3. Update: And here is a long commentary from Xavier Sala-i-Martin.  Use the Google translate button near top right to translate into English.

Summers on Piketty

One of the best reviews of the book I have seen.

A Visit to Dartmouth

I will be talking at a public event, along with Jared Bernstein, at Dartmouth on Monday.  If you are in the area and want to attend, information is available here.

Alan Krueger

The Princeton Alumni Weekly profiles the former CEA chair.

Rogoff on Piketty

Here, via Project Syndicate.  A tidbit:

Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?

An Interview with Mark Gertler

Words of wisdom from the NYU macroeconomist.

Very Sad News

A friend at the University of Chicago reports to me that Gary Becker died last night.  He was 83.

Gary was one of the greatest economists of the past half century. You can read about his contributions here.  I did not know him well, but based on every interaction I had with him, it seems that he was a truly nice man as well as a path-breaking scholar.  He will be missed.

Update: The Times obituary.

Media Slant

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

VHA Revisited

Advocates of government-run healthcare often point to the veterans health system as a prototype.  For example, Paul Krugman wrote a while back:

that brings me to Mitt Romney’s latest really bad idea, unveiled on Veterans Day: to partially privatize the Veterans Health Administration (V.H.A.).  What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform.

So this story from CNN (hardly a right-wing news source) caught my eye:

At least 40 U.S. veterans died waiting for appointments at the Phoenix Veterans Affairs Health Care system, many of whom were placed on a secret waiting list.  The secret list was part of an elaborate scheme designed by Veterans Affairs managers in Phoenix who were trying to hide that 1,400 to 1,600 sick veterans were forced to wait months to see a doctor, according to a recently retired top VA doctor and several high-level sources. For six months, CNN has been reporting on extended delays in health care appointments suffered by veterans across the country and who died while waiting for appointments and care.

Maybe privatization would solve the problem.  If veterans had vouchers that they could take to competing healthcare providers, they would likely not have had to wait as long.

More Competition

Steve Cecchetti and Kim Schoenholtz are blogging, mainly on issues related to money and banking. 

The blog seems meant to complement and promote their textbook.  Who would ever think to use a blog for such a purpose?

British Healthcare Fact of the Day

"In Britain, even though they're already paying for the National Health Service, six million Brits—two-thirds of citizens earning more than $78,700—now buy private health insurance. Meanwhile, more than 50,000 travel out of the U.K. annually, spending more than $250 million, to receive treatment more readily than they can at home."

Source.

An Interview with Piketty

On NPR...and I chime in as well.

Do more lectures improve student performance?

Yes, finds a new experimental study, but the authors interpret the effects as modest in size.  One group of students in introductory microeconomics got a lecture twice a week (what the authors call the "traditional" format), and the other group of students got a lecture only once a week.  All the students had the same access to online resources and the same wonderful textbook. (You can guess which one.)  The results:

We find that students in the traditional format scored 2.3 percentage points more on a 100-point scale on the combined midterm and final. There were no differences between formats in non-cognitive effort (attendance, time spent with online materials) nor in withdrawal from the class.

First Thoughts on Piketty

I have been reading Thomas Piketty's "Capital in the 21st Century." It is truly an impressive work, and I am much enjoying it. I have recently organized a session at the upcoming AEA meeting (January in Boston), where David Weil, Alan Auerbach, and I will be discussing the book, followed by a response from Professor Piketty.

Let me offer a few immediate reactions.

The book has three main elements:

1. A history of inequality and wealth.
2. A forecast of how things will evolve over the next century
3. Policy recommendations, such as a global tax on wealth.

Point 1 is a significant contribution. I like this part of the book a lot.

Point 2 is highly conjectural. Economists are really bad at such things. In particular, the leap from r>g to the conclusion of a growing role of inheritance in society seems too large to me. Many capital owners consume much of the return on their capital, so wealth does not grow at rate r. This consumption ranges from fancy cars and luxurious vacations to generous charitable giving. In addition, unless mating is perfectly assortative, or we return to an era of primogeniture, wealth per family shrinks as it is split among children.  So, from my perspective, Piketty tries to draw way too much from r>g. (Quick Quiz for econonerds: (a) What does r>g tell you in a standard overlapping generations model?  (b) And what is the magnitude of bequests in that model?  Answers below.*)

Point 3 is as much about Piketty’s personal political philosophy as it is about his economics. As we all know, you can’t get “ought” from “is.” Like President Obama and others on the left, Piketty wants to spread the wealth around. Another philosophical viewpoint is that it is the government’s job to enforce rules such as contracts and property rights and promote opportunity rather than to achieve a particular distribution of economic outcomes. No amount of economic history will tell you that John Rawls (and Thomas Piketty) offers a better political philosophy than Robert Nozick (and Milton Friedman).

