Category Archive for ‘Economics’ at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics

on May 18, 2011

in Current Events, Economics and Outrage

. 59 Comments

Under the headline “Ultimatum Holding Up Trade Deals”, the New York Times reports that:

The Obama administration said on Monday that it would not seek Congressional approval of free trade agreements with Colombia, Panama and South Korea until Republicans agree to expand assistance for American workers who might lose jobs as a result.

I have said this before and I will say it again: Anybody who loses his job because of a free trade agreement was overpaid to begin with. The $20-an-hour American who loses his job to a $5-an-hour Colombian is an American who has spent the past few years charging his countrymen twenty dollars for something they ought to have been able to buy for five.

So if I were writing this article it would have read something like this:

The Obama administration said on Monday that it would not seek Congressional approval of free trade agreements with Colombia, Panama and South Korea until Republicans agree to extort additional money from American consumer/taxpayers who might stop being overcharged as a result.

I guess that’s why I never got that call from the New York Times.

D’oh — Second in a Series

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on May 2, 2011

in Bad Reasoning and Economics

. 14 Comments

The problem with locavores — the breed of environmentalists who tout locally grown food, partly to minimize energy costs — is that they’re insensitive to the quality of the environment. A New York locavore spurns California tomatoes because of the energy spent trucking them across the country. But to focus on a small number of factors, like energy consumption, is to ignore a vast number of others: Do California tomatos, grown in locations where there might have been vineyards, displace California grapes? Do New York tomatos, grown in greenhouses where there might have been housing developments, lengthen morning commutes? What other useful services might California or New York workers provide if they weren’t growing tomatos? What are the alternative uses in each location for fertilizers, or farming equipment, or the resources that go into producing fertilizers and farming equipment?

Last August, Steven Budiansky, the self-described “Liberal Curmudgeon”, wrote a New York Times piece that I criticized on this blog for, essentially, making 1% of the right point and ignoring the other 99%. Now, having reread Budiansky, I think I was unfair to him. He had this right all the way through.

D’oh — The First in a Series

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on April 25, 2011

in Bad Reasoning, Blogging, Economics and Policy

. 39 Comments

When something is wrong on the Internet, bloggers love to pounce. But since no blogger is infallible, most of us can find ample fodder in our own past writing, if we go back and reread it with a sufficiently critical eye. Over the next few weeks, I plan to revisit some things I got wrong the first time around. (You’ll recognize those posts by the Homer Simpson logo.) I hope others will be inspired to do the same.

To lead off this series: In December, 2009 I blogged about space scientiest James Hansen, who prefers carbon taxation to cap-and-trade. His argument: A carbon tax allows for the possibility of additional carbon abatements through altruism. Under cap-and-trade, if I altruistically decide to buy a fuel-efficient car, someone else gets to buy an SUV. Whereas under a carbon tax, if I altruistically decide to buy a fuel-efficient car, less gas gets consumed.

Wait a second, though. Under a carbon tax, if I decide to buy a fuel-efficient car, I drive the price of gas down, which encourages someone else to buy an SUV. So altruism is equally ineffective under either policy, no?

That’s the argument I made in December, 2009. I now believe that:

Under a plausible interpretation of Hansen’s argument, I was wrong.
But Hansen is still unconvincing, though for somewhat subtler reasons.

Friday Quotes

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on April 22, 2011

in Bad Reasoning, Economics and Paul Krugman

. 44 Comments

Paul Krugman, economist:

This insight illustrates a general principle of the economics of taxation: the incidence of a tax — who really bears the burden of the tax — is typically not a question you can answer by asking who writes the check to the government.

Paul Krugman, blogger, remarking on a straightforward application of that principle:

There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place.

(Edited to add: My response to Krugman is here.)

Click here to comment or read others’ comments.

You Can’t Tax a Dead Man

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on April 21, 2011

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. 57 Comments

On Monday, I wrote about the man who can’t be taxed. There were many comments, some confused, some insightful, and (at least) one brilliant. Let me highlight that brilliant comment, then beat the point to death a little, and then draw a large moral.

