McCain vs Obama: NAFTA

It is almost surreal that what should be hailed as an example of bipartisan success in trade policy has instead become a significant campaign issue. Here are two new stories.

First, news from team Obama:

Obama campaign mum on NAFTA contact with Canada

Despite repeated requests, Barack Obama's campaign is still neither verifying nor denying a CTV report that a senior member of the team made contact with the Canadian government -- via the Chicago consulate general -- regarding comments Obama made about NAFTA....

On Wednesday, CTV reported that a senior member of Obama's campaign called the Canadian government within the last month -- saying that when Senator Obama talks about opting out of the free trade deal, the Canadian government shouldn't worry. The operative said it was just campaign rhetoric not to be taken seriously.

The Obama campaign told CTV late Thursday night that no message was passed to the Canadian government that suggests that Obama does not mean what he says about opting out of NAFTA if it is not renegotiated.

However, the Obama camp did not respond to repeated questions from CTV on reports that a conversation on this matter was held between Obama's senior economic adviser -- Austan Goolsbee -- and the Canadian Consulate General in Chicago.

Earlier Thursday, the Obama campaign insisted that no conversations have taken place with any of its senior ranks and representatives of the Canadian government on the NAFTA issue. On Thursday night, CTV spoke with Goolsbee, but he refused to say whether he had such a conversation with the Canadian government office in Chicago. He also said he has been told to direct any questions to the campaign headquarters.

Meanwhile, there is less confusing news from the McCain camp:

McCain affirms support for NAFTA

Penny Anti

The AP reports:

Asked Friday whether he thought the penny should be eliminated, [Treasury Secretary Henry] Paulson agreed that it would make sense.

Yes, it would.

Two strikes and I'm out of here

A new paper by Radha Iyengar on three-strikes-and-you're-out sentencing in California shows that crminals respond to incentives, sometimes in unintended ways:

I estimate that Three Strikes reduced participation in criminal activity by 20 percent for second-strike eligible offenders and a 28 percent decline for third-strike eligible offenders. However, I find two unintended consequences of the law. First, because Three Strikes flattened the penalty gradient with respect to severity, criminals were more likely to commit more violent crimes. Among third-strike eligible offenders, the probability of committing violent crimes increased by 9 percentage points. Second, because California's law was more harsh than the laws of other nearby states, Three Strikes had a "beggar-thy-neighbor" effect increasing the migration of criminals with second and third-strike eligibility to commit crimes in neighboring states.

The Audacity of Fear

The Economist looks at the recent rise of populism.

Quick Quiz: Middle Class Taxes

Question: How does the tax burden the middle class faces today compare with the tax burden the middle class has faced historically?

Answer: Click here and scroll down to see the chart. (N.B.: This includes all federal taxes, not just income taxes.)

Don't believe it? Check out the data source yourself.

Miron on Drug Legalization

Here is an old talk, recently posted on YouTube, by my friend and Harvard colleague Jeff Miron. (Jeff teaches ec 1010a, the intermediate micro course most Harvard econ students take after ec 10.) The topic is still relevant, as evidenced by today's news that the number of Americans in prison has reached a record high.

Our neighbors are not happy

The FT reports:

Candidates rebuked for attacks on Nafta

Mexico and Canada on Wednesday voiced concern about calls by Barack Obama and Hillary Clinton to renegotiate the North American Free Trade Agreement, as the Democratic presidential hopefuls compete to adopt the most sceptical stance towards free trade ahead of next week’s Ohio primary election.

In a televised debate on Tuesday night, Mr Obama and Mrs Clinton both threatened to pull out of Nafta if elected president unless Canada and Mexico agreed to strengthen labour and environmental standards.

Arturo Sarukhan, Mexico’s ambassador to the US, told the Financial Times that the US, Canada and Mexico had all benefited from Nafta and warned against reopening
negotiations.

“Mexico does not support reopening Nafta,” he said. “It would be like throwing a monkey wrench into the engine of North American competitiveness.”

Mexican diplomats believe a renegotiation could resurrect the commercial disputes and barriers to trade that the agreement itself was designed to overcome.

Tufts prof Daniel Drezner comments:

Democrats cannot simultaneously talk about improving America's standing abroad while acting like a belligerent unilateralist when it comes to trade policy.

Update: Related news:

[Canadian] Federal Trade Minister David Emerson hinted that if the North American Trade Agreement were to be revisited, a provision giving United States priority access to Canadian oil would be on the table.

