Tuesday, June 30, 2009

This makes my day

Milton Friedman has long been one of my role models. So I was delighted to read that, according to BYU econ prof Richard Evans, at least in one small way, I have managed to emulate him.

Split Opinion

...about the proposed health reforms:

A new Rasmussen Reports national telephone survey finds that 50% of U.S. voters at least somewhat favor the Democrats’ health care reform plan, while 45% are at least somewhat opposed.

While the overall numbers favor the plan, those with strong opinions tilt the other way. Twenty-four percent (24%) strongly favor the plan, but 34% are strongly opposed....

Among all voters, just 12% think their health care coverage will get better if the plan is passed while 37% expect it will worsen. Thirty-seven percent (37%) expect their coverage to stay about the same if the plan proposed by the president and congressional Democrats becomes law.

A Missed Opportunity

From Donald Marron:

On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster....

Economists have spent decades demonstrating the potential benefits of using environmental taxes to help finance the government (and make no mistake, a cap-and-trade system is a tax; the Congressional Budget Office, much to its credit, even scores it that way). But that economic logic works only when a substantial fraction of the revenues are used to improve fiscal policy — e.g., reducing deficits or reducing distortions from the tax system. The House bill does neither.

Donald is right. The Pigou Club is not happy.

Monday, June 29, 2009

Interview with Kevin Murphy

The Arbiter of Ignorance

In a brief blog post on healthcare, Paul Krugman says that George Will and I are "either remarkably ignorant or simply disingenuous." I cannot speak for George, but I can attest that I am completely ingenuous. So I suppose I must be remarkably ignorant.

There is a lot of that going around lately. In an earlier post on the state of macroeconomics, Paul says, "Brad DeLong and I have been sort of tag-teaming the Great Ignorance which seems to have overtaken much of the economics profession."

What is going through Paul's head as he writes these posts? I suspect three things:

1. On the issue of macroeconomics, I think I understand Paul's point of view. He accepts the 1970-vintage Keynesian economics he first learned from, say, Jim Tobin when Paul was an undergraduate at Yale. Like Tobin and Bob Solow, one of his teachers at MIT, Paul thinks a lot of modern macroeconomics was an unfortunate turn in the wrong direction. In this old paper (published version), I tell the story of modern macro and describe how many old Keynesians were more likely to denigrate modern macroeconomics than to engage it intellectually. Paul is following in that tradition.

2. On the issue of health care, I also think I understand Paul's point of view. He would like a single-payer system, and he views a public option as a Trojan horse to achieve that goal. In my column, I wrote, "for those who see single-payer as the ideal, a public option that uses taxpayer funds to tilt the playing field may be an attractive second best. If the subsidies are big enough, over time more and more consumers will be induced to switch." Paul was one of the people I had in mind (see this old post of his).

In his latest post, Paul writes, "the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough."

In my view, these comments are just off point. The Obama administration says it wants a public insurance plan that will compete on a level playing field with private plans (that is, without taxpayer subsidies). Is there any cogent economic analysis that suggests that such a policy addresses problems of adverse selection and moral hazard? None that I know. If it has to stand on its own financially, the public plan has no special advantage in addressing these issues.

In any event, it is not like the only alternatives available to us are a government-run health insurance plan or unregulated laissez faire. The most intriguing proposal in the current policy debate is the Wyden-Bennett bill (see this David Brooks column or this letter from CBO on the proposed legislation). That seems to be the best hope for truly bipartisan healthcare reform. At this point, given the legislative strategy of Congressional leadership, the hope is slim at best.

3. On the issue of tone, I again think I understand Paul's point of view. He likely believes that civility is overrated. He seems to think that in the blogosphere, and perhaps in the public debate more generally, you score points simply by insulting your intellectual adversaries. Sadly, I am afraid he may be right.

Sunday, June 28, 2009

Harvard's Troubles

Saturday, June 27, 2009

My Take on the Public Option

A Dose of Ennui

I have a soft spot for novels about adolescent ennui. Not that I was a particularly disaffected teenager. Quite the contrary. But I am sometimes a disaffected adult, so I still easily relate to this genre of fiction. Last year, I reread Catcher in the Rye and enjoyed it more than I did when I first read it in high school.

