Greg Mankiw's Blog

Some menu costs aren't so small

noreply@blogger.com (Greg Mankiw) — Fri, 16 May 2008 17:54:00 +0000

Like a lot of small-scale entrepreneurs, Cathy Osborne worries that she'll go out of business if fuel prices rise above $4 a gallon. Not because she won't be able to buy gas at that price, but because she won't be able to sell it.
The old mechanical gas pumps with scrolling dials at her country store in Fauquier County lack the gears to go beyond $3.99 a gallon...."I don't know what I'm going to do. I don't have $30,000 to invest in new pumps."

Substituting Physical and Human Capital

noreply@blogger.com (Greg Mankiw) — Fri, 16 May 2008 01:42:00 +0000

A student befriends me on facebook, leaving this message:

Your econ textbook helped us out tremendously this year.....especially because our teacher has no clue what she's doing, and so we have to read the text to understand what's happening.

This reminded me of a professor I know who once told me that he liked to assign the most confusing textbook he could find. By comparison, his lectures would seem like paragons of clarity.

He was joking (I think).

McCain vs Obama: The Farm Bill

noreply@blogger.com (Greg Mankiw) — Fri, 16 May 2008 00:38:00 +0000

Obama supports the farm bill. Clinton scolds McCain for opposing it.

Score one for McCain (for reasons spelled out in a previous post).

Update: The liberal editorialists at the NY Times call the bill "disgraceful." The conservative editorialists at the Wall Street Journal concur.

Ec 10 and Gen Ed

noreply@blogger.com (Greg Mankiw) — Thu, 15 May 2008 11:56:00 +0000

Today's Crimson covers the debate over where introductory economics fits within Harvard's new General Education requirements. For those interested in this inside-baseball topic, here is the full email I sent the reporter:

Ultimately, the issues involving ec 10 and Gen Ed are for the university and economics department. I just happen to be the current instructor running the course, so my personal opinion should not be given undue weight. Ec 10 has a long, distinguished history that predates me and will continue long after I retire. I have, however, been consulting with the chairman (Jim Stock) and director of undergraduate studies (Jeff Miron) on the issue.

Having said that, here is my personal opinion:

I did not particularly like the new Gen Ed requirements when they were first passed, and based on what I have seen to date, my opinion of them has not improved. I continue to believe that a simpler, more conventional set of distribution requirements would better serve the students. The committee that drafted the new Gen Ed rules tried to produce something more innovative than the kind of distribution requirements that other schools have. In the end, the process generated a product that was innovative but inferior. Unfortunately, it looks like we have little choice now but to live with it.

One problem is that the drafters seemed to have inadequate appreciation of the role of analytic social science. The debate over where ec 10 fits in the new requirements is a symptom of these flaws.

The Gen Ed committee appears to think that ec 10 should fit into "Empirical and Mathematical Reasoning." I believe, however, that this placement would be a mistake. The theories developed in ec 10 are extraordinarily basic. No math is used beyond what a typical Harvard student would have learned in the 8th or 9th grade. (This makes Ec 10 differ from the intermediate-level theory courses in microeconomics and macroeconomics, which use substantially more mathematics and are more oriented to developing tools for economics majors.) It would be a mistake to consider Ec 10 a good substitute for a course in mathematics or statistics.

The better placement for the course would the "The United States in the World." This category is supposed to include courses that "examine American social, political, legal, cultural, and/or economic institutions, practices, and behavior, from contemporary, historical, and/or analytical perspectives." Ec 10 develops primarily an "analytical" perspective on "American...economic institutions, practices, and behavior," while also including discussion of historical episodes and contemporary policy debates.

Does it matter a lot for ec 10 whether it is part of Gen Ed and, if so, where? Probably not. Harvard students are a smart lot. Many of them come in with a sense that they should learn some basic economics. They read the news. Their parents and older classmates alert them to the importance of the field. I have no doubt that whatever the Gen Ed committee ends up doing, ec 10 will remain a large, vibrant course.

