The Most Influential Book Ever Written

A poll (run by some Harvard students).

Libertarianism A to Z

My old friend and sometime coauthor Jeff Miron has published a new book, Libertarianism, from A to Z. 

Harvard students will recognize Jeff as the professor who regularly teaches Ec 1010a, Microeconomic Theory, as well as Ec 1017, A Libertarian Perspective on Economic and Social Policy.  You can find his blog here.

A Great Sentence

From David Brooks:

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

The Fundamental Theorem of Politics

Swagel on the Dodd Bill

My friend and sometime coauthor Phill Swagel describes what is wrong with the financial regulation bill now being debated in Congress.

Anti-Anti-Mankiw

The anti-Mankiw movement has motivated this comic in response:

Click on the graphic to enlarge.

Congratulations, Esther

Esther Duflo has won this year's John Bates Clark Medal.  Click here for a description of her work in general.  Click here to read her most cited paper (more than 1400 cites in Google Scholar).

Contingent Convertible Bond Watch

In my last Times column, I wrote approvingly about the idea of requiring financial institutions to issue contingent bonds that can be converted into equity if a financial crisis occurs and recapitalization is needed.  A reader alerts me to this news from Switzerland:

Swiss officials Thursday backed new banking laws to prevent the failure of one or both of Switzerland's major banks from imperiling the rest of the banking system.... Specific capital measures the commission is backing include having banks issue so-called contingent convertible bonds, which can convert into shareholders' equity in the event of a bank crisis.

Naked Self-Promotion

Now is the time in the academic year when many professors order textbooks for next year.  Do you need a recommendation?  Of course not.  If you are here perusing this blog, you are probably already making a wise choice.

But perhaps you are new to teaching and need some information about my favorite textbooks.  Or perhaps you want to learn more about many of the wonderful supplements that accompany them.

If you are an instructor and are interested in learning more about any of the five versions of my principles text (shown above), the person to contact is John Carey.

If you are interested in my intermediate macroeconomics text (shown to the left), the person to contact is Scott Guile.

Future Clark Medalists

The latest rumors.

Zipf's Law

My Harvard colleague Ed Glaeser discusses an intriguing empirical regularity.

Egalitarianism: The Next Step

A blog reader alerts me to this piece from the Times of London:

Brussels decrees holidays are a human right

AN overseas holiday used to be thought of as a reward for a year’s hard work. Now Brussels has declared that tourism is a human right and pensioners, youths and those too poor to afford it should have their travel subsidised by the taxpayer.

Under the scheme, British pensioners could be given cut-price trips to Spain, while Greek teenagers could be taken around disused mills in Manchester to experience the cultural diversity of Europe.

The idea for the subsidised tours is the brainchild of Antonio Tajani, the European Union commissioner for enterprise and industry, who was appointed by Silvio Berlusconi, the Italian prime minister.

The scheme, which could cost hundreds of millions of pounds a year, is intended to promote a sense of pride in European culture, bridge the north-south divide in the continent and prop up resorts in their off-season.

Tajani, who unveiled his plan last week at a ministerial conference in Madrid, believes the days when holidays were a luxury have gone. “Travelling for tourism today is a right. The way we spend our holidays is a formidable indicator of our quality of life,” he said.

Tajani, who used to be transport commissioner, said he had been able to “affirm the rights of passengers” in his previous office and the next step was to ensure people’s “right to be tourists”.

The Anti-Mankiw Movement...

...is looking for recruits.  If you think I am "an instrument of bourgeois ideology," you may want to sign up.

Update: Kenneth Anderson says that today's students would view this as a cool back-of-the-book endorsement, as in "This instrument of bourgeois ideology will have a permanent place on the bookshelf of your mind."

Kocherlakota on the Recovery

A speech from the President of the Minneapolis Fed.  His outlook:

My own forecast calls for about 3 percent growth per year over the next two years, as opposed to the consensus view among economists, which is 3.5 percent.

The Latest from the CEA Chair

Christy Romer discusses the present state of the economy.  A tidbit:

at one point I had tentatively titled my talk "It’s Aggregate Demand, Stupid"; but my chief of staff suggested that I find something a tad more dignified.

Spreading the Wealth via Heathcare Reform

I have long said that one of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income.  The Tax Foundation has now put some numbers to that proposition for the recently passed bill.  Roughly speaking, the top 1 percent of the population pays an additional $50,000 in taxes because of this legislation, and each of the bottom 50 percent gets about $1000 in benefits.  Click here for the more complete description.

A Guest Post from John Galt

David Leonhardt writes:

There is no question that the wealthy pay a higher overall tax rate than any other group. That is an American tradition. But there is also no question that their tax rates have fallen more than any other group’s over the last three decades. The only reason they are paying more taxes than in the past is that their pretax incomes have risen so rapidly — which hardly seems a great rationale for a further tax cut.

Really? What if the increase in their pretax income is in part attributable to the tax cuts? David seems to be treating pretax income as exogenous to tax policy, whereas there is good reason, both theoretical and empirical, to think that it responds to policy.

So I started wondering: How much of the increase of the the reported incomes of the superrich might be attributable to cuts in their marginal tax rates?  Let's do some very rough calculations to illustrate the possible magnitude of this phenomenon.  I will start my analysis before the first in the series of major tax reductions, which was the famous Kennedy tax cuts.