Our commenter Ken B invited us to imagine a dead man, with, say $84,000,000 in his bank account (and a will that requires this bank account to be maintained forever). And let’s suppose the government confiscates, say 82 of those 84 millions, thereby allowing it to reduce other people’s current or future taxes —making those people richer. They buy more stuff. They eat more, they burn more gas, they occupy more space. Where did that stuff come from?

(Alternatively, instead of lowering someone else’s taxes, the government takes the opportunity to spend more, in which case the government claims more stuff. We still have to ask where it comes from.)

It certainly did not come from the dead man, who was eating nothing, burning no gas, and occupying no more space than he continues to occupy. Instead, somebody else must decide to consume less.

But initially nobody wants to consume less. So people, collectively, are trying to consume more stuff than is available. This excess demand for stuff pushes up prices and/or interest rates until people are willing to cut their consumption.

There is no meaningful sense in which the dead man paid the tax. Instead, the tax burden is borne by those people who were hurt by rising prices and/or interest rates.

The Man Who Can’t Be Taxed

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on April 18, 2011

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. 111 Comments

Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.

Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.

Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.

Subtraction Distraction

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on April 11, 2011

in Bad Reasoning, Current Events, Economics, Paul Krugman, Policy and Politics

. 24 Comments

Paul Krugman, getting less serious by the minute, on the budget deal:

It’s worth noting that this follows just a few months after another big concession, in which [Obama] gave in to Republican demands for tax cuts. The net effect of these two sets of concessions is, of course, a substantial increase in the deficit.

Well, no, actually. The net effect of these concessions is a (small but not insignificant) cut in spending coupled with a (somewhat larger) set of tax cuts.

To sum that up by saying that the “net effect” is an increase in the deficit is like saying that if a woman gives birth to twins and then murders her husband, the “net effect” is to increase the population. We’re entitled to care about more than just the bottom line.

Unhealthy Reasoning

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on April 8, 2011

in Bad Reasoning, Economics, Paul Krugman and Policy

. 42 Comments

Paul Krugman on the Ryan budget proposal:

And then there’s the much-ballyhooed proposal to abolish Medicare and replace it with vouchers that can be used to buy private health insurance….

…The House plan assumes that we can cut health-care spending as a percentage of G.D.P. despite an aging population and rising health care costs.

The only way that can happen is if those vouchers are worth much less than the cost of health insurance.

Well, this is just plain illiterate. In fact, the only way that can happen is if the voucher system affects people’s health care choices. Which is, you know, the whole point.

Strategic Reasoning

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on March 21, 2011

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. 23 Comments

Senator Jay Rockefeller adds his voice to the chorus calling for the U.S. to deplete the strategic petroleum reserve in order to bring down oil prices.

Put aside the question of whether we should want to bring down oil prices. Put aside the question of whether this is a good use of the strategic reserve. Let’s just ask whether this idea would even work.

Simple economics certainly suggests that the answer is no. Oil, after all, is an exhaustible resource. This means that every barrel sold today is a barrel that can’t be sold tomorrow. Therefore profit-maximizing oil suppliers, of whom there are many, must constantly be asking themselves whether they’d prefer to sell another barrel now or leave it in the ground to sell later. And the key inputs to that decision are the current price and the expected future price.

If the government starts depleting the oil reserve now (with, presumably, the intent to replenish it in the future), they bid down current prices and bid up expected future prices — creating an incentive for all the other suppliers to sell less now and more in the future — pushing current prices right back up again. For a non-exhaustible resource, this would partially offset the government’s action, but for an exhaustible resource (like, for example, oil) there should be a 100% offset, at least on a naive application of Hotelling’s Rule.

Defici(en)t Thinking

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on March 10, 2011

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. 39 Comments

Gerald Seib, in the Wall Street Journal, reports that “There is a cancer eating away at the budget from within, one that steadily drains American wealth, sends much of it overseas and only gets worse over time.”