Farm Bill Veto

noreply@blogger.com (Greg Mankiw) — Wed, 14 May 2008 14:53:00 +0000

A friend at the White House emails me about the farm bill now being considered by Congress. An excerpt from the email:

A few of us have been debating the question “Which is the most important reason for the President’s veto of this bill?” Candidates include:
Too much spending: The bill increases spending by almost $20 billion over the next ten years, at a time when net farm income is at an all-time high. Much of this additional spending is disguised by budget gimmicks that take advantage of formal scoring rules to hide real spending increases.
New sugar program: The bill would make the government buy sugar for 2X the world price, store it, then resell it at about an 80% loss to the taxpayer. Sugar sells for about 11¢/lb on the world market. The US government would have to buy sugar for about 22¢/lb, store it, and then auction off the excess to ethanol plants. We estimate that such an auction would net the government about 4¢/lb. In addition, this new provision would require the government to guarantee that domestic sugar producers get 85 percent of the domestic sugar market.
Subsidies for rich farmers: Farmers would be eligible for government subsidy payments if their incomes were as high as $1.5 million if married, and up to $750,000 if single. We had a big fight with Congress last year over whether families with income of 3 times the poverty level should receive taxpayer-subsidized health insurance. This bill would subsidize amarried farming couple with income more than 107 times the poverty level (which is $14,000 for a couple). Put another way, such a couple would be in the top 0.2% of the income distribution. You would be subsidizing their business with your income taxes.
Getting the best of both worlds: “Beneficial interest” is a provision of current law which allows you to lock in a government subsidy payment when the market price for your good is low, and then hold the actual good and sell it when the market price is high. You thus get the best of both worlds – subsidy payments as if crop prices were low, but profits from selling your good at a higher price. The President proposed a “pick-your-price” reform, in which you lock in the subsidy at the same time that you lock in the sale price, so you can’t play timing games. The conference report does not include this reform, and continues the practice of current law.
Using food aid $ inefficiently: Under current law, US food assistance for hungry people around the world must be spent purchasing US crops. The President proposed to allow up to 25 percent of US global food assistance to be spent purchasing food from local farmers (in the country where the people are starving). This allows US dollars to be spent purchasing food, rather than paying transportation costs. It also encourages the development of farming infrastructure in these countries. Congress failed to include this forward-looking policy that will help save lives overseas. This means fewer starving people will get food, and these countries’ farming infrastructures will be less well developed.

Stiglitz on Inflation Targeting

noreply@blogger.com (Greg Mankiw) — Wed, 14 May 2008 12:47:00 +0000

Joe says it's a failure.

The Problem with Supply and Demand

noreply@blogger.com (Greg Mankiw) — Tue, 13 May 2008 19:55:00 +0000

Thomas Sowell spells it out:

If you want cheering crowds, don't bother to study economics. It will only hold you back. Tell people what they want to hear-- and they don't want to hear about supply and demand.
No, supply and demand is not too "complex." It is just not very emotionally satisfying.

McCain vs Obama: Carbon Auctions

noreply@blogger.com (Greg Mankiw) — Tue, 13 May 2008 08:42:00 +0000

Any cap-and-trade system for carbon creates a valuable resource: the right to produce carbon. A key question in the design of the system is how those carbon allowances are allocated. Are they given out for free to power companies and other established carbon emitters? Or are they sold at auction so the revenue can be used to reduce government debt, fund public programs, or reduce distortionary taxation? If the allowances are sold, their price resembles a Pigovian tax, which readers of this blog will recognize as the optimal policy response.

In his speech yesterday, Senator McCain gave a nod to selling the carbon allowances:

Over time, an increasing fraction of permits for emissions could be supplied by auction, yielding federal revenues that can be put to good use.

Not bad, but the statement raises several questions. Why over time? Why not immediately? And how high would that fraction become?

