A Faculty Meeting at U Michigan

A Conference for Undergrads

In international economics.

On SOPA

Several readers have asked me my opinion of SOPA, the Stop Online Piracy Act.  I fear that in this case, the devil is in the details, so I find it hard to reach a strong view.  But I have been disturbed by the relatively knee-jerk reaction of the anti-SOPA crowd.  This is a hard issue, and when someone makes it sound easy, I feel like they haven't thought it through very thoroughly.

The anti-SOPA crowd argues that this is a matter of basic liberty.  But it's not.  In a free society, you don't have the freedom to steal your neighbor's property.  And that should include intellectual property.  Moreover, it is the function of the state to enforce those rights.  We don't leave it up to civil litigation to protect property rights (although that is part of the solution).  We give the state substantial powers to stop theft.  Just as owners of tangible personal property have good cause to call for a police force and a system of criminal courts, owners of intellectual property have good cause to ask the state to stop those who would infringe on their rights.

This is an important economic issue for the United States.  We are large producers of intellectual property: movies, novels, software, video games, TV shows, and even economics textbooks.  If offshore websites find a way to distribute this intellectual property without paying for it, it is as if organized crime were stealing merchandise from a manufacturing firm at the loading dock.  It is neither efficient nor equitable. 

Maybe SOPA goes too far.  As I said, I am not knowledgeable enough about the details to judge.  But we need something along these lines.  Believers in free enterprise, property rights, and economic liberty should be among the most vocal advocates of laws to stop intellectual piracy.

Five Observations about Progressivity

There has been a lot of discussion recently about tax progressivity.  A few observations on the topic:

1. The U.S. personal income tax is generally progressive, and substantially so.  Click here to see the numbers.  The average tax rate for tax returns with over $1 million in income is 25 percent.  The average tax rate for returns with income between $50,000 and $75,000 is 7 percent.

2. It is arguably better to use an average tax rate that is all-inclusive.  That is, we should include not only personal income taxes but also payroll and corporate income taxes.  CBO analysts regularly do that.  They find a substantially progressive tax system, as I have pointed out before.

3. If we added transfer payments (which are essentially negative taxes), we would find an even more progressive fiscal system.  Those data are harder to come by, as data on transfers are rarely integrated with data on taxes.

4. It make little sense to aggregate payroll taxes with personal income taxes and ignore corporate income taxes.  A corollary: Paul Krugman should be more careful when reproducing graphs from partisan think tanks.

5. All of these calculations are static.  They ignore the general-equilibrium effects that arise as the true burden of taxation is shifted by behavioral responses.  In essence, these calculations are made under the implicit assumption that factors of production are supplied inelastically, so the tax stays where legislators put it.  Of course, that assumption is implausible, especially in the long run.  True general-equilibrium tax incidence is very hard, and as far as I know, reliable estimates on it are not readily available.

----
Update: Oddly, rather than admitting an oversight, Paul Krugman continues with the same misleading claims in his column in Friday's paper.  Even more oddly, at his blog, he uses the tax-shift argument (my point 5 above) to justify the exclusion of the corporate tax.  Of course, tax shifting because of behavioral responses applies to all taxes, not just corporate taxes.  The implication of tax-shifting is not that one should just ignore corporate taxes, as Paul chooses to do, but rather that all static analyses of the distribution of the tax burden should be taken with a grain or two of salt.

Should I put this award on my CV?

Peter Wirzbicki reports:

I just got back from Chicago, where, along with attending the American Historical Association, I participated in a series of protests held by Occupy Chicago, along with CACHE (Coalition Against Corporatization of Higher Education) that targeted the American Economics Association (AEA). It's not everyday that the worlds of street protests and academic conferences blend so well. But then again, part of the point was to “puncture the bubble” that academic economists live in.

