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Mankiw: Interpreting the Fed
| December 13, 2012 | 9:41 am | Greg Mankiw | No comments

Published for Greg Mankiw’s Blog, December 13, 2012

My friend and sometime coauthor Larry Ball sends me his quick analysis of the Federal Reserve’s recent announcement:

I think the FOMC announcement is big news: for the first time, the Fed clearly says it will be more dovish in the future than the pre-crisis Taylor Rule (TR) dicates.

In my estimation, the pre-crisis TR is something like the following for the real interest rate r:

r = 2.0 – (1.5)(u-u*) + (0.5)(pi-2.0).

Let’s say u* is still 5.0. Then if u=6.5 and pi=2.5, the TR says r = 0, which implies the nominal interest rate is i = 2.5. Yet the Fed says that i will still be zero!

Some argue that u* has risen above 5.0. That would raise the i implied by the TR, strengthening the conclusion that the Fed’s new rule is more dovish than the TR.

Some argue that r* [the constant term in the TR] has fallen from 2.0 to 1.0. I doubt it, but even with that change, the TR still implies i = 1.5. My conclusion about dovishness is robust.

This deviation from the TR has not happened since the TR was discovered. In particular, the Fed was NOT more dovish than the TR in 2003. I believe the numbers for 2003 are roughly u=6.0, u*=5.0, and pi=1.0. For the TR shown above, the 2003 numbers imply r =0 and i=1.0, which is about the same as the actual i.

It is not clear whether the Fed’s announcement of future dovishness will have significant effects today. The efficacy of announcements about future monetary policy is unproven.

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Mankiw: Faulty Memories
| May 22, 2012 | 11:57 am | Greg Mankiw | No comments

Published for http://gregmankiw.blogspot.com/, May 21, 2012

In watching various news talk shows over the past few weeks, I have seen Democratic partisans make the following argument:

President Obama just wants to return top tax rates to where they where in the 1990s under President Clinton. And that was a great time for the U.S. economy. So one shouldn’t be concerned about the impact of higher tax rates.

There are two things wrong with this.

First, the premise is incorrect.  President Obama wants to raise incometax rates to where they were during the Clinton years.  But because he has already raised the payroll tax as part of his healthcare reform (and also expanded the base of this tax to unearned income), the total tax rate under President Obama’s proposal would exceed that during the Clinton years.  All economists agree that it is the total tax rate that matters.

Second, it is worth remembering that the Clinton boom was in large measure driven by the dot-com bubble, which was coming to an unhappy conclusion during President Clinton’s last year in office.  (By the way, as I recall, President Bush did not spend as much time blaming his predecessor for bequeathing him a sick economy as President Obama has.)   It seems unlikely that President Obama’s tax increase will happen to coincide with another technological bubble that will drive the economy forward.

Reasonable people can disagree about the virtues of raising the top tax rate.  But it is important to separate valid arguments from political spin based on a faulty recollection of history.

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Mankiw: On Tax Breaks for Manufacturing
| May 3, 2012 | 3:15 pm | Greg Mankiw | No comments

Published for http://gregmankiw.blogspot.com/, May 3, 2012

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Mankiw: CBO looks at the president’s budget
| April 23, 2012 | 2:12 pm | Greg Mankiw | No comments

Published for www.gregmankiw.blogspot.com, April 20, 2012

The CBO reports:

CBO estimates that the President’s budgetary proposals would boost overall output initially but reduce it in later years. For the 2013–2017 period, under most of the estimates CBO produced using alternative models and assumptions, the President’s proposals would increase real (inflation-adjusted) output (relative to that under current law) primarily because taxes would be lower than those under current law, and, therefore, people’s disposable income and their demand for goods and services would be greater. Over time, however, the proposals would reduce real output (relative to that under current law) because the deficits would exceed those projected under current law, and the effects of increasing government debt would more than offset the favorable effects of lower marginal tax rates on labor income. When the net impact of those two types of effects would shift from an increase in real output to a decrease would depend on various factors, including the impact of increased aggregate demand on output and the effect of deficits on investment.

By CBO’s estimate, under the President’s proposals, the nation’s real output during the 2013–2017 period would be, on average, between 0.2 percent lower than the amount under current law and 1.4 percent higher than under current law. For the 2018–2022 period, CBO estimates that the President’s proposals would reduce real output, on average, by between 0.5 percent and 2.2 percent compared with what would occur under current law.

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Mankiw: Competition Is Healthy for Governments, Too
| April 16, 2012 | 11:22 am | Greg Mankiw | No comments

Published by www.newyorktimes.com, April 14, 2012

SHOULD governments — of nations, states and towns — compete like business rivals?

