Keynes vs Friedman, not

Brad DeLong says:

From one perspective, Friedman was the star pupil of, successor to, and completer of Keynes’s work.

A very good point. People are often surprised when I say that I am both a Keynesian and a Friedmanite, because they view Friedman as the anti-Keynes. But that perspective is far too simplistic. In my view, unless you have learned a lot of economics from both of these great thinkers, you haven't learned enough. Brad does a nice job of explaining why.

The Consensus of Economists

Robert Whaples surveys PhD members of the American Economic Association and finds substantial agreement on a wide range of policy issues. For example:

• 87.5 percent agree that "the U.S. should eliminate remaining tariffs and other barriers to trade."
• 85.2 percent agree that "the U.S. should eliminate agricultural subsidies."
• 85.3 percent agree that "the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged."
• 77.2 percent agree that "the best way to deal with Social Security's long-term funding gap is to increase the normal retirement age."
• 67.1 percent agree that "parents should be given educational vouchers which can be used at government-run or privately-run schools."
• 65.0 percent agree that "the U.S. should increase energy taxes."

And, finally, the topic that generates the most consensus:

• 90.1 percent disagree with the position that "the U.S. should restrict employers from outsourcing work to foreign countries."

One issue that fails to generate consensus is the minimum wage: 37.7 percent want it increased, while 46.8 percent want it eliminated.

Thanks to Arnold Kling for the pointer.

Advisers to Mitt

Mitt Romney gets advice from some of my favorite economists.

Update: Several readers have asked for more details about my involvement here.

I first met Governor Romney several years ago, but only briefly at that time. Recently, I have talked with him more substantively about a range of economic policy issues. I was impressed by his intellect, open-mindedness, and overall economic philosophy.

I was honored when he asked me to serve in a more formal advisory capacity. My role will be that of an outside adviser. My teaching at Harvard will continue to be my main responsibility and the focus of my attention, and the posts on this blog will reflect those priorities.

Update 2: The Harvard Crimson reports the news. And here is an article on Mitt Romney.

Kling on Inequality and Mating

Economist Arnold Kling says it's important to pick the right spouse. It certainly has worked for me.

What I'm reading

A reader asks me what research papers I've been reading lately. (Maybe this should be a regular blog feature.) This week I've been studying Optimal Sticky Prices under Rational Inattention. From the abstract:

This paper presents a model in which price setting firms optimally decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in the data, prices react fast and by large amounts to idiosyncratic shocks, but prices react only slowly and by small amounts to nominal shocks.

The aim of this paper is similar to some of my joint work with Ricardo Reis, which emphasized that monetary nonneutrality and plausible business-cycle dynamics can arise from "sticky information" on the part of price setters and other decisionmakers. Compared to our work, the framework in this paper has the benefit that price setters here choose how to allocate their scarce attention, whereas in our model sticky information is exogenous. Moreover, price setters here can choose to pay more attention to some types of information than others, whereas in our model when information is outdated, all of it is equally outdated. These significant benefits, however, come at the cost of substantially increased model complexity.

Anyway, this is how I have been allocating my scarce attention this week.

Throwing Rocks in Our Harbors

Robert Samuelson chimes in on the bleak trade picture:

We are dealing with something new here. It transcends traditional protectionism, which tries to shield specific industries and workers from imports. It's trade obstructionism: a reflexive reaction against almost any trade agreement.

Politics Roundup

Here is some recent news:

• President Bush likes the flat tax.
• Paulson warns of rising protectionism.
• Obama and Edwards dis Wal-Mart.

"absurd even by Washington standards"

That's how the New Yorker describes U.S. policy toward the sugar industry. Another tidbit:

the Bush Administration proposed eliminating the ethanol tariff this past spring, but Congress quickly quashed the idea—Barack Obama was among several Midwestern senators who campaigned in support of the tariff—and the sugar quotas appear to be as sacrosanct as ever.

Ec 10, Hyde Park style

Here's a profile of the introductory economics course at the University of Chicago.

How distortionary are taxes?

An ec 10 student emails me a question about taxes:

Dear Professor Mankiw,

I'm a freshman taking Ec10. Prior to taking Ec10, I had no experience or interest in economics and was convinced that I wanted to be a doctor and to major in neurobiology. Now, Ec10 is easily my favorite and most intriguing course, and taking it, in combination with my reading Freakonomics, has definitely caused me to rethink my interests, goals, and life in general. Thank you for teaching this course.

However, my intrigue in Ec10 has led me to question some of the principles of economics. The first regards the idea that high income taxes distort work incentives. In theory, this makes sense, but I feel that in practice, the idea doesn't apply well, especially to the income tax. Do the distortion of work incentives and the deadweight loss really have enough of an impact to be seriously considered while forming tax policy? The reason I think that high income taxes don't significantly distort work incentives in practice is that most people probably aren't thinking about how much of their income is taxed unless it's April 15. Most people probably believe that working more means more money and don't consider how much they're taxed unless they have to physically write the check (e.g. with property and excise taxes).

[name withheld]

The key issue is the elasticity of labor supply. Some economists do believe, as you suggest, that this elasticity is small and, as a result, that taxes aren't very distortionary. Others believe that the elasticity is larger. Economist Ed Prescott has suggested that the main reason Europeans work less than Americans is the higher tax rates they face.

Think of it this way. Imagine that you are a painter deciding whether to accept another painting job this weekend. I am willing to pay you $500 for the work. It is possible that you would do the job for $500 but not for $300 (the amount you would keep after paying payroll taxes, federal income taxes, and state income taxes)? If you think that all workers make such decisions without regard to remuneration, then the assumption of inelastic labor supply is correct. In this case, taxes are not distortionary. But if some people respond to incentives and would do the job for $500 but not for $300, then that response is what makes taxes distortionary.

There are other margins to consider besides the tradeoff between work and leisure. Another is market production vs home production. To continue with our painting example, imagine that you have a choice between taking the job and staying at home to rake your leaves and fix your car. As a painter, your comparative advantage is likely painting, and it might make sense to hire a lawn service and a car mechanic to fill your other needs. But if the tax rate on your painting income is too high, you might pass on the extra job and spend your time on your tasks at home.

Finally, there is the issue of career choice. An article in today's NY Times mentioned a Harvard PhD in economics who left an academic job for a better-paying one in private equity. Based on the article, he seemed a bit wistful about leaving an academic job behind. At a higher tax rate on his new higher income, might he have stayed with the perks of the ivory tower? Perhaps. But, based on market prices, his talents are more productively applied in private equity, where he is filling the important role of allocating the economy's capital stock. If he gave up that job because of a higher tax rate, the loss to the overall economy would be measured by the deadweight loss.

On a related note: I am delighted to hear that you are reevaluating your career goals and considering a switch into economics, That is what the first year of college is all about. But I think we can agree that this important decision should ideally be based on comparative advantage and personal preferences, and not marginal tax rates.

Bayes likes Obama

As I have noted previously, one can use Bayes theorem to evaluate the conditional election prospects of various Presidential candidates for 2008.

Here is the logic. Let A be the event that a candidate wins the general election, and B be the event that a candidate wins his or her party's nomination. Tradesports gives us the betting market's view of P(A) and P(B). It is a safe assumption that P(B / A) = 1, that is, a candidate can win only if nominated. We can then use Bayes theorem to compute P(A / B), the probability that the candidate will win the general election conditional on being nominated.

