How to meet me in Denver

If you are going to the Denver ASSA meeting next week, and if you would like to meet me for a discussion of the challenges facing economic policy, you might be interested to know that my publisher is arranging a couple of events. Click here to sign up.

I look forward to seeing you!

Econ Education at the ASSA Meeting

If you teach economics and are going to the upcoming ASSA meeting in Denver, you might find this list of the pedagogical sessions helpful.

One of the sessions includes an analysis of the leading economics textbooks.

Voting with Your Feet II

Ed Glaeser on regional population trends:

The future shape of America is being driven not by quality of life or economic success but by the obscure rules regulating local land use.  In a sense, the anti-regulation crowd is right that the laissez-faire attitude of the South and West explains their recent growth. But the usual argument focuses on the wrong regulations. Housing regulations, more than those that bind standard businesses, explain the Sun Belt’s population growth. If New York and Massachusetts want to stop losing Congressional seats, then they must revisit the rules that make it so difficult to build.

Malkiel's Recommended Asset Allocation

Source.

Economists on Ebenezer Scrooge

• Paul Krugman
• David Henderson
• Steven Landsburg
• Joel Waldfogel

Voting with Your Feet

A fact from Michael Barone:

[Population] growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average [over the past 10 years]. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England.  Altogether, 35 percent of the nation's total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade.

Advances in Inflation Measurement

Chapter 24 of my favorite textbook discusses how economists measure the cost of living.  This article in Slate would provide a good supplementary reading.

An Occupational Hazard

The Value of Good Teachers

From Eric Hanushek:

A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion.

The Charitable Deduction

Richard Thaler takes on the tax deduction for charitable giving.  He suggests that there is little reason for it and that a refundable tax credit would be more justified.

I think there is a bit more logic to current policy than Thaler does.  Suppose you believe, as I do, that consumption is a better tax base than is income.  Then, starting with a measurement of income, it makes sense to allow deductions for "non-consumed income"--specifically, saving such as IRA and 401k contributions and charitable giving.

Some may argue that giving to charity is itself a form of consumption.  After all, the person who gives is doing so voluntarily, so there must be some utility to the giver.  Perhaps, but there seems something fundmentally different about consumption in the form of charitable giving and consumption in the form of large homes and fast cars.  But maybe that is the puritan, rather than the economist, inside me speaking.

Econ Books for Young Children

Click here for five recommendations.  Just in time for Christmas.

I must confess that I have not read any of them with my kids, which makes me start to question my parenting skills.  (I have, however, read all seven volumes of the Harry Potter series out loud.)   By the way, here are some of my favorite childrens' books, which are not economics-related.

Menu Costs during Hyperinflation

A reader sends this photo along, with the following explanation:

In January of 2009 I traveled to Africa and we took a side trip to Victoria Falls in Zimbabwe.  I snapped the attached photo at the entry to the falls.  Notice how the price of entry in Zimbabwe Dollars is written in chalk.  This was so that they could change the price throughout the day as the ZW Dollar lost value.

The Economics of Seinfeld

Linda Ghent, author of the instructor's manual to accompany my favorite textbook, is also coauthor of an intriguing website that uses one of the best sitcoms ever to help teach the principles of economics. Check it out.

Avinash Dixit

A profile of the great economist.

An Economists' Hanukkah Song

On Editing an Economics Journal

Reflections from Preston McAfee.

The Daily Show: Printing Money

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
The Big Bank Theory
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog</a> The Daily Show on Facebook

The White House reads this blog

and cites it in a recent press release.

Fairness and Tax Policy

Readers of this blog may recall my recent essay Spreading the Wealth Around: Reflections Inspired by Joe the Plumber. 

For anyone interested in this topic, I recommend a new commentary on my paper by Northwestern University's Jonathan Weinstein.  Professor Weinstein makes some very thoughtful and thought-provoking observations.

Simon Johnson and Me on NPR

How Economics Saved Christmas

Art Carden retells the story of the Grinch and, in the process, reviews some basic lessons about Pigovian taxation and the Coase Theorem.

Gift Books for Econ Lovers

Recommendations from the University of Chicago's Allen Sanderson.

