Saturday, May 31, 2008
Toward a Better Mortgage Business
- Encourage banks to use "covered bonds" to fund – and hold onto – the fixed-rate mortgages they originate. Widely used in Europe, covered bonds have longer maturities than bank deposits and are on-balance-sheet liabilities. For example, a bank might sell $2 billion of five- and 10-year covered bonds secured at all times by $2.1 billion of high-quality mortgages and other assets. Those longer maturities would reduce maturity mismatching, which was the underlying cause of the U.S. S&L fiasco and more recent problems in the financial markets. The FDIC has begun to look more favorably upon covered bonds, but far too cautiously.
- Eliminate the double taxation of corporate dividends. This raises the cost of equity capital relative to debt, encouraging financial institutions to use excessive leverage to offset the high cost of equity capital. It also tilts banks toward securitizing assets into trusts not subject to the corporate income tax.
The Law of Demand
Thursday, May 29, 2008
Is the yen a negative beta asset?
Why the striking pattern in the last year? I think it's because during the liquidity crisis, the stock market has fallen at times when hedge funds and investment banks are deleveraging -- at such times, they cover the carry trade, that is, they buy yen and sell high-interest currencies such as the Australian dollar.
Wednesday, May 28, 2008
On the Case for Free Trade
The essence of his argument:
I agree with Professor Driskill about one thing: Any normative statement goes beyond sheer economics and involves a degree of political philosophy. Economists' devotion to free trade is based not only on the positive conclusion that it leads to a bigger economic pie but also on a couple of related philosophical positions.
Do economists know something, though, that Joe Sixpack doesn’t, and does this knowledge inform their thinking about free trade? What they know that Joe Sixpack doesn’t is a basic but not obvious result from economic analysis: The gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off. Note that economic analysis doesn’t say that these compensations actually take place. In fact, everyday experience shows us they don’t, and economists know that there are practical problems that make it virtually impossible to carry out such redistribution schemes. Why, then, do economists support free trade?...
What if free trade is making a small percentage of the country much better off, but is hurting a much greater percentage (the “Joe Sixpacks”), as some argue is the case? Even if the total gains to the few winners are sufficiently large that they could hypothetically compensate the losers, why would it be obvious that “Americans as a group are net winners”?
Some economists take the libertarian view that people should presumptively be allowed to engage in mutually advantageous trades, absent any externalities. Under this view, the restricted-trade equilibrium has no claim to moral superiority--indeed, just the opposite. The fact that some people lose when trade is opened up compared to a restricted-trade status quo is of little moral relevance.
Other economists take the utilitarian view that we should use society's resources to maximize total utility of everyone. Because of diminishing marginal utility, income redistribution from the rich to the poor is a key part of the utilitarian's plan. But a progressive tax and transfer system, rather than restricting international trade, is the most effective way of achieving that goal. Once again, the economic gain or loss compared to the restricted-trade equilibrium is no special relevance. Maybe it would be relevant if for some reason a progressive tax/transfer system were infeasible, but that is not at all the case.
As a theoretical exercise, we often examine the effects of trade by imagining the economy with and without trade. But the situation without trade is not a philosophically noteworthy benchmark under either libertarian or utilitarian perspectives. The libertarian wants maximum freedom; the utilitarian wants maximum social utility. Neither goal is best served by trade restrictions. The fact that some people lose when trade is opened up has no philosophical significance. (Whether it has political significance is another matter.)
Note that the arguments that Professor Driskill uses would also suggest that we economists should not be so hard on the Luddites. After all, there are sometimes losers from technological progress. And the original Luddites were precisely such losers. Yet I doubt that one would find many thoughtful libertarians or utilitarians (or economists of any other stripe) siding with the Luddite cause.
Sen on Hunger
Tuesday, May 27, 2008
How to reduce health care costs
This is what the Great Society program did in the 1960s, with imports of doctors whose visas tied them, for specific periods, to serving remote, rural areas. U.S.-trained physicians practicing for a specified period in an "underserved" area were not required to return home.
It is time to expand such programs – for instance, by making physicians trained at accredited foreign institutions eligible for such entry into the U.S. But in order to do this, both Democratic candidates will first need to abandon their party's antipathy to foreign trade.