Based on the most recent transaction prices, here is what you learn about the conditional probabilities:

Obama 88 percent
Gore 80 percent
Giuliani 65 percent
McCain 63 percent
Clinton 51 percent
Romney 50 percent
Edwards 44 percent

The market suggests that Obama would be the strongest candidate if nominated.

By the way, Steve Levitt likes Obama, too.

Dasgupta on the Stern Review

Partha Dasgupta reads the Stern Review of climate change and, like Bill Nordhaus, does not like what he finds:

the strong, immediate action on climate change advocated by the authors is an implication of their views on intergenerational equity; it isn't driven so much by the new climatic facts the authors have stressed....To give you an example of what I mean, suppose, following the Review, we set delta [the rate of subjective time preference] equal to 0.1% per year and eta [the elasticity of marginal utility with respect to consumption] equal to 1 [so utility is logarithmic] in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels.

Dasgupta has the right title to opine on these issues: He is the Frank Ramsey Professor of Economics at Cambridge University.

Minimum Wage as a Symbol

Gary Becker and Richard Posner have good posts on the minimum wage at their blog.

In watching this debate unfold, I am moving toward the view that the issue is more symbolic than substantive. Posner asks, "why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous?" Here is my answer: Many voters don't know what the EITC is, whereas the minimum wage is easy to understand. As Becker points out, "Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate." True, but few voters are so knowledgeable. As a result, the minimum wage is an easily explained issue that says, "We Democrats care about poor people, unlike those Republicans."

Here is a question that I would ask any politician: If you could set your ideal policy to help the poor, wouldn't you prefer to expand the EITC and abolish the minimum wage? Any politician that fails to answer "yes" is either misinformed or engaging in demagoguery.

How Tax Cuts Affect GDP

Whitman on Friedman

Marina v.N. Whitman, in today's Wall Street Journal, recounts a story about Milton Friedman:

Nearly 30 years ago, my husband and I were guests at a dinner party in the elegant Palo Alto home of Stanford professor Ezra Solomon, who had been my colleague on President Richard Nixon's Council of Economic Advisers. Among the other guests were Milton Friedman and his wife, Rose. Milton was having a fine time baiting the wife of the dean of the Business School, a feminist whose conviction was unleavened by any sense of humor, by proclaiming the foolishness of affirmative action.

"If businesses are forced to hire and train young women, many of whom will leave for marriage and family," he proclaimed, "they should at least be allowed to discriminate in favor of homely women, whose opportunities for marriage are below average." As the dean's wife reddened with fury, I leaned over and said softly, 'Thank you, Milton. I've always wondered what accounted for my professional success. Now I know." Milton, always the courtly gentleman where women were concerned, was speechless.

Sachs on Hayek and Easterly

Jeff Sachs responds to Bill Easterly in today's Wall Street Journal:

William Easterly is correct that Friedrich Hayek wrote "The Road to Serfdom" in 1946 to warn that central planning and state ownership would lead to the collapse of freedom ("Dismal Science," editorial page, Nov. 15). Yet in 1976, in the Preface to the Reprint Edition, Hayek made perfectly clear that he believed that the same outcome would occur through the welfare state. Noting that "socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state," Hayek wrote that "In the latter kind of socialism the effects I discuss in this book are brought about more slowly, indirectly, and imperfectly. I believe that the ultimate outcome tends to be very much the same . . ." (While the editors at Scientific American used the shorthand that Hayek wrote in the 1940s, my detailed paper on the Nordic economies makes explicit that Hayek's critique of the modern welfare state came in the 1970s, in the Reprint Edition).

Thirty years on, we can see the results of Hayek's prediction. Despite government revenues above 50% of GNP in the Nordic countries supporting an extensive social welfare state, those countries are vibrant democracies with open, competitive, and high-income economies and low rates of poverty. That is precisely the point of my Scientific American piece and a longer scholarly paper that Prof. Easterly wrongly attacks. He actually makes my point for me by pointing out that the Heritage Foundation/Wall Street Journal Index of Economic Freedom ranks Finland, Sweden and Denmark as "free economies," with Denmark ranked ahead of the United States, despite the fact of their extremely high rates of taxation and social welfare spending. Similarly, the Global Competitiveness Index of the World Economic Forum puts these three countries at ranks two, three and four in global competitiveness, ahead of the United States at rank six.

Mr. Easterly also repeats his favorite canard that I believe in central planning. Anybody who is at all familiar with my life's work and writings knows that I believe in market-led and open economies and was a leading economic adviser on the conversion of the former Communist economies to market economies. I do not believe in pure laissez faire, however. Nor do I believe that an antipathy to foreign aid is correct at a time when millions of children are dying each year as a result of extreme poverty unattended by practical help from the rich countries.

Jeffrey D. Sachs

Recession Risk Rising

From John Fernald and Bharat Trehan of the San Francisco Fed. John was once a student of mine at Harvard.

Rubinomics on the Defensive

Today's New York Times reports, "With the Democrats now a majority in Congress, and disquiet over globalization growing, a party faction that has been powerless — the economic populists — is emerging and strongly promoting an alternative to Rubinomics."

Grandpa needs an HSA

Economist Bryan Caplan describes what happens when a third-party payer covers all medical expenses:

my grandpa got $300k of elective surgery in his last year of life - bad knee, plus complications. And he was a cheap, cheap man. I doubt that he would have paid for the first $10k out of his own pocket.

That is quite a bit of deadweight loss.

Women with graduate degrees...

...are more attractive.

As late as the 1980s, according to economist Elaina Rose, women with PhDs or the equivalent were less likely to marry than women with a high school degree. But the "marital penalty" for highly educated women has declined steadily since then, and by 2000 it had disappeared. Today, women with a college degree or higher are more likely to marry than women with less education and lower earnings potential. Highly educated women are also now as likely to have children as their less-educated counterparts -- and much more likely to have children born in wedlock.

From today's Washington Post.

The Diminishing Trade Picture

Yesterday's Washington Post discusses how the new congress is likely to affect our southern neighbors:

Latin Americans Wonder If Democrats Are Traders
Anxiety High Over Stance of Incoming Congress

MEDELLIN, Colombia -- At the CI Jeans factory, where 3,900 people make their livings turning bolts of denim into trousers bound for the United States, the American market -- land of the customer -- appears to be slipping away.

In September, with a proposed trade deal between Colombia and the United States uncertain and orders flagging, the factory fired 320 workers. Now, the pact appears to be in peril. Democrats are set to take control of the U.S. Congress, speaking for a segment of the American public that is worried about globalization. The incoming leaders have pledged to redraft the terms of global trade.

Yesterday, the Bush administration signed the proposed deal, but leading Democrats promptly attacked it, underscoring growing doubts in Washington that Congress will approve the pact. Here in Colombia and next door in Peru, which awaits congressional approval for its own trade treaty, anxiety runs high.

"We watch the news and we're nervous about what might happen with what we send to the United States," said Janeth Palacio Ramirez, 35, who supports her 15-year-old daughter and her elderly parents by punching zipper stops onto 7,000 pairs of jeans a day, earning about $200 a month. "Everything we make here goes there, so if there are problems with exports, we'll all lose our jobs."

As Democrats prepare to reshape U.S. trade policy, the impact is being felt far from the Carolina mill towns and rust-belt factories that are a perennial focus of domestic concern.

Addressing fears that too many jobs are being sacrificed at home, the new Democratic leadership wants to slow the worldwide effort, which the United States has led since 1947, to lower import tariffs that hinder trade.

Sad news indeed.

Stiglitz vs Bush

Here is Joe Stiglitz, confirming his Pigou Club credentials:

A global externality can best be dealt with by a globally agreed tax rate. This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes. It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work.

