Greg Mankiw's Blog

From one perspective, Friedman was the star pupil of, successor to, and completer of Keynes’s work.

This paper presents a model in which price setting firms optimally decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in the data, prices react fast and by large amounts to idiosyncratic shocks, but prices react only slowly and by small amounts to nominal shocks.

We are dealing with something new here. It transcends traditional protectionism, which tries to shield specific industries and workers from imports. It's trade obstructionism: a reflexive reaction against almost any trade agreement.

the Bush Administration proposed eliminating the ethanol tariff this past spring, but Congress quickly quashed the idea—Barack Obama was among several Midwestern senators who campaigned in support of the tariff—and the sugar quotas appear to be as sacrosanct as ever.

Dear Professor Mankiw,

I'm a freshman taking Ec10. Prior to taking Ec10, I had no experience or interest in economics and was convinced that I wanted to be a doctor and to major in neurobiology. Now, Ec10 is easily my favorite and most intriguing course, and taking it, in combination with my reading Freakonomics, has definitely caused me to rethink my interests, goals, and life in general. Thank you for teaching this course.

However, my intrigue in Ec10 has led me to question some of the principles of economics. The first regards the idea that high income taxes distort work incentives. In theory, this makes sense, but I feel that in practice, the idea doesn't apply well, especially to the income tax. Do the distortion of work incentives and the deadweight loss really have enough of an impact to be seriously considered while forming tax policy? The reason I think that high income taxes don't significantly distort work incentives in practice is that most people probably aren't thinking about how much of their income is taxed unless it's April 15. Most people probably believe that working more means more money and don't consider how much they're taxed unless they have to physically write the check (e.g. with property and excise taxes).

[name withheld]

Nearly 30 years ago, my husband and I were guests at a dinner party in the elegant Palo Alto home of Stanford professor Ezra Solomon, who had been my colleague on President Richard Nixon's Council of Economic Advisers. Among the other guests were Milton Friedman and his wife, Rose. Milton was having a fine time baiting the wife of the dean of the Business School, a feminist whose conviction was unleavened by any sense of humor, by proclaiming the foolishness of affirmative action.

"If businesses are forced to hire and train young women, many of whom will leave for marriage and family," he proclaimed, "they should at least be allowed to discriminate in favor of homely women, whose opportunities for marriage are below average." As the dean's wife reddened with fury, I leaned over and said softly, 'Thank you, Milton. I've always wondered what accounted for my professional success. Now I know." Milton, always the courtly gentleman where women were concerned, was speechless.

William Easterly is correct that Friedrich Hayek wrote "The Road to Serfdom" in 1946 to warn that central planning and state ownership would lead to the collapse of freedom ("Dismal Science," editorial page, Nov. 15). Yet in 1976, in the Preface to the Reprint Edition, Hayek made perfectly clear that he believed that the same outcome would occur through the welfare state. Noting that "socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state," Hayek wrote that "In the latter kind of socialism the effects I discuss in this book are brought about more slowly, indirectly, and imperfectly. I believe that the ultimate outcome tends to be very much the same . . ." (While the editors at Scientific American used the shorthand that Hayek wrote in the 1940s, my detailed paper on the Nordic economies makes explicit that Hayek's critique of the modern welfare state came in the 1970s, in the Reprint Edition).

Thirty years on, we can see the results of Hayek's prediction. Despite government revenues above 50% of GNP in the Nordic countries supporting an extensive social welfare state, those countries are vibrant democracies with open, competitive, and high-income economies and low rates of poverty. That is precisely the point of my Scientific American piece and a longer scholarly paper that Prof. Easterly wrongly attacks. He actually makes my point for me by pointing out that the Heritage Foundation/Wall Street Journal Index of Economic Freedom ranks Finland, Sweden and Denmark as "free economies," with Denmark ranked ahead of the United States, despite the fact of their extremely high rates of taxation and social welfare spending. Similarly, the Global Competitiveness Index of the World Economic Forum puts these three countries at ranks two, three and four in global competitiveness, ahead of the United States at rank six.

Mr. Easterly also repeats his favorite canard that I believe in central planning. Anybody who is at all familiar with my life's work and writings knows that I believe in market-led and open economies and was a leading economic adviser on the conversion of the former Communist economies to market economies. I do not believe in pure laissez faire, however. Nor do I believe that an antipathy to foreign aid is correct at a time when millions of children are dying each year as a result of extreme poverty unattended by practical help from the rich countries.

Jeffrey D. Sachs

my grandpa got $300k of elective surgery in his last year of life - bad knee, plus complications. And he was a cheap, cheap man. I doubt that he would have paid for the first $10k out of his own pocket.