The bottom line: You can appreciate his economic history without buying into his forecast.  And even if you are convinced by his forecast, you don't have to buy into his normative conclusions.
-------
* Answers to quiz: (a) That the economy is dynamically efficient (that is, it has not over-accumulated capital).  (b) Zero.

Report from the Chair

Readers of this blog may have noticed that I have not been as active here over the past two years as I was previously. One of the reasons is that, about two years ago, I was appointed chairman of the Harvard economics department. That has been keeping me busy. But I am happy to report that the job is going well. One of the responsibilities of the chair is to oversee faculty hiring, and we have had some great results. Our new faculty hires include the following (in alphabetical order):

1. Gabriel Chodorow-Reich
2. Ben Golub
3. Robin Lee
4. Matteo Maggiori
5. Matthew Rabin
6. Gautam Rao
7. Neil Shephard
8. Stefanie Stantcheva
9. Elie Tamer

A pretty good list, if I say so myself!

The Many Determinants of Demand

Allen Sanderson sees them multiplying.

Solow on Piketty

A review in the New Republic.

Transitory Income and the One Percent

From today's NY Times:

Thomas A. Hirschl of Cornell and I [Mark Rank of Wash U] looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking. 

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.... 

It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. (This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60).... 

Rather than talking about the 1 percent and the 99 percent as if they were forever fixed, it would make much more sense to talk about the fact that Americans are likely to be exposed to both prosperity and poverty during their lives, and to shape our policies accordingly. As such, we have much more in common with one another than we dare to realize.

Sometimes it's better to split the baby

This story about the Census Bureau is amazing to me: The Census is changing its annual survey about health insurance.  As a result, the new data will not be comparable to the old, making it much harder to gauge the effects of the Affordable Care Act.

Is this a White House conspiracy to hide the effects of the law, as some have suggested?  Maybe, but probably not. I have a lot of respect for the government data producers, so I am giving them the benefit of the doubt.

Yet I don't see why the Bureau needs to make such a sudden change.  Why not, for a few years, give half the sample the old questionnaire and half the new one?  This procedure would provide a basis for eventually splicing together the old and new time series.

The most fun event the Harvard economics department has sponsored since Kuznets did his song and dance number in drag

How to Give an Applied Micro Talk

Advice from Jesse Shapiro.

Next time you hear someone advocate for single-payer healthcare, remember this

From the NY Times:

Two Florida doctors who received the nation’s highest Medicare reimbursements in 2012 are both major contributors to Democratic Party causes, and they have turned to the political system in recent years to defend themselves against suspicions that they may have submitted fraudulent or excessive charges to the federal government.... 

Topping the list is Dr. Salomon E. Melgen, 59, an ophthalmologist from North Palm Beach, Fla., who received $21 million in Medicare reimbursements in 2012 alone....  

Dr. Melgen’s firm donated more than $700,000 to Majority PAC, a super PAC run by former aides to the Senate majority leader, Harry Reid, Democrat of Nevada. The super PAC then spent $600,000 to help re-elect Senator Robert Menendez, Democrat of New Jersey, who is a close friend of Dr. Melgen’s. Last year, Mr. Menendez himself became a target of investigation after the senator intervened on behalf of Dr. Melgen with federal officials and took flights on his private jet.

Sentence of the Day

For Deacon Patrick Moynihan, Head of LCS [Louverture Cleary School], the importance of teaching economics in Haiti is clear, “After theology—economics is the most important science to study because the two things that impact everyone are God and the market.”

Here is the source.

Teaching the Liquidity Trap

Users of my favorite intermediate macro textbook will be familiar with the dynamic model of aggregate demand and aggregate supply, which I first put into the book in the 7th edition. That new chapter shows the student how to incorporate a standard Taylor rule into business-cycle theory, as well as how to trace the dynamic response of the economy to various shocks. Instructors who teach that chapter might be interested in this new paper, which shows how to incorporate the zero lower bound into the model.

