Greg Mankiw's Blog

Good News (both for job seekers and for one person trying to hold onto his job)

2012-02-03T10:54:00.003-05:00

Good news today about employment. The 243,000 increase in jobs is a very solid number. The graph below shows how the prices at Intrade reacted when the news was released at 8:30 am. President Obama's probability of being reelected rose by about 2 percentage points. Click on the graphic to enlarge.

We're number 1!

2012-01-31T11:19:00.000-05:00

Ec 10 is still the largest course at Harvard.

Are federal government workers overpaid?

2012-01-30T15:23:00.000-05:00

Yes, says CBO:

Differences in total compensation—the sum of wages and benefits—between federal and private-sector employees varied according to workers' education level.
Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.
Federal workers whose education culminated in a bachelor's degree averaged 15 percent higher total compensation than their private-sector counterparts.
Federal employees with a professional degree or doctorate received 18 percent lower total compensation than their private-sector counterparts, on average.
Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

How much would a Buffett Tax raise?

2012-01-30T12:27:00.001-05:00

Robert Samuelson has the numbers:

Obama’s still-vague Buffett Tax would apparently impose a minimum 30 percent tax rate on incomes exceeding $1 million....In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimates $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that’s all.

Support from Anonymous

2012-01-27T08:58:00.001-05:00

I don't know who this blogger is, but his or her first post is called "Mankiw is right. Buffett is wrong." And he or she puts the argument well (although I may not be objective here).

For High School Teachers and Students

2012-01-25T21:51:00.000-05:00

The Harvard Pre-Collegiate Economics Challenge is a competition for high school students studying AP economics. It is run by Harvard undergraduates and features one of my favorite economists as a guest speaker. This year it will be held on Saturday, March 31, 2012 from 9 am to 5 pm.

If you are interested in more information about this event, click here.

Two Reactions to the SOTU

2012-01-25T08:11:00.004-05:00

1. Last night President Obama continued his misleading claims about Warren Buffett's tax rate. David Leonhardt recalls that I rebutted those claims several years ago.

David usefully asks for a response to my rebuttal from the Center on Budget and Policy Priorities, a liberal-leaning research group in Washington. Chuck Marr, the center’s director of federal tax policy, emailed David back. Click through the link above, and read carefully what Mr Marr has to say. Does it respond to my arguments? No, not at all. Mr Marr just changes the subject. He follows the age-old advice for politicians: Don't answer the question they asked, answer the question you wish they had asked. This might work for some voters, but I am sure it won't for the careful analysts who read this blog. One might reasonably take Mr Marr's non-response as an admission that President Obama's claims about the taxes of Mr Buffett and his secretary don't hold up under closer examination.

2. I was disappointed, and even a bit surprised, that the President adopted the xenophobic approach to outsourcing and international trade. Usually, on issues of international trade, the President plays the role of grown-up and leaves it up to Congress to gin up populist ire. That is true of both parties. Recall that President Clinton pushed NAFTA through.

When President Obama bragged that his administration had substantially increased trade cases against China compared with his predecessor, it made me proud to be one of President Bush's advisers. (Not that the Bush administration was perfect on trade issues. It is just good to know we were better.) These trade cases include such things as anti-dumping claims, which in many cases are just the modern face of protectionism. Phill Swagel and I wrote about anti-dumping laws here.

At least I am consistent

2012-01-24T10:57:00.006-05:00

Here is the memo that Larry Summers sent to President Obama when the 2009 stimulus package was being debated. It was originally confidential, but somehow it has recently been made public and is now going viral.

I make a brief cameo appearance on page 11: "Greg Mankiw is the only economist we have consulted with who refused to name a number and was generally skeptical about stimulus." I explained my skepticism here. Of course, the fact that I was "the only economist" expressing skepticism reflects the range of economists that Team Obama chose to consult.

How to Reform the Tax System

2012-01-21T18:53:00.000-05:00

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

Penn World Table Bleg

2012-01-21T11:01:00.008-05:00

I need some help from the growth empiricists out there. If you aren't one of them, stop reading. Continuing will be a waste of your time.

For researchers studying economic growth, one of the standard resources for cross-country data has been the Penn World Table. My 1992 paper with David Romer and David Weil (my most cited paper by a large margin) used this resource, as have numerous other papers in this literature. In my intermediate macro book, I present a couple of figures presenting some of these data.

Here's the problem: It seems that the data have changed substantially in the most recent revision, and I cannot figure out why.

My intermediate macro text shows a scatterplot of per capita income and the investment share of GDP. These two variables are strongly positively correlated. When revising this figure with the newest data, I found that the correlation declines substantially (though is still positive). When I looked into the source of the change, I found that the historical estimates of the investment share of GDP have changed, in some some cases by a lot.

Let me give you an example. Take the investment share for Ghana in the year 2000. According to version 6.2 of the data, the investment share was about 5 percent. In version 7.0, it was about 21 percent. This is one of the larger changes I have found, but it is not the only country for which there are sizable changes in the reported investment share of GDP.

