Hoisted from the comments: Commenter Max

Max makes some smart comments:

I didn't know Volcker had come out against a second stimulus (or did I?), but in November 08, I would've put Volcker in at Treasury because he is a) unconnected to this mess and b) highly respected and c) determined and d) not a fan of this 'modern economy' crap.

I wouldn't put him in at the Fed because a) he's old and b) he's an inflation hawk, and we have plenty of those at the Fed. But a year's service at Treasury would work very nicely.

Since Bernanke would still be on the board if he did not get reappointed as Chairmen (a point I forgot), I would replace him with Janet Yellen, Koenig (I think - the KC guy) or my oddball choice, Christina Romer. She's suited to it by the simple fact that she's studied the Great Depression as much as Bernanke and he would be in there with her. She is notably a Democrat and not involved in this mess. (The O administration has been sending her out there to do the talking in place of Larry & Timmy lately because she isn't 'infamous' and that's worked well enough for me to think she should just change buildings.)

[After checking around] There are two vacancies on the board. If replacements have been queued up, I don't know who they are. But I'd make one Romer and the other Koenig from KC. And then I'd simultaneously appoint Romer as Chair. Bernanke, if not confirmed would stay on as Chair until a new Chair came in, and if he was absent, Kohn would become acting chair and Bernanke would remain on the Board.

max
['That would rebalance the board a bit.']

I tend to think that Bernanke could be influenced by smart Gagnon-proposal seats on the board, so Dems who don't want to rattle the markets by axing Bernanke could go that rout to help the economy. Volcker at Treasury is a good idea... Except he's likely to tamp down on more spending.

Re: Christina Romer -- my only issue w/ her is that although she's a student of the Great Depression, she's not a very perceptive student of the Great Depression. I read and reviewed some of her GD research, and was thoroughly underwhelmed...

Also, who wants to bet that Bernanke gets exactly 51 votes in the Senate?

House Hearing on Executive Compensation

Here it is although I do not currently have time to watch it.

Let me know if there's anything interesting...

If not Bernanke, then who? Volcker?

First I'd say, what's Jon Corzine doing these days?

I'm not actually that big on Volcker -- the knocks are that he signed up as a director for a think tank which was fighting the stimulus, and I believe he came out against a 2nd stimulus last spring. I'm curious what Volcker's position is on the Gagnon proposal, but he's got such a reputation as inflation hawk, and given that he was so anti-stimulus, I can't imagine he'd enact the Gagnon proposal as Fed Chair. He did a good job first time around, but the lessons from his first stint -- taking a hard and swift line against inflation to lessen the pain -- simply do not apply today...

Bernanke on the Outs too?

(Hat tip to MS.)

Roll Call has a piece. So does the WSJ and Huffpo , which is below.

From the Huffpo:

Opposition To Bernanke Growing In Wake Of Mass. Vote: Sanders

UPDATE: HuffPost's Jeff Muskus and I polled as many senators as we could find Thursday after posting this story.The question: Would they commit to reconfirming Federal Reserve Chairman Ben Bernanke.

We found 26 senators in all. Half were undecided; one wouldn't say; three were outright nays; only nine were firmly in the aye column.

Sen. Barbara Mikulski (D-Md.) summed it for many of her colleagues: The decision, she said, "gives me heartburn."

Along with Mikulski, eight other Democratic senators said they are undecided, including Maria Cantwell (Wash.), Ben Cardin (Md.), Patrick Leahy (Vt.), Carl Levin (Mich.), Amy Klobuchar (Minn.), Bill Nelson (Fla.), Bob Casey (Pa.), Barbara Boxer (D-Calif.) and Debbie Stabenow (Mich.).

Sen. Jay Rockefeller (D-W.V.) declined to say which way he would vote or whether he's made up his mind.

Republican Sens. Kit Bond (Mo.), John McCain (Ariz.) and Olympia Snowe (Maine) also said they are undecided.

The nine yes votes: Democrats Tom Carper (Del.), Kent Conrad (N.D.), Daniel Inouye (Hawaii), Paul Kirk (Mass.) and Mark Warner (Va.), plus Republicans Susan Collins (Maine), George Voinovich (Ohio) and Lindsey Graham (S.C.), along with independent Joe Lieberman (I-Conn.) all said they'd vote to confirm Bernanke.

The undecideds cited Bernanke's role in the financial collapse. "Usually at this stage of a vote like that, you have a better sense about it. I'm clearly and definitively undecided," said Casey. "Part of it is just how we analyze his stewardship at the time when our economy began to go in the wrong direction."

Story continues below http://www.huffingtonpost.com/images/v/darr.gif

Sen. Byron Dorgan (D-N.D.) said he's voting no unless Bernanke tells Congress "who got direct loans from the Fed," he said. "He's essentially said to us he doesn't intend to tell the congress or the American people which investment banks got direct loans from the Fed for the first time in history."

Sen. David Vitter (R-La.), who opposes Bernanke, said he thinks Democrats might sacrifice him him to distance themselves from the White House. "I do think more people -- Democrats, in particular -- are looking for separation from the administration on votes, so that could be a factor," Vitter said.

Sen. Bob Corker (R-Tenn.), a leading Republican on financial issues, said that while he backed Bernanke in committee, he is reserving judgment for the floor, but leaning toward support. "I talked to Ben this morning," said Corker. "I've shared with him, I think this AIG situation has certainly created some issues....You'd have to be sort of not alive to realize, no doubt, this AIG situation certainly has been damaging to the Fed."

McCain, who has said he believes that his presidential campaign was undone in large part by the financial meltdown, cited it as a reason to pause. "I do think the case is being made that his policies were a major contributor to the meltdown," he said.

Stabenow said much the same. "I certainly have question about his role in what got us to the point where we had the financial collapse," she said.

Sen. Richard Shelby (R-Ala.) has made up his mind and is firmly opposed. "I was a Fed defender for 22 years -- probably one of the biggest ones on the banking committee," he said. "Once I got into the weeds on the Fed's role as a regulator dealing with the holding companies, their regulatory regime, and their record was weak and flawed and that is my beef right now."


* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Martha Coakley and the Democratic supermajority in the Senate may not be the only casualties of the Massachusetts special election upset on Tuesday that sent Scott Brown to Washington.

Federal Reserve Chairman Ben Bernanke was originally scheduled for a vote on his confirmation Friday and was assumed to have the votes.

But on Wednesday, Sen. Bernie Sanders (I-Vt.), a Bernanke opponent, said that opposition was growing against his re-confirmation.

And on Thursday Jim Manley, senior communications adviser to Senate Majority Leader Harry Reid (D-Nev.), said that the vote had not been firmly locked in and won't take place this week. A spokeswoman for the Federal Reserve referred questions to the Senate.

Reading too much into the delay could overstate its immediate significance -- the Senate has a lot on its mind, after all -- but the populist rage against Wall Street now casts a once-secure confirmation in some doubt.

The election in Massachusetts has senators who previously considered themselves safe watching their backs, and they don't relish the prospect of a vote in favor of a man who failed to foresee the financial crisis and is closely associated with Wall Street.

A recent poll found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, while only 20 percent think he works for Main Street. Independents, who swung heavily for Brown in Massachusetts, are even more opposed to Bernanke than Democrats or Republicans. Fifty percent of independents think he cares first about Wall Street; 15 percent think he prioritizes the needs of Main Street. That's a difficult vote in the face of an angry public.

If Bernanke is confirmed, he'll have to rely on the same coalition that moved the bailout through Congress, when the leadership of both parties joined forces to oppose the rank and file.

The combined leadership of the two major parties may still be able to push Bernanke's confirmation through, but Sanders said he sees a growing movement in a new direction.

"I sense that many Democrats see the Massachusetts election as a wake-up call," Sanders said. "There is a growing understanding that our economy is in severe distress, a greater appreciation that people are disgusted with the never-ending greed on Wall Street, and a better recognition that we need a new direction at the Fed."

Sanders said that Bernanke's record doesn't warrant a new term. The Federal Reserve has four main responsibilities: to maximum employment and prevent inflation; to keep the financial system from imploding; to maintain the safety and soundness of financial institutions; and to protect consumers against deceptive and unfair financial products.

Bernanke has gotten high marks in general for his response to the crisis, but has refused to say what institutions the Fed has provided money to. Unemployment remains high -- it has doubled during Bernanke's term -- and the Fed failed to do any consumer protection. The system imploded on his watch and nearly brought down the global economy. More than 140 banks, including major financial institutions, have collapsed during his tenure.

