Posts Tagged ‘Greg Mankiw’

America’s Quantum Taxes

November 30, 2012 Leave a comment

How Our Tax System is Both a Particle and a Wave

Young_DiffractionThe CBO recently released a report on the effective marginal tax rates for low- and moderate-income workers and once you account for federal and state income taxes, federal payroll taxes, and SNAP (food stamp) benefits the tax system for these workers looks pretty flat.


Higher income groups pay roughly the same range of tax rates (or too often less) as the working class groups we see graphed above, so we basically have a de facto flat tax. As economic’s professor and former advisor to Mitt Romney, Greg Mankiw, points out, “we could repeal all these taxes and transfer programs, replace them with a flat tax along with a universal lump-sum grant, and achieve approximately the same overall degree of progressivity.” Saying “same overall degree of progressivity” is another way of saying no progressivity.

The United States is often thought of having a highly progressive tax code because most of the revenue we generate comes from the richest Americans. But if our effective marginal tax rates are basically flat, how are our revenues so “progressive”? Inequality. People at the top end of the income distribution must own a disproportionately large share of the national income.

Eduardo Porter, writing in the New York Times, is right that we shouldn’t get overly fixated on tax progressivity; our concern should be raising enough money to fund programs that can benefit the poor and the middle class.

[T]he government’s success at combating income inequality is determined less by the progressivity of either the tax code or the benefits than by the amount of tax revenue that the government can spend on programs that benefit the middle class and the poor.


The entire budget for cash assistance for families in the United States amounts to one-tenth of 1 percent of the nation’s economic output. The average across the O.E.C.D. nations is 11 times bigger.

Porter argues that European style flat taxes (e.g. VAT, carbon taxes) can raise more revenue to pay for larger benefits. But we don’t have that type of flat tax. Just like the wave-particle duality in quantum mechanics, where particles exhibit the characteristics of both waves and particles, the United States created an astonishing tax system: A highly inefficient de facto flat tax that somehow manages to disproportionally rely on the rich while collecting insufficient revenue and doing next to nothing about inequality. It’s simultaneously flat and progressive and, to paraphrase Richard Feynman, nobody understands the tax code.

(image: Thomas Young’s sketch of two-slit diffraction of light)

The Shocking Data of Class Warfare

October 5, 2011 1 comment

Greg Mankiw shares evidence from the Tax Policy Center that shows that President Obama’s proposed tax policy is different from Clinton’s.

Compared to President Clinton, President Obama would cut the effective tax rate by about 2 percentage points for the bottom 99 percent of the population and raise the effective tax rate by about 2 percentage points for the top 1 percent of the population.

You can agree or disagree with that policy choice.  But the facts are clear.  President Obama’s policy preferences are more focused on income redistribution (aka “class warfare”) than President Clinton’s tax policy ever was.

Get that? For all those seeking evidence of President Obama’s radical plan to turn America into a socialist dystopia, now you have it. Compared to Clinton-era rates, he wants to cut taxes by 2% for the bottom 99% and raise taxes by 2% for only the very richest.

It’s disappointing to see even the establishment candidates (Romney) and their advisors (Mankiw) perpetuate the “class warfare” smear. But, I’m not sure if I’m more amused or disturbed to read what they consider the evidence for it.

Seasonal Challenges

August 31, 2011 Leave a comment

It’s been a little over a year since I posted Mankiw’s and Mulligan’s challenge to “extreme Keynesians.”  Mulligan argues that the seasonal surge in teenage employment demonstrates that aggregate demand isn’t the source of our employment problems. If it was, he argues, the “increase in supply [of seasonal workers] should not translate into higher employment during deep recessions such as this one. But it does!”

I’m unable to find the comparative data for this year, but I’d like to revisit the topic anyway. My initial reaction to the challenge was that there might be an increase in demand during the summer months, which could explain the jump. Looking at the above graph now, I’m wondering if the slide well before September (when most kids go back to school) illustrates collapsing demand. After all, employment starts to drop before the temporary supply heads back to school – doesn’t that suggest demand’s importance? So, does employment drop before supply dries up and, if not, isn’t it difficult to say which is the cause?