Monday, May 26, 2008
A Pox on Both Your Houses
Sunday, May 25, 2008
Frank on Tax Policy
Update: A friend points out another article by Frank and says
the surprising thing in Robert Frank's book review in today's NY Times is that he endorsed the 2003 tax cut....he wants a progressive income tax and to exempt saving from taxation. So he's even to the right of the administration -- he would have a zero tax rate on dividends and capital gains.Here is the relevant paragraph from Frank (with emphasis added):
Skeptics invariably counter that the taxes needed to pay for an expanded social safety net would cripple the economy by weakening people’s incentives to work hard and take risks. Yet there are many ways to raise additional tax revenue that would actually cause G.D.P. to grow rather than shrink. A tax on carbon and other environmental pollutants, for example, would raise substantial revenue and yield a cleaner, more sustainable environment. Congestion taxes would save millions of hours currently wasted in traffic jams. A progressive income tax that exempts savings would divert billions of dollars from wasteful mine-is-bigger spending contests.Note that my friend is distinguishing the 2001 tax bill from the 2003 tax bill. The 2001 tax bill was mainly about lower income tax rates and an increased child credit. The 2003 tax bill, in addition to accelerating the phase-in of the 2001 changes, was mainly about reducing the tax burden on capital.
Saturday, May 24, 2008
Shooting Yourself in the Foot
The graphic to the right is a good summary of the article..
Friday, May 23, 2008
Oh, yeah, that should work
At another point, Ms. Waters [Democratic Congresswoman from California] brazenly suggested that perhaps the American oil industry should be nationalized, acknowledging that it was an “extreme step” but one that might be necessary if outsize profits and exorbitant gasoline prices continued.
Thursday, May 22, 2008
What I've been reading...
Highly recommended for nerdy dads (and moms) out there.
Barack's Best Idea Yet
Barack Obama, the presidential candidate of "change," told a town hall meeting recently that he'd "seriously consider" eliminating the penny if Lincoln's face could be placed on another coin.
Reinhart on the BS Bailout
The world has changed because of a few snap decisions made one weekend in March. We do not yet have an adequate understanding of what happened and why. But we can be sure that the Fed's action will be used to argue for more spending and more regulation.
Cross-Price Elasticity of Demand V
Thanks for Frank Stephensen for the pointer.
High gas prices drive farmer to switch to mules
High gas prices have driven a Warren County farmer and his sons to hitch a tractor rake to a pair of mules to gather hay from their fields. T.R. Raymond bought Dolly and Molly at the Dixon mule sale last year. Son Danny Raymond trained them and also modified the tractor rake so the mules could pull it.
T.R. Raymond says the mules are slower than a petroleum-powered tractor, but there are benefits.
"This fuel's so high, you can't afford it," he said. "We can feed these mules cheaper than we can buy fuel. That's the truth."
Here is the previous installment in this series.
Wednesday, May 21, 2008
How the AEA invests its money
Tuesday, May 20, 2008
What would Mancur say?
The Pelosi Problem
By effectively killing "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days, lawmakers in Washington, led by House Speaker Nancy Pelosi, have destroyed the credibility of the U.S. as a reliable negotiating partner.
Monday, May 19, 2008
The Coming Tax Hike
Under current law, rising costs for health care and the aging of the population will cause federal spending on Medicare, Medicaid, and Social Security to rise substantially as a share of the economy....In response to your letter of May 15, 2008, the Congressional Budget Office (CBO) has prepared the attached analysis of the potential economic effects of...using higher income tax rates alone to finance the increases in spending....
With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double. The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent.
Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion.
Allan Meltzer Podcast
Stock Market Valuation
Sunday, May 18, 2008
So, you want things to be fair?
I have a 10 year old at home, and she is always saying, “That’s not fair.” When she says that, I say, “Honey, you’re cute; that’s not fair. Your family is pretty well off; that’s not fair. You were born in America; that’s not fair. Honey, you had better pray to God that things don’t start getting fair for you.”
Sachs on Family Size
In an age when we don’t need to have lots of children to work the fields, or to compensate for high infant mortality, Sachs argues that it’s both economically rational — and crucial for a future of sustainable growth — for people to reproduce at a rate close to 2.1 children per family. In his acknowledgments, Sachs thanks his three children.I also have three kids, but I don't feel a shred of guilt about it, for reasons I explained here.
Where's the beef?
Speaking to a crowd of farmers in a barn, Barack Obama cited the Japanese not selling American beef as an example of how current trade policies have hurt rural communities.