Here was Senator Obama on this topic in a debate a few months ago:

I think cap-and-trade system makes more sense. That's why I proposed it because you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level. Now what you have to do is you have to combine it with a hundred percent auction.

The Pigou Club gives the edge to Obama.

The Empire Strikes Back

noreply@blogger.com (Greg Mankiw) — Mon, 12 May 2008 15:56:00 +0000

In response to the proposal in Massachusetts to tax Harvard's endowment by $840 million a year, one of my esteemed colleagues has an idea that he thinks would be better than my proposed move: Harvard can decide to no longer accept the children of Massachusetts residents.

Faculty children excepted, of course.

Cross-Price Elasticity of Demand IV

noreply@blogger.com (Greg Mankiw) — Mon, 12 May 2008 00:49:00 +0000

Gas prices knock bicycle sales, repairs into higher gear

Putinomics

noreply@blogger.com (Greg Mankiw) — Sun, 11 May 2008 13:06:00 +0000

From Aleh Tsyvinski and Sergei Guriev:

According to a recent survey, a majority of Russians believes that acquiring wealth requires criminal activity and political connections. Only 20% believe that talent matters.

Cross-Price Elasticity of Demand III

noreply@blogger.com (Greg Mankiw) — Sat, 10 May 2008 13:12:00 +0000

Gas Prices Send Surge of Riders to Mass Transit (as well as to smaller cars and camels).

Time for Harvard to Move?

noreply@blogger.com (Greg Mankiw) — Fri, 09 May 2008 15:46:00 +0000

The Wall Street Journal reports one of the most pernicious ideas I have heard of late:

Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion.
The effort takes aim at one of the primary economic engines of the state, which is home to nine universities with endowments that surpass the $1 billion level, led by Harvard University's $35 billion cache, the nation's largest....
Supporters said the proposal would raise $1.4 billion a year. Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually.

If this were to pass, here is what I would consider:

1. Instead of expanding the university into Alston, Harvard could create a second campus in another state. Call it Harvard South. (Put it in a better climate than Boston, and I would be one of the first faculty to volunteer for the move.)

2. Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts.

3. Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely.

I have often wondered what the efficient scale of a university is and, in particular, whether it would be better to create a second Harvard with the university's wealth than to expand the first one. Maybe the Massachusetts state legislature will give the powers-that-be at Harvard an incentive to consider more radical expansion plans.

Update: here.

The Coming Tax Hike

noreply@blogger.com (Greg Mankiw) — Fri, 09 May 2008 10:53:00 +0000

Andrew Biggs reports:

Going back to the tax rates of the 1990s doesn't mean that households will pay 1990s taxes. Because the tax brackets haven't risen along with incomes, average taxes would be significantly higher, and grow each year.
If the [Bush] tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.
Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average....
So even if the tax cuts are made permanent, future Americans will pay a greater share of their incomes to the government than in the past.

Wessel on Underwater Homeowners

noreply@blogger.com (Greg Mankiw) — Thu, 08 May 2008 18:27:00 +0000

The Best Case for a Gas Tax Holiday

noreply@blogger.com (Greg Mankiw) — Thu, 08 May 2008 12:40:00 +0000

Caplan says: If they don't do this, they'll do something even worse.

Colbert on the Gas Tax Holiday

noreply@blogger.com (Greg Mankiw) — Wed, 07 May 2008 22:07:00 +0000

Viard on the Corporate Income Tax

noreply@blogger.com (Greg Mankiw) — Wed, 07 May 2008 18:22:00 +0000

Alan says:

Rather than trying to prop up the corporate income tax against competitive pressures, countries around the world should celebrate its decline and work for its demise.

A Graphic for the Pigou Club

noreply@blogger.com (Greg Mankiw) — Wed, 07 May 2008 10:32:00 +0000

From today's Wall Street Journal, in an article that gives the club some much-appreciated publicity.

A Book Review

noreply@blogger.com (Greg Mankiw) — Wed, 07 May 2008 09:55:00 +0000

"All in all, I learned a lot from the book, without ever once feeling preached at."

