Monday, June 30, 2008

Sunstein-Wolfers on Capital Punishment

Cass Sunstein and Justin Wolfers say we don't really know whether or not capital punishment deters crime.

Maybe so, but it does solve the problem of recidivism.

Summers on the Economy

Sunday, June 29, 2008

Shiller on Fiscal Stimulus

Bob Shiller concludes that the recent fiscal stimulus is not enough:
The reality of the subprime situation, augmented by the energy crisis, at least suggests that we’d better get ready for another round of rebates. There is little talk of it now, but we should be putting in place another stimulus package like the current one, and stand ready for another after that, and another.
Sounds a bit like a permanent tax cut.

Friday, June 27, 2008

Wanted: More Beautiful Workers

I have long argued that the United States should welcome more skilled workers from other nations. A reader sends in an article reminding us that "skills" need to be broadly defined:

Around 1,000 additional tech workers may get visas to work in the United States next year, and they may have fashion models to thank. That's because foreign-born models and programmers will no longer have to duke it out for the same visa slots if a New York congressman gets his way.

Rep. Anthony Weiner, D-N.Y., has introduced a bill in the House that would create a new, nonimmigrant classification reserved exclusively for the catwalkers. Currently, foreign models who want to work in the United States require H-1B visas, which are normally used by computer programmers and other high-tech workers.

Weiner wants Congress to amend current visa rules to allow 1,000 foreign models into the United States each year under their own immigrant classification.

By the way, I believe that Congressman Weiner is single.

Creative Capitalism

Thursday, June 26, 2008

Wanted: More Skilled Workers

George Will hits the nail on the head:

Two-thirds of doctoral candidates in science and engineering in U.S. universities are foreign-born. But only 140,000 employment-based green cards are available annually, and 1 million educated professionals are waiting -- often five or more years -- for cards. Congress could quickly add a zero to the number available, thereby boosting the U.S. economy....

Barack Obama and other Democrats are theatrically indignant about U.S. companies that locate operations outside the country. But one reason Microsoft opened a software development center in Vancouver is that Canadian immigration laws allow Microsoft to recruit skilled people it could not retain under U.S. immigration restrictions. Mr. Change We Can Believe In is not advocating the simple change -- that added zero -- and neither is Mr. Straight Talk.

The Pigou Club in a Nutshell

From Tim Kane:
we should aim to tax the bad things (noise, gasoline, trash, violent crime, evil foreign dictators) and untax the good things (homegrown profits, employment, innovation).

Don't trust anyone who can't see into the future

Bloomberg reports:

[Senator McCain] has shown increasing disdain for any economist who questions his policy prescriptions. Earlier this month, he lashed out at critics of his proposal for a summer gas-tax holiday.

"You know the economists?'' McCain said June 12 at Federal Hall, near the New York Stock Exchange. "They're the same ones that didn't predict this housing crisis we're in. They're the same ones that didn't predict the dot-com meltdown. They're the same ones that didn't predict the inflation that's staring us in the face today.''

Fortunately, Mr McCain's crystal ball foretold all of these events.

Wednesday, June 25, 2008

McCain vs Obama: Ethanol

From the NY Times:

Mr. McCain advocates eliminating the multibillion-dollar annual government subsidies that domestic ethanol has long enjoyed.... Mr. Obama, in contrast, favors the subsidies....

On the campaign trail, Mr. Obama has not explained his opposition to imported sugar cane ethanol. But in remarks last year, made as President Bush was about to sign an ethanol cooperation agreement with his Brazilian counterpart, Mr. Obama argued that “our country’s drive toward energy independence” could suffer if Mr. Bush relaxed restrictions, as Mr. McCain now proposes.

“It does not serve our national and economic security to replace imported oil with Brazilian ethanol,” he argued....

The candidates’ views were tested recently in the Farm Bill approved by Congress that extended the subsidies for corn ethanol, though reducing them slightly, and the tariffs on imported sugar cane ethanol. Because Mr. McCain and Mr. Obama were campaigning, neither voted. But Mr. McCain said that as president he would veto the bill, while Mr. Obama praised it.

