Fun Fact of the Day

Support for free trade seems to be rising:

Source. Click on graphic to enlarge.

Surprising Truths About Trade Deficits

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

Congratulations, Gita

Christine Lagarde Appoints Gita Gopinath as IMF Chief Economist.  
A great choice.

Economics Teaching Conference

I will be talking at the annual conference of the National Economics Teaching Association, to be held October 25-26, 2018, in Phoenix, Arizona. If you are interested in learning more about the meeting, click here for more information.

Now I love Mike Pompeo

How can you not after this story?

Job Opening

I am looking to hire a couple part-time RAs.  Information here. These positions tend to go to Harvard students, but I will consider applicants from comparable institutions.

Update: Positions are filled.

Bill Gates's Freshman Year

By the second semester of my freshman year at Harvard, I had started going to classes I wasn’t signed up for, and had pretty much stopped going to any of the classes I was signed up for – except for an introduction to economics class called “Ec 10.” I was fascinated by the subject, and the professor was excellent.

Mr. Gates does not say who the professor was. And since this predates my time at Harvard by about a decade, I don't know. Perhaps Otto Eckstein, who taught the course for many years.

Update: Mystery solved. Otto was indeed the head professor, but Mr. Gates was probably referring to his section leader Robby Moore, who is now at Occidental College. Professor Moore emails me:

Hi Professor Mankiw -- I was reading your blog, and just wanted to let you know that I was the teaching fellow who had Bill Gates in my Ec. 10 section.  (I actually sat next to you at the memorial service for our friend, Chip Case).  In any event, it was the Currier House section that met up in Radcliffe Yard, and the academic year was 1974-75.  Steve Ballmer was also in the section of about 25 students.  (I am sure it was the fall semester since Bill Gates dropped out of Harvard after the micro portion of the course and I believe Bill Gates was a sophomore at the time.)  Anyway, when he did come to class, which wasn't actually all that often if truth be told, he was quite argumentative, which is why I remembered him..  In fact, when I presented the standard theory of how a monopoly maximizes profits, and drew the standard diagram with the profits box at that Q where MR = MC, he jumped right up at the end of class and declared, "this theory is all wrong".......he drew a new diagram but with a different AC curve and his showed more profits at a Q where MR didn't equal MC.  I tried to explain to him that you couldn't just draw in any old AC curve.......it had to be consistent with the MC curve, and the profit box had to be the biggest where MC = MR, but I'm pretty sure he felt his analysis was better.   (In any event, that's my absolutely true Bill Gates Ec. 10 story.)

The rest is history.......I became a lowly Head Section Leader of Ec. 10 and created the first Readings/Workbook for the course, with all the course wide problem sets, past exams, and solutions, etc., and he started Microsoft.

What I have been reading

Great book by UCLA economist Sebastian Edwards about a key moment in American economic history. Many economists believe that the most important thing FDR did to help the economy recover from the Great Depression was to go off the gold standard. As part of that policy, he pursued laws that rewrote many bond contracts, annulling gold clauses. It was controversial then (and surely would be again if such an issue were ever to arise). Edwards does a wonderful job telling the story.

Thumbs up for DAFs

Today's NY Times has a long but ultimately unconvincing article about Donor-Advised Funds (DAFs). The headline and tone of the article suggest something nefarious is going on. But unless you think that future charitable spending is less admirable than current charitable spending, nothing of the sort is the case.

True, the money managers make some money from these funds, but they do for every pool of money they manage. Is contributing to a college endowment suspect because some money manager will be paid to invest the money? Of course not. Moreover, these fees need not be excessive. At the Fidelity DAF, which I use, I put the assets in low-cost index funds.

True, there is lack of transparency. But charitable giving need not be public. There is no law against anonymous giving to charities. Nor should there be.

Most important, the donor of the funds cannot get the money back to finance his consumption or that of his heirs. The money has to eventually go to IRS-approved charities. Putting money into a DAF is essentially a commitment to give that part of your wealth, plus all future returns on it, to charity. As such, DAFs should be applauded.