Emerson declined to shrug off the anti-NAFTA talk by two Democratic presidential candidates as political posturing in a U.S. election year.

Outside Parliament on Wednesday, Emerson said: "There's no doubt if NAFTA were to be reopened, we would want to have our list of priorities," and hinted that U.S. access to Canadian oil could be one of them.

Meltzer on Bernanke

Allan Meltzer, the eminent economist and monetary historian, thinks the Fed is repeating the mistakes of the 1970s.

Who should I root for?

If Mike Moffatt fails to get back into shape, economics education will improve by $100. Details here.

"reactionary, populist, xenophobic and just plain silly"

That's how economists Willem Buiter and Anne Sibert describe the Patriot Employer Act .

The Dreaded S Word

Robert Samuelson on Stagflation:

no politician acknowledges the self-evident implication: that recessions, though unwanted and hurtful to many, are not just inevitable; sometimes they're also necessary to prevent the larger and longer-lasting harm that would result from resurgent inflation. Interestingly, many academic and business economists who have more freedom to speak their minds suffer the same deficiency. They treat every potential recession as a policy failure when it is often simply part of the business cycle. They thus contribute to a political climate that, focused on avoiding or minimizing any recession, may perversely aggravate inflation and lead to much harsher recessions later....

Unfortunately, the Fed shows signs of overreacting to these pressures and repeating the great blunder of the 1970s. Underestimating inflation then, the Fed repeatedly shoved out too much money and credit in a vain effort to keep the economy near "full employment." Now, switch to the present. Again, the Fed has underestimated inflation.

McCain vs Obama: Ethanol

David Brooks reports:

In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.

FYI, here is Paul Krugman on ethanol:

Bad for the economy, bad for consumers, bad for the planet — what’s not to love?

Will the real Obamanomics please stand up?

The New Republic reports that Barack Obama has surprisingly non-ideological policy shop.

Absolutely true. But I doubt any of those excellent economists in the policy shop would be willing to defend the anti-NAFTA, anti-Walmart rhetoric of their candidate.

The Larry Summers Anti-Foreclosure Plan

In two easy (well, not so easy) steps:

First, remarkably, bankruptcy laws currently provide that almost every form of property (including business property, vacation homes and those owned for rental) except an individual’s principal residence cannot be repossessed if an individual has a suitable court-approved bankruptcy plan. The rationale is the prevention of costly and inefficient liquidations. It is hard to see why similar protections should not be prudently extended to family homes....

Second, methods need to be found to enable creditors who accept a writedown in the value of their claims to retain an interest in the future appreciation of the homes on which they have mortgages. This is standard practice in situations of corporate distress, where debt claims are partially replaced by equity claims.

Source.

The best sentence...

...I have read so far today is from Brian Hollar:

I was talking with a professor here at GMU and another PhD student recently and all three of us agreed that after earning all the advanced degrees, nearly everything you ultimately use in economics, you learn in Mankiw.

Party, Party, Party!

Today, Feb 25, 2008, 3:00 pm - 5:00 pm, Littauer Center, 3rd Floor Lounge.

Book party for the release of Stephen A. Marglin's book The Dismal Science: How Thinking Like an Economist Undermines Community.

Prof. Stephen Marglin will perform a reading and lead a discussion. Refreshments to follow.

Who is #1?

A new Gallup poll:

"Which one of the following do you think is the leading economic power in the world today?"

China: 40 percent
The United States: 33 percent
Japan: 13 percent
The European Union: 7 percent
India: 2 percent
Russia: 2 percent

By contrast, check out this GDP ranking (or, if you prefer, the PPP-adjusted ranking).

Sunday Reads

• Larry Kotlikoff says Dems should love the FairTax.
• Alan Blinder says the Feds should enter the mortgage business.

Should the rich get better health care?

This anecdote from the United Kingdom is the tip of a looming iceberg:

Debbie Hirst’s...breast cancer had metastasized, and the health service would not provide her with Avastin, a drug that is widely used in the United States and Europe to keep such cancers at bay. So, with her oncologist’s support, she decided last year to try to pay the $120,000 cost herself, while continuing with the rest of her publicly financed treatment.

By December, she had raised $20,000 and was preparing to sell her house to raise more. But then the government, which had tacitly allowed such arrangements before, put its foot down. Mrs. Hirst heard the news from her doctor.

