Friday, February 29, 2008

McCain vs Obama: NAFTA

It is almost surreal that what should be hailed as an example of bipartisan success in trade policy has instead become a significant campaign issue. Here are two new stories.

First, news from team Obama:

Obama campaign mum on NAFTA contact with Canada

Despite repeated requests, Barack Obama's campaign is still neither verifying nor denying a CTV report that a senior member of the team made contact with the Canadian government -- via the Chicago consulate general -- regarding comments Obama made about NAFTA....

On Wednesday, CTV reported that a senior member of Obama's campaign called the Canadian government within the last month -- saying that when Senator Obama talks about opting out of the free trade deal, the Canadian government shouldn't worry. The operative said it was just campaign rhetoric not to be taken seriously.

The Obama campaign told CTV late Thursday night that no message was passed to the Canadian government that suggests that Obama does not mean what he says about opting out of NAFTA if it is not renegotiated.

However, the Obama camp did not respond to repeated questions from CTV on reports that a conversation on this matter was held between Obama's senior economic adviser -- Austan Goolsbee -- and the Canadian Consulate General in Chicago.

Earlier Thursday, the Obama campaign insisted that no conversations have taken place with any of its senior ranks and representatives of the Canadian government on the NAFTA issue. On Thursday night, CTV spoke with Goolsbee, but he refused to say whether he had such a conversation with the Canadian government office in Chicago. He also said he has been told to direct any questions to the campaign headquarters.

Meanwhile, there is less confusing news from the McCain camp:
McCain affirms support for NAFTA

Penny Anti

The AP reports:
Asked Friday whether he thought the penny should be eliminated, [Treasury Secretary Henry] Paulson agreed that it would make sense.
Yes, it would.

Two strikes and I'm out of here

A new paper by Radha Iyengar on three-strikes-and-you're-out sentencing in California shows that crminals respond to incentives, sometimes in unintended ways:
I estimate that Three Strikes reduced participation in criminal activity by 20 percent for second-strike eligible offenders and a 28 percent decline for third-strike eligible offenders. However, I find two unintended consequences of the law. First, because Three Strikes flattened the penalty gradient with respect to severity, criminals were more likely to commit more violent crimes. Among third-strike eligible offenders, the probability of committing violent crimes increased by 9 percentage points. Second, because California's law was more harsh than the laws of other nearby states, Three Strikes had a "beggar-thy-neighbor" effect increasing the migration of criminals with second and third-strike eligibility to commit crimes in neighboring states.

The Audacity of Fear

Thursday, February 28, 2008

Quick Quiz: Middle Class Taxes

Question: How does the tax burden the middle class faces today compare with the tax burden the middle class has faced historically?

Answer: Click here and scroll down to see the chart. (N.B.: This includes all federal taxes, not just income taxes.)

Don't believe it? Check out the data source yourself.

Miron on Drug Legalization

Here is an old talk, recently posted on YouTube, by my friend and Harvard colleague Jeff Miron. (Jeff teaches ec 1010a, the intermediate micro course most Harvard econ students take after ec 10.) The topic is still relevant, as evidenced by today's news that the number of Americans in prison has reached a record high.

Our neighbors are not happy

The FT reports:

Candidates rebuked for attacks on Nafta

Mexico and Canada on Wednesday voiced concern about calls by Barack Obama and Hillary Clinton to renegotiate the North American Free Trade Agreement, as the Democratic presidential hopefuls compete to adopt the most sceptical stance towards free trade ahead of next week’s Ohio primary election.

In a televised debate on Tuesday night, Mr Obama and Mrs Clinton both threatened to pull out of Nafta if elected president unless Canada and Mexico agreed to strengthen labour and environmental standards.

Arturo Sarukhan, Mexico’s ambassador to the US, told the Financial Times that the US, Canada and Mexico had all benefited from Nafta and warned against reopening

“Mexico does not support reopening Nafta,” he said. “It would be like throwing a monkey wrench into the engine of North American competitiveness.”

Mexican diplomats believe a renegotiation could resurrect the commercial disputes and barriers to trade that the agreement itself was designed to overcome.

Tufts prof Daniel Drezner comments:
Democrats cannot simultaneously talk about improving America's standing abroad while acting like a belligerent unilateralist when it comes to trade policy.

Update: Related news:

[Canadian] Federal Trade Minister David Emerson hinted that if the North American Trade Agreement were to be revisited, a provision giving United States priority access to Canadian oil would be on the table.

