A Reading for the Pigou Club

From the National Journal.

Hyperinflation in Hell

Allocating Inauguration Tickets

Here is a good topic for class discussion.

Background: The Congress allocates free tickets to the presidential inauguration, often by lottery.  Some winners of the lottery try to sell them for thousands of dollars.  Senator Schumer objects to the resale.

Question 1: When David,  a lottery winner, sells his ticket to Anne, both David and Anne are better off.  Who is worse off?

Question 2: Senator Taxcut proposes auctioning off the tickets and rebating the revenue lumpsum to all taxpayers.  Who would be better off?  Who would be worse off?  Which group is larger?

Question 3: Senator Deficithawk proposes auctioning off the tickets from the get-go to reduce the national debt.  What are the pros and cons of that proposal?

The Gains from Trade

A story of how a model employee outsourced his own job.

A Comic on GDP Accounting

A friend recommends this comic as a way to motivate a class discussion of GDP.

Very Quick Reviews

My older son and I saw Zero Dark Thirty over the weekend.  Great movie.  On par with Argo.  Much better than Lincoln, which seems to be the Oscar favorite.

By the way, I have heard that the revival of Pippin I saw and loved is moving to New York after its Boston run is over.  Highly recommended.

A Reading for the Pigou Club

And also about the Pigou Club, from the NY Times.

How much are your taxes going up?

The Tax Policy Center has a calculator to answer that question.

ASSA Humor Session

Many of the world's professional economists are spending the next few days in San Diego for the annual ASSA meeting, where economists network, get some publicity for themselves, and learn what other economists are up to. I am skipping this year's meeting to spend more time with family.  You might think that is lazy of me.  But heck, my marginal tax rate just went up.  A bit of extra laziness is optimal.

If I were there, one event I would certainly attend is the annual humor session.  Here is some information about it, in case you are interested:  It is 8 pm on Saturday January 5 in the Manchester Foyer of the Manchester Grand Hyatt. Unlike most of the sessions at the meeting, the humor session is free and open to the public. And best of all: the benefit of attending is entirely nonpecuniary, so it won't be reduced by the new higher tax rates!

The Dearth of Bestselling Economists

Last October, Amazon introduced a new feature: a list of bestselling authors, aggregating across all books an author has written. Here is the list of the top 100 authors.

For an economist, perusing the list is a humbling experience. As far as I can tell, not a single member of our profession made the list.  I wonder whether Galbriath might have made it in his day, as he had written a large number of books accessible to general audiences. But these days, not a single one of us has wide enough readership to make it onto the list. The next time you are tempted to lament the sad state of the public discussion of economic policy, remember that we economists are probably not doing enough to educate the public. We just don't write things that people want to read.

If you want to know what economists come closest, you can look at this list of bestselling authors in business and investment, a category that includes economics. Several of us make this less selective list.

Tax Progressivity: Update

Here are the effective federal tax rates (total taxes as a percentage of income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9

Top 0.1 percent: 39.6

Anne Pringle

All ec 10 students know David Johnson, the course's charismatic head teaching fellow.  What they likely do not know is that David's lovely wife, Anne Pringle, is also on the Harvard faculty.  Today's NY Times has an article about Anne and her research.

President rejects his bipartisan commission

The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to rein in spending and that increased tax revenue should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would look like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.

The Neverending Quest for a More Redistributionist Tax System

I just listened to President Obama's latest remarks on fiscal policy.  This passage caught my attention:

I want to make clear that any agreement we have to deal with these automatic spending cuts that are being threatened for next month, those also have to be balanced, because, remember, my principle always has been let’s do things in a balanced, responsible way. And that means the revenues have to be part of the equation in turning off the sequester and eliminating these automatic spending cuts, as well as spending cuts.

Now, the same is true for any future deficit agreement. Obviously we’re going to have to do more to reduce our debt and our deficit. I’m willing to do more, but it’s going to have to be balanced. We’re going to have do it in a balanced responsible way.