I understand that the changes may be related to new information about the relative price of investment goods. But the changes seem too large to be explained so easily, although perhaps I am wrong about this. If anyone can shed light on the matter, I would be greatly appreciative. Send me an email if you can help.
-----

Update: I have not yet fully figured this out, but readers have sent me some useful links. If you are interested, click here, here, and here.

Mitt Romney and His Economic Advisers

2012-01-21T07:58:00.003-05:00

An article in the National Journal.

A Conference for Undergrads

2012-01-20T13:00:00.000-05:00

In international economics.

On SOPA

2012-01-19T22:41:00.001-05:00

Several readers have asked me my opinion of SOPA, the Stop Online Piracy Act. I fear that in this case, the devil is in the details, so I find it hard to reach a strong view. But I have been disturbed by the relatively knee-jerk reaction of the anti-SOPA crowd. This is a hard issue, and when someone makes it sound easy, I feel like they haven't thought it through very thoroughly.

The anti-SOPA crowd argues that this is a matter of basic liberty. But it's not. In a free society, you don't have the freedom to steal your neighbor's property. And that should include intellectual property. Moreover, it is the function of the state to enforce those rights. We don't leave it up to civil litigation to protect property rights (although that is part of the solution). We give the state substantial powers to stop theft. Just as owners of tangible personal property have good cause to call for a police force and a system of criminal courts, owners of intellectual property have good cause to ask the state to stop those who would infringe on their rights.

This is an important economic issue for the United States. We are large producers of intellectual property: movies, novels, software, video games, TV shows, and even economics textbooks. If offshore websites find a way to distribute this intellectual property without paying for it, it is as if organized crime were stealing merchandise from a manufacturing firm at the loading dock. It is neither efficient nor equitable.

Maybe SOPA goes too far. As I said, I am not knowledgeable enough about the details to judge. But we need something along these lines. Believers in free enterprise, property rights, and economic liberty should be among the most vocal advocates of laws to stop intellectual piracy.

Five Observations about Progressivity

2012-01-19T09:20:00.007-05:00

There has been a lot of discussion recently about tax progressivity. A few observations on the topic:

1. The U.S. personal income tax is generally progressive, and substantially so. Click here to see the numbers. The average tax rate for tax returns with over $1 million in income is 25 percent. The average tax rate for returns with income between $50,000 and $75,000 is 7 percent.

2. It is arguably better to use an average tax rate that is all-inclusive. That is, we should include not only personal income taxes but also payroll and corporate income taxes. CBO analysts regularly do that. They find a substantially progressive tax system, as I have pointed out before.

3. If we added transfer payments (which are essentially negative taxes), we would find an even more progressive fiscal system. Those data are harder to come by, as data on transfers are rarely integrated with data on taxes.

4. It make little sense to aggregate payroll taxes with personal income taxes and ignore corporate income taxes. A corollary: Paul Krugman should be more careful when reproducing graphs from partisan think tanks.

5. All of these calculations are static. They ignore the general-equilibrium effects that arise as the true burden of taxation is shifted by behavioral responses. In essence, these calculations are made under the implicit assumption that factors of production are supplied inelastically, so the tax stays where legislators put it. Of course, that assumption is implausible, especially in the long run. True general-equilibrium tax incidence is very hard, and as far as I know, reliable estimates on it are not readily available.

----
Update: Oddly, rather than admitting an oversight, Paul Krugman continues with the same misleading claims in his column in Friday's paper. Even more oddly, at his blog, he uses the tax-shift argument (my point 5 above) to justify the exclusion of the corporate tax. Of course, tax shifting because of behavioral responses applies to all taxes, not just corporate taxes. The implication of tax-shifting is not that one should just ignore corporate taxes, as Paul chooses to do, but rather that all static analyses of the distribution of the tax burden should be taken with a grain or two of salt.

Should I put this award on my CV?

2012-01-18T17:57:00.002-05:00

Peter Wirzbicki reports:

I just got back from Chicago, where, along with attending the American Historical Association, I participated in a series of protests held by Occupy Chicago, along with CACHE (Coalition Against Corporatization of Higher Education) that targeted the American Economics Association (AEA). It's not everyday that the worlds of street protests and academic conferences blend so well. But then again, part of the point was to “puncture the bubble” that academic economists live in.

The protesters gave out “alternative” awards for Most Conflict of Interests (Columbia’s Glenn Hubbard), Intellectual Narrowness (Harvard’s Greg Mankiw), and top prize, the “Toxic Waste of Space Award” (Harvard/Obama administration’s Larry Summers). Other than a brief yelling match that one protester got in with a professor, the tone was light and fun. Protesters “accepted” awards acting as Mankiw, Hubbard, and Summers (who reminded us how much smarter he was than us) and served “Rahmon” noodles, in honor of the Chicagoans impoverished by Rahm Emmanuel’s neoliberal policies. Overall a lot of fun, albeit fun that might have gone over the heads of the random shoppers on Michigan Ave.

Home for the Holidays

2012-01-18T13:00:00.000-05:00

From a University of Minnesota graduate student:

Sad News

2012-01-17T09:43:00.002-05:00

Michael Mussa has passed away.