This is economic illiteracy in spades. The fact is that every single dollar of interest we pay on the national debt comes right back to the pockets of American taxpayers. If you don’t understand that, then you’re not thinking clearly about the national debt.

Suppose the government owes $100 and pays $3 a year in interest. The alternative to paying that interest is to raise current taxes by $100 and pay down the debt. If you do that, taxpayers are going to have $100 less in assets, and will therefore earn less interest on their savings. That costs them (roughly) the same $3 a year.

In other words, the damage was done back when the government spent that $100 in the first place. (Of course, if the $100 was spent wisely, the damage might have been worth doing. Or not.) Once that $100 has been spent, the taxpayers are out $3 a year forever regardless of whether the debt is ever paid off.

How’s That Again?

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on March 8, 2011

in Bad Reasoning, Economics and Paul Krugman

. 44 Comments

Paul Krugman’s latest gets my vote for his most incoherent column ever. As I understand his argument, it goes like this:

Computers are good at routine tasks.
Therefore the rewards to performing routine tasks are falling. This is true at all skill levels.
Therefore education does not always make people more productive. It makes people more productive only when it trains them to do tasks that are not better done by computers.
Therefore we need stronger labor unions and universal health care.

Say what?. The basic thesis — that there’s no point in learning to do something difficult if a computer can do it better, and that this is significantly affecting the returns to certain kinds of education — is an interesting one. The moral, of course, is that you can’t imitate your way to prosperity. If we want to be rich, we have to innovate.

So to encourage innovation, you want to strengthen the unions? To encourage innovation, you want to reduce the relative reward to innovation, by insuring that everyone gets the same health care regardless of their social contributions?

Now, you might suppose that Krugman was thinking something along the following lines: Large swaths of American workers are being rendered unproductive by computers. Somehow or another, we have to support those people even though they’re not producing much. Unions and universal health care will keep them afloat.

But that can’t be what Krugman was thinking. I’m sure of this, because I happen to know that Krugman has a Ph.D. in economics. Therefore he must surely be aware that you can’t divorce incomes from productivity. Sure, you can redistribute, but you can’t redistribute more than what gets produced. If the problem is that our old skills are no longer productive, then our incomes must fall unless and until we acquire different — and less computer-replaceable — skills.

Wisconsin Followup

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on March 2, 2011

in Current Events, Economics and Uncategorized

. 87 Comments

A couple of followups on yesterday’s post about Wisconsin:

1) Several commenters have pointed out that the conflict in Wisconsin is not (directly) about wages, benefits or working conditions, but rather about collective bargaining. This seems to me to be a distinction without a difference; nobody would care about collective bargaining unless they expected it to affect wages, benefits, and/or working conditions. The point stands that workers who are very upset about losing their collective bargaining rights must expect to use those rights to achieve above-market compensation.

2) Jim from Wisconsin made a comment, and I made a reply, that I think bear highlighting here. Jim from Wisconsin said:

Futhermore, isn’t the idea in private business that if you want the best and the brightest, you pay them well? Don’t we want our Government programs run effectively and efficiently? Seems to work in the private sector, so why can’t this apply to public sector as well?

To which I replied:

The problem with this is that every “best and brightest” who is hired by the public sector is unavailable to the private sector, so it’s not at all clear that we WANT the best and brightest in the public sector. To take an extreme case, I don’t want the best Silicon Valley engineers tempted to work as high school teachers; I’d rather have them pushing the limits of technology. From the point of view of economic efficiency, this is the one and only reason why public sector employees ought NOT be overpaid. (It’s also a reason why private sector employees ought not be overpaid, but there’s generally less threat of that happening because of the private-sector profit motive.) It’s the one and only reason not to overpay public employees — but it is a good and sufficient reason.

Wisconsin’s Smoking Gun

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on March 1, 2011

in Current Events and Economics

. 74 Comments

Are public sector workers overcompensated? A month ago, I’d have said “probably”. Today I think we’ve found the smoking gun.

