Posts Tagged ‘Greg Mankiw’

Larry Summers and Greg Mankiw on income inequality

Monday, February 17th, 2014

Harvard economist Larry Summers writes that the United States should address inequality with tax reform, “closing loopholes that only the wealthy can enjoy”.

The share of income going to the top 1 per cent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. …. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalised and budget deficits have at last been addressed.

President Barack Obama is right to be concerned. Those who condemn him for “tearing down the wealthy” and engaging in un-American populism are, to put it politely, lacking in historical perspective. Presidents from Franklin Roosevelt to Harry Truman railed against the excesses of a privileged few in finance and business. Some have gone beyond rhetoric. Confronted with rising steel prices, John Kennedy sent the FBI storming into corporate offices and is widely thought to have ordered the authorities to audit executives’ personal tax returns. Richard Nixon used the same weapon in 1973, announcing tax investigations “of the books of companies which raised their prices more than 1.5 per cent above the January ceiling”. All were reacting in their own way to a phenomenon that Bill Clinton has described best: “Although America’s rich got richer … the country did not … the stock market tripled but wages went down.” [...]

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve the result. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences.

Lawrence Summers, “America risks becoming a Downton Abbey economy“, Financial Times, 17 February 2014.

Not all economists share Professor Summers’ view. Greg Mankiw, the chair of Harvard’s economics department is one example. In a New York Times column, he defends increasing inequality of incomes, arguing that is needed for innovation and economic growth. (more…)

another reaction to Pope Francis

Sunday, December 1st, 2013

James Pethokoukis, at the American Enterprise Institute, posted a response to the Pope’s message that I prefer to Mankiw’s reaction. Mr Pethokoukis doesn’t say much, but directs us to a statement of University of Illinois professor Deirdre McCloskey that is two years old.

Some on the left are interpreting the Pope’s statement as the pontiff taking sides against free marketeers. I will write more on that later, but I thought this from the great Christian libertarian economist Deirdre McCloskey provides a useful lens through which to view the Pope’s comments:

Friedrich Hayek, the modern master of what people in the USA call “libertarianism” and what others call “real liberals,” once wrote an essay entitled “Why I Am Not a Conservative.” He was not a conservative, nor am I or Robert Nozick or Tom Palmer or Donald Boudreaux or Ronald Hamowy or John Locke or Thomas Paine or (the Blessed) Adam Smith.

I am a Christian Liberal. That is, I believe on the one hand that in human affairs the best policy is to let people alone to exercise their creativity. Such creativity has made the modern world. We should take power away from the massive modern state, which so often follows the Other Golden Rule: Those who have the gold, rule. States are corrupted by the rich ….

But on the other hand as a Christian I also believe that as a spiritual affair we should love God and love God’s creatures, that is, our neighbors as ourselves. (It is Jewish and Muslim law, too: Rabbi Hillel was asked to summarize the law and the prophets while standing one leg. His reply was: to love God , the commandments 1-4, and our neighbors, 5-10.) In consequence, unlike fatherly and unChristian liberals, I believe in helping the poor.

At a meeting libertarians/liberals last year in the Bahamas I expressed to someone what I thought was an axiom, “But of course we all want to help the poor.” He instantly retorted, “No: only if they help me.” It took my breath away. I want to help the poor, period, not only as part of an exchange … And my liberal part adds to my Christian duty: Help the poor really, not by making them unemployable by raising the minimum wage, or uneducated by forcing them into public schools, or violent and victimized by outlawing recreational drugs.

Deirdre N. McCloskey, “Christian Libertarianism (or, outside the USA, Christian “Liberalism”): An exchange with The Clinic, a satirical journal in Chile”, Prudentia, 21 November 2011.

James Pethokoukis, “A Christian, free-market response to Pope Francis“, AEI Ideas, 26 November 2013.

From what McCloskey says, it follows that the best way to help the poor is to help everyone, with universal (taxpayer financed, public or private) schooling and healthcare, universal child allowances, and universal old age pensions. Poverty can be eliminated if flat benefits are generous enough, bureaucracy will be minimized and the State will be stripped of its power to determine who receives benefits. Access to universal benefits depend only on legal residence and (sometimes) age, not wealth or income. Cash allowances for children go to the child’s mother or legal guardian, not directly to the child.

What is often ignored is that Hayek, in his essay “Why I Am Not a Conservative”, explained also why he was not a libertarian. He was living in Chicago at the time, and unhappy with American conservatives and libertarians.