The protesters gave out “alternative” awards for Most Conflict of Interests (Columbia’s Glenn Hubbard), Intellectual Narrowness (Harvard’s Greg Mankiw), and top prize, the “Toxic Waste of Space Award” (Harvard/Obama administration’s Larry Summers). Other than a brief yelling match that one protester got in with a professor, the tone was light and fun. Protesters “accepted” awards acting as Mankiw, Hubbard, and Summers (who reminded us how much smarter he was than us) and served “Rahmon” noodles, in honor of the Chicagoans impoverished by Rahm Emmanuel’s neoliberal policies. Overall a lot of fun, albeit fun that might have gone over the heads of the random shoppers on Michigan Ave.

Home for the Holidays

From a University of Minnesota graduate student:

Sad News

Michael Mussa has passed away. 

The Strategic Bequest Motive

A user of my intermediate macro text writes to me:

I always teach the strategic bequest motive in intermediate macro, mostly because it gets the students to think more deeply about why people save. While I have never really thought that strategic bequests are an important determinant of savings behavior, this story in today's NY Times moved my priors somewhat.

If you don't recall what the strategic bequest motive is, you can look it up in my text, or read the original research at this link.

The Santorum Tax Plan

As seen by economist Kevin Hassett.

Dear Student

A letter from econ prof Art Carden to students everywhere.

Judging Presidents

Ezra Klein polls CEA chairs.

The Liquidity Trap may soon be over

About a decade ago, I wrote a paper on monetary policy in the 1990s (published in this book). I estimated the following simple formula for setting the federal funds rate:

Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment).

Here "core inflation" is the CPI inflation rate over the previous 12 months excluding food and energy, and "unemployment" is the seasonally-adjusted unemployment rate. The parameters in this formula were chosen to offer the best fit for data from the 1990s.  You can think of this equation as a version of a Taylor rule.

Eddy Elfenbein has recently replotted this equation.  Here it is:

The interest rate recommended by the equation is the blue line, and the actual rate from the Fed is the red line.

Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession.  Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going.  But note that the rule is now moving back toward zero.  As Eddy points out, "At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close."

How much are new econ PhDs paid?

The results of a survey:

Responses from 90 institutions indicate that the average expected salary offer for the 2011-12 academic year is $89,155.... The average expected offer by Ph.D. degree granting institutions [is] $99,269.... The Top 30 institutions in the sample report an average expected offer of $115,000.... Bachelor and Master degree granting institutions report an expected offer of $74,520.

How to Reduce Traffic Congestion

The price system, of course.  New evidence from Seattle:

New tolls on the Highway 520 bridge have reduced traffic so much that drivers are commonly traveling at 65 mph, maybe three times as fast as they're used to.

Pigovian taxes save lives

New research via the NBER:

On January 1, 1991, the federal excise tax on beer doubled, and the tax rates on wine and liquor increased as well. These changes are larger than the typical state-level changes that have been used to study the effect of price on alcohol abuse and its consequences. In this paper, we develop a method to estimate some important effects of those large 1991 changes, exploiting the interstate differences in alcohol consumption. We demonstrate that the relative importance of drinking in traffic fatalities is closely tied to per capita alcohol consumption across states. As a result, we expect that the proportional effects of the federal tax increase on traffic fatalities would be positively correlated with per capita consumption. We demonstrate that this is indeed the case, and infer estimates of the price elasticity and lives saved in each state. We repeat this exercise for other injury-fatality rates, and for nine categories of crime. For each outcome, the estimated effect of the tax increase is negatively related to average consumption, and that relationship is highly significant for the overall injury death rate, the violent crime rate, and the property crime rate. A conservative estimate is that the federal tax reduced injury deaths by 4.7%, or almost 7,000, in 1991.

