Leonhardt on Prizes

David Leonhardt writes about GMU economist Robin Hanson's work on prizes and incentives.

Rodrik

Today's NY Times has a nice profile of Kennedy School prof Dani Rodrik, emphasizing his somewhat heterodox views on trade.

Central Bankers as Celebrities

In Ec 10 this semester, monetary policy will be one of our major topics of study. In yesterday's Washington Post, you can read profiles of current U.S. monetary policymakers.

One of them is a former Ec 10 sectionleader. Can you guess which? I will give the answer in an update tomorrow.

Update: Kevin Warsh was an Ec 10 sectionleader while he was a student at Harvard Law School. Randall Kroszner has his PhD from the Harvard economics department, but I don't think he was an Ec 10 sectionleader while here. Ben Bernanke was an undergrad at Harvard and most likely began his economics career as a student in Ec 10.

Hassett signs up

Kevin Hassett becomes a member of the Pigou Club:

If our leaders are serious about weaning us off of oil, then the economic textbooks provide guidance on how to do it. Government should tax things that produce pollution. If you are worried about global warming and energy security, then you should support a carbon tax.

Consider a tax of $15 per metric ton of carbon dioxide -- a tax rate comparable to the current carbon price in the European Emissions Trading System. Focusing only on carbon and assuming a short-term reduction in carbon emissions of 10 percent in response to the tax, a $15-per-ton tax rate would collect almost $80 billion a year, an amount that represents 28 percent of all corporate taxes collected in the U.S. in 2005.

The price changes aren't huge. The price of gasoline would increase by 13 cents a gallon, the cost of electricity generated by natural gas by 0.6 cents per kilowatt-hour, and the cost of electricity generated by coal by 1.4 cents per kwh. And all that revenue could be used to reduce corporate taxes, perhaps even stimulating higher economic growth....

If the president and congressional leaders are serious about energy security and global warming, they should zero out all our energy programs and replace them with a carbon tax.

Milton Friedman Day

Happy Milton Friedman Day, everyone. Many PBS stations are today broadcasting the new documentary about Friedman, The Power of Choice. In Boston, it's on channel 2 at 10 pm.

Gliberalism

Harvard Prof Ruth Wisse writes about gliberalism at elite universities and, in the process, quotes from an old post at this blog.

Paul Mulshine signs up

Columnist Paul Mulshine joins the Pigou Club:

George W. Bush says his energy plan will reduce gasoline consumption by 20 percent over the next 10 years. Jerry Taylor says it won't. And it's all because of the dolt in the F-150.

Taylor is an expert on energy with the free-market Cato Institute. The dolt in the F-150 is a constituent of U.S. Rep. Jack Kingston, a Republican from Georgia.

Not too long ago, Kingston appeared at an event to tout a bill of his designed to reduce oil imports. The bill was very similar to the proposal Bush introduced in his State of the Union address Tuesday night. Kingston's spiel was loaded with all the Beltway buzzwords that Bush likes to employ: "flex-fuel" vehicles, ethanol,"alternative energy" and so on. If only we could employ enough of this groovy new technology, Kingston argued, we could be energy-independent by 2015.

That sounded nice. But the congressman went on to bring up the sad tale of a constituent who complained that he was going broke pumping gas into the Ford F-150 pickup he drives on his daily commute of 75 miles each way. The feds have to find a way to help guys like this with their gas bills, Kingston said.

No, they don't, says Taylor. Cutting the price of gas would encourage more gas consumption, not less. If this guy wants to save money on gas, he should buy a more fuel-efficient car or move closer to work....

In case you're wondering what most economists suggest as the No. 1 solution to cutting oil imports, that's simple: Hike the hell out of the gas tax. The higher you raise it, the less gas people use. Simple.

Taylor doesn't support that option, but I do. Another of Bush's fanciful promises the other night was a promise to balance the budget. But he won't cut spending. So the Democrats are already insisting on raising the income tax.

But let us consider that in light of the aforementioned dolt. Raising the income tax would have little effect on him since, being a dolt, he probably doesn't make all that much money. It's us smart people in New Jersey who would suffer the most from an income tax hike.

Raising the gas tax, however, would require those hicks in the heartland to pay their fair share of the cost of government. That's far from the only advantage. A big gas tax would also reduce what economists call the "externalities" of car use--traffic, air pollution and so on. But best of all a big tax would reduce the amount of U.S. dollars going to such dubious characters as the Saudi sheiks and Hugo Chávez. Taxing gas at the pump in the United States has the exact same effect as taxing oil at the wellhead in Saudi Arabia or Venezuela - except that the U.S. gets to keep the money.

I particularly enjoyed the cheerleading for New Jersey, my state of birth.

Hayek, Picture Book Edition

Here is The Road to Serfdom in Cartoons. It doesn't do the book justice, but it's worth a look. Notice the product placement for Thomas Friedman's book on page 16.

Cruel Ironies

The Economist (subscription required) endorses the Bush health plan:

IT IS a cruel irony that George Bush has come up with one of the most sensible proposals of his presidency just as the chances of getting it implemented are close to zero. In his state-of-the-union speech, Mr Bush laid out a plan to limit the vast federal tax subsidies for health insurance. His ideas are bold and mostly good. Too bad that with Democrats in control on Capitol Hill and his approval ratings at dismal lows, the plan is more likely to end up in the dustbin than on the statute books.