Although President George W. Bush says he believes in markets, in this case he has called for voluntary action. But it makes far more sense to use the force of markets – the power of incentives – than to rely on goodwill.

On matters of economic policy, I am more likely to side with Bush than Stiglitz, but not this time.

Road Pricing

The Seattle Times reports on an experiment in road pricing:

Tolls could cut congestion, test shows

For about eight months, drivers in 275 Seattle-area households agreed to pay for something the rest of us get for free: The right to drive on the region's freeways and streets.

They were guinea pigs in a pioneering study that explored how motorists' behavior might change if they had to pay tolls — not just on a few bridges or highways, but on almost every road with a yellow center line. Researchers established virtual tolls ranging from a nickel to 50 cents a mile. They gave participants pre-paid accounts of between $600 and $3,000, and told them they could keep whatever the tolls didn't eat up.

The experiment ended in February. Preliminary results, released this month, suggest that if such so-called "road pricing" were widespread, it could make a significant dent in traffic....

Participants in the Puget Sound Regional Council's "Traffic Choices" study had devices mounted on their dashboards in late 2004 and early 2005 that tracked their travel and transmitted the information to a central computer. Tolls, which varied by road and time of day, were deducted electronically from the pre-paid accounts, which were funded by the study's sponsors and sized to match how much participants had been driving before the study.

The promise of keeping some of that money proved to be a powerful incentive. Nearly 80 percent of the participants drove less than they did before, or they changed their routes or travel times to avoid the highest tolls, said Matthew Kitchen, the study's director. When the study was finished, the average payout was nearly $700 per household.

When other variables are factored out, Kitchen said, participants took 5 percent fewer auto trips and drove 2.5 percent fewer miles each weekday because of the tolls. The drop was even more dramatic during peak-traffic periods, when tolls were highest: 10 percent fewer trips and 4 percent fewer miles in the morning, 6 percent fewer trips and 11 percent fewer miles at night.

Note that road pricing can be viewed as a Pigovian tax on congestion externalities.

Nordhaus on the Stern Review

Yale economist Bill Nordhaus, an expert on climate change, reads the Stern Review of the topic and does not like what he finds. The Review's apocalyptic conclusions are, according to Nordhaus, severely overstated because of its assumption of a near-zero discount rate (0.1 percent per year) and log utility (so marginal utility does not decline much as technological progress causes consumption to rise). Here is an excerpt from Nordhaus:

The Review proposes using a social discount rate that is essentially zero. Combined with other assumptions, this magnifies enormously impacts in the distant future and rationalizes deep cuts in emissions, and indeed in all consumption, today. If we were to substitute more conventional discount rates used in other global-warming analyses, by governments, by consumers, or by businesses, the Review’s dramatic results would disappear....

Suppose that scientists discover that a wrinkle in the climatic system will cause damages equal to 0.01 percent of output starting in 2200 and continuing at that rate thereafter. How large a one-time investment would be justified today to remove the wrinkle starting after two centuries? The answer is that a payment of 15 percent of world consumption today (approximately $7 trillion) would pass the Review’s cost-benefit test. This seems completely absurd. The bizarre result arises because the value of the future consumption stream is so high with near-zero discounting that we would trade off a large fraction of today’s income to increase a far-future income stream by a very tiny fraction.

Thanks to Tyler Cowen for the pointer.

Why do all movie tickets cost the same?

In today's Washington Post, business writer Steven Pearlstein examines a fascinating economic puzzle:

Why will movie theaters charge the same $9.50 to see "Casino Royale" this Saturday night that they charged to see the disappointing remake of "All the King's Men" on a Wednesday night in the middle of September?....It wasn't always so. Back in the golden years of Hollywood, before PG and XXX, there were "A" movies, "B" movies and "C" movies, distinguished not by their sexual content, but by the box-office appeal of their stars. Not only did it cost more to see Clark Gable in "Gone With the Wind" than Ronald Reagan in "Bedtime for Bonzo," but the ticket price also varied depending on whether you saw them in a first-run movie house downtown or a second-run theater in the suburbs, and whether you took in a matinee or an evening showing.

The article is based on research by Barak Orbach (University of Arizona law school) and Liran Einav (Stanford economics department). Einav is a recent Harvard PhD in economics.

Ben goes to China

The NY Times reports:

Fed Chief’s Help Enlisted for Trip to Press China

Treasury Secretary Henry M. Paulson Jr. has enlisted Ben S. Bernanke, the Federal Reserve chairman, to join an unusual delegation of cabinet members to China next month that will press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday.

The trip in mid-December, to be led by Mr. Paulson, a former Goldman Sachs chairman with extensive experience in China, escalates the pressure on the Beijing leadership to crack down on piracy, open up its economy to outside investors and allow the value of the Chinese currency to fluctuate more freely, Treasury officials say.

This is a dicey decision for Ben. On the one hand, if he can help Paulson keep the protectionists in Congress at bay, his presence on the trip is all to the good. On the other hand, if Ben is seen as lending support for the economically questionable argument, so popular among Beltway mercantilists, that China is harming the United States by buying its debt instruments, he risks his credibility. I am confident Ben will handle the balancing act well, but he has to be careful.

Happy Thanksgiving!

In case you haven't read this piece in Chapter 7 of my favorite economics textbook (it's new in the 4th edition), here is Jeff Jacoby giving thanks for the invisible hand. An excerpt:

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy is planned, the more it is plagued by shortages, dislocation, and failure.

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed -- without our ever intending it -- into prosperity, innovation, and growth?

The social order of freedom, like the wealth and the progress it makes possible, is an extraordinary gift from above. On this Thanksgiving Day and every day, may we be grateful.

It must be a slow news day

Today's LA Times has an article on economist-bloggers.

The Other Milton Friedman

Robert Frank and Cal Thomas discuss how the free-market economist Milton Friedman wanted to help the poor.

Make the Right Lifestyle Choices

The Harvard Crimson reports:

Sex won’t increase your risk of a heart attack—but cocaine could up your chances nearly 24 times over, according to two Harvard researchers.

No word yet about the effects of rock 'n roll.

An Expositional Challenge

It is a standard proposition in economics that the deadweight loss of a tax rises approximately with the square of the tax rate. In my favorite economics textbook, this proposition is explained in Chapter 8 using supply and demand curves and the standard deadweight loss calculation as the area of the triangle between the supply and demand curves (the area of the so-called Harberger triangle). The analysis shows that if we double the size of a tax, the deadweight loss increases four-fold; if we triple the size of the tax, the deadweight loss increases nine-fold. The graph of the deadweight loss as a function of the tax takes the shape of a parabola.

This analysis suggests that, from the standpoint of economic efficiency, reducing the highest marginal tax rates should be the greater priority of economic policymakers. (Equity considerations may point in another direction, but let's put the efficiency-equity tradeoff aside for a moment.) That is, reducing the marginal income tax rate from 40 to 35 percent for high-income taxpayers will, other things equal, generate more bang for the buck than reducing the marginal income tax rate from 15 to 10 percent for low-income taxpayers.

Earlier today, a journalist (one of the smartest ones I know, by the way) asked me how to explain the economics here to his readers. A newspaper cannot print supply and demand curves and calculate the area of deadweight loss triangles. How, therefore, should one try to explain this logic without using even high-school level mathematics? I must admit, he had me stumped. All my ec 10 students understand the logic of deadweight loss by now, but how can this famous insight be explained to a broader audience?