Pope Francis on the excesses of capitalism

Saturday, November 30th, 2013

[Pope Francis] has adopted a softer tone toward gay people, eschewed lavish features of the papal lifestyle, washed the feet of convicts and repeatedly called for greater efforts to lift up the world’s poor.

On Tuesday, he showed a willingness to use tough language in attacking what he views as the excesses of capitalism. ….

“Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” Francis wrote in the papal statement. “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

“Meanwhile,” he added, “the excluded are still waiting.”

Zachary A. Goldfarb and Michelle Boorstein, “Pope Francis denounces ‘trickle-down’ economic theories in critique of inequality“, The Washington Post, 26 November 2013.

I appreciate the pope’s concern with those left behind as the rich become richer, as well as his insistence that priests take seriously their vows of poverty, and minister to those less fortunate. None of these papal views are new. What is new is Pope Francis’ use of the term ‘trickle down’. This will ruffle more than a few feathers. Greg Mankiw, for example, reacted with these words:

[F]ree-market capitalism has been a great driver of economic growth, and … economic growth has been a great driver of a more moral society.

… “[T]rickle-down” is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose. It is equivalent to those on the right referring to the “soak-the-rich” theories of the left.It is sad to see the pope using a pejorative ….

[A]s far as I know, the pope did not address the tax-exempt status of the church. I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down.

Greg Mankiw, “The Pope’s Rhetoric“, 30 November 2013.

These are strong words. Mankiw asserts that unfettered capitalism leads to “a more moral society” and questions whether the church contributes to this goal.

It is possible to argue that capitalism, despite its many faults, is better than the alternatives. Mankiw chooses not to follow this line of reasoning. It is sad to see a Harvard economics professor describe capitalism as flawless and virtuous.

Greg Mankiw was adviser to two Republican politicians: President George W. Bush and presidential candidate Mitt Romney.

Mankiw on personal investing

Sunday, May 19th, 2013

Harvard economist Greg Mankiw has an excellent column in today’s New York Times. I agree with everything in it. So will most economists who read it, but investors rarely listen to us. ‘Expert’ money managers openly despise us. (“Dislike” is too weak a word!)

[W]e economists have written countless studies about the stock market. Here is a summary of what we know:

THE MARKET PROCESSES INFORMATION QUICKLY. One prominent theory of the stock market — the efficient markets hypothesis — explains how answering my mother’s question would be a fool’s errand. If I knew anything good about a company, that news would be incorporated into the stock’s price before I had the chance to act on it. Unless you have extraordinary insight or inside information, you should presume that no stock is a better buy than any other.

This theory gained public attention in 1973 with the publication of “A Random Walk Down Wall Street,” by Burton G. Malkiel, the Princeton economist. He suggested that so-called expert money managers weren’t worth their cost and recommended that investors buy low-cost index funds. Most economists I know follow this advice.

PRICE MOVES ARE OFTEN INEXPLICABLE. ….

HOLDING STOCKS IS A GOOD BET. ….

DIVERSIFICATION IS ESSENTIAL. ….

SMART INVESTORS THINK GLOBALLY. ….

If I could pick just one stock for someone to buy, what would it be? I would now suggest something like the Vanguard Total World Stock exchange-traded fund, which started trading in 2008. In one package, you can get low cost and maximal diversification. It may not be as exciting as trying to pick the next Apple or Google, but you’ll sleep better at night.

N. Gregory Mankiw, “Economic View: What Stock to Buy? Hey, Mom, Don’t Ask Me“, New York Times, 19 May 2013.

Mankiw is applying the term “efficient markets hypothesis” to micro efficiency (inability to predict the future price of individual stocks). Macro efficiency (rational expectations and efficiency of the financial market as a whole) does not follow from micro efficiency. Yes, there are booms and busts in financial markets. If you were able to buy at the trough (when everyone want to sell!) and sell at the peak (when everyone wants to buy!), you would become wealthy. This strategy, as Mankiw explains in this column, is not feasible because of our “ignorance about what moves the market”.

higher taxes affect Greg Mankiw

Saturday, January 5th, 2013

Harvard economist Greg Mankiw’s recent blog post leaves me scratching my head.

Many of the world’s professional economists are spending the next few days in San Diego for the annual ASSA meeting, where economists network, get some publicity for themselves, and learn what other economists are up to. I am skipping this year’s meeting to spend more time with family.  You might think that is lazy of me.  But heck, my marginal tax rate just went up.  A bit of extra laziness is optimal.