Frankly, I’m not sure why extra supply by itself would cause a spike in hiring. Teenage employment -even in the summer- continues to decline every year. The graph shows employment of 16-19 year olds go up relative to 20-24 year olds, but why wouldn’t unemployed 20-24 year olds be willing to fill available jobs? If it was only supply rather than increased summer demand, why wouldn’t businesses hire the unemployed workers in non-summer months? For example, are hotels going underemployed during non-summer months? Is there any evidence that the unemployed are refusing to work in large numbers?

If you examine the character of seasonal youth employment it seems to suggest increased demand could be causing the boost in hiring. The industries that see rises in summer employment are the same industries that see increased demand. Think recreation and vacations.

Meanwhile, schools and daycares experience decreased employment because people don’t need their services. The reason we see more 16-19 year olds relative to older age groups hired is that if business are going to hire workers to fill the temporary rise in demand they are still more likely to want the lowest cost workers. Nothing about that seems inconsistent with rising demand.

Whether it is increased demand or increased supply (or both) that causes the change in employment, I can’t say for sure. But, Mulligan’s claim that increased worker supply causes the employment spike may confuse correlation for causation. Either way, I’m willing to try anything that might help our employment crisis. I suppose that means expanding immigration into the US to increase the supply of workers and to reignite our efforts to generate more demand.

Mankiw Admits GOP Policies Are “Repellent”

April 14, 2011 Leave a comment

In his recent New York Times piece Harvard economist Greg Mankiw envisions a presidential speech in 2026 if we don’t do something now to fix our fiscal crisis.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided.

The odd thing about Mankiw’s formulation is that the “current problems” are basically his preferred solutions so we’re not really avoiding anything. I’m not denying that taking early action to fix these problems is sensible – the problems are real. But I’m not sure if conservatives fully recognize that it’s difficult to scare people into action by arguing that our only solutions to long-term problems is to embrace them earlier. A voter might reasonably ask, “if we’re going to face these difficulties no matter what, why not just wait?”

Economists like Mankiw recognize that a dollar today is worth more than a dollar in the future – so even if the difficulties intensify later it might seem that putting them off is “worth it.” But Greg Mankiw, Paul Ryan, and other conservatives argue that in order to prevent the destruction of our current policies we must… destroy all our current policies. You’ll notice that in all of Mankiw’s doomsday scenarios his proposed fix is not to adjust our commitments and tax code in creative ways to preserve the basic structure of our welfare state but to preemptively implement the pain now. It’s as if consent to misery somehow makes it more palatable. Also, conservatives’ policy preferences aren’t merely acquiescence to some Calvinistic political inevitability – they frequently argue the moral superiority of their policies.

In 2026 Mankiw imagines that “we have to cut Social Security immediately, especially for higher-income beneficiaries.” His solution to this in 2011 is to… cut social security.

In the future we’ll be forced “to limit Medicare and Medicaid.” To save us from this problem, the GOP plan is to have people “pay for these treatments on their own or, sadly, do without.”

Republicans including Mankiw favor repealing Obamacare. We better cut middle-income subsidies so we don’t have to cut them later!

Forthcoming budget realities ensure that “subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion” must go. As expected, Mankiw thinks we should do that regardless of the bond markets (e.g. here, here, and here).

On taxes, Mankiw predicts the budget will force us to broaden the tax base and eliminate deductions. Of course, economists like Mankiw already want that.

Watch out in 2026: we’ll have to raise the gas tax “by $2.” As a champion of the Pigou Club, Mankiw has been arguing for years that raising the gas tax is a great idea.

His hypothetical president believes these changes are “repellent.” Does that mean that Mankiw, the conservative economist that favors all these changes on their own merits, thinks his own policies are repellent? He’s right that if we choose them earlier they’d be less immediate and “draconian” but if they’re harsh then aren’t they detestable now?