The Strategic Bequest Motive

2012-01-16T17:03:00.000-05:00

A user of my intermediate macro text writes to me:

I always teach the strategic bequest motive in intermediate macro, mostly because it gets the students to think more deeply about why people save. While I have never really thought that strategic bequests are an important determinant of savings behavior, this story in today's NY Times moved my priors somewhat.

If you don't recall what the strategic bequest motive is, you can look it up in my text, or read the original research at this link.

The Santorum Tax Plan

2012-01-15T13:37:00.000-05:00

As seen by economist Kevin Hassett.

Dear Student

2012-01-13T12:02:00.000-05:00

A letter from econ prof Art Carden to students everywhere.

Judging Presidents

2012-01-12T19:34:00.003-05:00

Ezra Klein polls CEA chairs.

The Liquidity Trap may soon be over

2012-01-11T07:57:00.003-05:00

About a decade ago, I wrote a paper on monetary policy in the 1990s (published in this book). I estimated the following simple formula for setting the federal funds rate:

Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment).

Here "core inflation" is the CPI inflation rate over the previous 12 months excluding food and energy, and "unemployment" is the seasonally-adjusted unemployment rate. The parameters in this formula were chosen to offer the best fit for data from the 1990s. You can think of this equation as a version of a Taylor rule.

Eddy Elfenbein has recently replotted this equation. Here it is:

The interest rate recommended by the equation is the blue line, and the actual rate from the Fed is the red line.

Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession. Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going. But note that the rule is now moving back toward zero. As Eddy points out, "At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close."

How much are new econ PhDs paid?

2012-01-10T19:44:00.000-05:00

The results of a survey:

Responses from 90 institutions indicate that the average expected salary offer for the 2011-12 academic year is $89,155.... The average expected offer by Ph.D. degree granting institutions [is] $99,269.... The Top 30 institutions in the sample report an average expected offer of $115,000.... Bachelor and Master degree granting institutions report an expected offer of $74,520.

How to Reduce Traffic Congestion

2012-01-10T12:07:00.003-05:00

The price system, of course. New evidence from Seattle:

New tolls on the Highway 520 bridge have reduced traffic so much that drivers are commonly traveling at 65 mph, maybe three times as fast as they're used to.

Pigovian taxes save lives

2012-01-08T06:23:00.001-05:00

New research via the NBER:

On January 1, 1991, the federal excise tax on beer doubled, and the tax rates on wine and liquor increased as well. These changes are larger than the typical state-level changes that have been used to study the effect of price on alcohol abuse and its consequences. In this paper, we develop a method to estimate some important effects of those large 1991 changes, exploiting the interstate differences in alcohol consumption. We demonstrate that the relative importance of drinking in traffic fatalities is closely tied to per capita alcohol consumption across states. As a result, we expect that the proportional effects of the federal tax increase on traffic fatalities would be positively correlated with per capita consumption. We demonstrate that this is indeed the case, and infer estimates of the price elasticity and lives saved in each state. We repeat this exercise for other injury-fatality rates, and for nine categories of crime. For each outcome, the estimated effect of the tax increase is negatively related to average consumption, and that relationship is highly significant for the overall injury death rate, the violent crime rate, and the property crime rate. A conservative estimate is that the federal tax reduced injury deaths by 4.7%, or almost 7,000, in 1991.

A Few Days in the Windy City

2012-01-05T09:56:00.001-05:00

This afternoon I will heading off to Chicago, to the annual meeting of the American Economic Association. I am scheduled for various private events while there, but I am also speaking in one public session. For those who are attending the meeting and might be interested, here are the details:

Friday, January 06, 2012 10:15 am
Hyatt Regency, Grand Ballroom CD North

Short-Term and Long-Term Consequences of Tax Reform (Panel Discussion)

Alan Auerbach (University of California-Berkeley)
Gregory Mankiw (Harvard University)
James Poterba (Massachusetts Institute of Technology)
Joel Slemrod (University of Michigan)

De Gustibus non est Taxandum

2012-01-04T08:48:00.024-05:00

Bryan Caplan quotes a passage from Daniel Kahneman's Thinking, Fast and Slow (which I have not read, but plan to):

A large-scale study of the impact of higher education... revealed striking evidence of the lifelong effects of the goals that young people set for themselves. The relevant data were drawn from questionnaires collected in 1995-1997 from approximately 12,000 people who had started their higher education in elite schools in 1976. When they were 17 or 18, the participants had filled out a questionnaire in which they rated the goal of "being very well-off financially" on a 4-point scale ranging from "not important" to "essential."...

Goals make a large difference. Nineteen years after they stated their financial aspirations, many of the people who wanted a high income had achieved it. Among the 597 physicians and other medical professionals in the sample, for example, each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!

In other words, one reason that people differ in their incomes is that some people care more about having a high income than others. To put it in geekspeak, preferences over pecuniary goods (say, consumption) and nonpecuniary goods (say, leisure) are heterogeneous. Bryan goes on to suggest that to the extent this is true, it weakens the case for income redistribution.

He is absolutely right. Most of the literature on optimal taxation and redistribution, following Mirrlees, assumes homogeneous preferences. But Matthew Weinzierl has a recent paper on preference heterogeneity, which shows " to the extent that variation in income is due to preference differences rather than productivity differences, the optimal extent of redistribution is lower, and the neglect of preference heterogeneity biases the results of conventional optimal tax analyses in favor of redistribution of income."