Emerson declined to shrug off the anti-NAFTA talk by two Democratic presidential candidates as political posturing in a U.S. election year.

Outside Parliament on Wednesday, Emerson said: "There's no doubt if NAFTA were to be reopened, we would want to have our list of priorities," and hinted that U.S. access to Canadian oil could be one of them.

Meltzer on Bernanke

Wednesday, February 27, 2008

Who should I root for?

If Mike Moffatt fails to get back into shape, economics education will improve by $100. Details here.

"reactionary, populist, xenophobic and just plain silly"

That's how economists Willem Buiter and Anne Sibert describe the Patriot Employer Act .

The Dreaded S Word

Robert Samuelson on Stagflation:

no politician acknowledges the self-evident implication: that recessions, though unwanted and hurtful to many, are not just inevitable; sometimes they're also necessary to prevent the larger and longer-lasting harm that would result from resurgent inflation. Interestingly, many academic and business economists who have more freedom to speak their minds suffer the same deficiency. They treat every potential recession as a policy failure when it is often simply part of the business cycle. They thus contribute to a political climate that, focused on avoiding or minimizing any recession, may perversely aggravate inflation and lead to much harsher recessions later....

Unfortunately, the Fed shows signs of overreacting to these pressures and repeating the great blunder of the 1970s. Underestimating inflation then, the Fed repeatedly shoved out too much money and credit in a vain effort to keep the economy near "full employment." Now, switch to the present. Again, the Fed has underestimated inflation.

Tuesday, February 26, 2008

McCain vs Obama: Ethanol

David Brooks reports:
In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.
FYI, here is Paul Krugman on ethanol:
Bad for the economy, bad for consumers, bad for the planet — what’s not to love?

Will the real Obamanomics please stand up?

The New Republic reports that Barack Obama has surprisingly non-ideological policy shop.

Absolutely true. But I doubt any of those excellent economists in the policy shop would be willing to defend the anti-NAFTA, anti-Walmart rhetoric of their candidate.

Monday, February 25, 2008

The Larry Summers Anti-Foreclosure Plan

In two easy (well, not so easy) steps:

First, remarkably, bankruptcy laws currently provide that almost every form of property (including business property, vacation homes and those owned for rental) except an individual’s principal residence cannot be repossessed if an individual has a suitable court-approved bankruptcy plan. The rationale is the prevention of costly and inefficient liquidations. It is hard to see why similar protections should not be prudently extended to family homes....

Second, methods need to be found to enable creditors who accept a writedown in the value of their claims to retain an interest in the future appreciation of the homes on which they have mortgages. This is standard practice in situations of corporate distress, where debt claims are partially replaced by equity claims.


The best sentence...

...I have read so far today is from Brian Hollar:
I was talking with a professor here at GMU and another PhD student recently and all three of us agreed that after earning all the advanced degrees, nearly everything you ultimately use in economics, you learn in Mankiw.

Party, Party, Party!

Today, Feb 25, 2008, 3:00 pm - 5:00 pm, Littauer Center, 3rd Floor Lounge.

Book party for the release of Stephen A. Marglin's book The Dismal Science: How Thinking Like an Economist Undermines Community.

Prof. Stephen Marglin will perform a reading and lead a discussion. Refreshments to follow.

Who is #1?

A new Gallup poll:

"Which one of the following do you think is the leading economic power in the world today?"

China: 40 percent
The United States: 33 percent
Japan: 13 percent
The European Union: 7 percent
India: 2 percent
Russia: 2 percent

By contrast, check out this GDP ranking (or, if you prefer, the PPP-adjusted ranking).

Sunday, February 24, 2008

Sunday Reads

Friday, February 22, 2008

Should the rich get better health care?

This anecdote from the United Kingdom is the tip of a looming iceberg:

Debbie Hirst’s...breast cancer had metastasized, and the health service would not provide her with Avastin, a drug that is widely used in the United States and Europe to keep such cancers at bay. So, with her oncologist’s support, she decided last year to try to pay the $120,000 cost herself, while continuing with the rest of her publicly financed treatment.

By December, she had raised $20,000 and was preparing to sell her house to raise more. But then the government, which had tacitly allowed such arrangements before, put its foot down. Mrs. Hirst heard the news from her doctor.

“He looked at me and said: ‘I’m so sorry, Debbie. I’ve had my wrists slapped from the people upstairs, and I can no longer offer you that service,’ ” Mrs. Hirst said in an interview.