I don’t dispute that doing something soon is essential. I actually support a version of many of the policies Mankiw advocates. But conservatives have been advocating that cutting social security, slashing medicare and medicaid, removing all subsidies, and broadening the tax base are morally preferable. Paul Ryan doesn’t require his staff to read Ayn Rand because he thinks her policies are unfortunate inevitabilities; he considers them optimal and just.

No one believes that our current welfare state and tax policies are sustainable or flawless, but progressives at least attempt to preserve and improve them. It’s possible Paul Ryan and Greg Mankiw are right that all progressive policies will eventually collapse. I just can’t understand the rush to get there.

(photo credit)

[update 04/15: Greg Mankiw responds]:

I emailed Professor Mankiw asking what he thought about his policy preferences seeming to mirror the “repellent” and “draconian” view his column imagined.

That wasn’t me speaking. It was a hypothetical future president. 😉

Categories: Greg Mankiw, Paul Ryan Tags:

Monetary Policy isn’t a Radical Left-Wing Idea

November 17, 2010 3 comments

Just in case people think quantitative easing is some left-wing wacky idea, here are some conservative economists that favor it.

Scott Sumner:

When I started my blog in early 2009, fiscal stimulus was the hot issue.  Many conservatives were opposed to fiscal stimulus, arguing (correctly in my view) that it would fail.  And they made it quite clear that “failure” meant deficit spending would fail to boost nominal spending.  The implicit assumption was (almost everyone agreed) that more nominal output would be desirable, and the argument was that fiscal stimulus could not deliver it.  With monetary stimulus, the right is making exactly the opposite argument—they are opposed to QE because it might succeed in boosting NGDP.  Both fiscal and monetary stimulus boost NGDP (if they work at all) by shifting AD to the right.  Whether that extra spending shows up as inflation or real growth is of course an important issue.  But it makes no sense to argue fiscal stimulus would fail because it would not boost NGDP, and simultaneously argue that monetary stimulus would fail because it would increase NGDP.  I’m sure the right doesn’t think of its views in those terms, but that is essentially the message they are sending out, and it is an extremely incoherent message.

Greg Mankiw:

My view is that QE2 is a modestly good idea.  I say it is a “good idea” because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation.  By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand.  I include the modifier “modestly” because I don’t expect these actions to have a very large effect.

Milton Friedman:

Well, it is impossible to say whether he’d support QEII specifically because he’s dead, but he certainly didn’t have a problem with using monetary policy as a tool to increase the money supply to remedy the economy.

“The Bank of Japan can buy government bonds on the open market…” he wrote in 1998. “Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”

The Trouble With Partisan Critiques

October 25, 2010 10 comments

Keith Hennessey, Former Director of the National Economic Council under President Bush, has put out a video critiquing President Obama’s Chair of the Council of Economic Advisers’, Austan Goolsbee, video. Here’s Hennessey’s cleverly made video where he presents himself “on the other side of the white board” so he can “give you the other side of the story so you can judge for yourself.”

The problem with both videos, and I’ll focus on deconstructing Hennessey’s because Hennessey has deconstructed Goolsbee’s, is that they both set their argument up to win the partisan battle rather than the policy battle. Of course, those partisan battles are rooted in policy differences, but watching the videos the true aim of their arguments becomes clear.

Hennessey’s first criticism is that Goolsbee neglects to include public sector job workers in his chart. Rhetorically feigning incredulousness, he proposes three potential reasons why Goolsbee might do this: 1. “He doesn’t care about government workers” 2. “He didn’t want us to get confused with the effects of census workers being hired and fired” 3. “He wanted to hide the job losses over the last four months so his chart looked like things were getting better.” Then he tells us to be the judge. It doesn’t take much to figure out which option Hennessey wants us to assume is correct. By limiting the options to these three, Hennessey has given us a false choice. Isn’t another possible option that 4. He wants to show the effects of the government’s policies on what most people consider to be most important for long term prosperity, the private sector.

Now obviously, Goolsbee wants to make things look as positive as possible and wants to use visuals that present the administration he works for in the best light possible. That’s why a critique of Goolsbee is warranted, but intellectual honesty isn’t reached by omission on either side. The GOP, after all, were the ones that fought hardest to limit the state aid and to force the layoffs of government workers (one example). How many more ads from GOP candidates do we need to see calling for cutting state workers? Would Hennessey or Republicans support billions of dollars to fund increased hiring of government workers? Odd to criticize the Obama Administration for policy inaction that they don’t favor but you do.