In the comments section, please try your best to offer a nontechnical explanation.

Sociologists pay extra

From Craigslist:

We have a furnished one-bedroom apartment (about 950 square feet) in Georgetown available for short-term rental.... we are looking for very responsible tenants, economists (or economics-related professionals) preferred.

Private Charity vs Public Redistribution

In a new book, "Who Really Cares: The Surprising Truth About Compassionate Conservatism," Syracuse University professor Arthur C. Brooks tells us:

conservatives who practice religion, live in traditional nuclear families and reject the notion that the government should engage in income redistribution are the most generous Americans, by any measure. Conversely, secular liberals who believe fervently in government entitlement programs give far less to charity.

Here is an excerpt from the book. Thanks to the Freakonomists for the pointer.

Dinner Invite

One week from today, on Wednesday November 29, I will take up to ten ec 10 students out to dinner. We will meet at my Harvard office at 5:45 pm. To sign up, email me. I will take the first ten in my inbox. (Please: Only registered ec 10 students.)

Update: The dinner sign-up is full.

Official Forecast

The Bush administration releases its latest forecast, and CEA Chair Eddie Lazear discusses it. A few excerpts from Eddie:

• "What we've seen over the past year is that real wages for non-supervisory and production workers have increased by 2.8 percent. And that -- when we're talking about production workers, hourly wages of production workers, this excludes the 20 percent of supervisory workers who tend to earn more. So when we're talking about 2.8 percent, we're talking about mainstream American workers....I would anticipate that we will have positive and strongly positive wage growth, real wage growth into next year, through next year."
• "we have heard calls by Congress for increases in the minimum wage, and my sense is that this is not necessarily inconsistent with the President's view on this, and that there is some room for us to work on something together going forward."
• "The President has come out very strongly opposed to any tax increase because he thinks it will harm the economy. That's consistent with my view as well. I think a tax increase at this point is both unnecessary and undesirable."

A Market for Kidneys

Sally Satel says the best way to get more kidneys to people who need them is to compensate donors.

Would Hillary make a good president?

Tradesports says the probability is 57 percent that Hillary Clinton will be the Democratic nominee in 2008. (Obama is running second at 15 percent.) I have never met Senator Clinton, but here is the perspective of one economist who has observed her closer up:

My two cents' worth--and I think it is the two cents' worth of everybody who worked for the Clinton Administration health care reform effort of 1993-1994--is that Hillary Rodham Clinton needs to be kept very far away from the White House for the rest of her life. Heading up health-care reform was the only major administrative job she has ever tried to do. And she was a complete flop at it. She had neither the grasp of policy substance, the managerial skills, nor the political smarts to do the job she was then given. And she wasn't smart enough to realize that she was in over her head and had to get out of the Health Care Czar role quickly.

So when senior members of the economic team said that key senators like Daniel Patrick Moynihan would have this-and-that objection, she told them they were disloyal. When junior members of the economic team told her that the Congressional Budget Office would say such-and-such, she told them (wrongly) that her conversations with CBO head Robert Reischauer had already fixed that. When long-time senior hill staffers told her that she was making a dreadful mistake by fighting with rather than reaching out to John Breaux and Jim Cooper, she told them that they did not understand the wave of popular political support the bill would generate. And when substantive objections were raised to the plan by analysts calculating the moral hazard and adverse selection pressures it would put on the nation's health-care system...

Hillary Rodham Clinton has already flopped as a senior administrative official in the executive branch--the equivalent of an Undersecretary. Perhaps she will make a good senator. But there is no reason to think that she would be anything but an abysmal president.

From Brad DeLong, Berkeley econ prof and former Deputy Assistant Secretary in the Clinton Treasury Department, writing in 2003.

CBO on Agriculture

The CBO reports:

If all policies worldwide that distort agricultural trade were phased out in this decade, the likely total annual economic benefit to the world by 2015 would be roughly $50 billion to $185 billion, which is about 3 percent to 13 percent of the value added by world agriculture.

Second Acts for Presidential Advisers

F. Scott Fitzgerald said, "There are no second acts in American lives." But check out what President Carter's CEA Chair Charles Schultze has been up to lately. Something for me to look forward to.

Rangel and Friedman on the Draft

The Associated Press reports today:

Americans would have to sign up for a new military draft after turning 18 under a bill the incoming chairman of the House Ways and Means Committee says he will introduce. Rep. Charles Rangel (D-N.Y.) said Sunday he sees his idea as a way to deter politicians from launching wars. Rangel, a Korean War veteran who has unsuccessfully sponsored legislation on conscription in the past, has said the all-volunteer military disproportionately puts the burden of war on minorities and lower-income families. Rangel said on CBS' "Face the Nation" he will propose a measure early next year.

It might be worth repeating this old story about Milton Friedman and General William Westmoreland, who was once commander of U.S. troops in Vietnam.

In his testimony before the commission, Mr. Westmoreland said he did not want to command an army of mercenaries. Mr. Friedman interrupted, "General, would you rather command an army of slaves?" Mr. Westmoreland replied, "I don't like to hear our patriotic draftees referred to as slaves." Mr. Friedman then retorted, "I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher."

Who will play Friedman against Rangel's Westmoreland?

Ulrike

A nice piece on Ulrike Malmendier, a recent PhD from the Harvard econ department. Thanks to Tyler Cowen for the pointer.

Posner on Friedman

Of the many pieces written about Milton Friedman over the past few days, the one that Milton would have most enjoyed is, I suspect, the blog post by Richard Posner. Rather than just lauding Friedman, Posner takes the opportunity to argue with him, and there is nothing Friedman liked better than a good argument about economics. See, in particular, Posner's comments on the draft and Hayek.

Do the rich pay their fair share in taxes?

Larry Lindsey, former adviser to President Bush and former ec 10 head sectionleader, says yes:

A comparison between a relatively high-income entrepreneur, of which I am one, and a "typical" worker might be illustrative.

Last year an entrepreneur similar to me would have paid federal taxes equal to 33.9% of total income. That is, income before any exemptions, exclusions, adjustments or deductions. By this measure all of the fringe benefits that an entrepreneur provides himself as a self-employed individual are included in income. His federal income taxes and the employer and employee shares of his Social Security taxes are all counted as "taxes."

For comparison, consider a married worker earning a salary of $75,000, who like our entrepreneur, has three children. To compute his total income on the same basis, I gave him the same level of benefits as an average worker and the same level of capital income as others making his income. I also followed convention to impute to him both his own Social Security taxes and all of those paid by his employer. On that basis, his average tax rate was 14.5%.

From today's Wall Street Journal. Update: Free link.

Oster on AIDS

The new issue of Esquire Magazine features Harvard grad student Emily Oster and her research on the AIDS epidemic in Africa.

Assortative Mating

I have long thought that Harvard is the world's most elite dating agency.

Americans are increasingly pairing off by education level, according to the sociologists Christine Schwartz and Robert Mare. In an article published last year in the journal Demography, they reported that the odds of a high-school graduate marrying someone with a college degree declined by 43 percent between 1940 and the late 1970s. In our current decade, the researchers wrote, the percentage of couples who are “educationally homogamous” — that is, share the same level of schooling — reached its highest point in 40 years.

Assortative mating by income also seems to be on the rise. In a 2004 study of couples wed in the 1970s through the early 1990s, the researchers Megan Sweeney and Maria Cancian found an increasingly strong association between women’s wages before marriage and the occupational status and future earnings prospects of the men they married.

From today's NY Times. As the article notes, increased assortative mating could be one reason for rising income inequality.