Tuesday, June 24, 2008

A Reading for the Pigou Club

From Irwin Stelzer:
McCain should spend ten minutes with his adviser Douglas Holtz-Eakin, who I would guess is still recovering from his embarrassment at McCain's call for a cut in gasoline taxes, to discuss the opposite: a tax on oil products, especially gasoline and heating oil. This doesn't mean abandoning his opposition to higher taxes. Indeed, the point is not to raise federal revenues. Every dollar that comes in should be rebated, perhaps by reducing the payroll taxes of everyone earning less than, say, $50,000 per year, the group Obama intends to benefit by raising taxes on those energetic small-business owners. The beneficiaries of the McCain shift in taxes from work to polluting, imported gasoline would see the reduction in taxes immediately--when they received their first salary check after the new regime was in place. But the main point is this: The money that the Saudis and other supporters of jihadists would otherwise get would be reducing the taxes of hard-pressed Middle America. Take that, Barack Obama. It's called straight talk.

Department of Strange Bedfellows

Paul Krugman (also here) and Alan Reynolds agree: Don't blame speculators for high oil prices.

Read both pieces. Note that their economic arguments are roughly the same, despite their opposite political perspectives.

In related news: Obama Targets Speculation On Energy.

What I've been listening to

Vampire Weekend. The best new rock band I have heard in a long time.

For a free sample of their music, click here or here or here.

Monday, June 23, 2008

Will the real budget hawk please stand up?

An article in the Washington Post looks at the fiscal policy of the two presidential candidates. A notable excerpt:
Despite his promises of tax cuts, fiscal analysts note that McCain has a reputation as a budget-cutter.... "I suspect that McCain will be more constrained and will have a veto power over the Democratic Congress," said Alice M. Rivlin, who served as the first director of the Congressional Budget Office, as well as one of Clinton's budget directors. "If it's Obama, the Democratic Congress is going to be pushing for spending and it's awfully hard to rein in your own folks. No Democrat is going to want to go to war with Congress."

The Problem with Centralized Authority

The town I live in (Wellesley, MA) wants to build a new high school, and the State Treasurer Tim Cahill objects to the cost. The state government is providing some funding, as it typically does for school building projects, but the town is willing to fully fund the incremental cost of all the bells and whistles that Mr Cahill objects to.

Why, you might ask, is the cost of these add-ons a state issue at all? Why not let local residents decide what kind of high school to buy? According to the Boston Globe, Mr Cahill explains his position as follows:

One community should not be able to provide better opportunities for kids versus another community just because they have the money.
In essence, Mr Cahill does not want the residents of Wellesley--a group with higher-than-average income--to spend their own money on their children. I suppose it is better for them to buy fancier cars or spend more on dinners out at tony restaurants. But better school facilities? Absolutely not!

Mr Cahill's one-size-fits-all principle has many implications. For example, why should wealthier parents be allowed to hire tutors for their kids? Or give them private music lessons? Or send them to pricey summer camps? If Mr Cahill thinks that people should not be able to spend their own money to improve the lives of their children, the Wellesley High School is only the first step of a much larger project.

Karl Rove channels Schumpeter

Via the WSJ:

This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."...

Mr. McCain's angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a "perennial gale of creative destruction" is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is "the pivot on which everything turns," Schumpeter argued, and "proceeds by competitively destroying old businesses."

Most dramatic change comes from new businesses, not old ones. Buggy whip makers did not create the auto industry. Railroads didn't create the airplane. Even when established industries help create new ones, old-line firms are often not as nimble as new ones. IBM helped give rise to personal computers, but didn't see the importance of software and ceded that part of the business to young upstarts who founded Microsoft.

So why should Mr. McCain expect oil and gas companies to lead the way in developing alternative energy? As with past technological change, new enterprises will likely be the drivers of alternative energy innovation.

Sunday, June 22, 2008

Lindsey on Obamanomics

Larry points out:
A high-income entrepreneur would see his or her federal marginal tax rate rise to 53% from 37.7% under Sen. Obama's tax plan.
I believe this would be the highest tax rate on earned income since 1971.