Just imagine if total employment was up due to the government hiring more workers, does anyone think Hennessey would be arguing that Goolsbee has now given a complete and nonpartisan illustration of employment? Hennessey himself has written that he hopes “the pace of private job creation accelerates.” Why would he write that if he didn’t think there is something especially important about private sector job growth? When Goolsbee talked to a CNN Money correspondent he explained that the President wanted his economic team to focus on policies that help the private sector because “the President’s view from the beginning and continues to be now that private sector job growth creation is the sustainable form.” None of this is to argue that Hennessey isn’t correct that the administration should focus on total employment instead of only private sector jobs, but don’t you think he might have included that as an option?

The next statement that Hennessey challenges Goolsbee on is the claim that “the middle class had been squeezed like never before.” To undermine that Hennessey shows total job gains (uninterrupted for 46 months) during the Bush years. Yet this appears to be another example of partisan uncharitableness. Goolsbee wasn’t perfectly clear with what exactly he meant, and Hennessey is right to want to know exactly what Goolsbee meant, but it’s reasonable to assume by “squeezed” he wasn’t just talking about jobs numbers otherwise he probably wouldn’t have pointed out that the recession begins after the “intervening years” of the squeeze. In a discussion about his white board videos Goolsbee told Stephen Colbert that during the Bush employment boom (and he uses the word “boom” acknowledging employment/GDP growth), “it was the first boom in recorded US economic history in which the middle class’s income fell by over $2000 over what was supposed to be a boom and it was followed by what was the worst recession since 1929.” If Hennessey doesn’t watch Colbert, we know he watches the white house videos, and in the above video I posted, Goolsbee repeats the claim that the middle class was “squeezed,” this time in the context of healthcare. The more you listen to Goolsbee, the more you realize that he’s referring to a squeeze on multiple levels in their lives.

I don’t except Hennessey to follow everything Goolsbee has ever said or to be a mind reader, but if you’re trying to combat partisanship and the Adminstration’s selective data engaging in partisanship and omission yourself is hypocritical. I’m sure Hennessey and others may have some reasonable arguments about the exact nature and cause of Goolsbee’s middle class “squeeze” but to pretend you have no idea what he’s talking about or that he could only be referring to the job rate is disingenuous. If Hennessey really didn’t know, couldn’t he have asked?

Right after Hennessey makes the correct observation that people overstate the effect of the President and Congress on the short-term economy, Hennessey can’t resist and makes the same type of criticism he’s faulting Goolsbee and others for. But ultimately he’s right that the color selection is mostly a partisan trick.

Hennessey goes on to puncture Goolsbee’s argument by contending that no one can prove a counterfactual. He’s arguing that it is “impossible” to prove if the stimulus made things better or worse. It’s true that we can’t run history twice and prove conclusively either way, but Hennessey is using this to diffuse only positive assessments of a policy he doesn’t like. His claim works for everything and thus, if we follow Hennessey’s argument to its logical conclusion, means we can’t ever say anything ever about the effectiveness of any policy. He goes on to point out that other policies (many before Obama took office) affected the economy and therefore the recovery. He’s correct. The trouble is that he’s so caught up in blaming Goolsbee for making partisan arguments that he makes the same mistake again. If he was interested in the policy question rather than the political one, Hennessey wouldn’t be worrying about which administration these policies occurred under, just the effectiveness of them. Hennessey says, “Dr. Goolsbee wants to attribute any good economic news to the one policy that was all President Obama’s, the stimulus, and there’s no way he can know or prove that.” Yet, I can’t find where Goolsbee makes that claim. It’s also not evident to me the Goolsbee would argue that those other policies didn’t have a positive effect – Obama himself has argued that many of the policies Hennessey displays were helpful – he even continued and carried many of those policies out (certainly with the input of Goolsbee). Hennessey insists on the most uncharitable and narrow reading of Goolsbee’s argument, further demonstrating his own commitment to partisanship over objectivity.

