Equality vs Efficiency once again

The NBER reports:

If you provide very generous unemployment insurance, you may end up with more long-term unemployment. That's what economists Peter Kuhn and Chris Riddell find when they compare the long-term impact of a highly generous unemployment insurance (UI) program in the Canadian province of New Brunswick with the more modest UI program in the neighboring state of Maine. In Maine's northernmost countries, about 6.1 percent of employed men worked fewer than 26 weeks (half a year) in 1990. Across the Saint Croix River in New Brunswick, the comparative figure was more than three times as high, 20.8 percent. The more-generous UI program in New Brunswick accounts for about two-thirds of this difference, the authors estimate.

How indebted is the U.S. government?

Here is a good graph from yesterday's congressional testimony of CEA chair Eddie Lazear (click on the graph to enlarge). The bottom line: The level of U.S. government debt, either now or in the near future, is not unusually high by historical or international standards.

The looming problem with fiscal policy is the longer-term outlook, which will unfold over the next several decades as the baby-boom generation retires and starts collecting Social Security and Medicare. At that point, this series will start rising rapidly unless taxes are raised or spending is reduced compared with benefits promised under current law.

OPEC for Spuds

A reader alerts me to a textbook example of a cartel:

It took farmer Merrill Hanny three days to bury $100,000 worth of his perfectly good potatoes. He remembers how they crunched beneath his tractor as he plowed over his muddy field in the spring of last year.

Mr. Hanny destroyed part of his crop at the behest of the United Potato Growers of America, a fledgling group of regional farming cooperatives. The group aspires to be to potatoes what OPEC is to oil by carefully managing supply to keep demand high and constant, resulting in a more stable return for farmers.

The new organization has been a boon to Mr. Hanny, 53 years old, and other farmers who for years have watched potato overproduction push down prices and mash profits. "For the first time, I feel in control of my destiny," says Mr. Hanny, who is married and has seven children....

In the past year, United Potato helped erase 6.8 million hundred-pound potato sacks from the U.S. and Canadian markets -- the equivalent of about 1.3 billion medium orders of french fries at McDonald's. For farmers, their open-market returns surged to $10.04 per hundred pounds, up 48.5% from last year....

The spud cartel's manipulation of supply is perfectly legal. Orange, dairy and other farmers have employed similar co-ops as market stabilizers since 1922, when the Capper-Volstead Act exempted farmers from federal antitrust laws, permitting them to share prices and orchestrate supply.

From the Wall Street Journal two days ago. As a matter of public policy, it is hard to see any good reason to allow this cartel while outlawing most others.

But I must admit that it is hard for me to separate my objective analysis as an economist from my love of hash browns. So I have two reasons to object to this particular cartel.

Update: A comment draws attention to an odd phrase in the article: "managing supply to keep demand high and constant." This makes no sense if the words are interpreted as we use them in economics textbooks. Managing supply does not affect the demand curve. By "demand," the author probably meant "consumer expenditure," which in turn equals producer revenue.

Economics Nobel Prize Pool

Think you know who's going to win the Nobel prize in economics? Have a dollar you can afford to lose? If you answered "yes" to both questions, then contact Harvard grad student John Friedman.

Best line I heard today

"In Washington, the truth is just another special interest, and one that is not particularly well financed."

Attributed to Mike Mussa.

Update: A reader sends me the reference: Mussa, AER, May 1993.

I need to calm down

It really pisses me off when people confuse correlation with causation. Here is what I just read in the Harvard University Gazette:

Researchers at Johns Hopkins School of Medicine tracked 1,055 medical students for 36 years. Compared with cooler heads, the hotheads were six times more likely to suffer heart attacks by age 55 and three times more likely to develop any form of heart or blood vessel disease.

The conclusion is clear: Anger is bad for you at any age.

No, the conclusion from the fact given is not at all clear. People who get mad more easily do so for a reason--a more stressful job, bad genes, or some other mysterious factor X. Maybe it is the X factor, rather than the anger itself, that is bad for you. Maybe reducing anger without changing X won't change health outcomes at all.

I am going to call the author and give him a piece of my mind. Just as soon as this pain in my chest goes away.

Who invented supply and demand?

A blog reader emails me:

Hi-
I'm a devoted reader of your blog, and I use your textbook with the Boston Public School seniors whom I teach in Brighton. They love your book. Thanks for doing it!
Today in class, they asked two great questions that I couldn't answer, so I turn to...
Question 1. Who invented the supply and demand graph? (I said Heilbroner. Is that right?) 1B. What is there to read about the history of the graph itself? That is, when was it created? By whom? Was it adopted immediately? etc.
Question 2. Why is quantity on the X axis? Shouldn't it be on the Y axis?
Thanks again for all you do,
[name withheld]
Public School Econ teacher

The model dates long before Heilbroner. Here is the answer according to Wikipedia:

the partial equilibrium supply and demand economic model [was] originally developed by Antoine Augustin Cournot (published in a book in 1838) and thirty years later broadly publicized by Alfred Marshall.

That sounds right to me. I should note that Marshall's 1890 text was the standard for its day. You can find Marshall online, but unfortunately the online version omits the footnotes. In quickly looking through the copy I have on my shelf, I found supply-and-demand graphs in footnotes, but none in the main text. You can, however, read the discussion of supply and demand in Book V.

On the axis question: The instructor is right that, given the way we now teach supply and demand, it makes more sense to have price on the horizontal axis. The price is viewed as the variable that determines quantity supplied and quantity demanded, and we usually put the dependent variable (which here is quantity) on the vertical axis.

So why is it switched? Here is a guess. The early economists may have been imagining that, in the very short run, a given quantity of goods was supplied to the market (an agricultural harvest, for example). The supply curve is then vertical, and the price adjusts to ensure that quantity demanded equals this exogenous quantity supplied. So, in this very short run, the price seems more like the dependent variable. Now, however, the choice of axes is based more on historical convention than logic.

I am not an historian of economic thought, so these answers may be off base. But I am sure the commenters will correct me if I am mistaken.

Update: A comment directs us to a good article on the topic from the Richmond Fed.

Update 2: My Harvard colleague Robert Barro emails me his insights on the matter:

As I recall, Hicks in Value and Capital thought in terms of demand price and supply price. The demand price is how much a person was willing to pay for an additional unit of goods (starting from some initial quantity, Q). The supply price is how much a producer would have to be paid to provide an additional unit of goods. This construction--which I think comes from Marshall--makes it natural to have P on the vertical axis and Q on the horizontal.

Leonhardt on Cutler and Health Care

In today's NY Times, David Leonhardt highlights the work of Harvard health economics guru David Cutler. The bottom line:

an affluent society should devote an ever-growing share of its resources to the health of its citizens.

Cutler will be giving an ec 10 lecture later this semester.

Kremer on Immigration

My Harvard colleague Michael Kremer defends immigration. Here is a brief description of his new paper:

Immigrant workers serving as nannies, caretakers and housecleaners may be helping to improve conditions for native workers. A new paper, co-authored by a Harvard professor and a recent PhD graduate, concludes that the growing trend of immigrant household laborers is having the effect of raising salaries for native low-skilled workers, and reducing wage inequalities between workers overall.

The working paper titled “The Globalization of Household Production,” challenges many existing theories about the economic impacts of immigration. Co-authors Michael Kremer and Stanley Watt examine how immigrant household workers are affecting other labor trends, and how those trends are affecting the overall economy.

The authors document the rising numbers of women who are increasingly crossing international borders to work as private household workers. In Singapore and Hong Kong, for instance, foreign workers in private households comprise around 7% of the total labor force or more. The percentages are even higher in some “new rich” gulf countries.