By the way, the title of this post is taken from the Weinzierl paper.

The Reincarnation of Keynesian Economics

2012-01-03T19:46:00.001-05:00

The title of this post is the title of a short, relatively obscure paper I wrote twenty years ago. Here is the working paper version; here is the published (gated) version. To my surprise, Paul Krugman cites it over at his blog, but Scott Sumner wonders whether Paul really read it. In any event, it is delightful to see someone remember such an old paper.

Things I did not say

2012-01-03T08:23:00.058-05:00

One of the odd things about the blogosphere is that I often find myself being surprised by positions that are attributed to me. For example, Matthew Yglesias says:

Many proponents of low taxes on high-income individuals are "supply-siders" who claim that such a tax policy will maximize overall welfare. But other proponents of low taxes on high-income individuals such as Greg Mankiw deny that this is the relevant consideration, and simply say that progressive taxation is immoral.

If you follow the link that Mr Yglesias gives here, you will find it is to my paper "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber." Does this paper say that progressive taxation is immoral? No. In fact, while advocating what I call a "Just Deserts" approach to taxation, it says the following:

Public goods and Pigovian subsidies lead naturally to a tax system in which higher income individuals pay more in taxes. Surely, those with higher income and greater property benefit more from a governmental system that protects property rights. Moreover, the monetary value attached to other public goods (such as parks and playgrounds) and to positive-externality activities (such as basic research) very likely rises with income as well. Indeed, if the income elasticity of demand for these services exceeds one, as is plausible, a progressive tax system is perfectly consistent with the Just Deserts Theory.

What about transfer payments to the poor? These can be justified along similar lines. As long as people care about others to some degree, antipoverty programs are a type of public good. [Thurow 1971] That is, under this view, the government provides for the poor not simply because their marginal utility is high but because we have interdependent utility functions. Put differently, we would all like to alleviate poverty. But because we would prefer to have someone else pick up the tab, private charity can’t do the job. Government-run antipoverty programs solve the free-rider problem among the altruistic well-to-do.

Does that sound like someone who believes that progressive taxation is immoral?

Economics Humor

2012-01-02T15:08:00.000-05:00

Yoram Bauman (the economist, translator, and cartoonist) tells me that the 4th annual AEA humor session is coming up. It's Saturday January 7, 8 pm, Hyatt Regency Chicago, room Crystal B, free and open to the public.

Unfortunately, I will miss it, but I am sure it will be much fun.

More Competition

2011-12-31T22:18:00.000-05:00

U Chicago economist John Cochrane is now blogging.

A Half Dozen Short Takes

2011-12-31T17:51:00.000-05:00

To bring in the New Year, Sunday's NY Times offers up short pieces by all six economics columnists, including yours truly.

The Burden of the Debt

2011-12-30T07:32:00.001-05:00

Paul Krugman has several posts discussing the burden of the national debt. Some readers have asked me for my take on the topic. Let me refer them to this old paper I wrote with Larry Ball. It provides a nontechnical overview. Even though it is 16 years old, I think it holds up pretty well.

Jeremy Stein to the Fed

2011-12-27T17:39:00.001-05:00

President Obama has nominated my Harvard colleague Jeremy Stein to become a Federal Reserve Governor. This is an excellent choice. Congratulations, Jeremy!

(The President has also nominated Jerome Powell, whom I do not know.)

How do the rich earn their livings?

2011-12-27T12:01:00.004-05:00

Here is an interesting paper that answers the question. Some highlights from Table 3 about the top 0.1 percent:

18 percent are financial professionals.
42 percent are executives, managers, or supervisors in nonfinancial businesses. More than half of those are in closely-held (presumably often small) businesses.
7 percent are lawyers.
6 percent are in medicine.
3 percent are in arts, media, or sports.
Less than 1 percent are professors or scientists. :(

I win a journalism award

2011-12-27T07:54:00.001-05:00

Sort of. NY Times blogger Gene Marks puts one of my columns on his list of the Best Reads of 2011.

I wish you all a Merry Christmas, and also a New Year full of miracles

2011-12-24T10:19:00.005-05:00

Why, who makes much of a miracle?
As to me I know of nothing else but miracles,
Whether I walk the streets of Manhattan,
Or dart my sight over the roofs of houses toward the sky,
Or wade with naked feet along the beach just in the edge of the water,
Or stand under trees in the woods,
Or talk by day with any one I love, or sleep in the bed at night
with any one I love,
Or sit at table at dinner with the rest,
Or look at strangers opposite me riding in the car,
Or watch honey-bees busy around the hive of a summer forenoon,
Or animals feeding in the fields,
Or birds, or the wonderfulness of insects in the air,
Or the wonderfulness of the sundown, or of stars shining so quiet
and bright,
Or the exquisite delicate thin curve of the new moon in spring;
These with the rest, one and all, are to me miracles,
The whole referring, yet each distinct and in its place.

