Friday, August 31, 2007

The Baker-Samwick Proposal

Economists Dean Baker and Andrew Samwick have a suggestion for how to deal with the rise in foreclosures:
There is a simple way to allow troubled homeowners to stay in their homes without also bailing out the mortgage issuers and speculators. Congress can pass legislation granting current homeowners the right to stay in their homes as long as they like, simply by paying the fair-market rent. In other words, no one gets tossed out on the street, as long as they can pay the rental value of their house. The fair rent would be determined by an independent appraiser.
Among the policy interventions I have heard floated in the current environment, this is one of the better ones.

Update: For a truly terrible idea, click here. Also, here is Arnold Kling's proposal for a new agency to fix the problem, wonderfully named Bailie Mae.

Number Crunching

Yale's Ian Ayres has assembled links to a variety of fun prediction tools. For example:
  • Predict How Long You'll Live
  • Predict Your Child's Due Date
  • Predict the Market Value of Your Home
  • Predict Your Child's Adult Height
  • Predict Justice Kennedy's Vote
Ian emails me to ask for more suggestions. If you know of any similar prediction tools, post them in the comments section.

You can also read the first chapter of Ian's new book Supercrunchers.

Inequality Up, Mobility the Same

Tyler Cowen points us to the latest research on the American Dream:

This paper uses Social Security Administration longitudinal earnings micro data since 1937 to analyze the evolution of inequality and mobility in the United States. Earnings inequality follows a U-shape pattern, decreasing sharply up to 1953 and increasing steadily afterwards. We find that short-term and long-term (rank based) mobility among all workers has been quite stable since 1950 (after a temporary surge during World War II).
Here is a free link to the paper.

Thursday, August 30, 2007

Advice for the College Bound

For those readers who are now, or will soon be, starting college, here are some words of wisdom from Conan O'Brien.

Clark on Africa

In this op-ed, Gregory Clark, author of the widely talked about book A Farewell to Alms, discusses "How to Save Africa."

A Subsidy for Country Clubbers

I am not exactly a redistributionist zealot, but this tax break for the rich had me slapping my forehead:
Charles River Country Club in Newton -- with its rolling fairways and carefully manicured putting greens -- received a $381,000 tax break last year under a state law that exempts private country clubs from paying 75 percent of their property taxes.
From the Boston Globe.

Surprise of the Day

Amazon's list of the most popular items in economics puts The Communist Manifesto well ahead of The Wealth of Nations and Capitalism and Freedom.

Wednesday, August 29, 2007

The Clinton Rally

I was not following politics closely while vacationing on Nantucket. So, to catch up on developments upon my return, I did what comes naturally to an economist: I checked market prices. According to intrade, the probability that Hillary Clinton will be the Democratic nominee is now better than two out of three.

Update: A reader emails an intriguing hypothesis to explain the rally:

Hello Dr Mankiw,

The last 5-10% of this move might be attributed to Intrade changing margin requirements on August 13th, which forced some large short Clinton /long Obama traders, already suffering losses, to liquidate. After the margin change, over-margined traders were extended a grace period of approximately one week, and from the 20th-22nd you can see the Obama contract drop sharply from 22 to a low of 15 on heavy volume and no real news. Given this, I think Obama is a buy here for a bounce back into the 20s.

Jason Ruspini

The relative price of a professor

A very interesting post from Brad DeLong on the compensation of college professors. It starts as follows:

In 1905 "G.H.M.", an anonymous college professor, wrote a four-page article for the Atlantic Monthly in which he pleaded for more money for college professor salaries, and claimed to be vastly underpaid. The first thing to note is the relative level of professorial salaries back then: he claimed that the "average college professor’s salary"--the salary that he saw as clearly inadequate and unfairly low--"is about $2,000." Stan Lebergott's estimates in the Historical Statistics of the United States are that the average annual earnings of an employee in America in 1905 were $490 dollars if employed for the entire year--or $451 taking account of the hazards of unemployment. What G.H.M. says is the average college professor's salary is more than four times annual average earnings of the time.

