Tuesday, May 31, 2011

Household Expectations

The University of Michigan’s Survey of Consumers asks households about their future income prospects. They are asked: “By about what percent do you expect your (family) income to increase during the next 12 months?”  Here is the result:

Via the Cleveland Fed.  Thanks to Mark Thoma for the pointer.

The level of pessimism displayed here is striking.

How to Fix the Long-Term Fiscal Problem

A menu of plans, courtesy of the Peterson Foundation.

Friday, May 27, 2011

Advice for the Recently Tenured

From Bob Hall.  This is a couple years old, but I only just ran across it.  One tidbit from it:
Potomac fever is contagious and incurable. I know one economist who deliberately hired an undocumented nanny as a commitment device to avoid the temptation of government.

Feldstein on Greece

Marty suggests a temporary leave from the Euro.  How that would work, logistically, is unclear to me.  Introduce a new currency, devalue it, then go back to the Euro at the new exchange rate?  It seems that Marty is mainly trying to figure out a way to rewrite wage contracts with a new lower level of nominal wages.

Thursday, May 26, 2011

Barney & Fannie

Perhaps because Barney Frank is my congressman, I took a special interest in this interview of Gretchen Morgenson, New York Times reporter and coauthor of Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon:

DAVIES: What's fascinating about this story is that you have this entity [Fannie Mae], which you said became the largest and most powerful financial organization in the world, you had this entity, which has government guarantees and government subsidies, although perhaps indirect, but it engages in major political contributions and lobbying expenses. How big a player were they in terms of contributing to politicians and lobbying?
Ms. MORGENSON: They were very large. The numbers might not seem large in today's terms, but they were extremely shrewd and, you know, took great care, especially of the congressmen that were on the House Financial Services Committee and the senators on the Banking Committee.
They knew that these were very important people to their livelihood and to maintaining the government perquisites as they were.
One of the really big beneficiaries, albeit indirectly, was Congressman Barney Frank of Massachusetts. Back in 1991, when Congress was writing the legislation that would, you know, enhance or improve the oversight of Fannie Mae, or so they thought, Frank actually called up the company and asked them to hire his companion, who had just gotten an MBA from the Amos Tuck School of Business.
Of course the company was happy to provide a job for his companion and rolled out the red carpet in a series of interviews with a variety of executives, and it ultimately did hire the man. And he stayed there for I believe seven years.
So that was an example of the kind of thing that Fannie Mae would do. Now, when I asked Mr. Frank about this, I asked him, did it have any impact on his approach to the company. You know, was it a conflict? Did he feel that it had been a conflicted, put him in a conflicted spot? And he said absolutely not, that he didn't really remember being interested or having much to do with the 1992 legislation.
But the record shows that he was very aggressive and really tough on those who were testifying in Congress about reining in Fannie Mae and Freddie Mac. He was very aggressive to, for instance, the head of the Congressional Budget Office at that time, who was trying to call for increased capital requirements and to call for a focus on safety and soundness at Fannie Mae, that Frank really took him apart in testimony.

DAVIES: Right, and you write there were a number of occasions on which he defended Fannie and their record of promoting home ownership but in the end had a different view of the company, right?
Ms. MORGENSON: Well, after the taxpayers had to take it over, he, you know, came around, finally. But by then it was too late. He said: Well, we should shut them down. But, you know, it really was far too late, and he had been such a vocal supporter for so long that it was sort of an odd turnabout.

Wednesday, May 25, 2011

A regression I would like to see

In his column today, David Leonhardt writes the following about college admissions:
But all else equal, a low-income applicant was no more likely to get in than a high-income applicant with the same SAT score. It’s pretty hard to call that meritocracy.

When I first read this pair of sentences, they struck me as odd. But in the context of the whole article, they have some logic. David suggests that high-income applicants' SAT scores are, in some sense, an overstated measure of ability, because these applicants have the benefit of tutors, mulitiple testing opportunities, and so on. As a result, he says that we should correct for this by giving a preference to lower-income applicants.

Maybe David is right, but to convince me, here is what I would like to see.  Regress some measure of college success (such as GPA) on SAT scores and the student's family income.  If David is right, then the coefficient on family income should be negative.  That is, a lower-income student should do better in college, holding reported SAT score constant, because he managed to get that SAT score without all those extra benefits.  This is a regression that some enterprising college admissions committee could easily do.  (Maybe someone has already done it, and I am just not aware of the study.)

