Is the new measure of poverty better?

Robert Samuelson looks at a proposed new measure of the poverty rate.

Income and Federal Tax Shares

Click on grapic to enlarge.  Source: Scott Hodge from Tax Policy Center estimates.

Fama on Financial Reform

The Next Financial Crisis

As foretold by Harvard's Jeremy Stein.

The World Economy in a Nutshell

Thanks to Tim Schilling for the pointer.

Modesty, Gradualism, Balance

A couple years ago, I participated in a panel discussion on libertarianism in Michael Sandel's Justice class, along with my friend and colleague Jeff Miron.  Jeff is a true libertarian, and he defended that position with gusto.  By comparison to Jeff, I seemed lacking in conviction.  I described myself as a "libertarian at the margin."  By that, I meant that given our starting point today, I believe more reliance on individual liberty and less on governmental solutions is usually a step in the right direction, but I often recoil at more radical libertarian positions.

David Brooks's column yesterday offers a good explanation of skepticism about big radical ideas, such as pure libertarianism.  It made me feel better about my watered-down variety.

Whither Fannie and Freddie?

Donald Marron and Phillip Swagel propose a reform of the housing GSEs.

Do two rights make a wrong?

Users of my favorite textbook know that it includes, in Chapter 7, a case study on whether kidneys should be traded in a market.  Today's NY Times has a related article.

The paper's so-called "Ethicist" is dealing with this situation:

1. Person A receives a kidney transplant as a donation from person B.
2. A short time later, person B is having financial troubles and her home may go into foreclosure.  Person A is considering giving her some money to help out.

So what does the "Ethicist" say about all this?  Apparently, both of these gifts are noble acts, worthy of the highest praise and admiration. Unless, that is, there is some reason to think they are linked together.  In that case, the reallocation of resources (kidney, cash) would be a despicable market transaction.

I suspect that few economists would concur.  Indeed, the essence of market transactions is a kind of reciprocal altruism, enforced by contract.  It might be nice if the world could work using pure altruism alone, but that seems highly unrealistic.  The sad truth is that under the Ethicist's code of conduct, we have more deaths and more foreclosures than necessary, all in the name of fairness.

Picture of the Day

Source: Jodi Beggs.

The Feeling is Mutual

A friend sends along this story:

Majority Of Government Doesn't Trust Citizens Either

WASHINGTON—At a time when widespread polling data suggests that a majority of the U.S. populace no longer trusts the federal government, a Pew Research Center report has found that the vast majority of the federal government doesn't trust the U.S. populace all that much either.

According to the poll—which surveyed members of the judicial, legislative, and executive branches—9 out of 10 government officials reported feeling "disillusioned" by the populace and claimed to have "completely lost confidence" in the citizenry's ability to act in the nation's best interests.

"All the vitriol and partisan bickering in Congress has caused most Americans to form negative opinions of the U.S. government," Pew researcher Amy Ratner said. "However, over the same time period, the government has likewise grown wary of U.S. citizens, largely due to their utter lack of foresight, laziness, and overall incompetence."

Added Ratner, "And the fact that American Idol is still the No. 1 show on television doesn't exactly make our government burst with confidence."

By the way, the story is from The Onion.

Follow the Money

This video (via Mark Perry) describes some neat data. It seems to me that some clever dissertation-writer in economics should be able to use it for good effect, although exactly how is not obvious.

Glaeser on Cap-and-Trade

Ed opines on the Kerry-Lieberman climate change bill.

Harvard's Double Standard?

Peter Wehner says my employer has a double standard on gay rights.

Lessons from Greece

• As seen by Marty Feldstein
• As seen by John Cochrane
• As seen by Michael Spence
• As seen by Barry Eichengreen
• As seen by Joe Stiglitz
• As seen by Vincent and Carmen Reinhart

Is a VAT good for exports?