A Few Days in the Windy City

This afternoon I will heading off to Chicago, to the annual meeting of the American Economic Association.  I am scheduled for various private events while there, but I am also speaking in one public session.  For those who are attending the meeting and might be interested, here are the details:

Friday, January 06, 2012 10:15 am
Hyatt Regency, Grand Ballroom CD North

Short-Term and Long-Term Consequences of Tax Reform (Panel Discussion)

Alan Auerbach (University of California-Berkeley)
Gregory Mankiw (Harvard University)
James Poterba (Massachusetts Institute of Technology)
Joel Slemrod (University of Michigan)

De Gustibus non est Taxandum

Bryan Caplan quotes a passage from  Daniel Kahneman's Thinking, Fast and Slow (which I have not read, but plan to):

A large-scale study of the impact of higher education... revealed striking evidence of the lifelong effects of the goals that young people set for themselves. The relevant data were drawn from questionnaires collected in 1995-1997 from approximately 12,000 people who had started their higher education in elite schools in 1976. When they were 17 or 18, the participants had filled out a questionnaire in which they rated the goal of "being very well-off financially" on a 4-point scale ranging from "not important" to "essential."...

Goals make a large difference. Nineteen years after they stated their financial aspirations, many of the people who wanted a high income had achieved it. Among the 597 physicians and other medical professionals in the sample, for example, each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!

In other words, one reason that people differ in their incomes is that some people care more about having a high income than others. To put it in geekspeak, preferences over pecuniary goods (say, consumption) and nonpecuniary goods (say, leisure) are heterogeneous. Bryan goes on to suggest that to the extent this is true, it weakens the case for income redistribution.

He is absolutely right.  Most of the literature on optimal taxation and redistribution, following Mirrlees, assumes homogeneous preferences.  But Matthew Weinzierl has a recent paper on preference heterogeneity, which shows " to the extent that variation in income is due to preference differences rather than productivity differences, the optimal extent of redistribution is lower, and the neglect of preference heterogeneity biases the results of conventional optimal tax analyses in favor of redistribution of income."

By the way, the title of this post is taken from the Weinzierl paper.

The Reincarnation of Keynesian Economics

The title of this post is the title of a short, relatively obscure paper I wrote twenty years ago.  Here is the working paper version; here is the published (gated) version.  To my surprise, Paul Krugman cites it over at his blog, but Scott Sumner wonders whether Paul really read it.  In any event, it is delightful to see someone remember such an old paper.

Things I did not say

One of the odd things about the blogosphere is that I often find myself being surprised by positions that are attributed to me.  For example, Matthew Yglesias says:

Many proponents of low taxes on high-income individuals are "supply-siders" who claim that such a tax policy will maximize overall welfare. But other proponents of low taxes on high-income individuals such as Greg Mankiw deny that this is the relevant consideration, and simply say that progressive taxation is immoral.

If you follow the link that Mr Yglesias gives here, you will find it is to my paper "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber." Does this paper say that progressive taxation is immoral? No. In fact, while advocating what I call a "Just Deserts" approach to taxation, it says the following:

Public goods and Pigovian subsidies lead naturally to a tax system in which higher income individuals pay more in taxes. Surely, those with higher income and greater property benefit more from a governmental system that protects property rights. Moreover, the monetary value attached to other public goods (such as parks and playgrounds) and to positive-externality activities (such as basic research) very likely rises with income as well. Indeed, if the income elasticity of demand for these services exceeds one, as is plausible, a progressive tax system is perfectly consistent with the Just Deserts Theory.

What about transfer payments to the poor? These can be justified along similar lines. As long as people care about others to some degree, antipoverty programs are a type of public good. [Thurow 1971] That is, under this view, the government provides for the poor not simply because their marginal utility is high but because we have interdependent utility functions. Put differently, we would all like to alleviate poverty. But because we would prefer to have someone else pick up the tab, private charity can’t do the job. Government-run antipoverty programs solve the free-rider problem among the altruistic well-to-do.

Does that sound like someone who believes that progressive taxation is immoral?

Economics Humor

Yoram Bauman (the economist, translator, and cartoonist) tells me that the 4th annual AEA humor session is coming up.  It's Saturday January 7, 8 pm, Hyatt Regency Chicago, room Crystal B, free and open to the public.

Unfortunately, I will miss it, but I am sure it will be much fun.