Posts Tagged ‘Greg Mankiw’

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.

WTF

Sunday, February 13th, 2011

In his State of the Union address last month, President Obama set the stage for a coming policy debate and his re-election bid with a catch phrase. Six times, he called on Americans to “win the future.” ….

No doubt, the phrase appealed to White House political advisers and speechwriters. It is always better for presidents to focus on our future potential than the immutable past. And who doesn’t want to win? ….

Yet this catch phrase is also problematic. For one thing, “Winning the Future” was the title of a 2005 book by Newt Gingrich. …. And then there is that pesky abbreviated form of the phrase — WTF — that does not exactly inspire confidence.

More troublesome to me as an economist, though, is that calling on Americans to “win the future” misleads us about the nature of the policy choices ahead. Achieving economic prosperity is not like winning a game, and guiding an economy is not like managing a sports team.

N. Gregory Mankiw, “Economic View: Emerging Markets as Partners, Not Rivals“, New York Times, 13 February 2011.

Harvard economist Greg Mankiw goes on to explain the principle of comparative advantage and why trade is not a competitive game, with winners and losers. Everyone gains from free trade. This is an excellent column, but Princeton economist Paul Krugman long ago conveyed the same message with even better prose. Here is an abstract of Krugman’s paper.

The view that nations compete against each other like big corporations has become pervasive among Western elites, many of whom are in the Clinton administration. As a practical matter, however, the doctrine of “competitiveness” is flatly wrong. The world’s leading nations are not, to any important degree, in economic competition with each other. Nor can their major economic woes be attributed to “losing” on world markets. This is particularly true in the case of the United States. Yet Clinton’s theorists of competitiveness, from Laura D. Andrea Tyson to Robert Reich to Ira Magaziner, make seemingly sophisticated arguments, most of which are supported by careless arithmetic and sloppy research. Competitiveness is a seductive idea, promising easy answers to complex problems. But the result of this obsession is misallocated resources, trade frictions and bad domestic economic policies.

Paul Krugman, “Competitiveness: A Dangerous Obsession“, Foreign Affairs, March/April 1994.

Click on the link for the full paper. According to Google Scholar, this article has been cited 1271 times. Read (or re-read) it and be impressed. Paul Krugman is a gifted writer who breathes life into standard economics.

In praising Krugman, I do not wish to slight Mankiw. To compare of a 900-word column with a 17-page article is unfair. Ample space is needed to explain economic concepts in plain English, without jargon. That is why I enjoyed so much the articles Krugman used to write for the online magazine Slate. The short columns he now writes for the New York Times sometimes disappoint me. In Slate, Krugman was able to focus on economics. In the New York Times he often focuses on politics.

Krugman’s Slate writings are still available. One of the best is “In Praise of Cheap Labor” (21 March 1997). For more of Krugman’s Slate articles, go to this link.

fiscal austerity in the USA

Saturday, December 4th, 2010

The sick and the unemployed are suffering in the poorly-performing US economy.

In the news today:

Tuesday marked the expiration of a pair of federal programs that had extended unemployment benefits anywhere from 34 to 73 weeks on top of the 26 weeks already provided by the states. ….

Some recipients have already received their final checks. If the impasse remains unresolved, others will see their payments lapse in the coming days or weeks, depending on how long they have been receiving benefits.

By the end of December, more than two million are set to lose their extended benefits, according to estimates by the National Employment Law Project, and about a million more by the end of January.

Michael Luo, “Millions Bracing for Cutoff of Unemployment Aid”, New York Times, 4 December 2010.

and tomorrow:

With enrollments exploding, revenues shrinking and the low-hanging fruit plucked long ago, virtually every state has had to make painful cuts to its Medicaid program during the economic downturn.

What distinguishes the reductions recently imposed in Arizona, where coverage was eliminated on Oct. 1 for certain transplants of the heart, liver, lung, pancreas and bone marrow, is the decision to stop paying for treatments urgently needed to ward off death.

The cuts in transplant coverage, which could deny organs to 100 adults currently on the transplant list, are testament to both the severity of fiscal pressures on the states and the particular bloodlessness of budget-cutting in Arizona.