The Wee Hours of the Morning

From Viajero:
2:33 am, 2 nights after full moon : My room was lit by the silvery moon with 3 windows of my room wide open to let the 'still' breeze in. After a brief reading of N. G. Mankiw's 'Principles of Macroeconomics', I moved onto seeing a Telugu film (with subtitles of course).

Cross-Price Elasticity of Demand VI

The AP reports:

Home buying practices adjust to high gas prices

In his hunt for a new home, Demetrius Stroud crunched the numbers to find out that, with gas prices climbing, moving near an Amtrak station is the best thing for his wallet.

Click here for a previous installment.

Saturday, June 21, 2008

Heckman on Ability Gaps

This fascinating survey by Nobelist Jim Heckman (via Arnold Kling) make the following case:

Cognitive abilities are important determinants of socioeconomic success. So are socioemotional skills, physical and mental health, perseverance, attention, motivation, and self confidence. They contribute to performance in society at large and even help determine scores on the very tests that are commonly used to measure cognitive achievement.

Ability gaps between the advantaged and disadvantaged open up early in the lives of children. Family environments of young children are major predictors of cognitive and socioemotional abilities, as well as a variety of outcomes such as crime and health. Family environments in the U.S. and many other countries around the world have deteriorated over the past 40 years.

Experimental evidence on the positive effects of early interventions on children in disadvantaged families is consistent with a large body of non-experimental evidence showing that the absence of supportive family environments harms child outcomes. If society intervenes early enough, it can improve cognitive and socioemotional abilities and the health of disadvantaged children. Early interventions promote schooling, reduce crime, foster workforce productivity and reduce teenage pregnancy.

These interventions are estimated to have high benefit-cost ratios and rates of return. As programs are currently configured, interventions early in the life cycle of disadvantaged children have much higher economic returns than later interventions such as reduced pupil-teacher ratios, public job training, convict rehabilitation programs, adult literacy programs, tuition subsidies or expenditure on police.

Friday, June 20, 2008

Effective Tax Rates

From J.T. Young. Note: These numbers, originally from CBO, include all federal taxes.

Thursday, June 19, 2008

A Reading for the Pigou Club

Wednesday, June 18, 2008

He's baaaack...

Tuesday, June 17, 2008

Bernanke on Healthcare

Ben gives a talk about healthcare reform.

The most surprising thing about the speech is that he chose to give it. Healthcare is not an issue that directly concerns the Federal Reserve System, and Ben has no professional expertise in health economics.

What's next? The Fed chairman examining alternative ways to resolve the conflict in Iraq? His list of the best movies of the year? A blog on which he comments on anything that pops into his head?

Ben's talk is, however, very sensible--a good overview of the issues without saying anything sufficiently interesting that it might prove controversial.

Monday, June 16, 2008

Starve the Beast

In today's NY Times, Paul Krugman suggests that the Starve the Beast theory--tax cuts lead to smaller government--is true, albeit with a lag:

The Obama plan is also far more progressive, sharply reducing after-tax incomes for the richest 1 percent of Americans while raising incomes for the bottom 80 percent. But while $700 billion may sound like a lot of money, it’s probably not enough to pay for universal health care, which was supposed to be the overriding progressive priority in this election.

Why doesn’t Mr. Obama propose raising more money? Blame the Bush poison pill....

looking at the tax proposals of the two presidential candidates, it’s remarkable and disheartening to see how effective President Bush’s fiscal poison pill has been in restricting the terms of debate.

In other words, according to Krugman, the Bush tax cuts may well cause government under President Obama to grow less than it otherwise would.

Roughly the same story was told in Robert Reich's highly entertaining memior of the Clinton years, Locked in the Cabinet. Reich suggests that the Reagan tax cuts and resulting deficits constrained the Clinton administration from pursuing all the spending programs that Reich wanted.

Krugman and Reich view this situation as entirely negative, for they favor increased government spending. But for those classical liberals who prefer smaller government, their storyline supports the well-known and often maligned Starve the Beast theory.