"People do not want another term for the man whose major job as Fed chairman was to protect the safety and soundness of our financial system but instead was asleep at the switch," Sanders said. "I am confident that more and more senators understand that we need a new Fed and a new Wall Street and will oppose Bernanke's confirmation."

Bernanke's term expires on January 31.

Volcker on the Ins and Summers on the Outs?

The faces say it all.

Good news. It cost me some money as I was left holding the bag w/ my day-trading strategy, but good news nevertheless.

1 Year Anniversary

I've been so busy, the 1 year anniversary of this site came and went without comment.

One of the interesting things about blogging is going back and reading what you wrote a year ago, to assess if your judgment was correct.

It seems, last January the small size of the stimulus had me pretty hot... I ridiculed David Brooks' prediction that, because of the stimulus, "A governor with a few-hundred-million-dollar shortfall will suddenly have to administer an additional $4 billion or $5 billion."

Unfortunately he was wrong.

Of course, conservatives will probably say that I'm "just following Krugman". I also took a shot at Krugman here -- it's just not always the case that I agree with Krugman or DeLong... Not sure I've yet had any major disagreements with Stiglitz, however...

Here was my post from January 27th, 2009. My take on the stimulus was that "Poor Monty Python's arms have been chopped off, and we're treating it as a mere flesh wound..." ( i think i meant the knight from Monty Python...)

In any case, the site was founded because, even before the inauguration, I was worried sick when I learned that Larry Summers would play a substantial role in the administration. I felt that the Democrats, with Obama, had a once-in-a-generation opportunity to make change, and I was concerned that Larry Summers would lead Obama, and the Democrats, into a ditch.

Unfortunately, I was right.

My recommendation for Obama is to fire and replace his entire economic staff. They had their chance to sink or swim. They told him the economy would get better, and that a small stimulus was all that was needed to fix the economy. They were wrong. They sunk.

Yglesias on Inequality...

Has a nice post here .

Shows that for the bottom decile of workers, the US ranks below the OECD average in income...

Marty Feldstein is a joke...

Here is his pathetic defense of the size of stimulus, while an attack on the stimulus itself. Reminds me of those who supported the invasion of Iraq, but it was just the Bush goons who messed it up... As we know, in late 2008, Marty advocated a stimulus of $800 billion, or $400 billion over two years, saying that any more was unneeded. Many liberals noted that states and local governments would be cutting $200 billion or more each year, so that the net stimulus would be roughly only $200 billion a year, vs. an output gap of nearly $2 trillion. Hence, even though $800 billion sounds like a big number, it was patently obvious, even when Marty was writing before, that it wasn't enough.

Now it's even clearer, so what does Marty say? The package was the right size, but Congress just blew it on the wrong things -- things which only made things worse by making the deficit larger.

For example, says Marty, instead of those instant stimulus checks (of which roughly 40% got spent and much of the rest went to pay down credit card debt), he advocated permanently lower taxes. Of course, permanently lower taxes means a permanently higher deficit. And then there's the timing issue -- the Dow was crazily bottom feeding when those initial stimulus checks went out. Although I think that too much of the stimulus was tax cuts (40%), cutting some big checks immediately was probably smart, given that infrastructure spending isn't likely to start immediately. And consumer spending in Q2, 2009 was much better than consumer spending in Q1, 2009, so I'd like to see clear evidence that none of the checks got spent.

Marty writes that "with too much emphasis on redistributing income and preserving public-sector jobs and not enough on raising economic activity."

What? Aid to states was $79 billion out of a $775 billion stimulus! Just 10%. But, since aid to states was so small, some 40 states ended up cutting their budgets and many laid off workers, in addition to raising taxes. Several states were paying workers with IOUs, and public worker furloughs became the norm all across the US.

Think about California, which found itself with a $40 billion budget hole for the current fiscal year. It cut spending by $15 billion, raised taxes by $14 billion, used $5 billion in stimulus money, and issued $5 billion more in debt.

What Marty is arguing is that we should have spent that $5 billion in stimulus money on the army, and instead had california cut an extra $2 billion in spending, raise taxes by $2 billion, and issued $1 billion more of high interest debt.

OK, we might have been ever so slightly better off, but the difference really pales in comparison to what would have happened had California got a full $40 billion. Then, no budget cuts, and no tax increases. And GDP in this past year would have been about $60 billion bigger than it was -- that's 2-3% higher GDP for California...

As if his article couldn't get any worse, he ends it with a big scare story about the national debt, predicting that deficits will "absorb virtually all of the nation's household and business saving." How much do you want to bet that that won't happen?

The problem with the stimulus was the size. The problem was that Obama listened to Larry Summers, who doesn't know what he's talking about, and so Summers listened to his thesis adviser, who also doesn't know what he's talking about.

I'm going to go out on a limb and say that Harvard Economics Professors lack the inate ability to do economic policy. Before anyone gets mad and accuses me of prejudice, let me remind you that I'm not saying anything about how smart they are on average, I'm just saying that the tail properties of the distribution is such that none actually know WTF they are talking about...

They were both horribly wrong. Millions of Americans are out of a job because of it.

The Coakley Loss -- Who's to Blame?

The writing is on the wall for Dems now. Obama and his economic advisers bet the farm earlier this year that the economy would recover without a large stimulus, that cutting sweetheart deals for bankers would be enough, and that reappointing a Fed Chairman who sees nothing untoward about having very low inflation and very high unemployment would be vote-winners with people who've lost their jobs.

Also -- Coakley's loss helps validate a crazy theory I've long held about elections and professional sports, which (as a plus for Dems) was one region-specific factor which helped get Coakley beat: Boston sports fans' beloved Patriots got whacked in the first round of the playoffs just a week ago. I suspect anything which puts voters in a bad mood gets taken out on the incumbents... Dems have little to do with high unemployment, but since they're in power, and because voters want things to be "better", Dems bare the brunt of the blame for the economy. If the Patriots had been winning, suddenly a lot of voters would start thinking "maybe things aren't so bad...." In any case, no I haven't got any firm data to back this up, it's just another project that's some 14 projects back on my research ideas list...

In any case, I think it's worth pointing out that Bernanke's Fed is likely to oversee persistently low inflation and high unemployment. You heard it here first: by the time Bernanke is done, the Republican Party is quite likely to have a firm grip, once again, on all three branches of government.

I think the message for Democratic lawmakers is clear -- you'd best get that economy up and running! Whatever became of that jobs bill? You'd do well to get $200 billion out the door lickety-split, in time for the November massacre. If I were the White House, I'd also have a look at how Geithner is polling... Firing Geithner would not make him a sacrificial lamb -- Geithner & Summers had their chance at bat, they just struck out. Next batter please... And aren't there FOMC appointments the White House still needs to make? I'd make sure to get some inflation doves on there ASAP -- Joe Gagnon?

Two Worlds Exist Simultaneously...

One world is the real world, which exists all around us. The other world exists only in Greg Mankiw's head, and is filled with big, terrifying "inflation monsters".

In the real world, savvy bond traders are forecasting low inflation as far as the eye can see. In Greg's head, it's no different than the Miami condo market circa 2006. Just the latest bubble.

I'll give Greg the mike: "The Federal Reserve has also been rapidly creating money."

Now let's see what the Federal Reserve's Balance Sheet Says (in millions):

Dec 30 2009: 2,278,896
Jan 6 2010: 2,275,340
Jan 13 2010: 2,284,693

So, over the past year, the balance sheet has increased by less than a billion dollars. On a two trillion-plus balance sheet, this is chicken feed my friends. Now, the Fed did increase the balance sheet quite dramatically between Sept. 2009 and Dec 30, 2009. But it's been more than a year since then, and in 2009, the core CPI was up a staggering 1.8%. With high unemployment keeping wages pinned, hard to see the inflation monster is. Might that be because, like the Tooth Fairy and Santa Claus, he doesn't exist?

Blogging Vacation...

Just an fyi: Over the next few weeks I'll be horrendously busy, and so I don't expect to have much time for posting...

Hoisted from the Comments

Ted said...

Psh, every good conservative economist knows that per capita GDP (PPP) is not a good measure of economic prosperity. The proper measure clearly demonstrates America's supremacy:

Number of Billionaires:

Luxembourg = 0
Norway = 4
Singapore = 2
Switzerland = 9
Ireland = 5
Netherlands = 5

UNITES STATES = 359!!!!!!

