Tuesday, October 31, 2006

On Choosing a College

A student asks me about how to choose a college:

Hi Dr. Mankiw,

I'm a high school senior from Montclair, NJ, an avid reader of your blog (and textbook), and generally, a big fan of economics. I'm right in the middle of the college application process, and I was wondering whether you might be able to speak to the importance of getting an undergraduate degree in economics from a school with a top-notch economics program. Does the prestige of the program really filter down into the undergraduate education? Obviously, it matters a great deal for PhD programs,but would I be missing out, for example, if I chose Yale or Amherst, schools with strong but not fantastic economics programs, over a place like Harvard, MIT or Chicago? I mean,from a strictly "undergraduate economics education" standpoint, all other factors aside.

Thank you so much for all the help--I really consider you one of my most important intellectual influences.

[name withheld]

Economics departments are ranked based mostly on their research output, and teaching quality is not very correlated with research. Indeed, it is not even clear to me whether the correlation across economists in teaching ability and research output is positive or negative. On the one hand, productive researchers are more talented overall than nonproductive researchers, and that talent spills over to other activities, including teaching. On the other hand, to the extent that professors are focused on research, that can take time away from teaching. So don't expect to get much better teaching at higher-ranked schools than lower-ranked one.

The most important choice a high-school senior faces when choosing where to be an undergrad is between research-oriented universities and teaching-oriented colleges. If you go to a place like Harvard or Princeton, you get a famous faculty. But the first priority of that faculty is their own research and writing, and they are more likely to shower attention on grad students than undergrads. If you go to a place like Amherst, Swarthmore, or Williams, you get a faculty whose first priority is undergraduate teaching. But you do not have a menu of graduate courses to sample from, and you do not have as vibrant a research atmosphere to experience.

Having attended a small high school, I enjoyed being at a relatively large research university (Princeton) as an undergraduate. Given the career path I followed, that was the right choice. For someone who wants to consider a research career, being at a top research school conveys significant benefits: You get to know more active researchers early on, and you can attend a large array of research seminars. But those opportunities are not relevant for 90 percent of students at these schools, who will not go on to become PhD econonerds but will instead become doctors, lawyers, corporate executives, and so on. For those students, the choice of research university over teaching college is a closer call. I would still vote for the larger places like Harvard and Princeton, because they offer a more diverse range of activities and courses, but I would not argue too vehemently against smaller, more student-friendly colleges.

Larry Summers in the Pigou Club

I ran into Larry Summers at a party recently, and he asked to be inducted into the Pigou Club.

Larry reminded me of an article of his in the November 30, 1987 issue of The New Republic, called "A Few Good Taxes," in which he wrote:

Raising gasoline taxes would encourage energy conservation....It would also force motorists to pay more of the congestion, maintainance, and accident costs they impose by driving.
Welcome to the Club, Larry. Your secret decoder ring is in the mail.

On a related matter, membership in our facebook chapter is now up to 369.

Philanthropy and the Rich

The Bank of America reports on charitable giving among high-wealth individuals.

When asked how their giving would respond to a repeal of the estate tax, 5.5 percent say it would decrease, and 29.5 percent say it would increase. (See Figure 21.) This result is inconsistent with the conventional wisdom (as expressed in this CBO study, for instance) that estate-tax repeal would discourage philanthropy.

Either the conventional wisdom is wrong, or it is a bad idea to ask people how they would respond to hypothetical situations, or maybe both.

Better than a Nobel

The Independent reports:
The Governor of the Bank of England, Mervyn King, has announced that a portrait of Adam Smith will feature on a redesigned £20 banknote, to come into circulation next year.
The news comes under this headline:
The Big Question: Who was Adam Smith, and does he deserve to be on our banknotes?
Thanks to rgemonitor for the image.

Monday, October 30, 2006

2006 = 1958?

Harvard historian Niall Ferguson says this year's politics looks a lot like the politics of 1958, when the Republicans lost 48 House seats during Dwight Eisenhower's second term:

The parallel is especially intriguing because it was a combination of security concerns and economic woes that did the damage then. There had been a severe recession in the winter of 1957-58. But it was foreign policy that was on many people's minds. The previous year, the Soviets had successfully launched their Sputnik satellite, causing consternation among Americans, who had assumed their country had a built-in technological advantage in both the Cold War and the space race. Civil war was raging in Cuba; Fidel Castro was just a few months from victory. And in July, a coup d'etat had overthrown King Faisal II of — guess where? — Iraq, the prelude to the Baathist takeover of power in that country in 1963. American troops had been dispatched to Lebanon in response.

Ring any bells?

What's more, as happened in 1958, the combination of foreign policy setbacks and economic disappointments could set the stage not merely for Democratic gains at the midterms but for a Democratic victory in the presidential election two years down the line. Intriguingly, there is already a John F. Kennedy figure on the scene who, he recently admitted, has "thought about the possibility" of a bid for the White House. Youthful, charismatic and the personification of the American dream, Barack Obama, the junior senator from Illinois, has been this autumn's media sensation, his face on every talk show, his name in every column, his book rivaling Woodward's in the charts.

You think the U.S. is not ready for a black president? Well, back in 1958 you'd probably have said the same about an Irish Catholic.

Motherhood and Labor Supply

A new CBO study reports:
having a first child younger than one year old reduces female employment by 26.3 percentage points.
The study appears to do a good job of identifying exogenous fertility differences by comparing women who tried to conceive and succeeded with those who tried to conceive and failed.

A Freak Success

David Warsh tries to figure out why so many people are reading Steve Levitt.

Good Teachers

New research by Florian Hoffmann and Philip Oreopoulos (free link) tells us how to judge teaching ability:
subjective teacher evaluations perform well in reflecting an instructor's influence on students while objective characteristics such as rank and salary do not. Whether an instructor teaches full-time or part-time, does research, has tenure, or is highly paid has no influence on a college student's grade, likelihood of dropping a course or taking more subsequent courses in the same subject. However, replacing one instructor with another ranked one standard deviation higher in perceived effectiveness increases average grades by 0.5 percentage points, decreases the likelihood of dropping a class by 1.3 percentage points and increases in the number of same-subject courses taken in second and third year by about 4 percent.
If universities like Harvard take this research seriously when making promotion decisions, they will give less weight to research and more to student evaluations than they have historically.

The membership drive continues

The Princeton Alumni Weekly reports that George Schultz and Tony Lake have joined the Pigou Club:

While the initiative — which was co-chaired by former secretary of state George Shultz ’42 and former national Security Adviser Anthony Lake — is explicitly bipartisan, it challenges many aspects of the Bush administration’s national security approach....To promote energy independence, they call for a national gas tax that would start at 50 cents per gallon and increase by 20 cents each year for the next 10 years.
Here is the full report.

Today's Washington Post reports that economist Nicholas Stern is likely to join as well, but for somewhat different reasons:

Unchecked global warming will devastate the world economy on the scale of the world wars and the Great Depression, a major British report said Monday....

The author of the British report, Sir Nicholas Stern, a senior government economist, said that acting now to cut greenhouse gas emissions would cost about 1 percent of global GDP each year.

"The evidence shows that ignoring climate change will eventually damage economic growth," said Stern's 700-page report, an effort to quantify the economic cost of climate change.

Here is the Stern report.