All this is a prelude to a recommendation. My wife (who reads about twenty times as much fiction as I do) recently suggested that I read a short novel called Someday This Pain Will Be Useful to You by Peter Cameron. And she was right: It is indeed very good, so I am passing along the suggestion.

Friday, June 26, 2009

Was Keynes really a savvy investor?

An excerpt from Scott Sumner's thought-provoking blog:
I got to thinking about this issue last night while reading The Lords of Finance (which by the way is a fine book so far, despite one little point I will nit pick.) See what you make of this:
“In early 1920, he [Keynes] set up a syndicate, with his brother, some of the Bloomsbury circle, and a financier friend from the City of London. By the end of April 1920, they had made a further $80,000. Then suddenly, in the space of 4 weeks, a spasm of optimism about Germany briefly drove the declining currencies back up, wiping out their entire capital. Keynes found himself on the verge of bankruptcy and had to be bailed out by his tolerant father. Nevertheless, propped up by his indulgent family and by a loan from the coolly acute financier Sir Ernest Cassel, he persevered in his speculation”

Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him. But he did have a rich daddy, who bailed him

Don’t anyone write in and tell me that Keynes made lots of other good investments, because if you’ve got a rich backstop, none of that matters.

Here’s what I’d do if Bill Gates was willing to lend me $3.57 billion dollars for a day: I’d go to Vegas and put $5 million on numbers 1 through 34 on the roulette wheel. The odds are roughly 90% I’d win. If I did so, I’d win $180 million on a bet of $170 million. I repay the $3.57 billion and pocket my $10 million dollars and be rich for the rest of my life, clipping coupons. If numbers 35, 36, 0, or 00 came up I’d bet again, this time $100 million on each number 1 through 34. If I won, I’d receive $3.6 billion, repay Gates, and have $30 million dollars to spend for the rest of my life. The odds are nearly 99% that I’d win one of these two bets. Of course if both failed, I’d be in big trouble. But that’s not very likely is it?

What’s the point? If you have a rich backstop it’s relatively easy to come up with investment strategies that will usually (not always) make you look like a genius. From now on I will never believe anyone who tells me that Keynes was a great investor.

Does this matter? It shouldn’t, but unfortunately it does. If his investment reputation was like Fisher’s (calling stocks fairly priced in 1929) nobody would take seriously his Chapter 12 in the General Theory where he tries to shoot down the efficient market hypothesis.


Update from Greg: Because of the formatting, some readers mistakenly thought I wrote part of what appears above. To be clear: It is all taken from Scott's blog. Sorry for the confusion.

The Ugly Cap-and-Trade Bill

Analysis from economists Alan Viard and Ted Gayer.

The Public Option

Pro and Con.

Thursday, June 25, 2009

Posner on Financial Reform

Cutler on Healthcare Costs

My Harvard colleague David Cutler has been a healthcare adviser to President Obama. Click here to read how he and coauthor Melinda Beeuwkes Buntin believe healthcare costs can be contained.

Wednesday, June 24, 2009

Physicians' Incomes and Healthcare Costs

Source of the graph.

For obvious reasons, I have been thinking a lot about healthcare recently. One important question is, why does the United States spend so much more on healthcare than other nations do?
There are surely myriad reasons for the international differences, but part of the answer can be gleaned from this passage by Uwe Reinhardt, Gerard Anderson, and Peter Hussey (via an old post of Ezra Klein):

Although the United States now has relatively fewer physicians per 1,000 population than the OECD median, its total national spending on physicians as a percentage of GDP is double the OECD median (2.9 percent in 1999, compared with an OECD median of 1.3 percent). U.S. physician spending peaked in 1991–1992 at 3.0 percent after steadily rising from 1.7 percent in 1980. Since 1992 spending has more or less hovered around 3 percent. OECD median spending has been mostly flat over the entire period, hovering between 1.1 and 1.4 percent of total spending. As a dollar amount, U.S. per capita spending for physician services was the highest in the OECD in 1999: $988, compared with an OECD median of $342. Physician services accounted for 22.7 percent of total U.S. health spending in 1999, compared with 15.2 percent in the median OECD country.

