曼昆/Greg Mankiw's Blog

Kocherlakota on Macro

Wed, 16 Sep 2009 16:00:00 GMT

University of Minnesota economist Narayana Kocherlakota reflects on the state of modern macroeconomics.

What economists believe

Tue, 15 Sep 2009 16:00:00 GMT

Click here to read the results of a new survey of AEA members. This updates previous survey results, summarized in Chapter 2 of my favorite textbook.

Note that 83 percent agree that "the United States should eliminate remaining tariffs and other barriers to trade." I presume that would apply to tariffs on Chinese tires.

Thanks to Tyler Cowen for the pointer.

CBO on the Baucus Plan

Tue, 15 Sep 2009 16:00:00 GMT

The CBO blog on the health plan du jour:

the Chairman’s proposal would reduce the federal deficit by $16 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion. Consequently, CBO expects that the proposal, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law, with a total effect during that decade that is in a broad range around one-half percent of GDP....

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented.

In other words, the plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.

Let me try to put CBO's point in a more familiar setting:

Your friend Joe, who says he want to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request.

"Ahem, Joe," you whisper, "Aren't there a lot of calories in that?"

"Yes," he says, "but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. The exercise will more than work off those extra calories."

"But that's what you said last week, when you asked for an extra piece of cake. And you never made it to the gym."

"Yes, I know" he replies ruefully, "but this time I really mean it....Can you please pass the pie?"

Lehman and the Crisis

Mon, 14 Sep 2009 16:00:00 GMT

John Cochrane and Luigi Zingales opine.

Update: Phill Swagel, who was Assistant Secretary of the Treasury for Economic Policy at the time of the Lehman collapse, emails me the following commentary:

While I have a great deal of respect for John and Luigi, their oped in today's WSJ is misleading in important aspects. One example is this passage:

"It did not help that the TARP was such a transparently bad idea. The Fed and Treasury soon figured that out, settling on equity "injections" and a bank-debt guarantee instead. Floating a bad idea does not instill confidence."

The problem here is that it would have been impossible to start with capital injections -- a proposal for the government to buy 20 percent of the banking system would not have passed the House of Representatives. This was a hard constraint. John and Luigi might think that the initial TARP proposal was a bad idea -- that's a discussion I'd be glad to have -- but it is misleading to make this argument in comparison to an infeasible alternative. They should consider instead the choice between the TARP as originally envisioned to buy illiquid MBS and the (feasible) alternative of not having any TARP and thus not having the ability to switch to capital injections as financial market conditions deteriorated in the ensuing weeks.

This is all discussed on page 38 and following in the paper I wrote for Brookings in April. To find the discussion of this point in my paper, search for the phrase "politically oblivious."

Thanks, Phill.

A Coming Trade War?

Sun, 13 Sep 2009 16:00:00 GMT

In case you have not been following the headlines, here is a recap:

Obama to impose tariffs on Chinese tires: Obama imposes tariffs on China tires for 3 years, a decision that could anger Asian powerhouse

China Strikes Back on Trade: Beijing Threatens U.S. Chicken, Car Parts After Washington Slaps Stiff Tariffs on Tires

Stocks head lower on US-China trade concerns: Major indexes fall in early dealings amid concerns about US-China trade dispute

Gordon on Macro

Sun, 13 Sep 2009 16:00:00 GMT

Bob Gordon surveys the state of macroeconomics.

Thanks to David Warsh for the pointer.

A Victory for the Protectionists

Fri, 11 Sep 2009 16:00:00 GMT

Disappointing news:

Obama to impose tariffs on Chinese tires

President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

Where's the beef?

Fri, 11 Sep 2009 16:00:00 GMT

Jim Capretta on the President's healthcare speech:

The president has promised for months now that he would have a plan to “bend the cost-curve.” Indeed, even tonight, he spoke of the plans being worked on in Congress as if they would address the problem of rising costs and improve our long-term budget outlook.

It’s as if the president and his team haven’t read anything that the Congressional Budget Office (CBO) has said about the health care bills under consideration. The truth is that these bills would add an additional runaway health care entitlement to the ones already on the federal books. CBO has said that the House bill would set in motion new spending that would grow at about 8 percent rate per year, while the revenue to pay for it would increase only about 5 percent per year. You don’t have to be a financial genius to see a problem here.

Yes, indeed. That is why this passage in the President's speech had me scratching my head:

I will not sign a plan that adds one dime to our deficits -- either now or in the future.(Applause.) I will not sign it if it adds one dime to the deficit, now or in the future, period. And to prove that I'm serious, there will be a provision in this plan that requires us to come forward with more spending cuts if the savings we promised don't materialize.

At first, it sounds like the President is threatening to veto the bills being considered in Congress because, according to CBO, they will add significantly to deficits in the out years. If true, that would be a big story. But the provision he mentions in the next sentence seems to suggest he is just passing the buck.

Translation: "I promise to fix the problem. And if I do not fix the problem now, I will fix it later, or some future president will, after I am long gone. I promise he will. Absolutely, positively, I am committed to that future president fixing the problem. You can count on it. Would I lie to you?"

Flier on Health Reform

Fri, 11 Sep 2009 16:00:00 GMT

The dean of Harvard Medical School weighs in on the current debate. An excerpt:

there is our inefficient and inequitable system of tax-advantaged, employer-based health insurance. While the federal tax code promotes overspending by making the majority unaware of the true cost of their insurance and care, the code is grossly unfair to the self-employed, small businesses, workers who stick with a bad job because they need the coverage, and workers who lose their jobs after getting sick.

This employer-based system arose not by thoughtful design but as an unforeseen result of price controls during World War II and subsequent tax policy. How this developed and persisted despite its unfairness and maladaptive consequences is a powerful illustration of the law of unintended consequences and the fact that government can take six decades or more to fix its obvious mistakes.