I do agree with Hennessey’s further point that getting worse more slowly is not the same as getting better. He’s right to point that out to many in Goolsbee’s audience that might not be very familiar with analyzing graphs.

Unfortunately in his new graphs, once he fails to acknowledge Goolsbee’s reasoning behind showing only private sector employment, Hennessey doesn’t show us what that employment picture looks like. Even playing Goolsbee’s words over the new graph didn’t shock me as I think Hennessey intended. Sure, slowing the rate of job loss isn’t equivalent to gaining jobs, but I still can’t help but notice that it is preferable. Goolsbee isn’t obviously incorrect when he says the government’s policies “starts [us] on the path to improvement.”

Ultimately, Hennessey’s critique of Goolsbee had two effects on me. First, using the total employment numbers we see that the situation is far worse than the administration would like us to believe. Therefore, that leads me to support more of the policies that Hennessey (and the Hoover Institution he’s a fellow at) doesn’t seem to favor such as more state aid and direct government hiring. In other words, more fiscal stimulus.

Second, I saw an illustration of the trouble with partisan critiques. Hennessey’s main interest isn’t providing viewers with a complete picture of employment to “give you the other side of the story so you can judge for yourself” – he wants to undermine the Administration’s side and persuade you of his side… even if that means using the same type of omissions and fallacies that he wants to criticize Goolsbee of using.

I hope I haven’t given anyone the impression that I believe I’ve never made a partisan argument before or haven’t focused more on GOP failings over Democratic ones. My aim here is to expose the partisanship that both sides play and remind myself that in attempts to debunk and “deconstruct” the other side it is very easy to make the same mistakes you seek to refute. My purpose in deconstructing Hennessey’s deconstruction is not to declare which side is correct on the merits of their case for or against Obama’s policies. I’m sure reading this or other posts on my blog readers can figure out that I come down more on Goolsbee’s side. But I don’t want that to excuse either side purposefully casting the other’s arguments in the most negative light possible. The true test of an argument confronts the strongest case of the opposition not a weak or incomplete case.

(Hennessey’s video via Mankiw)


September 21, 2010 15 comments

You’ve all heard the cliche enough times used in international diplomacy: “All options are on the table.”  Of course, that’s code for the military option or even the nuclear option. Here, I want to use that metaphor to discuss our current debate about tax policy. Since the previous administration and legislature wrote into law that the “Bush tax cuts” must expire, we’re now faced with the predicament that lots of taxes will be raised amidst an anemic economy if something isn’t done, but if we extend them the deficit problem will be even worse. The locus of the debate or, if you will, the options on the table seem to be that we do nothing and let all the tax cuts expire, extend all the tax cuts, extend all but those for the wealthiest taxpayers, or compromise by extending the tax cuts for only 2 years.

The argument for extending all the tax cuts is pretty simple. Raising taxes now during a weak economy is going to make the economy worse, not better. Cato’s Jeff Miron wants to see them extended permanently.

Extending the Bush tax cuts — permanently — is a crucial step in restoring economic growth. The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest.

Alan Viard of AEI likes them all too.

The figure shows the increases that will occur in marginal tax rates at the top income levels if the high-income rate reductions (including the dividend tax cut) expire. Beginning in 2011, the top income-tax bracket for wages and self-employment income, and for ordinary investment income, would revert from 35 to 39.6 percent; wages and self-employment income would continue to face an additional 2.9 percent Medicare tax. The top capital-gains tax rate would revert from 15 to 20 percent. Dividends would lose their current 15 percent tax rate and become taxable as ordinary income, subject to the new 39.6 percent rate. All four categories of income would also face a 1.2 percent stealth-tax-rate increase, from the restoration of a provision that phases out itemized deductions at high income levels. Figure 1

Economists left of center like Paul Krugman think that extending the top-rate tax increases is not worth the $700 billion price tag (sounds hypocritical but it’s well reasoned).