At the National Journal, Clive Crook also likes the plan.

The Bush health plan is starting to look a lot like a gasoline tax hike or a gradual increase in the normal retirement age for social security and medicare--a policy that appeals to many policy wonks from the right, left, and middle but is nonetheless unlikely to command a Congressional majority.

Krugman on Friedman

An email draws my attention to a fascinating article in the New York Review of Books by Paul Krugman on Milton Friedman.

Krauthammer in the Club

Charles Krauthammer is a member of the Pigou Club:

The president ostentatiously rolled out his 20-in-10 plan: reducing gasoline consumption by 20 percent in 10 years. This with Rube Goldberg regulation -- fuel-efficiency standards, artificially mandated levels of "renewable and alternative fuels in 2017'' and various bribes (er, incentives) for government-favored technologies -- of the kind we have been trying for three decades.

Good grief. I can give you a 20-in-2: tax gas to $4 a gallon. With oil prices having fallen to $55 a barrel, now is the time. The effect of a gas-tax hike will be seen in less than two years, and you don't even have to go back to the 1970s and the subsequent radical reduction in consumption to see how. Just look at last summer. Gas prices spike to $3 -- with the premium going to Vladimir Putin, Hugo Chavez and assorted sheiks, rather than the U.S. treasury -- and, presto, SUV sales plunge, the Prius is cool and car ads once again begin featuring miles per gallon ratings.

No regulator, no fuel-efficiency standards, no presidential exhortations, no grand experiments with switchgrass. Raise the price and people change their habits. It's the essence of capitalism.

Frum on the SOTU

David Frum, former speechwriter for President Bush, reviews the State of the Union speech, evoking the ghost of George Stigler.

POTUS: Closet Pigovian?

A loyal reader takes exception to my description of President Bush's energy proposal as a "tangle of regulation." He suggests that it is, in fact, a Pigovian tax in disguise. He writes:

A big biofuel mandate + safety valve = gas tax where biofuel producers get to keep the first chunk of revenue (until the price of a biofuel credit reaches the safety valve price). It's paying a bribe to be allowed to do a gas tax.

In other words, if we impose very costly regulations on gasoline producers but allow these producers access to a "safety value" under which they get excluded from the regulations for a price of $X per gallon, then we have in effect imposed a $X tax. The "bribe" occurs because the price of biofuel will be bid up until the marginal cost of the regulations equals $X.

Bottom line: The proposed energy policy may be one way to impose a gasoline tax while avoiding the word "tax."

Clarification: Based on the comments, it seems that my explanation was not completely clear. Under the proposed system, as I understand it, the producer would pay the price of invoking the safety value $X to the government. For producers using the safety value, this mechanism has precisely the same effects on incentives and government revenue as a tax.

The Pigou Club on NPR

This morning, NPR's Marketplace gives the Pigou Club some much appreciated publicity. NPR also links to a Pigouclub.com website, which I did not create but is helping to push forward the cause.

Addendum: Related stories in the LA Times and the NH Concord Monitor.

Cowen on Inequality

In today's NY Times, Tyler Cowen has a nice piece on inequality. Here are two facts I learned from it:

Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations.

On Charitable Giving and Foreign Aid

My own, unfashionable view is that charitable giving, both governmental and private, is more likely to increase than to alleviate the poverty, ill health, and other miseries of the recipient populations.

Guess who said this? Jeff Sachs would not agree, but I bet Jeff would endorse this view of Mr. Who:

The "generous" gifts from wealthy countries--pluming themselves on their greater (apparent) generosity than the United States--enable those countries to hide, perhaps even from themselves, the extent to which their tariff policies immiserate poor countries.

Smart economic analysts debate the value of foreign aid, but no one seriously doubts that truly free trade would benefit the world's poor.

Alternative to the Pigou Club

Some of my libertarian friends aren't members of the Pigou Club because they view gasoline taxes as a case of excessively intrusive government. But if this tangle of regulation is the alternative, isn't it time for them to reconsider?

What makes a person liberal or conservative?

In today's Wall Street Journal, Arthur Brooks (subscription required) explains how conservatives and liberals differ. An excerpt:

While just about everybody -- left and right -- agrees that poverty is unacceptable (although policy makers disagree as to whether a minimum wage hike would help or hurt the working poor), conservatives do not share liberals' concern about income inequality. According to the 2005 Maxwell Poll on Civic Engagement and Inequality, self-described liberals are more than twice as likely as conservatives to say income inequality in America is a "serious problem." And while 84% of liberals think the government should do more to reduce inequality, only 25% of conservatives agree.

This is empirical substantiation for the old cliché that conservatives just don't care about the poor, right? Wrong. In fact, the data do not tell us that conservatives are uncaring; they actually tell us that conservatives are optimists. Conservatives are relatively untroubled by inequality, and unsupportive of government income redistribution, because they believe the American economy provides private opportunities to succeed. Liberals are far more pessimistic than conservatives about the possibility of a better future for Americans of modest means.

Consider the evidence. While 92% of conservatives believe that hard work and perseverance can help a person overcome disadvantage, only 65% of liberals think so. This difference of opinion, contrary to the convention, is not because conservatives earn more money. In fact, lower-income conservatives are about twice as likely as upper-income liberals to say they think there's "a lot" of upward mobility in America. If a liberal and a conservative are exactly identical in income, education, sex, family situation, and race, the conservative will be 20 percentage points more likely than the liberal to say that hard work leads to success among the disadvantaged.