In a recent CNBC interview, former President Clinton endorses the idea of a value added tax.  (Click here.  The discussion of the VAT is around minute 2:45.)

One of President Clinton's main arguments is that a VAT would improve our trade balance, because it is rebated on exports and imposed on imports.  The problem is that this argument is well-known, at least among economists who specialize in this topic, to be a fallacy.  Here is Alan Viard on the topic:

A common fallacy holds that border tax adjustments—imposing taxes on imports and rebating taxes on exports—would enhance American exports and reduce imports. The reasoning behind this mistake is simple enough. A border adjustment seems to provide a subsidy to exporters and to levy a tariff on importers. Border adjustment proponents, noting that international trade rules allow nations to border adjust consumption taxes such as European-style value added taxes, urge the adoption of a consumption tax in the United States so that we can border adjust and enhance our trade competitiveness.

Yet, such an argument ignores an essential truth about imports and exports: over the long term, exports and imports must be equal. We can think of a country like a household. Purchases are paid for from the proceeds of sales, and sales are made for the purpose of additional purchases. In the long run, purchases and sales must be equal. A nation’s trade policy works the same way. Over a nation’s history, the value of exports in current dollars must equal the value of imports in present value. Any attempt to permanently increase exports and decrease imports is futile.

What would actually happen if we border adjusted imports and exports is that exchange rate movements would offset the trade effects and the dollar would appreciate. The key variable is the real exchange rate, which determines the terms at which a country buys and sells. (For the United States, the real exchange rate is the value of the dollar in terms of foreign currency—the nominal exchange rate—multiplied by the U.S. price level and divided by the foreign price level.) The real exchange rate adjusts to keep the present discounted value of exports and imports equal. The adoption of a border adjustment by the United States would trigger an increase in the real exchange rate that would offset the perceived boost to exports and the perceived restraint on imports.

Imagine, for the moment, that one euro and one dollar have the same value under the current trade regime. If a firm in the United States wanted to import one euro’s worth of German chocolate, the cost of the chocolate to the importer would be one dollar.

Now, let’s imagine that we institute a 25 percent border adjustment. The cost of the chocolate to the importer would increase to €1.33 (25 percent of 1.33 is 0.33). At the same time, the dollar would appreciate to €1.33; conversely, one euro would be worth 75 cents. At the new exchange rate, the €1.33 chocolate would still cost the importer one dollar, so there would be no net increase in cost.

The same dynamics would be at play in the case where the United States is an exporter. Imagine that a German importer wants to buy one dollar worth of Florida oranges, which would cost one euro under the current trade regime. Under the border adjustment, the United States would rebate the American exporter 25 percent, so the cost to the German importer would decrease to 75 cents. Because the dollar would appreciate to €1.33, however, the cost to the German importer would still be one euro. There would be no competitive advantage for U.S. exports.

These examples reveal that the impact on overall trade flows would be neutral.

None of this means that a VAT is a bad idea.  But the argument in favor of it should not rely on the fallacious claim that it would promote exports and discourage imports.

Guess the Author

Read the passage.  Then click on the link below to learn the author's identity.

In our own times, a coherent socialist movement is nowhere to be found in the United States. Americans are more likely to speak of a golden past than of a golden future, of capitalism's glories rather than of socialism's greatness. Conformity overrides dissent; the desire to conserve has overwhelmed the urge to alter. Such a state of affairs cries out for explanation. Why, in a society by no means perfect, has a radical party never attained the status of a major political force? Why, in particular did the socialist movement never become an alternative to the nation's established parties?

In answering this question, historians have often called attention to various charcteristics of American society... an ethnically-divided working class, a relatively fluid class structure, an economy which allowed at least some workers to enjoy what Sombart termed "reefs of roast beef and apple pie"--prevented the early twentieth century socialists from attracting an immediate mass following. Such conditions did not, however, completely checkmate American socialism.... Yet in the years after World War I, this expanding and confident movement almost entirely collapsed....