“I said, ‘Where does that leave me?’ He said, ‘If you pay for Avastin, you’ll have to pay for everything’ ” — in other words, for all her cancer treatment, far more than she could afford.

Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.

This kind of situation is likely to arise more over time. Technological advance is making state-of-the-art health care increasingly expensive. In any kind of national health system, some treatments will, by simple cost-benefit calculation, be deemed too expensive to provide to all citizens. But does that mean those of above-average income should be excluded as well? Should they lose basic benefits if they choose to pay for these marginal services with their own money?

If you say yes to this last question, as the U.K. health service has, here is a related one: Should a parent who hires an after-school tutor for his child be barred from sending the child to the public schools?

Some people like to think of health care and education of basic human rights. Maybe they are. But they are also normal goods. That is, the income elasticity of demand is positive. It is hard to escape the conclusion that the right cost-benefit calculation for providing the good depends on the income of the consumer.

Achieving both efficiency and equality in the provision of these goods is impossible. Dealing with this conflict will provide a major challenge to the political system in the years to come.

What I've been reading

Barack Obama's The Audacity of Hope. It is fun, smart, and well written.

The most surprisingly honest sentence so far (page 156):
the conservative revolution that Reagan helped usher in gained traction because Reagan's central insight--that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing the pie--contained a good deal of truth.
The sloppiest sentence so far (page 146):
Over the past decade, we've seen...hefty corporate profits, but a shrinking share of those profits going to workers.
I am pretty sure that the share of profits going to workers has been stable--at zero. Profits are what owners get to keep after workers have been paid.

Thursday, February 21, 2008

The Age of Milton Friedman

Andrei Shleifer's new paper begins as follows:

The last quarter century has witnessed remarkable progress of mankind. The world’s per capita inflation-adjusted income rose from $5400 in 1980 to $8500 in 2005.Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just asfast. Compared to 1980, many more countries in the world are democratic today.

The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.

The Next President: NBER Edition

P(Poterba) = 1.0.

A great choice.

Wednesday, February 20, 2008

The Next President: Update

From the market at Intrade, here are the probabilities as of this morning (2/20/08):

P(Obama) = 0.54
P(McCain) = 0.35
P(Clinton) = 0.11

Pigou Club News

Several Canadian readers have alerted me to some advances up north:

Finance Minister Carole Taylor introduced an escalating carbon tax on most fossil fuels Tuesday, one she says is designed to ignite an environmental social movement in British Columbia and across Canada to fight climate change....

Ms. Taylor said the carbon tax will be revenue neutral, meaning the government will not use money generated from the tax to fill its coffers. The carbon tax revenue, estimated to hit $1.8-billion over three years, will be returned to taxpayers through personal income tax and business tax cuts, she said.

Tuesday, February 19, 2008

Thinking Alike

A conversation I had with a student last week went something like this:

Student: Professor Mankiw, if you could recommend just one book, what book would it be?

Me: Am I allowed to recommend my favorite textbook?

Student: No. Textbooks are disallowed.

Me: In that case, I'll suggest Milton Friedman's Capitalism and Freedom.

Student: That's funny. That's the same answer I got when I asked this question of Professor Summers.

Sunday, February 17, 2008

True Words

From Tyler Cowen:

Democracy is reasonably good at some things: pushing scoundrels out of office, checking their worst excesses by requiring openness, and simply giving large numbers of people the feeling of having a voice. Democracy is not nearly as good at others: holding politicians accountable for their economic promises or translating the preferences of intellectuals into public policy.

THAT might sound pessimistic, but it’s not. Many Americans will be living longer, finding new sources of learning and recreation, creating more rewarding jobs, striking up new loves and friendships, and, yes, earning more money. Just don’t expect most of these gains to come out of the voting booth or, for that matter, Washington.

Saturday, February 16, 2008

The Dems dis NAFTA

Both candidates in the Democratic primary have turned their backs on one of Bill Clinton's major accomplishments.

First, here is Barack Obama in Wisconsin yesterday, speaking of his opponent Hillary Clinton:
"Her supporting NAFTA didn't give jobs to the American people."
Hillary's defense:
"I was not in the Senate at the time. I did not have a vote. I find his argument to be quite tortured. I have been a vocal critic of NAFTA starting in my campaign for the Senate in 1999."

Friday, February 15, 2008

“like giving a drink to an alcoholic”

1.6 Percent

That's growth in real GDP, from the fourth quarter of 2007 to the fourth quarter of 2008, according to the new CBO forecast.

The Blue Chip consensus of private forecasters has the same number.