Barack Obama and Jeb Bush on Immigration

Immigration reform remains one of the great challenges facing our nation, and unfortunately, the policies of the current president fail to match his rhetoric.  In today's NY Times:

With the Obama administration deporting illegal immigrants at a record pace, the president has said the government is going after “criminals, gang bangers, people who are hurting the community, not after students, not after folks who are here just because they’re trying to figure out how to feed their families.” 

But a New York Times analysis of internal government records shows that since President Obama took office, two-thirds of the nearly two million deportation cases involve people who had committed minor infractions, including traffic violations, or had no criminal record at all. Twenty percent — or about 394,000 — of the cases involved people convicted of serious crimes, including drug-related offenses, the records show.... 

Mr. Obama came to office promising comprehensive immigration reform, but lacking sufficient support, the administration took steps it portrayed as narrowing the focus of enforcement efforts on serious criminals. Yet the records show that the enforcement net actually grew, picking up more and more immigrants with minor or no criminal records.

Will the next President do better?  There is reason to hope.  In today's Wall Street Journal:

Former Florida Gov. Jeb Bush said Sunday that he would make up his mind this year on whether to run for president, and waded into the immigration debate by describing the actions of many who come to the U.S. illegally as an "act of love."... 

"Someone who comes to our country because they couldn't come legally…yes, they broke the law but it's not a felony. It's an act of love. It's an act of commitment to your family. I honestly think that that is a different kind of crime," he said.

Sweet Home Alabama

Over the next few days, I will be visiting a couple colleges in Alabama.  If you happen to be in the area, you might be interested to know that I am giving a public lecture at Troy University on April 3.  You can find information about it here.

Update: A few photos of the event.

Announcement

As chairman of the Harvard economics department, I am delighted to announce the merger of the Harvard and MIT economics departments. After consulting with the department chairs, the Presidents of Harvard and MIT have concluded that the synergies were too great for the departments to operate separately, only two miles apart, as we have for many years. As a result, a new building is to be built at 950 Mass Ave, between the schools and near the NBER, that will house both departments as a new single entity. The faculty will teach courses open to undergraduates at both schools. The PhD programs will be completely merged to create a single, unified program. This development is considered a pilot project, which, if successful, could lead to a complete merger of Harvard and MIT in the future.

To learn more about this exciting development, click here.

Some Surprising Facts about Income Growth and Inequality

From Brookings's Gary Burtless.  A few very nice graphs here, based on CBO data.

A Random Snapshot

I have been shooting a series of short videos to serve as chapter introductions for my favorite textbook.  These will be available to those using the electronic version of the book, a rapidly increasing share of the market.  Just for fun, here is a snapshot from yesterday's video shoot.

Word of the Day

Bulverism.

I had never heard this word, but a correspondent recently drew my attention to it.  Coined by C.S. Lewis, it is a type of argumentation where you assume your opponent is incorrect then quickly move to explain the causes of his folly. Of course, it is not valid as a matter of logic, but it is unfortunately all too common.

Here is C.S. Lewis:

In other words, you must show that a man is wrong before you start explaining why he is wrong. The modern method [Note: This essay was written in 1941.] is to assume without discussion that he is wrong and then distract his attention from this (the only real issue) by busily explaining how he became to be so silly. In the course of the last fifteen years I have found this vice so common that I have had to invent a name for it. I call it “Bulverism.” Some day I am going the write the biography of its imaginary inventor, Ezekiel Bulver, whose destiny was determined at the age of five when he heard his mother say to his father - who had been maintaining that two sides of a triangle were together greater than the third - “Oh, you say that because you are a man.” “At that moment,” E. Bulver assures us, “there flashed across my opening mind the great truth that refutation is no necessary part of argument. Assume your opponent is wrong, and then explain his error, and the world will be at your feet. Attempt to prove that he is wrong or (worse still) try to find out whether he is wrong or right, and the national dynamism of our age will thrust you to the wall.” That is how Bulver became one of the makers of the Twentieth Century.

The Growth of Pass-Through Entities

Over the past few decades, there has been an amazing shift in how businesses are taxed.  See the figure below, which is from CBO.  Businesses are more and more taxed as pass-through entities, where the income shows up on personal tax returns rather than on corporate returns.  (Here is an article discussing how the mutual giant Fidelity recently switched from one form to the other.)