Singer, Songwriter, Central Banker

A friend emails me:

I’ve just been listening to Rich Clarida’s CD, Time No Changes.  It’s on Spotify.  Might be an amusing item for your blog!  The press has been talking about the fact that Goldman’s David Solomon is also DJ D-Sol, but it’s equally unusual to have a singer-songwriter as nominated Vice Chair of the Fed.

I recall seeing Rich perform years ago when he was a grad student at Harvard. (I was a grad student at MIT at the time.) He is indeed very talented.

FYI, you can hear a preview of the CD on itunes.

The most important book I've read this year

Larry Ball carefully looks at one aspect of the financial crisis--the collapse of Lehman Brothers--and documents that the conventional narrative, as told by many of the leading policymakers who were there, is false. According to Ball, the Fed failed to act as lender of last resort when it could have, making the financial crisis worse than necessary. In other words, at a crucial moment,  Bernanke and company did not summon the courage to act.

For serious students of macroeconomic history, a must read.

Update: Here is my Times column on the book.

A plea to economics journalists

I was recently reading an article by Greg Ip (one of best economics journalists around, by the way), and he used the following expression:

"the trade balance improved"

A quick google search finds this expression (and the related "the trade balance deteriorated") used many thousands of times by various writers. 

I would like to ask everyone to please stop saying things like this. Write instead:

"the trade balance moved toward surplus"

I know that is wordier, but saying "the trade balance improved" lends credibility to the view that trade surpluses are always good and trade deficits are always bad. That is not true, of course, and I doubt Mr. Ip intended that interpretation. But in light of all the craziness going on lately with regard to trade policy, it is best not to inadvertently give aid and comfort to the crazies.

An Effective Marginal Tax Rate

Interesting numbers from Phil Gramm and Robert B. Ekelund Jr.:

The bottom quintile earned 2.2% of all earned income in 2013, but after adjusting for taxes and transfer payments, its share of spendable income rose to 12.9%—six times its proportion of earnings. The second quintile’s share more than doubled, rising from 7% of earned income to 13.9% of spendable income. For the third quintile, middle-income Americans, the increase was much smaller, from 12.6% to 15.4%.

To put it another way, the effective marginal tax rate when a person moves from the bottom to the middle quintile is 1 - (15.4-12.9)/(12.6-2.2), or 76 percent.

Update: A reader points out that this calculation does not take into account various types of heterogeneity that might be correlated with income. True, but the graph in this old post shows that this probably does not matter much. Those in the bottom half of the income distribution face very high effective marginal tax rates.

A Response, along with a Movie Recommendation

A couple readers emailed me about yesterday's post, asking me whether I want to enforce the law. The implicit suggestion is that President Trump's immigration policy is simply law enforcement.

Of course, I believe in law enforcement, but enforcement has to be proportionate. Double parking is illegal, but we don't execute people for double parking. We give them a ticket.

The Trump administration's response to illegal immigration is vastly disproportionate. He paints a picture of the nation being ruined by illegal immigration, but that is just not true. He is doing great harm to many people to solve a problem that is largely fictional.

I don't pretend to fully understand Mr Trump's goals and actions, but his supporters seem motivated by a combination of understandable economic and cultural anxiety, misdirected blame, and in some cases latent prejudice. Mr Trump seems to play to that combination for purposes of self-aggrandizement.

Yesterday, I saw the movie Burden, a story about a man raised within the KKK community and his personal struggle to escape from it. I highly recommend the film. Along with the book Hillbilly Elegy, it does a good job of explaining the culture and perspectives of less educated white Americans, who are Mr Trump's base.

Anti-liberal Trolls

David Brooks:

For centuries, conservatives have repeated a specific critique against state power. Statism, conservatives have argued, has a tendency to become brutalist and inhumane because a bureaucracy can’t see or account for the complexity of reality. It tries to impose uniform rules on the organic intricacy of human relationships. Statist social engineering projects cause horrific suffering because in the mind of statists, the abstract rule is more important than the human being in front of them. The person must be crushed for the sake of the abstraction. 

This is exactly what the Trump immigration policies are doing. Families are ripped apart and children are left weeping by the fences constructed by government officials blindly following a regulation. 

This illustrates something crucial about this administration. It is not populated by conservatives. It is populated by anti-liberal trolls.