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The latest from the Congressional Budget Office:
CBO expects that Medicare spending under the legislation would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades (excluding the effect of establishing the Medicare prescription drug benefit). Adjusting for inflation, Medicare spending per beneficiary under the legislation would increase at an average annual rate of roughly 2 percent during the next two decades—well below the roughly 4 percent annual growth rate of the past two decades. It is unclear whether such a reduction in the growth rate could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care.
Legal scholar Richard Epstein opines on the current version of health insurance reform. An excerpt:
At this point, there is a near mathematical certainty that the scheme of health insurance market regulation contemplated by the Reid bill will reduce the risk-adjusted rate of return below the level needed to keep these firms in the individual and small-group health-insurance markets. I am not aware of a single provision in the Reid Bill that looks to ensuring a minimum rate of return. And there are countless provisions in the bill that impose new obligations to cover services while eliminating the revenue sources to deal with them. It is just this combination of regulatory programs that leads the CBO to treat private health insurance issuers as part of a federal program—as though they have been subject to de facto nationalization.
Looking for a Christmas gift for that special econonerd in your life? Try Steven Landsburg's new book, The Big Questions.
I recently finished it, and it is much fun. Reading it is like having dinner and sharing a bottle of claret with a smart, creative, iconoclastic friend. The conversation jumps from topic to topic in math, physics, philosophy, economics, public policy, etc., in a seemingly random fashion, and your friend does not always convince you of his point of view. But throughout you are entertained, and in the end you are even edified.
I recently finished it, and it is much fun. Reading it is like having dinner and sharing a bottle of claret with a smart, creative, iconoclastic friend. The conversation jumps from topic to topic in math, physics, philosophy, economics, public policy, etc., in a seemingly random fashion, and your friend does not always convince you of his point of view. But throughout you are entertained, and in the end you are even edified.The policy debate about drug reimportation brings up a lot of interesting questions, touching on the topics of free trade, price discrimination, and protection of intellectual property rights. Princeton economist Uwe Reinhardt has a good discussion of some of the issues. For an old post of mine, click here.
We reached different conclusions about a new educational technology. I am not at all confident that I am right about this one.
1. Above is a chart of the growth rate, from four quarters earlier, of real investment in equipment and software. Notice the left scale. Investment spending is very volatile. This is one of the standard stylized facts about the business cycle.
2. Investment has been particularly weak during this economic downturn. Weak residential investment is not a surprise, as the downturn was started by events in the housing market. But as this graph shows, business investment has also been very weak. Indeed, by the metric used in this graph, it is far weaker than in previous deep recessions, such as 1982.
3. Why is business investment so weak? Part of the reason is that the downturn is severe and investment responds to the overall economy. Part of the reason is that the credit crunch makes financing more difficult. Part of the reason is that the policy environment seems adverse to business. I am referring here to a group of policies that include higher minimum wages, the seeming retreat from free trade, proposed mandates to provide employees health insurance, higher prospective energy costs from climate change regulation, and the likelihood of higher future tax rates resulting from the huge fiscal imbalance we are now experiencing. All of these factors have worked in concert to depress business investment.
4. The recent weakness of business investment was one of unstated reasons why, in my recent NY Times column, I suggested that an investment tax credit (ITC) might have been a better form of fiscal stimulus than what we in fact are getting. Given the amount of money being spent on stimulus, the ITC could have been sizable. The measure of investment used in the chart above is about $1 trillion per year. So, to give a very rough example, if Congress had passed a 20 percent ITC in 2009, 10 percent in 2010, it would have cost the Treasury about $300 billion. Essentially, the Treasury would have picked up 20 percent of the cost of all of these investments if done this past year, and half that amount next year.
5. Some readers might wonder if this policy would work in the presence of the zero lower bound on interest rates (aka the "liquidity trap"). The truth is that we don't fully understand the role of the zero lower bound, and most of what we do know is based on stylized theoretical models with scant evidence to back them up. But those models suggest that an ITC would work just fine. The zero-lower-bound whiz kid Gauti Eggertsson in fact endorses the ITC as a plausible policy in that environment.
6. In my most controversial NY Times column, I said that what the economy needed was negative real interest rates, which could be accomplished via inflation. A temporary ITC does something similar. By temporarily reducing the effective price of capital goods, it creates expected inflation in this particular price. Under the numerical example above, the effective price of new capital would immediately fall by 20 percent, and expected inflation would rise by 10 percent. If nominal rates stay at zero, the real interest rate measured in units of new capital goods would become negative 10 percent. That is one way to view the way in which a temporary ITC stimulates investment spending.
7. So much for theory, but would it work? The cash-for-clunkers program is thought by many to have promoted, or at least accelerated, car purchases. An ITC would be similar, but it would apply to business investment rather than personal cars. Instead of targeting a very narrow, politically favored industry, it encourages investment broadly. It should have positive effects on aggregate demand in the short run and positive effects on aggregate supply in the medium and longer run.