Today's professors don't make such large relative salaries (except in business, law, and medical schools). In order to match turn-of-the-century college professors in terms of income relative to the national average, a professor today would have to make an academic salary of roughly $250,000--a height far above any professorial average, and one attained only by academic celebrities.
I think Brad somewhat overstates how much things have changed. The average salary for full professors at private, doctoral universities is now $136,689. (Source.) To compute total compensation, you should include the value of employer-provided health insurance, contributions to retirement accounts, and other fringes. You might then get to around $160,000. (I am guessing that the 1905 prof did not get these fringes; there was no income tax to avoid.) I don't know what modern data are comparable to the Lebergott data, but average hourly earnings are now about $17, suggesting annual earnings about $34,000 for a full-time worker, with compensation (including fringes) a bit higher than that. The relative price of professors still seems to be about four.

Update: The comments raise a couple of fair points. First, with a more comprehensive group of professors, the average compensation would be lower, and the relative price today might be closer to three than four. Still, a professor need not be an "academic celebrity" to make four times as much as the average worker: Being a typical full professor at a private, doctoral university will do. Second, with the average American more educated today than a century ago, one would expect this relative price to have fallen, as it may have done to some extent.

Tuesday, August 28, 2007

The magic number 49

US News ranks Harvard as the second best national university, after my alma mater Princeton.

Looking at the new rankings reminded me of a conversation I had with a teacher at a mid-ranked university a few years. He told me that all classes of introductory econ at his school were, without exception, capped at 49 students. Why such an odd number?, I asked. He explained that the US News ranking penalizes schools based on the percentage of classes with 50 or more students. Deans, like all people, respond to incentives.

Monday, August 27, 2007

My Last Beach Read of the Summer

I recently read Nineteen Minutes by Jodi Picoult. A friend called the novel to my attention because, on page 449, my favorite economics textbook makes a brief appearance. One of the characters, an economics professor, assigns the text in his introductory microeconomics course at the fictional Sterling College.

Picoult's book is about the events surrounding a school shooting, and it is most definitely a page turner. But I don't think the novelist quite manages to get inside the head of an economist. Here is a line from the book (page 130) about the econ prof:
Reaching for some chalk, Lewis began to print across the board, a long and lovely stream of numbers that calmed him inside.
She seems to think we are even nerdier than we are.

Romer on Growth

Here is a new podcast of Paul Romer talking about long-run economic growth.

Publish or Perish

For my academic colleagues obsessed with using Google-Scholar to count citations to their own and others' work (I won't mention names), I recommend downloading the free software Publish or Perish.

Sunday, August 26, 2007

Saint Larry

Larry Summers wants to reform Fannie and Freddie, but he suggests now is not the time:
I am among the many with serious doubts about the wisdom of the government quasi-guarantees that supported the government-sponsored entities, Fannie Mae, and Freddie Mac. But surely if there is ever a moment when they should expand their activities it is now.
This reminds me of Saint Augustine: "Oh Lord, give me chastity, but do not give it yet."

The Fair Tax

Friday, August 24, 2007

Becker and Posner on the Fed

Gary Becker gives his take on Fed policy during this financial crunch. Richard Posner also comments, concluding as follows:
Studies in cognitive and social psychology have identified deep causes for the overoptimism, wishful thinking, herd behavior, short memory, complacency, and naive extrapolation that generate speculative bubbles--and that require heavy doses of reality to hold in check. Any efforts to soften the blow will set the stage for future bubbles.

Thursday, August 23, 2007

Cato takes on the Pigou Club

A new Cato Institute publication says "state and federal gasoline taxes should be abolished." I have not read it thoroughly enough to comment (the weather has been too nice and my kids are still out of school), but as founder of the Pigou Club, I thought I should alert my blog readers to this new study on the principle of full disclosure.

I do have one question for the authors: If Congress were considering repeal of the gasoline tax together with an income tax increase to make up the lost revenue, would you favor this revenue-neutral change in the tax mix?

Update: Jerry Taylor from Cato emails me:
The answer to your question is that we would favor an elimination of federal highway and mass transit spending to correspond with an elimination of the federal gasoline tax. Highway and mass transit programs are more appropriately shouldered by state and local governments.
Judge for yourself whether that answers the question.

Wednesday, August 22, 2007

Susan Athey

Here is a profile of my Harvard colleague Susan Athey, written by Joshua Gans (who, coincidentally, is a coauthor of the Austalian adaptation of my favorite economics textbook).