Meanwhile, I am pleased to note that the Club's facebook chapter has jumped in membership from 73 yesterday to 219 today. We are still taking new members.

Government is too big, says the public

CNN reports:

Queried about their views on the role of government, 54 percent of the 1,013 adults polled said they thought it was trying to do too many things that should be left to individuals and businesses. Only 37 percent said they thought the government should do more to solve the country's problems.
And that's why Speaker Pelosi's first priority will be to shrink the size and scope of government.

Thanks to Arnold Kling for the pointer.

Sunday, October 29, 2006

Larry Summers, Columnist

Larry Summers has published his first piece as a columnist for the Financial Times.

How to join the Pigou Club

Kevin Burke, a student at the University of Pennsylvania, has opened a facebook arm of the Pigou Club. The group now has 73 members. Anyone registered in facebook is free to join.

One member posted a link to the above graphic from Foreign Policy. For previous Pigou Club posts, click here and here.

Women are catching up

The graph is from today's NY Times.

It's odd how the progress stalled from 1993 to 2001. The Clinton folk, who are usually eager to take credit for the economic developments of this period, will probably take a pass on this one.

Landes on Family Businesses

Today's NY Times reviews the new book by Harvard economic historian David Landes, titled Dynasties: Fortunes and Misfortunes of the World’s Great Family Businesses. A tidbit from the review:
Landes also wants to make a larger point, which is that the business-school mythos of the “professional manager” has led to a persistent underestimation of the importance of family firms. Fully a third of Fortune 500 companies can properly be characterized as family businesses, and on average they outperform the “professionally managed” firm by a surprisingly large margin.
I wonder how this affects David's view of the estate tax.

Saturday, October 28, 2006

So what else is new?

The Washington Post reports:
GAO Chief Warns Economic Disaster Looms
Click here for the solution.

My Politics

A comment on a previous post asks me whether I am a libertarian. I am, according to the world's smallest political quiz. See the red dot above--that's me.

Friday, October 27, 2006

Romer on Prop 87

Paul Romer has a nice ec10-level discussion of California's Prop 87.

Crook on Libertarians

Clive Crook explains why libertarians are lonely:
Today's main political battle is between those who want to run the economy from Washington and those who want to dictate the country's morals from Washington. (George Bush's Republican Party apparently wants to do both.) And we libertarians should not delude ourselves: If this is true, it is not because politics is letting people down but because most Americans feel comfortable in one or the other of those camps.
Crook is right that we get the kind of government we want. If libertarians want to win the battle of Washington, rather than simply airing their ideas to one another at Ayn Rand conventions, they have to make their point of view more palatable to the median voter. A politically successful libertarianism would have to be moderate and pragmatic.

Thursday, October 26, 2006

Making Life More Fair

Reported by ScrappleFace:

Dem Bill Would Force Obama to Share Charisma

Sen. Barack Obama, the presumptive 2008 Democrat presidential nominee, came under attack today from his own party when Democrats in the Senate introduced a bill that would force him to share his abundant charisma with his colleagues.

“Democrats never like to see an uneven distribution of the good things of life,” said one senate aide who helped to write the legislation. “ Sen. Obama has more than his fair share of charisma, while so many senate Democrats go without. It’s not right for so much charm and personality to be in the hands of so few.”

Under the terms of the measure, Sen. Obama’s charisma would be redistributed “to each Democrat senator according to his need.”

Reminds me of the classic Kurt Vonnegut story Harrison Bergeron.

The Return to Human Capital

Today's Washington Post reports:

How much is a bachelor's degree worth? About $23,000 a year, the government said in a report released Thursday.

That is the average gap in earnings between adults with bachelor's degrees and those with high school diplomas, according to data from the Census Bureau. College graduates made an average of $51,554 in 2004, the most recent figures available, compared with $28,645 for adults with a high school diploma....

The income gap narrowed slightly from five years earlier, when college graduates made nearly twice as much as high school graduates.

The last sentence caught my eye. It appears that the return to human capital, which increased so much over the past three decades, is now leveling off.

Alternatives to the Pigou Club

Today’s Wall Street Journal prints various letters in response to my oped on gas taxes. Rather than responding to to the specific points, or to all the comments posted on this blog, let me try to spell out more generally the alternatives from which we must choose.

Members of the Pigou Club favor higher Pigovian taxes in order to remedy externalities such as pollution and congestion while raising government revenue. If you aren’t a member of the Pigou Club, you most likely fit into one of these four categories.

1. You deny the existence of these externalities as a type of market failure. Perhaps you think you live in a Coasian fantasy world where people bargain without transaction costs to reach efficient allocations. (Note: I am not suggesting that Coase himself thought we lived in such a world—he considered it only a useful thought experiment.)

2. You recognize the externalities but you don’t think the government should try to respond to them. You are such a believer in small government that you are willing to live with inferior economic outcomes, such as pollution and congestion.

3. You recognize the externalities, think the government should try to correct them, but think the current low taxes we put on gasoline are sufficient. In this case, you have weighed and rejected the evidence, such as that of Parry and Small, that higher Pigovian would be optimal. (Parry and Small calculate an optimal tax of $1.01 for the United States in today's dollars. After my proposed phase-in of a $1 hike, the U.S. tax would be $1.40. Assuming 10 years of 3 percent inflation, the tax in real terms would approach almost exactly what Parry and Small recommend. By the way, the published version of Parry and Small was in the American Economic Review, September 2005.)

4. You recognize the externalities but think the government should try to correct the market failure through regulations (such as CAFE standards) or through market-based solutions that do not raise government revenue (such as cap-and-trade systems). Perhaps you are concerned that government would waste the extra revenue on useless government programs.

Let me respond to group 4, because my guess is that this is the largest group of antipigovians.

The reason I am less concerned that the extra revenue will be spent is that it already has been spent. The federal government has promised benefits to the elderly far in excess of what it can pay. At some point the nation will have to reckon with the looming fiscal gap. The most likely political compromise will involve higher tax revenue. We should, therefore, be ready to increase revenue in a way that does the least damage—or, better yet, the most good. If not Pigovian taxes, then other taxes will be increased.

An optimistic libertarian might hope that we can deal with the looming fiscal gap without raising the ratio of taxes to GDP above its current level. I wish I could believe that this were possible. In a previous oped, I advocated increasing, slowly but substantially, the age of eligibility for Social Security and Medicare. But even if we could scale back government spending in such a radical way, Pigovian taxes would not lose their appeal. Let’s use the extra revenue from Pigovian taxes to reduce distortionary taxes, such as income taxes. Politically unrealistic, you say? Surely, if a future government were so libertarian as to manage a radical reduction in entitlement promises to the elderly, it would have no trouble delivering equally radical cuts in income taxes. In fact, the tax cuts would be the easy part of the package.

Update: Some comments suggested new categories of nonpigovians, and some suggested the categories I described were strawmen. To be clear, my goal was to categorize, as logically as possible, the various points of view. Let me try to put the issue in terms of a flow chart.

Question: Do you believe consumption of gasoline is free of negative externalities leading to market inefficiency?

If YES, you are part of group 1.
If NO, continue.

Question: Do you believe that public policy should ignore these externalities?

If YES, you are part of group 2.
If NO, continue.

Question: Do you believe the current tax on gasoline sufficiently internalizes the negative externalities?

If YES, you are part of group 3.
If NO, continue.