Physicians’ incomes are much higher in the United States than they are in other OECD countries. In 1996, the most recent year for which data are available for multiple countries, the average U.S. physician income was $199,000. The comparable OECD median physician income was $70,324. The ratio of the average income of U.S. physicians to average employee compensation for the United States as a whole was about 5.5. Germany’s was the next highest, at only 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; and the United Kingdom, 1.4.

One can think of several reasons why physician compensation in the United States is relatively more generous than elsewhere. First, physicians in most other nations face a powerful single buyer (monopsony) for health services. As the McKinsey Global Institute and Mark Pauly have shown, market power (or regulation) translates into relatively lower prices for health services, including the services of physicians. Second, U.S. physicians must make a larger financial investment in their education than their counter parts in many other countries do; they must recover the debt they incur as part of the educational process. Third, the incomes of highly skilled health care workers—notably physicians—are determined partly with reference to the incomes that equally able and skilled professionals can earn elsewhere in the economy. Because the U.S. distribution of earned income for all occupations is wider than it is in most other OECD countries, the relatively high incomes offered skil led professionals in the United States may well have served to pull up the incomes of American physicians relative to the incomes of their peers abroad.

Based on this reading, and in particular on the three hypotheses outlined in their last paragraph, here are some questions for class discussion:

On the issue of monopsony power: Explain how a large government healthcare plan (a "single payer" being the extreme case) could potentially reduce the wages of healthcare workers and thereby national healthcare costs. What are the similarities and differences between this solution to high healthcare costs and a targeted income tax surcharge levied only on healthcare providers (the revenue from which is rebated to all taxpayers)? Are the policies you considered above efficient, using the economist's standard definition of efficiency? Are they equitable, as judged by your own notion of fairness? In your opinion, does your analysis argues for or against a government-run healthcare plan?

On the issue of doctor training: Suppose that in country A physicians get free training through a taxpayer-financed educational system, while in country B physicians finance their own education and then, once trained, are paid higher fees. If country A classifies these training expenses as education rather than healthcare spending, which country would report higher healthcare costs? Is that difference in healthcare costs real or an artifact of labeling? In which country would doctors, once trained, have more incentive to work long hours? In which country would there be more doctors? Which country's system, in your judgment, is more efficient and equitable?
On the issue of inequality: Do you think that the provision of medical services uses more or less human capital than does the typical job in the economy? What does your answer imply about the relative price of healthcare looking across countries with varying degrees of economic inequality? In the United States, the wage gap between skilled and unskilled workers has increased substantially over the past several decades. Other things equal, what does this fact imply about the trend in the relative price of healthcare? If public policy were to try to prevent this change in the price of healthcare without addressing the underlying trend in wage inequality, what effects would the policy have?

Addendum: These broad issues apply not just to doctors but to other skilled healthcare workers as well. If you look here, you will find that dentists, nurses, and physiotherapists are also paid more in the United States than in other nations. By contrast, relatively unskilled workers such as chambermaids and bus drivers do not get much advantage working in the United States.

Tuesday, June 23, 2009

Financial Crisis Timeline

If you have trouble keeping straight all the events of the past couple years, these timelines from the NY Fed will help you out.

Jury Duty

I had jury duty yesterday. I spent most of the day sitting around a courtroom to find out whether I would end up on a jury to hear a medical malpractice case. From the brief description of the case given by the judge, it appears that a woman had died of thyroid cancer and her family was suing her general practitioner for not ordering more tests or referring her to a specialist when she reported early symptoms of the problem.

I did not have any obvious disqualifications, such as knowing some of the parties, lawyers, or witnesses involved in the case. So I was called up and sat in the jury box, but that lasted for only about five minutes. Then, apparently, one of the sets of lawyers used a peremptory challenge to kick me. The only information they had about me at the time was based on a brief questionnaire, which did not say much more than my name, address, and occupation.