Life Expectancy as a Gauge of Healthcare

John Stossel reports:
The WHO judged a country's quality of health on life expectancy. But that's a lousy measure of a health-care system. Many things that cause premature death have nothing do with medical care. We have far more fatal transportation accidents than other countries. That's not a health-care problem. Similarly, our homicide rate is 10 times higher than in the U.K., eight times higher than in France, and five times greater than in Canada. When you adjust for these "fatal injury" rates, U.S. life expectancy is actually higher than in nearly every other industrialized nation.

Tuesday, August 21, 2007

Pigou on Steroids

Here is a proposal for a Pigovian tax on some professional baseball players:
He [J.C. Bradbury, author of The Baseball Economist] proposes that the players' union should adopt its own testing policy. The union itself would fine players who use steroids and distribute the fines among the other players—very sensible, since steroid users are imposing costs on other members of the union.
Sounds good to me.

Lunch with Ned

Did the Marshall Plan matter?

Monday, August 20, 2007

May you live in interesting times

This is the VIX index, which uses options prices to measure expected stock market volatility over the next 30 days. The latest run-up is striking. It suggests that the recent bumpy ride in financial markets is likely to continue for a while.

Sunday, August 19, 2007

An Introduction to Abstract Math

My son Nicholas (soon to be a 7th grader) and I have been reading together Mathematics: A Very Short Introduction by Timothy Gowers, winner of the Fields prize. The book is not a primer but a wonderful, basic introduction to the idea of mathematics as an exercise in abstract, rigorous reasoning.

Gowers uses a series of intriguing yet simple examples to explain how mathematicians think about what they do. I love the questions he addresses: For example, how can one prove, from first principles, that 0 x 0 = 0, or that 2 to the power of 1/2 equals the square root of two? (If questions like these strike you as nonsensical, that just goes to show, Gowers might say, that you have not thought about the issues in a sufficiently fundamental way.) Or how can one prove that the square root of two is an irrational number?

Here is a fun problem from the book: Consider an NxN square grid made up of 1x1 unit squares. Now take away from this grid two corner squares from diagonally opposite corners. The resulting board, which is now a square with two notches, has NxN-2 unit squares. You are then given dominoes with dimensions of 2x1. For what N can you completely cover the board with these dominoes?

Think about the problem on your own. I will post the answer (or at least part of it) as the first comment.

Econ Blogs

Here is a new ranking of economics blogs, based on Technorati data.

Saturday, August 18, 2007

Ned Gramlich

From the NY Times, a sad update on the distinguished economist and policymaker Ned Gramlich.

Friday, August 17, 2007

Econ in Cyberspace

Wondering what to do with that economics degree? Here is a new kind of job opportunity.

Virtual world hires real economist

Like many central bankers, Eyjolfur Gudmundsson spends his days fretting about inflation, making sure monetary growth is reasonable and trying to collect data about the economy. The difference is that the economy Guodmundsson oversees exists only in the virtual world of Eve Online, a science fiction computer game run out of Iceland. Guodmundsson is the newly appointed chief economist for CCP Games.

Continue the story here.

Thursday, August 16, 2007

From Yoram Bauman

Here is the latest clip from the standup economist (who, you may recall, previously translated the ten principles of economics). If you enjoy these, check out also his bumper sticker routine.

Update: Here is an article about Yoram.

Levy on China

Phil Levy, the international economist I once had the pleasure to work with at the CEA, has a nice piece on the farce called U.S. China policy.

Wednesday, August 15, 2007

Professor Vickrey must be smiling

Thanks to some federal prodding, it looks like congestion pricing may well come to San Francisco and New York City.

Stock Market Valuation

The perspective of Robert Shiller, via David Leonhardt. (Click on the graph to enlarge.)

From Keynes to Whom?

I have not read the book, but I love the title.

Tuesday, August 14, 2007

What I learned on my summer vacation

Nantucket residential real estate is selling at about three times the price it was a decade ago. According to one conversation I had with a realtor, the price of a summer house now is about 30 times the gross annual rental income that the house commands. A bubble, perhaps?

Monday, August 13, 2007

How We Spend Our Time

From economists Erik Hurst and Mark Aguiar in the QJE, via yesterday's Boston Globe:
For men, much of the gain in free time comes from a decrease in on-the-job hours. Their core market work has dropped [since 1965] from 42 to 36 hours weekly, the economists say....The average "core" time women spend on the job has climbed a bit, from 19 to 23 hours, but their total nonmarket work has plummeted -- from 33 to 23 hours....A depressing finding is what we do with our alleged extra time: mostly, watch TV. Hobbies are flat while reading and socializing are both down.