“He looked at me and said: ‘I’m so sorry, Debbie. I’ve had my wrists slapped from the people upstairs, and I can no longer offer you that service,’ ” Mrs. Hirst said in an interview.

“I said, ‘Where does that leave me?’ He said, ‘If you pay for Avastin, you’ll have to pay for everything’ ” — in other words, for all her cancer treatment, far more than she could afford.

Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.

This kind of situation is likely to arise more over time. Technological advance is making state-of-the-art health care increasingly expensive. In any kind of national health system, some treatments will, by simple cost-benefit calculation, be deemed too expensive to provide to all citizens. But does that mean those of above-average income should be excluded as well? Should they lose basic benefits if they choose to pay for these marginal services with their own money?

If you say yes to this last question, as the U.K. health service has, here is a related one: Should a parent who hires an after-school tutor for his child be barred from sending the child to the public schools?

Some people like to think of health care and education of basic human rights. Maybe they are. But they are also normal goods. That is, the income elasticity of demand is positive. It is hard to escape the conclusion that the right cost-benefit calculation for providing the good depends on the income of the consumer.

Achieving both efficiency and equality in the provision of these goods is impossible. Dealing with this conflict will provide a major challenge to the political system in the years to come.

What I've been reading

Barack Obama's The Audacity of Hope. It is fun, smart, and well written.

The most surprisingly honest sentence so far (page 156):

the conservative revolution that Reagan helped usher in gained traction because Reagan's central insight--that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing the pie--contained a good deal of truth.

The sloppiest sentence so far (page 146):

Over the past decade, we've seen...hefty corporate profits, but a shrinking share of those profits going to workers.

I am pretty sure that the share of profits going to workers has been stable--at zero. Profits are what owners get to keep after workers have been paid.

The Age of Milton Friedman

Andrei Shleifer's new paper begins as follows:

The last quarter century has witnessed remarkable progress of mankind. The world’s per capita inflation-adjusted income rose from $5400 in 1980 to $8500 in 2005.Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just asfast. Compared to 1980, many more countries in the world are democratic today.

The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.

The Next President: NBER Edition

P(Poterba) = 1.0.

A great choice.

The Next President: Update

From the market at Intrade, here are the probabilities as of this morning (2/20/08):

P(Obama) = 0.54
P(McCain) = 0.35
P(Clinton) = 0.11

Pigou Club News

Several Canadian readers have alerted me to some advances up north:

Finance Minister Carole Taylor introduced an escalating carbon tax on most fossil fuels Tuesday, one she says is designed to ignite an environmental social movement in British Columbia and across Canada to fight climate change....

Ms. Taylor said the carbon tax will be revenue neutral, meaning the government will not use money generated from the tax to fill its coffers. The carbon tax revenue, estimated to hit $1.8-billion over three years, will be returned to taxpayers through personal income tax and business tax cuts, she said.

Thinking Alike

A conversation I had with a student last week went something like this:

Student: Professor Mankiw, if you could recommend just one book, what book would it be?

Me: Am I allowed to recommend my favorite textbook?

Student: No. Textbooks are disallowed.

Me: In that case, I'll suggest Milton Friedman's Capitalism and Freedom.

Student: That's funny. That's the same answer I got when I asked this question of Professor Summers.

True Words

From Tyler Cowen:

Democracy is reasonably good at some things: pushing scoundrels out of office, checking their worst excesses by requiring openness, and simply giving large numbers of people the feeling of having a voice. Democracy is not nearly as good at others: holding politicians accountable for their economic promises or translating the preferences of intellectuals into public policy.

THAT might sound pessimistic, but it’s not. Many Americans will be living longer, finding new sources of learning and recreation, creating more rewarding jobs, striking up new loves and friendships, and, yes, earning more money. Just don’t expect most of these gains to come out of the voting booth or, for that matter, Washington.

The Dems dis NAFTA

Both candidates in the Democratic primary have turned their backs on one of Bill Clinton's major accomplishments.

First, here is Barack Obama in Wisconsin yesterday, speaking of his opponent Hillary Clinton:

"Her supporting NAFTA didn't give jobs to the American people."

Hillary's defense:

"I was not in the Senate at the time. I did not have a vote. I find his argument to be quite tortured. I have been a vocal critic of NAFTA starting in my campaign for the Senate in 1999."