I wonder: Why does being a professor of economics at Harvard make one an undesirable juror in such a case? And does this say anything about the judicial system or the need for medical malpractice reform? I am not at all sure about the answers, but the experience did raise some intriguing questions.

Monday, June 22, 2009

Top Level Institutions in Economics

A new ranking from REPEC.

This ranking aggregates various parts of a university, such as Harvard's Economics Department, Harvard's Kennedy School of Government, and Harvard's Business School, into a single entity. Click here for a more complete explanation.

Can better prevention save healthcare costs?

In the debate over healthcare reform, another claim one often hears is that better prevention will save us money. I have noted previously how "schlocky" this argument is. Over the weekend, a doctor writing in the Wall Street Journal puts the point as follows:

Prevention of a disease, we all assume, should save us money, right? An ounce of prevention . . . ? Alas, If only such aphorisms were true we’d hand out apples each day and our problems would be over.

It is true that if the prevention strategies we are talking about are behavioral things—eat better, lose weight, exercise more, smoke less, wear a seat belt—then they cost very little and they do save money by keeping people healthy.

But if your preventive strategy is medical, if it involves us, if it consists of screening, finding medical conditions early, shaking the bushes for high cholesterols, or abnormal EKGs, markers for prostate cancer such as PSA, then more often than not you don’t save anything and you might generate more medical costs. Prevention is a good thing to do, but why equate it with saving money when it won’t?

Think about this: discovering high cholesterol in a person who is feeling well, is really just discovering a risk factor and not a disease; it predicts that you have a greater chance of having a heart attack than someone with a normal cholesterol. Now you can reduce the probability of a heart attack by swallowing a statin, and it will make good sense for you personally, especially if you have other risk factors (male sex, smoking etc).. But if you are treating a population, keep in mind that you may have to treat several hundred people to prevent one heart attack. Using a statin costs about $150,000 for every year of life it saves in men, and even more in women (since their heart-attack risk is lower)—I don’t see the savings there.

As a daily consumer of a statin, I appreciate the extra lifespan, even at the cost. So I am not opposed to prevention--only to the claim that it will yield substantial budgetary savings.

Update: A reader points out that this doctor's brief mention about the budgetary effects of reduced smoking is likely inaccurate. The Congressional Research Service has concluded,
"Governments save on the costs of old-age medical care, social security, and nursing home care due to the earlier death of smokers...Smoking has apparently brought financial gain to both the federal and state governments, especially when tobacco taxes are taken into account. In general,smokers do not appear to currently impose net financial costs on the rest of society."
See also Viscusi. This fact strengthens the doctor's point: Even prevention via reduced smoking is not a money-saver.

To avoid misunderstanding among many of the young impressionable readers out there, let me emphasize that this fact does not mean that smoking is desirable. (As a personal lifestyle choice, smoking seems pretty dopey to me.) But it does mean that there are not negative externalities to smoking working through its effects on governmental budgets.

Saturday, June 20, 2009

Milton Friedman on Healthcare

Friday, June 19, 2009

International Health Comparisons

With the debate over health reform heating up, you can expect a lot of specious arguments to be thrown around. In a previous post, I tried to debunk the idea that we need health reform for reasons of international competitiveness, and I have applauded CEA Chair Christy Romer for pushing back against that "schlocky" argument.

There is another, flawed argument floating around that also needs debunking--that Americans pay more for healthcare but don't get anything for it, as measured by, for example, life expectancy. The problem with such international comparisons is that there are a lot of differences among nations beyond their health systems. To make comparisons in health outcomes, you need to control for other variables. Without such controls, the simple correlations have little meaning.

I tried to make this point in a NY Times op-ed a while back. In a recent post on his blog, Nobelist Gary Becker makes a similar argument:

the American system has sometimes been found wanting simply because life expectancies in the United States are at best no better than those in France, Sweden, Japan, Germany, and other countries that spend considerably less on health care, both absolutely and relative to their GDPs....