To me every hour of the light and dark is a miracle,
Every cubic inch of space is a miracle,
Every square yard of the surface of the earth is spread with the same,
Every foot of the interior swarms with the same.
To me the sea is a continual miracle,
The fishes that swim--the rocks--the motion of the waves--the
ships with men in them,
What stranger miracles are there?

-- Walt Whitman

The Ron Paul Portfolio

2011-12-22T14:24:00.000-05:00

As reported by the Wall Street Journal:

Most members of Congress, like many Americans, hold some real estate, a few bonds or bond mutual funds, some individual stocks and a bundle of stock funds. Give or take a few percentage points, a typical Congressional portfolio might have 10% in cash, 10% in bonds or bond funds, 20% in real estate, and 60% in stocks or stock funds.

But Ron Paul’s portfolio isn’t merely different. It’s shockingly different.

Yes, about 21% of Rep. Paul’s holdings are in real estate and roughly 14% in cash. But he owns no bonds or bond funds and has only 0.1% in stock funds. Furthermore, the stock funds that Rep. Paul does own are all “short,” or make bets against, U.S. stocks. One is a “double inverse” fund that, on a daily basis, goes up twice as much as its stock benchmark goes down.

The remainder of Rep. Paul’s portfolio – fully 64% of his assets – is entirely in gold and silver mining stocks....

At our request, William Bernstein, an investment manager at Efficient Portfolio Advisors in Eastford, Conn., reviewed Rep. Paul’s portfolio as set out in the annual disclosure statement. Mr. Bernstein says he has never seen such an extreme bet on economic catastrophe. ”This portfolio is a half-step away from a cellar-full of canned goods and nine-millimeter rounds,” he says.

The secret is out

2011-12-22T09:42:00.002-05:00

Click on image to enlarge.

Lessons from 2011

2011-12-21T16:55:00.000-05:00

As seen by Olivier Blanchard.

Holiday Gift Suggestions

2011-12-20T10:02:00.000-05:00

If you are looking for gift ideas for that special econonerd in your life, let me suggest a couple of books I recently enjoyed:

Both are intelligent, well written, and fun.

A Family Holiday Trip to NYC

2011-12-19T22:43:00.003-05:00

I just returned from New York City. My wife, three kids, and I went down to the city for a couple days, mainly to see the Broadway show How to Succeed in Business Without Really Trying before Daniel Radcliffe and John Larroquette step down from the lead roles.

It was much fun. Daniel Radcliffe in particular was fantastic. He provided the Mankiw family much consumer surplus.

Is modern capitalism sustainable?

2011-12-18T07:06:00.001-05:00

My Harvard colleague Ken Rogoff gives his answer.

Are economists selfish?

2011-12-17T10:19:00.000-05:00

Yoram Bauman takes up the question in a NY Times opinion piece, based on his research. In essence, he finds that being an economics major and taking classes in economics are negatively correlated with how much students donate to two particular charities: WashPIRG and Affordable Tuition Now.

I agree with Yoram's concluding sentence: "Learning about the shortcomings as well as the successes of free markets is at the heart of any good economics education, and students — especially those who are not destined to major in the field — deserve to hear both sides of the story."

Yet I am not persuaded by the evidence he gives that economics classes are failing to do that. Maybe, having heard both sides of the story, the students make better decisions, just not the ones that Yoram appears to approve of! Perhaps the students were persuaded by this famous insight: "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."

And no, that is not Gordon Gekko.

Books on Inequality

2011-12-14T10:31:00.003-05:00

Recommendations from MIT's Daron Acemoglu.

Shiller on Neuroeconomics

2011-12-13T08:15:00.001-05:00

Bob describes the research frontier at the border between economics and brain science.

This Year's Nobel Lectures

2011-12-12T18:49:00.005-05:00

From Tom Sargent and Chris Sims. Starts at about the 10:00 mark.

Steve Marglin on Heterodox Economics

2011-12-10T07:57:00.004-05:00

This is a talk from a few days ago, as part of the "Occupy Harvard" movement. Steve says a lot of interesting things here, and I agree with more than many in the audience might suppose. A main disagreement I have with Steve is pedagogical. I believe his critiques of mainstream economics should be presented after students have had a standard course like ec 10. That is, I would suggest Steve aim his course at sophomores rather than freshmen. If he did, he could attract a lot of economics majors who had just finished ec 10, rather than nonmajors who are avoiding it.

Coffee and the Age of Reason

2011-12-10T07:14:00.003-05:00

Taylor versus Krugman

2011-12-08T11:24:00.002-05:00

The Education of the One Percent

2011-12-07T21:29:00.002-05:00

The case for graduate school:

Apart from their bank accounts, Gallup finds education to be the greatest difference between the wealthiest 1% of Americans and everyone else. The Gallup analysis reveals that 72% of the wealthiest Americans have a college degree, compared with 31% of those in the lower 99 percentiles. Furthermore, nearly half of those in the wealthiest group have postgraduate education, versus 16% of all others.

A Discussion of Inequality

2011-12-06T09:28:00.000-05:00

A recording of a recent panel at Harvard's Kennedy School, including my economics department colleagues Larry Katz and Ed Glaeser. It takes over a hour.

