Random Observations for Students of Economics
Tomorrow, May 1, the Harvard Libertarian Forum will host a panel discussion of Bryan Caplan's "The Myth of the Rational Voter." Guests include Professor Caplan and his colleague Robin Hanson (economist-bloggers at GMU), David Estlund (professor of philosophy at Brown), and Jeffrey Miron (economist at Harvard). Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.I don't know any prominent economist who favors this McCain-Clinton proposal. More common is the reaction of a friend of mine (a veteran of the Clinton administration) who calls the idea "ludicrous."
The Federal Reserve's moves to prop up Bear Stearns Cos. will come to be seen as "the worst policy mistake in a generation," [said] the former head of monetary affairs at the Fed. The action is comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, said Vincent Reinhart, a scholar at the American Enterprise Institute, who retired from the Fed last fall.
Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor....
we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor.
We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.
All students [at Yale Law School] are required to take courses in contracts and in torts, and they're randomly assigned to an instructor for each class. Some of these teachers have Ph.D.s in economics, some in philosophy and other humanities, and some have no strong disciplinary allegiances at all. Professors are encouraged to design their courses as they see fit. Instructors from economics may emphasize the role of contracts in making possible the efficiency gains of the marketplace, while philosophers may emphasize equal outcomes for contracting parties. So economists teach about efficiency and philosophers teach about equality.
To figure out whether this affected their young charges, we put 70 Yale Law students in a computer lab, and had them play a game that would reveal to us their views on fairness....It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.
After adjusting for multiple sources of bias and differences in sample construction, we establish that (1) the U.S. high school graduation rate peaked at around 80 percent in the late 1960s and then declined by 4-5 percentage points; (2) the actual high school graduation rate is substantially lower than the 88 percent estimate of the status completion rate issued by the NCIS [National Center for Educational Statistics]; (3) about 65 percent of blacks and Hispanics leave school with a high school diploma, and minority graduation rates are still substantially below the rates for non-Hispanic whites. In fact, we find no evidence of convergence in minority-majority graduation rates over the past 35 years....A significant portion of the convergence reported in the official statistics is due to black males obtaining GED credentials in prison.
Maybe educations are like Willie Wonka’s chocolate bars. A few of them come with golden tickets that give you opportunities almost beyond imagination. But even if you aren’t lucky enough to get a golden ticket, you can still enjoy the chocolate, which by itself is well worth the price.
Mr. Sanford is popular on the right because he understands markets. "There are only two ways to raise the standard of living," he said, "through technology – one backhoe can dig more dirt than 50 men with shovels – and through brain power . . . And that's it."
EDMONTON —In what is being called an unprecedented move, the federal government will pay Canadian pork producers $50 million to kill off 150,000 of their pigs by the fall as the industry teeters on the brink of economic collapse....Those who qualify for payments must agree to kill off an entire breeding barn of pigs and not to restock the barn for three years.
Besides proposing useless or damaging ideas, the candidates also have passed up the single best idea for energy policy: a carbon tax that would curb use of fuels that release greenhouse gases, while encouraging development of clean alternatives.Update: Paul Mulshine agrees that On the gas tax, McCain is in the tank.
This argument should be familiar to ec 10 students, as it uses the basic tools of supply, demand, elasticity, and the theory of tax incidence. Burman and Toder are saying that the short-run supply curve is almost inelastic, so the welfare gain from the tax cut falls almost entirely on producers rather than consumers.Refiners run near capacity every summer as families rack up miles on family vacations. That’s one reason why gas prices jump in the summer. If McCain’s excise tax cut translated into lower prices, we’d all want to drive more, which would push up the demand for gasoline. [Greg: Actually, it's quantity demanded, not demand, since this represents a movement along the demand curve, not a shift in the curve, but perhaps pointing that out is too pedantic.]
Since the refiners can’t produce much more without building new refineries, the price has to go back up. Higher prices might stimulate a little more production and we might import more gasoline from our neighbors. But the price [received by refiners] will have to increase by almost the amount of the tax cut. Otherwise, there will be shortages. Unless the plan’s aim is to boost short-term profits for petroleum refineries, the proposal makes no sense.