A Women-only Tax Cut?

Alesina et al. defend their proposal to base taxes on gender. The basic idea, from their earlier article, is the following:

Women have a more elastic labour supply than men. By the Ramsey principle of optimal taxation, familiar to any first year graduate student of public finance, women’s labour income should be taxed less....In modern western societies (and elsewhere) differences in labour supply behaviour of men and women are not rooted only in the functioning of markets and firms but originate within the gender difference in access to labour market opportunities is the reason behind the difference in labour supply participation rates and elasticities of men and women.

I wonder: How would they treat same-sex couples?

It is hard for me to imagine this proposal making much headway as a practical matter. But I can imagine a more modest reform that would have similar effects: making the individual, rather than than the married couple, the taxpaying unit.

Under the current regime in the United States, a typical woman married to a high-income man pays a high marginal tax rate from the first dollar she earns. Indeed, because she faces the payroll tax plus the top marginal income tax rate, she faces a higher marginal tax rate than her husband. (Recall that there is a cap on the payroll tax.) The situation is symmetric, of course: a typical man married to a high-income woman faces the same high tax rates.

If, however, income taxes were paid by individuals rather than by families, the secondary earner would face lower marginal tax rates on his or her initial earnings. This change might well induce an increase in labor supply and enhance efficiency.

Thursday, February 14, 2008

Earmark Track Record

Take note fiscal conservatives:

Sen. Hillary Rodham Clinton helped secure more than $340 million worth of home-state projects in last year's spending bills, placing her among the top 10 Senate recipients of what are commonly known as earmarks, according to a new study by a nonpartisan budget watchdog group.

Working with her New York colleagues in nearly every case, Clinton supported almost four times as much spending on earmarked projects as her rival for the Democratic presidential nomination, Sen. Barack Obama (Ill.), whose $91 million total placed him in the bottom quarter of senators who seek earmarks, the study showed.

Sen. John McCain (Ariz.), the likely GOP presidential nominee, was one of five senators to reject earmarks entirely, part of his long-standing view that such measures prompt needless spending.

Source: Washington Post.

Wednesday, February 13, 2008

Obama on NAFTA

An open question in my mind is whether Barack Obama is going to align himself with the economic centrists in the Democratic party or with the populists on the far left of the party. A key litmus test is trade, and so far it does not look good.

Here is Barack Obama yesterday:

we know that the status quo in Washington just won't do. Not this time. Not this year. We can't keep playing the same Washington game with the same Washington players and expect a different result – because it's a game that ordinary Americans are losing....

It's a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That's what happens when the American worker doesn't have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that's why we need a President who will listen to Main Street – not just Wall Street; a President who will stand with workers not just when it's easy, but when it's hard.

By contrast, here is Larry Summers on the issue, expressing a view closer to that held by most economists:
I think the decision to support NAFTA was a crucial one because it was really a watershed as to whether America was going to stand for larger markets, was going to stand for forward defense of our interests by trying to have a more integrated global economy [in] which countries were growing. So [a] watershed in our relations with Mexico and establishing a real partnership with a country with whom we had a 2,000-mile border. I think it resulted in a profound change in the internal political dynamics in Mexico in favor of the progressive forces that believed in the market and friendship with the United States as opposed to the forces that believed more in socialism and opposition to the United States. And NAFTA didn't cost the United States a penny. It contributed to the strength of our economy both because of more exports and because imports helped to reduce inflation. It didn't cost the budget anything. It was a very worthwhile investment for our country.

Carbon Tax vs Cap-and-Trade

The CBO says:

A tax could achieve a long-term emission reduction target at a much smaller economic cost than an inflexible cap.

  • Provided that the tax was set equal to the expected benefit of reducing a ton of CO2, a tax could thus result in substantially greater net benefits (benefits minus costs) than a comparable cap-and-trade program.
  • The advantage of a tax stems from the long-term nature of climate change (which depends on the build-up of emissions over many decades, but is not sensitive to the amount of emissions in any given year) and the uncertain and variable nature of the cost of reducing emissions (which will vary from year-to-year based on the weather, conditions in energy markets, and the availability of new technologies).
  • An inflexible cap-and-trade program would provide more certainty about annual emissions than would a tax; however, that certainty would come at a cost:The cap would require too many reductions when the cost of achieving them was high and would mandate too few reductions when the cost was low.