Eichengreen on U.S. Fiscal Policy

2011-12-05T18:42:00.001-05:00

Barry writes:

Given low interest rates and the still-weak U.S. economy, it will be tempting for the U.S. government to continue running deficits and issuing additional debt. At some point, however, investors will recognize this behavior for the Ponzi scheme it is.

Continue reading here.

15 Years Later

2011-12-05T06:04:00.003-05:00

It was fifteen years ago today that Fed Chairman Alan Greenspan gave his famous "irrational exuberance" speech, which suggested that U.S. equities were overvalued.

Between then and now, on an annualized basis,

the return on the U.S. stock market has been 5.55 percent.
the return on the U.S. bond market has been 5.98 percent.

Score that as one point for Alan.

Sargent and Sims

2011-12-04T08:51:00.000-05:00

There is a nice profile of the new Nobelists in today's NY Times. Here is an excerpt for my army of ec 10 teaching fellows (and for teachers of introductory economics everywhere):

Economics, rather than politics, became his life’s work partly because of an inspiring teaching assistant named Jerry Kenley. Fifty years later, sitting in his office at N.Y.U., Mr. Sargent remembers his old T.A.

“Jerry liked to say, ‘Economics is organized common sense.’ I still think that’s about right,” Mr. Sargent says. Those early classes touched on everything from farm subsidies to taxation. “Wow, it really got me going,” he says.

My View of the Ec 10 Walkout

2011-12-03T19:39:00.000-05:00

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

Death to Pennies

2011-12-03T12:36:00.002-05:00

A theme I have written on before. Hat tip to Alex Tabarrok.

Is my ideology that obvious?

2011-12-02T15:04:00.000-05:00

A perspective on the Ec 10 walkout from Connel Fullenkamp, a former student who now teaches at Duke:

I really don’t think that Professor Mankiw was trying to brainwash his students with any conservative ideology or agenda. I make this statement based on my own experiences.... I was a teaching assistant for Mankiw’s first-year Ph.D. course in macroeconomics for two years, which means that I sat in on his entire course twice.

If there’s any strong ideological undercurrent in Mankiw’s teaching, I would say that it’s Nerdism: the belief that people should listen to, and learn from, nerds. Because believe me—and I say this with genuine respect and affection—Mankiw is a nerd’s nerd.

The Draghi Deal

2011-12-02T08:41:00.006-05:00

If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government spending is cut to put European governments on a sounder financial footing, monetary policy will do its best to ensure that any adverse impact on aggregate demand is kept to a minimum.

That seems a sensible compromise, given all the competing risks. Indeed a similar deal might well make sense for the United States.

My more liberal friends argue, based on Keynesian principles, that we need dovish fiscal policy as well. They often argue for short-run fiscal expansion coupled with long-run fiscal contraction. The problem is that fiscal policymakers cannot bind their future selves. It is hard to make commitments to future fiscal contraction credible, especially as short-run actions expand the budget deficit.

My more conservative friends argue, based on monetarist principles, that a dovish monetary policy risks future inflation. In my view, however, there are bigger risks than inflation just now. They include prolonged high unemployment and meager growth.

So I see Draghi as a fiscal hawk and monetary dove (at least under present circumstances). I wonder, which U.S. central bankers are in the same camp?

It's all Ben's fault!

2011-11-30T09:01:00.002-05:00

Have lunch with me

2011-11-28T11:39:00.004-05:00

To current ec 10 students (only):

I will take up to ten students out to lunch after Wednesday's lecture at Yenching, my favorite Chinese restaurant in Harvard Square. Email me if you are interested in joining the group. First come, first served.

Richard Epstein on Inequality

2011-11-28T10:54:00.003-05:00

Watch on PBS. See more from PBS NEWSHOUR.

What Milton Friedman might say to the Occupy movement

2011-11-26T11:04:00.000-05:00

Some classic clips. Thanks to Mark Perry for the pointer.

Thanksgiving Shopping Advice

2011-11-23T17:47:00.000-05:00

Don't overemphasize local foods.

And tomorrow, be grateful to the principle of comparative advantage.

Advice for Lost Graduate Students

2011-11-22T11:20:00.000-05:00

From Ariel Rubinstein.

Polling Economic Experts

2011-11-22T10:52:00.004-05:00

Chapter 2 of my favorite textbook has a table showing various propositions about which economists largely agree. It is based on the published results from several surveys. A new project by the IGM Forum is now regularly polling a diverse group of top economists on a variety of policy-related questions. It is a good way to see whether a professional consensus exists. You can follow the project by clicking here.

If you are curious, I declined being a member of the panel, mainly because time is scarce. Moreover, I have various other ways to let my opinions be known.

Straight No Chaser

2011-11-19T06:34:00.001-05:00

Last night was date night. My wife and I went to a concert by Straight No Chaser, the a cappella group famous for its rendition of the Twelve Days of Christmas. The tickets were a gift from our daughter. Thank you, Catherine.

The concert was terrific! A wonderful mix of music, from traditional holiday songs to Elvis Presley and Lady Gaga. You can find out if they are giving a show near you by clicking here.