“You can’t get American beef into Japan…even though we have the highest safety standards. They don’t want the competition,” he said in response to a question about trade and manufacturing jobs moving to China.
But Japan lifted its ban on American beef almost a year ago in June. The country had banned imports in 2003 after an outbreak of mad-cow disease. According to the U.S. Meat Export Federation in Denver, the U.S. currently exports over 5,000 tons of beef per month to Japan, down from 20,000 tones before the 2003 ban when Japan was the No. 1 importer of American beef.
But the problem is not, as Obama said, that the Japanese refuse to import American beef. Rather, it is that American beef now faces stiffer competition with Australian beef, which is cheaper and has made major inroads in the market in recent years.
Saturday, May 17, 2008
With friends like this....
This is from the Reserve Bank of Zimbabwe, where inflation is now running at an annual rate of about 355,000 percent.
As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.
That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.
Yet there are telling examples of the path we have taken from key economies around the world. For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.
A few months ago, the USA economy confronted a severe mortgage crisis, which threatened to spark an economy-wide recession.
The USA Central Bank again responded by injecting over US $160 billion between December, 2007 and March, 2008, to provide impetus to the American economy and prevent a worse crisis from happening....
Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander....
As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
Friday, May 16, 2008
Some menu costs aren't so small
Like a lot of small-scale entrepreneurs, Cathy Osborne worries that she'll go out of business if fuel prices rise above $4 a gallon. Not because she won't be able to buy gas at that price, but because she won't be able to sell it.
The old mechanical gas pumps with scrolling dials at her country store in Fauquier County lack the gears to go beyond $3.99 a gallon...."I don't know what I'm going to do. I don't have $30,000 to invest in new pumps."
Thursday, May 15, 2008
Substituting Physical and Human Capital
Your econ textbook helped us out tremendously this year.....especially because our teacher has no clue what she's doing, and so we have to read the text to understand what's happening.This reminded me of a professor I know who once told me that he liked to assign the most confusing textbook he could find. By comparison, his lectures would seem like paragons of clarity.
He was joking (I think).
McCain vs Obama: The Farm Bill
Ec 10 and Gen Ed
Ultimately, the issues involving ec 10 and Gen Ed are for the university and economics department. I just happen to be the current instructor running the course, so my personal opinion should not be given undue weight. Ec 10 has a long, distinguished history that predates me and will continue long after I retire. I have, however, been consulting with the chairman (Jim Stock) and director of undergraduate studies (Jeff Miron) on the issue.
Having said that, here is my personal opinion:
I did not particularly like the new Gen Ed requirements when they were first passed, and based on what I have seen to date, my opinion of them has not improved. I continue to believe that a simpler, more conventional set of distribution requirements would better serve the students. The committee that drafted the new Gen Ed rules tried to produce something more innovative than the kind of distribution requirements that other schools have. In the end, the process generated a product that was innovative but inferior. Unfortunately, it looks like we have little choice now but to live with it.
One problem is that the drafters seemed to have inadequate appreciation of the role of analytic social science. The debate over where ec 10 fits in the new requirements is a symptom of these flaws.
The Gen Ed committee appears to think that ec 10 should fit into "Empirical and Mathematical Reasoning." I believe, however, that this placement would be a mistake. The theories developed in ec 10 are extraordinarily basic. No math is used beyond what a typical Harvard student would have learned in the 8th or 9th grade. (This makes Ec 10 differ from the intermediate-level theory courses in microeconomics and macroeconomics, which use substantially more mathematics and are more oriented to developing tools for economics majors.) It would be a mistake to consider Ec 10 a good substitute for a course in mathematics or statistics.
The better placement for the course would be "The United States in the World." This category is supposed to include courses that "examine American social, political, legal, cultural, and/or economic institutions, practices, and behavior, from contemporary, historical, and/or analytical perspectives." Ec 10 develops primarily an "analytical" perspective on "American...economic institutions, practices, and behavior," while also including discussion of historical episodes and contemporary policy debates.
Does it matter a lot for ec 10 whether it is part of Gen Ed and, if so, where? Probably not. Harvard students are a smart lot. Many of them come in with a sense that they should learn some basic economics. They read the news. Their parents and older classmates alert them to the importance of the field. I have no doubt that whatever the Gen Ed committee ends up doing, ec 10 will remain a large, vibrant course.
