Random Observations for Students of Economics
Here is a fascinating new paper by Mikhail Golosov, Michael Graber, Magne Mogstad, and David Novgorodsky on the effects of winning the lottery. The bottom line on what people do with their good fortune: "On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents."
In other words, people use their extra wealth not only to buy more goods and services but also to buy more leisure. As a result, "the introduction of a UBI will have a large effect on earnings and tax rates. For example, even if one abstracts from any disincentive effects from higher taxes that are needed to finance this transfer program, each dollar of UBI will reduce total earnings by at least 52 cents."
My intermediate macro book begins with a quotation from John Stuart Mill, which ends with this conclusion:
"My advice to you is to study the great writers on Political Economy, and hold firmly by whatever in them you find true; and depend upon it that if you are not selfish or hardhearted already, Political Economy will not make you so."
Run by my colleague Eric Maskin (aimed at graduate students in economics, now an online event).
Yesterday, President Biden said, "I will not impose any tax increase on people making less than $400,000. But it’s time for corporate America and the wealthiest 1 percent of Americans to just begin to pay their fair share....But I will not add a tax burden, additional tax burden on the middle class of this country. They’re already paying enough."
According to the nonpartisan Tax Policy Center, the middle class (defined here as the middle quintile of the income distribution) now pays about 13 percent of its income in federal taxes. The top 1 percent pays about 30 percent of its income in federal taxes.
I wonder: What constitutes a "fair share" in President Biden's eyes? On what basis does he conclude that the current distribution of the tax burden is not fair?
Click here to read my most recent paper, coauthored with Larry Ball. Here is the abstract:
This paper examines the optimal accumulation of capital and the effects of government debt in neoclassical growth models in which firms have market power and therefore charge prices above marginal cost. In this environment, the real interest rate earned by savers is less than the net marginal product of capital. We establish a new method for evaluating dynamic efficiency that can be applied in such economies. A plausible calibration suggests that the wedge between the real interest rate and the marginal product of capital is more than 4 percentage points and that the U.S. economy is dynamically efficient. In addition, government Ponzi schemes can have different implications for welfare than they do under competition. Even if the government can sustain a perpetual rollover of debt and accumulating interest, the policy may nonetheless reduce welfare by depressing steady-state capital and aggregate consumption. These findings suggest that even with low interest rates, as have been observed recently, fiscal policymakers should still be concerned about the crowding-out effects of government debt.
Raising the federal minimum wage to $15 an hour by 2025 would increase wages for at least 17 million people, but also put 1.4 million Americans out of work, according to a study by the Congressional Budget Office released on Monday.
A phase-in of a $15 minimum wage would also lift some 900,000 out of poverty, according to the nonpartisan CBO. This higher federal minimum could raise wages for an additional 10 million workers who would otherwise make sightly above that wage rate, the study found.
Potential job losses were estimated to affect 0.9 percent of workers, the CBO wrote, adding: "Young, less educated people would account for a disproportionate share of those reductions in employment."
Sebastian Mallaby was a good column on the GameStop phenomenon.
A family member also suggested a good hypothesis: The bubble is being being driven by internet trolls. The right model of a troll is a person willing to waste his time and money to get other people to waste their time and money.
If you want to see me at the upcoming virtual ASSA meeting, you can do so at this session:
Larry Summers makes a good case that, on this issue, Mitch McConnell is right, and Donald Trump, Nancy Pelosi, and Chuck Schumer are wrong.
I am the Robert M. Beren Professor of Economics at Harvard University. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.