Question: Do you believe the best remedy for the remaining externalities is a regulatory system rather than a higher tax?

If YES, you are part of group 4.
If NO, you are a member of the Pigou Club.

Wednesday, October 25, 2006

Rich vs Very Rich

Matt Miller has a hypothesis that might explain why so many professors I know are miffed about widening income inequality:

Here's my outlandish theory: that economic resentment at the bottom of the top 1 percent of America's income distribution is the new wild card in public life....

Lower uppers are professionals who by dint of schooling, hard work and luck are living better than 99 percent of the humans who have ever walked the planet. They're also people who can't help but notice how many folks with credentials like theirs are living in Gatsby-esque splendor they'll never enjoy.

This stings. If people no smarter or better than you are making ten or 50 or 100 million dollars in a single year while you're working yourself ragged to earn a million or two - or, God forbid, $400,000 - then something must be wrong.

Libel from Harvey Mansfield

A reader emails me:

Harvey Mansfield, your Harvard colleague in Poli Sci, wrote the following paragraph in a recent piece for the New Criterion:

"In the brand new building where I work, the lights go on and off, the shades go up and down, and the toilets flush, automatically, without your having to turn a switch or push a handle. Rational control has replaced individual virtue, which is subject to vagaries and may not be active or awake. The building where I used to work was shared with economists, who, living the sort of life they describe, had no incentive to flush and sometimes failed to do so."

Looks like another "ouch" for your blog.

As a long-time resident of Littauer, the building to which Harvey alludes, I can attest that this is not a problem.

This is my last scatological post for a while. I promise.

The UN Security Council

There is a current ongoing battle over who gets a seat at the UN Security Council. Here is some related economic research from Harvard's Ilyana Kuziemko and Eric Werker:

How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations

Ten of the fifteen seats on the U.N. Security Council are held by rotating members serving two-year terms. We find that a country’s U.S. aid increases by 59 percent and its U.N. aid by 8 percent when it rotates onto the council. This effect increases during years in which key diplomatic events take place (when members’ votes should be especially valuable) and the timing of the effect closely tracks a country’s election to, and exit from, the council. Finally, the U.N. results appear to be driven by UNICEF, an organization over which the United States has historically exerted great control.


What chemists think of economists

Stephen Colbert interviews 2003 Nobel Laureate in chemistry Peter Agre:

Colbert: "You said 'anyone who grew up on a farm knows that evolution exists'. Ok, are you saying a monkey can milk a cow?"

Agre: "Well, if I can milk a cow I suspect a monkey as smart as I am can milk a cow."

Colbert: "Are there monkeys as smart as you?"

Agre: "I'm sure there are quite a few, quite a few.

Colbert: "Oh really? mmhum. Do they give a Nobel prize for thowing your own faeces?"

Agre: "........That's the Economics prize, I think."

From Steve Sailer.

Tuesday, October 24, 2006

Pornography and rape are substitutes

Todd D. Kendall, an economist at Clemson University, reports that more pornography leads to less rape:

The arrival of the internet caused a large decline in both the pecuniary and non-pecuniary costs of accessing pornography. Using state-level panel data from 1998-2003, I find that the arrival of the internet was associated with a reduction in rape incidence. However, growth in internet usage had no apparent effect on other crimes. Moreover, when I disaggregate the rape data by offender age, I find that the effect of the internet on rape is concentrated among those for whom the internet-induced fall in the non-pecuniary price of pornography was the largest – men ages 15-19, who typically live with their parents.
Thanks to David Friedman for the pointer.

Speaker Pelosi Update

The betting at tradesports says the probability that the Republicans keep control of the House is now 34 percent. However, three political scientists have looked at the data and concluded:

Based on current generic ballot polls, we forecast an expected Democratic gain of 32 seats with Democratic control (a gain of 18 seats or more) a near certainty.
Thanks to Statistical Modeling for the pointer.

Monday, October 23, 2006

Henry George on Free Trade

Henry George, the 19th century economist and social reformer, is best known as an advocate for taxes on land (as discussed in Chapter 8 of my favorite economics textbook). But these quotations about trade (via Larry Kudlow) show that he was passionate about other topics as well:
I was educated a protectionist and continued to believe in protection until I came to think for myself and examine the question.
-Henry George

Free trade consists simply in letting people buy and sell as they want to buy and sell. Protective tariffs are as much applications of force as are blockading squadrons, and their objective is the same--to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading.

- Henry George, Protection or Free Trade 1886

Economic Journalism

Here's a video of five economics journalists (Peter Coy, Greg Ip, Steve Liesman, Eduardo Porter, and Andrew Serwer) discussing their jobs at an event at Dartmouth. It takes about 90 minutes.

Thanks to Voxbaby for the pointer.

Sunday, October 22, 2006

Why firms are holding more cash

Today's NY Times explains why U.S. corporations are increasing their holdings of liquid assets:

Upon analyzing a dozen factors that economic theory suggests could play a role, the professors [Thomas W. Bates, Kathleen M. Kahle, and René M. Stulz] found that the biggest was an increase in risk — as evidenced by factors like unpredictable cash flow. Corporations have become less able to count on steady cash flow from year to year, according to the professors, and despite the growth of a complex derivatives market, companies can’t adequately hedge this risk without holding more cash.
You can obtain the study from the NBER.

Saturday, October 21, 2006

What's a classical liberal to do?

The Economist says that Libertarians (aka Classical Liberals) may be the new swing voters:

In a new study from the Cato Institute, a libertarian think-tank, David Boaz and David Kirby argue that libertarians form perhaps the largest block of swing voters. Counting them is hard, since few Americans are familiar with the term “libertarian”. Mr Boaz and Mr Kirby count those who agree that “government is trying to do too many things that should be left to individuals and businesses”, that government, rather than promoting traditional values, “should not favour any particular set of values”, and that “the federal government has too much power”. Using data from Gallup polls, they found that, in 2005, 13% of the voting-age population shared all three views, up from 9% in 2002.

That is easily enough libertarians to tip an election. And their votes are up for grabs. In 2000 George Bush won 72% of the libertarian vote, to Al Gore's 20%, by repeating the mantra “My opponent trusts government. I trust you.” But in 2004, after Mr Bush increased the size of government and curtailed some civil liberties as part of the war on terror, his margin dropped to 59%-38%. The swing was as sharp in congressional races, too. Going back further, libertarians backed George Bush senior by 74%-26% in 1988. But when he sought re-election in 1992, they split evenly between him, Bill Clinton and Ross Perot. A group that can give the eccentric Mr Perot a third of its support must be really disgruntled.

But until they represent much more than 13 percent of the electorate, classical liberals won't feel completely at home in either major party.

Update: Here is the Boaz-Kirby study.

Defense Spending

National defense is a classic example of a public good. But, as these charts from the Wall Street Journal show, it has been shrinking over the past half century, both as a share of the economy and as a share of overall federal spending. (Click on graph to enlarge.)

Economics as Computer Game

There is a long history of trying to teach economics with computer games. For example, when my first textbook came out in the early 1990s, students could buy supplementary software that included a Presidential Game in which they used the tools of monetary and fiscal policy to promote low inflation and robust and stable growth. That game is now available at the publisher's website.

NPR now tells us about a professor at UNC-Greensboro who has taken the concept of economic gaming to a new level. Thanks to Mark Thoma for the pointer.