Kevin Sack, “Arizona Medicaid Cuts Seen as a Sign of the Times”, New York Times, 5 December 2010.

Cuts in transplant coverage are outrageous. Even Republicans, who are worried about government “death panels”, would agree. As for extension of unemployment benefits, most economists favour this, not only because of humanitarian concern, but also because it provides a much-needed stimulus of demand. Harvard economist Greg Mankiw, however, is not sure about the worth of extending unemployment benefits in a prolonged recession.

A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits.  I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI. ….

[E]conomists who strongly favor the extension of UI benefits … also tend to favor more income redistribution in general. I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to “spread the wealth around.” That issue is, as I tell my students, more a matter of political philosophy than it is of economics.

Greg Mankiw, “My Agnosticism about UI”, Greg Mankiw’s Blog, 4 December 2010.

taxes on the wealthy

Sunday, October 10th, 2010

Harvard economist Greg Mankiw, in an op-ed column, cautions that a tax on income of the wealthy will reduce their incentive to work. But he omits something very important.

An important issue dividing the political parties is whether to raise taxes on those earning more than $250,000 a year. ….

So I thought it might be useful to do a case study on one of these high-income taxpayers. Fortunately, I have one handy: me. ….

I acknowledge that my motives in taking on extra work are partly mercenary. I don’t want to move to a bigger house or buy that Ferrari, but I hope to put some money aside for my three children. ….

Now you might not care if I supply less of my services to the marketplace — although, because you are eading this article, you are one of my customers.

N. Gregory Mankiw, “Economic View: I Can Afford Higher Taxes. But They’ll Make Me Work Less”, New York Times, 10 October 2010.

Actually, the issue is not whether to increase taxes on the wealthy – the tax cuts of GW Bush, after all, were temporary and are due to expire very soon. The issue, rather, is whether to cut once again marginal tax rates on incomes of the wealthy. What Professor Mankiw fails to mention – although it is implicit in his column – is that the wealthy tend to be satiated with goods and services, so are likely to save nearly all of their tax cuts. If economic stimulus is the objective, isn’t it better to give tax cuts to those who are not so wealthy, and are more likely to spend any additional income?

One more point: Does the New York Times pay Professor Mankiw for the op-ed columns that he writes? If the pay is zero, or very low, how would tax laws affect his supply of this service to readers?

Update: Greg Mankiw has responded to critics. But he doesn’t address either of my two points.

‘sin’ taxes

Sunday, June 6th, 2010

Harvard economist Greg Mankiw explores the pros and cons of paternalistic governance.

Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind.

Even as adults, we sometimes wish for parents to be looking over our shoulders and guiding us to the right decisions. The question is, do you trust the government enough to appoint it your guardian?

N. Gregory Mankiw, “Economic View: Can a Soda Tax Save Us From Ourselves?”, New York Times, 6 June 2010.

why The Economist is no longer worth reading

Friday, May 7th, 2010

It is a pity that The Economist, which used to be a sensible – indeed, excellent – newspaper, has fallen to such depths that I rarely read it. Here is a recent example, penned by “Buttonwood”:

It is a standard conservative argument that taxes on companies end up being taxes on everyone, since they will be passed on to consumers in the form of higher prices. But of course, it works the other way round; cuts in benefits for the poor, on in public sector payrolls, lead to lower demand for the goods and services that companies produce.

Buttonwood, “Democratic deficit”, Buttonwood’s notebook, 5 May 2010.

The writer is author of The Economist‘s column on financial markets.

Buttonwood’s analysis is flawed and incomplete. Everyone – producers and consumers alike – benefits from the stimulus of tax cuts and government spending only in times of recession and high unemployment. In normal times the standard argument applies, although it is somewhat more complex than assumed by Buttonwood. A full explanation can be found in any basic textbook, such as Greg Mankiw’s popular Principles of Economics:

Who Pays the Corporate Income Tax?

The corporate income tax provides a good example of the importance of tax incidence for tax policy. The corporate tax is popular among voters. After all, corporations are not people. Voters are always eager to have their taxes reduced and have some impersonal corporation pick up the tab.