This phenomenon complicates the interpretation of tax return data.  For example, when one looks at the growth of the 1 percent, or the 0.1 percent, in the Piketty-Saez data, that growth is likely exaggerated because some income is merely being shifted from corporate returns. I don't know how much.  If someone has already quantified the magnitude of this effect, please email me the answer. If not, someone should write that paper.

Click on graphic to enlarge.

Too Little Faith in People, Tax Policy Edition

Paul Krugman responds to my post about a recent column of his.  He is correct that not all economists agree that low capital taxation is desirable; he appropriately cites Diamond and Saez, who are on the high-capital-tax side of this debate. FYI, here is another recent paper, written in part as a response to Diamond and Saez, which finds that optimal rates of capital taxation, while positive, are quite low.

But that is not really the issue. If Paul had said "reasonable economists disagree, here are the arguments, and here is why I tend to favor one side rather than the other" I would not have objected.  Instead, in his original column, he wrote as if there were no reasonable arguments for the policy pursued by the Bush administration, and he attributed the most vile motives to those who advanced the policy.

This episode illustrates a fundamental difference between Paul and me.  I try not to assume the worst in other people, just because they disagree with me.

Markets in Everything

If there ever was a niche product, this is it.

Not Class Warfare, Optimal Taxation

Today's column by Paul Krugman is classic Paul: It takes a policy favored by the right, attributes the most vile motives to those who advance the policy, and ignores all the reasonable arguments in favor of it.

In this case, the issue is the reduction in capital taxes during the George W. Bush administration.  Paul says that the goal here was "defending the oligarchy's interests."

Really? As Paul well knows, there is a large literature in economics suggesting that an optimal tax system imposes much lower taxes on capital income than on wage income (or consumption).  I can personally attest that President Bush's economic advisers were well aware of this literature.

Note that when Barack Obama ran for President in 2008, he campaigned on only a small increase in the tax rate on dividends and capital gains.  He did not suggest raising the rate on this income to the rate on ordinary income.  Is this because Barack Obama also favors the oligarchy, or is it because his advisers also understood the case against high capital taxation?

The Economist as Philosopher

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

Measuring Slack in the Phillips Curve

According to a new paper coauthored by Alan Krueger, the short-term unemployment rate works better than the standard unemployment rate in explaining changes in inflation, and according to this measure, the economy was about at its NAIRU in 2013.  This finding is related to issues I discussed in a recent Times column.  Here is a relevant graph from the Krueger paper.

How to Win a Billion Dollars

Quicken Loans will pay you a billion dollars if you fill out perfect bracket for the NCAA men's basketball tournament.  But given the odds, the expected value is still less than a penny.

You can enter here.

Economists on a Minimum Wage Increase

Hundreds are in favor, hundreds are opposed.

In choosing whether to major in econ, women respond more to grades than men

This chart shows the percentage of male and female students who received a given grade in introductory economics course who then later majored in economics.

Source.

ERP

The new Economic Report of the President is available here.

The Divide over Market Efficiency

Here is a great article about Eugene Fama, Robert Shiller, and the debate over the informational efficiency of financial markets.

Is the Obama administration right in pushing for a trade deal?

1. Paul Krugman says no.
2. The Economist says yes.

It is all downhill after 40

Click on graphic to enlarge.

Source.

Gauging Mobility

I agree with the main point of Paul Krugman's latest blog post: When thinking about the welfare of a typical person in society, income inequality is more important than mobility. But this sentence struck me as more wrong than right:

"the most important factor in whether you can become rich is whether you chose the right parents: Most people are going to end up with socioeconomic status close to where they started."

According to a recent study of mobility (see Figure 1), the correlation between parent's income rank and children's income rank is about 0.3. That means that if you are in the 99th percentile (the much-talked-about 1 percent), your best guess is that your child will be at the 65th percentile.

To me, that seems like a lot of regression toward the mean. This is why financially successful parents often have strong bequest motives. They are smoothing consumption across generations.

Addendum: Here is the key Figure 1:

Superstars and Niche Products

Robert Frank has a great article in today's NY Times about how technology is changing the return to talent. I think he is focused on a key issue.  A lot of the longer-term trends we see in the economy are driven mostly by changes in technology, of which economists have only a rudimentary understanding.