Friday, October 20, 2006

General Education at Harvard

Harvard is considering a new set of general education requirements. The student newspaper, the Harvard Crimson, notices a glaring hole in the latest proposal:

Is Wal Mart a hero or a villain? Will immigrants help or hurt the wages of native workers? Do sweatshops alleviate or exacerbate poverty? Will a gasoline tax hurt oil companies or consumers? How does limiting trade affect a country’s well-being?

In a system of general education focused on providing students with knowledge relevant to being a global citizen, it’s hard to see how students should not be pushed to grapple with questions like these. To that end, we propose an additional area of inquiry and experience to be added to those proposed by the Task Force on General Education: “The Market and Society.”

When the Task Force’s report was released two weeks ago, it became readily apparent that the invisible hand was nowhere to be seen. Indeed, of the many current courses that are listed as examples that would fulfill various requirements, only two economics courses were cited—and both had extensive prerequisites. Social Analysis 10, "Principles of Economics," the College’s largest course, had no clear place. Some have speculated that the omission of economics may be a product of faculty backlash against former President Lawrence H. Summers....

For the most part we support the proposed general education system, its focus on relevance, its vision of broad courses, and its general structure. The omission of a course on markets, however, is glaring. We encourage the faculty to add “The Market and Society” to plug this hole in the preliminary report.

This suggested amendment sounds good to me.

The Pigou Club Manifesto

In today's Wall Street Journal, I offer a manifesto for the Pigou Club, the elite group of pundits and policy wonks with the good sense to advocate higher Pigovian taxes. (Click here for a partial membership list.)

Raise the Gas Tax
By N. Gregory Mankiw

With the midterm election around the corner, here's a wacky idea you won't often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it. Here's why:

The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.

Road congestion. Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.

Regulatory relief. Congress has tried to reduce energy dependence with corporate average fuel economy standards. These CAFE rules are heavy-handed government regulations replete with unintended consequences: They are partly responsible for the growth of SUVs, because light trucks have laxer standards than cars. In addition, by making the car fleet more fuel-efficient, the regulations encourage people to drive more, offsetting some of the conservation benefits and exacerbating road congestion. A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects.

The budget. Everyone who has studied the numbers knows that the federal budget is on an unsustainable path. When baby-boomers retire and become eligible for Social Security and Medicare, either benefits for the elderly will have to be cut or taxes raised. The most likely political compromise will include some of each. A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap.

Tax incidence. A basic principle of tax analysis -- taught in most freshman economics courses -- is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.

Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes.

National security. Alan Greenspan called for higher gas taxes recently. "It's a national security issue," he said. It is hard to judge how much high oil consumption drives U.S. involvement in Middle Eastern politics. But Mr. Greenspan may well be right that the gas tax is an economic policy with positive spillovers to foreign affairs.

Is it conceivable that the policy wonks will ever win the battle with the campaign consultants? I think it is. Even after a $1 hike, the U.S. gas tax would still be less than half the level in, say, Great Britain, which last I checked is still a democracy. But don't expect those vying for office to come around until the American people recognize that while higher gas taxes are unattractive, the alternatives are even worse.

Update: Here and here.

Thursday, October 19, 2006

The Politics of Trade

It's getting ugly out there:

As lawmakers hit the home stretch of tight races, textile makers are leveraging voters' economic anxieties to win industry protections and derail free-trade initiatives.

Before Congress left Washington for final campaigning, anxious lawmakers shelved several items that the Bush administration had pushed as part of its trade agenda, but which the textile industry opposed. Now the question for the White House is how to get those efforts back on track -- especially if Democrats, who are traditionally less friendly to free trade, take control of one or both houses of Congress in November's voting.

The textile industry's maneuvering shows how Republican vulnerabilities in midterm elections have created opportunities for some special-interest groups....

when Bill Thomas, chairman of the House Ways and Means Committee, introduced a bill Sept. 21 that would give trade preferences to Africa and Haiti, lobbyists for Amtac and the National Council of Textile Organizations, another textile group, swung into action. They were especially worried about provisions in the bill that would allow Haiti to use more foreign-made fabric, such as cheap cloth from China, to make clothes, while still qualifying for duty-free access to the U.S. market.

The groups appealed to Rep. Robin Hayes, a North Carolina Republican, for help. A schoolteacher and former textile worker is running on the Democratic ticket in a closely watched race against Mr. Hayes, who agreed to lead the opposition against the Haiti bill. Mr. Hayes spoke to party leaders, then wrote a letter to Speaker Dennis Hastert arguing that the legislation could expose U.S. workers to "devastating" new competition.

The day before the Sept. 26 vote, lobbyists for the two textile groups took Mr. Hayes's letter and headed to Capitol Hill to rally support among other textile-district lawmakers. Ultimately, 16 Southern Republicans signed on....

Cafta [the Central American Free Trade Agreement] squeaked through the House by two votes, including one cast by Mr. Hayes. So when he sent Republican leaders the letter opposing the Haiti bill, they pulled the measure from the floor.

From yesterday's Wall Street Journal.

Leonhardt on Health Care

In yesterday's NY Times, David Leonhardt asks why Americans spend much more on health care than do the citizens of other countries, even though we don't seem to benefit with longer life expectancy:

The administrative costs of our patchwork bureaucracy eat up about 25 percent of health spending, which is why would-be reformers have long focused on these costs. But they aren’t the main story. Even in Europe’s single-payer systems, administrative costs account for about 15 percent of health spending, once everything is included, according to the Lewin Group, a consulting firm....

So something beside administrative costs is at work here, and it involves a basic cultural difference. Americans seem to be less willing to take no for an answer and more willing to try almost anything, no matter how expensive or how slim the odds, to prolong life. (The United States is also a fatter, more diverse country with wider income disparity, which gives our medical system a harder task.)

There are enormous benefits to the American refusal to go gently into that good night. It has made us obsessed with medical advances and turned this country into the world’s research laboratory. If you followed this year’s Nobel Prize announcements, you may have noticed that every scientific prize went to an American. Even hernia surgery, which has been around for 5,000 years, is now based in significant part on American methods, notes Raymond C. Read, a retired surgeon who has studied its history. Some of our spending, in short, goes to support medical care in other countries.

But much of it is simply wasteful. Expensive procedures — like some Alzheimer’s treatments, some knee surgeries and many body scans — are often no more effective than basic ones, according to research. Yet doctors can keep on getting reimbursed for the expensive ones. “Basically, anything that doesn’t kill patients is paid for by Medicare and insurance companies,” said Jonathan Skinner, a health care researcher at Dartmouth College.

If David is right, then the question is: What institution will we trust to say "no" to medical procedures that don't pass a cost-benefit test?

Pigou Club Update

The Washington Post gives the Pigou Club some much appreciated publicity.

Tuesday, October 17, 2006

A Few Things to Read

I have some speaking engagements to attend to over the next few days, so I won't be blogging much. Here are several things to keep you busy:

Blue Eyes and Marriage Patterns

The Boston Globe reports:

About half of Americans born at the turn of the 20th century had blue eyes, according to a 2002 Loyola University study in Chicago. By mid-century that number had dropped to a third. Today only about one 1 of every 6 Americans has blue eyes, said Mark Grant, the epidemiologist who conducted the study....