Sunday, August 12, 2007

Frank on Economics Education

Cornell's Robert Frank thinks most teachers of introductory economics are doing a lousy job.

Saturday, August 11, 2007

PhD or not?

A student wonders whether he should pursue a PhD in economics:
Would you recommend someone to do a PhD if he knows he's unlikely to become a star in the field (weak math background due to lack of trainings and not being particularly gifted; lack of confidence in his creativity and talents) and does not have a burning desire to do research, but has interests in social science, enjoys learning, and likes to be able to interact with people he admires and respects? Or do you think it's better for him to work first until he's certain that research is what he wants to do?
A PhD takes quite a bit more time and concerted effort than most graduate degrees. An MBA is two years, a JD is three years, while a PhD is often about five or six years. This fact has a couple implications. First, you should be more confident that you really want the degree before you start (although there is nothing dishonorable about starting a PhD and then changing your mind after a year or two once you recognize that it is the wrong path for you). Second, you should not take off much time after college before starting. A year or two is fine, but more than that can be problematic, for the simple reason that as most people approach age 30, their willingness to lead a student lifestyle diminishes.

If one has the requisite degree of enthusiasm and commitment, however, one needn't be a superstar to pursue a PhD. A person can be perfectly happy with a PhD from a lower ranked school, followed by a career as a college teacher. There are thousands of economics professors around the country (as well as PhD economists in government and the private sector), and most lead very satisfying lives without ever being candidates for the Nobel prize. The one thing they share is a passion for the study of economics.

Financial turmoil...

Friday, August 10, 2007

Economics for Young Kids

A reader asks for a recommendation:

Dear Prof. Mankiw,

I'm a big fan of your intro book and your blog. I've used your book at Centre College, a small, selective liberal arts college near Lexington, Kentucky, since the first edition.

A family friend with two young daughters, ages 8 and 10, has asked my wife to ask me, "Maya was asking why the same things today cost so much more than years ago; Isabel wanted to know if the people who made those things years ago have so much more money now, since prices have risen. Does Bruce have any suggestions on books for kids to understand inflation, etc.?"

I don't know of anything and was wondering if you have any recommendations? If not, no need to reply--you must be swamped with e-mail.

Thanks so much,
Bruce Johnson

I don't have a lot a great ideas for you. I sometimes talk with my kids about economics, but I don't push it on them, and I have never given them any assigned reading!

One resource for educational material is the National Council on Economic Education. Much of their material is for high school students and teachers, but some is aimed at younger ages. Readers are encouraged to post their suggestions in the comments section.

As long as we are on the topic of children's books, I cannot help but mention Ellsworth, which sadly seems out of print. This picture book (aimed at ages three and up) does not teach any economics, but here is the plot summary:
Because Ellsworth, a dog, behaves too much like a dog when he is off duty, he is asked to leave his job as economics professor at Wallywell [University], causing him quite natural concern for the future.
Don't worry: It ends happily ever after.

What I've been reading

Special Topics in Calamity Physics. A bit too verbose for me, especially the first half of the novel, but fun nonetheless.

Thursday, August 09, 2007

Are pigs flying yet?

From this interview of Barack Obama, it looks like there may be a major presidential candidate ready to join the Pigou Club:

Q: Do you believe that we need a carbon tax in addition to a cap-and-trade program?

A: I believe that, depending on how it is designed, a carbon tax accomplishes much of the same thing that a cap-and-trade program accomplishes. The danger in a cap-and-trade system is that the permits to emit greenhouse gases are given away for free as opposed to priced at auction. One of the mistakes the Europeans made in setting up a cap-and-trade system was to give too many of those permits away. So as I roll out my proposals for a cap-and-trade system, I will price permits so that it has much of the same effect as a carbon tax.

Obama is right that if permits are auctioned, a cap-and-trade system has effects that are similar to a carbon tax. (Here is a previous post of mine on the topic; see also this post from a fellow econoblogger.)

I have not liked Obama's previous economic ideas (see here and here), but if he follows through on what he suggests in this interview and proposes a cap-and-trade system with auctioned permits, I will be impressed.

Update: In related news, Congressman John Larson joins the club: He introduced a carbon tax bill last week. President Bush declines membership.

Pigou Club News: CEO Edition

It is rare to see a CEO call for a tax on a complementary product, but it can happen if the alternative is worse.