If the coefficient does turn out to be significantly negative, that finding would provide strong evidence for the thesis of David's article.  Right now, I would venture to guess that the data would not support David's story, but I am always ready to be proven wrong.

Update:Todd Stinebrickner, an economist at The University of Western Ontario, emails me this comment:
It does seem reasonable to believe that, if a low income student and a high income student have the same SAT scores at the time of college entrance, the low income student was probably born with higher "inherent" ability.  At the same time, SAT scores may not capture all of the educational benefits of being from a high income family that may continue to matter in college. For example, a student's score on the Math SAT may not capture whether the student had the opportunity to take a Calculus course in high school.  This suggests that, from a theoretical standpoint, the effect of family income on college grades conditional on SAT scores is ambiguous.  As part of an ongoing in-depth case study at one particular school (motivated particularly by an interest in college dropout), we discuss this issue and run the type of regression you suggest in Table 3 of a 2003 JHR paper "Understanding educational outcomes of students from low-income families."  It is worth noting that everyone in our sample is of moderate or low family income. Regardless, within the income groups we examine, students from higher income backgrounds have significantly higher grades throughout college conditional on college entrance exam (ACT) scores.
The finding in the last sentence (which I put in bold) is the opposite of what the Leonhardt story suggests. What this means is that if you are a college admissions officer trying to identify the students who will do best in college, as measured by grades, you would give positive rather than negative weight on family income. I am not proposing that they should do this, as colleges have many goals when putting together a class. But it does seem that the hypothesis implicit in Leonhardt's article is not supported by the data.

Monday, May 23, 2011

Strong Dollar = Strong Economy ?

A Profile of Marty Feldstein

From the Harvard Crimson, on the occasion of his 50th college reunion.

Saturday, May 21, 2011

Markets in Everything

I bet this will prove to be a profitable business:
You've committed your life to Jesus. You know you're saved. But when the Rapture comes what's to become of your loving pets who are left behind? Eternal Earth-Bound Pets takes that burden off your mind.
We are a group of dedicated animal lovers, and atheists. Each Eternal Earth-Bound Pet representative is a confirmed atheist, and as such will still be here on Earth after you've received your reward. Our network of animal activists are committed to step in when you step up to Jesus.
We are currently active in 26 states, employing 40 pet rescuers. Our representatives have been screened to ensure that they are atheists, animal lovers, are moral/ethical with no criminal background, have the ability and desire to rescue your pet and the means to retrieve them and ensure their care for your pet's natural life.
We currently cover the following states: Maine,New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, Wisconsin, Minnesota, Michigan, Arkansas, Mississippi, Tennessee, Kentucky, West Virginia, Colorado, Oklahoma, Kansas, Washington, Oregon, Idaho, Montana, North Carolina, Georgia, Alabama, Illinois, Iowa.
Our service is plain and simple; our fee structure is reasonable. For $135.00 we will guarantee that should the Rapture occur within ten (10) years of receipt of payment, one pet per residence will be saved. Each additional pet at your residence will be saved for an additional $20.00 fee.

Friday, May 20, 2011

Being an economist is no defense

Partisan Grading

Here is a fascinating finding:
We study grading outcomes associated with professors in an elite university in the United States who were identified using voter registration records from the county where the university is located as either Republicans or Democrats. The evidence suggests that student grades are linked to the political orientation of professors: relative to their Democratic colleagues, Republican professors are associated with a less egalitarian distribution of grades and with lower grades awarded to Black students relative to Whites.
Regarding the last result, the authors note:
An obvious question that arises regarding the second finding is whether and to what extent Democratic professors discriminate in favor of Black students or Republican professors discriminate against them. At this stage we only note that in the absence of an appropriate benchmark for comparison, this question cannot be credibly answered.
Thanks to Mark Perry for the pointer.

Thursday, May 19, 2011

President Obama's Asset Allocation

This is surprising:
The Obamas reported total financial assets valued between $2.8 million and $11.8 million in 2010....They report having between $1.1 million-$5.25 million invested in Treasury bills and another $1 million to $5 million in Treasury notes....The Obamas report having between $200,000-$450,000 invested in the Vanguard 500 Index Fund.