America is still #1.

http://en.wikipedia.org/wiki/List_of_countries_by_the_number_of_billionaires

December Core CPI: up .1%

The BLS tells us there is still no sign of any moderate inflation much less hyperinflation. The WSJ reports that the Fed is unlikely to change anything at it's January meeting.

So, we've got a terrible employment situation and no sign of inflation. And the Fed thinks its best to do nothing. Makes sense to me.

UPDATE: In this post, I was being facetious. Longtime readers of this blog know that, going back six or seven months now, I've been arguing that the Fed should be doing more than it is. And every new data release has been saying the same thing -- that the job market is still much, much weaker than we want it and inflation does not appear to be a problem. It's really gotten farcical...

Why is Haiti so Poor?

Tyler Cowen and others are speculating why Haiti is so poor...

While there are many obvious candidates, one factor among many is that Haiti is almost without a doubt largely still Malthusian. The population of Haiti has more than doubled since 1980 which probably means around 2/3 of Haitians are under the age of 30. Imagine what America would like if this were true? On top of that, from what little I know they've managed to cut down most of their trees and have destroyed their environment.

The fact Haiti is Malthusian does not mean that we shouldn't help -- it's that a big part of the ensuing aid should go to building schools for Haitian girls (and boys). Not only do you lower birth rates, but you increase human capital... Of course, the first thing you do is keep people alive, improve infrastructure, improve the export infrastructure (airports, ports, roads to airports and ports). It's also imperative to get as many countries to take refugees as possible -- the more people who are in Haiti the more mouths there are to feed, and hence the more people who could go hungry in the next few months... Haitian refugees who go abroad and succeed will pay dividends Haiti can collect later -- in the form of remittances, and by serving as intermediaries in trade...

What I taught Students in my First TA Section...

First, I reproduced Greg Mankiw's Table 7-1 on "Standards of Living", only w/ 2009 GDP (PPP) data:

US $47,440
Japan 34,116
Germany 35,539
Mexico 14,534
China 5,970
India 2,780
Nigeria 2,162
Haiti 1,317

What Greg Mankiw, and the professor who teaches the course for whom I TA, want students to take from this is that the US is the greatest country on the face of the Earth. And, when I introduced this to students, I really played up American exceptionalism. Who's number one? I asked. "America!" the students shouted! Makes one wonder, I suggested, whether this wasn't clear proof that America's economic system is the greatest on Earth. I asked the students if there was any reason at all in the data above to think otherwise. Nobody could.

So then I went on, "and this isn't the only measure of standards of living, we could also compare countries by Life Expectancy... So, how do you think America ranks in the world in life expectancy?" "Number one!" shouted the students! "Well, no... Let's look..." Here are the numbers, world rank/life expectancy in years...

US #38 / 78.2 years
Japan 1 / 82.6
Germany 23 / 79.4
-
China #82 / 73
India 139/ 64.7
Nigeria 182/ 46.9

Interestingly, students were not only shocked by how poorly America compares, but nobody could guess how low life expectancy in Nigeria is -- one girl covered her mouth and gasped when I wrote the number on the blackboard... One student, who had shouted out that America is "Number one!" in life expectancy, then shut up and said nothing the entire rest of section... "We're number thirty-eight!" doesn't quite have the same ring to it...

I then pointed out that this wasn't the only measure of "Standard of Living", after all, America also has the Greatest Health Care System on the face of the Earth. So, next we did infant mortality: rank / Mortality in deaths/1,000 births

US #33 / 6.3
Japan 3 / 3.2
Germany 14 / 4.3
China 82 / 23
Nigeria 183 / 109.5

Next, I went over the "countries Greg Mankiw doesn't want you to know about. You see, when I said earlier that America is the richest country on the face of the Earth, I was lying to you. We're sixth."

Luxembourg $82,441
Norway 53,738
Singapore 51,226
Switzerland 43,196
Ireland 42,110
Netherlands 40,558

And, lastly, the kicker -- if we're going to talk about "standard of living", for a job which pays $100,000, would you rather work 80 hours and take 6 weeks of vacation a year, or work 100 hours a week, and take two weeks? Which job would we say has the higher "standard of living"? Of course, most would take the 80 hours/week job, with more vacation time. So, let's look at hours worked per year in these countries:

US 1777
Japan 1828
Germany 1362
_
Norway 1328
Netherlands 1309

So, in other words, Dutch GDP at American levels of work would be $55,000. So, the Dutch work much less than do Americans, they live longer, and fewer of their infants die in childbirth. So, all in all, there are reasons to doubt that America is the greatest country in the world at everything -- we do a lot very well, but so does Europe, despite higher taxes and "socialized" medicine, and there are obvious specific areas where we can still improve.

Scenes from Class

Here are a few choice quotes today from the professor's lecture of the class I'm TA'ing for (the one using Greg Mankiw's book):

"America is the greatest country in the world, that's why everyone comes here."

"American Universities are the best in the world, that's why students from all over the world vote with their feet." [just before bored-looking students were seen voting with their feet and leaving...]

"Economics was called the dismal science because it foretold mass poverty"

"The Fed is pumping money into the system..."

Professor: "Government deficits crowd out business investment."
Student: "Do tax cuts crowd out investment too?"
Professor: "No. Tax cuts increase spending..."

"The easiest thing for the government to do is cut spending [to balance the budget]"

Indoctrination

In Greg Mankiw's workbook (price $38 new on Amazon, for $200+ for book and workbook, both of which we require students to buy), on p. 147, #11 reads: "Researchers have found that countries that permit free international trade tend to:

The answer is: (a) grow more rapidly.

In the book, Mankiw cites the Sachs & Warner study which, famously, classified Japan as a "free trade country". He then cites Frankel-Romer, which nobody takes seriously (the authors key result is barely significant at 90%, they had no geographic clusters, and they basically constructed a Europe dummy -- they admit in comments that the inclusion of continent dummies would destroy their results...)

Greg-- My copy of this book is just a joke, right?

Greg Mankiw's Text... Keeps Getting Worse

On page 230-231, Mankiw calls it a "fact" that the Marginal Product of Capital is 12%. Thus, Manks says, the capital stock of the US is well below the golden rule level assuming economic growth of three percent and depreciation of four percent. Except, he could have chosen basically any number for depreciation and any number for MPK. The long-term average of the Dow is definitely less than 12% -- probably closer to about 6%. (The past 10 years, the stock market has returned closer to 0%...) I doubt too many firms in the US borrow at anywhere near 12%... The US government is now borrowing at basically 0%...

Of course, there are other problems with the whole Solow analysis, as I've pointed out -- namely, much investment in the US goes into housing, which isn't used in production (and depreciates more slowly than computers do...). Secondly, much of consumption is used later to produce -- such as consumption expenditures on food, health care, education -- so the whole concept is not that meaningful.

A second thought: The whole notion of "capital per effective worker" is both tricky for students to understand and adds nothing to the analysis of the Solow model. Why not drop it in favor of something more interesting? Like Kamarck/Crosby/Diamond/Sachs?

James Burke's "Connections"

Previously, commenter Jonathan recommended James Burke's "Connections". I'd forgotten until now when I looked to buy it, but I had a high school science teacher who used to put on "Connections" whenever he was too hungover to lecture, and I (and my classmates) were absolutely mesmerized. Later in life, I've never been able to remember the name of that series -- so thanks Jon! "Connections" tells how inventions from thousands of years ago led to more inventions in Medieval times to inventions which led to the Industrial Revolution to the present... It's fascinating stuff.

BTW, I've noticed it's downloadable on the pirate's bay, although i'm not advocating software piracy (at least not without having installed Peer Guardian 2 first...)...

Initial Thoughts on Greg Mankiws' "Macroeconomics"

So, first I'll have to give Gregory props -- he's a good businessman. One of his innovations is to sell advertising space in his textbook (and, I suppose, on his blog -- see my post on his Steven Landsburg review). I have no problem with this (especially if this could be used to reduce the price, $178, of the textbook), but when you do so in the context of listing what good resources are for students, to only list resources who will pay is poor scholarship. For instance, he lists Aplia, Mankiw WebCT, the Wall Street Journal, and he tells his readers that "Faculty receive a complimentary 15-week subscription when 10 or more students purchase a subscription." If we go to the Economist website, we can get access to: "Blogs. Blogs cover economics as well as U.S. and European politics." He doesn't mention that you can get access to Econ blogs on the world wide web, nor does he provide a list of the most influential Econ bloggers. Why not? Because they won't pay for advertising space in Mankiw's book.

