Sunday, May 31, 2009

The Myth of Healthcare Savings

Saturday, May 30, 2009

Ferguson takes on Krugman

The Case for Doing Little

As readers of this blog know, I have long been an advocate of Pigovian taxes, such as carbon taxes to deal with global climate change. (Here, also here ungated, is my most complete statement of the arguments.) On this topic, I was disappointed with the Bush administration, which did little to address the issue.

Their failure to act, while disappointing to me, was nonetheless principled and thoughtful. The logic for not doing much to address global climate change is spelled out in a recent blog post by former NEC director Keith Hennessey.

Clive Granger

Clive Granger, the great econometrician and Nobel laureate, has died. Here is his obituary.

Friday, May 29, 2009

Keeping Things in Perspective

The graph is from the Donald Marron's new blog.

The Cult of Utilitarians

Conor Clarke takes note of my paper with Matthew Weinzierl (earlier, ungated version) on taxing height and then comments:
I'm surprised to [see] the strong utilitarian view described as the consensus. I don't know much about utilitarian optimal tax theory, but I also don't know of any public finance or policy people who are dying to revive the prescriptive insights of Jeremy Bentham and Francis Edgeworth. Is there a cult of utilitarian social planners out there waiting to propose taxes on inputs like height, intelligence and race?
Well, no, to my knowledge no one is eager to tax height, intelligence, and race. But there is a prominent guy who lives at a nice home at 1600 Pennsylvania Avenue who wants to "spread the wealth around." The moral and political philosophy used to justify such income redistribution is most often a form of Utilitarianism. For example, the work on optimal tax theory by Emmanuel Saez, the most recent winner of the John Bates Clark award, is essentially Utilitarian in its approach.

The point of our paper is this: If you are going to take that philosophy seriously, you have to take all of the implications seriously. And one of those implications is the optimality of taxing height and other exogenous personal characteristics correlated with income-producing abilities.

A moral and political philosophy is not like a smorgasbord, where you get to pick and choose the offerings you like and leave the others behind without explanation. It is more like your mother telling you to clean everything on your plate. If you are a Utilitarian redistributionist, the height tax is like that awful tasting vegetable your mother served up because it is good for you. No matter how hard you might wish it wasn't there sitting on your plate, it just won't go away.

Thursday, May 28, 2009

Google's Economist

Blame the Board

Princeton economist Alan Blinder says much of the financial crisis was due to excessive risk taking, which was due to perverse incentives, which were due to crazy compensation packages, which were approved by boards of directors:
fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees. These boards, I'll remind you (and please remind the board members), are supposed to represent the interests of stockholders, not those of managers. Quite plainly, many were asleep at the switch, with disastrous consequences. The unhappy (but common) combination of coziness and drowsiness in corporate boardrooms must end. As one concrete manifestation, boards should abolish go-for-broke incentives and change compensation practices to align the interests of shareholders and employees better. For example, top executives could be paid mainly in restricted stock that vests at a later date, and traders could have their winnings deposited into an account from which subsequent losses would be deducted.

Wednesday, May 27, 2009

The Yield Curve is Steep

Source. Click here to enlarge.

This graph shows the difference between the 10-year and 2-year yields on Treasuries. In general, a steep yield curve--that is, a high value of this variable--is a positive indicator of future economic growth. In many ways, however, this is an unusual downturn, so it is not entirely clear to what extent historical relationships are a useful guide going forward.

The Shrinking of Harvard

Marty leaves AIG

The Crimson reports that after 22 years, Marty Feldstein is leaving the AIG board of directors, where he served "on the board’s finance and risk management committee as well as the regulatory, compliance, and public policy committee."

This will give Marty more time for his work on President Obama's economic advisory panel.

John Taylor is worried...

Tuesday, May 26, 2009

More on Negative Interest Rates

From Glenn Rudebusch of the San Francisco Fed:
The recommended future policy setting of the funds rate based on the estimated historical policy rule and these economic forecasts is given as the dashed line in Figure 2. This dashed line shows that, in order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year—well below its lower bound of zero.

Biofuels are lose-lose

SCOTUS nominee is a spender

I once wrote a short paper called The Savers-Spenders Theory of Fiscal Policy based on the premise that there are two types of people: Some save and intertemporally optimize their consumption plans, while others live paycheck to paycheck, spending their entire income as soon as it's received. Sometimes readers of the paper think of the two groups as rich and poor, but that interpretation is wrong. Some people with low incomes manage to scrimp and save (I always think of my grandmother), and some people with high incomes spend most everything they earn.