In other words, it looks like the president has only a small percentage (about 10 percent) of his personal financial assets invested in equities.  This is far, far less than financial advisers would recommend.  (If you are curious, I am at 60 percent equities.)  Either the president is not very financially savvy, or he has reason to believe that the future of the U.S. economy is not very bright.

Or maybe he is just too busy to think about it.

Wednesday, May 18, 2011

A Bond Market Meme

There seems to be a conventional wisdom forming that long-term interest rates in the United States are as about as low as they can possibly be.  For example, this is from an article in today's Wall Street Journal:
"Rates are so low it's hard to see them going much lower, but it's easy to imagine them going higher," said Kevin March, chief financial officer of Texas Instruments.
And this is from a post at Brad DeLong's blog:
It is certainly true that most of the time when the yield spread is high the way to bet is that long-term bond rates are coming down and long-term bond prices are going up. But somehow I can't see U.S. nominal interest rates falling much lower than they are now.

I don't buy it.  Why? Note this fact: The U.S. ten-year Treasury bond pays 3.18 percent, whereas a ten-year Japanese government bond pays 1.16 percent.

No, I am not predicting the United States is about to become just like Japan.  But it is not inconceivable.  That is why buying long-term bonds now is not a crazy investment strategy, and selling them (as many companies are now doing) is not at all a sure thing.

Addendum: Another noteworthy fact about bonds is that they have recently been negative beta assets.  (You can verify this fact with
this link.)  Their hedging properties also make buying bonds a reasonable investment strategy.

The Google Puzzle, Again

Good News

"Stanley Fischer candidate to replace Strauss-Kahn."

I have known Stan for many years. I first took a graduate course from him at MIT in 1980, and he was the main adviser for my PhD dissertation a few years later.  He also took the lead in 1987 in trying to recruit me, unsuccessfully, to leave Harvard to join the MIT faculty. Saying no to Stan was one of the hardest things I ever did.

Stan is a superb economist and international policymaker: smart, sensible, experienced, personable, and open-minded. He would be an ideal person to head the IMF.

Tuesday, May 17, 2011

Google Plays the Yield Curve

Click on graphic to enlarge.

I was fascinated a story in today's Wall Street Journal.  Apparently, Google is sitting on $37 billion in cash, but nonetheless decided to sell $3 billion worth of bonds.  Why?  To take advantage of low interest rates.

It is like reverse maturity transformation.  The banking system borrows short and lends long.  Google is borrowing long and lending short.  (Or maybe I should call it reverse quantitative easing, as Google is also doing exactly the opposite of what the Fed has been doing.)

Does this make sense for Google?  I have no idea, and I am ready to concede that those guys are a lot smarter (and financially successful) than I am.  But there is reason to be skeptical. 

The chart above shows the spread between the ten-year Treasury bond and the three-month Treasury bill.  The yield spread is now high by historical standards.  The empirical literature on the expectations theory of the term structure (in which I have sometimes played) suggests that this is a good time to borrow short and lend long--the opposite of what Google is doing.

Maybe this time is different, and past empirical regularities will not hold going forward.  But ponder this question: If you had a friend with a paid-up house, would you suggest that he now take out a long-term mortgage in order to deposit the proceeds in a money-market fund?  If not, does it make sense for Google to be doing much the same thing?


1. A smart reader sends in the following plausible explanation:
While it's true that Google has $37 billion in cash and equivalents, almost all of that $37 billion is in non-U.S. accounts (an artifact of funneling most of their profits through low-tax Ireland). They cannot spend that $37 billion in the U.S. without incurring a tax rate of 35 percent; thus, the borrowing is to finance spending in the U.S. (as opposed to abroad). All the big tech companies do the same thing (Microsoft was in the news for the same thing some 6 months ago).  Thus, Google is not trying to play the yield curve so much as intertemporally arbitrage the U.S. tax code. By not repatriating the $37 billion now, they are betting that the U.S. corporate tax rate on repatriated foreign profits will be appreciably lower in the future than it is now.
2. On the other hand, another loyal reader points me toward this source, which says:
The firm doesn't have the same issue with overseas cash that many of its large-cap technology peers do. Of Google's $37 billion in cash, only about $17 billion is sitting outside the U.S. Microsoft, by contrast, has no net cash remaining in the U.S., while nearly 90% of Cisco's cash is sitting outside of the country.