The students lose out.

Second advice to Gregory: Donate 10% of the proceeds of your $178 book to a charity which makes college education more affordable for low-income students and feel free to include this in the cover. You'll come across as less of a blood-sucking leech who just uses his position in society and the Harvard name to extract every dollar out of students he can (while dispensing less-than-worthless economic advice), which is unfortunately my impression at this juncture.

As one would expect from N. Gregory Mankiw, the book includes some whoppers...

P. 3: "Voters... know that government policy can affect the economy in powerful ways. As a result, the popularity of the incumbent president often rises when the economy is doing well and falls when it is doing poorly."

Except this isn't true. When the economy is doing poorly, voters take it out on incumbents regardless of whether the incumbents have anything to do with the poor state of the economy or not. Usually, the incumbent party has at best a very modest impact on the business cycle, and voters are generally unjustified in thinking otherwise (some rare cases excluded). It would be nice if Econ textbooks highlighted this so that voters would stop acting so irrational. (Greg: It's comments like this that got your Mensa application denied...)

On P. 60 -- Gregory buys into the "Great Productivity Slowdown" of 1973-1995. Of course, this 22 year period begins and essentially ended with low-productivity growth periods, while the shorter periods before and after it contained only brief recessions. We can make much of the "Great Productivity Slowdown" go away by slight arbitrary shifting of the dates. Greg's first period is chosen as 1959-1973, when productivity grew at 2.8% vs. 1.4% in the slowdown period. But of course, this is a questionable start date since average productivity growth from 1956-58 was only 1.3%, and a questionable end date since productivity growth in 1974 was -1.6% (according to the BLS ). Absorbing these four data points into the first period, which is eight years shorter than the second, would make productivity in the first period less than 2.4%. If we then make the second period 1975-1992, the average productivity growth was 1.7%, which cuts the magnitude of the "Great Productivity Slowdown" in half. If we exclude the three recession years during that time, then we get average productivity growth of 2.2% -- within the MoE of the first period (although this is kind of cheating -- it does help us "explain" why there was a productivity drop). The third period, from 1993-2008, is 2.2% as well (compared to 2.4% from 1995-2007).

I still think there was a productivity slowdown, it was just a minor blip (less than 1%) which, after accounting for the oil shocks and Volcker's battle with inflation, is probably within the MoE. Part of the reason the myth of the Great Productivity Slowdown took hold was that Europe and Japan grew like wildfire rebuilding after WWII, which may have helped US productivity as well by increasing their demand for American goods. Also, bias in the CPI is likely increasing over time, so that, in reality, we'd have to guess that productivity was roughly flat in the first two periods and increased in the third, but this increases our error estimates, so that it's actually tough to say. I don't put much faith in government bean-counters...

I'll have to admit, though, that the "The Great Productivity Slowdown" was a such a big, serious issue for Macroeconomists says more about the sorry state of Macro and Econ than the sorry state of Greg Mankiw, as I'm fairly certain every other Macro book says the same damn thing.

More to come...

UPDATE: Just opened Chapter 7. Greg starts the chapter off with a list of a few select countries by GDP with the title "International Differences in the Standard of Living". Greg has chosen the countries (leaving out the likes of Norway, Ireland, the Netherlands, or Switzerland) so that the US looks like far-and-away the country with the highest living standard in the world. Students will draw from this that the US therefore must have the greatest economic system for its citizens, and will begin to wonder how to explain the US's preeminence. What I recommend Greg do in the next version is to also list each countries rankings in terms of life expectancy, where the US ranks 38th in the world, and infant mortality rate, where the US ranks 33rd, just to give students a little perspective on how GDP translates to "Standard of Living". Also, as Greg knows, it makes more sense to include median GDP per person, where the US doesn't match up as well, or, even better, median income per hour worked, where the US would not longer even rank in the top 10, and would lag even France by a wide margin...

One of the countries Greg compares the US to is Germany, which lags the US by about 25%. Except, of course, Germans work about 1/3rd less than do Americans. Throw in the fact that Eastern Germany is still about 25% poorer than West, and it's clear that Greg Mankiw is leading his students to a faulty conclusion.

UPDATE II: The growth section is just AWFUL! Almost unspeakably bad. On page 215, Greg plots income per person against population growth, and sees a clear downward trend, about which he says "high population growth tends to impoverish a country because it is hard to mainatin a high level of capital per worker when the number of workers is growing quickly". Basically, he pitches it as confirmation of the Solow model. Except, there are two other theories it confirms -- the first, and more obvious one being the Demographic transition -- the (i had thought) well-known fact that when societies get rich, they have fewer children (so that income per person predicts population growth rather than the other way 'round), and the second being the Malthusian Model -- African countries which depend heavily on agriculture and resources have fast population growth.

Greg does go on to discuss the Malthusian Model, but there are some crazy comments in this section too, as Manks discusses the Malthusian Model as a relic of the distant past, having nothing to do with the world today. "There is now little reason to think that an ever expanding population will overwhelm food production and doom mankind to poverty." Greg, this should be changed to: "There is now little reason to think that an ever-expanding population will overwhelm food production and doom white countries to poverty." What about Sub-Saharan Africa? Much of Africa is quite likely still at least weakly Malthusian, definitely not completely out of the Malthusian woods yet...

Re: The Kremer Model -- Jared Diamond is the proper citation there, Diamond came first(I suspect Kremer meant to cite him). Diamond's theory is also more interesting than Kremer (even though Kremer came later) so you need to explain it.

Also Greg, a tip: AJR (2001) is fatally flawed research and, as such, has no place in an undergraduate text. First, you should go read Crosby and the original Diamond (3rd Chimpanzee, 1992). The basic problem with AJR (2001) is not that the authors made up their data, although they did. It's that for settler mortality to be a good proxy for institutions, it needs to be uncorrelated with geography. But, by construction, it's almost perfectly correlated with geography. The europeans could also bring their human capital and agricultural technology to other temperate areas -- not just their institutions.

Somewhere, in your section on growth, you've got to show a frigging map of the world w/ per capita GDP so students can see the latitude connection...

Fortunately, I got this book for free. (Sometimes you get what you pay for...)

Japan: Kan Naoto

It's a very good sign that Kan Naoto is now the Finance Minister in Japan. Unlike the PM Hatoyama, Kan Naoto is actually smart and liberal. He made his mark taking aim at government bureaucrats, which actually control most policymaking in Japan, while the Diet is essentially a rubber-stamp necessary to keep up appearances b/c western nations do not like dictatorships. Kan has spent his career fighting the powers that be to try to change this (actually, it's a mystery to me why the Dems didn't choose him to lead their party...). But here's the thing -- Japanese politicians are almost worthless (Kan and a few others excepted). In practice, they might be better off w/ knowledgeable Toudai (Tokyo University) bureaucrats running things, but I digress...

The Yen fell on the announcement (a good sign), but what the Japanese really need is for Kan Naoto to head the Bank of Japan. In any case, the next day Hatoyama scolded him, and he revised his initial remarks, and the yen gained ground! How stupid!

Anyway, it got me thinking, I wonder how much the grave errors in policy the Bank of Japan has made and is making has to do w/ how many of their top leaders have been trained by know-nothing American Macro Departments/have bought into standard Economic orthodoxy?

The current BoJ leader, Masaaki Shirakawa, who doesn't have a clue how to fix the simple problem of deflation, did his training at Chicago.
Another board governor, Kiyohiko Nishimura, got his Econ PhD from Yale in 1982.
The other board governor and most of the Members of the Policy Board did all of their training in Japan, however, but still, two out of the three leading posts are filled with Economists trained in leading US PhD Econ programs! Most of them went to schools like Tokyo University or Hitotsubashi, and a quick perusal of their homepages was enough to confirm that professors trained at US PhD Econ programs such as Chicago, Harvard, and MIT are well-represented...

And I would suspect that this is a common phenomenon all over the world. I've often taken graduate Economics courses where many of the students are from poor developing countries, where their government paid for them to come to America to do graduate work in Economics, with the understanding that they will go back and work in the Finance or Transport Ministry back in their home country... So, they come, do two years of algebra, and then go back to their home country, having learned nothing useful.