Tuesday, February 12, 2008

The Debt-Jobs Tradeoff

The NY Times reports:
administration officials are counting on a lift this summer from the $168 billion economic stimulus package that Congress passed last week and from the Federal Reserve’s recent decisions to reduce short-term interest rates....[CEA Chair Edward Lazear] predicted that the stimulus package would create an additional 500,000 jobs this year.
In other words, each job created adds $336,000 to the national debt.

Are taxes really distortionary?

The mysterious knzn says:
I've always been skeptical of the importance of the purported bad incentive effects of high marginal tax rates on high income earners.
This view characterizes many left-leaning economists. I disagree, which is one reason I lean more to the right.

Including all forms of federal, state, and local taxes, high income earners face marginal tax rates in the ballpark of 50 percent (and perhaps even higher to the extent that incremental dollars are to be left to one's kids and thus taxed a second time by the estate tax). So here is the question I would ask people like knzn:

Have you ever turned down a money-making opportunity that you would have accepted if it paid twice as much?

For many high income earners, the answer is yes, which means the tax system is distorting their behavior and reducing the size of the economic pie.

Update: Several people have asked, "Isn't the right question whether you would work more if all of your money-making opportunities were twice as lucrative, not just the ones you turned down?"

No, that is not the right question. It is a standard result of economic theory that the deadweight loss of taxation depends only on the substitution effect, which is measured by your response to a marginal opportunity. (That is, for this purpose, you need to use the compensated labor supply curve.) If we taxed your inframarginal work at a lower rate, the income effect would induce you to work less, as long as leisure is a normal good. But that income effect is not relevant for the question of deadweight loss, for reasons explained more fully in this previous post.

Fed Presidents look ahead

Sunday, February 10, 2008

The Gap between Rich and Poor

Cox and Alm report:

if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1....

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

The Next President?

From the market at Intrade, here are the probabilities as of Sunday morning:

P(Obama) = 0.41
P(McCain) = 0.34
P(Clinton) = 0.24

2/11 Monday morning update:

P(Obama) = 0.46
P(McCain) = 0.33
P(Clinton) = 0.21

2/13 Wednesday morning update:

P(Obama) = 0.50
P(McCain) = 0.31
P(Clinton) = 0.18

The Poverty Trap

Kennedy School economist Jeff Liebman (via Jeff Frankel's new blog) tells a sad story about the incentive effects of government programs aimed at helping the poor:
the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Saturday, February 09, 2008

GOP = :)

The Washington Post reports:
Republicans are happier than Democrats. A 2006 Pew Research poll found that 45 percent of Republicans describe themselves as "very happy," compared with only 30 percent of Democrats (and 29 percent of independents). This is a sizable gap and a remarkably consistent one, too. Republicans have been happier than Democrats every year since the General Social Survey, conducted biannually by the National Opinion Research Center at the University of Chicago, began asking about happiness in 1972.

Stiglitz at Davos

Joe Stiglitz reports on his foreign travels. I wonder who he is talking about here:
Anyone who goes to international conferences is used to hearing Americans lecture everyone else about transparency. There was still some of that at Davos. I heard the usual suspects – including a former treasury secretary who had been particularly vociferous in such admonishments during the East Asia crisis – bang on about the need for transparency at sovereign wealth funds (though not at American or European hedge funds).
Let me guess.

Equality before the IRS

Is my Harvard colleague Alberto Alesina "contributing to the decay of our democratic institutions"?

Gilles Saint-Paul seems to think so. (HT: Real Clear Markets).

The interesting and important question raised by this essay is what "equality before the law" means in the context of designing tax policy. We already give special tax breaks to taxpayers who own their own homes, those with large medical bills, those who give to charity, those who pay high state and local taxes, those with employer-provided health insurance, those with kids, and so on. Is there any principled way of distinguishing these cases from taxation based on gender or height?

PI joins the Club

The Prometheus Institute, a libertarian think tank, joins the Pigou Club. Its website advancing the cause of a carbon tax is called Pay Your Air Share.

Friday, February 08, 2008


A great picture from Menzie Chinn shows that in the world, like in the textbooks, the trade balance depends on the exchange rate.
The figure show the log real dollar exchange rate (a higher value means a weaker dollar) lagged two years (in blue), the ratio of net exports to GDP (in red), and the ratio of net exports excluding oil to GDP (in green). The last recession is shaded in gray.

Will "comparable worth" become a campaign issue?