Mulally: Gas tax worth exploring

Ford Motor Co. CEO Alan Mulally called the federal government's mandatory fuel economy requirements a failed program and suggested a tax on gasoline might do more to achieve energy independence and help the environment....

"I have never seen a market-distorting policy like CAFE," Mulally said. "It's a policy that forces you to put out more small cars than there is consumer demand for to make the bigger cars that people really do want. "You're trying to force the market instead of being market-driven."

Puzzle Solved

Now I understand why my colleagues take so many trips to Stockholm:

winning the Nobel Prize, rather than merely being nominated, is associated with between 1 and 2 years of extra longevity.
From Matthew D. Rablen and Andrew J. Oswald.

What are imaginary numbers good for?

I like doing math with my son Nicholas, who is about to enter the 7th grade. Yesterday, he asked me the question in the title of this post, and it stumped me. I know there are some applications in physics for imaginary and complex numbers, but they are too advanced for a 7th grader (or, I must admit, for a 49 year old applied macroeconomist). Off the top of my head, I could not think of any applications within basic economics or to everyday life. Can some commenter help me out?

Wednesday, August 08, 2007

A Few Good Reads

High School Economics

Mixed news. First, the good news:

12th-Graders Show Strength in Economics

Twelfth-graders did better on a recent national economics test than they did on similar math or reading tests, according to results released Wednesday.

Forty-two percent of 12th-graders nationwide scored at the proficient level or better on the economics test, meaning they could handle challenging subject matter. In contrast, just 23 percent of 12th-graders hit the proficient mark in math, according to results published earlier this year. In reading, 35 were proficient or better....

Students who took a high-level economics course, such as one labeled Advanced Placement or honors, were more likely to score high on the national test than students who did not take a similar course, according to the governing board.

Then the bad news:
But high schoolers who took a general economics course did not do any better on the economics test than students who didn't take a class, which raises questions about the rigor of those basic-level courses.
I have often worried about the quality of high school economic courses. Over the years, I have met quite a few AP teachers (and even spent some time as a member of the committee that writes the AP exam), and I am confident in the quality of those courses. But the non-AP courses, from reports I have heard, are less consistent in quality. Basic high school courses in economics need to start looking more like the introductory courses taught in college.

Warning: Advertisement

From my inbox:

Hello Professor Mankiw.

I am an Engineering student at Rutgers University. I have taken Intro to Microeconomics and am about to finish Intro to Macroeconomics, both courses using your 4ed books of those subjects. I would just like to tell you that your books are simply amazing. You explain all the theories and definitions of economics very well and I rarely would have to double check outside sources for help. Reading your books have gotten me very interested in Economics and I have decided to minor in it (sorry not majoring, but the engineering curriculum is so demanding that there isn't even space for a minor!) These books are great, and I will most definitely use them for help if I need to go back to Economics 101 in my more advance courses. Great work!

[name withheld]

The Times on the Dollar

The editorial writers at the New York Times have either forgotten their basic international macroeconomics or have a new theory of it that I do not understand. Here is what they say about the trade deficit and the exchange value of the dollar:

Over the last several years, America’s imbalances in trade and other global transactions have worsened dramatically, requiring the United States to borrow billions of dollars a day from abroad just to balance its books.

The only lasting way to fix the imbalances — and reduce that borrowing — is to increase America’s savings. But the administration has steadfastly rejected that responsible approach since it would require rolling back excessive tax cuts and engaging in government-led health care reform to rein in looming crushing costs — both, anathema to President Bush. It would also require revamping the nation’s tax incentives so that they create new savings by typical families, instead of new shelters for the existing wealth of affluent families — another nonstarter for this White House.

Stymied by what it won’t do, the administration has gone for a quicker fix — letting the dollar slide. A weaker dollar helps to ease the nation’s imbalances by making American exports more affordable, thus narrowing the trade deficit....

In the absence of leadership from the White House, the presidential candidates could elevate the issue, outlining their own plans to boost savings. But until the administration — either this one or the next — is willing to acknowledge the source of the economy’s imbalances, and starts addressing them seriously, the dollar is likely to remain weak.

I am all for taking steps to increase national saving, such as reforming the tax code to tax consumption rather than income and reducing the budget deficit through a combination of entitlement reform and additional revenues using Pigovian taxes. (Recall this op-ed of mine.) But the Times fails to acknowledge that increased U.S. saving will, according to standard macroeconomic theory, weaken the exchange value of the dollar.