But before deciding that the corporate income tax is a good way for the government to raise revenue, we should consider who bears the burden of the corporate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.

Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall.

The corporate income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters.

“Corporate Tax Rates”, Greg Mankiw’s blog, 3 May 2006.

Mankiw is conservative, so readers might infer that this is a conservative argument. I don’t think so. If my memory is correct, a similar statement can be found in any principles text. I am travelling, so do not have easy access to textbooks, but if anyone doubts this, check out, for example, a text authored by two economists – Paul Krugman and Robin Wells – who are definitely not conservative. Chapter 7 of their book, Economics, is titled “Taxes”, so might be a good place to search. If you find any passage that differs from Mankiw’s statement, please let me know: comments are open!

Greg Mankiw on “spreading the wealth around”

Saturday, February 27th, 2010

Harvard economist Greg Mankiw has written a new paper, one inspired by candidate Barack Obama’s response to a question posed by “Joe the Plumber” during the presidential campaign of 2008. Joe asked then-Senator Obama about his proposal to raise taxes on high-income households by letting GW Bush’s tax-cuts expire. The candidate responded, in part, “It’s not that I want to punish your success. I just want to make sure that everybody who is behind you, that they’ve got a chance at success, too…. I think when you spread the wealth around, it’s good for everybody.”  (more…)

taxing the deceased

Sunday, January 3rd, 2010

In the USA, thanks to GW Bush, the federal government no longer levies taxes on the estates of deceased citizens. Wealthy citizens who die in the years to come, beginning in 2011, will again face post-mortem taxes, with marginal rates as high as 55%.

Princeton economist Paul Krugman supports reinstatement of estate taxes.  Harvard economist Greg Mankiw favours their permanent repeal, for two reasons:

[First, although] the tax is levied only on the largest 2 percent of estates … [, it is not true] that the burden of the tax falls only on the richest 2 percent of Americans. …. As a first approximation, it would make more sense to distribute the burden of the tax to the estate’s beneficiaries rather than to the decedent.

What would happen if we allocated the estate tax burden to heirs rather than decedents? At first blush, one might think that it would not make much difference. After all, are not the children of rich people rich?

It turns out that the answer is “not always.” ….

[Second,] the estate tax unfairly punishes frugality, undermines economic growth, reduces real wages, and raises little, if any, federal revenue. There are no principles of good tax policy that support this tax, and I support the President’s call for its permanent repeal.

N. Gregory Mankiw, “Remarks at the National Bureau of Economic Research Tax Policy and the Economy Meeting”, National Press Club, 4 November 2003.

Professor Mankiw was Chairman of GW Bush’s Council of Economic Advisers at the time he made this statement.

For what it’s worth, I side with Krugman in this debate. Mankiw makes a valiant effort to support the estate tax, but I find his arguments flawed. In the case of tax incidence, Mankiw ignores the fact that the first million dollars of an estate are exempt from tax. If the heirs are not rich before receiving such an inheritance, they most certainly are after the fact. And, if Mankiw feels that a million dollars spread among children, grandchildren, nieces and nephews might leave some of them in poverty, then he ought to call for a larger exempt amount, or for an exempt amount for each beneficiary, not for repeal of the entire tax.

As for the effect of the estate tax on saving (NOT on investment, which is a separate issue), this is an argument for replacement of the income tax with a consumption tax – NOT for repeal of the estate tax. I, for one, favour exempting ALL saving from taxes, along with repeal of the estate tax, with one proviso: the accumulated savings (wealth) of an individual ought to be deemed ‘consumption’ upon death, and taxed accordingly. Alternatively, estates of the deceased could be taxed as income in the hands of beneficiaries. Professor Mankiw, alas, calls for abolishment of the estate tax but does not condition this on further tax reform.

Addendum: As a ‘small l’ liberal and follower of John Stuart Mill, I of course support the estate tax. Mill recommended in 1848 that government limit “the sum which any one person may acquire by gift or inheritance, to the amount sufficient to constitute a moderate independence”. For large estates, this implies a marginal tax of 100%!