From the Wall Street Journal:

There are actually two versions of comparable worth legislation, the Fair Pay Act and the Paycheck Fairness Act. The former is co-sponsored by Sen. Barack Obama; the principal sponsor of the latter is Sen. Hillary Clinton (Mr. Obama is a co-sponsor). Both would push companies to set wages based not on supply and demand -- that is the free market -- but on some notion of social utility. The goal is to ensure that jobs performed mostly by men (say, truck drivers) are not paid more than those performed mostly by women (paralegals, perhaps).

President Ronald Reagan correctly called comparable worth "a cockamamie idea." A great lesson of economic theory, not to mention historical experience, is that government-set wages and prices not only curtail freedom, but lead to shortages, surpluses and market disruptions.

I may be wrong, but I don't think many mainstream economists would defend this kind of legislation, regardless of party affiliation.

Here is a previous post on the topic of comparable worth.

We're number one!

The Harvard Crimson reports that ec 10 is again the largest course at Harvard. This spring's guest lecturers include:
  • Claudia Goldin
  • John Campbell
  • Andrei Shleifer
  • Martin Feldstein
  • Alberto Alesina
  • Larry Summers

Thursday, February 07, 2008

Trichet on Fiscal Stimulus

Jean-Claude Trichet, President of the European Central Bank, joins the Coalition against Fiscal Stimulus:
With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be avoided. There is ample evidence that activist fiscal policies were not effective in stabilising European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries with strong fiscal positions and safeguarding the long-term sustainability of public finances are the best contributions that fiscal policy can make to macroeconomic stability.
HT: RTE Blog.

Debt and the Real Threat

An econonerd friend in the White House emails me his analysis of the budget picture:

Monday the President proposed his budget for Fiscal Year 2009. This is the first "e-Budget" - it was transmitted electronically as an official document to the Congress. (For techies, it was digitally signed by the President's Executive Clerk.)

At a press conference Monday, Senate Budget Committee Chairman Kent Conrad's (D-ND) said:

But let me emphasize to you what I see in almost no stories: That is a four-letter word called debt. Nowhere do I see mentioned of what's going to happen to the debt. It never leaves the administration's lips. I have never seen it in a single story. I hear a lot of focus on the deficit.

No mention of what happens to the debt.

And I would suggest to you the debt is the threat. Why? Because if you look at what is scheduled to happen in this next year, according to the administration's own estimates, while the deficit goes up over $400 billion, the debt will go up over $700 billion in one year. The big difference, of course, is Social Security money that is being used to pay other bills. It doesn't get included in any deficit calculation, but every penny of it gets added to the debt.

The result is, under the Bush administration proposal, they are building a wall of debt. At the end of his first year, the gross debt of the United States stood at $5.8 trillion. We don't hold him responsible for the first year because he wasn't in charge the first year. The budget, as you know, is presented by the president outgoing.

If you look at the end of his eight years of responsibility, we see the debt as being over $10.4 trillion. That is almost a doubling of the national debt on his watch. You will recall, he said paying down the debt was a high priority. And we see the debt further escalating to more than $13 trillion by 2013.

One of Chairman Conrad's charts says "The Debt is the Threat." Let's look at his most misleading chart, which purports to show the Federal debt under President Bush's tenure. Looks pretty bad, no?

This is easiest to analyze if we look at the simplest statement made by Chairman Conrad: "That is almost a doubling of the national debt on [the President's] watch." The chart above purports to make that same point, as gross federal debt increases from $5.8 Trillion in 2001, to $10.4 T in 2009. (By the way, that's a 79% increase, which is a bit far from "almost doubling". But I'll set that aside.)

I'm going to disprove the statement: "That is almost a doubling of the national debt on his watch." I don't dispute the factual accuracy of the numbers, but instead the presentation and the conclusion.

This presentation misleads in three ways.

1. nominal $ vs. % of GDP - You can't compare $1 in 2001 to $1 in 2009, for two reasons. Inflation has made the $1 in 2001 worth less than the $1 in 2009 [actually, it is the other way around, but the basic idea is right - Greg], and economic growth since 2001 increase our economy's ability to carry the burden of any given amount of government debt. What we care about as an economic matter is not our debt, but our debt burden relative to our ability to support it with our income. As an example, someone with $50K of annual income who takes out a $500K mortgage is borrowing 10X his income - that's nuts. But someone with $1M of annual income who takes out the same $500K mortgage is borrowing ½X of his income. That's much more reasonable. Serious analysts look at federal debt over time measured as a share (%) of our national income (GDP), not measures of nominal dollars over time.