As SFpark is envisioned, parking rates would be adjusted based on time of day, day of week and duration of stay. People would be able to pay not just with coins, but with credit cards, prepaid debit cards and even by cell phone. If a meter is set to expire, a text message could be sent to the driver. More time could be purchased remotely.
People also would be able to check parking availability before arriving at their destination via the Internet, handheld devices such as BlackBerrys, or cell phone. Sensors would be embedded in the asphalt to keep track of when a parking spot is empty....
"The idea is to give people more choice, more convenience and to reduce congestion," said Mayor Gavin Newsom.
Under the program, which will focus on 10 neighborhoods, the city will adjust hourly parking rates based on demand - the price will go up when spaces are scarce and go down when plenty are available.
People may be less inclined to drive during peak times if they know it will cost them more.
I hereby declare Paul Volcker an enemy combatant to the economy of the United States of America and issue a warrant for his arrest. We're in the process of building our first Federal Reserve Prison.
The Fed should announce its intention to add to its holding of Treasury securities in order to provide additional liquidity. It should cease pegging the fed funds rate while this policy is in effect. While there is no guarantee, direct injection of money holds some promise of alleviating the worst of the credit crisis. This means that, after the election, Congress will not feel justified in nationalizing mortgage markets. While there is a substantial risk that inflation may rise for a time – this would be the policy goal – monetization is more easily reversible than nationalization of the mortgage market.
In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put some questions to his students at Harvard when he wanted to show how people's ethical preferences on public policy can be turned around. Suppose, he said, that you were designing a tax code and wanted to provide a credit -- a rebate, in effect -- for couples with children. (I'm simplifying a bit.) In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly. Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so. If the credit was going to vary with income, it seemed fair to award struggling families the bigger tax break. It would certainly be unfair, they agreed, for richer families to get a bigger one.
Then Schelling asked his students to think about things in a different way. Instead of giving families with children a credit, you'd impose a surcharge on couples with no children. Now then: Would it be fair to make the childless rich pay a bigger surcharge than the childless poor? Schelling's students thought so.
But -- hang on a sec -- a bonus for those who have a child amounts to a penalty for those who don't have one. (Saying that those with children should be taxed less than the childless is another way of saying that the childless should be taxed more than those with children.) So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich. To many, the first deal sounds unfair and the second sounds fair -- but they're the very same tax scheme.
That's a little disturbing, isn't it?
"From what you know, how much do you think the cost of the war in Iraq has contributed to the U.S. economic problems: a lot, some, not much or not at all?"I have never taken a public position on the Iraq war: The issue is a hard one, and foreign policy and military matters are well beyond my area of expertise. But I am confident that it would be a mistake to view the war primarily through the lens of economics. My guess is that if this poll question were asked of professional economists, most would answer "Not Much."
A Lot, 67 %
Some, 22%
Not Much, 6 %
Not at all, 4 %
Unsure, 1 %
I will be talking today at the Harvard Pre-Collegiate Economics Challenge, as I did last year. Harvard Hall 104 at 2 pm.
Dear Greg,Let me conclude by repeating advice from my original post on the topic of Harvard vs MIT: Don't sweat it. You will get a great education at either place.
Because I chair recruiting for MIT, several folks have contacted me about your blog entries on Harvard v. MIT. As one of our grad students has pointed out, there is a an irony to the department rankings that your blog overlooks:
a. On the list of top authors by rank score, 13 of the top 50 were educated at MIT (yourself included, of course) and 10 were educated at Harvard.
b. On the list of top authors by citations, 14 are MIT Ph.Ds and 11 are Harvard Ph.Ds.
I suppose you could argue that it matters more [where] these "home-runners" sit now than where they were trained. But the evidence doesn't really bear this out: the attached paper on department rankings, forthcoming in the ReStat, uses graduate student placements to rank departments. Over the past 40 years of data, Harvard slightly out-places MIT. Using data since 1990, MIT slightly out-places Harvard.