From the New York socialist movement's birth, sectarianism and dissension ate away at its core. Substantial numbers of SP members expressed deep and abiding dissatisfaction with the brand of reform socialism advocated by the party's leadership. To these left-wingers, constructive socialism seemed to stress insignificant reforms at the expense of ultimate goals. How, these revolutionaries angrily demanded, could the SP hope to attract workers if it did not distinguish itself from the many progressive parties, if it did not proffer an enduring and radiant ideal? How, the constructivists angrily replied, could the SP hope to attract workers if it did not promise them immediate benefits, if it did not concern itself with their present burdens?...

Through its own internal feuding, then, the SP exhausted itself forever.... The story is a sad but also a chastening one for those who, more than half a century after socialism's decline, still wish to change America. Radicals have often succumbed to the devastating bane of sectarianism; it is easier, after all, to fight one's fellows than it is to battle an entrenched and powerful foe. Yet if the history of Local New York shows anything, it is that American radicals cannot afford to become their own worst enemies. In unity lies their only hope.

Click here to learn who wrote this.

Kocherlakota on Modern Macro

A nice essay by the Minneapolis Fed President.

Spike Lee, Al Gore, and Me

What we have in common.

Who gets the goodies?

Ted Gayer looks at who gets the value of carbon allowances in the new Senate cap-and-trade bill.  He finds that, over the first decade, the bill auctions less than a quarter of the allowances, the remainder being given away to such things as electricity local distribution companies, trade-exposed industries, refiners, commercial developers of carbon capture and storage, and a National Industrial Innovation Institute.

Bernanke on Happiness

Ben gives a nice talk about happiness research.  This snippet is fun:

I am reminded of a story about Abraham Lincoln. According to the story, Lincoln was riding with a friend in a carriage on a rainy evening. As they rode, Lincoln told the friend that he believed in what economists would call the utility-maximizing theory of behavior, that people always act so as to maximize their own happiness, and for no other reason. Just then, the carriage crossed a bridge, and Lincoln saw a pig stuck in the muddy riverbank. Telling the carriage driver to stop, Lincoln struggled through the rain and mud, picked up the pig, and carried it to safety. When the muddy Lincoln returned to the carriage, his friend naturally pointed out that he had just disproved his own hypothesis by putting himself to great trouble and discomfort to save a pig. "Not at all," said Lincoln. "What I did is perfectly consistent with my theory. If I hadn't saved that pig, I would have felt terrible."

Pigovian Logic

From Holman Jenkins:

Even if you believe saving gasoline is a holy cause, subsidizing electric cars simply is not a substitute for politicians finding the courage to jack up gas prices. Think about it this way: You can double the fuel efficiency of any car by putting a second person in it. You can increase its fuel efficiency to infinity by refraining from frivolous trips.

These are the incentives that flow from a higher gas price. Exactly the opposite incentives flow from mandatory investment in higher-mileage vehicles. You paid a lot for a car that costs very little to operate—so why not operate it? Why bother to car pool? Why not drive across town for a jar of mayonnaise?

The Rodrik Hypothesis

Harvard's Dani Rodrik thinks that recent events in Greece may have a deeper meaning:

Deep down, the crisis is yet another manifestation of what I call “the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.

Read the full explanation here.  Sad, if true.

Opportunity Cost

Joshua Gans alerts me to a minor brouhaha over Neil Gaiman (a fantasy and science fiction writer) charging a library $45,000 to give a talk.  Mr Gaiman apparently understands the concept of opportunity cost (principles number 2 in my favorite textbook).  Here is how he explains his fees at his website.

Q. How can I get Neil Gaiman to make an appearance at my school/convention/event?

A. Contact Lisa Bransdorf at the Greater Talent Network. Tell her you want Neil to appear somewhere. Have her tell you how much it costs. Have her say it again in case you misheard it the first time. Tell her you could get Bill Clinton for that money. Have her tell you that you couldn't even get ten minutes of Bill Clinton for that money but it's true, he's not cheap.