Over the past half century, the top marginal tax rate has fallen from 91 percent in the 1950s and early 1960s to 35 percent today.  Thus, the amount a person gets to keep at the margin has risen from 9 percent to 65 percent, that is, by a factor of 7.2.  If the elasticity of taxable income with respect to 1-t is one, as some studies find for high-income taxpayers, then the incomes of the rich would have risen by a factor of 7.2 as well.  If the elasticity is one-half, then their incomes would have risen by a factor of 2.7.  In either case, the change in pretax income attributable to the tax cuts is substantial.

By comparison, the incomes of the superrich (top 0.01 percent), as a share of total income, increased by a factor of about 5 over this period.  So, it seems that for plausible elasticities, a significant portion of that increase can potentially be explained by the cuts in the top marginal tax rate.

To be clear, I am not suggesting that we are now on the wrong side of the Laffer curve and that cutting taxes will increase revenue.  And I will be the first to admit that we don't really know the relevant elasticity for the upper tail of the income distribution.  But I am suggesting that it is a mistake to presume that changes in marginal tax rates have little effect on reported pretax incomes.

Why are most professors leftists?

Here is one answer.  Thanks to Craig Newmark for the pointer.

The Valued Added Tax

An overview from Bob Carroll and Alan Viard.

Hear Me Squawk

I am scheduled to be on CNBC's morning show Squawkbox on Monday morning, a bit after 8 am.

Update: If you missed it, here it is:

How to Lie Without Statistics

Today's Parade Magazine (with a circulation of 32 million) includes its "Annual Salary Survey." What this means is that the magazine presents about a hundred photos of various people with their names, occupations, and annual earnings.

At first, you might think this is a good way to give readers a sense of the distribution of income in society. And it would be, if the sample were at all representative. But it isn't. Parade decides to oversample celebrities. That is understandable--after all, readers are more interested in hearing about famous actors and sport stars than about a plumber in Dubuque. But one result of this choice is that the sample is far from representative, making the whole affair misleading as a piece of journalism.

By my count, about 14 percent of the people in Parade's sample earn more than $1 million a year. In the real world, the actual percentage is about 0.2 percent. So, in a truly representative sample of a hundred people, you would most likely have zero, or perhaps one, person with a million dollar income. Finding two would be highly unlikely. 14 would be nearly impossible.

Does this matter? I think it might. There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.

The Enormity of the Fiscal Gap

Here is a striking way to describe our looming fiscal problem:

A study we conducted at the Tax Policy Center found that Washington would have to raise [income] taxes by almost 40 percent to reduce -- not eliminate, just reduce -- the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent.

What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP.

The Massachusetts Health Experiment

As seen by Jim Capretta.

Declining Admission Rates at Top Colleges

Click on graphic to enlarge. Source.

This is part of a longer-term trend.  Here are the admission rates from about 10 years before this graph begins:

Harvard: 12 %
Princeton: 14 %
Yale: 20 %
MIT: 27 %
Stanford: 19 %

Speculation about Larry

The media is abuzz with stories that Larry Summers is unhappy and may be leaving the Obama administration: click here, here, here, and here.

I have no idea if any of this speculation is true.  (The only way I would know is if Larry said something to me about it, and then I wouldn't be talking about it on my blog.  But he hasn't, so I can.)  What I do know is that it would be unfortunate for the country if Larry left.  I am obviously not privy to internal discussions at the White House, but I bet that, more often than not, Larry is pushing policy in a more moderate and more sensible direction.

On the other hand, a loss for the nation could be a gain for ec 10 students.  Before he left for the White House, Larry was a regular and popular guest lecturer.  We would be delighted to have him back.

Is "Unpaid" Below the Minimum Wage?

Here is a good article for class discussion.  Apparently, some government regulators think unpaid internships might violate minimum-wage laws.  (FYI, the internship as the Council of Economic Advisers is unpaid!)

Keynes: Economics as Impressionism

A correspondent alerts me to this fascinating quotation from the esteemed economist John Hicks:

"Of all great economists, Mr. Keynes is probably the most Impressionist; the General Theory, in particular, needs to be read at a distance, not worrying too much about detail, but looking principally at the general effect. At least, that is how I have read it myself, and it seems that as a result I retain a higher opinion of it than Professor Robertson does. His own criticisms sometimes remind one of a man examining a Seurat with a microscope and denouncing the ugly shape of the individual dots. It is very probable that the Impressionist method is not particularly appropriate to the higher economics (though it may be suitable enough for more popular writing); however, it is Mr.Keynes' method, and in his hands it has some countervailing virtues."

"The Monetary Theory of D.H. Robertson", 1942, Economica.

Barro on the Great Depression

My Harvard colleague Robert Barro opines, with a reading list.

An Auction

Today is the day Harvard announces admission decisions to the college.  Moreover, as you may know, Harvard has been struggling with a sizable budget shortfall.  The budget problem, however, has now been solved.  Harvard has decided to auction off 100 slots in next year's freshman class to the highest bidders.  If you are interested in entering a bid or learning more about the program, click here.  Bids are due by the end of the day.