The Myth of Shovel Ready

Me, January 2009:

People don’t usually spend their money buying things they don’t want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.

The way to avoid this problem is a rigorous cost-benefit analysis of each government project. Such analysis is hard to do quickly, however, especially when vast sums are at stake. But if it is not done quickly, the economic downturn may be over before the stimulus arrives.

President Obama, Now:

In the magazine article, Mr. Obama reflects on his presidency, admitting that he let himself look too much like “the same old tax-and-spend Democrat,” realized too late that “there’s no such thing as shovel-ready projects.”

Barney Frank, Then and Now

A news story from 2003:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

A news story from yesterday:

In a sharp-edged debut debate, US Representative Barney Frank, a Democrat, and Sean Bielat, his Republican challenger, squared off yesterday over national security, illegal immigration, and the roots of the mortgage crisis....

Bielat, a former Marine officer from Brookline, said Frank had contributed to the downfall and subsequent recession by supporting lenient lending standards for prospective home buyers.

“He has long been an advocate for extending homeownership, even to those who couldn’t afford it, regardless of the cost to the American people,’’ said Bielat, 35.

Frank, a leading liberal who has represented the state’s Fourth Congressional District for nearly 30 years and became chairman of the House Financial Services Committee in 2007, said he and other Democrats fought to curb predatory lending practices before the recession but were thwarted by Republicans. He said he had supported efforts to help low-income families rent homes, rather than buy them.

“Low-income home ownership has been a mistake, and I have been a consistent critic of it,’’ said Frank, 70. Republicans, he said, were principally responsible for failing to reform Fannie Mae and Freddie Mac, the mortgage giants the government seized in September 2008.

Response to Queries

My recent Times column generated more email and blogosphere commentary than usual.  While it is impossible for me to answer all the questions raised, I thought it might be useful to address three of the more common ones.

If no one is proposing eliminating taxes, why compare the Obama policy to a world without taxes?  Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources.  It is crucial to know how far we are from that optimum.  To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate.  Thus, increasing or decreasing a tax rate by 1 percentage point has a small effect on economic well-being if the initial tax rate is low, but it has large effect if the initial tax rate is high.  For the margin of adjustment I was discussing (work more now, let your kids consume the proceeds in 30 years) the distortion is very high once all taxes are taken into account.  As a result, every change in this tax wedge has a large impact on the size of the economic pie.

Aren't there ways to avoid some of these taxes, such as IRAs and life insurance trusts?   Yes, and I use such tax avoidance mechanisms to the extent they are legal and practical.  But there are limits to how much they can be used.  Thus, while they lower my average tax rate, they do not affect my marginal tax rate.  That is, for any incremental income, I cannot do more, so I am facing the full tax bite.

Aren't you motivated by more than money?  Of course. I have never suggested that money is my, or anyone's, sole motivation in choosing a lifestyle.  In economic models, we often simplify things by assuming that there are only two activities: work and leisure.  Work has a pecuniary benefit, whereas leisure has a non-pecuniary benefit.  Reality is more complicated.  I face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits.  Absent taxes, I would choose an optimal mix of these activities.  When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits.  Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work."  Blogging, for instance, or writing op-eds that particularly inflame the left-wing blogosphere.

Woodford on Monetary Policy

Mike argues for "catch-up" inflation.

Ec 10 Nobel Trivia

From my inbox:

Professor Mankiw,

I took Ec 10 during my freshman year, 1979-1980. It may not be obvious from his profile, but today’s Nobel Prize winner Chris Pissarides taught my Ec 10 section that year during his one-year visit to Harvard. So tell your current students that the section leader they are struggling to understand through accented English may someday be a Nobel prize winner.

I read your blog and my son’s college class uses your textbook.

Regards,

[name withheld] ‘83

The Nobel Prize

Congratulations to Peter Diamond, Dale Mortensen, and Christopher Pissarides

My Marginal Tax Rate

Click here to read my column in today's New York Times.

Betting on the Nobel

Here.  A few of my Harvard colleagues are supposedly in the running.  Thanks to Tyler Cowen for the pointer.