2. gross debt vs. debt held by the public - (this is the hard part) What we care about is how much the US Government owes to the American public and the rest of the world (meaning to those who buy Treasury bonds). This is commonly known as "debt held by the public". To this amount, the Chairman adds debt that one part of the government owes to another part of the government, to get what budgeters call "gross federal debt". If you use funds from your savings account to pay down a credit card, you have decreased your "debt held by the public". For comparison, if you borrow from your savings account and put it into your checking account, and leave in your savings account an IOU from you to you, Chairman Conrad's metric would say that you have "increased your gross debt." This is economically meaningless.

3. no comparison to the historic average - It's relevant to compare our federal debt [held by the public] with historic averages, to see if we're in a lot of debt relative to where we've been in the past.

So here's a new graph, using the same data source (OMB's Historical Tables), which corrects for these three problems.

Now that we're looking at a fair analytic presentation, we can draw a few conclusions from this new graph:

* Yes, the federal debt is higher than when the President took office. Debt in 2001 = 35.1% of GDP. Projected debt in 2009 = 37.9% of GDP.

* The claim that the debt is "almost doubling" under this President is absurd. Measured as a share of the economy, it's about 8% higher than it was when the President took office. (37.9 - 35.1) / 35.1 = 8%

* This debt increase comes in the context of: an inherited recession, a stock market crash, corporate scandals, a terrorist attack, war, and a huge increase in the price of oil.

The President's budget is merely the first stage in the annual Congressional budgeting process. The next step is for Chairman Conrad, and his House counterpart Chairman John Spratt (D-SC), to each propose his own budget. If their budgets raise taxes more than they increase spending, as was the case last year, then they would show lower debt held by the public than in the President's budget. But since they so far have not tackled the Social Security challenge, we would still expect those budgets to show significant increases in Chairman Conrad's preferred metric of "gross debt".

I want to more fundamentally disagree with Chairman Conrad's claim that "the debt is the threat". (He has another chart that says this.) His statement focuses entirely on what has happened to the debt (using a misleading measure) over the past seven years. His focus is: (1) backward-looking, (2) short-term, and (3) focused on debt.

This is trivial compared to what we call "the real fiscal danger": the projected long-run future growth of federal government spending.

* Where the Chairman's focus is backward-looking, the real fiscal danger is in the future.

* Where the Chairman's focus is on the past seven years, we face the real fiscal danger over the next several decades.

* The Chairman focuses on the debt. This is incomplete - our problem is debt driven by projected future spending growth. (I'll cover this point in a future blurb.)

To make the first two of these points, let's recreate the above graph, but I'm going to expand the timeline to cover the next several decades. Same graph, longer timeframe:

Now compare the part of this graph between 2000 and 2010, which is identical to the data in the graph above it, with what happens to the debt beginning in about 2025. On our current long-term policy path, the federal debt would explode beginning in about 20 years. Note that while this chart purports to go out to 2080, we would never make it that far on the light blue line on our current long-term policy path. Financial market pressures would force a change long before our federal debt got to 200 or 250% of GDP.

The real threat is not the additional 2.8% of GDP of debt we have accumulated since the President took office, during a time of recession, war, terrorist attacks, high oil prices, and burst stock market bubbles.

The real threat is that steady and steep upslope in the blue line - the explosion of future debt over the next several decades, if we don't do something about it. The President has proposed to do something about it, and Congress has failed to act. I'll write more about this in the future: why the blue line explodes, and what we must do about it.

Back to Greg: This discussion is correct as far as it goes. What my friend forgets to mention, however, is that the Medicare prescription drug bill signed by President Bush significantly increased the long-term spending trajectory. (FYI, both Senator McCain and Senator Clinton voted against the bill. Barack Obama was not yet in the Senate. Senator Conrad, who above expresses so much concern about fiscal responsibility, voted in favor.)

Bill vs Bill

Bill Easterly takes on Bill Gates. Easterly's bottom line:
profit-motivated capitalism is still the best hope for the poor.

Wednesday, February 06, 2008

Looks delicious (and like me)

Some students at the University of Minnesota celebrate my birthday and, via facebook, send me a picture of the cake.

The Clinton Mortgage Plan

Economists Richard Thaler and Susan Woodward opine on Senator Clinton's plan to deal with current mortgage problems.

Thanks to Newmark's Door for the pointer.

Enormous Strains

My colleague Ken Rogoff writes:

Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem.
Can you guess what economy he is talking about?

Monday, February 04, 2008

Athey Interview

From the Richmond Fed, here is an interview with my colleague (and fall ec 10 guest lecturer) Susan Athey.