So, if you want to keep your readers well informed, you might point out these facts as well.
- David
We should be clear, however, that monetary policy and these last-minute rescues can only prevent a meltdown of the economy; it can't resuscitate it. As Keynes pointed out, it's like pushing on a string - and even more so in this era of globalisation. With housing prices falling, new liquidity won't make homeowners borrow more or banks lend more. The money will look for safer and higher returns elsewhere, like China, which is now worried about US irresponsibility showing up in asset-bubbles in its own economy.I don't believe it. At the very least, even in a world of perfect capital mobility, monetary policy can use the exchange-rate channel: More expansionary policy causes the currency to depreciate, which stimulates net exports. That channel is part of the story right now.
I am an economics major at a university in Mexico. The student council (of which I am president) is organizing a party in a couple of days, and since we are big fans of your textbooks (and blog!) we decided to throw the party in your honor. I think you will like to see the invitation we created...
Greg:
Wanted to note an interesting phenomenon related to your blog post on the carry trade. Attached are two screen shots from my bloomberg showing the beta of the index that ETF tracks, the Deutsche Bank G10 Currency Future Harvest Index, to the S&P 500. Note the sample over which the beta is calculated in each attachment: the first is from 04/04/07 to 04/04/08 (the last year) and the second is from 04/05/04 to 04/04/07 (the preceding 3 years). As you can see the "beta" (at least ex-post) has increased dramatically.
Of course this prompts several interesting questions. First, why has the beta risen so significantly? I'm not sure there isn't an interesting paper to be written there. Second, do you believe the risk premium has increased? The latter may be more interesting to you as you personally consider investing.
Thanks as always for fond memories of Ec 2010 and for an interesting blog.
Jesse Barnes
The Fed failed to identify the twin bubbles of the last decade — in the stock market and in real estate — and we have to hope that the Fed and its global counterparts will do better in the future.
It is rare that I leave an economics conference with information that will change my personal financial decisionmaking. But I was close yesterday. A fascinating discussion of a paper on the carry trade made me wonder whether I should put a little money there. "Need" now means wanting someone else's money. "Greed" means wanting to keep your own. "Compassion" is when a politician arranges the transfer.
T ridership jumps with gas prices
The high cost of gasoline has helped fuel a sharp increase in MBTA riders over the first two months of the year and a decrease in the number and length of traffic jams, according to T officials and traffic specialists.The number of T trips rose from 27 million in February 2007 to nearly 30 million in February 2008, up more than 11 percent for the month, Massachusetts Bay Transportation Authority officials said. The numbers were up about 5 percent for January. Combined, the average increase is 8.3 percent.
The rising MBTA numbers follow a national trend. More Americans rode public transportation last year than at any time in history, according to the American Public Transportation Association, which also cited gas prices as a major factor.
To a large extent, the US crisis was actually made by the Fed....What was stunning was how the Fed, under Greenspan’s leadership, stood by as the credit boom gathered steam, barreling toward a subsequent crash. There were a few naysayers, but not many in the financial sector itself. Banks were too busy collecting fees on new loans, and paying their managers outlandish bonuses. At a crucial moment in 2005, while he was a governor but not yet Fed Chairman, Bernanke described the housing boom as reflecting a prudent and well-regulated financial system, not a dangerous bubble.
Barack Obama has called for a new mortgage tax credit to make the tax code fairer. Politics being what they are, he hasn’t proposed a cut in the current [mortgage interest] deduction, but his idea still represents progress. John McCain has arguably gone further, saying that as president he would want to send Congress a tax plan along the lines of the Bush panel’s — and then demand an up or down vote with no amendments.
To maintain high standards of living for Americans, the U.S. economy needs skilled workers. But our immigration policy keeps out many of the world's best, and as a result threatens America's competitiveness. The solution? Eliminate the cap on H1-B visas.I would not emphasize the issue of competitiveness, but I agree with his bottom line: Allowing in more skilled workers is a good idea.
I am the Robert M. Beren Professor of Economics at Harvard University. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.