A century ago, 80 percent of people married within their ethnic group, Grant said. Blue eyes -- a genetically recessive trait -- were routinely passed down, especially among people of English, Irish, and Northern European ancestry.

By mid-century, a person's level of education -- and not ethnicity -- became the primary factor in selecting a spouse. As intermarriage between ethnic groups became the norm, blue eyes began to disappear, replaced by brown.

Harvard, the world's most elite dating agency, has most likely contributed to this trend.

Tierney on Wal-Mart and Sweatshops

A great John Tierney column in today's NY Times. A brief excerpt:
Has any organization in the world lifted more people out of poverty than Wal-Mart?...Making toys or shoes for Wal-Mart in a Chinese or Latin American factory may sound like hell to American college students -- and some factories should treat their workers much better, as Strong readily concedes. But there are good reasons that villagers will move hundreds of miles for a job. Most ''sweatshop'' jobs -- even ones paying just $2 per day -- provide enough to lift a worker above the poverty level, and often far above it.
We will be discussing the sweatshop debate later in the semester in ec 10.

Mallaby on Evan Bayh

Washington Post columnist Sebastian Mallaby takes a look at POTUS wannabe Evan Bayh:

With Mark Warner out of the 2008 Demstakes, the chief anti-Hillary centrist is Sen. Evan Bayh of Indiana. This is a depressing commentary on the state of the Democratic Party. Bayh may have cleared his schedule to woo Warner supporters on Thursday. But he has yet to prove himself a real contender -- and he may not be a real centrist, either.

Two weeks ago Bayh circulated a preposterous letter to his Senate colleagues. It urged them to oppose what Bayh called "documented unfair trade" in a type of steel that's used in vehicles. It noted the Commerce Department's finding that lifting the tariff on this steel would lead to dumping by foreign producers. That would hurt U.S. steelmakers, the letter continued; so when the fate of the tariff is considered at a sunset review tomorrow, it should on no account be lifted.

Presidential aspirants are supposed to champion the national interest, not special interests. Someone should tell Democratic hopeful Sen. Evan Bayh of Indiana. This is not a policy that protects workers, as Bayh's letter pretended. It's a sellout to a self-serving lobby. It would help the steel guys at the expense of the car guys, even though the car guys are hurting more and they employ more workers.

The tariff that Bayh wants to preserve is one of more than a hundred that protect the steel industry. These fortifications were erected on the theory that the steel business is inherently unfair because every nation in the world wants its own steelmaker. The creation of these national champions guarantees global oversupply of steel, or so the argument used to go. Therefore the United States had to protect itself from dumpers' unfairly low prices.

This argument was always flawed. If foreigners wanted to sell artificially cheap steel, the United States should have been happy to pocket the subsidy. But the protectionist argument is now worse than flawed, because the steel industry has changed substantially. A wave of mergers has rationalized some of the old national champions, and the alleged oversupply of steel has disappeared in the face of exploding demand from developing countries.

I don't know what Bayh's position is on candlemakers.

By the way, the sentence I put in bold is a standard argument which, I have learned, convinces most economists but almost no one else.

Monday, October 16, 2006

Phelps on Taxes

Ned Phelps, the latest econ Nobelist, talks to the Wall Street Journal and gives some policy advice that neither political party will embrace:

WSJ: Barring a breakthrough in productivity, how can the U.S. solve the problem of its impending obligations? Should it raise taxes or cut Social Security benefits?

Prof. Phelps: Over the last couple decades, the federal government has virtually abolished taxation of a wide swath of people with smallish incomes. This was a mistake, because we need all the tax revenue we can get. It's inefficient to have low marginal tax rates on low incomes, because people with upper middle incomes and high incomes get the same breaks, but they don't get any incentive to work harder. What you want to do is give tax breaks that give people an incentive to earn income that would not otherwise be earned. So in my view, President Bush should have restored the taxes on the low-income people rather than lowering the taxes on the high-income people.

U.S. and European Inequality

Income inequality in the United States is greater than it is in western Europe. Average income is also higher in the United States. This graph (source) puts those two well-known facts in a new light. (Click on the graph to enlarge.)

The bottom line: The poor in the United States have about the same real income as the poor in western Europe. The rich in the United States, however, are much richer.


From today's Washington Post, believe it or not:

Virtual economies attract real-world tax attention

Users of online worlds such as Second Life and World of Warcraft transact millions of dollars worth of virtual goods and services every day, and these virtual economies are beginning to draw the attention of real-world authorities.

"Right now we're at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise -- taxes, barter exchanges, property and wealth," said Dan Miller, senior economist for the Joint Economic Committee of the U.S. Congress.

"You could argue that to a certain degree the law has fallen (behind) because you can have a virtual asset and virtual capital gains, but there's no mechanism by which you're taxed on this stuff," he told Reuters in a telephone interview.

Neat Proofs

Thanks to Mahalanobis for these.

Welcome, American number 300,000,000

The U.S. population is about to reach 300 million. Am I concerned about overpopulation? No, I am not.

Update: Richard Posner is more concerned. Gary Becker is not.

Sunday, October 15, 2006

Prop 87 is not Pigovian

An ec 10 student asks me whether the Pigou Club approves of Prop 87, a ballot initiative in California, described by San Francisco Chronicle as follows:

Prop. 87 aims to raise $4 billion by placing a new tax on oil production, in addition to taxes oil companies already pay. The money would be used to finance research and development of alternative fuels; education campaigns; and subsidies to consumers who buy vehicles that use alternative fuels and businesses that produce and distribute alternative fuels.
The measure is supported by both Bill Clinton and Al Gore.

The goal of Pigovian taxes is to ensure that market prices reflect social costs. Once private and public interests are aligned, people are then free to make their own decisions over the allocation of resources, and they will have the right incentives to reach an efficient outcome.

By contrast, this measure seems more like government central planning. Indeed, the spending side of the proposition is exactly that. But what about the tax itself? Advocates claim that the tax would not be passed on to consumers. Given that oil prices are set in a world market, this claim seems about right to me. Most of the tax would likely be paid by local oil producers rather than oil consumers. Although this lack of pass-through to consumers may make the tax more attractive politically, it means that there would be no incentive working through the price system for people to cut back on oil consumption.

From a Pigovian perspective, the tax proposed by Prop 87 makes sense only if there are negative externalities from oil production in California. If we want Californians to produce less oil and import more from Saudi Arabia and Venezuela, then the proposed tax is well designed. But this goal does not seem the right one to me. I see negative externalities flowing from oil consumption rather than domestic oil production.

I doubt, therefore, that a majority of the Pigou Club would support the measure. But I am only one member. If the Club ever has a meeting, I will make sure to put the question on the agenda.

Gilbert on Happiness

Harvard psychologist Dan Gilbert gives a great talk at the TED conference on the secrets of happiness. It takes 22 minutes.

Barone on John Edwards

Michael Barone comments on POTUS wannabe John Edwards and poverty in America:

His stump speech includes a line about a little girl whose parents couldn't afford a winter coat. Give me a break. You can buy a little girl's winter coat at Wal-Mart for $10. That's the price of taking the little girl out to lunch at McDonald's. As Juan Williams points out in his book Enough: The Phony Leaders, Dead-End Movements, and Culture of Failure That Are Undermining Black America—and What We Can Do About It, no one in America is stuck in poverty if he or she does three things: graduates from high school; gets a job, any job; refrains from having children before getting married. Poverty comes not from any structural failure of society but from dysfunctional behaviors. Edwards's poverty shtick is a crock.
Barone fails to mention that we have textile and clothing imports to thank for all those cheap coats.