These observations ring true to me.

I wonder to what extent a person's answer to these questions is in part a function of personal family history. Most likely, I unconsciously overestimate economic mobility because my family has gone from near the bottom to near the top of the income distribution in two generations. My successful friends who come from wealthy families (who are usually more liberal than I am) may well do the opposite--unconsciously overestimate the extent to which family background made their successes inevitable. Psychologists tell us that people tend to overweight salient observations when making decisions. There is no observation more salient than a person's family history.

"a step in the right direction"

That's how Leonard E. Burman, Jason Furman, and Roberton Williams describe the health care proposal that President Bush will propose in tonight's speech. So, yes, there is hope for bipartisanship.

Update: The Wall Street Journal also likes the proposal. Here's a theorem: Any time the Wall Street Journal editorialists and Jason Furman agree, they are right.

Update 2: Steven Pearlstein and Ruth Marcus have nice pieces on the topic in today's Post.

Update 3: Here is a description of the distributional impact of the policy. The U.S. Treasury estimates that it would be a tax cut for the bottom four quintiles and a tax increase for the top quintile.

Growth, Well Illustrated

Here is a neat graphic showing economic growth and advances in life expectancy. You can use the tool here to illustrate a variety of fascinating scatterplots.

Post on the Bush Health Plan

An editorial in today's Washington Post, normally no fan of the Bush administration, gives a favorable review to President Bush's health care proposal. An excerpt:

Generous insurance plans, which impose few restrictions on visits to specialists or on possibly redundant tests, inflate demand for medical services and push up prices for everyone; they help explain why the United States spends almost twice as large a share of its economy on health care as do most rich economies. By giving all insurance buyers a standard deduction, irrespective of the type of health coverage they choose, Mr. Bush would restrain medical costs and promote fairness. Because richer people tend to have more expensive insurance, the reform would slightly increase tax rates for people in the top fifth of the income distribution while slightly reducing tax rates for others, according to the White House.

The editorial includes an amendment to the proposal that the Congress should take seriously:

Rather than embracing tax deductions, which are most valuable to people in high tax brackets, Mr. Bush could have made his proposal even more progressive by recommending a refundable tax credit that would be worth the same to everyone.

If this plan (as revised to turn the deduction into a credit) does not command bipartisan support, nothing will.

Pigou Club News

A loyal reader alerts me to an article in the latest issue of The Atlantic by Pigou Club member Clive Crook, including this paragraph:

Tax increases are unlikely to happen accidentally, as a natural result of partisan contention. They will require courage and creativity. But a solution is available that practically cries out: the gas tax. Raise it modestly to start with, but announce a schedule of further increases over the next ten years. On grounds of economic efficiency, the case for a bigger gas tax is unassailable. Politically, it could be linked to deeply resonant issues--the environment, energy independence--and might offer a measure of face-saving for the administration. You could sweeten it further: promise up front that 50 percent of the proceeds will go to deficit reduction, and 50 percent to reductions in the Social Security tax, or to an expanded earned-income tax credit (both of which especially help the low-paid).

Another reader points out that Nobel economist Dan McFadden has joined the club:

McFadden suggested imposing a carbon emissions tax or introducing tradable emissions licenses as incentives to promote energy conservation.

The Boston Globe reported today that President Bush will focus on global warming in his state of the union speech tomorrow. I am hoping for the outside chance that he will propose a Pigovian tax, perhaps in exchange for permanence of his income tax cuts. The options mentioned in the article--tighter regulations and greater subsidies to energy alternatives--are more intrusive, require higher distortionary taxes, and are less effective.

How to Choose a Textbook

The thought processes of Princeton economist Uwe Reinhardt.

Podcast

I can't bear listening to this man's voice, so personally I won't click on this podcast, but some readers of this blog might not have the same aversion.

You say potato, I say...

Reaction to the Bush health proposal is starting to roll in. Economist Arnold Kling, author of Crisis of Abundance: Rethinking How We Pay for Health Care, gives the plan an A+. Economist Paul Krugman, prominent scholar of international trade theory, sees it as further evidence of how wicked George Bush is.

Updates: Here and here.

Mac or PC?

In an interview published in today's Wall Street Journal, one of his last, Milton Friedman reaffirms his supports for rules-based monetary policy:

Do you still think it would be a good idea to have a computer run monetary policy?

Friedman: Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.

In any event, the computer program would certainly prevent any major disasters either way, any major inflation or any major depressions. One of the great defects of our kind of monetary system is that its performance depends so much on the quality of the people who are put in charge.

We have seen that in the history of our own Federal Reserve System. Surely a computer would have produced far better results during the 1930s and during both world wars.

That raises a question about the desirability of our present monetary system. It is one in which a group of unelected people have enormous power, power which can lead to a great depression or which can lead to a great inflation. Is it wise to have that power in those hands?

An alternative would be to eliminate the Federal Reserve System; to reduce the monetary activities of the federal government to the provision of high-powered money, that is, currency and bank reserves, and to constitutionalize, as it were, what is to be done with high-powered money. My preference is simply to hold it constant and let financial developments produce the growth in the quantity of money in the form of bank deposits, a process that has been going on for many decades. But that is, of course, politically impossible.