Inequality

The fact that the share of income going to the top 1 percent rose during the 1980s and 1990s is not controversial among economists. What this fact implies for policy, however, is another matter.

Immortality

Cattle die, kindred die,
Every man is mortal:
But the good name never dies
Of one who has done well.

Posted by David Friedman, son of Milton, on his blog.

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For any of the five versions of my principles text, the person to contact is Brian Joyner at Thomson. His email is Brian.Joyner@thomson.com.

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If you would like a copy and are not a professor eligible for a freebie, you will have to fork over the cash and help put the Mankiw children through college.

Crook on the Task Ahead

In the National Journal, Clive Crook has a nice piece on the economic challenges facing the new Democratic congress.

Markets in Everything, Not

My Harvard colleague Al Roth (free link) has a new essay that examines people's reluctance to buy and sell some things. The abstract:

This essay examines how repugnance sometimes constrains what transactions and markets we see. When my colleagues and I have helped design markets and allocation procedures, we have often found that distaste for certain kinds of transactions is a real constraint, every bit as real as the constraints imposed by technology or by the requirements of incentives and efficiency. I'll first consider a range of examples, from slavery and indentured servitude (which once were not as repugnant as they now are) to lending money for interest (which used to be widely repugnant and is now not), and from bans on eating horse meat in California to bans on dwarf tossing in France. An example of special interest will be the widespread laws against the buying and selling of organs for transplantation. The historical record suggests that while repugnance can change over time, change can be quite slow.

Economists tend to be more open to market mechanisms than non-economists. But even we set limits. For example, we do not sell grades to students, and we do not buy and sell research papers among ourselves.

The absence of the latter market, however, may be due to lack of incentive rather than repugnance. I recall a conversation a few years back in which someone was wondering whether professors faced diminishing marginal rewards to publishing scholarly articles. One of my more prolific colleagues said, "Of course not. Otherwise, I'd be selling my articles to others."

More Milton

The Wall Street Journal offers a sampler of Milton Friedman's views and a tribute to him by economist Thomas Sowell.

Update: In the NY Times, a tribute from Austan Goolsbee. And another from Larry Summers.

Varian on Accident Externalities

In yesterday's NY Times, Hal Varian discusses Pigovian taxes to deal with accident externalities.

Pennywise

Two economists debate getting rid of the penny--a proposal of which I am very much in favor.

Milton Friedman

We lost a great human being today. Here is what I wrote about him in 1998.

The Economist of the Century
By N. Gregory Mankiw

Anyone who thinks that ideas matter (and who doesn't?) naturally takes an interest in people who generate more than their share. Milton Friedman is one of them. As he approaches his 86th birthday, Friedman remains one of the world's most influential living economists.

Fans of this great intellect are in for a treat: Friedman and his wife, Rose, have just published their memoirs, Two Lucky People (University of Chicago Press, $35). The Friedmans take turns telling their story as they trace their lives from humble childhoods in Rahway, N.J. (Milton), and Portland, Ore. (Rose), through a lifetime of teaching, research, and policy controversies.

The Friedmans are best known for their articulate and unwavering defense of the free market. Their policy objective is, simply, "the promotion of human freedom." This goal, they tell us, "underlies our opposition to rent control and general wage and price controls, our support for educational choice, privatizing radio and television channels, an all-volunteer army, limitation of government spending, legalization of drugs, privatizing Social Security, free trade, and the deregulation of industry and private life to the fullest extent possible." Milton and Rose were libertarians--aggressively vocal libertarians--before libertarians were cool.

Their campaign for a freer society led them into the confidence of some of the great political figures of our times, including Barry Goldwater, Richard Nixon, Ronald Reagan, and Margaret Thatcher. The authors don't shy from judging these leaders: we are told, for instance, that Reagan's choice of George Bush as his Vice President was "the worst decision not only of his campaign but of his presidency."

The Friedmans' political involvement came with its share of controversy. Most notably, in 1975 Milton spent six days giving lectures on public policy in Chile and had one brief meeting with right-wing dictator Augusto Pinochet. The result was a firestorm of protest. When Friedman won a Nobel Prize the next year, public objections came from all directions, including previous prize-winners David Baltimore and Linus Pauling.

Friedman was--and is--unrepentant. Of course, he did not endorse the dictatorship. But, he wrote, "I do not regard it evil for an economist to render technical economic advice to the Chilean government to help end the plague of inflation, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean government to end a medical plague." He also notes that years later, when he offered similar economic advice to China, there were no similar protests, even though the left-wing Chinese dictators were no less oppressive than Pinochet.

Friedman's politics may have generated public controversy, but his scientific contributions yielded a consensus of admiration among his professional colleagues. When students today are taught about the determinants of consumer spending, the history of monetary policy, or the relationship between inflation and unemployment, they owe much to the intellectual legacy of Milton Friedman. Legend has it that economist George Stigler once called Friedman "the best economist in a bad century." Stigler may well have been right that Friedman doesn't quite measure up to the 18th century's Adam Smith or the 19th century's David Ricardo--economists, like many of the things that they study, are subject to the law of diminishing returns. But Friedman runs a good race against such 20th-century luminaries as Paul Samuelson and John Maynard Keynes, and that is no mean feat.

The book does drag at times, especially when it lingers over the minutiae of the Friedmans' home life. (How much detail do we really need to know about Friedman family vacations, for example?) But overall, it's charming. It's almost like a letter from a couple of old friends--a couple of old friends who had a long, compelling intellectual journey, came to know some of the great world leaders of this century, and had 60 years of happy, supportive marriage. After reading Two Lucky People, you really can't help but agree with the title.

Update: Here is the NY Times obituary.

What should the Dems do?

Today's op-ed by the Senator-elect Webb got me thinking. The piece is filled with standard Democratic hand-wringing about rising inequality, but as Arnold Kling points out, it is essentially devoid of policy proposals.

Free-market economists like me are typically less concerned about rising inequality; some, like Gary Becker, go so far as to call it a "favorable development." But let's suppose for a moment that a free-market economist were hired by the Dems to offer policy advice. If the boss's goal is to reduce income inequality, what is the best way to do that?

The standard Democratic fare would be quickly rejected. Erecting barriers to trade, raising the minimum wage, encouraging the cartelization of labor via unions, and bashing Wal-Mart are inefficient and poorly targeted ways to redistribute income.

The tax system is probably the best vehicle to accomplish the Dems' goal. One possibility would be to reduce the payroll tax rate and to make up the lost revenue by increasing, or perhaps even eliminating, the cap on taxable payroll. That would benefit, approximately, the bottom 90 percent of the income distribution.

This policy change would, of course, have an efficiency cost. By raising taxes on taxpayers who already face the highest tax rates, the deadweight losses of the tax system would surely rise. But almost any attempt to achieve a more equal distribution of income would entail efficiency costs. The Dems' goal should be to minimize the efficiency cost for any given amount of redistribution. And that is most likely accomplished through the tax system rather than by more heavy-handed market interventions.

Lunch?

If any blog reader (especially ec 10 student) wants to have lunch with me today, please stop by my Harvard office (Littauer 223) at noon.

Easterly on Hayek and Sachs

In today's Wall Street Journal, economist Bill Easterly channels Friedrich Hayek to take on economist Jeffrey Sachs. An excerpt:

Hayek's great book [The Road to Serfdom] is all about the dangers of large-scale state economic planning, courageously written in 1944 when Soviet central planning, technocratic socialism and administrative control of the wartime economy appealed as a peacetime model to many New Dealers, celebrity economists and policy wonks of all stripes.