If I were there, one event I would certainly attend is the annual humor session. …. Unlike most of the sessions at the meeting, the humor session is free and open to the public. And best of all: the benefit of attending is entirely nonpecuniary, so it won’t be reduced by the new higher tax rates!

Greg Mankiw, “ASSA Humor Session“, Greg Mankiw’s Blog, 3 January 2012.

Professor Mankiw (born 1958) is author of the best-selling first-year textbook Principles of Economics. He was economic adviser to Republican candidate Mitt Romney from 2006 to 2012 and chaired GW Bush’s Council of Economic Advisers from 2003 to 2005.

Since Greg Mankiw does not permit comments on his popular blog, I am posting this on TdJ. Because of the “Fiscal Cliff” deal passed by the Senate on January 1st and by the House of Representatives the following day, payroll taxes will increase in 2013 from 4.2 percent to 6.2 percent, from the very first dollar of earnings up to a maximum of $113,700. Mankiw’s Harvard salary is undoubtedly larger than this, so the payroll tax cannot be the marginal tax to which he is referring.

More likely, Mankiw’s reference is to the increase in income tax rates, from 35 percent to 39.6 percent, on earnings greater than $400,000 ($450,000 for couples). Wealthy taxpayers will also see taxes on capital gains and dividends increase, from 15 percent to a new top rate of 23.8%.

But why would increased taxes on income cause Greg Mankiw to cancel a trip to San Diego to participate in the annual meeting of the American Economic Association? One possibility is that lower after-tax income in 2013 makes it difficult for him to finance travel to San Diego. Professor Mankiw clearly states, however, that his reason for non-attendance is laziness, so the budget constraint explanation can be ruled out.

Mankiw writes that the benefit of attending the humor session “is entirely nonpecuniary, so it won’t be reduced by the new higher tax rates”. But this is true for the entire meeting, not just the humor session! Now, higher taxes on earnings might discourage a young professional who attends only to search for opportunities to increase his or her income, but attendance is irrelevant to the income of a successful economist like Greg Mankiw.

I can only conclude that Professor Mankiw must be joking when he asserts that it is optimal for him to stay home with family this weekend because of higher marginal taxes on his 2013 income.

averting the ‘fiscal cliff’

Sunday, November 11th, 2012

On January 1st the United States reaches the so-called “fiscal cliff“: automatic tax increases and defence spending cuts that Republicans loath, as well as other spending cuts that Democrats find offensive. These automatic fiscal changes will most certainly plunge the US (and the world) into another recession. They can be averted only if Republicans and Democrats in Congress make a deal on the budget, and increased tax revenue will have to be part of any deal.

Harvard economist Greg Mankiw (a Republican) and Berkeley economist Christina Romer (a Democrat) suggest ways that Republicans can agree to increase tax revenue without violating pledges of “no new taxes”.

According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years [about $75 billion a year].  Moreover, according to the TPC’s distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.

This may be the germ of a possible deal between President Obama and Speaker Boehner: The speaker agrees to this tax hike if the president agrees to some fundamental reform of the entitlements, such as gradually but significantly raising the age of eligibility for Social Security and Medicare.

Greg Mankiw, “How To Raise Tax Revenue From The Rich Without Increasing Tax Rates“, Greg Mankiw’s Blog, 10 November 2012.

A brief fall off the cliff would free lawmakers from the straitjacket of having signed Grover Norquist’s pledge never to raise taxes. Once taxes have returned to their Clinton-era levels, a partial reinstatement of the Bush tax cuts would count as a tax cut. And a brief plunge would also show that the president is serious about raising additional revenue. ….

Democrats should be flexible, however, about the form of tax increases. If Republicans want to cut exemptions and loopholes more and raise marginal rates less, that should be on the table. What shouldn’t be contemplated is redistributing tax burdens away from the wealthy and toward the middle class. And the additional revenue needs to be substantial. The Bowles-Simpson proposal that revenue be about $200 billion a year higher should be a guidepost for the size of a sensible tax component.

Christina D. Romer, “Economic View: Budget Showdown Offers an Opportunity for Progress“, New York Times, 11 November 2012.

economists who sell snake oil

Friday, August 10th, 2012

Oxford economist Simon Wren-Lewis is pessimistic about the future of economics as an academic discipline.