Sunday, June 15, 2008

Blinder on Bubbles

A Reading for the Pigou Club

Chick Flicks

I just saw the new Sex and the City movie. Even as a fan of the HBO show on which it was based, I was disappointed: It seemed like a hastily written made-for-TV movie.

What struck me most was the audience. I was one of only two men in the theater. My wife commented that a man had to be very confident in his masculinity to be there (but I think she may have been feeding me a line).

For a much better chick flick, I recommend The Devil Wears Prada.

Saturday, June 14, 2008

The Politics of Trade

Roger Lowenstein points out:
Clinton passed his trade deals mostly with the votes of Republicans.
I wonder: What would President Obama with a Democratic congress do on this issue? Would Democrats in Congress start voting like Republicans? Or would the movement toward increased openness in world trade come to a halt?

Update: A reader alerts me to this useful summary of how the two parties have voted on trade legislation.

Thursday, June 12, 2008

So much for Ricardian Equivalence

Total sales at U.S. retailers rose a full percentage point in May as many consumers had more spending cash in their wallets from government rebate checks.

From Reuters.

Wednesday, June 11, 2008

Two Great Books for Kids

Over the past couple days, several blog readers told me they appreciate my childrens' reading recommendations. So here are two more.

A favorite picture book: Miss Rumphius.

A favorite chapter book for young readers: Frindle.

The Harvard-Yale Presidential Duopoly

From Michael Medved:

What's the explanation for this extraordinary situation — with Yale/Harvard degree-holders making up less than two-tenths of 1% of the national population, but winning more than 83% of recent presidential nominations?...

Today, the most prestigious degrees don't so much guarantee success in adulthood as they confirm success in childhood and adolescence. That piece of parchment from New Haven or Cambridge doesn't guarantee you've received a spectacular education, but it does indicate that you've competed with single-minded effectiveness in the first 20 years of life.

And the winners of that daunting battle — the driven, ferociously focused kids willing to expend the energy and make the sacrifices to conquer our most exclusive universities — are among those most likely to enjoy similar success in the even more fiercely fought free-for-all of presidential politics.

McCain vs Obama: Checks and Balances

From Robert Samuelson:
McCain does have one provisional and accidental advantage. By most appraisals, the Republicans will get slaughtered in congressional elections, and I have a visceral dislike of one-party government. It didn't work well under Bill Clinton or George W. Bush. Divided government doesn't ensure good government, but it may limit bad government by checking the worst instincts of both parties.

Monday, June 09, 2008

A Gold Star for Barack Obama

My friend and former student Jason Furman has joined the Obama campaign as Director of Economic Policy.

Update: The far left objects.

I am tempted to come to Jason's defense here, but somehow I doubt that support from me would allay the fears of Jason's critics. Maybe it would help if I attacked him?

My Whereabouts

I will be spending the next several days on Cape Cod talking about the Phillips curve.

Call it a Geek Vacation.

Sunday, June 08, 2008

George Stigler rolls over in his grave

Remember when the University of Chicago used to be the intellectual center of the deregulation movement? No more. A reader alerts me to this news:

Investment banks that obtain Federal Reserve Bank loans during a financial crisis should face much closer regulatory scrutiny, a key economic adviser to Democratic presidential candidate Sen. Barack Obama said.

Austan Goolsbee, an economics professor at the University of Chicago and one of Sen. Obama's closest advisers on economic issues, said the senator believed strongly in enhanced regulation of any financial institution that has access to the Fed's discount window.

"If you can borrow money from the U.S. taxpayer at a moment of crisis, that is a very sacred insurance policy underwritten by the U.S. taxpayer," said Mr. Goolsbee in an interview last week with Dow Jones Newswires. "We have the right to oversee anyone who is accessing that insurance policy."...

Mr. Goolsbee said that an Obama presidency would ensure that investment banks are regulated as closely as commercial banks.

Here's a question for Austan: Can an investment bank avoid such regulation if it promises never to use the discount window? Or is this insurance-regulation combo a mandate?