[However], national differences in life expectancies are a highly imperfect indicator of the effectiveness of health delivery systems.for example, life styles are important contributors to health, and the US fares poorly on many life style indicators, such as incidence of overweight and obese men, women, and teenagers. To get around such problems, some analysts compare not life expectancies but survival rates from different diseases. The US health system tends to look pretty good on these comparisons.

A study published in Lancet Oncology in 2007 calculates cancer survival rates for both men and women in the United States, the United Kingdom, and the European Union as a whole. The study claims that the most important determinants of cancer survival are early diagnosis, early treatment, and access to the best drugs, and that the United States does very well on all three criteria. Early diagnosis helps survival, but it may also distort the comparisons of five or even ten-year survival rates. In any case, the calculated five-year survival rates are much better in the US: they are about 65% for both men and women, while they are much lower in the other countries, especially for men. These apparent advantages in cancer survival rates are large enough to be worth a lot to persons having access to the American health system.

Several measures of the quality of life also favor the US. For example, hip and knee replacements, and cataract surgery, are far more readily available in the US than in Europe.

The next time you hear someone cavalierly point to international comparisons in life expectancy as evidence against the U.S. healthcare system, you should be ready to explain how schlocky that argument really is.

Why I write textbooks

Kling on Financial Regulation

Arnold makes several good points, including this one:

In the interview, President Obama says,

I think you've got a broader structural problem in our economy in which our last two recoveries had been based on bubbles, and a massively overleveraged consumer, a massively overleveraged corporate sector, and a financial system that didn't have much restraint.

Both the President and the white paper blame this excess leverage on greed and faulty compensation structures. What about taxes and subsidies? Our high corporate tax rate, along with the deductibility of interest for corporations, encourages corporations to look for ways to minimize equity financing. For individuals, government-subsidized mortgages and the tax deductibility of mortgage interest help to encourage over-leveraging.

As they say, read the whole thing.

By the way, if we had an ideal tax system--something along the lines of the Hall-Rabushka flat tax--there would not be incentives for corporate and individual leveraging.

Hennessey on Financial Regulation

Thursday, June 18, 2009


Click on the graphic to enlarge.

The above graph, from the Cleveland Fed, shows inflation as gauged by the consumer price index and by a measure called the median CPI. As every grade school student learns when the teacher reports results of the latest test, the average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data.

Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual.

Wednesday, June 17, 2009


Conor Clarke interviews the great economist Paul Samuelson. This excerpt caught my eye:

Samuelson: The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up -- and by the way, most of these guys are MIT trained; Princeton to MIT or Harvard to MIT -- Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!

Clarke: Oh, I used those textbooks. There's got to be something in there on liquidity traps.

Samuelson: Well, not in the index.

Paul is factually wrong here, or at least out of date. If you look in the most recent edition, the 6th, of my intermediate macro book (or in the new 7th edition, which will be released next month), you will find term "liquidity trap" in the index. And it will point you to an extended discussion of the topic.

I presume Paul was looking at an older edition of the book. The material on the liquidity trap was added in the 5th edition, published in 2003. As a textbook author, I am always fine-tuning the selection of topics covered. To do otherwise would be, well, complacent.


Tuesday, June 16, 2009

Twenty-Five Years Ago Today

Here is the story, in case you missed it at the time. It is best decision I have ever made.

CBO on the Healthcare Bill

The Congressional Budget Office weighs in on the healthcare bill being considered in Congress. The bottom line: It would add $1 trillion to the deficit over the next 10 years and reduce the number of uninsured by about 16 million (which is about a third of the currently uninsured).

Monday, June 15, 2009

Samuelson's Words of Warning

Paul Samuelson, the great economist and textbook author, has some ominous things to say:

Up until now, China has been willing to hold her recycled resources in the form of lowest-yield U.S. Treasury bills. That's still good news. But almost certainly it cannot and will not last.

Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar. That means lethal troubles for the future U.S. economy. When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared.