Saturday, October 14, 2006

Why MicroCredit?

Muhammad Yunus, the recent winner of the Nobel Peace Prize, explains why he prefers to help the world's poor with loans rather than grants of financial aid:

Many people ask, Why not just give free cash, especially under such dire circumstances? In Bangladesh, we've learned that when aid is free, not only do the poor get the least of it, but everyone inflates their needs. While some handouts are clearly necessary in such times, we focus on lending small amounts of money. This lets us keep costs down and rebuild funds for the next disaster. Most importantly, our Grameen banks are ready to act at a moment's notice. They can respond to a disaster without waiting for anyone's permission, immediately becoming like humanitarian agencies by suspending loan payments, and providing cash, food and medicines. Once rebuilding starts, the bankers keep detailed records of the money lent, and people are allowed to repay bit by bit.
Here is the entire Yunus article.

On Cell Phones and Indian Fishing

Sunday's Washington Post has a fascinating article about how cell phones have revolutionized the Indian fishing industry. (Yes, you read that correctly.)

The reader who alerts me to this story also sends along a paper on the topic by Kennedy School professor Robert Jensen. As far as I know, the paper is not available on the web, but here is the abstract:

When information is limited or costly, agents are unable to engage in optimal arbitrage. Excess price dispersion across markets can arise and goods may not be allocated efficiently; in this setting, information technologies may improve market performance and increase welfare. Between 1997 and 2001, mobile phone service was introduced throughout Kerala, a state in India with a large fishing industry. Using micro-level survey data, we show that the adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion, the complete elimination of waste and near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased.
The paper is forthcoming in the Quarterly Journal of Economics.

Signaling at the AEA Job Market

If you are an econ grad student about to go on the job market, this post is for you.

A PhD candidate from the University of Michigan sends me an email:

Hi Greg,

As a possible blog idea that would be well received by many econ grad students around this time each year, perhaps you could offer some thoughts as to the econ job market. How to best go about it, how to reduce noise in the process, how to sell oneself appropriately, ... Some insight as to the new signalling system offered by the AEA would also be most welcome! The latter is raising some real questions in my neck of the woods among this year's outgoing cohort (of which I'm one). Some like the idea as helping to reduce noise in the process by identifying some individuals' strong preferences. Others fear the inevitable interview question: "Why didn't we get a signal from you?" which can best be avoided by not sending any signal!

We'd all your insight on this whole process!

[name withheld]

On the job market in general, please see the links in a previous post.

Before receiving this email, I didn't know anything about the new AEA signaling system. I guessed (correctly, it turns out) that my Harvard colleague Al Roth would have something interesting to say. I emailed Al and got this in reply:

Hi Greg:

Indeed, I'm the chair of the AEA ad hoc committee on the Economics job market that put the new signaling mechanism into effect. (Last year we introduced the "scramble" web page in March, which will also operate this year.)

Just as the idea of the scramble was to add some thickness to the late (March-April) part of the market, the idea of signaling is to reduce some of the congestion in the thick, January interviews part of the market.

(Incidentally, Muriel Niederle is giving a seminar on it this Tuesday, in the behavioral/experimental seminar. She is on the committee too, and is doing some related theoretical work with Peter Coles.)

In terms of advice, we wrote the (attached) document, which also appears on the web now. [See the first link given above.] I'm also enclosing the scramble document which appeared last year and which isn't now on the web, but a revised version will reappear later in the market.

The basic idea of a signaling mechanism is that there is a big part of the market in which departments, in allocating scarce interview slots, have to form an assessment not only of how promising a student looks, but also of how likely that student is to be interested in them. (Harvard doesn't spend a lot of time worrying about that, but at Pitt, where I spent many happy years before coming to Harvard, we definitely factored that into our decisions.)

Of course students can send any signals they want in their cover letters, but because every cover letter expresses interest, that may be of limited help to departments in separating the signals from the noise. To some extent that may also apply to information in emails and letters from advisors. Those channels can all convey valuable signals of interest, of course. The new signaling mechanism is just a supplement to the traditional ways of signaling interest, and may be of most help to students who are interested in places to which they don't have other reliable means of conveying their interest. Because they can send a maximum of two signals through the AEA mechanism, the signals may convey some information.

So, what information should students try to convey? In our "advice to applicants" paragraph, we said

"The two signals should not be thought of as indicating your top two choices. Instead, you should think about which two departments that you are interested in would be likely to interview you if they receive your signal, but not otherwise (see advice to departments, above). You might therefore want to send a signal to a department that you like but that might otherwise doubt whether they are likely to be able to hire you. Or, you might want to send a signal to a department that you think might be getting many applications from candidates somewhat similar to you, and a signal of your particular interest would help them to break ties. You might send your signals to departments to whom you don't have other good ways of signaling your interest."

Basically we don't think students will often want to signal MIT or Princeton or Stanford or Chicago or other very competitive departments very often, because those departments can somewhat safely presume that they'll have a reasonable chance of being attractive to any students they interview. And we expect that departments will understand that they may not get signals from applicants who can demonstrate clear interest in other ways. So, in our advice to departments, we wrote

"Applicants can only send two signals, so if a department doesn't get a signal from some applicant, that fact contains almost no information. (See advice to applicants, below, which suggests how applicants might use their signals). But because applicants can send only two signals, the signals a department does receive convey valuable information about the candidate's interest.

A department that has more applicants than it can interview can use the signals to help break ties for interview slots, for instance. Similarly, a department that receives applications from some candidates who it thinks are unlikely to really be interested (but might be submitting many applications out of excessive risk aversion) can be reassured of the candidate's interest if the department receives one of the candidate's two signals."

If you wanted to give a very toy model of why signaling might be useful, you might want to start with the two-firm, two-applicant example in which on one even cares who works for whom, but each firm has only one interview slot, and can only hire someone they have interviewed. Then the symmetric equilibrium involves randomization (each firm randomly chooses one applicant to interview), and there is coordination failure half the time (when both firms interview the same applicant, so only one hire is accomplished). But if applicants can first send one signal, then even if they randomize to whom they send the signal (since they don't care in this simple example), then coordination failure is cut in half, if each firm adopts the strategy of interviewing the applicant whose signal they get in case they get exactly one signal. (Now, coordination failure is only a possibility when both applicants signal the same firm, in which case both firms randomly choose who to interview, which is the situation that existed in the absence of any signal...)

Al Roth

Thanks, Al.

Gabaix on CEO Pay

One highlight of my week was attending a seminar by Xavier Gabaix, the young star economist who was formerly a student in the Harvard PhD program and is now on the Princeton faculty. Xavier presented his paper on CEO pay . The above graph, from the Wall Street Journal earlier this week, shows the striking fact in need of explanation.

Here is the abstract of the paper (coauthored with Augustin Landier):

This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.
In Xavier's view, CEO's are earning the value of their marginal product. Top CEOs are paid high salaries because they are directing the fortunes of large enterprises, and even a small amount of extra talent is worth a lot.

