Category: Economics

Megan McArdle (what do you call her when Jane links to Megan?  And can they have an infinite regress?) and Brad DeLong seem to agree that the Bush tax cuts should not be made permanent.  My take is the following: Taxes already were raised when the government spending occurred.  In that sense the "tax cuts" never were permanent.  But when do we wish to admit this?  We could raise (nominal) tax rates sooner rather than later, and hope that the subsequent "financial calming" effect will improve the chances for better policy in the future.  Alternatively, we could play "chicken" with the marginal tax rates, and hope that holding them lower, for longer, will increase the chance of the appropriate entitlement reforms.  I don’t have any strong views as to which is the best way to proceed, at least assuming we cannot raise the gas tax instead.

But I do suspect that Megan favors a lower rate of government spending than does Brad.  So does this mean she sees the first scenario, and he sees the second, and that they agree on the big question only because they disagree on the little one?

Mahalanobis points us to Ugly Criminals:

Using data from three waves of
Add Health we find that being very attractive reduces a young adult’s (ages
18-26) propensity for criminal activity and being unattractive increases it for
a number of crimes, ranging from burglary to selling drugs. A variety of tests
demonstrate that this result is not because beauty is acting as a proxy for
socio-economic status. Being very attractive is also positively associated with adult
vocabulary test scores, which suggests the possibility that beauty may have an
impact on human capital formation. We demonstrate that, especially for females,
holding constant current beauty, high school beauty (pre-labor market beauty)
has a separate impact on crime, and that high school beauty is correlated with
variables that gauge various aspects of high school experience, such as GPA,
suspension or having being expelled from school, and problems with teachers.
These results suggest two handicaps faced by unattractive individuals. First, a
labor market penalty provides a direct incentive for unattractive individuals
toward criminal activity. Second, the level of beauty in high school has an
effect on criminal propensity 7-8 years later, which seems to be due to the
impact of the level of beauty in high school on human capital formation,
although this second avenue seems to be effective for females only.

"It makes no sense to tax ethanol coming in from friendly countries like Brazil when we do not tax oil imported from countries like Saudi Arabia…"

Or how about:

…Brazil’s experience shows that to successfully copy its example, the U.S. may have to make political choices that U.S. politicians have ducked in the past, including raising gasoline taxes, ending government support for crucial agricultural products such as sugar and corn, and opening protected agricultural markets.

Both are from "How Brazil Broke its Oil Habit," The Wall Street Journal, 6 February 2006, p.A9.

Here it is.  Excerpt:

Germany’s problem, in part, is that it went into the euro at the
wrong exchange rate that overvalued the deutsche mark. So you have a
situation in the eurozone where Ireland has inflation and rapid
expansion while Germany and France have stalled and had the
difficulties of adjusting.

The euro is going to be a
big source of problems, not a source of help. The euro has no
precedent. To the best of my knowledge, there has never been a monetary
union, putting out a fiat currency, composed of independent states.      

Thanks to www.2blowhards.com for the pointer.

Addendum: Here is an interview with Gary Becker, who talks about Friedman, John Nash, Dostoyevsky, and Brokeback Mountain.  Thanks to Freakonomics blog for the pointer.

Long before Larry Summers shocked the elite by suggesting that men and women might be different he signed on to a World Bank memo noting:

"I think the economic logic behind dumping a load of toxic waste in the
lowest wage country is impeccable and we should face up to it."

A number of people suggested that the US was doing just this as lower tariff barriers made it easier to export dirty manufacturing industries and import the goods.  An NBER paper, however, finds no evidence for this effect.  Quoting from the NBER Digest:

Imports overall grew by 318 percent during the period. But according to World Bank data that characterizes industries by their pollution intensity, imports of goods manufactured in highly polluting processes grew at a much slower rate. In other words, just as the U.S. manufacturing sector was growing while simultaneously shifting toward clean industries, the same thing was happening to our imports: they were rising, but the percentage of goods coming from polluting industries was going down. "The cleaner U.S. manufacturing composition is not offset by dirtier imports," the authors write. "Rather, the composition of imports has also become cleaner."

One reason pollution hasn’t been exported may be that the dirtier (older) industries have more political power and have resisted tariff reductions.  The authors find, however, that even if one eliminated all tariffs on manufactured goods pollution would still not be exported.

It’s not that this wouldn’t be a good idea, it’s just that it so happens that poor countries don’t have a comparative advantage in producing the goods that require a lot of pollution.  Of course, if we tax pollution in the United States at higher levels it will make more sense to export it – an interesting dilemma.

Ed Lazear has just been nominated to be Bush’s new CEA head.  Lazear deserves a lengthy, link-rich post, but sadly from northern Mexico he is not going to get it.  Here is a home page.  Here is a speech praising Ed.  Here are his most cited pieces on the web.  A few points of mine:

1. He has pioneered the theory of tournaments with Sherwin Rosen.  The key point is that you should compensate people for their performance relative to their peers (rather than for their absolute performance) only under specialized conditions.  Most importantly, there should be general shocks to labor productivity or your ability to measure labor productivity.  In other words, if you are not sure how good your exam is, or how well you taught the class, grade your students on a curve.  This will help some of your mistakes wash out.  I think of this as his best-known piece, although there is much competition.