Here’s what I knew a month ago: Public-sector quit rates are roughly one-third of their private-sector counterparts. The obvious explanation is that public-sector jobs are generally too cushy to walk away from. It seems to me that it would be hard to account for that factor of three in any other way, though you can see some reasonable attempts in the comments here. (To be clear: I think that some of the factors in these comments can reasonably account for part of the difference in quit rates. I find it implausible that those factors are collectively substantial enough to account for a factor of three.)

A month ago, that was the best evidence on the table. Today, thanks to the protestors in Wisconsin, we’ve got something like proof positive.

Dow 36,000 12,000

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on February 28, 2011

in Bad Reasoning, Books, Economics, Finance and Paul Krugman

. 15 Comments

In 1999, the journalist James K. Glassman co-authored a book called Dow 36,000. The eponymous prediction did not pan out. A couple of days ago, Glassman popped up in the Wall Street Journal, trying to explain where he went wrong. “The world changed”, explains Glassman. The relative economic standing of the U.S. is declining. Plus terrorists and economic instability made the world a riskier place.

But there’s a better explanation. Glassman’s story never made sense in the first place, for reasons Paul Krugman explained when the book first came out.

Glassman has a substantial history of confusion about how financial markets work. Ten years before he wrote Dow 36,000, he was explaining in The New Republic that stocks are better investments than real estate:

The Top 20

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on February 23, 2011

in Economics

. 35 Comments

An extremely distinguished committee of economists has selected the top 20 articles published in the last 100 years in the American Economic Review, widely recognized as one of the top journals of the profession. All 20 are publicly available, via links from the committee’s report.

The 20 choices are uniformly excellent, and taken together they give a good sampling of the ideas that have changed the way economists think. Of course, many equally influential articles were disqualified by virtue of appearing in journals other than the AER. (The first few that come to mind are Lucas on Expectations and the Neutrality of Money, Coase on The Problem of Social Cost, and Lucas again on The Mechanics of Economic Development).

Some of these are pretty technical. One that’s not is Hayek’s 1945 classic on The Use of Knowledge in Society, which is both one of the clearest and most profound essays in the history of economics. In fact, its clarity tends to mask its profundity; once you’ve read it, you feel sure you must have understood this stuff all along.

Today’s Post is Optional

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on February 16, 2011

in Economics and Finance

. 41 Comments

When I was young, the pricing of stock options and other derivatives seemed like an obscure black art. Then one day Don Brown showed me a simple example that made everything crystal clear. Today I’ll share an even simpler version of Don’s example.

Imagine a stock that sells for $10 today. A year from now it will be worth either $20 or $5. (Yes, I know that real-world stocks have a wider range of possible future prices. That’s why I called this a simple example.) What would you pay for an option that allows you to buy the stock next year at today’s $10 price?

You might think you’d need a whole lot more information to answer that question. You might expect, for example, that the answer depends on the probability that the stock price will go up to $20 rather than down to $5. You might expect the answer to depend on how much traders are willing to pay for a given dollop of risk-avoidance.

But the amazing fact is that none of that matters. The only extra bit of information you need is the interest rate.

Freedom, Prosperity, and the Future of Egypt

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on February 1, 2011

in Current Events, Economics and Politics

. 57 Comments

With regime change perhaps imminent in Egypt and elsewhere in the Middle East, and amid all the calls for democracy and political freedom, it’s a good time to remind ourselves that desirable as political freedom may be, it’s no guarantee of prosperity. For that you need capitalism.

My colleague Alan Stockman and I looked into this question about 10 years ago; I have not updated the data since then but I expect it would still tell pretty much the same story. First, the following graph plots political rights (as defined and measured by Freedom House) against GDP per capita. Low scores indicate more political freedom (defined by criteria that include the existence of free and fair elections, the right to organize, the existence of opposition parties, the absence of domination by the military, religious heirarchies and economic oligarchies, open and transparent government operations, and full political rights for ethnic, religious and cultural minorities, ). There is a small postive relationship between political freedom and prosperity, but many of the freest countries are still poor. And there is very little difference in GDP per person between countries ranked between 2 and 7 on the political freedom scale.