In the spring in ec 10, we will discuss the debate over monetary policy rules.

The Secret to Investment Success

Harvard's endowment has earned a remarkable return in recent years. Now the Economist tells us why:

According to one former Harvard official, its endowment fund has done so well because it has avoided taking advice from the economics faculty.

Of course, this is merely comparative advantage in action. You also shouldn't trust your investment managers to teach economics.

Richard Musgrave

Richard Musgrave, a former economics professor at Harvard and a major figure in public finance, has died. Here is his obituary.

John Taylor's New Book

Here is a review of John Taylor's new book, Global Finanical Warriors, The Untold Story of International Finance In the Post-9/11 World.

Update: Here is symposium on John's book.

Bush Health Proposal

Reuters reports the new heath insurance initiative from the Bush Administration:

Bush's health-care proposal would use tax breaks to make it easier for people who do not have employer-provided health insurance to buy coverage on their own. The tax incentives would be similar to deductions used by homeowners for the interest on their mortgages, Bush said.

But the program is intended to have no effect on government revenues because the cost of the tax breaks would be offset by changing the way health insurance is treated in the tax code, according to a senior administration official who described the proposal to reporters.

The current health system relies primarily on employers to provide health-care coverage as a fringe benefit. Employees are not taxed on the benefits but the Bush plan would set a cap on the amount of coverage that could be offered tax-free.

Anything above that would be taxed as income, the administration official on condition of anonymity.

Economists have long suggested that tax subsidies lead to excessive use of employer-provided health insurance. This proposal would help fix that problem, while giving a helping hand to the uninsured.

Note that some Democratic economists have made similar proposals in the past, so there is hope that this idea will command bipartisan support.

Why Econ Teachers Must Try Harder

Bloomberg reports:

Americans Souring on Free Trade Amid Optimism About Economy

41 percent [of Americans] agreed that free trade has hurt the economy, versus 28 percent who said it's helped....Public sentiment on trade has reversed from 10 years ago, when almost 4 in 10 Americans said it helped the economy and 3 in 10 said it hurt.

Five Minutes to Midnight

Doomsday is a bit closer:

This deteriorating state of global affairs leads the Board of Directors of the Bulletin of the Atomic Scientists--in consultation with a Board of Sponsors that includes 18 Nobel laureates--to move the minute hand of the “Doomsday Clock” from seven to five minutes to midnight.

Maybe it is time to start saving less:

The hypothesis of this article is that the performance and, in particular, the rate of saving in the postwar U.S. economy has been influenced by the changes in the public perception of the threat of a catastrophic nuclear war. An increased threat shortens the expected horizon of individuals, and thus reduces their willingness to postpone present consumption in favor of investment. The hypothesis is tested by expanding a standard savings function estimation technique to include a measure of the perceived threat of nuclear war. Several alternative measures of the perceived threat are considered, based either on the setting of the "doomsday" clock published monthly in Bulletin of the Atomic Scientists, which reflects the editors' judgement about the likelihood of a nuclear conflict, or on an index of the extent of press coverage of nuclear war issues. The tests all support a large and statistically significant impact of the threat of nuclear war on the rate of private saving. These tests are not viewed as conclusive evidence in favor of the economic impact of the perceived threat of nuclear war. Nevertheless, this research suggests that economists may have been overlooking an important source of influence in the postwar, postnuclear U.S. economy. Conceivably, it could affect not only the private savings rate but also other economic variables such as the level of investment in human capital, the level of asset prices, the term structure of interest rates, and the rate of inflation.

From University of Michigan economist Joel Slemrod.

Tribe on Obama

The Harvard Crimson reports:

Loeb University Professor Laurence H. Tribe ’62, who taught Obama and employed him as a research assistant, remembers him as a “brilliant, personable, and obviously unique” person. Tribe said that Obama’s theoretical perspective on applying modern physics to law was “very impressive.”

Unfortunately, the article fails to explain that last sentence. Applying modern physics to law? Inquiring minds want to know.

Update: Reader Matt Rognlie directs us to the Harvard Law Review and, in particular, this Tribe article, which thanks Obama in a footnote. Also thanked in the footnote is Gene Sperling--I presume it's the same Gene Sperling who later became a Clinton economic adviser.

Bernanke on the Fiscal Gap

We have heard all this before, but Ben Bernanke does a particularly nice job of laying out the long-term fiscal challenge in his testimony yesterday:

Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit (equal to the difference of the two) was 1.9 percent of GDP. These percentages are close to their averages since 1960....Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP. In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP. As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.

A Few Things to Read

• John Tierney on neuroeconomics.
• Charles Murray on education and IQ: Part I, Part II, Part III.
• John Stossel on the trade deficit.

Robert Samuelson signs up

In his latest column, Robert Samuelson says we should "enact an energy tax equivalent to $2 a gallon on gasoline -- introduced over six years, or about 33 cents annually," making him the latest member of the Pigou Club.

I have proposed a more modest $1 increase, in part based on the research of Parry and Small, but of course there is a degree of uncertainty about how high the optimal tax is.

Samuelson also advocates more rigorous fuel-economy standards for cars. Here I part company with him. One purpose of Pigovian taxation, in my view, is to avoid heavy-handed regulations with all their unintended consequences. Higher gasoline taxes would provide consumer and auto companies the incentive to produce more fuel-efficient vehicles, making such regulation unnecessary.