Apparently, the new Supreme Court nominee Sonia Sotomayor is an example of the latter. The Washington Post reports that the 54-year-old Sotomayer has a $179,500 yearly salary but

On her financial disclosure report for 2007, she said her only financial holdings were a Citibank checking and savings account, worth $50,000 to $115,000 combined. During the previous four years, the money in the accounts at some points was listed as low as $30,000.

My grandmother would have been shocked and appalled to see someone who makes so much save so little.

Update: Several readers have emailed me to suggest that Judge Sotomayer does not need to save much because federal judges have generous retirement benefits. Maybe so. And, in any event, economic theory alone does not prescribe what the right level of saving should be: Optimal saving is a function of the subjective rate of time preference, and economists have no basis to say that some intertemporal preferences are better than others. In my savers-spenders model, both savers and spenders may be acting optimally given their own preferences. I am sure, however, that none of these arguments would have convinced my grandmother.

Update 2: A couple other readers have pointed out a possible problem with the Washington Post story I cited above. To quote from one email, "Under the Ethics in Government Act of 1978, federal judges are not required to report publicly amounts they have saved in their Thrift Savings Plan (5 U.S.C. app. sec. 102(i)(1)(A)). The Thrift Savings Plan ("TSP") is the federal employee's version of a 401(k) plan. Of course, Judge Sotomayor may not have saved much in her TSP. On the other hand, she may have saved several hundred thousand dollars that way. The point is that the TSP need not be disclosed under the law, so there is no way the Washington Post could have reported on it."

Update 3: Ten days later, based on new documents filed by the nominee, the NY Times reports: "So how is it that Judge Sonia Sotomayor...reported a net worth of just $740,000 this week, with no stocks or bonds and a savings account of $31,985, just marginally more than she owes her dentist and credit card companies?...Besides living in an expensive area of the country, Judge Sotomayor has a taste for nice things and is an avid traveler. Her destinations have ranged from the Caribbean to the Galápagos Islands, and she has been known to stop in at a casino on vacation....Judge Sotomayor has been described in interviews as an interior decorating buff who loves to shop. And she is a frequent patron of Manhattan restaurants, sometimes picking up the tab for dinner with clerks in SoHo or at Chinatown places like Joe’s Shanghai."

Monday, May 25, 2009

The Healthcare-Competitiveness Fallacy

A common argument, often made by ostensibly sophisticated commentators, is that the United States needs to reform its health care system to maintain its international competitiveness. Regardless of your views of health care reform, this particular argument is, to put it bluntly, nonsense. Long ago, Paul Krugman wrote a nice piece demolishing the whole concept of international competitiveness as a motive for national economic policy. More recently, the Congressional Budget Office has done a nice job explaining why the idea of international competitiveness as a reason for health care reform is fallacious. The passage below, from page 167 of the CBO analysis, is written in the CBO's traditional understated way, but the point is clear:

International Competitiveness

Some observers have asserted that domestic producers that provide health insurance to their workers face higher costs for compensation than competitors based in countries where insurance is not employment based and that fundamental changes to the health insurance system could reduce or eliminate that disadvantage. However, such a cost reduction is unlikely to occur, except in the short run.

The equilibrium level of overall compensation in the economy is determined by the supply of and the demand for labor. Fringe benefits (such as health insurance) are just part of that compensation. Consequently, the costs of fringe benefits are borne by workers largely in the form of lower cash wages than they would receive if no such benefits were provided by their employer.

Replacing employment-based health care with a government-run system could reduce employers’ payments for their workers’ insurance, but the amount that they would have to pay in overall compensation would remain essentially unchanged. Even though changes to the health care system could have various effects on the supply of labor, the underlying amount of labor supplied at any given level of compensation would hardly be
affected by a change in the health care system. As a result, cash wages and other forms of compensation would have to rise by roughly the amount of the reduction in health benefits for firms to be able to attract the same number and types of workers.

Compensation could take some time to adjust to its market-clearing level (the point at which supply and demand are equal). During that time, firms that formerly provided health benefits—especially firms that employ workers under multiyear contracts—could experience substantial reductions in labor costs, which would boost their profits temporarily. But those firms would experience no permanent change in their competitive status.