Wednesday, May 14, 2008
Farm Bill Veto
Too much spending: The bill increases spending by almost $20 billion over the next ten years, at a time when net farm income is at an all-time high. Much of this additional spending is disguised by budget gimmicks that take advantage of formal scoring rules to hide real spending increases.
A few of us have been debating the question “Which is the most important reason for the President’s veto of this bill?” Candidates include:
New sugar program: The bill would make the government buy sugar for 2X the world price, store it, then resell it at about an 80% loss to the taxpayer. Sugar sells for about 11¢/lb on the world market. The US government would have to buy sugar for about 22¢/lb, store it, and then auction off the excess to ethanol plants. We estimate that such an auction would net the government about 4¢/lb. In addition, this new provision would require the government to guarantee that domestic sugar producers get 85 percent of the domestic sugar market.
Subsidies for rich farmers: Farmers would be eligible for government subsidy payments if their incomes were as high as $1.5 million if married, and up to $750,000 if single. We had a big fight with Congress last year over whether families with income of 3 times the poverty level should receive taxpayer-subsidized health insurance. This bill would subsidize amarried farming couple with income more than 107 times the poverty level (which is $14,000 for a couple). Put another way, such a couple would be in the top 0.2% of the income distribution. You would be subsidizing their business with your income taxes.
Getting the best of both worlds: “Beneficial interest” is a provision of current law which allows you to lock in a government subsidy payment when the market price for your good is low, and then hold the actual good and sell it when the market price is high. You thus get the best of both worlds – subsidy payments as if crop prices were low, but profits from selling your good at a higher price. The President proposed a “pick-your-price” reform, in which you lock in the subsidy at the same time that you lock in the sale price, so you can’t play timing games. The conference report does not include this reform, and continues the practice of current law.
Using food aid $ inefficiently: Under current law, US food assistance for hungry people around the world must be spent purchasing US crops. The President proposed to allow up to 25 percent of US global food assistance to be spent purchasing food from local farmers (in the country where the people are starving). This allows US dollars to be spent purchasing food, rather than paying transportation costs. It also encourages the development of farming infrastructure in these countries. Congress failed to include this forward-looking policy that will help save lives overseas. This means fewer starving people will get food, and these countries’ farming infrastructures will be less well developed.
Stiglitz on Inflation Targeting
Tuesday, May 13, 2008
The Problem with Supply and Demand
If you want cheering crowds, don't bother to study economics. It will only hold you back. Tell people what they want to hear-- and they don't want to hear about supply and demand.
No, supply and demand is not too "complex." It is just not very emotionally satisfying.
McCain vs Obama: Carbon Auctions
In his speech yesterday, Senator McCain gave a nod to selling the carbon allowances:
Over time, an increasing fraction of permits for emissions could be supplied by auction, yielding federal revenues that can be put to good use.Not bad, but the statement raises several questions. Why over time? Why not immediately? And how high would that fraction become?
Here was Senator Obama on this topic in a debate a few months ago:
I think cap-and-trade system makes more sense. That's why I proposed it because you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level. Now what you have to do is you have to combine it with a hundred percent auction.The Pigou Club gives the edge to Obama.
Monday, May 12, 2008
The Empire Strikes Back
Faculty children excepted, of course.
Sunday, May 11, 2008
Cross-Price Elasticity of Demand IV
Here is the previous installment in this series.
According to a recent survey, a majority of Russians believes that acquiring wealth requires criminal activity and political connections. Only 20% believe that talent matters.
Saturday, May 10, 2008
Cross-Price Elasticity of Demand III
Friday, May 09, 2008
Time for Harvard to Move?
If this were to pass, here is what I would consider:
Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion.
The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest....
Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually.
1. Instead of expanding the university into Alston, Harvard could create a second campus in another state. Call it Harvard South. (Put it in a better climate than Boston, and I would be one of the first faculty to volunteer for the move.)
2. Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts.
3. Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely.
I have often wondered what the efficient scale of a university is and, in particular, whether it would be better to create a second Harvard with the university's wealth than to expand the first one. Maybe the Massachusetts state legislature will give the powers-that-be at Harvard an incentive to consider more radical expansion plans.
The Coming Tax Hike
Going back to the tax rates of the 1990s doesn't mean that households will pay 1990s taxes. Because the tax brackets haven't risen along with incomes, average taxes would be significantly higher, and grow each year.
If the [Bush] tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.
Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average....
So even if the tax cuts are made permanent, future Americans will pay a greater share of their incomes to the government than in the past.