Some people on the left have suggested that high CEO pay is a reflection of poor corporate governance, which allows CEOs to, in effect, steal value from shareholders. Xavier tests for this possibility using a measure of corporate governance and concludes, "Poor governance does increase CEO pay, but the effect seems small."

Another aspect of Xavier's work, however, should appeal to those on the left: In his model, high CEO salaries are pure economic rents. CEOs are paid what they are worth to their companies, and their high pay reflects the extraordinary value of their talent, but the supply of talent is inelastic, and the allocation of talent would not be affected if everyone faced high tax rates.

Xavier's model encourages people to think of CEOs as similar to Tiger Woods. Woods makes a lot of money because he is really, really good at golf. He is not stealing from those companies that pay him millions for endorsements. To the people paying Woods for his services, he is worth every penny. Yet if Woods were taxed at 50 percent, rather than 35 percent, he probably wouldn't give up golf or forgo the lucrative endorsements. (Response from the right: On the other hand, at a higher tax rate, Woods might play fewer tournaments each year. He might retire earlier. He might take more compensation as untaxed fringe benefits, such as a cushy private jet to fly to tournaments. And so on.)

Have Gabaix and Landier found the right model of CEO pay? It is too early to say. But there is no doubt that their paper will be a focal point of the literature on this topic.

Friday, October 13, 2006

A Second Nobel for Economics

Bangladeshi banker and economist Muhammad Yunus, whose system of micro-credit loans reshaped development efforts in poor nations, won the Nobel Peace Prize today, along with the bank he founded.
From the online Washington Post this morning.

The Nopigou Club

It must be good news for the Pigou Club when someone takes the time to form the Nopigou Club.

Thursday, October 12, 2006

The Latest on Outsourcing

It appears that outsourcing may not be destroying life as we know it (or at least not yet).

Multinationals cut down on outsourcing

The wave of outsourcing that has engulfed the global economy over the past few years is showing signs of abating as multinational companies opt for shorter and smaller deals, according to a study to be published on Thursday.

The outsourcing industry has just experienced its worst quarter in four years and is unlikely to match the $81.9 bn in contracts won in 2005 by the end of this year, data from the consulting firm Technology Partners International shows.

A slowdown in 2006 would mark the second consecutive yearly fall in the volume of outsourcing contracts since their $84.7 bn peak reached in 2004.

The results suggest that, following the drive to curb costs and streamline operations by contracting out non-core functions, multinationals might be running out of major operations to outsource.

Henderson on Phelps

On the opinion page of today's Wall Street Journal (subscription required), David Henderson has a nice piece on Ned Phelps. An excerpt:
Edmund S. Phelps is difficult to categorize politically. On the one hand, he decries the lack of dynamism in Europe (as he did on this page on Tuesday) and wants European governments to deregulate their economies. On the other, he believes that low-end jobs don't pay enough and wants the government to subsidize such jobs. He understands that the minimum wage prices people out of labor markets, resulting in "idleness, deprivation, drugs and crime." So, in his 1997 book, "Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise," he advocated a vast subsidy program that would have cost $125 billion in 1997 dollars, a whopping 1.5% of that year's GDP.

Wednesday, October 11, 2006

King on Monetary Policy

Mervyn King, the most charming central banker I know, offers his views about monetary policy in a globalized economy:

Some of you may be tempted to think that because the growth of the Chinese economy has affected key prices in our own economy, inflation in Britain is now largely determined overseas. Low inflation in industrialised countries, it is argued, is made in China. As with the Arthurian legends, epitomised by King Arthur’s Round Table above us, that too is a myth. Despite large changes in relative prices, the average change in prices – inflation – has been remarkably stable. Indeed, it is striking that in a decade in which prices moved so much, overall inflation was more stable than in any decade for a hundred years. It was a decade that in my first speech as Governor, I described as NICE– a non-inflationary consistent expansion.

How can inflation be stable when individual prices move around so much? The explanation is that inflation is the result, in the old adage, of too much money chasing too few goods. Inflation arises when the total amount of money spending (or nominal demand) in the economy is greater than the value today of the available goods and services. When the Bank of England changes Bank Rate to keep consumer price inflation close to the target of 2%, we influence – albeit imprecisely and with a time lag – the amount of money spent in the economy and so the inflation rate.

In short, inflation is made at home.

Goofiest Headline of the Year

You Might Have Him To Thank for Your Job
Professor Who Solved Stagflation Wins Nobel

From yesterday's Washington Post, writing about Ned Phelps.

Actually, given the fields in which we work, Ned may well have written an evaluation letter about me when I came up for tenure, so perhaps I do have him to thank for my job. But I doubt the same is true of the typical Washington Post reader.

Are all economists free-market purists?

Some of my fellow academics may think of economists as the right wingers on the faculty. A recent survey, however, suggests that most economists are moderates.

Is There a Free-Market Economist in the House? The Policy Views of American Economic Association Members

By Daniel B. Klein and Charlotta Stern

People often suppose or imply that free-market economists constitute a significant portion of all economists. We surveyed American Economic Association members and asked their views on 18 specific forms of government activism. We find that about 8 percent of AEA members can be considered supporters of free-market principles, and that less than 3 percent may be called strong supporters. The data is broken down by voting behavior (Democratic or Republican). Even the average Republican AEA member is middle-of-the-road, not free-market. We offer several possible explanations of the apparent difference between actual and attributed views.

According to the survey, the policy issues on which there is a particularly large divide between Democratic and Republican economists are the minimum wage, gun control, and redistribution. The issue of "tariffs to protect American industries" generates the strongest opinions overall; naturally, economists of both parties are opposed.

The paper considers several reasons why economists are often misperceived as free-market purists. Here is an excerpt:

Probably one of the most significant explanations for the erroneous free-market attribution is that almost all scholarly free-market supporters are economists. The center columns of Table 5 [actually Table 6] show that free-market supporters are practically non-existent in anthropology, history, political science, and sociology. There is a familiar heuristic bias of confusing a statement with its inverse. That is, if people perceive that every free market professor is an economist, they may slip into thinking that a preponderance of economists are free-market.
That sounds plausible to me.

Tuesday, October 10, 2006

Phelps on Capitalism

On the opinion page of today's Wall Street Journal, the newest nobelist Ned Phelps has a long essay comparing the U.S. economy to those of continental western Europe. The bottom line:
the free enterprise system is structured in such a way that it facilitates and stimulates dynamism while the Continental system impedes and discourages it....I conclude that capitalism is justified -- normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.
I recommend the entire article to give a good sense of Ned's worldview and writing style. Unfortunately, subscription is required.

Update: A commenter finds a free link to the article.

Pigou in MA

The Pigou Club is not doing well in my home state of Massachusetts. Two days ago, the Boston Globe reported:
A special state commission is expected to call for a 9-cent a gallon increase in the gas tax and reinstatement of tolls that had been eliminated in Western Massachusetts and in West Newton, according to two panel members.
The political reaction, reported the next day, was disappointing:
Gubernatorial candidates Deval Patrick [Democrat], Christy Mihos [Independent], and Lieutenant Governor Kerry Healey [Republican] yesterday came out in opposition to a gas tax increase being considered by a state commission studying transportation needs in Massachusetts.
I have to keep reminding myself that Sisyphus is my role model.

