First Rule of the Stimulus, Do not Talk About the Stimulus

I’ve been a little slow at updating the blog lately, so here a few posts ideas I have been meaning to write

So last Friday I went to see Fight Club. In Fight Club there is a strong anti-consumerist message. Instead of buying IKEA, Tyler Durdin (Brad Pitt’s character) thinks we should go back to farming and hunting. I was going to write a post about how if all the sudden we all joined a Fight Club and purchased fewer house hold goods it would hurt the economy and our faces.

In some ways a recession does the same thing. Instead of changing our attitudes about consumption because of an ethos some people might not spend as much because they are worried about losing their jobs. To combat this a local apartment complex is offering:

“If you involuntarily lose your job for any reason while in a lease agreement with us, we will WAIVE all termination fees if you decide to leave. “

So how do we solve the problem. Perhaps ask an economist, Gregory Clark points out that many economists have no idea what’s going on. After he asked one economist signatory of a NY Times letter against the stimulus to debate the stimulus with a proponent the signatory replied:

"all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."

I feel the same way, that I’m not equipped to debate the stimulus, although I do read more blogs. But what I can do is teach some Econ 101 concepts that Gregory Clark points out are at the center of the debate.

So tomorrow I’ll explain why using Econ 101, I don’t think debt forgiveness is the way to go.

Economic Stimulus 101

Let’s start with what you know: The economy is not doing so well. The government is trying to do something to help the economy get going. The options are cut taxes, spend money, or buy bad assets.

What’s the debate? Which method is best.

How do Economists determine which method is best? They look at the multiplier.

What is the multiplier? It is the number of dollars the economy increases for each dollar extra spent by the government.

Can you give an example? Imagine the government sends you a check for $100.
Typically, you would go and spend some of that $100 (let’s say on a massage and save some. Let’s say you buy an $80 massage, the masseuse takes that $80 then uses it to buy a nice meal at a restaurant let’s say for $64 (he saves the other $16). Now $144 (=$80 + $64) dollars have been spent from that first $100. Imagine the waiter at the restaurant gets another hair cut (after saving some) then the barber buys some books….ect. Each time some of the money is spent and some is saved.

So what is a typical multiplier in an Intro to Econ textbook? Greg Mankiw's NY Times OP ED (here) points out that for government spending a typical multiplier is 1.4 (for every dollar spent 1.4 dollar increase in GDP). He also points to a paper by Obama Economic adviser Christina Romer, who showed that decreasing taxes has a multiplier of around 3.

But is this a typical time? No

So do we have an idea what the multiplier is under the current conditions? Maybe, an idea but who knows.
OK so no one knows, but where can I follow the debate? I’m reading (Greg Mankiw, Marginal Revolution, Brad DeLong, Megan McCardle, and Paul Krugman)

So why not instead pay off people’s credit card bills and mortgages, isn’t this also a credit crisis? (suggestion from the Daily Show via Grinnell friend Paul Carlson) Yes it is a credit crisis. But the goal of the stimulus is to increase spending. Paying off debt, probably has a lower impact (smaller multiplier) than the other options.

Which Party Will Be Better for Economic Growth?

Alan Blinder, Princeton Economist, in a recent NY times article points out that economic growth has been higher under Democratic presidential administrations than Republican, but Casey Mulligan a University of Chicago Economist, shows that women’s wages grew faster relative to men’s wages during Republican presidencies than democratic.

So what does this mean? Greg Mankiw, Harvard Economist, points to the good old question does correlation =? causation. In other words it could have just been a coincidence that both things happened at the same time.

Mulligan has a good response to Mankiw’s question, basically if we give democrats credit for growth then we might want to also give Republicans credit for equality.

So who knows, which party will do better?

This makes me think of a similar problem with evaluating the 700 billion bailout plan. If the economy gets better, was it the bailout plan or did the economy just get better?

What is Scott Adams Smoking at The Economics Party?

O.K. I was just going for a cool title, but Scott Adams, Dilbert’s creator, is talking about creating an economics political party, but I think he misses the mark on what economists agree on. This party idea was in response to recent debate on the gas tax. From his blog, Scott Adams suggestions for the party would be:

The Economics Party would ignore superstition in its decisions. Here are a few things I think would end up on the platform, assuming most leading economists agree:
- Withdraw from Iraq
- More aggressive energy policy (back off on ethanol)--
- More sane tax policies
- Limited government
- Legalize doctor assisted suicide
- Keep abortion legal
- Decriminalize marijuana
- Strong education policy

I’m not sure this is what economist actually agree on. Generally as Greg Mankiw summarizes a survey of American Economics Associate members, economists like free trade, don’t like agricultural subsidies, like immigration, think social security is going to run into trouble and we should raise the retiring age.