For example, I’m willing to reduce our government’s Medicare bills by finding new ways to reduce the cost of health care in this country. That’s something that we all should agree on. We want to make sure that Medicare is there for future generations. But the current trajectory of health care costs has gone up so high, we’ve got to find ways to make sure that it’s sustainable.

But that kind of reform has to go hand and hand with doing some more work to reform our tax code, so that wealthy individuals, the biggest corporations, can’t take advantage of loopholes and deductions that aren’t available to most of the folks standing up here; aren’t available to most Americans.

So there is still more work to be done in the tax code to make it fair, even as we’re also looking at how we can strengthen something like Medicare.

Translation: The deal we are about to strike will raise taxes on the rich. But the fiscal imbalances we face will remain unsustainably large.  So I will ask for more tax increases on the rich later.

Maybe the Rs and Ds are both wrong

Click here to read my column in Sunday's NY Times.

Fiscal Cliff Rock

Theater Recommendation

For those in the Boston area: Yesterday, my family and I enjoyed one of our Christmas presents from Santa and went to the new production of the musical Pippin at the American Repertory Theater in Cambridge. I recall seeing the original Broadway production in the 1970s when I was in high school and liking the play then. I went to see it yesterday with a bit of trepidation, wondering whether my sensibilities had changed too much over the past four decades for me to still enjoy it. But the play did not disappoint, not even one bit. This new production is absolutely terrific: great acting, music, dancing, and even acrobatics. Everyone had a blast, from my teenage sons to my 85-year-old mother.

The play's run lasts until January 20. Go see it if you can.

Glaeser on Disability

Ed considers what might be behind this fact:

Thirty years ago, there was a 40-to-1 ratio between the total labor force and those workers receiving Social Security disability payments. Today that ratio is less than 18-to-1.

A Reading for Christmas

My favorite Christmas-themed economics article is this one by Steve Landsburg. From 2004, but truly timeless.

A Krugman Puzzler

I often disagree with Paul Krugman, but I usually understand him.  Lately, however, I have been puzzled about his view of the bond market.  In a recent post, he takes President Obama to task for believing that the failure to deal with our long-term fiscal imbalance might cause a spike in interest rates:

America can’t run out of cash (except politically, if Congress refuses to raise the debt ceiling); it basically can’t experience an interest rate spike unless people see an increased chance of economic recovery and hence a rise in short-term rates. And the people who have been predicting an interest rate spike any day now for four years shouldn’t have any credibility at this point.

But back in 2003, when the fiscal imbalance was much smaller, he wrote:

With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.... 

How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. 

And as that temptation becomes obvious, interest rates will soar. It won't happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future. 

I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared -- the ultra-establishment Committee for Economic Development now warns that ''a fiscal crisis threatens our future standard of living'' -- investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions -- and I've locked in my rate.

I am having trouble reconciling these points of views.  Has Paul changed his mind since 2003 about how the bond market works?  Or are circumstances different now?  If anything, I would have thought that the fiscal situation is more dire now and so the logic from 2003 would apply with more force.  I am puzzled.

Update: Several people have emailed me possible resolutions of the puzzle, but none is really satisfying.

One group of emailers says that things are different now because we are in a liquidity trap.  But back in 2003 the federal funds rate was at about 1 percent, so we were very close to the zero lower bound.

Another group of emailers says that Paul has admitted that his 2003 forecast was mistaken.  But that is not the issue.  Of course, we can look back and say it was mistaken.  No big deal.  Any economist who has ever made a forecast has made some mistaken forecasts.  The puzzle to me is how Paul can act so certain that the outcome he viewed as likely in 2003 is now beyond the realm of the plausible, even though the fiscal imbalances are much larger.

By the way, my column coming out in Sunday's NY Times touches on these issues, which is why the puzzle came to mind.

Russ Roberts talks with John Taylor

Previous installments are here.

A Cartoon for the Pigou Club

Asness on Buffett

Warren may be a great investor, but he really doesn't cut it as a policy wonk.

A New Way to Reduce Our National Debt

Sell Alaska.

Feldstein on the Fiscal Cliff

Marty offers his recommendation.