Random Observations for Students of Economics
Potomac fever is contagious and incurable. I know one economist who deliberately hired an undocumented nanny as a commitment device to avoid the temptation of government.
DAVIES: What's fascinating about this story is that you have this entity [Fannie Mae], which you said became the largest and most powerful financial organization in the world, you had this entity, which has government guarantees and government subsidies, although perhaps indirect, but it engages in major political contributions and lobbying expenses. How big a player were they in terms of contributing to politicians and lobbying?
Ms. MORGENSON: They were very large. The numbers might not seem large in today's terms, but they were extremely shrewd and, you know, took great care, especially of the congressmen that were on the House Financial Services Committee and the senators on the Banking Committee.
They knew that these were very important people to their livelihood and to maintaining the government perquisites as they were.
One of the really big beneficiaries, albeit indirectly, was Congressman Barney Frank of Massachusetts. Back in 1991, when Congress was writing the legislation that would, you know, enhance or improve the oversight of Fannie Mae, or so they thought, Frank actually called up the company and asked them to hire his companion, who had just gotten an MBA from the Amos Tuck School of Business.
Of course the company was happy to provide a job for his companion and rolled out the red carpet in a series of interviews with a variety of executives, and it ultimately did hire the man. And he stayed there for I believe seven years.
So that was an example of the kind of thing that Fannie Mae would do. Now, when I asked Mr. Frank about this, I asked him, did it have any impact on his approach to the company. You know, was it a conflict? Did he feel that it had been a conflicted, put him in a conflicted spot? And he said absolutely not, that he didn't really remember being interested or having much to do with the 1992 legislation.
But the record shows that he was very aggressive and really tough on those who were testifying in Congress about reining in Fannie Mae and Freddie Mac. He was very aggressive to, for instance, the head of the Congressional Budget Office at that time, who was trying to call for increased capital requirements and to call for a focus on safety and soundness at Fannie Mae, that Frank really took him apart in testimony.
DAVIES: Right, and you write there were a number of occasions on which he defended Fannie and their record of promoting home ownership but in the end had a different view of the company, right?
Ms. MORGENSON: Well, after the taxpayers had to take it over, he, you know, came around, finally. But by then it was too late. He said: Well, we should shut them down. But, you know, it really was far too late, and he had been such a vocal supporter for so long that it was sort of an odd turnabout.
But all else equal, a low-income applicant was no more likely to get in than a high-income applicant with the same SAT score. It’s pretty hard to call that meritocracy.
It does seem reasonable to believe that, if a low income student and a high income student have the same SAT scores at the time of college entrance, the low income student was probably born with higher "inherent" ability. At the same time, SAT scores may not capture all of the educational benefits of being from a high income family that may continue to matter in college. For example, a student's score on the Math SAT may not capture whether the student had the opportunity to take a Calculus course in high school. This suggests that, from a theoretical standpoint, the effect of family income on college grades conditional on SAT scores is ambiguous. As part of an ongoing in-depth case study at one particular school (motivated particularly by an interest in college dropout), we discuss this issue and run the type of regression you suggest in Table 3 of a 2003 JHR paper "Understanding educational outcomes of students from low-income families." It is worth noting that everyone in our sample is of moderate or low family income. Regardless, within the income groups we examine, students from higher income backgrounds have significantly higher grades throughout college conditional on college entrance exam (ACT) scores.The finding in the last sentence (which I put in bold) is the opposite of what the Leonhardt story suggests. What this means is that if you are a college admissions officer trying to identify the students who will do best in college, as measured by grades, you would give positive rather than negative weight on family income. I am not proposing that they should do this, as colleges have many goals when putting together a class. But it does seem that the hypothesis implicit in Leonhardt's article is not supported by the data.
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We study grading outcomes associated with professors in an elite university in the United States who were identified using voter registration records from the county where the university is located as either Republicans or Democrats. The evidence suggests that student grades are linked to the political orientation of professors: relative to their Democratic colleagues, Republican professors are associated with a less egalitarian distribution of grades and with lower grades awarded to Black students relative to Whites.Regarding the last result, the authors note:
An obvious question that arises regarding the second finding is whether and to what extent Democratic professors discriminate in favor of Black students or Republican professors discriminate against them. At this stage we only note that in the absence of an appropriate benchmark for comparison, this question cannot be credibly answered.Thanks to Mark Perry for the pointer.