Nursery Tales — An Afterword

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on January 31, 2011

in Economics and Paul Krugman

. 5 Comments

baby One of Paul Krugman’s favorite stories is about the baby-sitting co-op that almost collapsed when members started hoarding scrip; similarly, he says, a lot of economic activity can dry up when people start hoarding money. Last Tuesday, in a post called Nursery Tales, I observed that money-hoarding can’t retard economic activity (at least in anything like Krugman’s sense) unless something prevents prices from adjusting. So absent an auxiliary story about what that “something” is, I don’t find the baby-sitting story terribly helpful.

Several commenters responded that in the real world, prices and/or wages are “known” to be sticky (that is, slow to adjust), and thought that this rescues Krugman’s metaphor. I don’t agree. Here’s why:

Nursery Tales

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on January 25, 2011

in Economics and Paul Krugman

. 62 Comments

Paul Krugman, not for the first time, invokes the Great Capitol Hill Baby Sitting Co-Op Crisis as a metaphor for the macroeconomy.

First things first: Krugman is absolutely right that we learn a lot from well-chosen simple examples. But this particularly example seems poorly chosen.

The Capitol Hill Baby-Sitting Co-Op consisted of about 150 couples who baby sat for each other. They paid each other in scrip — pieces of paper each worth a half hour of baby-sitting time. New members received 20 units of scrip, which they were expected to pay back upon retiring. Aside from that, you earned scrip by baby-sitting, and you purchased baby-sitting with scrip, so that in the long run you’d sit exactly as much as you were sat for.

The problem was that people started hoarding scrip, thinking they might need it someday. As a result, the demand for babysitting services dried up. This made it harder to earn scrip, which encouraged even more hoarding, and so on around the vicious circle. The solution was to issue more scrip — each member got 10 more units. This made the hoarders a little less frantic and a little more willing to go out, which meant more sitting jobs were available, which eased the hoarder’s minds still further, and soon the co-op entered a golden age.

That, says Krugman, is the story of most recessions. People hoard money, which makes it hard to earn money, which makes people hoard still more money, which makes it even harder to earn money. The solution is to issue more money.

But here’s the part of the baby-sitting story that never made sense to me: Continue reading ‘Nursery Tales’

The State of the Union

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on January 24, 2011

in Current Events, Economics and Policy

. 26 Comments

The New York Times reports that President Obama, in his State of the Union speech, will call, among other things, for encouraging exports.

Now, since exports must equal imports in the long run, encouraging exports is exactly the same thing as encouraging imports. And wouldn’t you expect that if you were out to encourage imports, your first step might be to stop discouraging imports, say by declaring an end to all tariffs and quotas on foreign-made goods?

In a sane world, that’s indeed what you might expect. But somehow I don’t expect it.

Meager Means and Noble Ends

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on January 20, 2011

in Birthdays, Economics and Education

. 8 Comments

On Monday we marked the hundredth birthday of the Nobel laureate and all-around intellectual curmudgeon George Stigler. I promised more Stigler quotes by the end of the week. Here, then, is Stigler on the consequences of competition in the market for higher education; the passage is from one of the two-dozen lively and provocative essays collected here. If he’d been born just a bit later, Stigler could have been a champion blogger.

For clarity: When Stigler refers to an academic “field”, he is referring to a sub-discipline. Economics is a discipline; industrial organization and public finance are fields. Physics is a discipline; particle physics and solid state physics are fields.

We cannot build universities that are uniformly excellent … I shall seek to establish this conclusion directly on the basis of two empirical propositions.