Be ready: This fallacy may well be rearing its ugly, and illogical, head in the days to come.

Saturday, May 23, 2009

Crisis 101

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

Then and Now

From a Obama-Biden campaign position paper:
Barack Obama and Joe Biden’s cap-and-trade system will require all pollution credits to be auctioned. A 100 percent auction ensures that all large corporate polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies.
From today's newspaper:
Under the House bill, only 15% of the emission permits will be auctioned initially. The rest of the permits will be given away -- 2% to oil refiners, 5% to free-standing "merchant" coal plants, 9% to regulated natural-gas distributors, and so on.
So, Mr President, the bill now being considered in Congress is in direct contradiction to your campaign pledge. Will you now please stand up for principle and issue a veto threat?

Friday, May 22, 2009

Counting on Ignorance

I have recently started the process of buying a car (to be used, primarily, by my teenage daughter and, in a couple years, my older son). Like every conscientious consumer, I have been doing a bit of research. In particular, I got a copy of the Consumer Reports auto issue (April 2009).

Page 15 was particularly enlightening. There, in their "Automakers report cards," Consumers Union summarized their findings for each of fifteen major car companies.

Dead last was Chrysler. CU recommended zero percent of the Chrysler vehicles they tested. That's right--zero. Second to last was General Motors. CU recommended 17 percent of GM models. By contrast, most other companies had half or more of their models get the thumbs up. Honda was the top ranked brand; CU recommended 95 percent of its models.

Is it any surprise that Chrysler and GM are now in the process of going out of business? From the perspective of the Consumer Reports advice, it looks like their business model was to count on the ignorance of the buying public about the quality of their products. Their bankruptcy should perhaps be viewed as a success of the market system.

Thursday, May 21, 2009

The Economics of Star Trek

Andrew Leonard notes, as some others have, that in the new Star Trek movie, young Vulcans are taught the meaning of "excludable" and "rival." I am delighted to see economics education thrive into the 23th century. I am, however, not surprised: After all, it is only logical.

Leonard suggests that the reference in the movie is a shout-out to Paul Romer's work. Maybe so, but that is less obvious to me. Paul certainly used the terms "excludable" and "rival" in his famous work on economic growth, and to great effect, but these terms predate Paul's work. Indeed, they are the standard terms that public finance economists have long used to distinguish private and public goods. Today at Harvard, most students first learn these words when studying the basics of public finance rather than the theory of long-run growth. I won't venture a guess about the Vulcan curriculum.

By the way, the Star Trek movie is a lot of fun.

Even better than I thought

MIT economist Jonathan Gruber emails me:

Greg -

I thought you would appreciate this. My daughter likes doing her homework in my office but she needs a flat surface on which to write. She perused all the textbooks in my office and decided she liked your macro book best as her writing surface. Now she won't use any other book and won't do her homework in my office if we can't find your book. So now you have another reason to recommend your macro text!


Wednesday, May 20, 2009

Women are less happy

According to new research from Betsey Stevenson and Justin Wolfers:

The Paradox of Declining Female Happiness
By many objective measures the lives of women in the United States have improved over the past 35 years, yet we show that measures of subjective well-being indicate that women's happiness has declined both absolutely and relative to men. The paradox of women's declining relative well-being is found across various datasets, measures of subjective well-being, and is pervasive across demographic groups and industrialized countries. Relative declines in female happiness have eroded a gender gap in happiness in which women in the 1970s typically reported higher subjective well-being than did men. These declines have continued and a new gender gap is emerging -- one with higher subjective well-being for men.

I am not at all sure how to interpret this finding. It sounds like either the women's movement was a mistake or subjective happiness is not the right objective.

The Fiscal Future, Again

From OMB (page 191). Thanks to Andrew Biggs for the pointer.

Monday, May 18, 2009

The Fiscal Future

Robert Samuelson looks at the President's fiscal policy.
Update: Here, via Nick Schulz, is Samuelson's point in graphical form:

The Latest Bailout Request

Click on the graphic to enlarge. Thanks to the reader who sent this in.

The Fundamental Theorem in Practice

Recall the fundamental theorem of carbon taxation:

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

You can see this at work in an article from the NY Times:

How did cap and trade, hatched as an academic theory in obscure economic journals half a century ago, become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?