Humility aside...

What's the #1 economics department? You can find the answer here. Thanks to Newmark's Door for the pointer.

Carbon Tax Coming?

Jim Connaughton is not quite a member of the Pigou Club, but I would be happy to accept his application.

Here is what I read in yesterday's Washington Post:

On Saturday I put the case for a carbon tax or a cap-and-trade system to James Connaughton, the head of the Council on Environmental Quality at the White House. Far from denouncing these policies as eco-socialist nonsense, Connaughton sounded open to them. "In concept I can agree with you," he said. Something must be done to stem demand for climate-warming energy, and although there are several ways of getting there, a carbon tax or cap-and-trade system would be the most "elegant."

Whoa! This may be spin, but it's certainly new spin. Only a few months ago, Al Hubbard, director of Bush's National Economic Council, brushed aside the idea of a carbon tax: "The American people are not interested in paying more for gasoline," he told me, sounding like a frog in the path of a herd of elephants who says he's not interested in jumping.

I would bet against seeing any sensible increase in Pigovian taxation over the next two years, but if mainstream Republicans like Jim Connaughton appreciate the elegance of the idea, there is always hope.

Ray joins the Club

A reader alerts me to the fact that Cartalk's Ray Magliozzi is a member of the Pigou Club.

MLK Day

For this Martin Luther King Day, I reprint for my blog readers a case study from my favorite economics textbook:

Case Study
Discrimination in Sports

As we have seen, measuring discrimination is often difficult. To determine whether one group of workers is discriminated against, a researcher must correct for differences in the productivity between that group and other workers in the economy. Yet in most firms, it is difficult to measure a particular worker's contribution to the production of goods and services.

One type of firm in which such corrections are easier is the sports team. Professional teams have many objective measures of productivity. In baseball, for instance, we can measure a player's batting average, the frequency of home runs, the number of stolen bases, and so on.

Studies of sports teams suggest that racial discrimination is, in fact, common and that much of the blame lies with customers. One study, published in the Journal of Labor Economics in 1988, examined the salaries of basketball players. It found that black players earned 20 percent less than white players of comparable ability. The study also found that attendance at basketball games was larger for teams with a greater proportion of white players. One interpretation of these facts is that, at least at the time of the study, customer discrimination made black players less profitable than white players for team owners. In the presence of such customer discrimination, a discriminatory wage gap can persist, even if team owners care only about profit.

A similar situation once existed for baseball players. A study using data from the late 1960s showed that black players earned less than comparable white players. Moreover, fewer fans attended games pitched by blacks than games pitched by whites, even though black pitchers had better records than white pitchers. Studies of more recent salaries in baseball, however, have found no evidence of discriminatory wage differentials.

Another study, published in the Quarterly Journal of Economics in 1990, examined the market prices of old baseball cards. This study found similar evidence of discrimination. The cards of black hitters sold for 10 percent less than the cards of comparable white hitters. The cards of black pitchers sold for 13 percent less than the cards of comparable white pitchers. These results suggest customer discrimination among baseball fans.

New Taxes in Massachusetts

Today's Boston Globe reports:

Governor Deval Patrick said yesterday that he had come up with a way to pay for more police officers in Massachusetts: charge convicted criminals a fee. Unveiling his most detailed account yet of his plans for next year's state budget, Patrick said he would propose a "safety fee," which every person convicted of a crime would have to pay.

This fee can be viewed as a Pigovian tax on crime externalities. (It reminds me of the old quip, "A fine is a tax for doing something wrong. A tax is a fine for doing something right.")

Like many Pigovian taxes, this one is being criticized as having bad distribution properties:

Reacting to Patrick's announcement, advocates of prisoners' rights said the plan was unfair. Leslie Walker, executive director of Massachusetts Correctional Legal Services, which represents inmates, said about 85 percent of convicted criminals in Massachusetts earn less than $11,000 a year at the time of their convictions.

Another one of Patrick's proposals is less attractive from the standpoint of economic efficiency:

Patrick also pledged to support legislation that would allow cities and towns to hike the state's 5 percent meals tax to as much as 8 percent.

My guess is that restaurant meals have a large elasticity of demand (meals at home are a good substitute) and a large elasticity of supply (restaurant space can be converted to other business uses, and the labor can be redeployed to other industries and states). With a large elasticity of demand and a large elasticity of supply, a tax on this market would entail a particularly large deadweight loss.

Will the Fed become less independent?

Today's Wall Street Journal reports:

Fed Chairman May Face Heat At Hearings

When Federal Reserve Chairman Ben Bernanke testifies on monetary policy next month, he is likely to get far more scrutiny than usual.

By law, the Fed chairman must testify twice a year to Congress: in February and July. Ordinarily, each installment lasts two days, one before the Senate Banking Committee, the other before the House Financial Services Committee. There are no other witnesses.

In a break with that tradition, Barney Frank, the Massachusetts Democrat who took over the House panel this month, said he plans to hold an additional day of hearings in which witnesses, such as economists and labor experts, will give their views on what Mr. Bernanke said.

The Fed is a creation of Congress, and the Congress surely has the right and duty to oversee the central bank. On the other hand, many economists have argued that an independent central bank performs better than one more closely tied to politics. A classic reference on the topic is Alesina and Summers. After reading a story like this, one might worry that more Congressional scrutiny will translate into less Fed independence and, if Alesina and Summers are right, worse macroeconomic outcomes.