Greg Mankiw is known to every economist and economics student, if only because of his best selling textbook. John Taylor is known to every macroeconomist, if only because of the large number of bits of macro with his name on it (Taylor rule, Taylor contracts etc). Both are respected by other academics because of the quality and influence of their academic work.

With two others, they recently wrote this about the Obama administration’s attempts to stimulate the economy through fiscal policy after the recession: “The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies.” They then quote from two studies. … No other studies are directly referred to. That might just be because the overwhelming majority suggest that the stimulus package worked. ….

Now the quote comes from a paper prepared for the Romney presidential campaign. It is clearly political in tone and intent. As both academics are Republican supporters, it may therefore seem par for the course. But it should not be. ….

This is sad, because it tells us as much about economics as an academic discipline as it does about the individuals concerned. In the past I have imagined something similar happening in physics…, if it did, the academics concerned would immediately lose their academic reputation. …. Responding to evidence rather than ignoring it is what distinguishes real science from pseudo science, and doctors from snake oil salesmen.

Simon Wren-Lewis:, “Giving Economics a Bad Name“, Mainly Macro, 9 August 2012.

HT Mark Thoma.

FT columnist Martin Wolf, commenting on this post (9 August 2012 06:55) wrote that economics, unlike physics, is inherently ideological:

You [Simon Wren-Lewis] are being naive.

Physicists are not god: they cannot change the universe, merely seek to understand it. Economists do play god: they seek to change the economy, not just understand it. Physicists can manipulate nature. They cannot create it. Economists seek to do both.

Of course, physics was also inherently ideological in a world in which it was taken for granted that some authority (Aristotle, the Bible or something else) had determined how nature works. But the last time that was true in Europe was the 17th century. Even in biology, it is possible to imagine a world in which evolution is simply accepted as true. But economics is always going to be ideological, because it is always going to be about how societies should be run. It is inherently ideological in a way that physics or biology is not.

Economists need to accept this.

I agree. Economics is not a true science. It resembles engineering more than it resembles physics. Readers need to remember that the writings of economists are sometimes (often?) ideological tracts dressed up in the language of science.

Update: Simon Wren-Lewis responds to Martin Wolf.

Martin Wolf comments that it would be naive to think that economics could ever be as free from ideological or political influence as science or engineering, and I agree. However that does not mean that it is wrong to try and expose and reduce that influence. So it is therefore interesting if the influence of right wing politics and free market ideology is less powerful in some parts of Europe than it is in the US. Unfortunately I have little idea quite why that is and what it implies.

Simon Wren-Lewis, “Why do European Economists write Letters while US Economists Endorse Candidates“, Mainly Macro, 16 August 2012.

French lessons for the US

Sunday, October 23rd, 2011

Harvard economist Greg Mankiw uses the recent economic histories of four countries – Zimbabwe, Japan, Greece and France – to illustrates policy mistakes “that could, if we are not careful, presage the future of the United States economy”.

The four cases are different, and not equally relevant. I (and Mankiw) would argue that Zimbabwe’s hyperinflation has little or no relevance for the United States at this time. Of the other three cases, I would emphasise Japan’s deflation and prolonged economic slump. Mankiw emphasises France, not for its policy mistakes, but rather as an illustration of the tradeoff between income and leisure.

Here are two facts about the French economy. First, gross domestic product per capita in France is 29 percent less than it is in the United States, in large part because the French work many fewer hours over their lifetimes than Americans do. Second, the French are taxed more than Americans. In 2009, taxes were 24 percent of G.D.P. in the United States but 42 percent in France.

Economists debate whether higher taxation in France and other European nations is the cause of the reduced work effort and incomes there. Perhaps it is something else entirely — a certain joie de vivre that escapes the nose-to-the-grindstone American culture.

We may soon be running a natural experiment to find out. If American policy makers don’t rein in entitlement spending over the next several decades, they will have little choice but to raise taxes close to European levels. We can then see whether the next generation of Americans spends less time at work earning a living and more time sipping espresso in outdoor cafes.

N. Gregory Mankiw, “Economic View: Four Nations, Four Lessons“, New York Times, 23 October 2011.

Greg Mankiw is advising Mitt Romney, the former governor of Massachusetts, in his campaign for the Republican presidential nomination.

means tests as stealth taxes

Sunday, June 19th, 2011

Harvard economist Greg Mankiw has a wonderful column that illustrates a favourite truism of mine: means tests are equivalent to taxes on the relatively well-off. They are ‘stealth taxes’ because they are hidden.

