How I spent my day

The Conservative Heart

Click here to read my piece in this coming Sunday's NY Times Book Review.

The Mess in Europe

Click here to read my column in Sunday's NY Times.

:)

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Free at Last

I am delighted to report that I am no longer chairman of the Harvard economics department.  My three-year sentence term having been completed, I am happy to turn things over to David Laibson. Condolences Congratulations, David.

Milton Friedman on the Euro

With the problems in Greece now leading the news, this old article by the great Milton Friedman is worth (re)reading.  (Martin Feldstein made similar arguments at the time in this article.)

Best of Enemies

I recently had the pleasure of seeing several films at the Nantucket Film Festival.  My favorite was Best of Enemies, a documentary about the TV debates between William Buckley and Gore Vidal during the 1968 presidential nominating conventions.  It is being released later this month. 

Here is the trailer:

 

A Common Error in Pedagogy

I happened to be flipping through another introductory economics textbook. (Yes, some people have the temerity to try to compete with my favorite textbook.) I noticed an error that is, unfortunately, all too common in how introductory economics is taught.  I won't mention which book it is, because I am quite fond of the authors, and because my goal here is not to pick on one particular book but rather to draw attention to a more pervasive problem.

The issue is how one applies welfare economics to understand price controls, such as rent control and minimum-wage laws.

The sin that this book makes is to look at consumer surplus, producer surplus, and deadweight loss as if we were studying the welfare cost of a tax. The cost of a price control, the reader is taught, is the small Harberger triangle between the supply and demand curves.

This reasoning is problematic because it assumes perfect rationing. But rationing under price controls is never perfect. Under rent control, for example, apartments do not automatically go to those who value the apartments the most. The misallocation due to imperfect rationing makes the actual welfare cost of price controls much higher than the standard deadweight loss triangle.

In many cases, economists are deeply skeptical of price controls. If the costs of price controls were similar to those of taxes, I suspect that this skepticism would be substantially less. By applying off-the-shelf welfare analysis to price controls without thinking through the inefficiency of most rationing systems, teachers of introductory economics mislead their students about the effects of these policies.

Addendum: Here is a relevant paper on the topic.