Bob's story of Alfred Marshall and the piano industry is particularly noteworthy and, I am embarrassed to say, new to me.

Addendum: In the article, Bob mentions his sons' music group.  For those interested, here it is:

The Draft

University of Chicago's Allen Sanderson discusses the economics and political economy of conscription.

As for my view: I find it hard to imagine that I would ever endorse the reinstatement of the draft, not so much for economic reasons, but out of respect for individual liberty.

CBO on a Minimum-Wage Hike

From a new report:

Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers....The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.

CEOs are paid for performance

In response to my recent article, some commentators (like this one) are prone to say, "Sure, actors, authors, and athletes deserve their good fortune, because they get paid well only if they produce, but hefty CEO pay is unfair because it is not based on performance."  Before you are tempted to make that argument, please make yourself familiar with the facts by reading this paper:

Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges
Steven N. Kaplan

Abstract:

In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.

On the Iron Men of Wall Street

Commenting on my recent column, Paul Krugman wonders if I somehow missed the financial crisis of the past few years.  He seems to think the crisis proves that the titans of Wall Street earn much more than the value of their contributions. 

I will be the first to admit that measuring the social value of the financial sector is hard.  But let me offer a few observations:

1. In thinking about the social value of the workers in the financial system, it is as important to keep in mind long-run growth as well as short-run fluctuations.  Financial intermediation plays a key role in growth.  And a case can be made that for human welfare, growth swamps fluctuations.  (Robert Lucas most famously made this argument.)

2. It is too facile to blame the financial crisis entirely on Wall Street.  In the recent edition of my favorite intermediate macro textbook, there is a case study of who bears responsibility for the crisis.  It concludes there is no single culprit but lots of blame to spread around. (See page 580 of Chapter 20.)

3. It would be a mistake to think that the rich had it easy during this crisis.  According to the Saez-Piketty data, during the downturn from 2007 to 2009, average income fell 17 percent, but the incomes of the top 1 percent fell 36 percent.  Wall Street titans at the center of the crisis such as Dick Fuld and Hank Greenberg reportedly lost 90 percent of their net worth.  To be sure, they started off at a much higher base than most people, but let's not pretend the bankers got off scot-free.

On Stanley Fischer

Wellesley College's Joe Joyce reviews Stan's qualifications to be the Fed's Vice Chair.

Defending the One Percent (Again)

Click here to read my column in Sunday's NY Times.  I expect this one will generate more than its share of irate letters.

Obamacare versus Romneycare

One of the themes that we have all heard over the past few years is that President Obama's healthcare reform is merely bringing the kind of changes Massachusetts had under Governor Romney to the nation. If that were really true, you would think that these national reforms would have minimal impact on the state of Massachusetts. Well, here is a story from today's Boston Globe:

About 50,000 health insurance applications, many filed by low-income Massachusetts residents, have yet to be processed by the state’s troubled insurance marketplace, officials disclosed Thursday, and it may take months to get all these people enrolled in subsidized plans. 

For several months, residents have been encouraged to file old-fashioned paper applications because the state’s insurance website has been hobbled by error messages and has crashed frequently since it was revamped in October to comply with the more complex requirements of the federal health care law. 

Frustration with the broken Massachusetts Health Connector website and the paperwork backlog was evident Thursday, when Jean Yang, the agency’s executive director, wept as she told the Connector board how demoralized her staff is.

Happy Valentine's Day

Source.

If Obamacare reduces labor supply, will it raise wages?

In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

Perhaps the easiest way to think about this issue is in the context of a Solow growth model. In the Solow model, the steady-state real wage is a function of technology, the saving rate, and the population growth rate. If labor supply per person suddenly falls by, say, 2 percent and stays there, the real wage will rise initally, but it will eventually return to its former level. Steady-state income per person falls by the full 2 percent.

One effect that might occur is a change in the composition of labor income. If the Act reduces labor supply primarily among the low-skilled, while not having that effect among the highly-skilled, then we might get a change in the relative wages of skilled and unskilled. But an overall increase in real wages seems unlikely.

The Economics of Downton Abbey

From The Washington Post.