8. Recall that an investment tax credit was part of the Kennedy plan to get the economy going again back in the early 1960s. According to historical reports, Kennedy came to this idea of tax cuts with the advice of economist Paul Samuelson, who just passed away. In memory of Professor Samuelson, if the Obama administration wants to switch gears and try a sizable investment tax credit, I propose that we call it the Paul Samuelson Memorial ITC.
9. Update: Intrigued by this idea? Try these further readings on the subject by Bruce Bartlett and Hal Varian.
Like many students of my generation, I started my studies of economics with Paul Samuelson. When I took econ 101 as a freshman at Princeton, Paul's textbook, then in its 9th or 10th edition, was the assigned reading. I recall the book well, and I give it a lot of credit for fostering my interest in economics.
A few years later, as a grad student at MIT, I sat in some of Paul's lectures. They were mainly about "reswitching" and the Cambridge-Cambridge capital controversy. A few years after that, when I was an assistant professor, Paul was part of the effort that tried to recruit me to join the MIT faculty. (In the end, I decided to stay at Harvard--persuaded in large measure by Paul's nephew, Larry Summers). Over the past decade or so, I saw Paul off and on, mainly at the Federal Reserve Bank of Boston, where we both served on an academic advisory panel. He remained engaged and insightful well into his years of retirement. He will be missed, in that meeting and many other places as well.
A few years ago, I had the good fortune of running across a first edition of Paul's textbook (not the recent reprint of the original text, but an actual 1948 edition). It was a real find. I bought the volume in an online auction for, if my recollection is correct, $35. Talk about consumer surplus! I would have gladly paid many times that.
At the next Boston Fed meeting, I took the book along to get Paul to sign it. Below is the book's title page, along with Paul's gracious inscription.
A few years later, as a grad student at MIT, I sat in some of Paul's lectures. They were mainly about "reswitching" and the Cambridge-Cambridge capital controversy. A few years after that, when I was an assistant professor, Paul was part of the effort that tried to recruit me to join the MIT faculty. (In the end, I decided to stay at Harvard--persuaded in large measure by Paul's nephew, Larry Summers). Over the past decade or so, I saw Paul off and on, mainly at the Federal Reserve Bank of Boston, where we both served on an academic advisory panel. He remained engaged and insightful well into his years of retirement. He will be missed, in that meeting and many other places as well.
A few years ago, I had the good fortune of running across a first edition of Paul's textbook (not the recent reprint of the original text, but an actual 1948 edition). It was a real find. I bought the volume in an online auction for, if my recollection is correct, $35. Talk about consumer surplus! I would have gladly paid many times that.
At the next Boston Fed meeting, I took the book along to get Paul to sign it. Below is the book's title page, along with Paul's gracious inscription.
Click on images to enlarge.
| The Colbert Report | Mon - Thurs 11:30pm / 10:30c |
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<p class="ljsyndicationlink"><a href="http://gregmankiw.blogspot.com/2009/12/colbert-on-fed.html">http://gregmankiw.blogspot.com/2009/12/colbert-on-fed.html</a></p><table style="font:11px arial; color:#333; background-color:#f5f5f5" cellpadding="0" cellspacing="0" width="360" height="353"><tbody><tr style="background-color:#e5e5e5" valign="middle"><td style="padding:2px 1px 0px 5px;"><a target="_blank" style="color:#333; text-decoration:none; font-weight:bold;" href="http://www.colbertnation.com">The Colbert Report</a></td><td style="padding:2px 5px 0px 5px; text-align:right; font-weight:bold;">Mon - Thurs 11:30pm / 10:30c</td></tr><tr style="height:14px;" valign="middle"><td style="padding:2px 1px 0px 5px;" colspan="2" <a="<a" target="_blank" style="padding:2px 1px 0px 5px;" href="http://www.colbertnation.com/the-colbert-report-videos/258142/december-08-2009/fed-s-dead">Fed's Dead<a></td></tr><tr style="height:14px; background-color:#353535" valign="middle"><td colspan="2" style="padding:2px 5px 0px 5px; width:360px; overflow:hidden; text-align:right"><a target="_blank" style="color:#96deff; text-decoration:none; font-weight:bold;" href="http://www.colbertnation.com/">www.colbertnation.com</a></td></tr><tr valign="middle"><td style="padding:0px;" colspan="2"><lj-embed id="124"/></td></tr><tr style="height:18px;" valign="middle"><td style="padding:0px;" colspan="2"><table