On the other hand, I'm really busy, and I ought to be writing, so pricing appearances somewhere between ridiculously high and obscenely high helps to discourage most of the people who want me to come and talk to them. Which I could make a full time profession, if I didn't say 'no' a lot.

I appreciate Mr Gaiman's logic completely. For much the same reason, I say "no thanks" to over 95 percent of speaking invitations I receive. Occasionally, I quote a speaking fee based on my opportunity cost, which is partly a function of travel time to the venue (I hate airplanes). Once in a while, this strategy yields a lucrative speaking gig. But I fear that even quoting a price may seem like an insult to the person extending the invitation, so I usually just turn down speaking requests from the get-go.

The Welfare State's Death Spiral

Robert Samuelson interprets the turmoil in Greece.

Ferguson on Posner

Harvard's Niall Ferguson reviews Richard Posner's new book.  I particularly enjoyed this snippet on the financial reform bills being debated in Congress:

Both these measures recall the old British sitcom “Yes Minister,” in which all crises elicited the following response from the clueless politician Jim Hacker: “Something must be done. This is something. Therefore we must do it.”

Does a common currency area need a centralized fiscal authority?

Paul Krugman has a thoughtful and thought-provoking column on Greece today.

A large part of his argument is that Europe is not an optimal currency area because it lacks a large central government enacting transfer payments among the various regions.  That argument will be familiar to students of macroeconomics.  (See, e.g., the case study on monetary union in chapter 12 of my intermediate macro textbook.)

Is that right? I am not so sure. The United States in the 19th century had a common currency, but it did not have a large, centralized fiscal authority. The federal government was much smaller than it is today. In some ways, the U.S. then looks like Europe today. Yet the common currency among the states worked out fine.

Once upon a time, one might have said that the U.S. back then had a particularly vicious business cycle.  But Christy Romer's path-breaking research has demolished that claim. 

One might argue that the 19th century had a different set of labor institutions than we have today, and these facilitated the adjustment of wages.  That argument, suggested by the research of Chris Hanes, may have some merit.  If that is the case, then maybe that is the path forward for Greece and the rest of Europe.  As Paul suggests, increasing wage flexibility won't be painless.  Yet it might be easier than giving up on the Euro experiment.

A final possibility is that the key difference is labor mobility: Americans were willing to move among the states, whereas Greeks have to stay in Greece because they don't speak German.  If that is the key difference, then Paul may well be right that the Euro experiment is over.

Update: More from Paul.

The Budget in One Picture

Source: CBO.

In Defense of Price Gouging

For the past several days, many towns around Boston have found themselves without drinkable tap water. This increased the demand for bottled water, putting upward pressure on the price. While some policymakers cried foul, this opinion piece endorses the market’s natural response.

Obviously, he didn't take ec 10

Click on the graphic to enlarge.

A Talk from Esther Duflo

Thanks to Alex Tabarrok for the pointer.

Ambivalence

Click here to read my column in Sunday's NY Times about the possibility of a value-added tax.

How to Solve Inbox Congestion

A blog reader makes a Pigovian suggestion:

I think an excellent Pigouvian tax would be a tax on emails. Many emails involve a negative externality (I don't really want to receive them) and almost all the ones I really want to get are worth much more than a penny or so to the sender. So a penny tax (say) on email would probably generate large amounts of revenue, mitigate an important negative externality, and have minimal inefficient disincentives. Since email servers are necessarily centralized and networked and all email senders are ipso facto connected to an ISP who is charging them for access the transactions costs and evasion problems seem low.

I know my life would improve under such a tax.
 
Even better, if possible, might be to have the recepient set the price!  I would happily raise mine to a dime, and let the government use the revenue to fix the long-term fiscal imbalance or cut other more distortionary taxes.