Kremer and Watt argue that as more immigrant women serve in household positions, more high-skilled native women are therefore available to join the labor market, driving down relative wages among high-skilled workers and reducing the disparity in wages between low- and high-skilled workers. In addition, Kremer and Watt contend that as more native women return to the workforce, they contribute more tax dollars to the general coffers. This provides “a fiscal benefit for the population, even without considering the taxes paid by the migrants themselves,” they write. Assuming immigration levels of 7% of the total labor force, relative wages of native low-skilled workers are increased by 3.9%, and native welfare overall is increased by 1.2%, they claim.

Congratulations, Phill

President Bush today announced the nomination of Phillip Swagel to be Assistant Secretary of Treasury for Economic Policy. A graduate of Princeton and the Harvard PhD program in economics, Phill was my chief of staff at the CEA and, most recently, a coauthor of mine on papers on antidumping and outsourcing.

A great choice for an important job.

The Omnipotent POTUS

Some Americans don't understand the limits of Presidential power in a market economy:

According to a new Gallup poll, 42 percent of respondents agreed with the statement that the Bush administration "deliberately manipulated the price of gasoline so that it would decrease before this fall's elections."...Almost two-thirds of those who suspect President Bush intervened to bring down energy prices before Election Day are registered Democrats, according to Gallup.

From yesterday's Washington Post.

I take this as further evidence that we need better and more widespread economics education.

Stiglitz on GDP

Economist Joe Stiglitz, writing in Fortune magazine, takes aim at Gross Domestic Product as a measure of how well an economy is doing. He prefers Green Net National Product to take into account (1) degradation of the environment and use of natural resources, (2) depreciation, and (3) payments to foreigners.

I won't argue the points, but they seem somewhat pedantic to me (even as a fellow pedant). I bet these two measures are highly correlated over time and across countries, so for most purposes the distinction is not crucial. Moreover, I doubt focusing on the wrong measure has really lead to any significant policy blunders. No politician wakes up in the morning and says, "Today, I am going to maximize GDP as measured by my national income accountants."

LifeAtHarvard.com

Here is a brand new blog, apparently written by a few Harvard undergrads, which might interest some readers here, especially the post Economics: the biggest, baddest major at Harvard.

I already learned something about the school I didn't know after teaching here for 21 years: We have waffles with the school seal.

Nouriel goes out on a limb

Nouriel Roubini, an econ professor at NYU, talks to New York Magazine about the housing market:

Will there be a fire sale in the city?

I’d expect prices to be 5 to 10 percent lower a year from now, on average. On the national level, real home prices may fall 20 to 30 percent.

Good news for affordable-housing advocates.

Robert Mundell

Here is a nice piece on economist Robert Mundell, a pioneer in international finance, whose work is highlighted in Chapter 12 of my intermediate macroeconomics text.

How to Make $1 Billion

In today's Washington Post, Sebastian Mallaby says we should get rid of the penny (I agree), and he estimates the value of this long-overdue reform:

the National Association of Convenience Stores and the Walgreens drugstore chain have estimated that handling pennies adds 2 to 2.5 seconds per cash transaction. Assume that the average citizen makes one such transaction every day, and so wastes (to be conservative) 730 seconds a year. The median worker earns just over $36,000 a year, or about 0.5 cents per second, so futzing with pennies costs him $3.65 annually.

Multiply that last figure by the number of Americans, and you find that getting rid of the penny would free up economic resources valued at about $1 billion a year.

Hume vs Schumer and Graham

Here is a good question for an exam in international economics:

"One of the fundamental tenets of free trade is that currencies should float -- or at the very least, move along with market forces." True or False? Explain.

The quotation is from an op-ed in today's Wall Street Journal by Senators Charles Schumer and Lindsey Graham, writing about their plan to slap tariffs on Chinese goods unless the Chinese let the yuan move in foreign-exchange markets.

My answer would start by saying that the quoted statement is false. There is nothing inconsistent between free trade and fixed exchange rates.

My explanation would emphasize David Hume's price-specie flow mechanism. Back in the 18th century, Hume studied how the world economy reaches equilibrium under the fixed exchange rates established by a world gold standard. In such a system, adjustments in the price levels at home and abroad were the mechanism that brought trade flows into equilibrium. As a result of automatic adjustments in money supplies and prices, fixed exchange rates between currencies can coincide with free trade in goods and services.

Here is a question for the Senators to ponder: How do New York and South Carolina manage to have free trade between them? There is no floating exchange rate to bring interstate trade flows into equilibrium. By using a common currency, the two states effectively have a fixed exchange rate, and somehow everything works out just fine. David Hume explained why.

Or maybe the Senators want to slap tariffs on interstate purchases until each of their states adopts its own freely floating currency. There's a topic for their next op-ed.

For previous posts on the Chinese exchange rate, click here and here.

Truthiness

It is always fascinating to hear when "facts" turn out to be otherwise. Here is a "fact" from psychiatrist Louann Brizendine, author of the best-selling new book The Female Brain:

A woman uses 20,000 words per day, while a man uses only 7,000.

That is an amazing "fact," and I remember being quite struck by it when I first read it several weeks ago in an article on Brizendine.

But is it true? In today's Boston Globe, Mark Liberman, a Professor of Phonetics at the University of Pennsylvania, says that this "fact" has no hard data to back it up:

As it happens, there are many scientific studies that count the words used by females and males.... The findings? According to a 1993 review of the scientific literature by researchers Deborah James and Janice Drakich, ``Most studies reported either that men talked more than women, either overall or in some circumstances, or that there was no difference between the genders in amount of talk."

Liberman says Brizendine's "fact" is urban legend. Is he right? I have no idea. But one of them must be wrong.

Before readers tell me this post has nothing to do with economics, let me beg to differ. There is a lesson here: Be ready to question all "facts" you read, including those coming from economists. Don't believe everything you find in books and newspapers, or even on your favorite blog.

Update: A reliable source tells me that this "fact" is indeed wrong and that the book will be corrected. He describes Brizendine as "a pretty responsible scientist who lept at a few things which seemed to quantify her basic thesis in journalistic shorthand."

Ferguson Interview

The "Ideas" section of today's Boston Globe interviews Harvard historian Niall Ferguson. An excerpt:

IDEAS: But you supported the invasion of Iraq.

FERGUSON: I argued that if it was to be done, it should be done well or not at all. But I didn't oppose it. With the benefit of hindsight, I regret that. It was a disaster to commit so few troops and to have no coherent plan for reconstruction. It was in defiance not only of British imperial history but of successful American occupations--for example of Germany, Japan, and Korea, where the United States stayed long enough to change institutions. But typically, American interventions last only a few years. In the case of the Middle East, the result will be turning Iraq into a Haiti on the Tigris.

IDEAS: How do you understand radical Islamism? Is it, as some say, the successor to Marxism?

FERGUSON: It is. The great category error of our time is to equate radical Islamism with fascism. If you actually read what Osama bin Laden says, it's clearly Lenin plus the Koran. It's internationalist, revolutionary, and anticapitalist--rhetoric far more of the left than of the right. And radical Islamism is good at recruiting within our society, within western society generally. In western Europe, to an extent people underestimate here, the appeal of radical Islamism extends beyond Muslim communities.

IDEAS: To people who might once have been drawn to Marxism?

FERGUSON: And for much the same reason. Here is a way to reject the impure, corrupt qualities of western life and embrace a monotheistic zealotry.

New Book on Adam Smith

We have been talking about Adam Smith in ec 10. So it is timely that I now learn about a new biography of him. Tim Worstall reviews the book by James Buchan in today's Philadelphia Inquirer. Here is an excerpt from the review:

The Authentic Adam Smith

Here is a quite delightful little introduction to the life, times and work of Adam Smith. We are reminded early on that the Smith we think we know, lauded as the ultimate free marketeer, was in fact a philosopher seeking the eternal verities, not just doing the vulgar calculations of business and markets....