The first proposition is that there are at most fourteen really first-class men in any field, and more commonly there are about six. Where, you ask, did I get these numbers? I consider your question irrelevant, but I shall pause to notice the related question: Is the proposition true? And here I ask you to do your homework: gather with your colleagues and make up a numbered list of the twenty-five best men in one of your fields — and remember that these fields are specialized. Would your department be first-class if it began its staffing in each field with the twenty-fifth, or even the fifteenth, name? You have in fact done this work on appointment committees. I remember no cases of an embarrassment of riches, and I remember many where finding five names involved a shift to “promising young men”, not all of whom keep their promises. I leave it to the professors of moral philosophy and genetics to tell us whether the paucity of first-class men is a sort of scientific myopia, a love of invidious ranking, or a harsh outcome of imprudent marriages. But the proposition is true.

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The Intellectual and the Marketplace

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on January 17, 2011

in Blogging, Economics and Memories

. 40 Comments

Today is the 100th birthday of the late George Stigler, who won a Nobel prize for his economics and would have won a second if they gave one for dry wit. This is not the best example of that wit, but it’s the one I remember most vividly: One day long ago I was walking across the quadrangle at the University of Chicago, when I felt a hand on my shoulder — a very large hand, because Stigler was a very large man (in the tall-and-lanky sense of large). He’d been away for a few months, so I was a little surprised to see him. Before I could say anything like “Welcome back”, Stigler asked me: “So, what’s become of that young lady you were squiring around before I left town?”. In a fit of circumspection, all I said was “Oh, she still exists”, and Stigler immediately replied, “Oh, how lovely. You know, I’ve never been a subscriber to this theory that says you should destroy them when you leave them.”

The Intellectual and the Market Place — Stigler’s classic defense of the marketplace against the discomfort felt by so many intellectuals — is well worth a quick read. Parts of it have been paraphrased so often by so many imitators that they’ve begun to seem almost trite, but none of the imitators has ever achieved Stigler’s panache. Besides, it’s been imitated so much precisely because there’s so much here worth saying. A few sample paragraphs to whet your appetite:

Centenary

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on December 29, 2010

in Birthdays and Economics

. 18 Comments

The great Ronald Coase is 100 years old today.

One year ago today, he celebrated with a 100th birthday party, though he was only 99. I’m not sure what festivities are planned for today but I hope it’s a very good day for him.

Also one year ago today, I published a 99th birthday tribute here on this blog. I’m re-running it today.

Happy Birthday, Ronald Coase

In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.

The Great Compromise

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on December 10, 2010

in Current Events, Economics, Policy and Politics

. 24 Comments

A few scattered thoughts on the great compromise (numbered for the convenience of commenters, so you can easily say which part you’re responding to):

There were never any such thing as a “Bush tax cut”. There were only tax deferrals. In the absence of spending cuts, lower taxes today mean higher taxes tomorrow. So all this talk about how, in the absence of an extension, the average family will pay so-and-so many more thousands in taxes — it’s sheer balderdash. We will collectively pay exactly the same amount in taxes, present and future combined, whether or not this extension goes through.
Although the average long-run tax burden is unaffected, changes in the tax code can of course shift the burden from one class of taxpayers to another. The Bush “tax cuts”, for example, probably made the tax code somewhat more progressive, shifting the burden from the poor to the rich. (You might have heard the opposite, but I suggest paying more attention to numbers than to rhetoric.)

The Return of Depression Economics

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on December 7, 2010

in Bad Reasoning, Economics, Paul Krugman and Policy

. 23 Comments

Paul Krugman writes that trade does not equal jobs and concludes that trade restrictions cannot even in principle trigger a depression. After all, restricting trade means restricting exports (less jobs!) but it also means restricting imports (more jobs!) so everything washes out.

Well, let’s try an extreme example. Suppose I prevent everyone in America from trading with anyone outside their own households. We’d eat only what we could raise in our own gardens, burn only the fuel we could gather from our own backyards, and wear only the clothes we could make for ourselves. In other words, we’d all be living pretty much at the subsistence level. Would you be willing to call that a Depression? I would. Krugman, apparently, would not.