Judging Downturns II

Wed, 09 Sep 2009 16:00:00 GMT

In response to my previous post, an economist at a financial firm emails me the following analysis:

I am following the discussion on measuring the severity of recessions.

I prefer the unemployment rate for historical analysis. In olden days, it was likely better measured than real GDP. And before 1947, there is no quarterly real GDP. We have plenty of data on industrial production, but as the US becomes less of a manufacturing economy, its relevance is fading.

The point a reader raised about changing composition of the labor force is good. We can adjust for that. The CBO creates a quarterly estimate of NAIRU going back to 1947. The changing composition of the labor force is reflected in the estimate of NAIRU.

The first chart below compares the unemployment rate (quarterly average) with the CBO's NAIRU estimate.

The second chart shows the difference between the two series:

As of Q2:2009, the gap is just a touch lower than in Q4:1982. The gap is likely to expand for two or three more quarters, making it the worse gap of the post World War Two Period.

Another way to gauge the slack is to focus on a single demographc. Let's take married men, spouse present. They are the most stable segment of the labor forcce, and here is their unemployment rate:

It has been terrible this time, but not as bad as the early-1980s. Why this time seems worse is the unemployment rate for teenagers is a record high. I think we should give some blame to 3 consecutive annual hikes in the minimum wage.

A final way to compare the rise in the unemployment rate from bottom to top; the dates of the cycle in the unemployment rate need not coincide with NBER peaks and troughs. Here are my calculations for real GDP and the unemployment rate.

The rise in the unemployment rate in 1945 was much less than in the recent recession. But the rise in the unemployment rate in 1937-38 was much worse than the current recession.

If we combine the 1980 and 1981-82 recessions into one super-recession, the rise in the unemployment rate was 5.0 percentage points, slightly bigger than what we have seen so far.

Finally, critics like to make remarks that the US has artificially reduced its unemployment rate by putting people in jail, claiming that those people would otherwise be unemployed. First, there is no evidence they would be otherwise unemployed. But more important, secondly, the total institutionalization has not changed. Mental hospitals have been emptied out. Sad to say, many of these mentally ill people are in jail. The point is that the sum of all institutionalization is probably stable. As for comparing the US to Europe, many European countries reduce their unemployment rates by putting the long-term unemployed on disability, so they drop out of the labor force.

Bad as things are now, they don't feel as bad as in 1982. With good reason. The ratio of employment to working age population for those 20 years old or older has fallen a lot, from a peak of 65.4% in Q1:2007 to 62.0% in Q2:2009. But by contrast, in Q4:1982, that ratio was only 58.9%. In recovery, the rate did not hit 62.0% until mid-1986. Our current bad rate is the same as a good then-record high in 1986. More people working is a type of income insurance.

France joins the Pigou Club

Wed, 09 Sep 2009 16:00:00 GMT

The BBC reports that France is set to impose a carbon tax. Unfortunately, there is no discussion in the story of cutting other taxes. The goal of Pigovian taxation is to switch toward more efficient taxes, not to raise the overall tax burden.

Update: The Post reports some good news: "the government expects to raise euro 3 billion, which will be entirely returned to households and businesses through a reduction in other taxes or repaid via a so-called 'Green Check,' Sarkozy said."

How Did Economists Get It So Wrong?

Wed, 09 Sep 2009 16:00:00 GMT

Barry Eichengreen's answer (from a few months back).

Speech Review

Tue, 08 Sep 2009 16:00:00 GMT

"Inspiring."

That's what I was told about the President's speech to schoolchildren when I asked my favorite 5th grader about it last night at the Mankiw family dinner table. He even recounted the story of young Barack Obama having to wake up at 4:30 am for his lessons.

Good job, Mr. President.

Field Research in Economics

Tue, 08 Sep 2009 16:00:00 GMT

Click here to watch talks given this past summer at the NBER by John List and Michael Kremer.

Most Lucrative College Majors

Mon, 07 Sep 2009 16:00:00 GMT

Click here for the list.

Of course, these data do not allow one to distinguish the treatment effect from self-selection based on innate characteristics.

Matthew Weinzierl

Mon, 07 Sep 2009 16:00:00 GMT

An interview with one of my coauthors.

Saving the Capitalists from Capitalism

Mon, 07 Sep 2009 16:00:00 GMT

Insights from University of Chicago economist Luigi Zingales:

We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms....

The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.

Unfortunately, it looks for now like the Obama administration has chosen this latter path.

Unemployment Update

Sat, 05 Sep 2009 16:00:00 GMT

Source of graph. Click here for my interpretation of it.

How large is the fiscal policy multliplier?

Sat, 05 Sep 2009 16:00:00 GMT

Volker Wieland's answer:

Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009). These models include extensive Keynesian features such as price and wage rigidities, but also employ up-to-date microeconomic foundations. The model of EU Commission researchers is especially interesting because it is recently estimated and one-third of its households do not care about the future and follow a traditional Keynesian consumption function.

How large is the fiscal policy multiplier?

Sat, 05 Sep 2009 16:00:00 GMT

Volker Wieland's answer:

Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009). These models include extensive Keynesian features such as price and wage rigidities, but also employ up-to-date microeconomic foundations. The model of EU Commission researchers is especially interesting because it is recently estimated and one-third of its households do not care about the future and follow a traditional Keynesian consumption function.

Update: A reader emails me a recent, related study, which makes an important point: The impact of a fiscal change depends on whether and how quickly people expect it to be reversed. If the fiscal stimulus is very temporary and soon to be reversed, the crowding out effects described above by Wieland will be smaller, and the effects on output will be larger.