Thursday, May 08, 2008
The Best Case for a Gas Tax Holiday
Wednesday, May 07, 2008
Viard on the Corporate Income Tax
Rather than trying to prop up the corporate income tax against competitive pressures, countries around the world should celebrate its decline and work for its demise.
A Graphic for the Pigou Club
A Book Review
From King Rat.
Tuesday, May 06, 2008
In Praise of Gas Tax Hysterics
Paul is right that the issue is, quantitatively, small potatoes, but I am nonetheless pleased to see it get so much attention. This issue is like the canary in the coal mine: No one really cares about the canary, but its condition tells us about deeper problems that lie below.
Many economic issues (e.g., health care, corporate taxation, the trade deficit) are vastly complicated, with experts holding a variety of opinions. When candidates disagree, it simply means that each is siding with a different set of experts, and it is hard for laymen to figure out which set of experts is right. By contrast, the gas tax holiday is not nearly as complicated, and the experts speak with one voice.
Why, then, are candidates proposing the holiday? I can think of three hypotheses:
Ignorance: They don't know that the consensus of experts is opposed.
Hubris: They know the experts are opposed, but they think they know better.
Mendacity with a dash of condescension: They know the experts are opposed, and they secretly agree, but they think they can win some votes by pulling the wool over the eyes of an ill-informed electorate.
So which of these three hypotheses is right? I don't know, but whichever it is, it says a lot about the character of the candidates.
The Source of Bad Ideas
John McCain, the presumptive Republican presidential nominee who should know better, was the first presidential candidate to endorse the gas-tax holiday for the summer driving season. Reportedly, the idea originated with a political pollster, not among Mr. McCain's economic advisers.
Monday, May 05, 2008
Summers on Tax Competition
the US should take the lead in promoting global co-operation in the international tax arena. There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.This issue goes well beyond economics to questions of political economy and political philosophy. If you think it is the job of government to take from Peter to pay Paul, and if Peter can move around the globe, then you need international tax cooperation. Otherwise, some countries will become nations of Peters, leaving all the Pauls to fend for themselves.
On the other hand, if you think that the main job of government is to facilitate voluntary exchange by protecting property rights, rather than re-slicing the economic pie as it sees fit, then tax competition is a good check against excessive interventionism. In other words, are you more worried about too little government or too much?
Sunday, May 04, 2008
Hillary vs the AEA
Sen. Hillary Clinton, D-N.Y., declined this morning to name a single economist who backs her call for a gas tax suspension.
"I'm not going to put my lot in with economists," Clinton said in an exclusive appearance on a special edition of "This Week" from Indianapolis.
The Legacy of Bailouts
It will, for example, substantially reduce the profitability of investment houses and, therefore, reduce their scale. But that’s the price you pay for access to a publicly financed safety net.That is why some economists cringe when Wall Street firms are bailed out. Beyond the obvious equity issues about risking taxpayer money to help rich guys, there is the problem of efficiency. If you start bailing the firms out when they lose, you have to regulate the gambles they take. You can no longer count on the creditors to limit the firms' leverage, as the creditors are counting on Uncle Sam if things go wrong. But the more regulated these firms are, the lower their productivity will be.
The bottom line: The Bear Stearns bailout may have saved the economy from an episode of financial contagion in the short run, but in the long run it will likely leave us with a more regulated and less vibrant financial system.
Saturday, May 03, 2008
Cross-Price Elasticity of Demand II
Farmers in the Indian state of Rajasthan are rediscovering the humble camel. As the cost of running gas-guzzling tractors soars, even-toed ungulates are making a comeback, raising hopes that a fall in the population of the desert state’s signature animal can be reversed.
“It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.”
Friday, May 02, 2008
Cross-Price Elasticity of Demand
Thursday, May 01, 2008
Tomorrow in Ec 10
Other Harvard students and regular blog readers in the Boston area are welcome to attend. The class meets in Sanders Theatre in Memorial Hall from noon to 1 pm.
More on the Gas Tax Holiday
This headline reminds me of a story from the election of 1956:
Woman in crowd: Senator, you have the vote of every thinking person.
Adlai Stevenson: That's not enough, madam, we need a majority!
Update: Len Burman emails me:
Yesterday I was on the NewsHour to talk about the gas tax holiday. I asked if there was another guest and the producer said, "We tried, but we couldn't find anyone to argue the other side (that the gas tax holiday made sense)."