Buchan places Smith, as he was, firmly at the heart of the Scottish Enlightenment. In addition to his great friend David Hume, he knew James Watt the engineer, and was a childhood friend of Robert Adam, who did so much to create Bath and thus influence the Edinburgh New Town. He taught at the University of Glasgow and became a professor there in 1752.

The first of Smith's two major works, The Theory of Moral Sentiments, appeared in 1759, and Buchan not only takes us through the book's main points but also provides us with the background to the debates within it -- where an argument came from, and how it was answering or developing a point proffered by another.

We are also given a series of more personal details about Smith that help us to understand the man himself. Certainly he was of the utmost probity concerning money: In 1764 he became tutor to the young Duke of Buccleugh for the, at the time, remarkable fee of 300 pounds a year and a pension of the same for life after three years. On leaving the university, Smith insisted on returning the lecture fees to his students, and when they protested, "seizing by the coat the young man... he thrust the money into his pocket, and then pushed him from him."...

The value of this book is in precisely those moments and pieces of background. There will be those who have only heard of Smith as the intellectual basis for some assumed free market economic methods, but he was far more subtle than that. Both of his great works are mentioned and discussed, the above Theory and of course The Wealth of Nations. But, by placing him in his time, discussing the surrounding debates and events, Buchan is able to make a much more important point. Smith was not, in fact, attempting to provide a moral basis for a specific form of economic organization, in the way that perhaps Marx was a century later. Rather, he was interested in morals first; the economic thoughts grew from his research into them.

Yale, gratis

CNN reports that some Yale courses will be made available online for free:

Yale University said on Wednesday it will offer digital videos of some courses on the Internet for free, along with transcripts in several languages, in an effort to make the elite private school more accessible.

While Princeton University, Massachusetts Institute of Technology and others already offer course material online without charge, Yale is the first to focus on free video lectures, the New Haven, Connecticut-based school said.

The 18-month pilot project will provide videos, syllabi and transcripts for seven courses beginning in the 2007 academic year. They include "Introduction to the Old Testament," "Fundamentals of Physics" and "Introduction to Political Philosophy."

Might this news mark the beginning of a big change in the industrial organization of higher education?

Zeroing

Bloomberg reports, EU Renews WTO Complaint Over U.S. `Zeroing' Practice. Zeroing refers to the bizarre method of calculating antidumping duties--a method that has no basis in economic theory or common sense and that serves as yet another barrier to trade.

Here is how Phill Swagel and I described zeroing in our paper on antidumping:

One ongoing dispute concerns the U.S. practice of “zeroing,” which allows officials to disregard instances in which foreign firms charge prices over fair value, thus offsetting supposed instances of undercharging. Consider, for example, a foreign firm that sells a product in its home and U.S. markets. Six months a year, the firm charges $10 in its home market and $8 in the United States; the other six months a year, it charges $8 at home and $10 in the United States. On average, the firm charges $9 both overseas and in the United States. But under zeroing, a U.S. official can define this as dumping, with each sale in the first half of the year assigned a dumping margin of $2 and each sale in the second assigned a dumping margin of zero (rather than -$2). Instead of letting the overpricing offset the underpricing, which would mean no tariff, the average
dumping margin—and the resulting tariff—is $1.

Europe’s version of zeroing was recently found to be contrary to its WTO obligations.The U.S. government has asserted that its version differs from the Europeans’ and is attempting to defend its practice before the WTO. The WTO is unlikely to accept Washington’s defense, hinting at yet another defeat for the United States in the WTO dispute process.

This is an international dispute the United States deserves to lose.

Comments Policy

October 2007 Update: The rules below proved too costly to enforce once the readership of the blog expanded. As a result, comments are no longer enabled. Feel free to email me any comments you might have.

-----

A prominent economist emails me some comments on a previous post, with the following preface:

I do not feel like responding on the site. It feels like shouting in a crowded room.

This got me to rethink my comments policy. In the past, I have deleted only a very few comments that readers have posted. But I think it may be time to turn down the volume of the shouting in order to raise the level of the discussion.

Here is my new policy: Anyone is free to disagree with me, or with other commenters, as long as it is done politely. Comments that take a belligerent approach to economic debate are at risk of being deleted.

Please approach this blog with the civility you would bring to a college seminar. Don't post anything here that you wouldn't say to a fellow seminar participant face to face.

Update: One more rule, which perhaps goes without saying: Any post that aims to promote specific commercial products--or, God forbid, competing textbooks!--will be promptly deleted as well.

Ip is caught framing

In today's Wall Street Journal, Greg Ip describes recent changes in tax rates:

The data show that the average tax rate for all taxpayers was 12.1% [in 2004], up slightly from 11.9% in 2003 but down from 15.3% in 2000, due in part to the Bush tax cuts. Rates fell most for those at the top. The tax rate of the richest 1% fell to 23.5% from 24.3% in 2003 and 27.5% in 2000. For the bottom 50%, the 2004 tax rate was 3%, unchanged from 2003 and down from 4.6% in 2000.

The sentence that I have bolded puts a particular spin on the numbers. Here is an alternative way to describe the changes:

From 2000 to 2004, the average tax rate for all taxpayers fell from 15.3% to 12.1%, representing 21% tax cut. The tax rate of the richest 1% fell from 27.5% to 23.5%, a 15% tax cut. For the bottom 50%, the tax rate fell from 4.6% to 3%, a 35% tax cut. As a result of these changes, the top 1% paid a larger share of the tax burden in 2004 than it did four years earlier, and the bottom 50 percent paid a smaller share.

Isn't it amazing how the same set of numbers can be framed in different ways?

The reporters at the Journal, including Greg Ip, are among the best in the business and are usually good about keeping their own political views out of their news stories. This is an exception. By choosing the particular framing that he did, Ip let his politics seep into his reporting.

To be clear, I am not suggesting that the second description is neutral and better. I offer it to illustrate how the same numbers can be seen in a different light. If Ip had cut the sentence that I put in bold and just presented the facts, his paragraph would have conveyed the same information without any spin.

The Boys from Belarus

Here is a nice profile of MIT's Mikhail Golosov and Harvard's Aleh Tsyvinski, two young hotshots working at the boundary of macroeconomics and public finance. (Note to Harvard students: Tsyvinski will teach Ec 1011b this spring.)

Immigration and African-Americans

Of all the economists I know, George Borjas of Harvard's Kennedy School is the one most critical of proposals to relax immigration restrictions, such as President Bush's proposed guest worker program. Here is a new paper of his that could potentially have a big impact in the immigration debate:

Immigration and African-American Employment Opportunities: The Response of Wages, Employment, and Incarceration to Labor Supply Shocks
by George J. Borjas, Jeffrey Grogger, Gordon H. Hanson

The employment rate of black men, and particularly of low-skill black men, fell precipitously from 1960 to 2000. At the same time, the incarceration rate of black men rose markedly. This paper examines the relation between immigration and these trends in black employment and incarceration. Using data drawn from the 1960-2000 U.S. Censuses, we find a strong correlation between immigration, black wages, black employment rates, and black incarceration rates. As immigrants disproportionately increased the supply of workers in a particular skill group, the wage of black workers in that group fell, the employment rate declined, and the incarceration rate rose. Our analysis suggests that a 10-percent immigrant-induced increase in the supply of a particular skill group reduced the black wage by 3.6 percent, lowered the employment rate of black men by 2.4 percentage points, and increased the incarceration rate of blacks by almost a full percentage point.

Should Harvard undercut early decisions?

Dartmouth professor Andrew Samwick reports on his blog that Dartmouth is unlikely to follow Harvard (and now Princeton) in abolishing its early decision program. If this is a sign of what other, similar schools will do, it could make Harvard's recent policy change less tenable. Some strong but risk-averse students might apply to Dartmouth, Columbia, Brown, etc., forgoing the chance to apply to Harvard in order to get the advantage of an early application. If Harvard starts losing too many good applicants in this way, it will have to rethink its position.