Now, consider first what would happen if we extend the [high-end] tax cuts for the next 10 years. This would add $700 billion to the debt (pdf). If the rich spread their windfall evenly across the decade, that’s $70 billion a year in additional consumer spending — or $140 billion during the period when we need it. So, $700 billion in deficits for $140 billion in stimulus; not a good bargain!

Alternatively, suppose we extend the tax cuts for only 2 years. That’s only $140 billion on the deficit. But the rich, knowing that it’s temporary, won’t spend much of it — if they really operate on a 10-year horizon, they’ll spend only $14 billion a year more, so $28 billion of stimulus when we need it, in return for $140 billion of debt; still a lousy bargain! 

Just for the record, it’s not like the rich wouldn’t get a tax cut under the Democrat’s proposal.

That’s because of how marginal tax rates work. For a good discussion on that go here.

Most famously President Obama’s former OMB director, Peter Orszag wants to extend all the tax cuts for 2 years, then let them all expire.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

In a great piece, Bruce Bartlett explains why the Bush tax cuts were inefficient, of little benefit, and harmful to the debt, but acknowledges that during this recession recovery economy it’s probably best we just extend them. 

Subsequent research by Federal Reserve economists has found little, if any, impact on growth from the 2003 tax cut. The main effect was to raise dividend payouts. But companies cut back on share repurchases by a similar amount, suggesting that only the form of payouts changed. (See herehere, and here.) Moreover, according to a study by Steven Bank of the UCLA law school, the fact that the dividend tax cut was temporary was a key motivation for higher dividend payouts; had the dividend tax cut been permanent, as the supply-siders favored, the impact probably would have been much less.

Maybe the answer is obvious (politics) but I’m not sure why these are the only options on the table. Can’t we extend the table? The nuclear option doesn’t even seem to be an option right now. But now may be the perfect time to blow up the tax code and put a new one in place. Here’s the diplomatic stick for the Administration to use: “Let’s put in a simpler, better tax code or all the tax cuts are going to expire and opponents will be responsible for raising taxes on Americans at the worst possible time.” There’s a carrot too: “You get to support a simple efficient tax code that everyone has long claimed they support.”

I honestly have trouble understanding why we have to extend poorly designed, little bang-for-the-buck tax cuts rather than doing something that could really be a huge boon for the economy. Talk about a game-changer from the Obama Administration! A Democratic administration gets to be the one supporting fundamental and economically productive tax reform while forcing the Republicans (or Democrats), if they vote against it, to be essentially responsible for raising taxes and blocking what a lot of their supporters favor. If Republicans are really worried, rest assured that the tax reform wouldn’t be able to save the economy soon enough to have a dramatic positive effect by the election so the GOP candidates will still have a great chance to pick up a ton of seats – and most likely take the House. Will businesses, conservative intellectuals, and angry tea-partiers (so-called small government types) really be able to support the Republicans ever again if they don’t jump on an opportunity like this?

I’ve long touted a VAT as a potential replacement for our absurd tax code. Many mainstream conservatives have even had good things to say about it assuming it was replacing the tax code, not being added on top of it. Here’s a favorite option of progressive policy wonks – something that might appeal to Obama, that I’d be excited to support: the progressive consumption tax. Maybe the Democrats could even slip in some decent energy policy (that they’ve given up on) by raising energy taxes as part of tax reform. Even a flat tax that conservatives have often pushed for would be better than the status quo. Lots of different and better options have to exist rather than being stuck with tinkering with the Bush tax cuts.

If the problem is just lack of time, I’m not sympathetic – everyone has known since the Bush tax cuts passed that they were going to expire. It seems difficult to imagine a potentially better time to force lawmakers’ hands to simplify the tax code than now. We’re in desperate need of new revenue, the weak economy could strongly benefit from a more efficient tax code, taxes will automatically rise if nothing is done, and sometimes it takes the people you’d least expect to be able to dramatically shift course. Think of Nixon going to China or Clinton with welfare reform. What Republican wants to be outflanked by a “socialist president” on tax reform? President Obama might be able to drag along enough in his own party to support a tax reform that the business community surely must favor.