Solow vs Mankiw on the One Percent

Readers of this blog will be familiar with my recent article Defending the One Percent.  In the new released issue of JEP, you can read a letter by Bob Solow commenting on the article as well as my response.

Sentence of the Day

From the Congressional Budget Office:

CBO estimates that the ACA [Affordable Care Act] will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

Implicit in this estimate are elasticities that measure how much people respond to incentives.  My sense is that CBO is typically conservative when it come to gauging these incentives effects.  So I would take their estimate of the impact on hours worked as a lower bound. The actual figure may be higher.


Addendum: Here is a column I wrote about these incentive effects five years ago.

Econ Summer Camp

Grad students with an interest in the history of economic thought should click here.

Humility-based Libertarianism

On the suggestion of Bryan Caplan, I just read In Praise of Passivity by philosopher Michael Huemer. A lot in the article makes sense to me.  As a social scientist, I think there is much we don't know about how the world works, and that intellectual humility goes a long way to explaining my skepticism about many governmental interventions into private behavior.  In any event, I also recommend the article.

An Econ Conference for Undergrads

In April in Washington, DC.

My Proposed (but not accepted) Bet with Paul Krugman on the Obama Forecast

Scott Sumner declares that I would have been the winner.

What worries Americans?

When Gallup recently asked Americans what the biggest problem facing the United States is, the four most common answers were dissatisfaction with government, the economy in general, unemployment, and healthcare.  Each was mentioned by more than 15 percent of those polled.  The gap between rich and poor was mentioned by only 4 percent.


If President Obama wants to make the 2014 electoral debate about income inequality, as he seems to, he has an uphill climb ahead of him.

How an Economist Helped Inspire the Movie Dr. Strangelove

Thomas Schelling, of course.

Does income inequality increase mortality?

In his recent Times column, Paul Krugman writes:

Rising inequality has obvious economic costs: stagnant wages despite rising productivity, rising debt that makes us more vulnerable to financial crisis. It also has big social and human costs. There is, for example, strong evidence that high inequality leads to worse health and higher mortality.

The links are from the online version of Paul's column.  I followed the second link to an interesting article by Angus Deaton.  Angus writes the following (emphasis added):

Darren Lubotsky and I ⁷ have investigated the relationship between income inequality, race, and mortality at both the state and metropolitan statistical area level. In both the state and the city data, mortality is positively and significantly correlated with almost any measure of income inequality. Because whites have higher incomes and lower mortality rates than blacks, places where the population has a large fraction of blacks are also places where both mortality and income inequality are relatively high. However, the relationship is robust to controlling for average income (or poverty rates) and also holds, albeit less strongly, for black and white mortality separately. Nevertheless, it turns out that race is indeed the crucial omitted variable. In states, cities, and counties with a higher fraction of African-Americans, white incomes are higher and black incomes are lower, so that income inequality (through its interracial component) is higher in places with a high fraction black. It is also true that both white and black mortality rates are higher in places with a higher fraction black and that, once we control for the fraction black, income inequality has no effect on mortality rates, a result that has been replicated by Victor Fuchs, Mark McClellan, and Jonathan Skinner⁹ using the Medicare records data. This result is consistent with the lack of any relationship between income inequality and mortality across Canadian or Australian provinces, where race does not have the same salience. Our finding is robust; it holds for a wide range of inequality measures; it holds for men and women separately; it holds when we control for average education; and it holds once we abandon age-adjusted mortality and look at mortality at specific ages. None of this tells us why the correlation exists, and what it is about cities with substantial black populations that causes both whites and blacks to die sooner.

In a review of the literature on inequality and health, I note that Wilkinson's original evidence, which was (and in many quarters is still) widely accepted showed a negative cross-country relationship between life expectancy and income inequality, not only in levels but also, and more impressively, in changes. But subsequent work has shown that these findings were the result of the use of unreliable and outdated information on income inequality, and that they do not appear if recent, high quality data are used. There are now also a large number of individual level studies exploring the health consequences of ambient income inequality and none of these provide any convincing evidence that inequality is a health hazard. Indeed, the only robust correlations appear to be those among U.S. cities and states (discussed above) which, as we have seen, vanish once we control for racial composition. I suggest that inequality may indeed be important for health, but that income inequality is less important than other dimensions, such as political or gender inequality.¹⁰

Is Angus's article really support for Paul's claim?  It seems to me that it is more the opposite.