China, Japan and Korea now hold dollars not because they think dollars will stay safe. Why then? They do this primarily because that is a way that can prolong their export-led growth.

I am not alone in this paranoid future balance-of-payment fear. Warren Buffett, for one, has turned protectionist. Alas, protectionism may well soon become more maligned.*

President Obama struggles to support free trade. But as a canny centrist president, he will be very pressed to compromise.

And he will be under new chronic pressures. His experts should right now be making plans for America to become subordinate to China where world economic leadership is concerned.


*From Greg: I wonder whether the intended meaning of this sentence was lost in editing. "Malign," the adjective that means "injurious," makes more sense here than "maligned," the past participle that means "spoken ill of.".

Sunday, June 14, 2009

The New Voodoo

Tyler Cowen writes:

MEDICARE expenditures threaten to crush the federal budget, yet the Obama administration is proposing that we start by spending more now so we can spend less later. This runs the risk of becoming the new voodoo economics. If we can’t realize significant savings in health care costs now, don’t expect savings in the future, either.
Continue reading here.

Friday, June 12, 2009

World's Best Ice Cream

Here. They deliver anywhere in the continental United States. I particularly like their Mocha Chocolate Chip.

Taxing Height

Is increased health spending optimal?

President Barack Obama, speaking yesterday, says the answer is no:
If we do nothing, within a decade we will be spending one out of every $5 we earn on health care. And in 30 years, we'll be spending one out of every $3 we earn on health care. And that's untenable. It's unacceptable. I will not allow it as President of the United States.
Economists Robert Hall and Chad Jones, writing in the QJE a couple years ago, say the answer is yes:
Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

The Case against a Minimum Wage Hike

Wednesday, June 10, 2009

He doesn't look like Moses

Cap-and-trade bill looks worse and worse

As all good economics textbooks teach (see chapter 10 of my favorite one), the virtue of market-based policies to deal with externalities is that they are more efficient than command-and-control regulations. In the case of carbon emissions and global climate change, putting a price on carbon is supposed to be a better substitute for government micromanagement.

Apparently, that lesson is lost on the writers of the bill now making its way through Congress. Although the bill changes incentives by putting a price on carbon, it also offers a large dose of command-and-control regulation. Essentially, the sponsors don't seem to believe that getting incentives right is enough.

The Washington Post reports:

THE RUNNING joke in Washington is that nobody has read the 900-plus-page energy bill sponsored by Reps. Henry A. Waxman (D-Calif.) and Edward J. Markey (D-Mass.), which the House will consider in coming weeks. What you hear from its backers is that its cap-and-trade provisions would create a market-based program to reduce greenhouse gas emissions -- which should mean that a simple, systemwide incentive encourages polluters to make the easiest reductions in greenhouse gases first, keeping the costs of fighting global warming to a minimum. In fact, the bill also contains regulations on everything from light bulb standards to the specs on hot tubs, and it will reshape America's economy in dozens of ways that many don't realize.

Here is just one: The bill would give the federal government power over local building codes. It requires that by 2012 codes must require that new buildings be 30 percent more efficient than they would have been under current regulations. By 2016, that figure rises to 50 percent, with increases scheduled for years after that....

According to the bill's advocates, America's buildings account for perhaps 40 percent of U.S. greenhouse emissions, and technology is available for builders to meet the targets in ways that are economical for building owners. Much of the problem is old buildings that waste huge amounts of energy, which wouldn't necessarily be touched by the new code. But it would be good if builders met these efficiency goals with new construction.

Is the best way to achieve that, though, to federalize what has long been a matter of local concern? And if the point of cap-and-trade is to change market incentives, why does Congress, and not the market, need to dictate these changes?

The Olympics of Voting

Tuesday, June 09, 2009

Height and Happiness

The latest research from Angus Deaton and Raksha Arora (via Kevin Denny):
According to the Gallup-Healthways Well-Being Index daily poll of the US, taller people live better lives, at least on average. They evaluate their lives more highly, and they are more likely to report a range of positive emotions such as enjoyment and happiness. They are also less likely to report a range of negative experiences, like sadness, and physical pain, though they are more likely to experience stress and anger, and if they are women, to worry. These findings cannot be attributed to different demographic or ethnic characteristics of taller people, but are almost entirely explained by the positive association between height and both income and education, both of which are positively linked to better lives.
So why wouldn't a utilitarian want to tax them to share the joy?