Harvard could, however, become the catalyst for systemic change: It could decide to stop honoring early decision commitments to other schools. In this case, a student could get into Dartmouth early, secretly apply to Harvard, and then renege on his Dartmouth commitment if accepted by Harvard. A few years ago, it was rumored that Harvard was considering just that.

There are pros and cons to Harvard taking such a radical step. The arguments against:

• Harvard would be encouraging students to break promises.
• The Harvard student body would be disproportionately made up of dishonest students.

On the other hand:

• By undermining early decisions at other schools, Harvard would give a big push toward changing a system that many educators view as adverse for high-school students.
• Harvard would be able to accept a greater proportion of the best students.
• As a general matter, Harvard does not enforce contracts between its students and third parties. Why should Dartmouth be different?

Ideally, Harvard could avoid having to make the choice. If schools such as Dartmouth started worrying that Harvard was considering such a drastic step, maybe that fear alone would be enough to get them to change course and abolish their early decision programs.

But what might induce Dartmouth to fear this possibility? Maybe, if some Harvard faculty member speculated about it on his blog,....

Legacy Admits

Daniel Hemel of the Harvard Crimson reviews "The Price of Admissions: How America’s Ruling Class Buys Its Way into Elite Colleges—and Who Gets Left Outside the Gates" by Daniel Golden. Hemel, who is not a legacy, defends preferential treatment for alums and the wealthy. An excerpt:

For instance, in 1996, Harvard admitted an applicant named Anne Chandler Bass “in the hope of favors yet to come” from her father, a Yale-educated oil magnate. When Anne Chandler Bass graduated in 2000, her father donated $7 million to Harvard—a gift that now pays the salary of Bass Professor of Government Michael J. Sandel. (The delicious irony—which goes unmentioned by Golden—is that this apparently-unjust admissions break is the source of the funding that facilitates Sandel’s wildly-popular course “Justice.”)

My Role Model

As an undergraduate, I loved Albert Camus's The Myth of Sisyphus (an assignment in a freshman philosophy class taught by Richard Rorty). So I was particularly pleased to read this over at Economic Investigations:

Prof. Mankiw is like Sisyphus, doomed for eternity to point out to people that they—including the state—face trade-offs.

I have finally found my calling.

Lively Levitt Lecture

University of Chicago economist Steve Levitt, coauthor of Freakonomics, gives a great talk describing the research he has done on crack cocaine and the lives of gang members.

Rosling on Health and Wealth

A reader alerts me to an illuminating and entertaining presentation by Swedish professor Hans Rosling on international health and economic development. It takes a few minutes but is well worth the time, especially for students unfamilar with the data on these topics.

Rogoff on the IMF

My Harvard colleague Ken Rogoff, formerly chief economist at the International Monetary Fund, writes in the new issue of Newsweek Who Needs the IMF?

Inequality Trends

In my ec 10 lecture yesterday, I said that while income inequality has increased in the United States over the past several decades, it has decreased in the world as a whole. A student in the class emails me a good question about this claim:

Professor Mankiw

With all due respect, I cannot find peace with your assertion today that the world is becoming 'more equal'. I just read this in one of my other lecture notes: 'Though Africa has historically been poor the difference between it and the restof the world has dramatically increased in the last 200 years. In 1800, per-capita income in the US was possibly 3 times greater than in Africa. Now itis 20 times greater. Compared to the poorest African countries it might be 50 or 60 times greater.'

I would really appreciate some feedback on this matter. Of course I understand how busy you must be so please do not let this be an inconvenience to you.

Sincerely,
[name withheld]
South Africa

As the student notes, Africa is indeed lagging behind. The decline in world inequality is driven by the experiences of India and especially China, rapidly growing countries with large numbers of poor people.

Here is an excerpt from a research paper by Columbia University economist Xavier Sala-i-Martin:

All indexes show a reduction in global income inequality between 1980 and 1998. We also find that most global disparities can be accounted for by across-country, not within-country, inequalities. Within-country disparities have increased slightly during the sample period, but not nearly enough to offset the substantial reduction in across-country disparities. The across-country reductions in inequality are driven mainly, but not fully, by the large growth rate of the incomes of the 1.2 billion Chinese citizens.

Unless Africa starts growing in the near future, we project that income inequalities will start rising again. If Africa does not start growing, then China, India, the OECD and the rest of middle-income and rich countries diverge away from it, and global inequality will rise. Thus, the aggregate GDP growth of the African continent should be the priority of anyone concerned with increasing global income inequality.

Here is another paper on the African growth experience. See also page 435 of your textbook, where you will find a box on global inequality (new in the 4th edition).

Interview with Marty

The Minneapolis Fed interviews Martin Feldstein, my Harvard colleague and predecessor as head of Ec 10.

CBO on Global Warming

A just-released report from the Congressional Budget Office takes on global warming, framing the issue in a way that should be familiar to Ec 10 students. CBO points to a negative externality from carbon emissions and a positive externality from research. An excerpt:

The possibility of climate change involves two distinct “market failures” that prevent unregulated markets from achieving the appropriate balance between fossil fuel use and changes in climate. One market failure involves the external effects of emissions from the combustion of fossil fuels—that is, the costs that are imposed on society by the use of fossil fuels but that are not reflected in the prices paid for them. The other market failure is a general underinvestment in research and development (R&D) that occurs because investments in innovation may yield “spillover” benefits to society that do not translate into profits for the innovating firm. The first market failure yields inefficiently high use of fossil fuels; the second yields inefficiently low R&D.

Because there are two separate market failures, an efficient response is likely to involve two separate types of policies:

• One type of policy would reduce carbon emissions by increasing the costs of emitting carbon, both in the near term and in the future, to reflect the damages that those emissions are expected to cause.
• The other type of policy would increase federal support for R&D on various technologies that could help restrain the growth of carbon emissions and would create spillover benefits.

Policymakers could increase the cost of emitting carbon by setting a price on those emissions. That could be accomplished by taxing fossil fuels in proportion to their carbon content (which is released when the fuels are burned) or by establishing a “cap-and-trade” program under which policymakers would set an overall cap on emissions but allow fossil fuel suppliers to trade rights (called allowances) to those limited emissions. Either a tax or a cap-and-trade program would cause the prices of goods and services to rise to reflect the amount of carbon emitted as a result of their consumption. To the extent that a carbon tax or allowance price reflected the present value of expected damages, such policies would encourage users of fossil fuels to account for the costs they impose on others through their emissions of greenhouse gases.

It sounds like the CBO is angling for admission into the Pigou Club.

A Few Fun Readings for Ec 10

Here is the link to I, Pencil, the essay I discussed in today's ec 10 lecture. On price gouging and its defense, here is legal scholar Richard Posner and economist Gary Becker. And here is the defense of Scrooge that I mentioned.

Note: Readings I recommend on this blog are optional, unless they also appear on the official Harvard course website.

Sugar Ethanol

In today's NY Times, columnist Tom Friedman arrives at the intersection of energy, farm, and trade policy and doesn't like what he finds:

Thanks to pressure from Midwest farmers and agribusinesses, who want to protect the U.S. corn ethanol industry from competition from Brazilian sugar ethanol, we have imposed a stiff tariff to keep it out. We do this even though Brazilian sugar ethanol provides eight times the energy of the fossil fuel used to make it, while American corn ethanol provides only 1.3 times the energy of the fossil fuel used to make it. We do this even though sugar ethanol reduces greenhouses gases more than corn ethanol. And we do this even though sugar cane ethanol can easily be grown in poor tropical countries in Africa or the Caribbean, and could actually help alleviate their poverty.

Friedman calls this state of affairs "stupid." This is a word I usually avoid (for it is hard to use politely), but it does seem particularly apt here.