The Obamas reported total financial assets valued between $2.8 million and $11.8 million in 2010....They report having between $1.1 million-$5.25 million invested in Treasury bills and another $1 million to $5 million in Treasury notes....The Obamas report having between $200,000-$450,000 invested in the Vanguard 500 Index Fund.
"Rates are so low it's hard to see them going much lower, but it's easy to imagine them going higher," said Kevin March, chief financial officer of Texas Instruments.
It is certainly true that most of the time when the yield spread is high the way to bet is that long-term bond rates are coming down and long-term bond prices are going up. But somehow I can't see U.S. nominal interest rates falling much lower than they are now.I don't buy it. Why? Note this fact: The U.S. ten-year Treasury bond pays 3.18 percent, whereas a ten-year Japanese government bond pays 1.16 percent.
While it's true that Google has $37 billion in cash and equivalents, almost all of that $37 billion is in non-U.S. accounts (an artifact of funneling most of their profits through low-tax Ireland). They cannot spend that $37 billion in the U.S. without incurring a tax rate of 35 percent; thus, the borrowing is to finance spending in the U.S. (as opposed to abroad). All the big tech companies do the same thing (Microsoft was in the news for the same thing some 6 months ago). Thus, Google is not trying to play the yield curve so much as intertemporally arbitrage the U.S. tax code. By not repatriating the $37 billion now, they are betting that the U.S. corporate tax rate on repatriated foreign profits will be appreciably lower in the future than it is now.2. On the other hand, another loyal reader points me toward this source, which says:
The firm doesn't have the same issue with overseas cash that many of its large-cap technology peers do. Of Google's $37 billion in cash, only about $17 billion is sitting outside the U.S. Microsoft, by contrast, has no net cash remaining in the U.S., while nearly 90% of Cisco's cash is sitting outside of the country.
Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.
According to a [Newport Beach] city report on lifeguard pay for the calendar year 2010, of the 14 full-time lifeguards, 13 collected more than $120,000 in total compensation; one lifeguard collected $98,160.65. More than half the lifeguards collected more than $150,000 for 2010 with the two highest-paid collecting $211,451 and $203,481 in total compensation respectively....Lifeguards are able to retire with 90 percent of their salary, after only 30 years of work at as early as the age of 50.
Starting next year, this typical [66-year-old] couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending....
Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today's dollars) toward these benefits during their working careers.
But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.As the graph below illustrates, the price of labor does not show any significant inflationary pressures right now:
Suppose that groceries were supplied in the same way as K-12 education. Residents of each county would pay taxes on their properties. Nearly half of those tax revenues would then be spent by government officials to build and operate supermarkets. Each family would be assigned to a particular supermarket according to its home address. And each family would get its weekly allotment of groceries—"for free"—from its neighborhood public supermarket.
No family would be permitted to get groceries from a public supermarket outside of its district. Fortunately, though, thanks to a Supreme Court decision, families would be free to shop at private supermarkets that charge directly for the groceries they offer. Private-supermarket families, however, would receive no reductions in their property taxes.
Of course, the quality of public supermarkets would play a major role in families' choices about where to live. Real-estate agents and chambers of commerce in prosperous neighborhoods would brag about the high quality of public supermarkets to which families in their cities and towns are assigned.
Being largely protected from consumer choice, almost all public supermarkets would be worse than private ones. In poor counties the quality of public supermarkets would be downright abysmal. Poor people—entitled in principle to excellent supermarkets—would in fact suffer unusually poor supermarket quality.
How could it be otherwise? Public supermarkets would have captive customers and revenues supplied not by customers but by the government. Of course they wouldn't organize themselves efficiently to meet customers' demands.
Responding to these failures, thoughtful souls would call for "supermarket choice" fueled by vouchers or tax credits. Those calls would be vigorously opposed by public-supermarket administrators and workers.
Opponents of supermarket choice would accuse its proponents of demonizing supermarket workers (who, after all, have no control over their customers' poor eating habits at home). Advocates of choice would also be accused of trying to deny ordinary families the food needed for survival. Such choice, it would be alleged, would drain precious resources from public supermarkets whose poor performance testifies to their overwhelming need for more public funds.
As for the handful of radicals who call for total separation of supermarket and state—well, they would be criticized by almost everyone as antisocial devils indifferent to the starvation that would haunt the land if the provision of groceries were governed exclusively by private market forces.
With very few exceptions, the rich have done better over the past 30 years, even in highly egalitarian places like Scandinavia.
I am the Robert M. Beren Professor of Economics at Harvard University. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.