Most economists wash their hands of this problem by saying that, look, if you are interested in policy you should go to a public policy program. The problem is that the outside world is still under the mistaken impression that trained economists are trained to think about economic policy issues. This is why, when you look at leading policymakers around the world, from Masaaki Shirakawa to Ben Bernanke to Larry Summers, their core training is in doing fast algebra.

Give me three months as the Governor of the Bank of Japan and I will cure the country of its economic maladies...

Do We Really Need More Stimulus?

I hear voices saying that if the unemployment rate is above 9.9% in February, then they'll support more Stimulus, but as of right now, the Fed and Admin are on the right path...

For reasons I've explained before, we are not likely to still be above 10% unemployment in February simply because January and February are always really low employment months, and so we'll get huge positive seasonal adjustment factors when, since we've already got so much unemployment, is not likely to hold this year.

What I'd like to know is, if the Fed does an extra $500 billion of QE now, and the labor market completely turns a corner the rest of January and February, what exactly do we lose? After all, if things start to get better quickly, they could just reverse that $500 billion, and then perhaps raise the Fed Funds rate if the economy gets really hot.

If we don't do anything, and the labor market continues to be weak or gets worse, on the other hand, that would be very bad.

I haven't heard why the risks are symmetric here...

Toss in all the budget cutting going on at the state and local level, the fact that stimulus will phase out over the 2nd half of the year, the ending of Fed purchases of MBS, and it all makes for a really slow recovery and finishing the year above 9% unemployment...

And a shit-beating for the Dems this fall.

So, yes, we need more stimulus.

Dismal Unemployment Numbers

So, met with dismal unemployment numbers for December, will the Fed, or their conservative backers, update their priors and say to themselves "look, the job market is still much, much worse than we thought, let's pump another $350 billion into the economy and see what happens..."

Or will they just continue on autopilot?

If we see two to three months in the 150K to 200K plus range, I would be changing my tune, and saying we don't need any more QE, and that we should start to reverse the stuff we've got in place.

But we just haven't turned the corner yet.

Let's be clear what these numbers mean -- since last summer, the Fed has been making more-or-less clear-cut policy errors. Each month, the Fed gets worse numbers than it thought. It reacts to these numbers by ... continuing on the same path it had when it thought things were better. Ben Bernanke believes the same thing Wednesday as he did Monday, no matter what the BLS announced Tuesday.

This is serial incompetence.

And, it extends to Larry Summers and the Obama administration. How much longer will they pretend that the stimulus was "just the right" size?

Graduate Macro

To get the Development people off my back: Today I sat in on a Grad Macro/Money Field course, and basically, as far as the material is concerned, it was no different than going to a graduate mathematics course.

My simple objection is that mathematics training alone isn't enough to train a macroeconomist. Learning new tools will not change their ideas about economics. They will just use the tools to push their priors...

UPDATE: Hoisted from the comments.

«They will just use the tools to push their priors...»

But that is the whole purpose of Economics: confirming the central truthiness that the distribution of income is justified by productivity and creativity. The maths are used to give the respectability of formal methods to proofs of this central truthiness of Economics.

Summers being forced out? (From the department of WTF?)

Manks links the Al Hunt piece that I blogged about last week, and Kaus speculating whether Summers may be being pushed out. I don't think so. Hunt doesn't really have anything in his piece to support that, but, nevertheless, it's nice to see Greg Mankiw contribute to the speculation.

Greg gives Larry the Greg Mankiw seal of approval. Greg says there's "no one better" for thinking about hard questions. I don't know that that is going to reassure thinking people...

Summers on Tax Incidence

I've long been "meaning" to read and critique more Larry Summers papers...

Finally, I was assigned to read one in a course I'm auditing, entitled "Tax Incidence" with Larry Kotlikoff.

On some level, the paper is basically fine. However, it falls into the category of what I like to call "pre-Modern" Economics, as the premise of the paper is that "we" know nothing about human behavior except that humans are uber-rational machines. It is a paper chalk full of obviously erroneous assumptions such as "all agents are the same" and "Production exhibits Constant Returns to scale" while maintaining innocence that the conclusions are a product of the assumptions...

Take the first (seemingly harmless) insight that tax incidence need bear no correlation with who bears the legal incidence of a tax. And that who bears the legal incidence will make no difference to the equilibrium price or quantity. It's a fascinating insight! Except it's not true in the real world case.

Theoretically, fine. But as Larry Summers himself would be wont to say "There are idiots. Look around..." If the government taxes each carton of milk, and charges the company directly, so that a consumer sees only the post-tax price when they walk into the grocery store, there will be a different equilibrium outcome than if the tax is not levied until the consumer gets to the cash register... Should there be? No. But, people are, well, people. $1.99 with 5% tax later looks like a better deal than $2.09. The milk-producing folks might well be better off with the tax incidence falling on the consumer...

But, whatever, you say, you can't expect someone to theorize about everything at once. Fine. The next section in the paper deals with factor taxes. Summers & Kotlikoff just consider the homogenous-worker tax incidence case. Some things, such as "a tax on capital doesn't affect the real wage in the short run" are obviously conclusions that will not extend to the real world case (although I suspect, in this case, the authors realize it).

More strikingly though, the basic conclusion that, when taxing factors, the more elastically demanded and inelastically supplied factor will bear the burden of the tax, does not hold if we start relaxing some of our assumptions (which nobody believes anyway). Let's assume everyone, and every job is not the same. Let's look at NFL teams -- clearly the quarterback position is the most important on the team. The Colts demand for Peyton Manning is clearly more inelastic than Peyton Manning's supply of labor to the Colts. If the Colts unilaterally announced they would cut his salary to $5 million, Peyton could threaten to sign w/ Tennessee and could easily get way more (in which case, how many seconds would it take the Colts to come crawling back?). On the other hand, for lineman and/or wide receivers, especially the second-stringers, its quite plausible that the Colts demand for these guys is quite elastic (second-stringers are easy to replace), while at the same time, the Colts have an inelastic demand for some second string lineman.

Summers' theory suggests that, when we tax Peyton Manning, the incidence should not primarily fall on Peyton Manning. But if Peyton were taxed by declaring all income over $5 million taxed at a 99% rate, Peyton would likely just settle for $5 million since it's not the Colts organization which is insulting him. Now, with more room under the salary cap, the lineman, receivers, and second stringers would be getting more. The incidence falls completely on Peyton Manning, even though he's the guy, according to Summers' analysis, who can't be touched by taxes.

Am I cheating here by relaxing so many assumptions? And, isn't the NFL a special case? Well, in a sense yes, and in a sense no. Summers' didn't mention that there isn't just one labor supply curve, that if the Colts offer Peyton less or more he'll react differently than if the government taxes Peyton less or more (even if it's the city of Indianapolis which taxes him to pay for inner-city education). Or that Peyton Manning will have a different supply curve if the Colts offer him $5 million, but promise to sign a pro-bowl lineman with the proceeds. And Peyton's labor supply curve for playing for the Colts is different than his supply for playing football at all.

In the last section, he considers an OLG model, which implies that a higher tax on capital reduces the capital stock and the real wage.

How might we tweak this model? Instead of assuming everyone is the same, we could merely assume two types of Agents. The first type is the Walton family, and the second type are workers who work at Wal-mart. The ultra-rich tend to do the lions share of saving, so let's assume the workers all have tight budget constraints, while the Walton family all goes to grad school until they are 40 and then soothe their soles working on humanitarian projects in between ski trips to Aspen. In other words, let's assume the Waltons are rich enough they are at or near a satiation point.

What happens now when we increase the tax on savings? Well, nothing really changes, especially if the taxes get refunded, lump-sum. The workers weren't saving anyway, and the Waltons are basically satiated enough to the point where they are just giving money away... Now, probably the real world is somewhere in between my story and their story, but, nevertheless, the conclusion of Summers and Kotlikoff "Thus, an interest income tax compensated in the second period unambiguously reduces capital intensity. This means that the pre-tax return to capital rises and the wage falls. The tax is thus at least partially shifted to labor." only follows because of the authors assumptions, assumptions which do not happen to hold in the real world case...

Of course, there are dozens of ways we could relax the assumptions and reverse tweedle-dee and tweedle-dum's results. We could assume, for the poor group, that their consumption largely consists of education, food, and health care expenditures, and that productivity in the second period depends on consumption in the first. In this case, the larger the tax on capital, the higher productivity is, and the higher the steady-state capital stock. But, of course, if the capital stock mostly consists of the Waltons' vacation homes, this might not even be a good thing!