The Demographic Challenge

In today's Wall Street Journal, economist Jeremy Siegel looks at the demographic trends, as shown in the graph above, and concludes that Americans need to retire later:

When Social Security was passed in 1935, the average retirement age was 69. That age fell to 67 by 1950, and to 62 today....

Because of our aging population, I calculate that the average retirement age will have to rise by 10 years or more for workers to produce enough goods and services to provide for a comfortable retirement. This increase will greatly exceed the expected increase in life expectancy and lead -- for the first time in history -- to an absolute reduction in the number of years in retirement.

Siegel also suggests that one way to finance the baby boomers' retirement is persistent capital inflows and trade deficits with developing countries.

Predicting the Nobel Prize

Thomson Scientific forecasts the 2006 Nobel Prize in Economics.

TNR on Outsourcing

A blog reader asks me about an article in the new issue of The New Republic, in which Clay Risen reports that he has read my paper with Phillip Swagel (published version) on offshore outsourcing.

Risen concludes that "ultimately, Mankiw and others are right--we really are better off, in the long run, with freer trade." But he calls us "cynical" for wanting to frame the issue in terms that non-economists can more easily understand. Risen's preferred solution is an expansion in the generosity of the social safety net: more generous unemployment insurance, wage insurance for displaced workers, more spending on worker retraining, and national health insurance.

Unfortunately, he throws out these ideas as cliches without addressing the hard tradeoffs they entail. Higher unemployment-insurance benefits may reduce risk but they affect the search effort of the unemployed and increase unemployment. Wage insurance raises a question of equity: Does someone who loses a high-wage job and takes a low-wage job deserve greater government benefits than a low-wage worker who never had a high-wage job? Worker retraining programs should pass a cost-benefit test, and the evidence, at least for older workers, is not encouraging. National health insurance raises a whole host of difficult issues that health economists debate and that have little to do with offshore outsourcing. Whatever you think about national health insurance, the outsourcing of some call centers to India probably shouldn't change your mind.

So, overall, I was not impressed by Risen's piece. But at least he spelled my name right.

The Rich, Redux

In a post last week, I asked, "Who are the very rich who are making out so well?" In response, Steve Kaplan of the University of Chicago emails me a new paper of his that starts to answer this question. Here is the abstract:

We consider how much of the top end of the income distribution can be attributed to four sectors – top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities. Non-financial public company CEOs and top executives do not represent more than 8% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%). Individuals in the Wall Street category comprise at least as high a percentage of the top AGI brackets as non-financial executives of public companies. While the representation of top executives in the top AGI brackets has increased from 1994 to 2004, the representation of Wall Street has likely increased even more. While the groups we study represent a substantial portion of the top income groups, they miss a large number of high-earning individuals. We conclude by considering how our results inform different explanations for the increased skewness at the top end of the distribution. We argue the evidence is most consistent with theories of superstars, skill biased technological change, greater scale and their interaction.

The last sentence seems broadly consistent with the view David Brooks has been advocating in his NY Times column.

The paper also claims that because the groups studied make up well under half of the top income group, the results are "strongly inconsistent with the claim in Dew-Becker and Gordon (2005) that CEOs, celebrities, and athletes explain most of the top end of the distribution."

Milken on the World Economy

In today's Wall Street Journal, Michael Milken points out:

China and India combined to produce nearly half the world's economic output in 1820 compared to just 1.8% for the U.S. Our remarkable growth since 1820 has benefited from democratic institutions, a belief in capitalism, private property rights, an entrepreneurial culture, abundant resources, openness to foreign investment, the best universities, immigration and relatively transparent markets.

That graph is truly striking.

What's New in 4e?

Today, after my ec 10 lecture, a student asked me: Is the 4th edition of my Principles of Economics textbook substantially different from the 3rd edition?

As an answer, let me offer an excerpt from the preface to the 4th edition:

Although the principles of economics are timeless, the application of those principles changes over time as events unfold and as policymakers consider new initiatives. To keep the study of economics fresh and relevant for each new cohort of students, teachers of economics must constantly update their courses. This new edition contributes to that effort by including dozens of new case studies and boxes.

The new features in this edition are too numerous to list in their entirety, but here is a sample:

• A new box describes how football coach Bill Belichick has used economic research to improve his team’s 4th-down strategy.
• A new box summarizes recent research by Nobel prize winner Ed Prescott on how taxes influence work effort in Europe.
• A new box discusses the winners and losers from the increased textile trade with China.
• A new box considers the economics of offshore outsourcing.
• A new case study describes the fiscal challenge ahead that arises from an aging population.
• A new box describes how London has reduced congestion with road pricing.
• A new box discusses how rapid growth in Asia is making the global distribution of income more equal.
• A new box summarizes recent research into the causes of child labor in poor nations.
• A new case study examines the moral hazard problem as applied to corporate managers.
• A new box discusses what behavioral economics says about the determinants of saving.
• A new box considers how economic statistics can miss the underground economy.
• A new box uses three striking photos to illustrate the differences in living standards in Great Britain, Mexico, and Ethiopia.
• A new box includes an article by the presidents of Mali and Burkina Faso on how freer world trade would benefit their nations’ poor farmers.
• A new box examines some of the peculiar features of U.S. health insurance.
• A new box discusses the problem of high unemployment in Germany.
• A new case study considers whether the U.S. economy could ever experience a bout of capital flight.
• Two new boxes analyze the economics of Hurricane Katrina—one focusing on the short-run macroeconomic impact and the second on the reconstruction effort.
• And finally, a new case study in Chapter 2 discusses my own recent experience as an economic adviser to President Bush.

In addition to updating the book, I have refined its coverage and pedagogy with input from many users of the previous edition. There are many changes, both large and small, aimed at making the book clearer and more student-friendly.

Ivy League CEOs

Today's Wall Street Journal reports that American business is not elitist:

'Any College Will Do'

The college diplomas of the nation's top executives tell an intriguing story: Getting to the corner office has more to do with leadership talent and a drive for success than it does with having an undergraduate degree from a prestigious university.

Most CEOs of the biggest corporations didn't attend Ivy League or other highly selective colleges. They went to state universities, big and small, or to less-known private colleges....

Some 10% of CEOs currently heading the top 500 companies received undergraduate degrees from Ivy League colleges, according to a survey by executive recruiter Spencer Stuart. But more received their undergraduate degrees from the University of Wisconsin than from Harvard, the most represented Ivy school [with 9 CEOs].

Interesting spin. You could turn the numbers around and tell a different story. My very rough guess is that about 1 percent of college graduates have degrees from Ivy League schools. So that 10-percent figure means that an Ivy League graduate is about ten times more likely to become a CEO than is an average college graduate.

Of course, the better chances for the Ivy League grad are largely a selection effect rather than a treatment effect, as discussed in this old article by Alan Krueger.

Milton and Me

That's me on the left, as explained in this email I received this morning:

Professor Mankiw,

I'm a economics student at the University of Illinois in Champaign-Urbana. I'm a huge fan of yours. I'm starting the graduate school application process and I enjoy your blog posts for students interested in pursuing Ph.D.s in economics. Heeding your advice,I've enrolled in more advanced mathematics courses than any senior in college would ever want to stomach.

This is going to sound a little weird, but I assure you I'm not totally crazy. I was adding a new fish to my fish tank and I was trying to come up with the perfect name for him. His tankmate is already named Milton Friedman, and because I have a soft spot for free market economists I thought the best name for my new little friend would be Mankiw. I've attached a photo of your marine namesake. He's the yellow angelfish, and Milton Friedman is the blue and orange gourami. I hope you enjoy that your name will be immortalized... or, well, for as long as angelfish live.

Sincerely,
[name withheld]

What a great way to start a day!

Peers Matter

Peer effects are a hot research topic.

