Not News Really

TW: Everyone knows this, most even agree it needs to be done but why is not being proposed? Simple game theory, the party that does will be hammered by the other.

From conservative economist Greg Mankiw:
"Americans, as well as citizens of many other advanced nations, now spend about twice as many years in retirement as they did a generation or two ago. During that time, they expect the government to provide them with income support and healthcare. Is it any wonder that we face serious fiscal problems?

I hope the president's fiscal commission makes raising the age of eligibility for these programs one of its main recommendations"
http://gregmankiw.blogspot.com/2010/03/life-expectancy-at-retirement.html

Understanding Taxes On Negative Externalties

TW: Krugman with support from Mankiw make an easy to forget point about climate change legislation. The point of climate change legislation is to discourage consumption of high carbon energy. The taxes or caps embedded in the legislation place a cost on the bad behavior but this tax revenue does not disappear into thin air. These revenues can be used, however, society wishes as defined by their legislators. Folks will no doubt argue vociferously about how to use the revenues (income tax cuts v. deficit reduction v. other spending etc.) but the revenues will exist.

Furthermore, there are additional negative externalities beyond the carbon emissions (e.g. imported oil subsidizing unfriendly regimes and our costs of protecting overseas oil sources etc.)

From Paul Krugman at NYT:
"...Basic economics says that if we want to discourage a negative externality, like pollution, we need to put a price on that externality. One way is through an emissions tax; an alternative, with very similar economic results, is a system of tradable permits. All this goes back to Pigou; Greg Mankiw has urged economists to join his Pigou Club of those who support externality taxes.

Now, a key point in all this is that the emissions tax...does not represent a net loss to society. It’s just a transfer from one set of people to another — from the emitters, and ultimately those who buy their products, to whoever collects the taxes or gets the permits, and ultimately whoever benefits from the revenue or rents thus generated. The only net loss is the Harberger triangle created by the reduction in emissions — which has to be set against the benefits of reduced pollution.

And the burden on households from cap and trade depends on what’s done with the rents (taxes). In the original Obama plan, the rents would be used to pay for middle-class tax cuts; in Waxman-Markey, many of the permits are initially granted to utilities — but since these utilities’ profits are regulated, many of the rents would end up being passed on to consumers through lower prices...

From Greg Mankiw (referring to Krugman's post above relative to utilities getting the permits for free initially) :
"...that is a bug, not a feature, of the Waxman-Markey bill. From the standpoint of economic efficiency, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions regarding energy consumption. Consumers should be compensated for paying these higher prices via cuts in income or payroll taxes. Those tax cuts would be financed by the revenues received from the auctioning of carbon rights (or, better yet, a carbon tax)."

TW: I agree with Mankiw the permits should not be given away initially but that appears to be a requisite in order to the get bill passed. The permits would eventually be auctioned creating the tax revenue and associated cost to consumers. Again the taxes would be "rebated" back to society in the potential forms mentioned above.


http://krugman.blogs.nytimes.com/2009/09/25/pigou-glenn-beck-and-the-false-case-against-cap-and-trade/

Mankiw Arguing That Rationing Is Inevitable

TW: Republican economist Mankiw makes a legitimate point- rationing especially in an age where medical technology is creating better and ever expensive treatments is inevitable. But then he makes an implication- that universal care should be avoided. He does not directly say it but he strongly implies it.

Understanding as we have discussed in detail here that many folks including the elderly and poor already receive the equivalent of universal care, I find his implication reprehensible. It is this logic that leads to middle class, working Americans bearing the price for the rest of the country. These working folks face recission and increasingly unaffordable health care alternatives while the elderly, poor, those associated with the military and wealthy attain world class care. Everyone should be brought into the "U.S. health care system", then the very tough decisions made in terms of what our society can afford. Squeezing out the non-poor, non-elderly, non-healthy from the system is not the answer

From Greg Mankiw in the NYT:
"...like millions of middle-age men, I take my little [statin] pill every morning. Here is the question I ask as the pill passes through my lips: Is it worth it?

And that is, indeed, how I thought about the decision when my doctor recommended the treatment. One thing I did not consider was the price. Like most consumers of health care, I was insulated from economic concerns. I knew that the insurance company — and, indirectly, all its policyholders — would pick up most of the tab. This arrangement, encouraged by the tax system, ensures that I get the benefit of the pills while paying little of the extra costs they generate.