Also, by the way, here is a shot from a recent episode of The Simpsons, sent in by a reader:

Update: More prognostication from Northwestern and Chicago and Harvard.

Rogoff on Gold

Ken looks at its soaring price.

Harvard Undergrads, Real and Imagined

I saw The Social Network over the week.  Like every reviewer, I enjoyed it.  In style and tone, it reminded me of Shattered Glass, another excellent docudrama, but one that received much less attention when it came out.

There was one thing that bothered me about the movie, however.  Every Harvard undergrad portrayed in the film was a pompous snob, an annoying social climber, or an antisocial nerd (or some combination of the three).  In short, they were all unlikable. The only really likable student in the movie was a character named Erica Albright, who apparently was attending BU.

After teaching at Harvard for 25 years, I can report that this depiction does not ring true to me.  Most Harvard undergrads are in fact quite likable.  If they were as unpleasant as the film made out, I would have left here long ago. It made me wonder about the veracity of the movie more generally.

Addendum: A former Harvard student informs me that Eduardo Saverin, one of Facebook's cofounders and a major character in the film, was not only a Harvard economics major but also an ec 10 unit test grader.

The Debate over Fiscal Adjustment

1. The IMF and the Economist take on Alesina and Ardagna.
2. My Harvard colleague Alberto Alesina responds.

Jack of All Trades

The Latest from the Standup Economist

Economic Education Video Competition

Sponsored by the St. Louis Fed.  For college students.

New NRC Rankings

The National Research Council has released updated rankings of PhD graduate programs.   You can find the ranking of economics departments here.

Bill Clinton channels Friedrich Hayek

Friedrich Hayek, The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Bill Clinton, 9/21: "Do you know how many political and economic decisions are made in this world by people who don't know what in the living daylights they are talking about?"

HT: Newmark's Door.

The Harvard Nobel Prize Pool

is up and running.

A New Approach to Intermediate Macroeconomics

I have a new intermediate macroeconomics textbook coming out.  Coauthored with my old friend Larry Ball, it is aimed at those instructors who want to include more material on the financial system than is traditional in macro courses.  Click here for more information, and click here to read a sample chapter.

The book is being printed now and will be available for next semester's classes.

Best Congressional Testimony Ever

Smart Athletes

A reader points out to me that Sporting News has named the 20 smartest athletes in sports. Two of them are graduates of the Harvard economics department.

Me on All Things Considered

Larry and Harvard

A reader asks the following about Larry Summers:

The media is saying that Larry is leaving the White House in part because his leave from Harvard is almost up and if he stayed away longer, he'd have to reapply for tenure. From your own experience, is that probably true? I thought universities routinely relaxed such policies for star academics like you and Larry. Also, how prestigious is it to be a university professor?

Different universities have different policies regarding faculty leave for policy jobs, and different degrees of enforcement. Harvard allows two years of leave, and it has the reputation of enforcing the rule rather strictly. I can imagine that Larry could have negotiated an extra semester of leave, but I would have been surprised if the university had extended his leave much beyond that. (FYI, I left my CEA job in February 2005 after being in Washington for precisely two years.)

Also, being a university professor is quite a good deal.  Top pay with maximum flexibility regarding teaching etc.  As I understand it, you do pretty much whatever you want.

Would Larry have been rehired by Harvard if he resigned and stayed another couple of years in Washington?  Unclear.  The pro case for rehiring would be that Larry is one of the smartest guys around and has a great deal of fascinating experience to share with students.  The con case would be that he has been out of the academic research game for quite a while and that in a time of reduced financial resources, faculty slots should be devoted to younger scholars rather than potentially extinct volcanoes.  Ironically, if Larry were on the faculty voting on this matter, the con case is the kind of argument he might have made.

So, while I am sure that Larry's decision had various inputs, Harvard's leave policy was very plausibly one of them.

I can also say that ec 10 students will likely be among the beneficiaries of Larry's return.  Larry was a regular guest lecturer in the course, and his lectures were always well received.   He does a great job illustrating the connections between economic theory and economic reality.