It seems perverse that such extreme options can be on the table for international relations but are so limited for domestic issues. When it comes to tax policy, I welcome the mushroom cloud.

(h/t to Greg Mankiw)

Mankiw Challenges "Extreme Keynesians"

August 15, 2010 Leave a comment

I don’t think I actually fall into that category, but I’ve been stretching my Keynesian lungs frequently enough on this blog to warrant posting Mankiw’s challenge

University of Chicago economist Casey Mulligan offers a challenge to that view.  Casey points out that there is a regular surge in teenage employment during the summer months because more teenagers are available to work (that is, the supply of their labor has increased).  That is no surprise: It is normal supply and demand in action.  But if aggregate demand were the main constraint on employment, this increase in supply should not translate into higher employment during deep recessions such as this one.  But it does!

I’ll be clear, I think supply and demand still function during recessions and weak economies. I’m not an economist and I don’t pretend to be but this chart doesn’t seem to suggest to me that weak aggregate demand isn’t a problem. Doesn’t increased summer demand partly explain the increased seasonal employment? Also, 2010’s employment numbers run much lower than all the other lines so something different is going on at least at the margins. Mostly though, what this graph doesn’t illustrate is what would happen in seasonal employment without fiscal stimulus. I’d like to see state adjusted data that corresponds to the net stimulus in each state. Mulligan argues that this graph undermines the notion of a liquidity trap and the need for stimuli, but we’re not looking at data that shows an economy behaving normally in the absence of stimuli. Couldn’t I just as easily view this as confirming the success of government intervention breaking the liquidity trap? 

Those are just some of my initial thoughts – I’ll be sure to post some more expert views if I come across them. Mulligan and Mankiw are right that supply still matters and I agree that this graph shows that; I’m just not sure it is any real challenge to Keynesianism. 

We Should Replace Every Grade With Kindergarten, ctd

August 5, 2010 Leave a comment

Judith Harris and Raj Chetty get back to Greg Mankiw on his questions – they also address some of mine.

We Should Replace Every Grade With Kindergarten

David Leonhardt of The New York Times continues to put out great stuff one after the other. This latest piece excited as well as confused me.

Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.


Mr. Chetty and his colleagues — one of whom, Emmanuel Saez, recently won the prize for the top research economist under the age of 40 — estimate that a standout kindergarten teacher is worth about $320,000 a year. That’s the present value of the additional money that a full class of students can expect to earn over their careers. This estimate doesn’t take into account social gains, like better health and less crime. 

This is really exciting news if it is true, but the “not yet peer-reviewed” findings, as Greg Mankiw also wondered about, seem to contradict the evidence that suggests even parents’ actions don’t have much of an effect on children’s adult outcomes. 

Meanwhile Jonah Lehrer argues that preschool and early education programs don’t so much make you more intelligent but do affect our “non-cognative” abilities. 

How does preschool work its magic? Interestingly, the Perry Preschool didn’t lead to a lasting boost in IQ scores. While kids exposed to preschool got an initial bump in general intelligence, this dissipated by second grade. Instead, preschool seemed to improve performance on a variety of “non-cognitive” abilities, such as self-control, persistence and grit. While society has long obsessed over raw smarts – just look at our fixation on IQ scores – Heckman and Cunha argue that these non-cognitive traits are often more important. They note, for instance, that dependability is the trait most valued by employers, while “perseverance, dependability and consistency are the most important predictors of grades in school.” Of course, these valuable skills have little or anything to do with general intelligence. And that’s probably a good thing, since our non-cognitive traits are much more malleable, at least when interventions occur at an early age, than IQ. Preschool might not make us smarter – our intelligence is strongly shaped by our genes – but it can make us a better person, and that’s even more important. (my emphasis)

That helps explain things a little, but I’m still unclear why our parents wouldn’t be able to effect those same abilities. Until that is settled, I still think the public policy implication is obvious: spend more on early education. 

The economists calculate that, for every dollar invested in preschool for at-risk children, society at large reaps somewhere between eight and nine dollars in return. 

More from Leonhardt here.

(image: Robin Hood School, Stoneham, MA.)

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