Addendum: Here is a case study on the topic from my intermediate macroeconomics textbook:

Case Study
Central-Bank Independence

Suppose you were put in charge of writing the constitution and laws for a country. Would you give the president of the country authority over the policies of the central bank? Or would you allow the central bank to make decisions free from such political influence? In other words, assuming that monetary policy is made by discretion rather than by rule, who should exercise that discretion?

Countries vary greatly in how they choose to answer this question. In some countries, the central bank is a branch of the government; in others, the central bank is largely independent. In the United States, Fed governors are appointed by the president for 14-year terms, and they cannot be recalled if the president is unhappy with their decisions. This institutional structure gives the Fed a degree of independence similar to that of the U.S. Supreme Court.

Many researchers have investigated the effects of constitutional design on monetary policy. They have examined the laws of different countries to construct an index of central-bank independence. This index is based on various characteristics, such as the length of bankers' terms, the role of government officials on the bank board, and the frequency of contact between the government and the central bank. The researchers then examined the correlation between central-bank independence and macroeconomic performance.

The results of these studies are striking: more independent central banks are strongly associated with lower and more stable inflation. Figure 14-4 shows a scatterplot of central-bank independence and average inflation for the period 1955 to 1988. Countries that had an independent central bank, such as Germany, Switzerland, and the United States, tended to have low average inflation. Countries that had central banks with less independence, such as New Zealand and Spain, tended to have higher average inflation.

Researchers have also found there is no relationship between central-bank independence and real economic activity. In particular, central-bank independence is not correlated with average unemployment, the volatility of unemployment, the average growth of real GDP, or the volatility of real GDP. Central-bank independence appears to offer countries a free lunch: it has the benefit of lower inflation without any apparent cost. This finding has led some countries, such as New Zealand, to rewrite their laws to give their central banks greater independence.

Dingell vs CBO

Bloomberg reports today:

The Democratic-led House, defying the Bush administration, passed legislation requiring Medicare to negotiate drug prices with manufacturers....

"It will deliver lower premiums to the seniors, lower prices at the pharmacy, and savings for all taxpayers," House Energy and Commerce Committee Chairman John Dingell, a Michigan Democrat, said on the House floor today.

Two days ago, the Congressional Budget Office told Mr Dingell in a letter:

CBO estimates that H.R. 4 would have a negligible effect on federal spending because we anticipate that the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law.

I wonder what evidence leads Mr Dingell to expound a conclusion exactly the opposite from that reached by the Congress's own experts.

Updates: Robert Reich says CBO is right, and he does a good job of explaining why. Meanwhile, a very smart economist (who prefer anonymity) emails me a good explanation:

The drug price negotiation issue is a good one for your econ students. People have this notion that the federal government ought to be able to negotiate a low price because it purchases on behalf of so many patients. But size alone doesn't get you discounts. You need to be able to threaten something if you don't get those discounts. Many folks in Congress don't get that. The federal government can get discounts if it threatens to revoke intellectual property rights (Cipro might fall in that category), it threatens with legal penalties (rebates in Medicaid backed by legal sanctions), or it threatens to not purchase (formularies in the VA). It can't get discounts just by "negotiating".

Wessel on Global Poverty

"Do we really know how to help the poor people -- the increasing number of poor people? Do we really know how to help them out of poverty?" Not really, suggests David Wessel.

This blog will not be undersold!

Hal Varian explains why.

Internships

Being a summer intern is a great way for students to observe different career paths and figure out which are right for them. For students interested in economic policy, there are internship programs at the policy organizations such as the CEA, CBO, Fed, and NY Fed, and policy think tanks such as AEI, Brookings, Cato, and Heritage. This is the time of year when students should start applying.

If readers know about other good programs, please post information in the comments section.

The Power of Choice

On January 29, PBS will broadcast The Power of Choice, a documentary about Milton Friedman. Here is a preview.

Rising Stars

In today's NY Times, David Leonhardt draws attention to thirteen rising stars of the economics profession.

David writes that "the list is incredibly diverse." That is not entirely true, however. I am delighted to note that a majority have their PhDs from Harvard, and all but one have been at Harvard as a student, post-doc, or faculty member at some point in their young careers.

Fame is so fleeting

The Crimson reports:

The Larry Summers burger at Bartley’s Burger Cottage was scrapped from the menu Monday morning after two and a half years of serving the former president’s namesake, said Bill Bartley, son of the burger joint’s founder Joe Bartley....

“He’s done. No más. Not interesting,” Bartley said. He added that the burger, which was topped with swiss cheese and honey mustard, was “about as popular as Larry Summers. We can’t make him something he’s not.”

Let me propose the name "ec 10 burger" for....what? Suggestions welcome in the comments section.

The California Health Care Plan

Economist David Henderson takes on the Terminator.

Minimum wage vs EITC

The CBO today released a brief report comparing an increase in the minimum wage with an expansion in the Earned Income Tax Credit. The report shows that the EITC is far better targeted as an antipoverty policy.

Here is the summary:

On the basis of data from the March 2005 CPS, about 18 percent of the 12 million workers who were paid an hourly wage rate between the federal minimum wage of $5.15 and $7.24 were in families that had a total cash income below the federal poverty threshold in 2004. Had all of the workers in that wage range, instead, received $7.25 per hour, they would have gotten about $11 billion in additional wages in that year. About 15 percent of those additional wages ($1.6 billion) would have been received by workers in poor families.