As late as the 1980s, according to economist Elaina Rose, women with PhDs or the equivalent were less likely to marry than women with a high school degree. But the "marital penalty" for highly educated women has declined steadily since then, and by 2000 it had disappeared. Today, women with a college degree or higher are more likely to marry than women with less education and lower earnings potential. Highly educated women are also now as likely to have children as their less-educated counterparts -- and much more likely to have children born in wedlock.

Latin Americans Wonder If Democrats Are Traders
Anxiety High Over Stance of Incoming Congress

MEDELLIN, Colombia -- At the CI Jeans factory, where 3,900 people make their livings turning bolts of denim into trousers bound for the United States, the American market -- land of the customer -- appears to be slipping away.

In September, with a proposed trade deal between Colombia and the United States uncertain and orders flagging, the factory fired 320 workers. Now, the pact appears to be in peril. Democrats are set to take control of the U.S. Congress, speaking for a segment of the American public that is worried about globalization. The incoming leaders have pledged to redraft the terms of global trade.

Yesterday, the Bush administration signed the proposed deal, but leading Democrats promptly attacked it, underscoring growing doubts in Washington that Congress will approve the pact. Here in Colombia and next door in Peru, which awaits congressional approval for its own trade treaty, anxiety runs high.

"We watch the news and we're nervous about what might happen with what we send to the United States," said Janeth Palacio Ramirez, 35, who supports her 15-year-old daughter and her elderly parents by punching zipper stops onto 7,000 pairs of jeans a day, earning about $200 a month. "Everything we make here goes there, so if there are problems with exports, we'll all lose our jobs."

As Democrats prepare to reshape U.S. trade policy, the impact is being felt far from the Carolina mill towns and rust-belt factories that are a perennial focus of domestic concern.

Addressing fears that too many jobs are being sacrificed at home, the new Democratic leadership wants to slow the worldwide effort, which the United States has led since 1947, to lower import tariffs that hinder trade.

A global externality can best be dealt with by a globally agreed tax rate. This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes. It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work.

Although President George W. Bush says he believes in markets, in this case he has called for voluntary action. But it makes far more sense to use the force of markets – the power of incentives – than to rely on goodwill.

The Review proposes using a social discount rate that is essentially zero. Combined with other assumptions, this magnifies enormously impacts in the distant future and rationalizes deep cuts in emissions, and indeed in all consumption, today. If we were to substitute more conventional discount rates used in other global-warming analyses, by governments, by consumers, or by businesses, the Review’s dramatic results would disappear....

Suppose that scientists discover that a wrinkle in the climatic system will cause damages equal to 0.01 percent of output starting in 2200 and continuing at that rate thereafter. How large a one-time investment would be justified today to remove the wrinkle starting after two centuries? The answer is that a payment of 15 percent of world consumption today (approximately $7 trillion) would pass the Review’s cost-benefit test. This seems completely absurd. The bizarre result arises because the value of the future consumption stream is so high with near-zero discounting that we would trade off a large fraction of today’s income to increase a far-future income stream by a very tiny fraction.

Why will movie theaters charge the same $9.50 to see "Casino Royale" this Saturday night that they charged to see the disappointing remake of "All the King's Men" on a Wednesday night in the middle of September?....It wasn't always so. Back in the golden years of Hollywood, before PG and XXX, there were "A" movies, "B" movies and "C" movies, distinguished not by their sexual content, but by the box-office appeal of their stars. Not only did it cost more to see Clark Gable in "Gone With the Wind" than Ronald Reagan in "Bedtime for Bonzo," but the ticket price also varied depending on whether you saw them in a first-run movie house downtown or a second-run theater in the suburbs, and whether you took in a matinee or an evening showing.

Fed Chief’s Help Enlisted for Trip to Press China

Treasury Secretary Henry M. Paulson Jr. has enlisted Ben S. Bernanke, the Federal Reserve chairman, to join an unusual delegation of cabinet members to China next month that will press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday.

The trip in mid-December, to be led by Mr. Paulson, a former Goldman Sachs chairman with extensive experience in China, escalates the pressure on the Beijing leadership to crack down on piracy, open up its economy to outside investors and allow the value of the Chinese currency to fluctuate more freely, Treasury officials say.

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy is planned, the more it is plagued by shortages, dislocation, and failure.

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed -- without our ever intending it -- into prosperity, innovation, and growth?

The social order of freedom, like the wealth and the progress it makes possible, is an extraordinary gift from above. On this Thanksgiving Day and every day, may we be grateful.

Sex won’t increase your risk of a heart attack—but cocaine could up your chances nearly 24 times over, according to two Harvard researchers.