According to a new working paper by Alexandre Mas and Enrico Moretti, a person works harder when he has hard-working peers:

Using scanner level data, we measure high frequency, worker-level productivity of checkers for a large grocery chain. Because of the firm's scheduling policy, the timing of within-day changes in personnel is unsystematic, a feature for which we find consistent support in the data. We find strong evidence of positive productivity spillovers from the introduction of highly productive personnel into a shift. A 10% increase in average co-worker permanent productivity is associated with 1.7% increase in a worker's effort.

According to a new working paper by Philip J. Cook, Robert MacCoun, Clara Muschkin, and Jacob Vigdor, whether sixth graders are grouped with younger kids in elementary school or older kids in middle school affects their behavior:

sixth grade students attending middle schools are much more likely to be cited for discipline problems than those attending elementary school....Furthermore, the higher infraction rates recorded by sixth graders who are placed in middle school persist at least through ninth grade. A plausible explanation is that sixth graders are at an especially impressionable age; in middle school, the exposure to older peers and the relative freedom from supervision have deleterious consequences.

To read about earlier work on peer effects, click here and here.

These results would not surprise Judith Rich Harris.

Good Academic, Bad Human Being

Mike Moffatt considers the question:

"What real world experiences should I have to be a good academic economist?"

He answers:

I'd say none. Academia, by necessity, is about focusing your concentrations on very isolated and unique problems. I've noticed the people who succeed in graduate school tend to have fewer outside interests to distract them from their focus, not more.

A lot of economics professors I know would agree with this answer. Indeed, I have heard similar advice given many times. But I am inclined toward a different judgment.

It all comes down to the definition of "good academic economist." If your goal is to maximize the probability of winning a Nobel prize, or at least to climb up as high as you can on citation rankings, then this advice is correct. Real world experiences and outside interests are a distraction. Don't take time off from academic pursuits for a job in public policy. Don't ever work on Wall Street or do any consulting. Don't engage in the broader societal debate by writing op-eds or working on political campaigns. All of that takes time away from getting papers published in academic journals.

But don't stop there. If you have this objective, then it is best not to have hobbies, or read novels, or go to the movies. Don't spend time teaching well or mentoring students, except the very best students who can help you with your research. Don't get married or have friends, unless your spouse and friends are PhD economists and can coauthor papers with you. Whatever you do, don't have children--boy, are they a time sink! And if you make the mistake of having children, make sure you spend as little time with them as you can.

In other words, if you want to be the best academic you can be, get ready to be a miserable human being.

Alternatively, you might decide that, at the end of your life, Saint Peter will not judge you solely by checking the Social Science Citation Index. If so, maybe you should make life choices using a broader objective function--one that encourages you to sacrifice some degree of academic success narrowly construed for a more diverse, more satisfying, and more noble life.

How to Identify My Car

Grad Student Ambassadors

U.S. higher education is an export industry, with positive externalities:

one of the best ways the United States can improve its image abroad is to encourage more foreigners to spend a year or two in America. It is therefore heartening to see that, according to the Council on Graduate Schools, there has been a recovery in international students attending U.S. graduate schools: "First-time enrollment increased by 4% in 2005, the first increase in four years."

From Drezner at the Open University blog.

Ec 10 Review

The Harvard Crimson, the student newspaper, reviews Ec 10. An excerpt:

For many Harvard freshmen, Ec10 (aka, Social Analysis 10, “Principles of Economics,”) is as much a part of the college experience as sneaking food out of Annenberg. Sections will sometimes bore you to tears, yet this introductory economics survey is one of the most practical classes offered at the College. Besides knocking out the Social Analysis core and fulfilling a requirement for Economics and Social Studies concentrators, it teaches concepts that will seem so intuitive you’ll be embarrassed by how little you knew before taking the course. Not surprisingly, Ec10 attracts about a third of the freshman class from all walks of Harvard life: future investment bankers, undecided souls who are “thinking about Social Studies,” and, naturally, some stereotypical jocks....

Liberals criticize Ec10 as having a conservative bias and preaching a form of “free-market fundamentalism.” And it’s true that Mankiw—a former economic adviser to George W. Bush—did assign an article entitled “Two Cheers for Sweat Shops.” But hey, that’s economics, baby.

By the way, that article on sweat shops is by the well-known right-winger Nicholas Kristof.

Public Attitudes Toward Trade

The news is not good:

Shifts in domestic attitudes and world politics have combined to create one of the least hospitable environments for trade liberalization in recent memory. The most dramatic shift in opinion came from Americans making more than $100,000 a year. According to the Program on International Policy Attitudes (PIPA), support in that income group for promoting trade dropped to 28 percent in 2004 from 57 percent in 1999. A September 2005 German Marshall Fund (GMFUS) survey revealed that 57 percent believe that freer trade destroys more American jobs than it creates, and 58 percent of Americans would favor raising tariffs for imported goods if it meant protecting jobs -- a higher number than in Germany, France, or Great Britain.

From Daniel W. Drezner in the Washington Post.

The UN in a Nutshell

This is described as an "old quip," but it's new to me:

When there is a dispute between two small nations, the UN steps in and the dispute disappears. When there is a dispute between a small nation and a large nation, the UN steps in and the small nation disappears. When there is a dispute between two large nations, the UN disappears.

From Ken Rogoff, who suggests some parallels with the IMF.

Rogoff joins the Pigou Club

I am pleased to welcome my Harvard colleague Ken Rogoff into the Pigou Club. In his latest op-ed, he writes:

As for the US, a sharp hike in energy taxes on gasoline and other fossil fuels would not only help improve the government’s balance sheet, but it would also be a way to start addressing global warming. What better way for new US Treasury Secretary Hank Paulson, a card-carrying environmentalist, to make a dramatic entrance onto the world policy stage?

The Pigou Club is an elite group of economists and pundits with the good sense to have publicly advocated higher Pigovian taxes, such as gasoline taxes or carbon taxes. Here are some examples of the current membership:

• Greg Mankiw (Fortune 5/24/99, WSJ 1/3/06, 5/31/06)
• Bill Nordhaus (Foreign Policy in Focus 3/27/06)
• Martin Feldstein (WSJ 6/4/92)
• Gary Becker (Businessweek 5/27/02)
• Robert Frank (NY Times 2/16/06, 6/8/06)
• Andrew Samwick (his blog)
• Ted Gayer (Regulation)
• Mike Moffatt (about.com)
• Ken Rogoff (Project Syndicate)
• Paul Krugman (Slate 4/18/97)
• Greg Easterbrook (NY Times 5/25/04)
• John Tierney (NY Times 10/4/05, 5/23/06)
• Jonathan Rauch (National Journal 2/9/02)
• Thomas Friedman (NY Times 9/21/05, 2/8/06, 6/16/06)
• Joe Klein (Time 5/7/06)
• Andrew Sullivan (Time 4/11/04)
• Jane Galt (her blog)
• Christopher Farrell (Businessweek 8/19/05)
• William Baldwin (Forbes 6/19/06)
• Clive Crook (National Journal 6/2/06)
• Al Gore (Charlie Rose Show 6/19/06 at 42:45)

We are always looking for more members. An elected official or two would be nice.

Update: Alan Greenspan signs up. So do George Schultz, Tony Lake, Nicholas Stern, Hal Varian, Larry Summers, Richard Posner, David Frum, Nouriel Roubini, Joe Stiglitz, Brink Lindsey, Tim Harford, Rob Stavins, Ray Magliozzi, Robert Samuelson, Dan McFadden, Charles Krauthammer, Paul Mulshine, Kevin Hassett, Jason Furman, Anne Applebaum, Paul Volcker, Bill Frenzel, Isabel V. Sawhill, Charles Stenholm, William Hoagland, Robert Shapiro, David Leonhardt, Morton Kondracke, Gilbert Metcalf, Fred Foldvary, Arthur Laffer, and a majority of economists.