The question is simpler to ask than to answer. But it reflects why conservatives and liberals disagree on many big issues facing the nation.

Most everyone agrees that competition is vital to a well-functioning market economy. Since the days of Adam Smith, economists have understood that the invisible hand of the marketplace works only if producers of goods and services vie with one another. Competition keeps prices low and provides an incentive to improve and innovate.

Granted, competition is not always good for producers. I produce economics textbooks. I curse the fact that my competitors are constantly putting out new, improved editions that threaten my market share. But knowing that I have to keep up with the Paul Krugmans and the Glenn Hubbards of the world keeps me on my toes. It makes me work harder, benefiting the customers — in this case, students. The upshot is that competition among economics textbooks makes learning the dismal science a bit less dismal.

For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.

The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

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Mankiw: The sun shines on the Tea Party
| March 21, 2012 | 11:47 am | Greg Mankiw | No comments

Published for http://gregmankiw.blogspot.com/, March 20, 2012

Stevenson and Wolfers report the results of an unusual natural experiment:

The Tea Party came into prominence in a series of protests around the country on tax day, April 15, 2009. Sunny skies in some parts of the country encouraged large and boisterous rallies, while in other places rain suppressed the attendance. If the areas that nature randomly selected to have good weather that day subsequently became more conservative, that would suggest the Tea Party had a real impact beyond what would have happened in its absence.

How much of a difference can a rainstorm make? It turns out a lot. At least that’s the message from some striking research by four young scholars spanning the political spectrum — Andreas Madestam of Bocconi University and Daniel Shoag, Stan Veuger and David Yanagizawa-Drott of Harvard University.

Their research demonstrates that in politics, success begets success. The initial boost from the weather generated substantial momentum. Counties that enjoyed better weather on tax day had more people sign up to become Tea Party organizers, greater donations to an affiliated political action committee, and larger rallies a year later.

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Mankiw: Free Bikes and Girls’ Education
| March 21, 2012 | 11:46 am | Greg Mankiw | No comments

Published for http://gregmankiw.blogspot.com/, March 20, 2012

A clear application of difs-in-difs methodology. By the way, Karthik was a grad student at Harvard not long ago.

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Mankiw: Obama shifts stance on dividend taxes
| March 9, 2012 | 2:45 pm | Greg Mankiw | No comments

Published for http://gregmankiw.blogspot.com, March 9, 2012

Alex Brill and Alan Viard write:

In the summer of 2008, the Obama campaign’s two top economists proudly proclaimed that their candidate favored a dividend tax rate of 20 percent, “lower than all but five of the last 92 years.” Well, that was then. In a sharp break from that campaign stance and the Administration’s first three budgets, President Obama is now calling for an all-in dividend tax rate of almost 45 percent, the highest rate in 27 years. The president’s about-face bodes ill for the economy.

While the president’s proposal raises dividend tax rates only on high-income stockholders, Americans at all income levels will feel the economic impact of the tax hike. Higher dividend taxation will impede the investment that fuels long-run growth, depress stock prices, and weaken incentives for good corporate governance.

The president’s proposal would allow the 2003 dividend tax cut to expire for high-income households at the end of the year, pushing the top dividend tax rate up from 15 to 39.6 percent. That’s a dramatic increase in its own right. But, other provisions make the true increase even larger. The president also wants to bring back a provision phasing out deductions for high-income taxpayers, which will cause each additional dollar of dividends to trigger 1.2 cents of extra taxes. And, beginning next year, the president’s health care law will impose an additional 3.8 percent tax on dividends and other investment income of high-income households. Under the president’s proposal, the top all-in dividend tax rate will be 44.6 percent – almost triple today’s 15 percent rate.

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Mankiw: Academic Uses of Social Media
| February 27, 2012 | 11:18 am | Greg Mankiw | No comments

Published for http://gregmankiw.blogspot.com/, February 25, 2012

This is from a panel discussion held at Harvard last year. (I just recently learned that it was posted online.) I show up around minute 13:00.

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Mankiw: Are federal government workers overpaid?
| January 31, 2012 | 9:52 am | Greg Mankiw | No comments

Published for www.gregmankiw.blogspot.com, January 30, 2012

Yes, says CBO:

Differences in total compensation—the sum of wages and benefits—between federal and private-sector employees varied according to workers’ education level.

-Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.
-Federal workers whose education culminated in a bachelor’s degree averaged 15 percent higher total compensation than their private-sector counterparts.
-Federal employees with a professional degree or doctorate received 18 percent lower total compensation than their private-sector counterparts, on average.

Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

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