From King Rat.

In Praise of Gas Tax Hysterics

noreply@blogger.com (Greg Mankiw) — Tue, 06 May 2008 19:34:00 +0000

Paul Krugman thinks all of the fuss about the gas tax holiday has become a bit hysterical. He agrees that the policy is a bad idea, but it is no big deal, so let's not focus on it.

Paul is right that the issue is, quantitatively, small potatoes, but I am nonetheless pleased to see it get so much attention. This issue is like the canary in the coal mine: No one really cares about the canary, but its condition tells us about deeper problems that lie below.

Many economic issues (e.g., health care, corporate taxation, the trade deficit) are vastly complicated, with experts holding a variety of opinions. When candidates disagree, it simply means that each is siding with a different set of experts, and it is hard for laymen to figure out which set of experts is right. By contrast, the gas tax holiday is not nearly as complicated, and the experts speak with one voice.

Why, then, are candidates proposing the holiday? I can think of three hypotheses:

Ignorance: They don't know that the consensus of experts is opposed.

Hubris: They know the experts are opposed, but they think they know better.

Mendacity with a dash of condescension: They know the experts are opposed, and they secretly agree, but they think they can win some votes by pulling the wool over the eyes of an ill-informed electorate.

So which of these three hypotheses is right? I don't know, but whichever it is, it says a lot about the character of the candidates.

The Source of Bad Ideas

noreply@blogger.com (Greg Mankiw) — Tue, 06 May 2008 09:25:00 +0000

From the Washington Times:

John McCain, the presumptive Republican presidential nominee who should know better, was the first presidential candidate to endorse the gas-tax holiday for the summer driving season. Reportedly, the idea originated with a political pollster, not among Mr. McCain's economic advisers.

Summers on Tax Competition

noreply@blogger.com (Greg Mankiw) — Mon, 05 May 2008 21:49:00 +0000

Larry is against it:

the US should take the lead in promoting global co-operation in the international tax arena. There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes. It might be inevitable that globalisation leads to some increases in inequality; it is not necessary that it also compromise the possibility of progressive taxation.

This issue goes well beyond economics to questions of political economy and political philosophy. If you think it is the job of government to take from Peter to pay Paul, and if Peter can move around the globe, then you need international tax cooperation. Otherwise, some countries will become nations of Peters, leaving all the Pauls to fend for themselves.

On the other hand, if you think that the main job of government is to facilitate voluntary exchange by protecting property rights, rather than re-slicing the economic pie as it sees fit, then tax competition is a good check against excessive interventionism. In other words, are you more worried about too little government or too much?

Hillary vs the AEA

noreply@blogger.com (Greg Mankiw) — Mon, 05 May 2008 01:52:00 +0000

From ABC News:

Sen. Hillary Clinton, D-N.Y., declined this morning to name a single economist who backs her call for a gas tax suspension.
"I'm not going to put my lot in with economists," Clinton said in an exclusive appearance on a special edition of "This Week" from Indianapolis.

The Legacy of Bailouts

noreply@blogger.com (Greg Mankiw) — Sun, 04 May 2008 13:03:00 +0000

Alan Blinder makes the case for more regulation of financial institutions. The key passage:

It will, for example, substantially reduce the profitability of investment houses and, therefore, reduce their scale. But that’s the price you pay for access to a publicly financed safety net.

That is why some economists cringe when Wall Street firms are bailed out. Beyond the obvious equity issues about risking taxpayer money to help rich guys, there is the problem of efficiency. If you start bailing the firms out when they lose, you have to regulate the gambles they take. You can no longer count on the creditors to limit the firms' leverage, as the creditors are counting on Uncle Sam if things go wrong. But the more regulated these firms are, the lower their productivity will be.

The bottom line: The Bear Stearns bailout may have saved the economy from an episode of financial contagion in the short run, but in the long run it will likely leave us with a more regulated and less vibrant financial system.