This is described fully in Chapter 32 of my favorite economics textbook. The intuition is that higher saving will reduce the interest rate that equilibrates the market for loanable funds. (Equivalently, one could say that it lowers the interest rate consistent with output and employment at their natural rates.) Lower U.S. interest rates will discourage the inflow of capital from abroad. The reduced flow of capital into the United States will reduce the demand for dollars, thereby decreasing value of the dollar in foreign exchange markets.

If more saving means a weaker dollar, it seems odd to argue, as the Times seems to be, that a weak dollar reflects our failure to save enough.

Update: Dean Baker and I are on the same page.

Pigou Club Headlines

Tuesday, August 07, 2007

Escape from Malthus

Gregory Clark has a new thesis about the origins of the Industrial Revolution:

Generation after generation, the rich had more surviving children than the poor, his research showed. That meant there must have been constant downward social mobility as the poor failed to reproduce themselves and the progeny of the rich took over their occupations. “The modern population of the English is largely descended from the economic upper classes of the Middle Ages,” he concluded.

As the progeny of the rich pervaded all levels of society, Dr. Clark considered, the behaviors that made for wealth could have spread with them. He has documented that several aspects of what might now be called middle-class values changed significantly from the days of hunter gatherer societies to 1800. Work hours increased, literacy and numeracy rose, and the level of interpersonal violence dropped.

Monday, August 06, 2007

A Few Good Reads

Sunday, August 05, 2007

The Sociology of Economics

A reader sends this interesting letter:

Dear Professor Mankiw,

I'm a resident at one of the Harvard hospitals. In the past couple of years I've had the chance to attend a number of inter-disciplinary seminars where you have statisticians, physicians, sociologists, anthropologists, epidemiologists and economists present. I've been impressed with what your discipline has to say: in virtually every seminar the economists are able to say something useful. Without inflating your ego, I've also noticed that the economists present better papers and are less likely to be caught off-guard in a seminar. They are also more likely to discover problems in the work of others. I've been trying to educate myself on the economic way of thinking by reading your blog, Freakonomics, and now, by slowly reading your textbook. But clearly, there's no substitute to being formally trained as one.

My question to you doesn't concern economics, but more its sociology. So feel free to ignore this email. At the seminar that I attend most often, I've noted the following:

1. The economists are the most aggressive people in the room. They have little patience for introductions, motivation, or "being nice". They want to spend the first 10 minutes trying to figure out the -entire- talk. If they're not happy, they tend to disengage. I will note that they're like this with each other also. Why are things this way in economics? There must be pluses and minuses to this way of interacting.

2. The economists are the only social-scientists in the room that are willing to argue with the statisticians. This could be that you are a more argumentative lot in the absence of substance, but also that you know something. I'm not qualified to tell who wins these disputes, but the statisticians seem to regard the economists with a high degree of regard. Why do you think that different disciplines view the importance of statistics differently?

3. There seems to no love lost between the economists and other social-sciences. Some of this has to do with the nature of interferce in the two disciplines: your colleagues are always concerned about confounders. Other disciplines like "to tell a story"; confounders are certainly of concern to them, but the issues of bi-directional causality, and omitted variables seem of second-order importance to them. As a physician, I share your colleagues view of the importance of "selection bias" (nice term, incidentally). Why do you think that different disciplines weight the role of confounders differently?

I posed these questions to one of the economists who regularly attends. His response (that I have permission to send to you) is as follows:

"In general, economists are smarter (we may be better looking too). It's fashionable not to say such things, but I will bet that if you look at the GRE and SAT scores of incoming PhD students at BU, Harvard and MIT, the average economist will sit at a higher percentile than the average (non-economist) social-scientist. Given that all the other disciplines are trying to recruit students with higher scores, I'm not willing to believe the explanation that these disciplines value other attributes that aren't measured in the GRE. Higher salaries in economics will tend to reinforce the "economists are smarter" phenomena. Smart people don't have the time waiting for the less-smart to catch up. If we can finish up the seminar in 10 minutes, then why not do it?