The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics. Many members of Congress remember the painful political lesson of 1993, when President Bill Clinton proposed a tax on all forms of energy, a plan that went down to defeat and helped take the Democratic majority in Congress down with it a year later.

Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.

During the campaign, candidate Obama had the edge over candidate McCain on this issue because he favored auctioning off all the permits. Sadly, the Congress seems to have now rejected this position.

I wonder: Will the President now fight for his admirable campaign position? Or will he cave into the special interests to get a bill passed, even if it is highly flawed?

Sunday, May 17, 2009


Click on the graphic to enlarge. Source. Click here to see an updated graph.

When the Obama stimulus plan was proposed, the president's economic team put out a report in January 2009 that purported to show what would happen with and without the fiscal stimulus. The chart above is from page four that report, together with the actual results over the past couple months. As you can see, the actual outcome is significantly worse than the projection with the stimulus plan and is, in fact, roughly on track with what was projected without the stimulus.

What does this mean? One interpretation is that the fiscal stimulus has failed to achieve what Team Obama thought it would. Another interpretation is that the baseline was worse than they believed at the time. I am confident the report authors would adopt the second interpretation. If so, that fact is consistent with what I said in a previous post: In light of the shifting baseline, it is impossible to hold the administration accountable for whether its policies are achieving their intended effects.

To be clear, this lack of accountability is not a feature on this specific administration but is, instead, a reflection of the inherent uncertainties associated with macroeconomics. The administration, however, has not been particularly forthright in admitting to this lack of accountability. Indeed, the act of releasing quarterly reports on how many jobs have been "created or saved" gives the illusion of accountability without the reality.

Saturday, May 16, 2009

Never mind

It is becoming increasingly clear that the long-term fiscal strategy at the White House is based on large doses of wishful thinking. Here is OMB directer Peter Orszag in yesterday's Wall Street Journal:
This week confirmed two important facts -- that health-care costs are the key to our fiscal future, and that even doctors and hospitals agree that substantial efficiency improvements are possible in how medicine is practiced....If we can move our nation toward the proven and successful practices adopted by lower-cost areas and hospitals, some economists believe health-care costs could be reduced by 30% -- or about $700 billion a year -- without compromising the quality of care. This may all seem academic, but this week a stunning thing happened: Representatives from some of the most important parts of the health-care sector -- doctors, pharmaceutical companies, hospitals, insurers and medical-device manufacturers -- confirmed that major efficiency improvements in health-care are possible. They met with the president and pledged to take aggressive steps to cut the currently projected growth rate of national health-care spending by an average of 1.5 percentage points in each of the next 10 years. By making this pledge, the providers and insurers made clear that they agreed the system could remove significant costs without harming quality.
Meanwhile, over at the NY Times, we get this headline:
Health Care Leaders Say Obama Overstated Their Promise to Control Costs

Friday, May 15, 2009

The Personal Side of the Credit Crisis

Ed Andrews, one of many diligent Washington reporters I got to know a bit when I was at the CEA, tells the story of his own problems with debt and delinquent mortgages.

Update: Another side of the story.

Thursday, May 14, 2009

Limited Purpose Banking

Wednesday, May 13, 2009

News for the Pigou Club

Paul Krugman concedes

My Whereabouts

I am speaking tonight at annual meeting the Wellesley Chamber of Commerce. (Wellesley is the idyllic suburb west of Boston that my family and I have called home for the past two decades.)

Tuesday, May 12, 2009

Measuring Jobs Created or Saved

The stimulus bill Congress passed a few months ago apparently requires the Council of Economic Advisers to report quarterly on the employment effects of the act. That job is, essentially, impossible. Because we have only one economy, there is no way to know for sure what would have happened without the stimulus bill. It is like asking a doctor, "How much sicker would this particular patient have been if you had not given him treatment up to now?" You can get, as an answer, the doctor's subjective professional judgment, but you cannot expect objective measurement.

Click here to read the CEA document describing how they will respond. Click here to read a press briefing on the matter with a senior administration official (who might that be?). The best question and the official's answer follows:

Q: A lot of this report is based off estimates about what the multipliers of GDP from government spending and from tax cuts, what those multipliers are. When you do the reevaluations, are you going to be retesting whether or not those assumptions about the multipliers were reasonable? Will that be part of the --

SENIOR ADMINISTRATION OFFICIAL: That would certainly be one of the things that we'll be looking at. The other thing we'll definitely be checking are the spend-out assumptions, because certainly our estimates have been based on what we -- how we thought the program was going to spend out. That's something we'll need to check.