Fact of the Day

From MSN Money:
former Federal Reserve chief Alan Greenspan is a fan of men's underwear sales as an important economic indicator.

Monday, June 08, 2009

Randy & Phill

In April, Randy Kroszner, former Fed Governor, and Phill Swagel, former Assistant Secretary of the Treasury, talked about the financial crisis and rescue efforts at Kenyon College. Click here to watch their presentations.

Thanks, Robin

Sunday, June 07, 2009

Team Obama

Here is an inside look at the dynamic among the President's economic advisers.

The article ends describing an apparently heated interchange between Larry Summers and Christy Romer on health care and international competitiveness. I score the point for Christy, for reasons explained in a previous post.


Is Google the next target for antitrust enforcers? Maybe so, says the Washington Post (via Donald Marron). The nub of the matter:
the government's approach has traditionally been: "We won't punish you for being successful. But if you're a monopolist and you spit on the sidewalk, we'll break up your company."

This Recession's Gender Gap

These charts from Mark Perry illustrate that the male unemployment rate has risen substantially relative to the female unemployment rate during this downturn. Indeed, the gap is now at an unprecedented level. I would conjecture that a large part of the explanation is the sectoral mix of this particular downturn in economic activity, including a significant slump in residential construction.

Friday, June 05, 2009

What's the point of a public option?

In the national debate over health insurance reform, a key issue is whether the government should offer a "public plan" to compete with private insurers. For example, in today's NY Times, Paul Krugman writes,

What’s still not settled, however, is whether regulation will be supplemented by competition, in the form of a public plan that Americans can buy into as an alternative to private insurance.

Now nobody is proposing that Americans be forced to get their insurance from the government. The “public option,” if it materializes, will be just that — an option Americans can choose. And the reason for providing this option was clearly laid out in Mr. Obama’s letter: It will give Americans “a better range of choices, make the health care market more competitive, and keep the insurance companies honest.”

It seems to me that this passage, like most discussion of the issue, leaves out the answer to the key question: Would the public plan have access to taxpayer funds unavailable to private plans?

If the answer is yes, then the public plan would not offer honest competition to private plans. The taxpayer subsidies would tilt the playing field in favor of the public plan. In this case, the whole idea of a public option seems to be a disingenuous route toward a single-payer system, which many on the left favor but recognize is a political nonstarter.

If the answer is no, then the public plan would need to stand on its own financially and, in essence, would be a private nonprofit plan. But then what's the point? If advocates of a public plan want to start a nonprofit company offering health insurance on better terms than existing insurance companies, nothing is stopping them from doing so right now. There is free entry into the market for health insurance. If a public plan without taxpayer support would succeed, so would a nonprofit insurance company. The fundamental viability of the enterprise does not depend on whether the employees are called "nonprofit administrators" or "civil servants."

The bottom line: If the goal is honest competition in the provision of health insurance, the public option cannot do much good but can potentially do much harm.

Government Motors

Here is what President Obama said about the GM restructuring:
What we are not doing -- what I have no interest in doing -- is running GM. GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to innovation and quality. They -- and not the government -- will call the shots and make the decisions about how to turn this company around. The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions. When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the United States government, will make that decision.

In short, our goal is to get GM back on its feet, take a hands-off approach, and get out quickly.
Very well put. Apparently, however, the president's congressional allies did not get the memo. Today's Boston Globe reports:

Frank intervention extends life of GM's Norton center

General Motors Corp. will delay the closing of a Norton parts distribution center it planned to shutter by the end of the year, according to US Representative Barney Frank. The extension will temporarily preserve about 80 jobs....

The plant manager received word yesterday that Frank had successfully lobbied GM chief executive Fritz Henderson to delay the closing....