We have a furnished one-bedroom apartment (about 950 square feet) in Georgetown available for short-term rental.... we are looking for very responsible tenants, economists (or economics-related professionals) preferred.

conservatives who practice religion, live in traditional nuclear families and reject the notion that the government should engage in income redistribution are the most generous Americans, by any measure. Conversely, secular liberals who believe fervently in government entitlement programs give far less to charity.

My two cents' worth--and I think it is the two cents' worth of everybody who worked for the Clinton Administration health care reform effort of 1993-1994--is that Hillary Rodham Clinton needs to be kept very far away from the White House for the rest of her life. Heading up health-care reform was the only major administrative job she has ever tried to do. And she was a complete flop at it. She had neither the grasp of policy substance, the managerial skills, nor the political smarts to do the job she was then given. And she wasn't smart enough to realize that she was in over her head and had to get out of the Health Care Czar role quickly.

So when senior members of the economic team said that key senators like Daniel Patrick Moynihan would have this-and-that objection, she told them they were disloyal. When junior members of the economic team told her that the Congressional Budget Office would say such-and-such, she told them (wrongly) that her conversations with CBO head Robert Reischauer had already fixed that. When long-time senior hill staffers told her that she was making a dreadful mistake by fighting with rather than reaching out to John Breaux and Jim Cooper, she told them that they did not understand the wave of popular political support the bill would generate. And when substantive objections were raised to the plan by analysts calculating the moral hazard and adverse selection pressures it would put on the nation's health-care system...

Hillary Rodham Clinton has already flopped as a senior administrative official in the executive branch--the equivalent of an Undersecretary. Perhaps she will make a good senator. But there is no reason to think that she would be anything but an abysmal president.

If all policies worldwide that distort agricultural trade were phased out in this decade, the likely total annual economic benefit to the world by 2015 would be roughly $50 billion to $185 billion, which is about 3 percent to 13 percent of the value added by world agriculture.

Americans would have to sign up for a new military draft after turning 18 under a bill the incoming chairman of the House Ways and Means Committee says he will introduce. Rep. Charles Rangel (D-N.Y.) said Sunday he sees his idea as a way to deter politicians from launching wars. Rangel, a Korean War veteran who has unsuccessfully sponsored legislation on conscription in the past, has said the all-volunteer military disproportionately puts the burden of war on minorities and lower-income families. Rangel said on CBS' "Face the Nation" he will propose a measure early next year.

In his testimony before the commission, Mr. Westmoreland said he did not want to command an army of mercenaries. Mr. Friedman interrupted, "General, would you rather command an army of slaves?" Mr. Westmoreland replied, "I don't like to hear our patriotic draftees referred to as slaves." Mr. Friedman then retorted, "I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher."

A comparison between a relatively high-income entrepreneur, of which I am one, and a "typical" worker might be illustrative.

Last year an entrepreneur similar to me would have paid federal taxes equal to 33.9% of total income. That is, income before any exemptions, exclusions, adjustments or deductions. By this measure all of the fringe benefits that an entrepreneur provides himself as a self-employed individual are included in income. His federal income taxes and the employer and employee shares of his Social Security taxes are all counted as "taxes."

For comparison, consider a married worker earning a salary of $75,000, who like our entrepreneur, has three children. To compute his total income on the same basis, I gave him the same level of benefits as an average worker and the same level of capital income as others making his income. I also followed convention to impute to him both his own Social Security taxes and all of those paid by his employer. On that basis, his average tax rate was 14.5%.

Americans are increasingly pairing off by education level, according to the sociologists Christine Schwartz and Robert Mare. In an article published last year in the journal Demography, they reported that the odds of a high-school graduate marrying someone with a college degree declined by 43 percent between 1940 and the late 1970s. In our current decade, the researchers wrote, the percentage of couples who are “educationally homogamous” — that is, share the same level of schooling — reached its highest point in 40 years.

Assortative mating by income also seems to be on the rise. In a 2004 study of couples wed in the 1970s through the early 1990s, the researchers Megan Sweeney and Maria Cancian found an increasingly strong association between women’s wages before marriage and the occupational status and future earnings prospects of the men they married.

Cattle die, kindred die,
Every man is mortal:
But the good name never dies
Of one who has done well.

This essay examines how repugnance sometimes constrains what transactions and markets we see. When my colleagues and I have helped design markets and allocation procedures, we have often found that distaste for certain kinds of transactions is a real constraint, every bit as real as the constraints imposed by technology or by the requirements of incentives and efficiency. I'll first consider a range of examples, from slavery and indentured servitude (which once were not as repugnant as they now are) to lending money for interest (which used to be widely repugnant and is now not), and from bans on eating horse meat in California to bans on dwarf tossing in France. An example of special interest will be the widespread laws against the buying and selling of organs for transplantation. The historical record suggests that while repugnance can change over time, change can be quite slow.