The View from Penn (a shameless plug)

2011-11-17T10:11:00.002-05:00

My favorite textbook is used at the University of Pennsylvania. The student newspaper writes:

[Mankiw's] textbook, Principles of Economics, has sold more than one million copies worldwide. It is used in his own class and in Economics 002, Introduction to Macroeconomics, at Penn. The class, taught by Luca Bossi, enrolls about 200 students in the fall semester and 500 in the spring.

Bossi chose the textbook because he believes it is one of the best introductory macroeconomics texts available in the market. He adds that the material is “clearly explained” and does not contain any partisan slants.

“I think the fact that Professor Mankiw has advised and still is advising Republican candidates running for office gives the impression to people that he is a conservative in the way he approaches economics,” he said. However, this “is not reflected in the content of the book.”

Ugly Discrmination

2011-11-16T11:55:00.002-05:00

Chapter 19 of my favorite textbook has a case study on the economics of beauty, highlighting research by economist Dan Hamermesh. So I thought some blog readers might enjoy this Daily Show clip featuring Hamermesh and his work on this topic.

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

The British 1 Percent

2011-11-15T08:40:00.002-05:00

This figure, via Paul Krugman, shows the income share of the top 1 percent in the United Kingdom. The broad pattern is very similar to what U.S. data shows. The figure suggests that the explanation of growing inequality over the past several decades cannot be U.S.-specific but must have broader applicability.

You can generate more plots like this here. You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but much less so in France, Germany, Japan, and Sweden. Might the rising share of the top 1 percent be related to the increasing use of English as a global language?

The Long, Sad History of Industrial Policy

2011-11-12T18:03:00.000-05:00

Solyndra is only the latest chapter.

Supply-side Policies as a Way to Boost Aggregate Demand

2011-11-12T10:14:00.003-05:00

A new paper from the Philadelphia Fed makes an important point:

This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies.

On Leverage and Financial Regulation

2011-11-11T14:52:00.000-05:00

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

A Profile of Daniel Kahneman

2011-11-08T18:06:00.000-05:00

By Michael Lewis.

Darkness in Europe

2011-11-08T17:31:00.002-05:00

Berkeley economist Barry Eichengreen surveys the situation.

A Profile of OWS

2011-11-08T14:23:00.003-05:00

A Harvard colleague recommends this article on Occupy Wall Street.

Input from Cornell

2011-11-08T09:46:00.018-05:00

A student defends mainstream economics and endorses my favorite textbook:

Having used Mankiw’s textbook in an Introductory Economics class at Cornell, I can attest to the fact that the book lays a thorough and necessary foundation upon which to continue the study of economics and outlines the basic economic principles through which we understand much of our economy and society.

Why I am waking up so early

2011-11-08T05:16:00.001-05:00

I am scheduled to be on Fox and Friends this morning. The hit will be around 6:50 am, if you are awake, curious, and happened to be near a TV.

Update: Here is the clip.

What would John Maynard Keynes have said about Obamacare?

2011-11-07T12:45:00.003-05:00

It is impossible to know, of course, but this passage from an open letter Keynes wrote to FDR in 1933 offers some hints (emphasis added):

You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.

I know that some people would dismiss this appeal to the "confidence fairy," but clearly Keynes was a big believer in her importance to the short-run business cycle.

Race Against the Machine

2011-11-07T10:17:00.002-05:00

MIT economist Erik Brynjolfsson emails me:

I agree with your recent blog post that "the timing suggests that the two trends--the increasing value of education and the rising share of the top 1 percent--may be related." But how are they related? I think the biggest single factor is the digital revolution, which is boosting the economy and benefitting you, me and Paul Krugman, while leaving many people behind. The median worker's skills and our institutions aren't keeping up with accelerating technological change.

I discuss this in my very short new ebook (about 20,000 words) with Andrew McAfee called "Race Against the Machine: How the Digital Revolution Accelerates Innovation, Drives Productivity and Irreversibly Transforms Employment and the Economy". In it, we seek to reconcile the fact that the 2000s has been the best decade since the 1960s for productivity growth, better than the roaring 1990s even. And yet median wages have largely stagnated and employment actually has fallen since 2000. We attribute this in part to the fact that tech. progress is driving productivity even has it leaves many types of workers behind. In fact, a large group has been made worse off, even as those with education and talent have gained immensely, and opportunities for entrepreneurs are better than ever. In my judgment, the underlying trends are on track to accelerating in coming years.

Educating Oligarchs

2011-11-05T11:05:00.007-04:00

In a couple of recent posts (here and here), Paul Krugman claims that it is just wrong to think that increasing income inequality is largely about education, because much of the income gains have accrued to the very top of the income distribution--the much discussed 1 percent. Instead, he says, increasing inequality is about the growing influence of oligarchs.

I have been puzzled by Paul's argument. My initial reaction was that it struck me as a non sequitur. Even if the income gains are in the top 1 percent, why does that imply that the right story is not about education?

I then realized that Paul is making an implicit assumption--that the return to education is deterministic. If indeed a year of schooling guaranteed you precisely a 10 percent increase in earnings, then there is no way increasing education by a few years could move you from the middle class to the top 1 percent.