2. He has a seminal piece on why law firms are organized as partnerships, and on other "up or out" schemes, including tenure.  Such contracts are sometimes more incentive-compatible.  A firm will always want to cut your wages, if it can get away with it.  But with "up or out," they only want to get rid of you if in fact you stink.  This can lead to greater harmony on both sides of the relationship; you also might invest more specialized human capital in the value of the firm.  Lazear has applied similar insights to issues of mandatory retirement.  Here is an interview with Ed on personnel management.

3. He has argued that piece-rate incentives may boost productivity significantly.

4. His recent work tries to establish the conditions under which The Peter Principle will hold.  He is a famous economist, capable of earning huge sums by consulting, but he has not "cashed in" intellectually.  In his late fifties, he remains at the top of his profession.

5. He headed Bush’s recent tax panel, which produced a remarkably well-reasoned and non-partisan document.  He appears to have rejected supply-side ideas that cuts in income tax rates are self-financing and he has not caught the obsession over a flat tax.

6. He has studied culture and language.  He believes that diverse immigration is better than concentrated immigration from a few locales.  He is quite capable of incorporating behavioral assumptions into economics and moving beyond the simple rational man model.  Nonetheless he sees considerable scope for economic reasoning; here is his piece on economic imperialism.

7. He has argued that unemployment insurance should become more like a loan program.

8. Lazear defends high executive salaries as a means of stimulating competition for the top jobs.  This is an offshoot of his work on tournaments.

9. Here is a summary of his work on how class size affects the quality of education.

10. Here is his recent piece on the efficacy of educational testing, a matter of interest to the Bush Administration.  The bottom line is somewhat complex, read it.

11. Here is his piece on when retail stores dominate auctions.  This is a favorite for those of us who like micro puzzles.

12. A long time ago he wrote this piece on social security and pensions.  Too bad I can’t open it on this old Mexican Adobe Reader.  Maybe a reader can offer its bottom line in the comments section.

The bottom line: Lazear is a superb economist.  I do not know him, but I often hear him spoken of with a more general respect, and not just for his intellect.  The key question is who will be listening… stay tuned, and comments are open in case you have additional remarks on this appointment…

I do not worry much about particular levels of the current account, the dollar, or the measured savings rate per se.  I used to say "deficits do not much matter, and the level at which they would matter will never be reached in the United States."  I do not say this any more, but hey I’ve gotten used to that too.

I pin great hopes on the growth rate.  Furthermore I tend to think that the best forecast of next period’s growth rate is often this period’s growth rate.  That is why I am distressed by recent news of a 1.1 percent quarterly growth rate.  I do not see any way to put a positive or neutral spin on this.  Beware.

For further commentary, check out Macroblog and Brad DeLong.

Dana Rodrik writes:

..what is so special about China’s exports is not that they are voluminous or that its large pool of labor gives it a huge labor cost advantage. What stands out is that China sells products that are associated with a productivity level that is much higher than a country at China’s level of income. This helps account both for why China’s trade is viewed as problematic in advanced countries, and for China’s rapid economic growth.

The economically relevant question for sustainability is not whether trade-GDP can keep on rising, but whether China will manage to latch on to higher- and higher-income products over time, and continue to fuel its growth thereby.

Anyone interested in China should read this paper.  The key question is how the Chinese managed this trick.  My gut suggests two factors: the predominance of joint ventures (the best of foreign technology and management, yet with domestic diffusion of best practices), and the benefits of a very large population.  Your best producers will do wonders for the quality of your best ventures.  I am not persuaded by Rodrik’s praise of Chinese industrial policy.

Thanks to the New Economist blog for the pointer.   They also link to a good discussion of U.S. productivity.

Addendum: Here is a link to some dissenting opinions.

…unless Italy and other Eurozone laggards change their policies to pursue serious economic reforms that restore competitiveness and growth, they will eventually be forced to exit EMU.

Nouriel Roubini, an intermittent blogger, has much more.

Read the debate over at Brad Setser’s weblog.  As a first approximation, I believe a developing country should dollarize if otherwise the rate of price inflation would exceed ten percent.

Here is today’s story from The New York Times.  They say "yes."

By the way, I am at a Liberty Fund conference, enjoying the company of Daniel Drezner, Megan McArdle, Virginia Postrel, Nick Schulz, and Grant McCracken, among others.  The topic is the eighteenth century critique of luxury, and the responses from Adam Smith, David Hume, and Bernard Mandeville.  Tomorrow we consider Bob Frank’s critique of status-seeking.  Hermosillo and brain tacos come Sunday.

Addendum: Here is Hollywood does Freakonomics, starring Will Ferrell, Chris Rock, and Steve Martin.