An optimist might hope that my doctor, or someone higher up in the health care hierarchy, made a rational cost-benefit calculation on society’s behalf. To figure out whether my treatment makes sense, one would have to weigh the cost of the drug against the benefit of an extended life. And to do that, one would have to put a dollar value on my life — the kind of calculation that makes everyone but economists squirm.

Not long ago, I read that a physician estimated that statins cost $150,000 for each year of life saved. That approximate figure reflects not only the dollars patients and insurance companies spend on the treatment but also — and just as important — an estimate of how effective it is in prolonging life. (That number is for men. Women have a lower risk of heart disease.)

...Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick, or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000.

Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality.

Most Americans, however, would not be so lucky. Because the price of these new pills well exceeds average income, it would be impossible to provide them for everyone, even if all the economy’s resources were devoted to producing Dorian Gray tablets.

So here is the hard question: How should we, as a society, decide who gets the benefits of this medical breakthrough? Are we going to be health care egalitarians and try to prohibit Bill Gates from using his wealth to outlive Joe Sixpack? Or are we going to learn to live (and die) with vast differences in health outcomes? Is there a middle way?

These questions may seem the stuff of science fiction, but they are not so distant from those lurking in the background of today’s health care debate. Despite all the talk about waste and abuse in our health system (which no doubt exists to some degree), the main driver of increasing health care costs is advances in medical technology. The medical profession is always figuring out new ways to prolong and enhance life, and that is a good thing, but those new technologies do not come cheap. For each new treatment, we have to figure out if it is worth the price, and who is going to get it.

The push for universal coverage is based on the appealing premise that everyone should have access to the best health care possible whenever they need it. That soft-hearted aspiration, however, runs into the hardheaded reality that state-of-the-art health care is increasingly expensive. At some point, someone in the system has to say there are some things we will not pay for. The big question is, who? The government? Insurance companies? Or consumers themselves? And should the answer necessarily be the same for everyone?

Inequality in economic resources is a natural but not altogether attractive feature of a free society. As health care becomes an ever larger share of the economy, we will have no choice but to struggle with the questions of how far we should allow such inequality to extend and what restrictions on our liberty we should endure in the name of fairness."

In the end of our day of philosophizing, however, we face a practical decision:

Who gets the magic pills, and who pays for them?
http://www.nytimes.com/2009/09/20/health/policy/20view.html

Income And Education

(click on graphs to enlarge)

TW: The first graph above is from Greg Mankiw's blog, he dismisses it:

"...Of course! But so what? This fact tells us nothing about the causal impact of income on test scores...This graph is a good example of omitted variable bias...The key omitted variable here is parents' IQ. Smart parents make more money and pass those good genes on to their offspring.Suppose we were to graph average SAT scores by the number of bathrooms a student has in his or her family home. That curve would also likely slope upward..."

TW: He is right. The graph implies causation when many other variables could be relevant (including although certainly not limited to IQ). But my guy Krugman counters with the second graph. Low income kids with high scores manage to attain fewer college degrees than high income kids with LOW scores. Why is that?

The Old "Wealthy Pay All the Taxes" Whine From the Right

TW: Like clockwork this morning I see the conservative econ bloggers flagging the annual Tax Foundation report that shows wealthy folks paying lots of federal tax, their grave tones indicating they are purveying profound new information is so very cynical if utterly consistent:

From Jim Pethokoukis:
"1) The top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government — the highest percentage in modern history — while the top 1 percent paid 24.8 percent of the income tax burden.

2) The share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

3) To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined."

From Greg Mankiw:
"IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act. Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined."

TW: We have debunked this propaganda previously. It is not challenging. Conservatives throw out this meme to portray "woe is me" for wealthy taxpayers. But they NEVER complete the circle. They only show federal income tax so payroll taxes, state and local taxes, sales taxes which are paid far more proportionately by less wealthy folks are ignored. Most importantly they NEVER do the intellectually honest thing and show what % of the income those same wealthy folks have. The basic point- income is so concentrated now in the U.S. that the wealthy pay a % of the federal income tax because they possess a high % of the income, unless the federal taxes are set up to be regressive they will inherently pay a % of the federal income tax.

The graph at the top from Peth might as well be a graph of how income has pooled at the top to the detriment of the middle and lower classes. Here are some more relevant graphics:

Some Insight From Paul Samuelson

TW: Paul Samuelson is a liberal economist, Nobel Prize winner in economics and still dishing it out at age 94.

From Paul Kedrosky:
"A few more quotable quotes from that new interview:

On Greg Mankiw and Ben Bernanke
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.