Frank, whose district includes Norton, said he told Henderson, "Look, I understand that these things have to happen but they don't have to happen in the midst of the worst recession in years."

Will the Obama administration call Congressman Frank and ask him to refrain from further politicization of GM business decisions? Or will it put aside its principles and defer to Congress on these matters?

Thursday, June 04, 2009

A New Ranking of Economics Journals

Click here. Harvard's QJE is number one, natch.

Wednesday, June 03, 2009

What Harvard's new graduates are doing

The Crimson reports:
The number of seniors entering finance and consulting has fallen from 47 percent in 2007 to 39 percent in 2008 to 20 percent for the current Class of 2009. ...More seniors indicated that they would be working in the fields of education and health care. The large increase in the number of seniors entering education—from 10 percent to 15 percent in the past year—likely reflects the popularity of programs like Teach for America, which received applications from a record-setting 14 percent of Harvard seniors, according to data released by the organization. Similarly, the number of people entering health care doubled, rising from 6 percent last year to 12 percent this year.

Tuesday, June 02, 2009

Are B-school economists different?

David Brooks, the NY Times columnist, emails me an intriguing query:
I was having dinner with a journalist last night and he mentioned that he was finding that many of his best sources on the crisis teach at B schools, not Econ Departments. I've also found that a rising number of people I learn from also teach at B-Schools. I have no idea if there is a difference in training or in the sorts of talents the two departments draw upon, but this struck me as an interesting trend, if true.
I don't know of any hard data to establish whether journalists are more likely to cite economists in business schools than those in economics departments, but I can believe it might be the case. I know a lot of economists in both places, and I think it is true that, on average, economists in business schools have a more practical and empirical approach to the field than do those in economics departments. The phenomenon is not universal (I like to think of myself as practical and empirical, even though I am in an economics department), but it seems a valid generalization.

Why? I don't think the answer is, as David conjectures, a difference in training. Economists in business schools often earn their PhDs in economics departments, as do economics department professors. There is no large difference in training between the two groups.

I think part of the answer is self-selection. Economists who are naturally more abstract will have a harder time teaching MBAs and will gravitate toward economics departments. The PhD students there will not mind the higher level of abstraction. By contrast, economists of a more practical and empirical frame of mind will gravitate toward business schools, where their practicality is valued and the salaries are typically higher.

Another part of the answer is that some business schools encourage more practical research. The case studies written by faculty at Harvard Business School are a particularly extreme example. This experience forces the faculty to come down to earth from the rarefied theory that often characterizes economics research.

Finally, the students themselves influence how the faculty thinks. Faculty who teach PhD students are used to being asked, "How did you derive that first-order condition? How can you prove that the equilibrium exists and is unique?" Faculty who teach MBA students are used to being asked, "Is that really how it works? When I worked at Goldman Sachs last year,...." My guess is that typical journalists' questions more closely resemble those of MBAs than those of PhD candidates.

I should note that undergraduate teaching, at its best, will have some resemblance to MBA teaching. Like the typical MBA student, the typical undergraduate prefers practical to abstract economics. But undergraduates are usually less assertive in their preferences. So if the professor wants to teach theory, the undergraduate will learn it to do well on the exam. By constrast, the typical MBA student, like the typical journalist, is older and more self-confident; he or she will more likely balk at what seems to be excessive abstraction. The business students force the faculty to think practically.

Optimal Taxation in Theory and Practice

Here is my latest paper, coauthored with Matthew Weinzierl and Danny Yagan.

FYI, Weinzierl received his PhD from the Harvard economics department last year and now is on the faculty of Harvard Business School. Yagan is a current PhD candidate in economics at Harvard.

The Latest from the CEA

The New Antitrust Policy

Monday, June 01, 2009

It's a tie

Ds versus Rs

From a longitudinal study of Harvard men:
personality traits assigned by the psychiatrists in the initial interviews largely predicted who would become Democrats (descriptions included “sensitive,” “cultural,” and “introspective”) and Republicans (“pragmatic” and “organized”).

The Cap-and-Trade Bill