style="margin:0px; text-align:center" cellpadding="0" cellspacing="0" width="100%" height="100%"><tr valign="middle"><td style="padding:3px; width:33%;"><a target="_blank" style="font:10px arial; color:#333; text-decoration:none;" href="http://www.comedycentral.com/colbertreport/full-episodes">Colbert Report Full Episodes</a></td><td style="padding:3px; width:33%;"><a target="_blank" style="font:10px arial; color:#333; text-decoration:none;" href="http://www.indecisionforever.com">Political Humor</a></td><td style="padding:3px; width:33%;"><a target="_blank" style="font:10px arial; color:#333; text-decoration:none;" href="http://www.colbertnation.com/the-colbert-report-videos/254015/november-02-2009/sport-report---nyc-marathon---olympic-speedskating">U.S. Speedskating</a></td></tr></table></td></tr></tbody></table>
<br /><table style="font:11px arial; color:#333; background-color:#f5f5f5" cellpadding="0" cellspacing="0" width="360" height="353"><tbody><tr style="background-color:#e5e5e5" valign="middle"><td style="padding:2px 1px 0px 5px;"><a target="_blank" style="color:#333; text-decoration:none; font-weight:bold;" href="http://www.colbertnation.com">The Colbert Report</a></td><td style="padding:2px 5px 0px 5px; text-align:right; font-weight:bold;">Mon - Thurs 11:30pm / 10:30c</td></tr><tr style="height:14px;" valign="middle"><td style="padding:2px 1px 0px 5px;" colspan="2" <a="<a" target="_blank" style="padding:2px 1px 0px 5px;" href="http://www.colbertnation.com/the-colbert-report-videos/258143/december-08-2009/fed-s-dead---bernie-sanders">Fed's Dead - Bernie Sanders<a></td></tr><tr style="height:14px; background-color:#353535" valign="middle"><td colspan="2" style="padding:2px 5px 0px 5px; width:360px; overflow:hidden; text-align:right"><a target="_blank" style="color:#96deff; text-decoration:none; font-weight:bold;" href="http://www.colbertnation.com/">www.colbertnation.com</a></td></tr><tr valign="middle"><td style="padding:0px;" colspan="2"><lj-embed id="125"/></td></tr><tr style="height:18px;" valign="middle"><td style="padding:0px;" colspan="2"><table style="margin:0px; text-align:center" cellpadding="0" cellspacing="0" width="100%" height="100%"><tr valign="middle"><td style="padding:3px; width:33%;"><a target="_blank" style="font:10px arial; color:#333; text-decoration:none;" href="http://www.comedycentral.com/colbertreport/full-episodes">Colbert Report Full Episodes</a></td><td style="padding:3px; width:33%;"><a target="_blank" style="font:10px arial; color:#333; text-decoration:none;" href="http://www.indecisionforever.com">Political Humor</a></td><td style="padding:3px; width:33%;"><a target="_blank" style="font:10px arial; color:#333; text-decoration:none;" href="http://www.colbertnation.com/the-colbert-report-videos/254015/november-02-2009/sport-report---nyc-marathon---olympic-speedskating">U.S. Speedskating</a></td></tr></table></td></tr></tbody></table>
<br />Thanks to the <a href="http://blogs.wsj.com/economics/2009/12/09/colbert-looks-at-the-feds-naughty-parts/">RTE blog</a> for the pointer.<div class="blogger-post-footer"><img width="1" height="1" src="https://blogger.googleusercontent.com/tracker/24784288-7146456585931101632?l=gregmankiw.blogspot.com" alt="" /></div>
Chapter 21 of my favorite textbook discusses the role of income and substitution effects in determining labor supply, including a case study about lottery winners. UCLA economist Matthew Kahn applies this kind of thinking to the Tiger Woods saga.
Before reading Matthew's analysis, ask yourself this question: Does economic theory predict that Woods will play more or fewer tournaments next year?
Before reading Matthew's analysis, ask yourself this question: Does economic theory predict that Woods will play more or fewer tournaments next year?
Page Summary
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gregmankiw : The Case Against the Millionaire Surtax [+0] - gregmankiw : The Price of Christmas [+0]
- gregmankiw : Sachs on the Copenhagen Summit [+0]
- gregmankiw : Rolling the Dice on Medicare [+0]
- gregmankiw : Epstein on the Reid Bill [+0]
- gregmankiw : Readings on Financial Regulatory Reform [+0]
- gregmankiw : The Big Questions [+0]
- gregmankiw : Reinhardt on Drug Reimportation [+0]
- gregmankiw : Mankiw vs Pinker [+0]
- gregmankiw : Nine Observations about Investment [+0]
- gregmankiw : Memories of Paul [+0]
- gregmankiw : Why Keynesians drive Scott Sumner nuts [+0]
- gregmankiw : Paul Samuelson has died [+0]
- gregmankiw : Fiscal Stimulus Revisited [+0]
- gregmankiw : Joe Stiglitz [+0]
- gregmankiw : Chip Case retires [+0]
- gregmankiw : Colbert on the Fed [+0]
- gregmankiw : Tiger Woods as a Natural Experiment [+0]
- gregmankiw : The Transactions Tax [+0]