Hayek's great book [The Road to Serfdom] is all about the dangers of large-scale state economic planning, courageously written in 1944 when Soviet central planning, technocratic socialism and administrative control of the wartime economy appealed as a peacetime model to many New Dealers, celebrity economists and policy wonks of all stripes.

The countries that are now rich subsequently listened enough to Hayek and to common sense to avoid the road to serfdom. Yet today, Mr. Sachs (in his book "The End of Poverty") is peddling his own administrative central plan -- 449 steps in all -- to end world poverty. In his plan, the U.N. secretary-general (to whom he is an adviser) would supervise and coordinate thousands of international civil servants and technocratic experts to solve the problems of every poor village and city slum everywhere. Mr. Sachs is not in favor of central planning as an economic system, but he offers it as a solution, anyway, to the multifold problems of the world's poorest people. If you want the best analysis of why the approach of Mr. Sachs and his confreres in Hollywood and the U.N. will fail to end world poverty this time (as similar efforts failed over the past six decades), you can find it in Hayek.

During their long years in the wilderness, Democrats lashed out against trade and globalization, even though denying the economic case for trade is like pretending that tax cuts pay for themselves. Now that they have won Congress, the Democrats must prove that they are more than the mirror image of their opponents. This means reviving the pro-market centrism of the Clinton era.

Democratic Gains Raise Roadblocks To Free-Trade Push

The Democrats' sweep of Congress is set to deliver a blow to President Bush's free-trade ambitions and could hamper impending trade deals both big and small.

Democrats' stances against free trade helped build the party's success at the polls and could tip the balance on trade matters. The new dynamic could put a definitive end to the already troubled effort to reach a global agreement to reduce tariffs and open markets, known as the Doha round. It also could put in jeopardy smaller deals such as those the U.S. has crafted with Peru and Colombia, intended to boost two-way trade by lowering tariffs and increasing intellectual-property protections.

Two dozen tightly contested races turned partly on Democrats' protectionist platforms, according to Public Citizen, a liberal advocacy group. All told, 16 incoming "trade skeptics" are set to replace "trade friendly" Republicans in the House, according to a study by the Swiss Institute for International Economics at the University of St. Gallen. Five new Senate Democrats are viewed as more critical on trade than were their opponents.

"The House and Senate are going to exert themselves on trade much more aggressively," vows Ohio Democrat Sherrod Brown, whose successful campaign against free-trade Republican Sen. Mike DeWine was built on opposition to the Bush trade agenda.

Big structural tax reform or action on entitlements are almost inconceivable. The challenge for trade policy in the next two years will be primarily defensive: to resist protection rather than to further liberalization.

Prof. Mankiw,

I'm an avid reader of your blog and let me be one among the thousands who have probably already told you that it rocks!

I am doing my Masters in Economics here in the US and I recently went to a Graduate Economics Students Conference in my city. I sat through a whole day of paper presentations and the one thing that struck me was how incredibly technical, narrow and to a some extent pointless, some of the research was. It seemed like in a quest to do something original, a lot of graduate students in economics are diverting all their energy towards coming up with things that have absolutely no implications in this world. Most papers I saw were so narrow and simply forms of academic gymnastics that it seemed like the whole point of research in economics was lost (maybe that is the point of research in economics today).

So far I have been seriously considering doing a PhD in the subject, but after the conference I have started having my doubts. It seems like a lot of research in economics today is just churning out results that are primarily of no use to anyone and only a way of standing out in a crowd by showing that you have done something they have not, no matter how pointless. It saddens me to see this happen to the subject. It leaves me disappointed and discouraged. I'm left wondering if nowadays to be successful in a PhD program I must enjoy doing something very narrow and technical even though it might be bordering on real world irrelevance. I hope I am wrong.

Regards,
[name withheld]

The Farm Bill probably provides the best example of where we've gone wrong, and what we need to do to hew back to our first principles.

During the 1990s, then-Sen. Phil Gramm accurately described U.S. farm policy as "enough to make a Russian Commissar puke." The Republicans assembled the "Freedom to Farm Act," which, starting in 1996, put U.S. farmers on a glide path toward an end to subsidies. Somewhere between the field and the silo, however, we became mired in the political mud. In 2002, we repealed the Freedom to Farm Act and in its place installed the "Farm Security Act" -- those who value the adage about trading freedom for security can pause and shudder here -- with even more lavish subsidies.