Keep the Mortgage Interest Deduction

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on November 22, 2010

in Current Events, Economics and Policy

. 41 Comments

Greg Mankiw endorses the Bowles-Simpson recommendation to eliminate the mortgage interest deduction. I am not convinced. Here’s why:

I start from the position that capital income (including interest income) ought not be taxed. Unlike a tax on labor income, which (unfortunately) discourages work, a tax on capital income discourages both work and saving, and so is doubly destructive. Moreover, it effectively taxes the labor of the young (who earn, save for a while, and then spend) at a higher rate than the labor of the old (who earn, save for a shorter time, and then spend), which is both unfair and distortionary (in that in encourages young people to postpone their high-earning years).

QE2

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on November 18, 2010

in Economics and Policy

. 46 Comments

Some Q&A about quantitative easing, with a somewhat higher ratio of economics to cartoon characters than we had yesterday:

What is this quantitative easing stuff? What exactly is the Federal Reserve (a/k/a “the Fed”) doing?

They’re creating 600 billion new dollars and using those dollars to pay down the government’s debt.

They’re paying down the debt? I thought they were buying bonds.

It’s the same thing. Last year, Huey McDuck lent the government a dollar and received a bond. (A bond is the same thing as an IOU.) Today the Fed buys Huey’s bond. Now the government owes a dollar to the Fed instead of to Huey.

But the government still owes someone a dollar!

Well, yes and no. Unlike Huey, the Fed is subject to a 100% tax on profits. So the government can pay its one-dollar debt to the Fed and then turn right around and swoop that dollar back up again. That’s just as good as not owing anything in the first place.

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Quantitative Easing Explained by Cartoon Characters

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on November 17, 2010

in Economics and Humor

. 12 Comments

I can’t really endorse the content, but I like the presentation:

Get the Flash Player to see this content.

(Original here .)

Did the Stimulus Work?

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on November 16, 2010

in Current Events and Economics

. 25 Comments

Did the stimulus create jobs?

Daniel Wilson of the San Francisco Federal Reserve Bank has just released what might be the first real evidence-based effort to resolve this question. One apparent problem with drawing inferences from the experience of the past couple years is that we have only one experiment to look at. But Wilson points out that in some sense, we have 50 separate experiments because stimulus spending differed substantially across states. You can potentially learn a lot from 50 experiments.

Unfortunately, they’re not controlled experiments, because stimulus funds were not allocated randomly. States with particularly weak economies probably got more Medicaid funds. States with bloated and inefficient bureaucracies might have been slow to complete necessary paperwork and hence slow to receive funds. If those weak economies or shamblng bureaucrats also had an effect on job growth, then the experiments are not clean.

But fortunately there are substantial components of the funds that were distributed according to objective formulas (demographics, number of highway miles, and so forth). Wilson makes competent use of these components, together with standard econometric techniques, to zero in on the subset of stimulus spending that can be considered effectively random. Now that he’s got his fifty more-or-less controlled experiments, he also controls for other confounding variables that could plausibly affect state-by-state economic growth. All of which is the right way to do this.

Thaler on the Estate Tax

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Continue reading ‘Thaler on the Estate Tax’

on November 8, 2010

in Bad Reasoning, Economics and Policy

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Dick Thaler, writing in the New York Times, says so many wrong things about the estate tax that I don’t know where to begin. But let’s begin here:

First, it is incorrect to say the estate tax amounts to double taxation. The wealth in many large estates has never been taxed because it is largely in the form of unrealized — therefore untaxed — capital gains.

This is just not true. Virtually all of the wealth in every large estate has already been taxed at least once. Namely, it was taxed when it was earned. You do not understand this issue unless you understand the following simple example: Scrooge McDuck earns a dollar, makes some fortunate investments, and leaves a hundred million dollars in unrealized capital gains to his ne’er-do-well nephews. If Scrooge has to pay 50 cents income tax on that dollar, then he invests half as much, earns half as much, and leaves his nephews half as much. Scrooge’s fifty cent tax bill has already cost his nephews fifty million dollars.