Wednesday, July 31, 2013

Stan and His Students

When Stan Fischer was a professor at MIT, he was one of the all-time great advisers to those of us in the process of becoming macroeconomists.  At a recent conference, Stan took a picture with some of his former students.  Here is the snapshot.  How many can you recognize?

Saturday, July 27, 2013

On Au

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

The topic is whether you should invest in gold as part of your portfolio.  After you read the column, you might find the following problem of interest.  It is based on roughly plausible assumptions.

Imagine that you start off with a portfolio of 60 percent stocks and 40 percent bonds.  The returns on stocks, bonds, and gold are uncorrelated.  Stocks earn a higher expected return than bonds.  Bonds and gold earn the same lower expected return, but gold returns are three times as volatile as bond returns, as measured by the standard deviation.  You want to minimize risk, measured by the variance of your portfolio return, without changing the expected return on your portfolio. How much gold should you buy?

I will leave this problem as an exercise for the reader.  But I believe you should be able to come up with a precise numerical answer without resorting to a computer.

Update: Albert Zevelev, a grad student at Penn, posts the correct answer here.

Is Technopessimism Bunk?

Friday, July 26, 2013

A Tale of Two Political Systems

Here is a fascinating TED talk about the Chinese political culture.  It takes about 20 minutes.

Addendum: And here is a thoughtful commentary on the talk.

Thursday, July 25, 2013

Geography and Mobility

A former student, M. Daniele Paserman, who is now a professor at Boston University, sends me the following email, which I thought was interesting enough to share (with permission, of course):
I bumped into your blog post on the Great Gatsby curve, and I was happy to see you raise the point about the arbitrariness of imposing geographic boundaries in measuring intergenerational mobility (why should one lump Connecticut and Mississippi together?)

Claudia Olivetti and I raise a similar point in our recent paper on the evolution of intergenerational mobility in the US between the end of the 19th and the beginning of the 20th Century. We measure a large increase in the intergenerational elasticity between the the cohort of children born in the 1850s and those born in the 1910s, but almost all of it can be explained by income divergence across regions. In fact, within the Northeast and the Midwest, the intergenerational elasticity was flat, or maybe even falling (it was rising in the South, though).

Tuesday, July 23, 2013

Capital Income Taxation

Friday, July 19, 2013

The Changing Distribution of Income

Click on graphic to enlarge. 

Mark Perry points out: "Yes, the middle class has been disappearing, but they haven’t fallen into the lower class, they’ve risen into the upper class."

Thursday, July 18, 2013

Observations on the Great Gatsby Curve

In recent years, some economists have drawn attention to a correlation that has been dubbed the Great Gatsby curve.  In particular, countries that have more inequality in income also have less economic mobility.  (By the way, the curve seems misnamed: Jay Gatsby lived in a time a great inequality and managed to move from being very poor to being very rich.  But never mind that.)

My own view is that this correlation is not particularly surprising.  Let me give you an analogy to explain why.

Suppose we collected data on various chess clubs (nations).  In every club, we have data on each member's win-loss record over the year (income).  We can then measure the variance of individuals' win-loss records (inequality).  We can also measure how a person's win-loss record in one year predicts his win-loss record in the subsequent year (mobility).

Some clubs have a bunch of players with similar levels of skill at chess.  In this case, everyone would have a win-lose record that is close to each other, and a person's club ranking one year would not have a lot of predictive value for his ranking the next.  That is, we would have small inequality and substantial mobility.

Other clubs are more heterogeneous.  They have some masters and some novices.  The masters have much better records than the novices, and their better records tend to persist year to year.  That is, we would have substantial inequality and little mobility.

If we put all these clubs together in a scatterplot, we would get something close to the Great Gatsby curve.

Notice a corollary: Suppose we combined two clubs, one that with mostly masters and one with mostly novices.  The new combined club would be more heterogeneous and, therefore, would exhibit more inequality and less mobility than either of the clubs separately.

The application of this corollary to the Great Gatsby curve is that if we looked at Europe as a whole, rather than each nation separately, we would find that Europe as a whole has more inequality and less mobility than the individual countries.  That is, Germans are richer on average than Greeks, and that difference in income tends to persist from generation to generation.  When people look at the Great Gatsby curve, they omit this fact, because the nation is the unit of analysis.  But it is not obvious that the political divisions that divide people are the right ones for economic analysis.  We combine the persistently rich Connecticut with the persistently poor Mississippi, so why not combine Germany with Greece?

The bottom line for me that the Great Gatsby curve is a bit interesting, but neither particularly surprising nor suggestive of any specific conclusions or policy recommendations.

Monday, July 15, 2013

Who will the next Fed chair be?

Wednesday, July 10, 2013

The Fed's First 100 Years

I spent today at the NBER's conference celebrating the 100th anniversary of the Federal Reserve. Among the conferences I have attended over the years, this was among the best. You can find the papers presented here.

Tuesday, July 09, 2013

Who should the next Fed chair be?

A friend points out to me that the monkeys over at Economics Job Market Rumors are voting whether they would prefer Janet Yellen or Larry Summers as the next Fed chair.  Right now, it is close to a tie.

Monday, July 08, 2013

Summers on the Corporate Tax

On the issue of corporate tax reform, Larry Summers tries to forge a compromise:
The United States should eliminate the distinction between repatriated and unrepatriated foreign corporate profits for U.S. companies and tax all foreign income (after allowances for taxes paid to other governments) at a fixed rate well below its current corporate rate, perhaps in the range of 15 percent.

Thursday, July 04, 2013


Over on his blog, Paul Krugman calls attention to the Cengage bankruptcy.  I am not sure why he thinks this event is noteworthy.  He seems to do so because Cengage is the publisher of my favorite textbook. I suppose it is schadenfreude on Paul's part.

If you are interested in the topic, I suggest you read this article.  The short story is that this is a Chapter 11 bankruptcy (a reorganization), not a Chapter 7 bankruptcy (a liquidation).  These are very different things. In this case, the equity holders are being wiped out, and the debt holders are the new equity holders.  Otherwise, not much is happening.  As the article states:
The transaction is expected to be largely a non-event for others doing business with Cengage. The company has permission from the lenders to keep using cash flow from operations to fund the business, and expects to keep paying vendors, authors’ royalties, and employees on schedule. (Since Cengage has substantial cash balances—a vendor Frequently Asked Questions document estimates the company’s liquidity at approximately $280 million—and expects to generate positive cash flow, it does not need debtor-in-possession financing.) The company plans to keep delivering orders in full, is not planning to renegotiate any customer contracts except as they expire as usual, and is continuing to launch new products.
So if you are a user of my favorite textbook, rest assured that it is business as usual.