What Went Wrong With Summers?

Someone asked. After all, his uncles Kenneth Arrow and Paul Samuelson are two of the Greatest Econ Nobels of all time, and both were obsessed with things such as market failure, asymmetric information, and externalities. Instead of doing a Ph.D. at MIT, Summers crossed over to the dark side of Cambridge, studying under Martin Feldstein at Harvard, which had essentially shown Samuelson the door.

Have a look at Summers' tribute to Milton Friedman penned in the NYT, in which Summers, in no uncertain terms, says Milton Friedman was a better economist than either of his uncles. This is a big deal, in part, because Samuelson and Friedman had a contentious, though respectful, rivalry. It's also a big deal b/c Friedman was very wrong on many of the big issues -- he argued that monetary policy alone caused/could have saved the Great Depression, that financial markets should be completely free, and that the Clinton tax increases would lead to a deep recession.

Kenneth Arrow and Paul Samuelson are not just two Nobel Prize winning economists -- they are two of the most respected economists ever. Both were well-respected by nearly everyone -- and they were politically liberal, technically-oriented, and smart. Both are responsible, in a big way, for economics being so technical today, only both were keen real-world observers in contrast to most economists today who can just do lots of math.

I can only imagine there must have been some raging debates at his family reunions, especially went larry went over to the dark side at the H. Larry's relations with his uncles was strained at times -- although both of his uncles are not the type of people who are difficult to get along with. I posted awhile back a quote of Samuelson in which, when asked about Summers, said "We're not in contact."

Here's another thing -- people I know who know either Arrow or Samuelson always say they are very nice, down-to-Earth, easy-going, and are not the least bit arrogant. Larry Summers is none of those things. So, what I suspect is that Summers always wanted to live up to the family name (or rather, the family name his father changed -- something I think is really, really strange and bears investigating). Summers then found he couldn't even come close to matching his uncles -- despite having the not-insubstantial doors of MIT and Harvard open to him, but then again, almost nobody could live up to them -- and so I'd speculate that this fact probably caused the over-amitious Summers a lot of pain, pain he helped assuage himself by mentally imagining Milton Friedman to be the greatest economist of all the post-war era rather than Samuelson or Arrow (in reality, I don't see how Milton isn't the 3rd best among those three), and perhaps as a quasi-revenge on his uncles for being too much for little Larry to compete with. Perhaps there was also some brotherly-competition between Robert Summers and Paul Samuelson? Larry's father, Robert Summers, strikes me as an extremely conventional "economists'-economist" who was competent enough, but a nothing next to his wunderkind/genius-brother Paul or brother-in-law Kenneth (which is no knock on Robert). Both went on to dominate the field. And Larry might also have felt a grudge for seeing his father so thoroughly outdone even if his father himself bore his brothers no grudge...

Another thought is that anyone raised by conventional economists is likely to have some screws loose...

Also, its worth mentioning that there exists a strange brand of economist-Democrats who might not have voted for Bush, but who, influenced and confused by their identities as economists, nevertheless buy into all kinds of conservative myths. I think Summers is probably one of these, or possibly an authentic moderate conservative who wants to makes sure liberals don't destroy the country...

Blattman Responds: "Don't Lose Hope"

It speaks really well of him that he would respond to my rant attacking his field.

We're probably not that far apart on the basic issue. I liked the syllabus he put together for his class. And I can understand that a field course is necessarily going to have to teach method, but I'll maintain it should go well beyond just method (and I suspect he wouldn't disagree).

Perhaps I'm just bitter I was never assigned Crosby or Kamarck.

In any case, here's the bulk of his post:

First, something that becomes clear only in retrospect: a graduate class in any field of economics is not attempting to teach you about the big ideas in that field; it’s attempting to teach you method. Your professors are showing by example how to write a tight, well-theorized, well-identified research paper. You have the rest of your life to learn about why some countries are poor (the logic goes) but you will never outside of that class teach yourself how to build a structural model.

Second, a lot of economics research aims to answer narrow questions very well–especially the kind of research that gets you a good job or tenure. Some of this work is mathematical masturbation. Some is a rehashing of puzzles that economists care about only because they are puzzles (and it’s a chance to be clever). But a lot of the research is very good and very important.

To see an example, take a look at Esther Duflo and Abhijit Banerjee’s Growth Theory Through the Lens of Development Economics. They aggregate oodles of mainstream development research into a set of answers (and unanswered questions) about the larger process of development. I think it’s marvelous. And there are many more examples (or I’d have little to write on this blog). Indeed, most of the mainstream development people, in their main work or behind the scenes, contribute to development thought that really matters.

Finally, those seemingly pointless papers that rehash an irrelevant question serve a higher purpose: they advance the method. I could care less about the 100th paper on the ‘returns to education’. Who cares if it is 0.12 or 0.14? But the debate that raged to identify one silly parameter did more to advance our understanding of causal identification in statistics that almost any other question in social science. And the literature is better for it.

Do I wish that junior faculty could pursue big and fuzzy questions in development without committing tenure suicide? Yes. Is the profession distorted towards a narrow set of questions that be answered with a specialized set of tools? To some degree. But do I think that the demand for excruciating rigor in theory and statistics has changed the world? Absolutely.

I finish with the advice from the brilliant, senior, fuzzy development economist who stopped me from leaving the PhD: “Yeah, there’s a lot of bulls**t, but it’s good for you, and it will get better, and soon you’ll get to do what you really want to do. So suck it up and stay.”

I did, and with no regrets. Don’t lose hope.

Institutions vs. Geography: Which matters for development?

I agree here w/ commenter Ted -- both matter. What's interesting to me is that the debate is not symmetric. Those, like myself, who point out that geography is surprisingly important do not say that institutions are unimportant also, but many, like Acemoglu, who favor institutions do claim that geography is irrelevant, and label anyone who thinks otherwise "geographic determinists".

These people need to start looking at maps. Economics doesn't happen in a vacuum.

Summers' on Moral Hazard

Via the Baseline Scenario (hattip to commenter on this blog).

In larry's Ely Lecture in 2000, he said "[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts..."

Yep, that's why Lehman failed, they just knew they'd get bailed out.

The basic problem with worrying too much about moral hazard is this: suppose I wanted to prevent you from doing some kind of bad behavior, such as eating candy bars. As punishments, you could be fined $100, or have your house blown up with a nuclear weapon. Of course, a $100 fine is probably enough to get you to not eat candy bars if you can help it, w/ the added benefit that it won't also have lots of collateral damage. This isn't a great analogy for finance, but most firms weren't really aiming to go bankrupt and I don't think getting bailed out really enters into their thinking about how they trade. Regulating pay and higher capital requirements would do much more to alter behavior...

Comment on Acemoglu...

Brad DeLong assigns his students an Acemoglu article.

It's wrong, of course. Acemoglu wrote:

How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

On one side of the border fence, in Santa Cruz County, Arizona, the median household income is $30,000. A few feet away, it's $10,000. On one side, most of the teenagers are in public high school, and the majority of the adults are high school graduates. On the other side, few of the residents have gone to high school, let alone college. Those in Arizona enjoy relatively good health and Medicare for those over sixty-five, not to mention an efficient road network, electricity, telephone service, and a dependable sewage and public-health system. None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.

The key difference is that those on the north side of the border enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. On the other side, the inhabitants have institutions that perpetuate crime, graft, and insecurity.

Except, of course, another big difference is that, on the north side of Nogales, if the labor market there is bad, a person could easily move to Texas, New York, or California, whereas on the Mexican side, they could move to Chiapas... (Another difference is that on the American side, they could probably get a job w/ a US defense contractor, which they could not get on the Mexican side...)

Hence, you've got to compare the geography of the US as a whole compared to that of Mexico as a whole. And the geography of the US is similar with the geography of Europe and contains an ocean with trade winds which make it effectively close to europe. the only part of mexico similar to europe are the central highlands. these highland areas are among the most developed in Mexico, and also extremely remote from Europe.

The problem is that Acemoglu has cherry-picked his example. Why not compare Harlem to SoHo in NYC? They've got the same institutions, yet couldn't be more different, no? Or Watts to Orange county? San Fran to Oakland? Or almost any inner city to the surrounding suburbs? We're talking huge income differences across short distances, w/ institutions fixed. One can hardly infer from any of these examples that institutions and geography don't matter...