Why Aspiring Economists Need Math

A student emails me a question about the use of math in economics:

Dear Dr. Mankiw,

Hi, I am an undergraduate student studying economics in Michigan. I have recently become a big fan of your blog. I found your "Advice for Students" very helpful to professional economist-wannabes like me, and especially, those considering graduate study in economics. Your suggestion on math preparation for undergrads landed me on one simple question: "Do economists really use all that math?"

I was wondering if you could tell me how closely math and the works of professional economists at international organizations, such as World Bank and IMF, are related?

I look forward to your answer. Thank you in advance!

Best Regards,
[name withheld]

A student who wants to pursue a career in policy-related economics is advised to go to the best graduate school he or she can get into. The best graduate schools will expect to see a lot of math on your undergraduate transcript, so you need to take it. But will you use a lot of differential equations and real analysis once you land that dream job in a policy organization? No, you won't.

That raises the question: Why do we academics want students that have taken a lot of math? There are several reasons:

1. Every economist needs to have a solid foundation in the basics of economic theory and econometrics, even if you are not going to be either a theorist or an econometrician. You cannot get this solid foundation without understanding the language of mathematics that these fields use.

2. Occasionally, you will need math in your job. In particular, even as a policy economist, you need to be able to read the academic literature to figure out what research ideas have policy relevance. That literature uses a lot of math, so you will need to be equipped with mathematical tools to read it intelligently.

3. Math is good training for the mind. It makes you a more rigorous thinker.

4. Your math courses are one long IQ test. We use math courses to figure out who is really smart.

5. Economics graduate programs are more oriented to training students for academic research than for policy jobs. Although many econ PhDs go on to policy work, all of us teaching in graduate programs are, by definition, academics. Some academics take a few years off to experience the policy world, as I did not long ago, but many academics have no idea what that world is like. When we enter the classroom, we teach what we know. (I am not claiming this is optimal, just reality.) So math plays a larger role in graduate classes than it does in many jobs that PhD economists hold.

Is it possible that admissions committees for econ PhD programs are excessively fond of mathematics on student transcripts? Perhaps. That is something I might argue with my colleagues about if I were ever put on the admissions committee. But a student cannot change that. The fact is, if you are thinking about a PhD program in economics, you are advised to take math courses until it hurts.

Improving College Admissions

David Bell, a humanities professor at Johns Hopkins, makes an intriguing suggestion:

Yet if Harvard really wants to do something to make admissions fairer, it should consider doing away with the most inane and manipulable part of the present process: the application essay....the application essay has been corrupted from another direction: by wealthy parents who hire consultants for tens of thousands of dollars to game the system, "advising" students on their essays (i.e. writing them), and also arranging for just the right range of activities and "experiences" to make the essays compelling to admissions officers.

I have never sat on an admissions committee, but I have long wondered how much information such essays can really convey.

Greenspan on the Minimum Wage

Larry Mishel, President of the Economic Policy Institute, sent me an email today, asking me to sign a letter of economists endorsing an increase in the minimum wage. Apparently, he already has some high-profile signers, including my undergraduate thesis adviser Alan Blinder and my current Harvard colleague Larry Katz. Despite my fondness and respect for Alan and Larry, I declined.

Alan Greenspan will, I predict, decline as well--a forecast I make based on this old article from the files.

Greenspan warns higher minimum wage could raise unemployment
The Associated Press, February 24, 1999

Raising the minimum wage could deny some teenagers their chance at entry-level jobs, Federal Reserve Chairman Alan Greenspan said Wednesday.

Responding to questions from House Banking Committee members while delivering the Fed's semiannual report to Congress, Greenspan said increasing the wage probably would push inflation higher. But he said his main concern was "individuals who become unemployed because of the minimum wage."

"Being unemployed when you're a teenager... is very detrimental to... learning by training and becoming a productive member of the work force," he said.

Greenspan's view is consistent with recent research by David Neumark. Obviously, not all economists are convinced.

I wonder if Ben Bernanke will be as forthright on this topic as Greenspan was. My guess is that Ben's views on the minimum wage are not very different from Greenspan's, but that Ben will decide that he hasn't accumulated enough political capital to stick his neck out on such a politically charged issue.

Will on Wal-Mart

In today's Washington Post, George Will defends Wal-Mart. An excerpt:

The median household income of Wal-Mart shoppers is under $40,000. Wal-Mart, the most prodigious job-creator in the history of the private sector in this galaxy, has almost as many employees (1.3 million) as the U.S. military has uniformed personnel. A McKinsey company study concluded that Wal-Mart accounted for 13 percent of the nation's productivity gains in the second half of the 1990s....Wal-Mart and its effects save shoppers more than $200 billion a year, dwarfing such government programs as food stamps ($28.6 billion) and the earned-income tax credit ($34.6 billion).

People who buy their groceries from Wal-Mart -- it has one-fifth of the nation's grocery business -- save at least 17 percent. But because unions are strong in many grocery stores trying to compete with Wal-Mart, unions are yanking on the Democratic Party's leash, demanding laws to force Wal-Mart to pay wages and benefits higher than those that already are high enough to attract 77 times as many applicants than there were jobs at this store.

Here's a theorem: Any time George Will and Jason Furman agree, they're right.

Human Capital, Terrorist Edition

Economists have long studied the benefits of education, but this study puts a new spin on the topic:

In their new study, “Attack Assignments in Terror Organizations and the Productivity of Suicide Bombers,” two economists, Efraim Benmelech of Harvard University and Claude Berrebi of the RAND Corporation, set out to analyze the productivity of terrorists in the same way they might analyze the auto industry. But they defined the “success” of terrorists by their ability to kill.

They gathered data on Palestinian suicide bombers in Israel from 2000 to 2005 and found that for terrorists, just like for regular workers, experience and education improve productivity. Suicide bombers who are older — in their late 20’s and early 30’s — and better educated are less likely to be caught on their missions and are more likely to kill large numbers of people at bigger, more difficult targets than younger and more poorly educated bombers.

Professor Benmelech and Dr. Berrebi compare a Who’s Who of the biggest suicide bombers to more typical bombers. Whereas typical bombers were younger than 21 and about 18 percent of them had at least some college education, the average age of the most successful bombers was almost 26 and 60 percent of them were college educated.

Experience and education also affect the chances of being caught. Every additional year of age reduces the chance by 12 percent. Having more than a high school education cuts the chance by more than half.

From Austan Goolsbee in today's NY Times. Click here for a related post.

Neuroeconomics

The new issue of the New Yorker has a nice piece on neuroeconomics, the emerging field that tries to bring together economics and brain science. The article features, among others, my Harvard colleague David Laibson:

“Natural science has moved ahead by studying progressively smaller units,” Laibson told me. “Physicists started out studying the stars, then they looked at objects, molecules, atoms, subatomic particles, and so on. My sense is that economics is going to follow the same path. Forty years ago, it was mainly about large-scale phenomena, like inflation and unemployment. More recently, there has been a lot of focus on individual decision-making. I think the time has now come to go beyond the individual and look at the inputs to individual decision-making. That is what we do in neuroeconomics.”

To avoid confusion: Economics is still "about large-scale phenomena, like inflation and unemployment." It is not like we have exactly nailed those problems yet. But maybe Laibson is right that we need to redefine "microfoundations" as starting at the neuron and building up from there.

By the way, Laibson will once again be giving an ec 10 lecture this fall.

Thanks to The Austrian Economists for the pointer.

Paulson on Globalization

The new Treasury Secretary gave a speech today on China and the global economy. There is nothing shocking in it, but it demonstrates a clear commitment to free trade:

Protectionist policies do not work and the collateral damage from these policies is high. By closing off competition and blocking the forces of change, protectionism reduces the losses of the present by sacrificing the opportunities of the future. Jobs saved in the short term job are off-set by more job losses and a lower standard of living in the future....The United States wants open markets. We welcome foreign investment. And we seek partners to join us in advancing a global agenda that will help realize the benefits of economic liberalization and competition. We will not heed the siren songs of protectionism and isolationism.