As requested, CBO examined the potential effects of hypothetical expansions in the EITC that would have provided additional payments to workers in poor families similar to the amount of additional earnings poor workers would have received by increasing the minimum wage rate to $7.25 per hour. One option was to increase the subsidy rate for childless workers by 50 percent. Another option was to increase the subsidy rate for workers with three or more children by 25 percent. On the basis of data from the CPS, combining those options would have increased total EITC payments by roughly $2.4 billion in 2004, with workers in poor families receiving $1.4 billion of that total.

Predicting Grad Student Success

What predicts getting a good job after econ grad school? Athey et al. have the answer.

Thanks to Tyler Cowen for the pointer.

Federal Tax Progressivity: Just the Facts

From a new CBO report, here are the effective federal tax rates for 2004 (the most recent year available in this report):

Lowest quintile, 4.5
Second quintile, 10.0
Middle quintile, 13.9
Fourth quintile, 17.2
Highest quintle, 25.1

Top 10 percent, 26.9
Top 5 percent, 28.5
Top 1 percent, 31.1

These numbers include all federal taxes (not just income taxes) and are expressed as a percentage of household income.

Criminals respond to incentives

An ec 10 student recommends an article on Free-Market Justice, which says that when choosing between private lawyers and public defenders,

criminal defendants, just like any other consumers of services, appear to be making choices based on their rational assessments of costs and benefits.

No gazebo left behind

My home state of Massachusetts has a new governor. Let's see how he is doing:

Patrick Warns Fiscal 2008 Deficit Could Be $1 Billion
Governor Patrick says the state faces a potential budget deficit of one billion dollars in the next fiscal year. The state's new chief executive says the Romney administration misrepresented the financial situation with "all sorts of patches and plugs."

And then this:

Patrick's reversal of cuts brings joy
$383.6m restored for local projects
With Deval Patrick now in the corner office on Beacon Hill, officials and community leaders south of Boston are applauding his decision to restore budget cuts made by former governor Mitt Romney.

The restored cuts statewide amount to $383.6 million. While it is difficult to estimate how much of that money was destined for south of Boston, the funds clearly benefit dozens of projects here and help thousands of people.

The affected projects range from downtown revitalization work in Stoughton, Milton, and Quincy, to a skating rink in Randolph. Workers at Bridgewater State College and those who work with the elderly will get long-awaited raises. And ratepayers in communities served by the Massachusetts Water Resources Authority will get $25 million in rate relief.

In Braintree, the list of restored budget items illustrates why Patrick's reversal of his predecessor's order came as a huge relief: $100,000 for a library land purchase; $100,000 in aid to the police and fire departments; $100,000 for a town gazebo; $25,000 for the local Council on Aging; $20,000 to help close the public library's budget; and $250,000 for a flooding study in the Bestick Road area.

Mission Accomplished

I read in the Harvard Crimson:

The jargon of economics has, in fact, become a sort of lingua franca for many at Harvard.

But you should use econ jargon only up to the point where the marginal benefit of doing so equals the marginal cost.

The Akerlof-Friedman Team

Steve Levitt points out that economists George Akerlof and Milton Friedman are cut from the same cloth:

Both Akerlof and Friedman want to explain real world phenomena and their work aims squarely at doing so. Many economists, in contrast, care little about real-world questions. In this important regard, I see Akerlof and Friedman as being on the same team rather than opposing teams.

But Levitt avoids the most intriguing question that his comment raises: Why hasn't Akerlof-Friedman team vanquished the opposition?

2007 = 1914?

Harvard historian Niall Ferguson wonders whether the events of 1914 could repeat themselves:

try rereading the events of 1914 with the place names changed. Imagine the assassination of the U.S. Vice President in Baghdad this coming June. The U.S. suspects Iranian involvement and sends an ultimatum to Tehran. Israel takes the American side; Russia lines up with the Iranians ... It's not a wholly implausible sequence. And some central bankers admit privately that they would have to struggle to counter the liquidity crunch that such a geopolitical shock would trigger. A stock-market shutdown in 2007? History warns us not to rule it out.

Mankiw vs Bush

An editorial in today's Washington Post uses my research with Matthew Weinzierl to challenge my former boss:

PRESIDENT BUSH wrote in a Wall Street Journal op-ed Wednesday that "it is also a fact that our tax cuts have fueled robust economic growth and record revenues." The claim about fueling record revenue is flat wrong, and it is shocking that the president should persist in making such errors. After all, tax cuts are the central plank of his domestic policy. How can he fail to understand the basic facts about them?

This is not just our opinion. Harvard's N. Gregory Mankiw, an economic conservative who served as chairman of Mr. Bush's Council of Economic Advisers, has tested the hypothesis on which Mr. Bush's claim is based: He looked at the extent to which tax cuts stimulate extra growth and the extent to which that growth generates extra tax revenue that offsets the initial loss of revenue from the tax cut. Mr. Mankiw's conclusion: Even over the long term, once you've allowed all of the extra growth to feed through into extra revenue, cuts in capital taxes juice the economy enough to recoup half of the lost revenue, and cuts in income taxes deliver a boost that recoups 17 percent of the lost revenue. So a $100 billion cut in taxes on capital widens the budget deficit by $50 billion, and a $100 billion cut in income taxes widens the budget deficit by $83 billion.