On Robert Lucas and his acolytes (TW: Lucas is also a Nobel winner from U. of Chicago, a conservative)
Those guys were useless at Federal Reserve meetings.

On Alan Greenspan
But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy.

On Milton Friedman
He was a libertarian to the point of nuttiness.

On bubbles
And I'm not sure most of the people that get caught up in the middle of a bubble can be described as irrational. It seems pretty rational to buy a house and flip it in the next few weeks at a profit when that's been happening for along time. It works both ways.

On the dollar:
I think it's almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there's going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation.

On economic history: what would you say to someone starting graduate study in economics?
Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. "

The Circularity Of Cap And Trade

TW: This Marron piece laments the lack of revenue the cap and trade bill will produce since the emission permits for the most part are being given away as opposed to sold. He is correct in that if the permits were sold much revenue would have been created. But then he late in his piece states why the permits were given away. The reason cap and trade is moving forward instead of a better concept such as an explicit carbon tax is the political malleability of the cap and trade.

Marron titled his piece "Missed Opportunity" but all he is doing is sniping. Folks like Marron can lament the lack of revenue but I am highly confident he and other conservatives would be nowhere to be found if actual auctions of the permits were included in the bill.

Unfortunately conservatives offer no solutions only the status quo. They will attack cap and trade from various angles but again where are the solutions, if the bill includes taxes folks wave the bloody shirt of higher taxes. Yet the same folks are now waving another bloody shirt of "runaway" deficits. And oh btw what about those negative externalities created by carbon energy?

From Donald Marron:
"...I should emphasize that the idea of auctioning all of the allowances is almost certainly impossible as a political matter. Affected industries have enough clout to oppose anything quite that ambitious. And, indeed, one of the beauties of a cap-and-trade system (from an environmental point of view) is that politicians can use free allowances as currency to reduce opposition to the policies. Unfortunately, such horse-trading can easily transform into the pure power politics of pork..."
http://dmarron.com/2009/06/30/big-money-in-cap-and-trade/

The Cap n'Trade Quandry

TW: I oppose cap and trade for two reasons- there are better ways to effect carbon reductions (i.e. an explicit carbon tax) and cap and trade to me is highly susceptible to regulatory capture and congressional manipulation (even more than the usual shenanigans). The bill that passed the House reflects the latter challenge in spades.

The one aspect of cap and trade I like is that at least something is being done. If conservatives were out there beating the table for a carbon tax alternative I would be supportive but their alternative is to retain the status quo (and for some go off on climate change denial rants).

Cap and trade is an energy tax. Some support energy taxes because they believe the negative externalities (i.e. pollution, deploying troops in Middle East, supporting folks like Putin/Chavez/Ahmadinejad/Wahhibists etc.) associated with carbon based energy should be reflected in the prices paid by consumers. Other see carbon taxes as a huge potential revenue source.

The cap and trade bill passed by the House raises little revenue and hence does little initially to curb the negative externalities associated with carbon energy. The reason is circular. If the bill would have raised revenue then it would have gone down in flames as a "tax" bill, but now folks say it does not do enough to curb carbon emissions.

You do not have to believe in climate change in order to support a carbon energy tax of some support, the other negative externalities are sufficient from my perspective. Alternatively if you are interested in long-term fiscal security an energy tax is a powerful tool to deploy whilst addressing negative externalities.

The only wrong choice is the status quo. Cap and trade is deeply flawed but it does create a structure to raise revenues and curb negative externalities if at some point in the future the political will is created to act.

Fun With Graphics...It Is All Relative

TW: Above was the graph posted by Greg Mankiw on his blog Apr 15. Mankiw is a conservative economist albeit a moderate for whom I have respect and follow him as a rational economic voice on the right. But one sees the graph and perhaps thinks jeepers tax rates sure are high for those "poor" wealthier folks. The graph below integrates the EFTR above with income by quintile.

TW cont.: So while it is true that the "poor overtaxed" folks in the top quintile pay about 6X the taxes of those actual poor folks in the bottom quintile, those same folks in the top quintile have about 14X the income of those in the bottom quintile. Every April 15th we get the more or less same editorials and snarky posts from the right mourning the "extraordinary" burdens of those at the top, they NEVER mention the blue bars on the graph above, until and unless they do in a rational manner they lack credibility in my eyes.

Where Economists Agree...But Policy Does Not Follow

TW: Much is made of economists quarreling especially these days relative to the stimulus and bank bailouts. But as Mankiw points out there are actually many areas where economists are in general agreement. Frequently, however, politicians (reflecting the will of the people) are unable or unwilling to execute policies consistent with the agreed economic rationale.