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

Let me give you a couple examples. I am comfortably in the top 1 percent. I believe that Paul, with his Princeton professorship, regular Times column, speaking fees, and moderately successful textbook, is there as well. I suspect (although cannot prove) that if he and I had stopped our educations after finishing high school, we would not have been anywhere near where we are in the income distribution. If that is correct, might it be better to think of education as the key rather than focusing on the growing influence of oligarchs?

I am inclined to think that education is important here in part because the large increase in the share of the top 1 percent from the 1970s to the present occurred together with the increase in the rate of return to education during this period documented by labor economists. It is possible, of course, that the the two phenomena just happened to occur simultaneously. But the timing suggests that the two trends--the increasing value of education and the rising share of the top 1 percent--may be related.

Addendum: Here is a related old post.

I speak with NPR

2011-11-03T16:24:00.000-04:00

Occupy Wall Street comes to Ec 10

2011-11-02T05:58:00.006-04:00

The Harvard Crimson has the story. Ironically, the topic for today's lecture is the distribution of income, including the growing gap between the top 1 percent and the bottom 99 percent. I am sorry the protesters will miss it.

Updates:

The open letter that attacks ec 10.
A student comes to ec 10's defense.
Here's what happened: About 5 to 10 percent of the class participated in the walk-out. At the same time, some previous ec 10 students came in to sit in the lecture as counter-protesters. The lecture then proceeded as planned.
The Crimson offers an editorial on the protest.

The Distributional Effects of the Perry Plan

2011-11-01T20:03:00.000-04:00

...as estimated by the Tax Policy Center.

Try This One

2011-10-31T22:52:00.000-04:00

Source.

More on a Nominal GDP Target

2011-10-29T18:00:00.001-04:00

Christy Romer makes the case for a new framework for monetary policy. She is kind enough to remind us of this old paper that Bob Hall and I wrote on the topic. For more on this subject, including further links, click here.

The Impact of Economics Blogs

2011-10-29T10:27:00.000-04:00

If this study is right, my providing you with this link will greatly increase its visibility.

My Lecture at Princeton

2011-10-29T08:35:00.002-04:00

I gave a lecture at my alma mater last week. You can watch it by clicking here. It's a bit over an hour.

The Budget Deficit

2011-10-27T10:21:00.000-04:00

A panel discussion at MIT, with Peter Diamond, Jeff Leibman, Deborah Lucas, Robert Solow, and yours truly. It takes about 90 minutes.

The Rich Get Poorer

2011-10-26T14:57:00.005-04:00

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

These recent numbers illustrate the broader phenomenon, discussed in this paper, that high-income households have riskier-than-average incomes.

Fates to Avoid

2011-10-22T23:19:00.000-04:00

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

Nordhaus on Energy Economics

2011-10-20T20:20:00.000-04:00

A smart friend recommends this article by Yale economist Bill Nordhaus. The Pigou Club endorses the conclusion:

The need for taxes on energy externalities such as carbon emissions is central to our ability to reduce the harmful side effects of economic growth. It is striking how the political dialogue in the US has ignored a policy that has so many desirable features. Perhaps, in the near future, faced with the deadline of a dire economic situation, negotiators will formulate such a policy. It would generate substantial revenues while bringing so many long-run economic and environmental benefits. Simply put, externality taxes are the best fiscal instrument to employ at this time, in this country, and given the fiscal constraints faced by the US.

After Keynesian Macroeconomics

2011-10-20T15:44:00.000-04:00

A reenactment of a famous collaboration, starring Ellen McGrattan as Robert Lucas and Pat Kehoe as Tom Sargent.

The Latest from Merle Hazard

2011-10-19T14:12:00.002-04:00

The Distributional Effects of 9-9-9

2011-10-18T21:19:00.000-04:00

...as evaluated by the Tax Policy Center.

A Target Path for Nominal GDP

2011-10-18T09:00:00.001-04:00

...is a monetary policy endorsed by Goldman Sachs economists.

The Increased Role of the Minimum Wage

2011-10-16T09:27:00.001-04:00

I am in the process of revising my intermediate macro book. As I was updating the section on the minimum wage, I was struck by how much the data has changed over three years. The minimum wage has a much larger role now than it did three years ago, in large part because of the legislated increase in the minimum wage from $5.15 to $7.25 an hour. For example, comparing the 2010 data with the 2007 data, one finds the following:

The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.
The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.
The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.

Question for class discussion: In light of what is occurring with the overall economy during this period, how would you evaluate the policy change regarding the minimum wage?

Even leftists believe in property rights

2011-10-14T08:50:00.003-04:00

...at least when it comes to their property.

From one of the recent protests:

Photo by Elizabeth Fama
Click on photo to enlarge.

The Monetary System of the Future?

2011-10-12T21:59:00.002-04:00

A friend sends me this photo from some of the recent protests.

The sign says, "1. End Debt-based Fiat currencies. 2. End Fractional Reserve and Compound Interest Banking. 3. End the Fed."

Question for class discussion: What kind of monetary system would satisfy these demands? What are the pros and cons of this alternative system?

The Nobel Prize

2011-10-10T07:03:00.001-04:00

Congratulations to this year's winners of the Nobel Prize in economics: Thomas Sargent and Christopher Sims. Richly deserved!