"To this ex ante advantage, add the role of superior and more rigorous training. Economics graduate school is not for slackers. It's like boot-camp in the Army. One example of this is that we are provided a much deeper understanding of statistics than every other social-science. Consequently, economists are able to publish in journals like JASA and the Annals of Statistics. No other social science is able to do this with the same frequency. This superior training, complemented by a generally higher comfort-level with mathematics is the principal reason for why economists will not shy away from statistics. I wish I had concrete evidence for my argument. At present, it's indirect evidence. But this "economics know more stats" argument is another reason for why we are more aggressive; we are able to see the strengths and weaknesses of a study faster than others who're not as fluent in the methods.

"Third, the set of advocates who are economists is quite small (I don't know if this reflects treatment or selection). In general, economists are more likely to make up their minds about whether a particular policy works based on theory or data. They may have priors, but not the the sort of "do-gooder"priors that advocates have. One of the reasons that economists are so aggressive with the non-economists is that we want to expose all the priors immediately. In my view, a lot of non-economics social science is straight advocacy. There is an important role for advocacy. It may influence policy more than science. But the nature of advocacy is to simplify and ignore nuance and confounding. But our (economists) beef with advocacy isn't its lack of nuance. We just get really upset when advocacy masquerades as science.

"Fourth, the economics job-market is just that -- a market. This means that the best people are more likely to be at the best programs. In other disciplines there are more "bad matches" (good people at bad places). What this means is that Harvard and MIT's economics departments are more likely to have the top economists than the Sociology Department is likely to have the top sociologists. This is important because what you're seeing at the Harvard seminars is an exchange between the best economists and not necessarily the best sociologists. The best sociologists may be able to clobber a mediocre economist."

I'm curious if you have some of your own observations to add to the above.

Best regards,
[name withheld]

These are fascinating questions. I see a lot of truth to the observations described in the letter. I have heard many others note, for example, that economists are generally more aggressive in seminars than other academics. I am not sure how to explain this fact.

To the hypotheses in the letter, let me add one additional conjecture, which is less charitable to me and my colleagues: Perhaps the skills that make a good economist are, for some reason, negatively correlated with the attributes associated with being an agreeable human being. That is, economics may attract people with a particular set of personality attributes, and perhaps these attributes are not the same set of attributes you might choose for your next dinner party.

This is not entirely conjecture on my part. For example, this study
"explores the relationship between student's personality types, as measured by the Myers-Briggs Personality Type Indicator, and their performance in introductory economics. We find that students with the personality types ENTP, ESTP, and ENFP do significantly worse in Principles of Macroeconomics than identical students with the personality type ISTJ."
What is this personality type ISTJ that excels in economics class? Check out this description, which say in part:

The ISTJ is not naturally in tune with their own feelings and the feelings of others.
Sounds like any economist you know?

Medicare and Medicaid as a Percent of GDP

From CBO. In case you are curious which line is most relevant, CBO notes:

Over the past four decades, Medicare’s and Medicaid’s costs per beneficiary have increased about 2.5 percentage points faster per year than has per capita gross domestic product (GDP).
The big question is whether health costs will continue to rise as they have in the past.

Rogoff on Health Care

A good read from one of my Harvard colleagues.

Saturday, August 04, 2007

Do people dislike being around the rich?

Daniel Gross reviews Robert Frank's latest books. This sentence caught my eye:

When asked whether they’d rather have a 4,000-square-foot house in a neighborhood of 6,000-square-foot McMansions, or a 3,000-square-foot home in a zone of 2,000-square-foot bungalows, most people opt to lord it over their neighbors.

Do people really behave as reflected in this survey? I bet the 4,000 square foot house surrounded by McMansions would sell for more the 3,000 square foot house surrounded by bungalows.

Market prices should reflect the externalities imposed by neighbors. I don't spend a lot of time talking with real estate agents (I have been living in the same house for about twenty years), but if my recollection is correct, their conventional wisdom is that houses surrounded by bigger, more expensive homes sell for more, other things equal, than houses surrounded by smaller dwellings. This suggests that the rich convey positive, not negative, externalities.

Adios, Washington Consensus

From yesterday's Washington Post:

After two decades of reliance on the economic prescriptions of the United States, the World Bank and the International Monetary Fund, Bolivia has turned left, embracing Venezuelan and Cuban aid, nationalizing industries and championing what its leaders call a pragmatic version of socialism.

Bolivia's break from Washington is part of a regional trend underwritten by Chávez, who has lavished aid on allies to roll back the influence of the United States and Washington-based institutions that have long shaped Latin America's development.