Only 62% are pro-legalizing marijuana. I’m unsure on economists views on abortion, suicide, and Iraq, but I’m guessing they largely fall in line with their political and not economic views.

Heck we can’t even agree on the minimum wage (38% think it should be higher, 47% think it should be eliminated). We do agree that economists are under paid and appreciated so next time you see one give them a hug.

Clinton and McCain are out of the Pigou Club: Cutting Gas Tax Helps Producer Profits Not Consumers!

So the latest political news is that Hilary Clinton is attacking Obama on his refusal to decrease the federal gasoline tax over the summer. John McCain has made a similar proposal (see article here).

This proposal does not make economic sense. When supply is relatively fixed like oil (i.e. inelastic) removing a tax will only increase the price received by producers instead of decrease the price for consumers. In other words, lowering taxes will not lower prices to consumers as much as it will increase profits for oil companies.

This result has been well highlighted by Greg Mankiw, Econ blogger/Text book writer/Harvard Econ Prof, through his pet cause the Pigou Club. The club is named for those who support higher gas taxes and Dr. Mankiw has even written a Pigou Club Manifesto. Why support higher taxes? Because driving creates a negative externality, you drive and it hurts me through pollution and highway congestion. A Pigovian tax is a corrective tax on negative externalities, that is charge people more to do stuff that is bad overall for society. Take a look at the list of members of the Pigou Club from Gore to Greenspan to Krugman to Arthur Laffer and this blog writer. Will Obama add his name to the list?

update: Mankiw's reaction

Update on previous posts

The New York Times and Salon have picked up on the surrogate parent in India story: my take here.


Some more thoughts on the median wage from Brad Schiller via Greg Mankiw. In short perhaps the median wage is greatly effected by immigration. I'm less sure of my previous posts (here and here) on median wages, but the issue needs a closer look

Wanna Bet! Intrade

Occasionally readers send me subjects to blog about. So for Emily in Minnesota here is a post on Intrade. Intrade is a betting website. Basically you sell someone the right to ten dollars if they are correct. Most of the predictions/bets involve politics. But you can bet on where the next Olympic Games will be, if the US will go to war with North Korea, or if Bird Flu will be discovered.

So for example right now people are paying around $8.25 to win $10 if Obama is the democratic nominee. In the last week that price has gone up from $7.90. The online magazine Slate tracks the price for political candidates. What does this information tell us, well this week people think Obama as an 82.5% chance at winning the nomination up from 79% last week.


So the next question is does this tell us anything meaningful? I think the answer is sort of. The idea of this type of markets is that of Malcom Gladwell’s Blink. That large groups of people with a limited amount of information are pretty decent and a lot of times better than experts at predicting outcomes.

The problem with Intrade as Tyler Cowen at Marginal Revolution are two fold. First, the market is not big enough. By my rough estimate the size of the total shares sold is a few million dollars. As this article in the New York times suggests there sometimes is money to be made betting against unlikely candidates like Ron Paul and Al Gore. Second, you have to keep your money sitting interest free in Intrade accounts so you would lose any interest you would gain from now until the nomination or election.

But, the market seems to be popular with Economist as Greg Mankiw another economist/blogger has cited Intrade in the past.


You want a hot tip, I think good bets right now our McCain at 33% to win the presidency. Really I think democrat or republican is closer to 50/50. And bet against S&P 500 to close above 1750, because if that happens I’ll be hedged with my investments.

But if I knew I was right wouldn’t I bet on it?

Obama believes that trade with foreign nations should strengthen the American economy

I e-mailed Greg Mankiw the other day in response to his blog post about Obama's anti-trade stance. He was kind enough to e-mail me back. I agree in some sense with Dr. Mankiw response that in some cases it is hard to tell if Obama is listening to his advisors to playing or to the farther left wing part of the Democratic party.

I wish Dr. Mankiw would post a more balanced discription of Obama's stance on free trade, instead of posting only his possibly anti-trade quotes. As I said in my last post I think Obama is really not that far off main stream economist beliefs. Below is text from Obama's campaign website on his belief in trade.

But first a quote from nobel Prize winner Joeseph Stiglitz from his book Globalization and its Discontents “No one said there wouldn’t be losers, but the assumption was that there would be enough winners to compensate the losers,” Stiglitz said. But this has not happened, he added. “If we are to make globalization work, we have to recognize that there are losers and that we have to design policies that respond to this.”

Obama seems to propose ways to compensate the losers of free trade.

Obama's trade platform

Trade

Obama believes that trade with foreign nations should strengthen the American economy and create more American jobs. He will stand firm against agreements that undermine our economic security.