This story seems to confirm the fears of Vince Reinhart.

Fear of Foreigners

Wisdom from Tyler Cowen:

the prevailing intellectual tendency these days is to apologize for free trade. A common claim is that trade liberalization should proceed only if it is accompanied by new policies to retrain displaced workers or otherwise ameliorate the consequences of economic volatility.

Yes, the benefits of a good safety net are well established, but globalization is not the primary source of trouble for most American workers. Health care problems, bad schools for our children or, in recent times, bad banking practices have all produced greater disruptions — and these have been fundamentally domestic failings.

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other.

Saturday, June 07, 2008

A Reading for the Pigou Club

An excerpt from Charles Krauthammer:

You want more fuel-efficient cars? Don't regulate. Don't mandate. Don't scold. Don't appeal to the better angels of our nature. Do one thing: Hike the cost of gas until you find the price point.

Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians and Iranians do the taxing for us -- and pocket the money that the tax would have recycled back to the American worker.

This is insanity....

But instead of doing the obvious -- tax the damn thing -- we go through spasms of destructive alternatives, such as efficiency standards, ethanol mandates, and now a crazy carbon cap-and-trade system the Senate is debating this week. These are infinitely complex mandates for inefficiency and invitations to corruption. But they have a singular virtue: They hide the cost to the American consumer.

Want to wean us off oil? Be open and honest.

Friday, June 06, 2008

Which inflation rate?

With oil prices and other commodity prices rising, many commentators are starting to worry about inflation. These events raise the question in the minds of some astute observers of which inflation rate central bankers should focus on.

Ricardo Reis and I addressed this question in a paper a few years ago, called What Measure of Inflation Should a Central Bank Target? (published version). The abstract:
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector's characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
With this conclusion in mind, let's look at growth in nominal compensation per hour:

As judged by this series, inflationary pressures look reasonably well contained at the moment.

But notice what happened in the late 1990s. Reis and I commented on this episode in our conclusion:

Consider how a monetary policymaker in 1998 would have reacted to these data. Under conventional inflation targeting, inflation would have seemed very much in control, as the CPI inflation rate of 1.5 percent was the lowest in many years. By contrast, a policymaker trying to target a stability price index would have observed accelerating wage inflation. He would have reacted by slowing money growth and raising interest rates (a policy move that in fact occurred two years later). Would such attention to a stability price index have restrained the exuberance of the 1990s boom and avoided the recession that began the next decade? There is no way to know for sure, but the hypothesis is intriguing.

Detested Masterpieces

My Harvard colleague Ed Glaeser asks:
WHAT SHOULD be done with an official building, such as Boston's City Hall, that is regarded as a modern masterpiece by architectural cognoscenti but detested by many, if not most, of the city's population?

Thursday, June 05, 2008

Congratulations, Harvard Grads

Having read all seven volumes of the Harry Potter series (out loud, in fact), I eagerly anticipated J.K. Rowling's address at Harvard's commencement today. She did not disappoint.

You can read her talk here.

Update: Or you can watch it here.

Landsburg on Tax Policy

Steve in the WSJ:

Like philanthropy, saving is an act of self-denial that enriches your neighbors (by leaving more goods available for them to consume). But unlike philanthropy, saving is punished by the tax system (via the taxes on interest, dividends, capital gains and inheritance). That's nuts. When you tax saving, you encourage people – wealthy people in particular – to spend more and grab a larger share of the consumption pie. "More consumption by the rich" should not be among the primary objectives of the tax code.

The alternative is to tax can easily implement a consumption tax with a Form 1040 that says: "How much did you earn this year? How much did you save? Now pay tax on the difference." And you can make that tax as progressive as you like.

Bernanke comes home

Ben talks to graduating Harvard students.

I was not there, but the students are tough critics:
“We could have gotten that from Ec 10.”

Tuesday, June 03, 2008

Summers on Financial Regulation

Monday, June 02, 2008

Thanks for the Assist

Attracting Customers

Jeff Miron asks: Why is economics the most popular major at Harvard?