Acemoglu's example just doesn't say what he thinks it says.

More on Budgets

According to the Center for Budget Priorities and Policies the total state budget shortfalls for 2010 are $192.6 billion, with another $120 billion projected for FY 2011. And these do not count local budget shortfalls.

We're going to need more stimulus...

Deja Vu from the AP...

How awful -- awful -- is the mainstream media?

Today in my local paper, two AP articles, side-by-side, reminded me of last January, when David Brooks predicted that the stimulus would result in state Governors who have a couple hundred million deficit trying to figure out what on Earth to do with billions in stimulus money -- while the article on the front page of his own newspaper on the same day described states' furloughing workers, hundreds of billions in state budget shortfalls, New York City increasing Met fares on disabled people, Florida increasing taxes on retirement homes, and large tax increases and budget cuts all around -- and by Governors who knew stimulus money was in the pipeline.

The first article is clearly critical of the new Jobs bill Congress is considering, pointing out that "only 9 percent of $27.5 billion for highways had been spent" and that it would be hard to find ways to stimulate the economy quickly. The second article is about the massive state budget shortfalls which are going to hit in 2010, and the coming tax hikes/spending cuts coming down the pike later this year.

Of course, there is no way both of these "stories" can be true simultaneously. Either it is difficult for the government to find things to spend money on quickly (and state budgets are fine) or state budgets are not fine (in which case it would be a simple matter to stimulate -- give states money so that they do not cut spending or raise taxes).

It's always interested me the way disparate story lines in the press -- which are mutually contradictory -- can coexist without anyone realizing it.

One Day 'Till I get my free Greg Mankiw Book

As I've mentioned, I will be blogging the course I am TA'ing this quarter which is using Greg Mankiw's Macro book. I'll be reviewing the book as well.

Stay tuned.

Rant on Development Economics

Here's my take on Development Economics, wrong or right.

Development Economics is not a "main-stream" Economics field. Most Development Economists are Development Economists because they really do care about the worlds' poor, they tend to be more liberal and less dogmatic than your average economist, and many of them view other, more mainstream fields such as Macroeconomics or Macro Growth as witchcraft. They often point out that in Macro, you've always got these really difficult identification issues, and it's often impossible to say w/ any certainty that you've identified a causal relationship as opposed to just correlation. With Micro-Development Randomized Trials, it is possible to know "things" with much more certainty.

While I can understand the views of Development Economists, I cannot really remember being impressed by any Development Economists, or have ever walked away from a Development Econ presentation/class feeling like I've really learned a new, important insight into the fundamental question of Economics: Why are some countries poor? And what can "we" do about it? And this was my feeling today when I sat in on a first graduate development lecture of the term. First I should say that the professor was an eminently likable guy who's heart is in the right place, and that there are many readings on the syllabus which I was not familiar with which look like they could be very interesting papers: Bliss & Stern's (1978) "Productivity, Wages and Nutrition", and Hoddinott et. al. "Effect of a Nutrition Intervention During Early Childhood on Eocnomic Productivity in Guatemalan Adults". At the same time, I can only sit thru so much blather on the Household Production Model and blather about rural credit markets (maybe this means I have ADD).

The real problem with the course and syllabus is what it did not have: There was not a single geography paper. Not a single Economic History paper. Not a single Macro-Growth paper. Not a single book of any kind.

Is geography really altogether unimportant? Does it really make no difference for manufacturers whether they produce high up in the Bolivian mountains or next to Iron Ore Deposits on a navigable waterway next to Chicago? Is the whole of History irrelevant because it's impossible to go back and do a randomized trial? (For that matter, I suspect that only a fraction of the papers on the syllabus are randomized trials -- it looks like many are simply rural Micro-Theory papers -- and of those which are, I wonder how many tell us something we didn't already know and carry important policy implications.) Perhaps the whole of Macro Growth is irrelevant (I don't actually think so, I think there are some diamonds in the rough), but is the whole field of Economic Geography irrelevant? Urban Economics too? Is there nothing to be learned by looking at detailed case studies at countries which have managed to develop?

I'm of the theory that a syllabus for a graduate course is a very intimate, personal thing which says everything about you as a scholar. Everything you've ever learned about your field which was not already obvious to someone outside of your field should on that syllabus. Since Development is a wide-ranging topic, the syllabus should be wide-ranging as well. It goes w/out saying that 2/3rds of the stuff listed can be "background" readings, and that the class itself should focus on a more specific, focused slice of the literature.

The problem is that I didn't get the impression that this professor, or other development economists, had read, say, Jeffrey Sachs "Tropical Underdevelopment" paper, or Alfred Crosby's "Ecological Imperialism" and found it wanting. My sense is that they haven't even read them.

What they have read is what other Development Economists who they see at conferences each year write, who all think the same way, who all edit and publish in the same set of journals.

The question is, then, what is the difference between a "Macro/Micro Development Economist" an "Urban Economist", a "Growth Economist", an "Economic Geographer", or an "Economic Historian?" They all try to get at the same two questions -- why are some countries rich and other countries poor, and what can we do about it. But they do not talk to each other. They cannot be bothered to read each others papers, or attend each others conferences. The lines between these fields are delineated, basically, in a more-or-less completely arbitrary (and heavily path-dependent) manner based on who your friends are, what kind of papers they write, and what their and their friends' priors are about the fundamental question of economics.

The syllabus I received will be an extremely helpful resource if I try to publish any papers in a development journal -- as it will allow me to cite the key development papers which will impress (and likely have been written by) referees. Reading all of these papers will also show me what kind of papers, data, methods, and writing style is considered acceptable for the field. Yet, it's much less clear how many of these papers will teach me something I do not already know and have policy implications -- after all, I already suspected that having poor nutrition growing up would be correlated with time spent out of the labor market later in life, however nice it is to see a confirmation of this.

Few, if any, of the papers on the syllabus are "big picture" papers. This follows from the anthropology of Development Micro people -- randomized trials are King, it's impossible to do a randomized trial of industrial policy for different countries, so Development Economists would prefer to be silent. Fair enough.

The only problem is that if I'm the President of Madagascar, I've still got to answer these "big picture" high-development questions and decide on a "grand strategy" and choose my actual policies. (Just because Esther Duflo can't think of how these questions can be answered doesn't mean that they aren't actually answered by people making policy choices.) Wouldn't it be nice if, instead of relying on my priors, there were an academic discipline designed to help provide insight into answering these questions, as difficult as they are? Perhaps we could call this discipline "Development Economics"!

In any case, I'd like to hear why I'm wrong.

UPDATE: I just surfed over to Chris Blattman's blog, and read clicked on his syllabus for his: African Poverty and Western Aid" Course, and most of the criticisms I have above are not valid. His syllabus actually looks quite good...

Larry dollar-billz-y'all Summers-blogging...

More from Mark Ames I'd missed:

Last month, a little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the “stress test” to these same banks.

A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected -- thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup “negotiated” down its financial hole from $35 billion to $5.5 billion.)

Last month, it was revealed that Summers, whom President Obama appointed to essentially run the economy from his perch in the National Economic Council, earned nearly $8 million in 2008 from Wall Street banks, some of which, like Goldman Sachs and Citigroup, were now receiving tens of billions of taxpayer funds from the same Larry Summers. It turns out now that those two banks have continued paying into Summers-related businesses.

...

Black pointed out another sleazy aspect of Revolution Money's pitch: it proudly boasted in late 2007 that it would make it easier than ever for people with low credit ratings to find access to lines of credit. In other words, Revolution Money billed itself as the ultimate ghetto loan shark.

Nineteen months later, Larry Summers, now in control of the economy, told Meet The Press, “We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again savings, and families are again preparing to send their kids to college, for their retirement and so forth.”

Summers Worked for Mukesh Ambani

Via Mark Ames again:

I’d like to kick this series off with India’s top oligarch, Mukesh Ambani, the only foreign boss who paid Summers to work for him in 2008 -- and by “work,” I mean “you agree to be listed on my board of international advisors, which requires nothing from you, and in return I’ll give you $187,000.”

The Summers Conundrum...

I just happened across this old Nation article on Summers by Mark Ames... There was this graf:

He worked for 10 months as a top analyst in President Reagan's Council of Economic Advisers when his mentor, Martin S. Feldstein, was running it, and his colleagues don't recall him venting anti-Reagan heresies then....