Now, with reauthorization of the Farm Bill on the horizon next year, we have to decide whether we will up the ante with Democrats in terms of red state/blue state politics in the heartland, or whether we believe our own rhetoric about free markets. This debate will have implications larger than the fiscal one. Most notably, it will determine if we are serious about the future of free trade.

The president should send Congress a tax-reform proposal now, shaping it so that it appeals to enough Democrats to split the opposition. Here's one way to do that: Democrats have made a great theme of "energy independence." The president has likewise denounced America's "addiction to oil" and often presented nuclear power as a crucial element of an ideal energy policy. What if he baited the Democrats with some kind of energy tax (or, better, a carbon tax -- which exempts nuclear-generated energy) in exchange for permanent cuts in taxes on work, savings and investment. "Tax waste, not work" is not a bad slogan.

Many of the Democrats who recaptured seats held by Republicans have been described as moderates or social conservatives, who will be out of synch with Speaker-to-be Nancy Pelosi. The better term, with props to Fareed Zakaria, is probably illiberal Democrats. Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory.

You should link to this story -- to supplement the many critical Pelosi stories you've linked to. At a minimum it's worth noting that House Democrats will be unambiguosly better than the Republicans they're replacing on the only major "free trade" issue on the agenda over the next two years: immigration. That plus the Democrats' greater instinctive sympathy for the Pigou Club should be at least a bronze lining for you.

"about twice as many people have no political views as have a coherent political belief system."

Hi Greg,

A graduate of our MPA/ID program, and a former student of mine, has written to me that you frequently entertain questions in your blog from prospective graduate students who are looking for a serious, rigorous policy-relevant program, but find few options out there.

I am the faculty chair of the MPA in International Development program at the KSG, which would be a good option to consider for those who are interested in development and international economics. We do serious, PhD-level two semester sequences in micro, macro, and stats/econometrics (textbooks: Mas-Collel, Whinston, Green, Romer, etc.). It's all done in a policy-serious way, with case workshops and so on. Here is the link in case you are interested to find out more.

Thanks, and I hope you are well.

Dani

Protectionist Stance Is Gaining Clout
Democrats Benefit by Fighting Free Trade, And Next Congress Could Face Changing Tide

Bidding for a congressional seat held by a free-trade Republican for nearly two decades, Democrat Bruce Braley has gained an edge by taking the opposite view: bashing globalization.

In one of the most closely watched congressional races, Mr. Braley has made opposition to the Bush administration's free-trade agenda a centerpiece of his campaign. He has run ads blaming the state's job losses on President Bush's "unfair trade deals." He has urged more focus on labor rights in national trade policy and talked of using economic sanctions to keep America competitive. "Our workers aren't on a level playing field," he says.

Mr. Braley's stance has helped propel the 49-year-old lawyer, who is running against an unabashedly free-trade Republican, into position to reverse recent trends and secure a Democratic win in Iowa's First District. His strong showing not only underscores how trade concerns have emerged as a central issue in many of this year's races but also suggests a more-protectionist U.S. trade policy if Democrats take Congress....

Trade is a perennial political dividing line. But the issue is taking on importance this year, amid increased public anxiety over globalization and activism by trade opponents. The political committee formed by the Citizens Trade Campaign, a labor, farm and environmental coalition, dispatched organizers after Labor Day to a dozen battleground districts to rally free-trade opponents. Protectionist sentiments and economic nationalism appear to be emerging as symbols of a broader but less well-defined sense of economic unease, which is particularly apparent in the Midwest this year.

The Republican-controlled Congress has already showed its sensitivity to the issue, helping derail a deal by Arab-owned Dubai Ports World to purchase the commercial operations at five U.S. ports and approving millions of dollars to build a wall to stem the tide of illegal immigrants from Mexico. Republican leaders have put aside initiatives on the Bush free-trade agenda, delaying action on a trade pact with Peru and pushing the White House to commit to a plan to possibly curtail imports from Vietnam.

The trend may become more pronounced if Democrats take one or both houses of Congress. In the 1990s, a bloc of House Democrats regularly supported free-trade initiatives like the North American Free Trade Agreement. These numbers have fallen as doubts increase about globalization, with only 15 Democrats backing the Central American Free Trade Agreement in 2005. The emergence of candidates like Mr. Braley could accelerate the Democrats' transformation.

Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of the recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone.

As an American, I am appalled, ashamed, and embarrassed by my country's lack of leadership in dealing with global warming....

a wide range of economists favour a uniform ("harmonized") global tax that would tax carbon emissions equally everywhere in the world, and from whatever source - whether coal, oil, or gas, and whether consumers or businesses.