Amen. I wish him luck in turning these noble sentiments into concrete policies.

Textbook Erratum

An alert student at the U.S. Military Academy has identified an error in the new (4th) edition of my principles textbook (the only one, as far as I know):

I just wanted to inform you that I found a mistake in the textbook. It's in Chapter 9 (Application: International Trade). On page 185, there is a table in Figure 4 where above the columns is written "Before Trade", "After Trade," and "Change". I think the author wanted to say "Before Tariff" and "After Tariff."

The student is correct. Current users of the text should take note. I have alerted the publisher, and the error will be corrected in the next print run.

Articles That Caught My Eye

• Tim Worstall on why we should abolish the corporate income tax.
• Kevin Hassett on the economic impact of 9-11.
• Robert Samuelson on the monster called Medicare.
• David Henderson on the distribution of income.
• Daniel Klein and Michael Clark on how the Bush CEA is not sufficiently right-wing.

The Wisdom of Eddie

Here is a notable sentence from a speech CEA chair Edward Lazear gave earlier today:

The most important way to encourage growth in an economy is to maintain the smallest possible difference between the before-tax and the after-tax rates of return to investments, both in physical and human capital.

This sentence can be used as an economist's Rorschach test. Economists on the right say, "Of course." Economists on the left say, "That's preposterous."

Time for Princeton and Yale to Sneeze

Today's Harvard Crimson reports:

College Rejects Early Admissions

In a move unprecedented among the nation’s top private schools, Harvard College will scrap its early admission program next fall and put all its applicants on a single deadline, University officials said yesterday....

Interim President Derek C. Bok said that he and the six fellows of the Harvard Corporation, who approved the change yesterday morning, had concluded in recent months that “somebody had to take the lead” in eliminating early admission. “We feel that if anybody is going to step up and take the lead to try to get rid of something which is really doing more harm than good in high schools across the country, it’s us,” Bok said....

Two Harvard professors who co-authored “The Early Admissions Game: Joining the Elite” wrote in an e-mail that they were “quite surprised” at Harvard’s decision.

“Harvard has benefited greatly over the years from its early admissions policies,” Larsen Professor of Public Policy Christopher N. Avery ’88 and Ramsey Professor of Political Economy Richard J. Zeckhauser ’62 wrote. “This strongly suggests that this policy change is a selfless act, not some stratagem to outmaneuver its rivals.”

Shelving early admission is a bold move for Harvard. Students eager to gain admission to college could potentially apply early to other leading schools instead of waiting for Harvard’s later, unitary deadline. If other top colleges don’t follow Harvard’s lead, some high school seniors may opt for earlier notification elsewhere over a Crimson diploma....

“The old adage is, ‘When Harvard sneezes, everyone else gets pneumonia,’” said Bruce Breimer, school principal and director of college relations at the Collegiate School in New York. “It’s going to cause everyone else to re-evaluate.”

Derek made a good call here. The early admission process has been becoming increasingly strategic on the part of both schools and students, and this game playing does not seem to serve much social purpose. Harvard is the number #1 undergraduate institution in the country, as judged by the revealed preference of students.* If a systemic change is going to occur, this is the place.

*US News and World Report puts my employer Harvard as #2 and my alma mater Princeton as #1. Guess who I root for at sporting events.

Update: Princeton sneezes.

Mayor Daley on the Living Wage

Here is a good decision, but politically a tough one for any elected official, as reported in USA Today:

Mayor vetoes Chicago's 'living wage' ordinance aimed at big retailers

Mayor Richard Daley vetoed an ordinance Monday that would have required mega-retailers to pay their workers more than other employers after some of the nation's largest stores including Wal-Mart Stores warned that the measure would keep them from opening their doors within the city's limits.

Supporters said the measure would guarantee employees a "living wage," but in a letter to City Council members released Monday, Daley said the ordinance would drive businesses from Chicago.

"I understand and share a desire to ensure that everyone who works in the city of Chicago earns a decent wage," Daley wrote. "But I do not believe that this ordinance, well intentioned as it may be, would achieve that end." The veto was Daley's first in 17 years in office, and will likely set up a showdown during Wednesday's council meeting.

Here is an old piece I wrote on the topic, when Harvard students were protesting for a living wage at the university.

The Cost of a "Living Wage"

By N. Gregory Mankiw
Boston Globe, 6/24/2001

If student movements are a leading indicator of social trends, and they often are, then the recent student takeover of the administration building at Harvard University is a troubling sign.

The students wanted a ''living wage'' ($10.25 a hour, plus benefits) for all Harvard workers. Like the broader living wage campaign, which could culminate in a much higher national minimum wage, the students were laudable in their intentions but deficient in their analysis.

The appeal of the living wage is obvious. Life is hard for workers trying to support families on $7 or $8 an hour. If we could wave a magic wand and help those at the bottom of the economic ladder move up a rung or two, we should do it.

But enacting a social reform is not like waving a magic wand. It is more like prescribing a drug with a long list of side effects. Sometimes the side effects are worse than the disease.

Like most other prices, wages are set by the market forces of supply and demand. The major difference between high-wage workers and low-wage workers is not that the former are better organized or better liked by their employers -- it's that their higher productivity enhances the demand for their services. Workers earning only $7 or $8 a hour are typically those with the fewest years of education and the least experience, which depresses the demand for their labor.

The living wage campaign wants to repeal the law of supply and demand and raise wages by fiat. The goal is to help low-wage workers. Unfortunately, it wouldn't work out that way. One effect of a higher wage is a reduction in the amount of labor that employers demand.

Take Harvard, for instance. How often does it need its janitorial staff to vacuum the classrooms and wash the blackboards? It's a judgment call. An increase in the wage from $8 to $10 a hour raises the cost of labor by 25 percent. It is wishful thinking to suggest that this won't affect the number of workers hired.

Living wage proponents say that Harvard, with its huge endowment, can afford to pay higher wages. Yes, that's true, but that's not the point. Like all employers, Harvard is always making cost-benefit calculations, weighing the benefits of one project (hiring more janitors to clean blackboards more often) against others (hiring more professors to reduce class sizes). By raising the relative price of unskilled workers, the passage of a living wage shifts the tradeoffs in a way that means fewer of those workers will be hired.

Living wage advocates often point to a study by economists David Card and Alan Krueger, which claims that raising the minimum wage does not reduce employment. This research became prominent during the Clinton years, in part because Krueger was once chief economist in Clinton's Labor Department.

Although Card and Krueger are reputable economists, equally reputable economists have attacked their data, methods, and results. Meanwhile, most research on the minimum wage finds that it reduces employment. Emphasizing the Card-Krueger evidence is like a doctor prescribing a drug relying on a single controversial study that finds no adverse side effects, while ignoring the many reports of debilitating results.

Moreover, the adverse effects of a high minimum wage go beyond its impact on total employment. In addition to reducing the amount of labor demanded, a high minimum wage compounds the problem by increasing the amount of labor supplied. In other words, not only are there fewer jobs available for unskilled workers, but more people apply for those jobs. Studies have found that increases in the minimum wage encourage some teenagers to drop out of school earlier than they otherwise would. These teenagers take jobs that would go to unskilled adults, making it harder for those adults to make the transition from welfare to work.

The case against a high minimum wage is even more compelling once one realizes that it is not the only way to address the hardship of the working poor. A better weapon to fight poverty is the Earned Income Tax Credit, a provision of the income tax system that supplements the income of low-wage workers. Like any spending program, this policy has the cost of higher taxes on everyone else. But those costs are smaller than the unemployment that results from high minimum wages.

Throughout history, students have been drawn to utopian social reforms. But history teaches that such social reforms often fail to yield what the reformers promised. The living wage campaign is the most recent example.