Greg Mankiw's Blog

Did you know that Kendall Roy (of Succession fame) graduated from the Harvard economics department? You can bid on his diploma here. He must have been in ec 10, though I don't recall him.

Click on image to enlarge.

 ...based on relevance for central banks.  At the top is the Brookings Papers on Economic Activity, followed by the Quarterly Journal of Economics and the Journal of Monetary Economics.

In recent years, I have been teaching a seminar to a small group of Harvard freshmen. I described the seminar in this essay in the NY Times. 

The assigned readings change a bit from year to year. In case any of my blog readers are interested, here are the books I chose for this year:

• The Worldly Philosophers, by Robert Heilbroner
• Capitalism and Freedom, by Milton Friedman
• Equality and Efficiency: The Big Tradeoff, by Arthur Okun
• We’ve Got You Covered: Rebooting American Health Care, by Liran Einav and Amy Finkelstein
• Open Borders: The Science and Ethics of Immigration, by Bryan Caplan and Zach Weinersmith
• The Two-Parent Privilege: How Americans Stopped Getting Married and Started Falling Behind, by Melissa Kearney

These TV shows aren't new, but they were new to me, and I enjoyed them both: Borgen (a Danish political drama) and Caliphate (a Swedish drama about an impending ISIS attack). Both are on Netflix, available dubbed in English or in the original language with subtitles. Thanks to Olivier Blanchard for the Borgen recommendation.

I make some recommendations in the Wall Street Journal.

This graph from David Leonhardt's column is illuminating. Now I understand why those of us who are fiscally conservative and socially liberal have trouble finding political candidates to fully represent our views. There are too few of us!

Isn't it a bit odd to base your candidacy on the sunk cost fallacy?

I was recently chatting with someone who teaches introductory macroeconomics (not using my favorite textbook). He does not teach the students about money creation under fractional reserve banking, which he considers an unnecessary technicality, but he does teach them the following two statements about inflation.

1. If the Fed lowers the interest rate on reserves, that policy stimulates economic activity in the short run and, via the Phillips curve, increases inflation.
2. In the long run, the quantity theory of money explains inflation.

I agree with both of these statements, and I consider them critical for students to understand. But consider: How does one explain the transition from the short run to the long run?

The only way I know to answer this question is that a lower interest rate on reserves increases bank lending and expands the money supply by increasing the money multiplier. But if students don’t know about how banks create money under fractional reserve banking, they are not equipped to understand this logic.

The bottom line: The traditional pedagogy about how banks influence the money supply remains important if students are to understand the economics of inflation.

Update: This post generated more than the usual amount of confusion and misdirection on Twitter. So let me explain my logic more slowly:

1. It is useful to teach the quantity theory of money (M and P are parallel) as a long-run equilibrium condition, regardless of which direction causality runs.
2. It is useful for students to know that cutting the interest rate on reserves is expansionary for aggregate demand and, over time, inflationary. That is, it raises P.
3. To complete the story, you need to explain how cutting the interest rate on reserves raises M.
4. To be sure, lower interest rates increase the quantity of money demanded. But you also must explain the quantity of money supplied.
5. The money supply M equals m*B, where m is the money multiplier and B is the monetary base (currency plus reserves).
6. Cutting the interest on reserves (unlike open-market operations) does not change B. So if it changes the money supply M, it must work through the money multiplier m.
7. One cannot understand the money multiplier m without understanding fractional reserve banking. (Under 100-percent-reserve banking, m is fixed at 1.)

From research.com.

1. The collapse of Silicon Valley Bank seems closely related to the fact that we recently experienced the largest drawdown in bonds in history. That is, the bank made an imprudent bet on interest rates and was very, very unlucky. 

2. Contrary to the claims of some talking heads, the relaxation of Dodd-Frank in 2018 appears not to be a big part of the story. The "severely adverse scenario" in the regulators' stress test did not include a major bond drawdown.  Instead, it described a recession accompanied by falling interest rates. That is, the regulators would not likely have caught the imprudent bet the bank was making.

3. I am not particularly concerned about the moral hazard associated with insuring all bank deposits (though the expansion of deposit insurance should be done explicitly, rather than through the implicit and ad hoc process now occurring). It is not realistic to expect bank depositors to monitor the health of their banks. A sophisticated depositor with a large balance would instead spread his holdings in $250,000 chunks among many banks. Those left with large holdings in a single bank are, by revealed preference, unsophisticated.

4. People say we need better regulation. Of course, but that is easier said than done. Don't expect supervision to get much better, though we should try.

5. The simplest way to avoid these problems is to push banks toward higher levels of capital. Maybe that can be accomplished by making deposit insurance fees depend more strongly on the bank's capital/asset ratio. Or something along those lines.

A wise economist of the center left recently suggested to me that the Biden administration faces a trilemma: They would like to (1) increase spending on programs they consider important, (2) not raise taxes on those making less than $400,000 a year, and (3) put fiscal policy on a sustainable path. But the stark reality is that they can have only 2 out of the 3.

The President's just released budget chooses to forgo fiscal sustainability. As the Committee for a Responsible Federal Budget notes, even under the unlikely scenario that the President gets everything he wants through Congress and his economic projection turns out to be correct, "debt would hit a new record by 2027, rising from 98 percent of GDP at the end of 2023 to 106 percent by 2027 and 110 percent by 2033."

Cengage, the publisher of my Principles text, is sponsoring an online economics teaching conference on March 10. You can find information about the agenda and registration at this link.

My colleague Eric Maskin points me to this opportunity for graduate students.

Recently, I had the opportunity to speak with Boston University economist Larry Kotlikoff and some BU students and faculty.  You can listen to the conversation here at his podcast. You can also subscribe to Larry's substack here.

I am not attending the ASSA meeting in person this year, but I will participate via zoom in a session on Efficient and Effective Course Preparation. It is today from 2:30 to 4:30 CST at the Hilton Riverside, Grand Salon A Sec 3 & 6. The panel is also being streamed live. Click here for more information.

Click on image to enlarge.