Knowing Where You Stand

Who are the top producers of new economic knowledge? Here is the most up-to-date ranking.

If you are not listed and think you should be, maybe you are part of the minority of research economists who has not yet registered. In that case, click here immediately.

Sunday, February 03, 2008

Happy Birthday to Me

Saturday, February 02, 2008

Welcome to the Club, Jay

This is a first: A candidate for the U.S. Senate emails me to apply for membership in the Pigou Club.

Hello Greg,

I am a candidate for the U.S. Senate in New Hampshire ( and believe we should address our energy problem through a National Security Levy on oil. I have worked with Doug Irwin and Jon Skinner from Dartmouth on the National Security Levy (Doug says hello), and have also consulted with Andrew Samwick.

The details of the National Security Levy are enclosed. [Here is a link.] The e-mail we sent out about it earlier appears below.

Think we could be listed as a member of the Pigou club?

Look forward to talking with you.



Dear Friends,

If we needed confirmation that we've lost control of our energy future, we got it on Tuesday. President Bush was in Saudi Arabia trying to convince King Abdullah to help out our economy by increasing oil production. According to the report I read, the King's response was "lukewarm."

Now it's time for the American people to choose our energy future. We can either devote ever-increasing resources to defending our access to oil overseas -- and deal with the effects of global warming. Or we can use our technological skills to make the transition to renewable alternatives.

At a news conference yesterday in Manchester, I proposed a new plan to take charge of our future through a National Security Levy on oil.

Basically, the National Security Levy would be a fee on every barrel of oil consumed in the U.S -- combined with a price floor guaranteeing that oil would not sink below a certain price. The National Security Levy would be phased in slowly so that consumers wouldn't face a sudden price shock.

Part of the revenues from the levy would be rebated to working families to help compensate for increased energy costs. The rest would help finance an Apollo Program for Energy to make the US a world leader in energy development and production. This technological drive would create new jobs and businesses here in New Hampshire, where we have a growing alternative energy economy. The details of the National Security Levy are on our website:

This plan is going to require everyone in the US to change how they use energy. This may make the plan unpopular with some. But I got into this Senate race not to just look for the politically popular path, but to do things that need to be done. And getting serious about our energy problem is way overdue.

As a nation, we can be great at this transition. No other country on Earth has the talents, resources, and drive to change from petroleum to renewable alternatives as well as we can. Also, spending billions of dollars for energy here in the United States that we otherwise would have sent to foreign governments is going to be an enormous economic boost for us. But we have to get started.

I'm very glad to be able to put this proposal forward. But I can't make it happen alone. Please tell your friends about it, ask them to join us, and contribute to the campaign. With your support, we can succeed. I look forward to hearing from you.


Note to journalists out there: Give this guy the attention he deserves. It is brave and honorable to try to turn this good policy into successful politics.

Inflation expectations are rising

From the inflation-protected bond market via Grep Ip, here is the the “five-year, five-year forward” breakeven rate. It reflects the market's expectation of five-year inflation beginning five years from now.

A rise in expected inflation is not consistent with the conventional wisdom that the economy is on the verge of a serious slump driven by inadequate aggregate demand. It is, however, consistent with the hypothesis that policymakers are overreacting to some bad economic news with excessive monetary and fiscal stimulus.

Friday, February 01, 2008

Interpreting the Employment Report

The JEC's Tim Kane (via email) uses his recession model and interprets today's employment report:
In this morning's BLS Employment Situation report for Jan 2008, the unemployment rate is 4.9. Therefore the new employment-based recession probability index (RPI) is 0.060 (or 6.0%).

The RPI is a combination of the two most valuable employment indicators of a recession's early stages: weekly initial unemployment insurance (UI) claims and the unemployment rate.

The 4-week moving average of initial UI claims was reported yesterday at 325,750, which is 17,000 lower than 4 weeks ago and essentially unchanged from the October average. Alone, trends in UI claims suggest a 4 percent recession probability. The unemployment rate is 0.1 points lower than December, but 0.1 higher than three months ago, suggesting an 8 percent recession probability. Combined, this yields an overall recession probability of 6 percent.
Other economists, I should note, are less sanguine.

Volcker takes a stand

Paul Volcker has endorsed Barack Obama.

I am not surprised. Most Democratic economists I know prefer Obama and appear to share Brad DeLong's view of Hillary Clinton. Some are reluctant to say so publicly, hoping to land a job in a possible Clinton administration. But Volcker, at the age of 80, presumably has no political aspirations. So why not go public?