The countries that are now rich subsequently listened enough to Hayek and to common sense to avoid the road to serfdom. Yet today, Mr. Sachs (in his book "The End of Poverty") is peddling his own administrative central plan -- 449 steps in all -- to end world poverty. In his plan, the U.N. secretary-general (to whom he is an adviser) would supervise and coordinate thousands of international civil servants and technocratic experts to solve the problems of every poor village and city slum everywhere. Mr. Sachs is not in favor of central planning as an economic system, but he offers it as a solution, anyway, to the multifold problems of the world's poorest people. If you want the best analysis of why the approach of Mr. Sachs and his confreres in Hollywood and the U.N. will fail to end world poverty this time (as similar efforts failed over the past six decades), you can find it in Hayek.

How rich are you?

Click here to find out. Thanks to Marginal Revolution for the pointer.

Glaeser on GenEd

Economist Ed Glaeser opines on the debate at Harvard over general education.

Federal Spending and Taxes

From today's Wall Street Journal.

Nice chart, which illustrates that taxes are not particularly low now by historical standards, but I don't fully buy into the accompanying editorial. The "fiscal crisis" that some people are worried about is the looming gap between spending and taxes: as the baby boom generation retires over the next few decades and becomes eligible for Social Security and Medicare, the spending line here will automatically keep rising.

Here is my solution. Like the Journal editorialists, I would prefer to avoid tax increases to the extent possible, but everyone has to come to grips with the fact that something has to give. None of the ways to fix the problem is politically attractive. The choice is among large tax increases, large cuts in promised benefits, or some combination.

The Task Ahead

In today's Washington Post, Sebastian Mallaby outlines what the Democratic party needs to do. Here is how he starts:

During their long years in the wilderness, Democrats lashed out against trade and globalization, even though denying the economic case for trade is like pretending that tax cuts pay for themselves. Now that they have won Congress, the Democrats must prove that they are more than the mirror image of their opponents. This means reviving the pro-market centrism of the Clinton era.

Is a burrito a sandwich?

Apparently not. A nice example of how businesses try to impede competition.

AMT Reform

The Washington Post reports that the new Democratic majority in Congress wants to focus on the Alternative Minimum Tax. The AMT is paid disproportionately by residents of Democratic states because those states tend to have high state and local taxes and the state and local tax deduction is disallowed under the AMT.

This raises the question: Is the state and local tax deduction justifiable in the first place? I think not. Suppose the residents of town A vote for high local taxes to finance, say, a municipal pool. The residents of neighboring town B keep taxes low, allowing people who so choose to join a private pool club. Because of the federal tax deduction, town A gets a federal subsidy at the expense of town B. This outcome is neither equitable (it is violates the principle of horizontal equity) nor efficient (it encourages excessive provision of goods and services by states and localities over the private sector).

So if we want to get rid of the AMT, let's combine it with eliminating the state and local tax deduction. That would be, I believe, approximately revenue neutral. I understand that this proposal would not fulfill the political goal of rewarding blue-state voters, so I am not holding my breath expecting it to happen. But I am enough of an optimistic to believe that if a change promotes both equity and efficiency, there is at least a chance it might become policy.

David Ricardo rolls over in his grave

From today's Wall Street Journal:

Democratic Gains Raise Roadblocks To Free-Trade Push

The Democrats' sweep of Congress is set to deliver a blow to President Bush's free-trade ambitions and could hamper impending trade deals both big and small.

Democrats' stances against free trade helped build the party's success at the polls and could tip the balance on trade matters. The new dynamic could put a definitive end to the already troubled effort to reach a global agreement to reduce tariffs and open markets, known as the Doha round. It also could put in jeopardy smaller deals such as those the U.S. has crafted with Peru and Colombia, intended to boost two-way trade by lowering tariffs and increasing intellectual-property protections.

Two dozen tightly contested races turned partly on Democrats' protectionist platforms, according to Public Citizen, a liberal advocacy group. All told, 16 incoming "trade skeptics" are set to replace "trade friendly" Republicans in the House, according to a study by the Swiss Institute for International Economics at the University of St. Gallen. Five new Senate Democrats are viewed as more critical on trade than were their opponents.

"The House and Senate are going to exert themselves on trade much more aggressively," vows Ohio Democrat Sherrod Brown, whose successful campaign against free-trade Republican Sen. Mike DeWine was built on opposition to the Bush trade agenda.

Summers on the New Congress

Larry Summers looks at the changed political landscape and concludes:

Big structural tax reform or action on entitlements are almost inconceivable. The challenge for trade policy in the next two years will be primarily defensive: to resist protection rather than to further liberalization.

Sadly, he's probably right.

What happened to the surplus?

Remember 2001, when the federal government was projecting huge surpluses, and people were worrying what we would do when the government debt was completely paid off? Well, it looks like we solved that problem!*

How did we do it? The table above, from economist J. Edward Carter based on CBO data, shows the causes of the change from a ten-year surplus of $5.6 trillion to a ten-year deficit of $2.9 trillion--a swing of $8.5 trillion. The biggest factor was increased spending, of which increased defense spending was the largest piece. The second biggest factor was changed economic and technical assumptions (that is, the forecasters were wrong).

The tax cuts amounted to $1.8 trillion of the $8.5 trillion--about a fifth. [Update: As several commenters point out, the added debt service is partly attributable to the tax cuts. The simplest correction would be to focus on the primary deficit by taking out the change in debt service. In this case, the budget swing is 7.2 trillion, of which the tax cuts represent a quarter.]

Even that amount is most likely an overestimate, because it relies on static assumptions. A dynamic analysis that allows for a feedback of lower taxes to more rapid growth would reduce the share of the budget swing attributed to tax cuts.

Reasonable people can disagree about whether the Bush tax cuts were advisable, but don't let anyone tell you that the tax cuts were the main reason the surplus of 2001 disappeared.

* Before some commenter flames me: yes, this sentence is tongue-in-cheek.

Real World Pigovians

Several readers have emailed me examples of the Pigou Club making headway in the real world (as opposed to the fantasy world of academia and op-ed pages):

• Boulder, Colorado, has just passed a carbon tax.
• Elizabeth May of Canada's Green Party has been advocating a carbon tax. I am told, "Unlike the party south of the border, the Canadian Greens are very fiscally conservative (May was an advisor to former Conservative PM BrianMulroney)."
• Christine Gregoire, governor of Washington state, signed into law an increase in the gas tax in 2005.

A meager start, but a start nonetheless.

Whither academic economics?

A grad student in economics emails me his dismay about the field:

Prof. Mankiw,

I'm an avid reader of your blog and let me be one among the thousands who have probably already told you that it rocks!

I am doing my Masters in Economics here in the US and I recently went to a Graduate Economics Students Conference in my city. I sat through a whole day of paper presentations and the one thing that struck me was how incredibly technical, narrow and to a some extent pointless, some of the research was. It seemed like in a quest to do something original, a lot of graduate students in economics are diverting all their energy towards coming up with things that have absolutely no implications in this world. Most papers I saw were so narrow and simply forms of academic gymnastics that it seemed like the whole point of research in economics was lost (maybe that is the point of research in economics today).

So far I have been seriously considering doing a PhD in the subject, but after the conference I have started having my doubts. It seems like a lot of research in economics today is just churning out results that are primarily of no use to anyone and only a way of standing out in a crowd by showing that you have done something they have not, no matter how pointless. It saddens me to see this happen to the subject. It leaves me disappointed and discouraged. I'm left wondering if nowadays to be successful in a PhD program I must enjoy doing something very narrow and technical even though it might be bordering on real world irrelevance. I hope I am wrong.