Fight for Fair Trade: Obama will fight for a trade policy that opens up foreign markets to support good American jobs. He will use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks. Obama will also pressure the World Trade Organization to enforce trade agreements and stop countries from continuing unfair government subsidies to foreign exporters and nontariff barriers on U.S. exports.

Amend the North American Free Trade Agreement: Obama believes that NAFTA and its potential were oversold to the American people. Obama will work with the leaders of Canada and Mexico to fix NAFTA so that it works for American workers.
Improve Transition Assistance: To help all workers adapt to a rapidly changing economy, Obama would update the existing system of Trade Adjustment Assistance by extending it to service industries, creating flexible education accounts to help workers retrain, and providing retraining assistance for workers in sectors of the economy vulnerable to dislocation before they lose their jobs.

Obama and Free Trade

I never posted a review of my trip to the Obama rally on Tuesday. I have to say that while I thought his speech was very good, I did not think it was great. Although it is still pretty impressive he can fill a college basketball arena.
I was listening to his speech with careful attention to his economic policies. Not that he was going to reveal anything strongly. I do recall him specifically saying he supported lower trade barriers. He similarly on his website says

“In the end, I believe that expanding trade and breaking down barriers between countries is good for our economy and for our security, for American consumers and American workers.” – Barak Obama

Greg Mankiw today questions Obama’s support of free trade. Mankiw sites text from a recent Obama speech that sounds more anti-free trade, with rhetoric of supporting renegotiating labor standards for NAFTA. Mankiw then contrasts that speech with Larry Summers who typical of most economists is pro-free trade.

As Mankiw suggests like most economists I agree with Larry Summers, but many economists including Mankiw’s colleague Dani Rodrick might not disagree with Obama. When discussing issues of labor and environmental standards in free trade agreement Rodrik says “These are all difficult questions, without clear-cut answers.” (pg 21).

Given that it is not so simple I think Obama might not be that far off the right path. There are not easy answers or us economists would be out of job.

An Economist's Take on the Potomac Primary

After leaving Iowa in 2002, I thought my potential impact on primaries was over. Then when I was in Wisconsin, Kerry dealt Dean the knock out blow in 2004. Now the primaries have come to the Potomac. While, my vote might not have the impact of the average Grinnell College student. I still like giving who I’m going to vote for some thought. I have a tough time voting for John McCain who seems to still believe in the Laffer Curve “Tax cuts, starting with Kennedy, as we all know, increase revenues.” via Greg Mankiw, Havard Economist and former Romney advisor. Also Greg Mankiw gave Obama a gold star for his answer on cap in trade in a debate

So for this economist it comes down to Obama and Clinton. However, deciding on economic belief it is hard to support one over the other. As Brad DeLong put it when comparing the two “But what policy differences there are are insufficient to push anybody toward one rather than the other.” DeLong wound up voting for Obama based on his speaking abilities.

Perhaps deciding on the relative Economic policies of Obama and Clinton is not the right way to go. As Robert Frank, Cornell Economist, put it this way“some economists seem similarly baffled by the exuberance inspired by the Obama candidacy. But while homo economicus may be unresponsive to calls for sacrifice for the common good, the plain fact is that many people find such calls compelling.”

I'm just about ready to declare myself an Economsit for Obama (which has its own blog). I'm going to go to the Obama rally at University of Maryland to see if I agree with DeLong and Frank.
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note political opinions are those of solely of Seth Gitter. This entry used no State of Maryland resources.

Happy Wedding Anniversary

So today is our 4th wedding anniversary. I’m one happily married economist!

Although I do not work directly with the economics of marriage, I do have a paper on household decision making in Nicaragua. Economists typically, look at marriage and households in one of two ways. Either the household is a single unit making one decision, or the two married members bargain based on their power to influence household decisions to get the household to move more resources to things they like. My wife and I have similar, but slightly different preferences. I think the key to a happy marriage is to try to convince yourself your household is a single unit, while going through the bargaining process.

Some other thoughts on marriage from a couple of Econ bloggers

From Greg Mankiw:“Economists David Blanchflower and Andrew Oswald have suggested that a lasting marriage produces as much happiness as an extra $100,000 a year in salary….”’

From Tyler Cowen Marginalrevolution.com:
“The secret to a good marriage, therefore is selective forgetfulness.”

Tim Harford from Slate“Joskow's explanation surely tells you something about when to be a freelancer—perhaps even when to stop playing the field and get married. Like East Coast coal mines, it can be attractive to be footloose and fancy-free as long as you always have alternatives and as long as you are not required to make serious investments that are specific to the relationship. My own marriage was swiftly followed by a relationship-specific investment. She's nearly 2 and a half.”