Monday, October 09, 2006


Over at the Open University blog, Darrin McMahon reports a striking statistic:

as recently as 1956, 400 members of the Princeton graduating class of 750 served in the armed forces. In 2004, that number was down to 9. And Princeton is positively military friendly when compared to schools like Harvard or Yale, where the faculty decided in 1969 that ROTC programs had no place on a progressive campus of lux et veritas. Despite the efforts of a vocal minority, the ban has not yet been lifted.
I have long thought that Harvard should bring ROTC back.

In my view, Harvard has a moral obligation to play an appropriate role in our nation's defense. No one benefits more from the freedoms that the military defends than academics, who use the freedoms of expression more liberally than the average American. It seems particularly reprehensible for us to free ride as completely as we do.

In addition, from a purely self-interested standpoint, Harvard as an educational institution would benefit from having more students who are considering a military career. If one judges "diversity" by worldview rather than merely skin color, more ROTC students would substantially increase the diversity of Harvard's student body. Their presence would enrich discussions in various history and government classes.

Finally, ROTC at Harvard would extend the university's reach in the world. We have run into diminishing returns filling the ranks of investment banking and management consulting. Wouldn't it be great if some of the next generation of military leaders launched their careers at Harvard? If the Harvard faculty wants to have influence, they should be eager to teach the next Colin Powell.

Some faculty see the Harvard ROTC ban as a protest against the federal government's treatment of gay military personnel. But to me the form of the protest seems particularly sanctimonious, as the faculty are asking for a sacrifice from others (in particular, from potential ROTC students and from other students who would benefit from a more diverse student body), while giving up relatively little themselves. I propose that any professor who wants to protest federal policy can do so personally by refusing to apply for or accept any grants from the federal government.

The envelope, please

This year's Nobel prize in economics goes to Edmund Phelps "for his analysis of intertemporal tradeoffs in macroeconomic policy."

A wonderful choice. To learn more, you can read the committee's summary of Ned's contributions.

Addendum: In the Nobel pool here in Cambridge, there were 209 entries. The favorites were Bengt Holmstrom (11.5%), No Correct Guess (10%), Robert Barro (10%), Oliver Hart (9%), Eugene Fama (7%), and Oliver Wlliamson (6%).

Update: I am told that one person out of 209 entries bet on Phelps.

Putnam on Diversity

This is the most disturbing piece of research I have read about recently.

Study paints bleak picture of ethnic diversity

A bleak picture of the corrosive effects of ethnic diversity has been revealed in research by Harvard University’s Robert Putnam, one of the world’s most influential political scientists.

His research shows that the more diverse a community is, the less likely its inhabitants are to trust anyone – from their next-door neighbour to the mayor....

The core message of the research was that, “in the presence of diversity, we hunker down”, he said. “We act like turtles. The effect of diversity is worse than had been imagined. And it’s not just that we don’t trust people who are not like us. In diverse communities, we don’t trust people who do look like us.”

Update: Putnam disputes this article's interpretation of his work.

Sunday, October 08, 2006

Gasoline Taxes around the World

From today's NY Times. The article by Daniel Gross gives the Pigou Club some much appreciated publicity.

Saturday, October 07, 2006

How to Write Well

When I was CEA chair, I sent the following guidelines to my staff as they started drafting the Economic Report of the President. A friend recently emailed me a copy, and I thought I would share them with blog readers. They are good rules of thumb, especially for economists writing for a general audience.

ERP Writing Guidelines

  • Stay focused. Remember the take-away points you want the reader to remember. If some material is irrelevant to these points, it should probably be cut.
  • Keep sentences short. Short words are better than long words. Monosyllabic words are best.
  • The passive voice is avoided by good writers.
  • Positive statements are more persuasive than normative statements.
  • Use adverbs sparingly.
  • Avoid jargon. Any word you don’t read regularly in a newspaper is suspect.
  • Never make up your own acronyms.
  • Avoid unnecessary words. For instance, in most cases, change
    o “in order to” to “to”
    o “whether or not” to “whether”
    o “is equal to” to “equals”
  • Avoid “of course, “clearly,” and “obviously.” Clearly, if something is obvious, that fact will, of course, be obvious to the reader.
  • The word “very” is very often very unnecessary.
  • Keep your writing self-contained. Frequent references to other works, or to things that have come before or will come later, can be distracting.
  • Put details and digressions in footnotes. Then delete the footnotes.
  • To mere mortals, a graphic metaphor, a compelling anecdote, or a striking fact is worth a thousand articles in Econometrica.
  • Keep your writing personal. Remind readers how economics affects their lives.
  • Remember two basic rules of economic usage:
    o “Long run” (without a hyphen) is a noun. “Long-run” (with a hyphen) is an adjective. Same with “short(-)run.”
    o “Saving” (without a terminal s) is a flow. “Savings” (with a terminal s) is a stock.
  • Buy a copy of Strunk and White’s Elements of Style. Also, William Zinsser’s On Writing Well. Read them—again and again and again.
  • Keep it simple. Think of your reader as being your college roommate who majored in English literature. Assume he has never taken an economics course, or if he did, he used the wrong textbook.

Speaker Pelosi

According to the betting at tradesports.com, the probability that the Republicans keep control of the House is now 44 percent.

Oct 14 Update: It's now down to 37 percent.

Women in Science

Richard Posner and Gary Becker dis the Shalala Report. If Larry Summers writes something on the topic, I will post an update.

Nobel Predictions

Today's Wall Street Journal joins in the speculation:

The Royal Swedish Academy of Sciences will announce its choice on Monday for the Nobel Memorial Prize in economics. As the day approaches, some of the world's best minds are engaged in a highly inexact science: predicting the winner.

The outcome is far from trivial. Though the winning work of Nobel laureates tends to be decades old, the prize confers great benefits beyond the purse of about $1.4 million, including a renewed influence in the public realm, canonical status and coveted bragging rights for the universities whose halls the laureates haunt. To date, the University of Chicago leads with nine laureates. Harvard has four, and MIT three....

Academics see several areas and names as "ripe" for a Nobel. Among the favorites: Harvard's Oliver Hart, whose work in contracts has helped economists understand why companies merge and split apart; Robert Wilson and Paul Milgrom, both of Stanford University, whose work in auction theory inspired the design of radio-spectrum selloffs; Columbia's Jagdish Bhagwati, whose work demonstrated that trade barriers are among the worst ways to solve domestic economic problems; and Chicago's Eugene Fama, whose idea that stock-price moves can't be predicted spawned a whole industry of specialized index funds.

Thomson Scientific, which produces an annual list of front-runners based on how many peers cite an economist's work, forecasts three possible combinations: Mr. Bhagwati, together with Princeton trade specialists Avinash Dixit and Paul Krugman; Mr. Jorgenson alone; and Mr. Hart, together with Bengt Holmstrom of Harvard and Oliver Williamson of Berkeley. Betting pools at Harvard and MIT favor Cambridge, Mass., locals such as Mr. Hart, Mr. Holmstrom and Harvard macroeconomist Robert Barro.

The following winners were on the Harvard faculty for part of their careers, sometimes very briefly: Kuznets, Merton, Arrow, Leontief, Schelling, Spence, Sen, and Fogel. But only the first four were on the faculty when they won the prize . We are, however, happy to take some credit for all of them, and also for those who were once students here, such as Samuelson, Solow, and Tobin.