Regards,
[name withheld]

I have a lot of sympathy for the letter writer. I often have a similar reaction after attending a conference. Let me make a few observations that may (or may not) be comforting.

1. Economics teaches that activities often run into diminishing returns. That may be true of research in economics. The early economists got the really great ideas (Smith on the invisible hand, Ricardo on comparative advantage, Pigou on corrective taxation, etc.). When we modern guys arrived on the scene, the juicy low-hanging fruit had already been taken.

2. A second issue is stock vs flow. The stock of economic knowledge based on centuries of thinking is great. The flow of new knowledge is meager. Your past coursework was based on the stock. Conferences are based on the flow. So conferences always seem thin cruel compared with well-run courses.

3. A related issue is selection. Courses are based on the best ideas of the past. When you go to a conference, however, you are getting a more random selection of new ideas. Most of these research papers will be forgotten, but a few will be judged by the profession to be important and will end up being incorporated into textbooks and courses in the future. Trying to find the needle in the haystack--and trying to be the author of that needle--is what the research game is all about. That task is difficult because the output of a research project is often unpredictable; even after a paper is finished and published, it can take years for the profession to judge whether its contribution is important.

4. You need to think about the motivation of researchers. An idealized view of academics is that they are motivated to improve the world by expanding knowledge. A more realistic view is that they are motivated to impress more senior academics in order to get good jobs at top universities. Expanding knowledge is the best way to impress the senior academics. Failing that, a second-best option is to write a technically demanding paper that proves how smart you are. Sadly, a lot of papers fall into the second category.

The most exciting course in economics I have ever taken was Principles of Microeconomics, taught by uber-teacher Harvey Rosen during my freshman year at Princeton. That course opened my eyes to a whole new way of viewing the world. No subsequent course or conference has ever yielded the degree of intellectual excitement I felt learning basic micro from Harvey. When I first recognized this fact, I was disappointed, much as the letter writer is. But, even so, I have enjoyed being a professional economist by coming to accept that I will not reach that pinnacle again. You might call it the "soft bigotry of low expectations."

What's wrong with the GOP?

In today's Wall Street Journal, congressman Jeff Flake gives his answer. An excerpt:

The Farm Bill probably provides the best example of where we've gone wrong, and what we need to do to hew back to our first principles.

During the 1990s, then-Sen. Phil Gramm accurately described U.S. farm policy as "enough to make a Russian Commissar puke." The Republicans assembled the "Freedom to Farm Act," which, starting in 1996, put U.S. farmers on a glide path toward an end to subsidies. Somewhere between the field and the silo, however, we became mired in the political mud. In 2002, we repealed the Freedom to Farm Act and in its place installed the "Farm Security Act" -- those who value the adage about trading freedom for security can pause and shudder here -- with even more lavish subsidies.

Now, with reauthorization of the Farm Bill on the horizon next year, we have to decide whether we will up the ante with Democrats in terms of red state/blue state politics in the heartland, or whether we believe our own rhetoric about free markets. This debate will have implications larger than the fiscal one. Most notably, it will determine if we are serious about the future of free trade.

I agree. The farm issue is a good bellwether about whether politics trumps principle.

More Pigou Club News

The Pigou Club get added media attention--this time in Slate and The Economist.

Two New Members

Former Bush speechwriter David Frum shows his Pigou Club credentials in today's Wall Street Journal:

The president should send Congress a tax-reform proposal now, shaping it so that it appeals to enough Democrats to split the opposition. Here's one way to do that: Democrats have made a great theme of "energy independence." The president has likewise denounced America's "addiction to oil" and often presented nuclear power as a crucial element of an ideal energy policy. What if he baited the Democrats with some kind of energy tax (or, better, a carbon tax -- which exempts nuclear-generated energy) in exchange for permanent cuts in taxes on work, savings and investment. "Tax waste, not work" is not a bad slogan.

Economist Nouriel Roubini signs up as well.

Dems and Drugs

Yesterday, as the market was processing all the political news, the stock market was up slightly (+0.2%), but pharmaceutical companies took a hit.

My interpretation: The Dems will likely give us lower drug prices and less research into new drugs. Good news if you plan to be sick soon. Bad news if you plan to be sick in the more distant future.

The Lou Dobbs Democrats

Over a Slate, a troubling essay by Jacob Weisberg. An excerpt:

Many of the Democrats who recaptured seats held by Republicans have been described as moderates or social conservatives, who will be out of synch with Speaker-to-be Nancy Pelosi. The better term, with props to Fareed Zakaria, is probably illiberal Democrats. Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory.

Pat Buchanan expresses a similar theme, although more approvingly.

The Bronze Lining

A friend of mine who often advises Democratic candidates writes me:

You should link to this story -- to supplement the many critical Pelosi stories you've linked to. At a minimum it's worth noting that House Democrats will be unambiguosly better than the Republicans they're replacing on the only major "free trade" issue on the agenda over the next two years: immigration. That plus the Democrats' greater instinctive sympathy for the Pigou Club should be at least a bronze lining for you.

Fair points. But as far as I know, no elected official of either party has yet qualified for the Pigou Club.

The Challenges Ahead

In today's NY Times, David Leonhardt has a nice piece about the economic challenges the new Congress faces.

Kinsley on the Democratic Agenda

If you want to know what the world (inside the Beltway) will probably look like tomorrow morning, read this.

It's Election Day!

"about twice as many people have no political views as have a coherent political belief system."

From an old New Yorker article by Louis Menand on what motivates voters. The article is well worth reading. Thanks to the ec 10 student and loyal blog reader who called it to my attention.

Which party favors free trade?

Some of my best friends are Democrats. They often like to think that their party is good for international trade.

"Remember NAFTA?," they tell me. "Clinton was a Democrat, and he pushed the free-trade agenda forward."

Yes, but let's look at how he did it. The 1993 roll call vote in the House found 132 Republicans in favor of NAFTA, 43 against. Among House Democrats, there were 102 in favor, 156 against.

In the Senate, the same story. Among Republican senators, there were 34 in favor of NAFTA, 10 against. Among Democratic senators, 27 were in favor, 28 against.

Since NAFTA, the difference between the two parties has, if anything, grown larger. When the Central America Free Trade Agreement came up for a vote in 2005, the House produced 202 Republicans in favor, 27 against. The Democrats had only 15 in favor, 187 against.

NAFTA passed in 1993 because a smart, moderate Democratic president rejected the majority view of his own party in order to complete a policy initiative that his Republican predecessor had begun. I give Clinton a lot of credit for that decision. But it would be a mistake to look back at this episode and delude oneself into thinking that the Democratic caucus in Congress is filled with Bill Clintons.

Updated rankings

Here are updated rankings of economics blogs and academic economists.

Note: Neither ranking includes the entire universe of candidates. The blog ranking requires that the blog have a public sitemeter, and the economist ranking requires the person be registered (more than half of active researchers now are).

Caplan on Voting

GMU economist Bryan Caplan gives a preview of his forthcoming (and highly recommended) book, The Myth of the Rational Voter.

Flake vs Pelosi

Last night, the TV news show 60 Minutes had a profile of Arizona Congressman Jeff Flake and his noble tilting-at-windmills campaign against earmarks and wasteful government spending. Just for fun, I checked the rating of the National Taxpayers Union, which grades lawmakers for "responsible tax and spending policies." By a large margin, the NTU gives Flake its highest grade of 91 percent.