Monday, May 16, 2011


Sunday, May 15, 2011

A Poll of Economists

Who are economists' favorite economists?

Click here to find out.

Friday, May 13, 2011

Evaluating ARRA

Tim Conley and Bill Dupor have a new paper on the American Recovery and Reinvestment Act (that is, the Obama stimulus bill).  Their empirical findings:
Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.

Thursday, May 12, 2011

Fun Fact of the Day: California Edition

Here is a small clue that might help explain California's fiscal problems:
According to a [Newport Beach] city report on lifeguard pay for the calendar year 2010, of the 14 full-time lifeguards, 13 collected more than $120,000 in total compensation; one lifeguard collected $98,160.65. More than half the lifeguards collected more than $150,000 for 2010 with the two highest-paid collecting $211,451 and $203,481 in total compensation respectively....Lifeguards are able to retire with 90 percent of their salary, after only 30 years of work at as early as the age of 50.

Our Negative Bequest to Our Children

As calculatated by John Cogan:
Starting next year, this typical [66-year-old] couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending....

Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today's dollars) toward these benefits during their working careers.

But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.

Tuesday, May 10, 2011

Libertarian Paradise? Discuss.

Saturday, May 07, 2011

Macroeconomic Uncertainties

I agree with Paul Krugman

As my regular blog readers know, Paul Krugman and I often do not see eye to eye.  So, once in a while, it might be useful to point out those times when we actually agree.

In a recent post on commodity prices, Paul says, "Volatile prices are volatile, which is why they shouldn’t be used to determine monetary policy."  I agree, and I suspect many other macroeconomists would as well.

I once wrote a paper on this topic with Ricardo Reis, called "What Measure of Inflation Should a Central Bank Target?" (published link)  Here is the abstract:
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
As the graph below illustrates, the price of labor does not show any significant inflationary pressures right now:

Click on graphic to enlarge.
For more on this topic, see a recent post by MIT grad student Matt Rognlie.

Friday, May 06, 2011

The Inanity of Rent Control

Thursday, May 05, 2011

If Supermarkets Were Like Public Schools

A thought-provoking analogy from Donald Boudreaux:
Suppose that groceries were supplied in the same way as K-12 education. Residents of each county would pay taxes on their properties. Nearly half of those tax revenues would then be spent by government officials to build and operate supermarkets. Each family would be assigned to a particular supermarket according to its home address. And each family would get its weekly allotment of groceries—"for free"—from its neighborhood public supermarket.
No family would be permitted to get groceries from a public supermarket outside of its district. Fortunately, though, thanks to a Supreme Court decision, families would be free to shop at private supermarkets that charge directly for the groceries they offer. Private-supermarket families, however, would receive no reductions in their property taxes.
Of course, the quality of public supermarkets would play a major role in families' choices about where to live. Real-estate agents and chambers of commerce in prosperous neighborhoods would brag about the high quality of public supermarkets to which families in their cities and towns are assigned.
Being largely protected from consumer choice, almost all public supermarkets would be worse than private ones. In poor counties the quality of public supermarkets would be downright abysmal. Poor people—entitled in principle to excellent supermarkets—would in fact suffer unusually poor supermarket quality.
How could it be otherwise? Public supermarkets would have captive customers and revenues supplied not by customers but by the government. Of course they wouldn't organize themselves efficiently to meet customers' demands.
Responding to these failures, thoughtful souls would call for "supermarket choice" fueled by vouchers or tax credits. Those calls would be vigorously opposed by public-supermarket administrators and workers.
Opponents of supermarket choice would accuse its proponents of demonizing supermarket workers (who, after all, have no control over their customers' poor eating habits at home). Advocates of choice would also be accused of trying to deny ordinary families the food needed for survival. Such choice, it would be alleged, would drain precious resources from public supermarkets whose poor performance testifies to their overwhelming need for more public funds.
As for the handful of radicals who call for total separation of supermarket and state—well, they would be criticized by almost everyone as antisocial devils indifferent to the starvation that would haunt the land if the provision of groceries were governed exclusively by private market forces.

Wednesday, May 04, 2011

Increasing Inequality around the World

From the OECD, via The Economist:
With very few exceptions, the rich have done better over the past 30 years, even in highly egalitarian places like Scandinavia.