The other thing that's going to be so nice about getting the direct reporting, right, so we can try to say, here's what we thought we were going to get, and when we get the numbers back, how do they compare? It will inherently be at -- you know, it'll be a two-way test. There are issues involved in how good the numbers we get back are going to be, and it will also be a test of what we were assuming about multipliers. And so, absolutely.

One of the things that I try to emphasize in the reports -- because we haven't yet even had to face a report to Congress -- is, we're going to do it lots of ways but I think -- to make sure that we've covered all our bases, we're going to try estimating it one way, we'll look at the direct numbers, we'll try some different multipliers, we'll be looking at other studies, we'll be doing some microeconomic analysis to see if, you know, a county had a whole lot of government spending; does it show up in the county employment data?

We're just planning to very much go on all fronts to get as complete a picture of what this Act is doing as we possibly can.

Here is the question I would have asked: "Going forward, what macroeconomic data would you have to observe before you concluded that the stimulus bill has been a failure? Or will you conclude, no matter how bad things get, that the economy would have been in even worse shape without the stimulus? And if the latter is the case, aren't these quarterly reports just a bit surreal?"

Monday, May 11, 2009

More from the Standup Economist

The Pomposity of Positive Thinking

Keith Hennessey looks at the President's health care announcement. Keith's analysis starts as follows:

The President spoke about health care in the cross-hall today, flanked by the heads of several major health lobbying groups (”trade associations,” in Washington vernacular):

* hospitals — the American Hospital Association (”AHA”);
* doctors — the American Medical Association (”AMA”);
* insurance companies — America’s Health Insurance Plans (”A-Hip”);
* the drug manufacturers — Pharmaceutical Research and Manufacturers of America(”Pharma”);
* the medical device manufacturers — Advanced Medical Technology Association (”AdvaMed”); and
* health care worker unions — the Service Employees International Union (”SEIU”).

The President announced,

"[T]hese groups are coming together to make an unprecedented commitment. Over the next 10 years — from 2010 to 2019 — they are pledging to cut the rate of growth of national health care spending by 1.5 percentage points each year — an amount that’s equal to over $2 trillion."

This is one of the sillier White House announcements I have seen. Let me draw a sports parallel.

Imagine if the mayor of your nearest big city were to hold a press conference with the General Manager of the city’s Major League Baseball team. The Mayor announces that the GM, working with the coaches and players, has committed that he will work to develop plans for the team to hit the Mayor’s new goal of winning 40 more games this season than they otherwise would have won. Those plans will improve the team’s hitting, pitching, and fielding. The Mayor also announces that the manager’s plans, combined with the Mayor’s new policy initiative for better parking at the stadium, will make fans happier and help the team win more games.

Baseball fans would reply, “Great, I’m all for it.”
They might then ask a few questions:

What do you mean the GM “will develop plans”? Doesn’t he have any specific plans yet? How will he improve hitting, pitching, and fielding?

How are we supposed to verify that the team won 40 more games than they otherwise would have, since we will never know how many games they would have won?

Other than picking the number 40, why is the Mayor involved in this press conference? What does the Mayor’s new parking initiative have to do with the coaching changes, and how will the new parking initiative help the team win more games?

If this is such a good idea, what has changed to make it happen now? Is the Mayor claiming that his persuasive powers alone are worth 40 more wins? Why didn’t the GM make these changes before?

SNL on Stress Tests

Negative Interest Rates

They exist:
Bills of 1, 2, 5, 10, 20, and 50 Chiemgauer were issued. Each one is equivalent to respectively to 1, 2, 5, 10, 20, and 50 euro. To maintain them in circulation, every three months, you have to put on the banknotes a "scrip", corresponding to the 2% of the banknote value. This system, called demurrage, is a sort of currency circulation tax.

Coming Soon: More Active Antitrust Policy

In an old post, How do the right and left differ?, I wrote, "The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy."

There is a good example of this regularity at work right now. An article in today's NY Times tells us,
President Obama’s top antitrust official this week plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share. The new enforcement policy would reverse the Bush administration’s approach, which strongly favored defendants against antitrust claims. It would restore a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.
This is precisely what worries me. In my judgment, the Microsoft case was a policy error, and I fear that a more activist antitrust policy will mean more errors of this sort.