Hear Me Squawk

More on the Tax Deal

David Leonhardt says that, quantitatively, the President got a good deal:

Of its estimated $900 billion-plus cost over two years, roughly $120 billion covers the high-end tax cuts and the estate tax cut, $450 billion covers Mr. Obama’s wish list and $360 billion covers the tax cut extensions both parties favored.

CBO says that the payroll tax cut would be more stimulative if it went to employers rather than employees (an issue I discussed here):

A temporary reduction in payroll taxes—especially in the share of taxes paid by employers—would also have a significant positive short-term effect on the economy. This approach would boost output and employment both by increasing demand for goods and services and by providing an incentive for additional hiring.

Thanks to Felix Salmon for the pointer.

The Distribution of the Tax Deal

• Compared to current policy (that is, with 2009 tax law continued).
• Compared to current law (that is, with all the Bush tax cuts expired).

The Tax Deal

I am generally pleased with the compromise over taxes the President and Republicans struck yesterday.  (The President should be too, but he seemed dejected at his news conference.  Buck up, Mr President!  You don't want anyone to start thinking of the word "malaise.")

One aspect of the deal struck me as worth discussing with econ students: The compromise includes a one-year cut in the payroll tax by 2 percentage points.  The tax cut will be entirely in the employees' share.  Why do you think they designed the policy in this way?  Was it the right choice?

One basic lesson of microeconomics is that it doesn't matter which side of a market the government taxes.  As a result, you might think it doesn't really matter which side of the payroll tax is cut.

But this standard analysis assumes that wages are flexible and thus can reach equilibrium of supply and demand.  This assumption might not hold in the short run.  Over the course of a year (the time horizon over which this policy is in effect), it may be better to think of the wage as given.  In that case, it matters which side of the market gets the tax cut.

As the policy was described yesterday, this payroll tax cut goes entirely to the worker.  This increases work incentives, but the main motivation is probably to increase take-home pay, consumer spending, and aggregate demand.  CEA chair Austan Goolsbee recently said, “We’re not saying that our long-term recovery ought to be built on trying to increase consumer spending.”  Maybe not, but the plans for short-run recovery are very definitely consumption-based.

An alternative would have been to reduce the employer's share of the payroll tax, at least to some degree.  Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment.  It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

I should note that, as part of the deal, the President also got his proposal to allow businesses to expense investment spending.  As I have said previously, this is a good idea, but the impact is likely to be modest.

200 Countries and 200 Years in 4 Minutes

My Agnosticism about UI

A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits.  I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI.  But perhaps it would be useful to explain my agnosticism.

UI has pros and cons.  The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn.  The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed.  To me, all these pros and cons seem significant.  I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.

So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks?  If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?

It is plausible to me that UI benefits should last longer when the economy is weak.  The need for increased aggregate demand is greater, and the impact on job search may be weaker.  But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right.  It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.

I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general.  I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around."  That issue is, as I tell my students, more a matter of political philosophy than it is of economics.

Grading Econ Textbooks on Climate Change

A report card from Yoram Bauman.  One book "shakes [his] faith in capitalism."  Can you guess which?

1/2 Math + 1/2 Faith = ???

Click on graphic to enlarge.  Source.

A Mono Mandate for the Fed?

Along with Congressman Paul Ryan, economist John Taylor calls for a revision of the Federal Reserve's mandate:

Quantitative easing is part of a recent Fed trend toward discretionary and away from rules-based monetary actions. The consequences of this trend are clear: The Fed's decision to hold interest rates too low for too long from 2002 to 2004 exacerbated the formation of the housing bubble. And while the Fed did help to arrest the ensuing panic in the fall of 2008, its subsequent interventions have done more long-run harm than good....

Congress should reform the Federal Reserve Act, particularly the section of the act that establishes the Fed's dual mandate. The Fed should be tasked with the single goal of long-run price stability within a clear framework of overall economic stability. Such a reform would not prevent the Fed from providing liquidity, serving as lender of last resort, or cutting interest rates in a financial crisis or a recession.

I am skeptical. If the Fed's mandate were different, monetary policy today might well be the same. That is, with inflation now below its target, the Fed could be pursuing QE2 even if it were operating under the proposed mono mandate. Looking ahead, the Fed believes that inflation too low, even deflation, is a larger risk than inflation too high, so it is engaging in expansionary policy to get inflation back on target.