Democrats want to increase taxes on the rich to fund the looming fiscal gap, which is driven largely by soaring health costs. Republicans object, saying higher taxes create economic distortions, discourage work and impede growth. Last month, John A. Boehner, the House speaker, said that we should instead consider means-testing Medicare. But what does that mean?

Here is how means-testing might work. We could start by choosing some income threshold — say, $250,000 — and then require people over 65 with higher annual income to pay more in Medicare premiums than they do now. For example, for every $1,000 of income beyond the threshold, they might have to pay an extra $10 in annual premiums.

Sounds good, right? But notice that the economic effects of means-testing are much the same as a tax increase. This particular plan is like increasing the income tax rate by one percentage point for high-income seniors. It is only semantics as to whether the $10 is called a “tax” or a “premium.”

Professor Mankiw also looks at Obama’s insurance mandate, which imposes a fine on anyone who refuses to purchase health insurance. Republicans oppose this mandate, but are not clear about how they would proceed to achieve expanded health care coverage. Senator John McCain – Obama’s opponent in the 2008 presidential campaign – prefers carrots to sticks: a tax credit for purchase of insurance rather than penalties for not buying it. But who would pay for the tax credit?

The answer is all taxpayers. This tax burden would be particularly hard on the uninsured, who would face higher taxes without enjoying the credit’s benefit. In other words, giving a tax credit to those who buy insurance is a back-door way to impose fines on those who don’t.

N. Gregory Mankiw, “Economic View: Seriously, Some Consensus About Health Care“, New York Times, 19 June 2011.

Carrying Mankiw’s logic a bit further, who pays for the tax breaks given to (1) workers with employer-provided health insurance and (2) those contributing to government-approved retirement savings plans? The answer is all taxpayers. Taxpayers who do not have employer-provided health insurance or do not have approved retirement savings come out on the short end of the stick. Inevitably, these are among the poorest and least-advantaged of taxpayers.

Greg Mankiw (born 1958) chaired President George W Bush’s Council of Economic Advisors from 2003 to 2005. He is advising Mitt Romney, former governor of Massachusetts, in his campaign for the Republican presidential nomination.

Mankiw’s challenge

Sunday, May 8th, 2011

Harvard economist Greg Mankiw, author of a leading economic principles text, acknowledges that there exist at least three questions on the current US economy that he is unable to answer.

I have a confession to make: There is a lot I don’t know about the economy. …. So let me come clean and highlight three questions that perplex me. ….

[1] How long will it take for the economy’s wounds to heal?

…. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills ….

[2] How long will inflation expectations remain anchored?

…. Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip. They are probably right, but there is still reason to wonder. ….

[3] How long will the bond market trust the United States?

A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.

N. Gregory Mankiw, “Economic View: If You Have the Answers, Tell Me“, New York Times, 8 May 2011.

I was thinking of taking up Mankiw’s challenge, but economist Dean Baker beat me to it. I like Baker’s answers, and have nothing to add to them.

Let’s start with questions 2 and 3, because these are easier.

The answer to question number 2 seems obvious — as long as there is no inflation. Why should people expect inflation when they are not seeing any. There is no evidence of generalized cost pressure in the economy as all indexes of wages are showing the rate of wage growth remaining pretty much constant. ….

The answer to question 3 largely follows the answer to question 2. After all, the real threat to those holding U.S. government bonds is inflation, not insolvency …. The United States can always print more dollars to meet its obligations. Greece cannot do the same with euros. ….

Okay, on to question #1. This is obviously a trick question, since it depends on what policies the country pursues. If the deficit hawks get full control over the levers of government and we start cutting spending rapidly, then it will take many many years before the economy recovers.

Similarly, if inflation hawks at the Fed can force increases in interest rates, like their counterparts at the European Central Bank, then recovery can take a very long time.

On the other hand, if we could get another big jolt of stimulus, a more aggressive monetary policy, or a big fall in the dollar to boost net exports, then we could see the economy recover fairly quickly.

Dean Baker, “Gregory Mankiw’s Pop Quiz on the Economy“, Beat the Press, 7 May 2011.

Greg Mankiw (born 1958) chaired President GW Bush’s Council of Economic Advisors from 2003 to 2005. Dean Baker (also born 1958) is co-founder of the Washington-based Center for Economic and Policy Research.