Those concerned with high rates of taxation of wealthy dead individuals should – I believe – show at least equal concern with the even higher rates of taxation of incomes of the working poor. But they rarely do, with the notable exception of Greg Mankiw. Remember, marginal rates of taxation of low incomes often exceed 100%!

the tragedy of means tests

Monday, November 16th, 2009

Greg Mankiw is one of a handful of economists who worry about the effect of means tests on the welfare of the poor. Some time ago, he  posted a quote of “Kennedy School economist Jeff Liebman (via Jeff Frankel’s new blog) [who] tells a sad story about the incentive effects of government programs aimed at helping the poor”:

the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Greg Mankiw, “The Poverty Trap”, 10 February 2008.

Jeffrey Liebman is now Executive Associate Director of Obama’s Office of Management and Budget (OMB).

More recently, Mankiw linked to work by Boston University economists Kotlikoff and Rapson, who give the tax-transfer system of the US very low marks:

America’s tax-transfer system confronts the vast majority of American households with either high, very high, or astronomically high total effective marginal tax rates on labor supply and saving. It also provides very substantial tax arbitrage opportunities to a subset of households, particularly those with high incomes or advanced ages.

The pattern of net marginal tax rates and arbitrage opportunities with respect to age, marital status, and earnings is quite simply all over the map. But this is what one would expect given the amazing complexity of the fiscal system, the fact that the various components of the system are being developed with little or no thought to their interaction, and that the various governmental bodies responsible for the different elements of our tax-transfer system appear to make little or no attempt to understand the overall work and saving disincentives as well as arbitrage opportunities they are producing.

Laurence J. Kotlikoff and David Rapson, “Does It Pay, at the Margin, to Work and Save? — Measuring Effective Marginal Taxes on Americans’ Labor Supply and Saving”, Boston University, October 2006.

For reasons that I do not fully understand, political conservatives like Mankiw frequently fail to draw the obvious conclusion that universal benefits trump targeted transfers. The unwritten implication is the poor would be better off without transfers, but with their work incentives intact. Where are the ‘compassionate conservatives’?

health insurance and implicit taxes

Sunday, November 1st, 2009

Greg Mankiw today complains, like Tyler Cowen last week, that the proposed US health care reform bill contains income-tested subsidies that implicitly tax the incomes of the poor.

[Under President Obama's] policies, the largest increases in marginal tax rates may well apply not to the rich but to millions of middle-class families. These increases would not show up explicitly in the tax code but, rather, implicitly as part of health care reform. ….A family of four with an income, say, of $54,000 would pay $9,900 for health care. That covers only about half the actual cost. ….Now suppose that the same family earns an additional $12,000. …. In that case, the federal subsidy shrinks, so the family’s cost of health care rises to $12,700.

In other words, $2,800 of the $12,000 of extra income, or 23 percent, would be effectively taxed away by the government’s new health care system.

That implicit marginal tax rate of 23 percent … comes on top of the explicit marginal tax rate the family already faces from income and payroll taxes.

N. Gregory Mankiw, “Economic View: Supply-Side Ideas, Turned Upside Down”, New York Times, 1 November 2009.

On his blog, Mankiw explains that this is one “representative” example. Implicit tax rates are much higher for families with less income, for example 34% for a family of four with an income between $42,000 and $54,000, and higher yet for those with lower incomes.

What are the alternatives to the proposed reform? One option is to do nothing, leaving millions without health insurance. Another option is to fund universal health insurance from general government revenue. Mankiw cautions that this option is costly: “If large health insurance subsidies were offered to all Americans, regardless of income, the program’s cost would be exorbitant, requiring substantial increases in explicit taxes.”

But the cost of basic health insurance, spread over all taxpayers, would surely require less than a 23 percentage-point increase in explicit taxes on income. Another alternative is to finance health care with a national sales or value-added tax. This earmarked tax would have the advantage of taxing consumption, not savings. It is also a tax paid by everyone, rich and poor alike.

Income-tested subsidies – means tests – are implicit taxes on incomes of the working poor, which discourage them from working harder. Mankiw is right to emphasize the work incentives of explicit and implicit taxes. With this in mind, someone ought to take a close look at alternative ways to finance universal health care in the US.