By contrast, Nancy Pelosi, the next House speaker (now with probability 0.8), gets a grade of 11 percent, close to the bottom of the class.

MPA/ID

My Harvard colleague Dani Rodrik sends me an email requesting some publicity for the Kennedy School's Master in Public Administration in International Development:

Hi Greg,

A graduate of our MPA/ID program, and a former student of mine, has written to me that you frequently entertain questions in your blog from prospective graduate students who are looking for a serious, rigorous policy-relevant program, but find few options out there.

I am the faculty chair of the MPA in International Development program at the KSG, which would be a good option to consider for those who are interested in development and international economics. We do serious, PhD-level two semester sequences in micro, macro, and stats/econometrics (textbooks: Mas-Collel, Whinston, Green, Romer, etc.). It's all done in a policy-serious way, with case workshops and so on. Here is the link in case you are interested to find out more.

Thanks, and I hope you are well.

Dani

The program is, in fact, very strong. Students in the program are among some of our best ec 10 teaching fellows. If you want to learn some serious economics beyond college, are interested in policy jobs rather than academic jobs, and aren't eager to make the approximately five-year commitment required for a PhD, this program is a good choice.

What's at stake tomorrow

From today's Wall Street Journal:

Protectionist Stance Is Gaining Clout
Democrats Benefit by Fighting Free Trade, And Next Congress Could Face Changing Tide

Bidding for a congressional seat held by a free-trade Republican for nearly two decades, Democrat Bruce Braley has gained an edge by taking the opposite view: bashing globalization.

In one of the most closely watched congressional races, Mr. Braley has made opposition to the Bush administration's free-trade agenda a centerpiece of his campaign. He has run ads blaming the state's job losses on President Bush's "unfair trade deals." He has urged more focus on labor rights in national trade policy and talked of using economic sanctions to keep America competitive. "Our workers aren't on a level playing field," he says.

Mr. Braley's stance has helped propel the 49-year-old lawyer, who is running against an unabashedly free-trade Republican, into position to reverse recent trends and secure a Democratic win in Iowa's First District. His strong showing not only underscores how trade concerns have emerged as a central issue in many of this year's races but also suggests a more-protectionist U.S. trade policy if Democrats take Congress....

Trade is a perennial political dividing line. But the issue is taking on importance this year, amid increased public anxiety over globalization and activism by trade opponents. The political committee formed by the Citizens Trade Campaign, a labor, farm and environmental coalition, dispatched organizers after Labor Day to a dozen battleground districts to rally free-trade opponents. Protectionist sentiments and economic nationalism appear to be emerging as symbols of a broader but less well-defined sense of economic unease, which is particularly apparent in the Midwest this year.

The Republican-controlled Congress has already showed its sensitivity to the issue, helping derail a deal by Arab-owned Dubai Ports World to purchase the commercial operations at five U.S. ports and approving millions of dollars to build a wall to stem the tide of illegal immigrants from Mexico. Republican leaders have put aside initiatives on the Bush free-trade agenda, delaying action on a trade pact with Peru and pushing the White House to commit to a plan to possibly curtail imports from Vietnam.

The trend may become more pronounced if Democrats take one or both houses of Congress. In the 1990s, a bloc of House Democrats regularly supported free-trade initiatives like the North American Free Trade Agreement. These numbers have fallen as doubts increase about globalization, with only 15 Democrats backing the Central American Free Trade Agreement in 2005. The emergence of candidates like Mr. Braley could accelerate the Democrats' transformation.

Stiglitz on Cotton Subsidies

Joe Stiglitz objects--as do most other economists--to government subsidies to U.S. cotton producers:

Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of the recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone.

Rogoff on Global Warming

My Harvard colleague Ken Rogoff remains a member in good standing of the Pigou Club:

As an American, I am appalled, ashamed, and embarrassed by my country's lack of leadership in dealing with global warming....

a wide range of economists favour a uniform ("harmonized") global tax that would tax carbon emissions equally everywhere in the world, and from whatever source - whether coal, oil, or gas, and whether consumers or businesses.

How to handle a telemarketer

I apologize: This has nothing to do with economics, but it is so funny that I could not resist passing along the link. Thanks to Don Luskin for the pointer.

Election Day Approaches

In 2000, when I was a columnist for Fortune, I wrote the following piece. It was the only thing I wrote for the magazine that the editors refused to run. I think they viewed the topic as vaguely unpatriotic. (By the way, I myself vote regularly.)

Why Some People Shouldn't Vote
By N. Gregory Mankiw
October 2000

As election day gets close, get ready to hear the usual exhortations about voting. Whether Bush or Gore is the better choice is debatable, but responsible people all agree that everyone should be encouraged to vote. It's a national disgrace, the hand-wringers say, that millions of eligible voters fail to turn out in presidential elections. Voting is a civic responsibility, they tell us, because democracy works best when everyone participates.

The problem is, this isn't true. Sometimes the most responsible thing a person can do on election day is stay at home.

Before we're too hard on people who don't vote, we should ask why they don't. It is tempting for us voters to view abstainers as lazy free riders who aren't holding up their end of the democratic bargain. But is it really this simple? Not according to economists Timothy Feddersen and Wolfgang Pesendorfer. They wrote a 1996 article in the American Economic Review that is now on the cutting edge of explaining why people don't vote.

Feddersen and Pesendorfer suggest that nonvoting has to be understood together with a related phenomenon--the decision of voters to skip some items listed on the ballot. This behavior, which political scientists call roll off, is common. Feddersen and Pesendorfer give an example of a 1994 Illinois gubernatorial race in which about 3 million citizens showed up at the polls, but only 2 million voted on a proposed amendment to the state constitution.

Anyone who has ever entered a polling booth can easily see why roll off occurs. You come ready to vote for your favorite candidate in some race you've been following closely, but then you face a whole list of races and ballot questions, most of which you know little or nothing about. What do you do? You could quickly make a decision based on your scant knowledge. But what if the contest is very close? Do you really want the outcome based on your almost random vote?

So you choose another course: You skip the item. In practice, this means that you are relying on your fellow citizens to make the right choice. But this can be perfectly rational. If you really don't know enough to cast an intelligent vote, you should be eager to let your more informed neighbors make the decision.

Feddersen and Pesendorfer suggest that not showing up to vote is motivated by the same reasoning as roll off. Eligible voters who are less informed about the candidates than their fellow citizens choose to stay at home, knowing the outcome will be more reliable without their participation. By not voting, they are doing themselves and everyone else a favor. If the ill-informed were all induced to vote, they would merely add random noise to the outcome.

What's the evidence that this theory is right, that nonvoters are less informed than voters? Studies of voter turnout have found that education is the single best predictor of who votes: The highly educated turn out more often than less educated. A classic argument for why democracies need widespread public education is that education makes people better voters. If this is true, then the less educated should show up at the polls less often. They are rationally delegating the decision to their better educated neighbors.

So the next time a friend of yours tells you he's not voting, don't try to change his mind. It's a good bet that if he's not voting, he's not been following the election closely anyway. Maybe he watched a baseball game instead of the debates. Maybe he is bored silly with all the talk of targeted tax cuts, privatized social security, and campaign finance reform. Maybe he's as ignorant about public policy as those focus groups of undecided voters that are the media's latest darling.

So rather than pushing your friend to the polls, perhaps you should thank him for staying at home. He's making your vote count just a little bit more.

On Kevin Murphy

A nice profile of the Chicago economist.

Thanks to Marginal Revolution for the pointer.