In the past two years, Bolivia, Nicaragua, Argentina and Ecuador have used Venezuelan aid to pay off their debts to the IMF or allow credit agreements to lapse, while adopting unorthodox development strategies that would have been barred so long as they depended on the fund for credit.

Friday, August 03, 2007

The Giuliani Health Plan

It sounds remarkably similar to the Bush health plan. In particular,
Americans without employer-based insurance, or those who would rather have individual coverage, should enjoy the same tax benefits as the 175 million Americans with employer-based coverage. We can do this through a new tax-free income exclusion up to $15,000 for Americans without employer-based coverage. Any amount a family pays less than $15,000 -- for individuals, less than $7,500 -- could be put tax-free into a Health Savings Account. This would create a powerful incentive for more Americans to own their private health insurance -- making it portable instead of dependent on an employer.
In case you forgot the Bush plan and the generally favorable reaction it got from serious commentators, click here, here and here.


Here is a striking fact that is hard for a Princeton alum like me to admit:
you'd have to go back to 1984 to find a Democratic nominee (Walter Mondale) who didn't attend one of those elite universities [Harvard or Yale] for either college or graduate school....And the pattern will continue in 2008 if either Hillary Clinton (Yale Law) or Barack Obama (Harvard Law) wins the nomination.

Thursday, August 02, 2007

The Fundamental Theorem of Carbon Taxation

In today's Washington Post, congressman John Dingell pushes for a carbon tax. He ends by suggesting, however, that cap-and-trade is politically more feasible.

He may be right, but it is a frustrating conclusion. Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is,

Cap-and-trade = Carbon tax + Corporate welfare.

If the public understood this theorem, the carbon tax alternative, with revenues rebated to households through lower payroll or income taxes, would attract a lot more interest.

Wednesday, August 01, 2007

The Top Three Economic Concepts

A new teacher of economics writes for some advice:

Dr. Mankiw,

I have been a reader of your blog for the last few months. Before that, I was a reader of your textbook and an (undergraduate) admirer of your work. After graduating from the University of Texas with an economics degree last spring, I joined Teach for America and wound up teaching high school social studies in Baltimore. At the end of last year, I was able to convince my principal to let me teach an economics course to second semester seniors this spring....

I thought I would write to ask you the following question: If you could teach every American teacher three economic concepts, what would they be?

Thank you,
[name withheld]

I organized my principles text to put the most important concepts toward the front of the book. If I had limited time to teach a basic course, I would try to get through the first 10 chapters (out of 36 in the book), perhaps skipping chapter 2 on methodology and 5 on elasticity. Summarizing these chapters in three big ideas is hard, but here goes:

1. Comparative advantage and the gains from trade.

2. Supply, demand, and the efficiency of market equilibrium.

3. Market failure, such as externalities, and the role for government.

The lesson is that we can all gain from economic interdependence and that markets are a good, but not always perfect, way to coordinate people in an interdependent world.

What Makes a Terrorist

This new book by Princeton economist Alan Krueger is sure to get a lot of attention.

1,028 economists...

...signed this petition.

We, the undersigned, have serious concerns about the recent protectionist sentiments coming from Congress, especially with regards to China.

By the end of this year, China will most likely be the United States' second largest trading partner. Over the past six years, total trade between the two countries has soared, growing from $116 billion in 2000 to almost $343 billion in 2006. That's an average growth rate of almost 20% a year.

This marvelous growth has led to more affordable goods, higher productivity, strong job growth, and a higher standard of living for both countries. These economic benefits were made possible in large part because both China and the United States embraced freer trade.

As economists, we understand the vital and beneficial role that free trade plays in the world economy. Conversely, we believe that barriers to free trade destroy wealth and benefit no one in the long run. Because of these fundamental economic principles, we sign this letter to advise Congress against imposing retaliatory trade measures against China.

There is no foundation in economics that supports punitive tariffs. China currently supplies American consumers with inexpensive goods and low-interest rate loans. Retaliatory tariffs on China are tantamount to taxing ourselves as a punishment. Worse, such a move will likely encourage China to impose its own tariffs, increasing the possibility of a futile and harmful trade war. American consumers and businesses would pay the price for this senseless war through higher prices, worse jobs, and reduced economic growth.

We urge Congress to discard any plans for increased protectionism, and instead urge lawmakers to work towards fostering stronger global economic ties through free trade.

An ad announcing this is in today's Wall Street Journal. Will it work? Sadly, it did not last time.