A few comments:

1. The editorial is wrong when it says we "tested the hypothesis." In fact, my paper with Weinzierl was data-free, and any scientific test requires data. What we did was address the policy question by calibrating a standard intertemporal general equilibrium model using parameter estimates drawn from the literature. In other words, our paper presented a model simulation, not an empirical test.

2. The 17 percent figure cited in the editorial is not for income taxes, but for labor income taxes. Because income taxes are a combination of labor income taxes and capital income taxes, the right figure for income taxes would be between 17 percent and 50 percent--I would guess about 25 percent.

3. The results cited are for our baseline model. The paper also presents a variety of alternative simulations that lead to different conclusions. For example, if one believes in large social multipliers, then the elasticity of labor supply could be larger than we assumed, and the revenue feedback effects would be greater. Similarly, if one believes that capital investment generates significant positive externalities (as suggested, for example, by the research of DeLong and Summers), then the revenue feedback effects would be much larger. Tax cuts could even be self-financing. I don't view that outcome as the most likely, however, mainly because I am not convinced of the evidence for such positive externalities. But I have enough respect for DeLong and Summers as economists that I would not completely rule out the possibility.

What I'm reading

Here is George Akerlof's Presidential Address to the American Economic Association, to be delivered tomorrow, on "The Missing Motivation in Macroeconomics."

Thanks to Arnold Kling for the pointer.

A Few Things to Read

• George Bush on working with Congress.
• Andrew Samwick, who is vexed by the preceding piece.
• Arnold Kling on avoiding the truth.
• Thomas Sowell on income disparities.
• Donald Boudreaux, responding to Lou Dobbs.
• George Will on why the minimum wage should be set to zero. (But should it then be indexed for inflation?)

Publish or Perish

Here is an unusual response to being turned down for tenure:

A professor who was denied tenure at the Massachusetts Institute of Technology has vowed to start a hunger strike on February 5 outside the provost’s office.

“I will either see the provost resign and my hard-earned tenure granted at MIT, or I will die defiantly right outside his office,” James L. Sherley, who teaches biological engineering, wrote in a letter to colleagues.

HT: Newmark's Door.

Spence on the Trade Deficit

Economist Michael Spence (erstwhile Harvard prof) has a nice piece on the U.S. trade deficit and the Chinese exchange rate in today's Wall Street Journal. His bottom line:

it would be useful if we stopped pretending or alleging that China's exchange-rate policies are the root cause of our trade deficit. If our savings rate is stubbornly stuck below our investment rate, and if China does allow its currency to revalue over time, then we will simply run a deficit with another collection of countries, and from a domestic point of view, nothing much will have changed. Except that we won't have this subject to discuss with China anymore.

The linkage among saving, investment, and the trade deficit is a topic that will feature prominently in ec 10 this spring.

Note to Debbie

This is what I want for my birthday.

What I'm reading

Ed Prescott has posted his new paper on the optimal size of government debt. This paper is related to earlier posts (here and here) based on a Prescott op-ed.

The Diminishing Role of Energy Prices

In his latest column, Austan Goolsbee reminds us why changes in energy prices have a smaller impact today than they did in the past:

The energy used for each dollar of gross domestic product in 1980 was almost 70 percent greater than it is today.

Education and Health

Today's NY Times has a fascinating article on the link between educational attainment and health outcomes. An excerpt:

The one social factor that researchers agree is consistently linked to longer lives in every country where it has been studied is education. It is more important than race; it obliterates any effects of income.

Year after year, in study after study, says Richard Hodes, director of the National Institute on Aging, education “keeps coming up.”

And, health economists say, those factors that are popularly believed to be crucial — money and health insurance, for example, pale in comparison.

Dr. Smith explains: “Giving people more Social Security income, or less for that matter, will not really affect people’s health. It is a good thing to do for other reasons but
not for health.”

Health insurance, too, he says, “is vastly overrated in the policy debate.”

Instead, Dr. Smith and others say, what may make the biggest difference is keeping young people in school. A few extra years of school is associated with extra years of life and vastly improved health decades later, in old age.

The article is particularly good at explaining how studies handle the identification problem. That is, researchers have worked hard to disentangle correlation and causation. The results indicate that education has a causal impact on health.

Passports for Sale

Econ prof Dwight R. Lee wants to "give Americans the right to sell their citizenships to non-Americans." Arnold Kling calls it "an idea only an economist could love."

Taxpayers respond to incentives

Economists Lee Ohanian. Andrea Raffo, and Richard Rogerson have a new paper on "Long-Term Changes in Labor Supply and Taxes: Evidence from OECD Countries, 1956-2004." They conclude

taxes can account for much of the variation in hours worked both over time and across countries.

For another point of view, see Alberto Alesina, Edward L. Glaeser, and Bruce Sacerdote, who believe that regulations pushed by unions, not taxes, are the reason Europeans work fewer hours than Americans.

Life at the Top

From the new WSJ blog on the "lives and culture of the wealthy."

Theater Recommendation

I am a fan of musical theater, and there is no show I have enjoyed more in recent years than Jersey Boys, which my family and I saw yesterday. Whether or not you can make it to New York for the show, try the recording, which has entertained my kids for hours in the car.

Okay, now back to economics.