From Greg Mankiw (former Bush economic advisor):
"1)A ceiling on rents reduces the quantity and quality of housing available. (93%)
TW: Rent controls are thankfully rare but for NYC. Although some proposals meant to address the "housing" crisis may start to adopt some of these characteristics.

2) Tariffs and import quotas usually reduce general economic welfare. (93%)
TW: Protectionism is a looming threat here and abroad amidst the economic contraction. I hope it is resisted.

3) Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
TW: Flexible rates have been a huge contributor to post WWII world economic growth, but they will be under intense scrutiny now. The Chinese yuan and US $ in particular are under a microscope, will one or both fold?

4) Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
TW: Okay there is consensus amongst the economists on the need for stimulus but certainly the Republicans favor tax cuts while Dems the spending. BUT, those Republicans demagoguing about "spending our grand children's future" are acting contrary to this consensus or merely playing politics. One has to go into deficit during contractions else one contributes to the downturn cycle. John McCain has been one of the chief demagogues during the recent debate.


5) The United States should not restrict employers from outsourcing work to foreign countries. (90%)

6) The United States should eliminate agricultural subsidies. (85%)
TW: Strongly agree but the tyranny of the minority dominates here. Non-proportional representation (i.e. Louisiana having as many senators as CA or NY or TX) leads to minority interests such as sugar growers having disproportionate and irrational sway over policy.

7) Local and state governments should eliminate subsidies to professional sports franchises. (85%)
TW: Agree. This is one of those game theory situations, if no one did it society would be better off, but someone always does it.

8) If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
TW: Yes!! Which is why the Republian demagoguery re "spending our grand children's money" is just that. The time to have been balancing the budget was 2001 to 2006 (and recall it was balanced through 2000).

9) The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)

10) Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)

11) A large federal budget deficit has an adverse effect on the economy. (83%)

12) A minimum wage increases unemployment among young and unskilled workers. (79%)

13) The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14) Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)
TW: Carbon taxation is the answer!!

Economists At War: Wise Advice From Mankiw

TW: There is a war emerging between conservative and liberal economists. The conservatives usually adherents of Milton Friedman are petrified that they will lose their pre-emiment position gained since the rise of Reaganism as the economy tanks. The liberals usually adherents of Keynes are gearing up for 2009 and the Obama Administration as they seek to provide their suggestions to address the economic quagmire.

Greg Mankiw is a conservative economist, biased certainly but level-headed and not merely a shill for the Republicans like a Kudlow; who has worked for Reagan and Bush but his response to an aspiring economics student was useful. Neither side has all of the answers.

From Mankiw's blog:
"[question from student] What advice would you give to a college undergrad being exposed to so many different ideologies at the same time? I can go from being told by my ECON 301 (Intermediate Micro) professor that we should, for example, let the banks fail and let the market do it's work, and I can see his point. I can then go talk to my ECON 302 (Intermediate Macro) professor and he will say that it's ludicrous to not do SOMETHING regarding the financial crisis, and I can also see his point."

[Mankiw answer]
"1. The current economic environment is a particularly hard time to learn economics. There are a lot of topics about which economists agree, but the diagnosis and best remedy for the current economic downturn are not among them. It is therefore no surprise that your econ profs express disparate views about the appropriate policy in the current environment. Don't read too much into this fact. I bet there are many other topics about which these economists would come to similar conclusions. Ask them about rent control, or international trade, or Pigovian taxes, for instance, if you want to find broad areas of agreement.

2. You are lucky that you have professors with different viewpoints. Your job, as a budding economist, is to learn from all of them. Ideally, at the end of the day, you should be able to understand and appreciate (although not necessarily agree with) each point of view. You should try to construct in your mind a debate between your Friedmanite professor and your Keynesian professor. What points would each raise, and how would the other respond?

3. As you come to grips with these various points of view, you will be in a better position to judge which you find most cogent. But don't expect to reach unequivocal positions easily. In my view, it is best to consider all knowledge as tentative. The best scholars maintain an open-mindedness and humility about even their own core beliefs. Excessive conviction is often a sign of insufficient thought, which in turn may be derived from a certain pig-headedness. Intellectual maturity comes when you can maintain the right balance between informed belief and honest skepticism. You sound like you are on the right path."
http://gregmankiw.blogspot.com/2008/12/question-about-learning-economics.html