Here is what I wrote about the Microsoft case back in the February 16, 1998 issue of Fortune magazine:

Bob Dole vs. Microsoft (Go, Microsoft!)

Amid the armies of experts on law, economics, and technology who have been drawn into the battle over Microsoft's future, Bob Dole is a bit like Waldo in the Sunday comics: out of place and easy to miss. But the former Senator's small role in the Microsoft case is nonetheless significant. It speaks volumes about what's wrong with the government's crusade against the software maker.

Now I have nothing against Bob Dole--but he is no computer scientist. Nor is he a specialist in the economics of industrial organization. Microsoft's rivals have recruited Dole as a foot soldier in their fight against the software giant simply for his political clout.

The struggle centers on what Microsoft should be allowed to do with its immensely popular Windows operating system. The Justice Department does not trust market forces to limit Microsoft's hegemony. The government's lawyers claim that Microsoft is illegally attempting to expand its market power by bundling Windows with its Internet browser.

Is it bad for consumers when a company bundles products together? My father bought a primitive car air conditioner and installed it himself in our 1962 Buick. Now, cars and air conditioners are routinely sold together--and consumers are better served. A three-piece suit, a ham-and-cheese sandwich, and a semester at Harvard are all made of components that could be sold separately. Not even the most zealous Justice Department lawyer would try to break up these products.

When a company (Microsoft) has a monopoly over a valuable product (Windows), it appears to have consumers over a barrel, forcing them to buy something they don't want. But why would it? A monopolist does not gain by bundling its valuable good with an undesirable one. The best way for a monopolist to profit is to provide precisely the product that consumers want and then charge the highest price it can get.

Although the consumers-over-a-barrel theory doesn't work, economic theorists have concocted more elaborate stories of how bundling may be adverse. They argue that a monopolist could deter potential competitors by bundling disparate products. For instance, if Microsoft can make applications such as the browser part of its operating system, other software firms might have less incentive to develop new and better applications. But these theories offer little guidance to those making policy. If bundling is often beneficial but sometimes not, policymakers need to be able to tell which is which before they start regulating how companies market their products. They can't.

This brings us back to Dole. When Microsoft's rivals hired him to lobby, they exposed their cynicism. They are betting the legal system will decide Microsoft's future based not only on economic principles but also on popular perception. What could be better in the court of public opinion than siccing a respected friend of business on the world's richest man?

Using antitrust laws to regulate business practices like bundling is not likely to benefit consumers. Even if the world's smartest economists did the regulating, they would often get things wrong. And given the realities of how policy is actually made inside the Beltway, things are more likely to go wrong than right.

What company will dominate the software industry in the next century? I don't know, and neither does anyone else. I hope it is the company with the best programmers. I fear it may be the company with the best lawyers.

Comedian in Chief

Saturday, May 09, 2009


Yesterday's Washington Post has a nice feature article on Aplia, the educational software firm founded by economist Paul Romer.

I have never used the Aplia product in my courses at Harvard, but I know professors at other schools who have tried it, and they love it. It is available to be used in conjunction with my Principles text.

My other textbook Macroeconomics, which comes out in a new edition on July 15, 2009, will be the first intermediate macro text to have an Aplia product to accompany it. I have been told that the Aplia intermediate macro product will be available for Spring 2010 courses.

Biggest Threat?


As of earlier this morning, that is the number of visitors who have stopped by this blog.

Fear subsides

The VIX index, which uses option prices to measure expected stock market volatility, has fallen off substantially. This is surely good news.

Friday, May 08, 2009

No Need to Worry

Conor Clarke says my livelihood is in peril.

It is true that there is always entry into the textbook-writing business, which puts incumbents like me at risk. But I am not worried. I am one of the economics profession's leading producers of textbooks, I have an extensive network of dealers (aka professors), and I have friends in high places (Larry Summers, Christy Romer). So doesn't all this make me precisely the kind of too-big-and-too-interconnected-to-fail plutocrat that, if push comes to shove, will get a government bailout?

If you doubt me, let me point out that my initials are GM.

Thursday, May 07, 2009

The Auto Industry of the Future

One my colleagues in the Harvard econ department recommends to me this George Will column.