"One of the ironies of this business is that Summers's economics are quite close to Feldstein's," said William A. Niskanen, who was a member of the Feldstein council.

and

Some fifteen years after Summers's stint in the Reaganomics war room, he reappears as one of the key villains fighting to suppress the regulatory efforts of a top official, Brooksley Born, who was trying to call attention to the dangers of the unregulated derivatives, such as credit swap defaults, which today are considered the key to the current economic crisis.

Reply to Commenter on Protection

Commenter Ted takes issue with my pro-protectionist argument.

So, let me say that if I were advising a developing country, I would have them be protectionist in a heartbeat. Only, protectionism w/ tariffs is suicide, b/c these countries really, really need market access -- that might be the most important variable in all of economics. A much smarter way is with capital controls, an undervalued peg, and an umbrella of Treasuries one can deploy on a rainy day. Nobody has ever won a WTO case stemming from an undervalued peg. (Who's to say it's undervalued? Who's to say China shouldn't hold $2 trillion in Treasuries?)

Anyway -- here's a trivia question for blog readers/Ted: Name three countries that got rich on free trade.

Keep in mind Hong Kong doesn't count here -- when Hong Kong got rich, it had an effective monopoly on the opium/tea trade between southern China and the rest of the world.

Here's a random thought: Meiji Japan has got to be the most under-studied (at least by economists) Development Policy case-study there is... Which is odd, b/c that's also the most successful development example there's ever been. I'm going to go sit in on a Macro Development course on monday, and I'd be willing to bet my lunch money there will be nothing about Meiji Japan. Hell, I'd be willing to be my lunch money there won't even be anything historical on the syllabus, which i can't see, b/c this prof is still stuck with the cultural norms of a decade in which it was not expected, as a professional courtesy, to put your effing syllabus on-line before the semester starts! But I digress. The original "Men of Meiji" had the Midas touch -- everything they touched turned to gold (Korea, Manchuria, Formosa...)

More Reasons to Abolish the Estate Tax: Think of the Baby Seals

Yesterday, we linked Greg Mankiw making a common-sense case to the common man about what happens when the ultra-rich get taxed -- it comes straight out of the common man's paycheck, only the common man is too stupid to know it. Manks linked Ed Prescott's arguments against "grave robbing": "our public employees have better things to do than construct estate tax codes" ... "Just think of all the time and resources that would be saved if people didn't have to hire expensive lawyers and clever accountants to get around the government's attempt to grab a share of their earthly bounty." He finally concludes "there is certainly no justification for such a tax." Harvard's Mary Feldstein says "the net impact of the estate tax is probably to reduce overall tax revenue." Gary Becker is also against the "death tax" since "they do little to reduce income or wealth inequality." You see, he Gary Becker, only supports large, grand measures to fight inequality, not by pussyfooting around with estate taxes on the ultra rich. And since GB worries about the common man, he's worried about the estate tax hitting "farmers and other owners of small businesses" which is why they "continue to be active politically in advocating much lower estate taxes, if not their complete abolition." Since most farmers and mom-and-pop small-businesses leave multi-million dollar estates...

Any other arguments against the Estate Tax? Here's a surprising and little-known fact: Every time a rich person pays estate taxes, a baby seal is harpooned and clubbed to death.

Thank G_d the grave-robbing of farmers and the senseless slaughter of baby seals has surceased...

Greg Mankiw Demands Justice for Lazy Rich Kids

Manks links his own CEA Chair speech on why estate taxes need to be abolished.

Until yesterday, a $10 million estate would get taxed at less than 30%. Greg's first argument was that the estate tax is not actually that progressive, b/c, even though it only falls on the ultra-rich, sometimes the kids of the ultra-rich are uber-lazy, and hence not rich until they get their inheritance.

This was his lede...

I can share an anecdote here to bolster Greg's point. A friend of my parents had two aunts who inherited a very large estate ($30 mill plus). He was just waiting for them to die -- it turns out the last aunt lived to be more than 100, by that time the guy was in his late 40s, living a horrific middle-class lifestyle. The day his last aunt finally croaked, however, he, predictably quit his job to become a full-time amateur golfer and globe-trotter.

Your aunts aren't worth $30 mill? Don't worry, Greg says that "the repeal of the estate tax would stimulate growth and raise incomes for everyone, even those who never receive a bequest."

You see, Greg Mankiw, Harvard man, is just looking out for the little guy who is too dumb to look out for his own interests. "The average worker" Greg says, "has little reason to know that his weekly paycheck is smaller because of the existence of the estate tax."

Greg then goes on to argue that repealing the estate tax will raise revenue...

That's it. Greg Mankiw is almost too stupid for me to blog, even in jest. There is just no conceivable way behavioral responses to the estate tax are that strong. People who grew up rich but who have low incomes in adulthood will still get lots of money they do not deserve even with an estate tax. And the idea that economic growth is really that sensitive to taxes on capital is crazy -- after all, both Clinton and Bush cut capital gains taxes, so that now, LT gains for someone in my bracket are not taxed at all, whereas just a few years ago I'd have paid 20%.

A simple, bare-bones economic model used by Mankiw and many leading Macroeconomists might imply that this will increase the capital stock by as much as 40%, and GDP by 15%.

Except, when capital gains taxes are cut the result could not be more different. Greg-- time to update those priors buddy.

Blog Topic of the Day: China

Thanks to Krugman, I see that China is the blog topic of the day.

Yglesias takes issue w/ Krugman, saying that the US should adopt looser policy to get a different currency alignment. However, due to capital controls, this wouldn't happen automatically, but rather, if the Fed did *way* more QE, and the dollar declined dramatically, it would put pressure on the Chinese to seek a higher revaluation. (Partly b/c Europe and other countries would put more pressure on the Chinese...)

My two cents about the issue is that China's policy, of piling up massive reserves and undervaluing its currency, is extremely smart industrial policy. Any trade model of increasing/dynamic returns will yield the conclusion that John Stuart Mill/Hamiltonian infant industry protection is a good idea for developing countries (and this also happens to be what the data say. My only problem w/ Rodrik's paper is that he somehow missed the infant industry argument... but i digress) And anyone who was around during the Asian Financial Crisis knows that having a mountain of US Treasuries can be of help in a pinch.

Despite the above logic, however, Larry Summers is on record calling Chinese currency manipulation "stupid". Hopefully, he realizes that, in reality, it isn't stupid, and second, that this is something the US should fight.

OK, back to research...

Imperial Germany and the Industrial Revolution

By Thorstein Veblen, via Brad DeLong.

Here's a snippet:

Owing to this mechanical discontinuity between any given state of the industrial arts and the scheme of magical, religious, conventional, or pecuniary use and wont with which it lives in some sort of symbiosis,
the carrying-over of such a state of the industrial arts from one community to another need not involve the carrying-over of this its spiritual complement. Such is particularly the case where the borrowing takes place across a marked cultural frontier, in which case it follows necessarily that the alien scheme of conventions
will not be taken over intact in taking over an alien technological system, whether in whole or in part. The borrowing community or cultural group is already furnished with its own system of conceits and observances — in magic, religion, propriety, and any other line of conventional necessity — and the introduction of a new scheme, or the intrusion of new and alien elements into the accredited scheme already in force, is a work of habituation that takes time and special provocation. All of which applies with added force to the introduction of isolated technological elements from an alien culture, still more particularly, of course, where the technological expedients borrowed are turned to other uses and utilised by other methods than those employed in the culture from which they were borrowed, — as, e.g., would be the case in the acquisition of domestic cattle by a sedentary farming community from a community of nomadic or half-nomadic pastoral people, as appears to have happened in the prehistoric culture of the Baltic peoples. The interposition of a linguistic frontier between the borrower and creditor communities would still farther lessen the chance of immaterial elements of culture being carried over in the transmission of technological knowledge.
The borrowed elements of industrial efficiency would be stripped of their fringe of conventional inhibitions and waste, and the borrowing community would be in a position to use them with a freer hand and with abetter chance of utilising them to their full capacity, and also with a better chance of improving on their use,
turning them to new uses, and carrying the principles (habits of thought) involved in the borrowed items out, with unhampered insight, into farther ramifications of technological proficiency. The borrowers are in a position of advantage, intellectually, in that the new expedient comes into their hands more nearly in the
shape of a theoretical principle applicable under given physical conditions; rather than in the shape of a concrete expedient applicable within the limits of traditional use, personal, magical, conventional. It is, in other words, taken over in a measure without the defects of its qualities.