More on Negative Interest Rates

From LSE economist (and former central banker) Willem Buiter, who concludes
Removing the zero lower bound on nominal interest rates would represent a valuable addition to the policy arsenal of the central banks. We know something about how interest rates work. There is no reason to believe there would be any dramatic change in the effectiveness of policy rate cuts if these cuts to the rate [are to a] level below zero. We know next to nothing about the effectiveness of the alternative policies that central banks are forced to adopt if they don’t just want to sit on their hand[s] once the[y] hit the zero lower bound: quantitative easing and credit easing, relaxing the collateral requirements for central bank lending etc.
I should note that, economic logic aside, the "optics" of negative interest rates are not very good. I received more hate mail from my NY Times article on the topic than from anything else I have ever written. Indeed, Harvard University President Drew Faust received several emails suggesting that I be fired for writing the piece. She graciously copied me on her replies, which noted that Harvard faculty are not sacked for espousing controversial ideas. Central bankers, however, do not enjoy the same luxury.

Melitz to Harvard

Good news for Harvard. Marc Melitz has decided to accept the offer to return to our economics department. I am delighted.

Marc is, according to a standard ranking, the number one young economist in the country. (Note that Raj Chetty, who is number five on this list, has also recently decided to join our faculty.)

Here is one summary of the rightly famous Melitz model of international trade.


Happy Odd Day!

Enjoy it. It occurs only six times every century.

Wednesday, May 06, 2009

Is the White House bullying hedge funds?

A hedge fund manager defends the rule of law:

Cliff Asness, whose firm manages some $20 billion of assets, has written an open letter blasting President Obama for his attack on the hedge fund industry in the wake of the Chrysler bankruptcy.

As you'll recall, hedge funds, which hold approximately $1 billion in Chrysler bonds, refused the government's offer to take approximately thirty cents on the dollar. Obama accused hedge funds of holding out "for the prospect of an unjustified taxpayer-funded bailout."

These comments have enraged many in the industry but few have spoken out publicly. Asness, whose firm doesn't hold Chrysler bonds, says the industry is genuinely afraid in the face of Obama's power. Stating that he himself is "fearful writing this," Asness still pulls no punches:

"Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing."

"The President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along."

"The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power."

Tuesday, May 05, 2009

Inflation or Deflation?

A Reading for the Pigou Club

An Overview of the Credit Crisis

A friend alerts me to a useful summary of how events have unfolded during this crisis. If you are looking for a short piece to assign undergraduate classes, this is a good choice.

Monday, May 04, 2009

Should the U.S. government tax corporate income from overseas?

The answer from the White House (via the WSJ):

Firms Face Tighter Tax Rules

The Obama administration is rolling out details Monday of what aides are calling a far-reaching crackdown on offshore tax avoidance, targeting many U.S.-based multinational corporations and wealthy individuals.

President Barack Obama will flesh out a proposal included in his February budget blueprint seeking to curb the practice of parking foreign earnings in offshore tax havens indefinitely. By some estimates, $700 billion or more in U.S. corporate earnings have accumulated in overseas accounts in recent years.

The plan to be announced Monday will go further. It aims to change the legal treatment of offshore subsidiaries and structures that companies have used to avoid not only U.S. taxes, but taxes in other developed countries as well.

The answer from economist Mihir Desai, professor at Harvard Business School:

Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms

Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy. This paper address these questions by analyzing the available evidence on two related claims - i) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and ii) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.

Meltzer vs Krugman

In today's NY Times, Allan worries about inflation, while Paul worries about deflation.

Update: The debate continues here and here.

Sunday, May 03, 2009

Financial Planning

Click here to try ESPlannerBasic, a financial planning program developed by BU economist Larry Kotlikoff.

Saturday, May 02, 2009

Hard to Please

Friday, May 01, 2009

From the CEA Chair

Click here to read Christina Romer's testimony in the front of the Joint Economic Committee yesterday, entitled "The Economic Crisis: Causes, Policies, and Outlook."

Like being an undertaker during a plague... is good for the economics profession.

US News and World Report (via Mark Perry) reports:
"There is no unemployment among Ph.D.'s in economics," declares John Siegfried, a Vanderbilt University professor. Just do the math, and you'll see why: In the current academic year, the American Economics Association has listed approximately 2,200 job openings worldwide—but U.S. universities will grant only 950 Ph.D.'s in economics. Universities themselves may cut back, but economists remain in demand in government, business, and nonprofits and as consultants or policy analysts.