The Economist as Civil Libertarian

Tyler Cowen's new column in the NY Times reminds us that the worldview of economists often extends beyond economic issues.

The Best Job Opportunity Ever

The Harvard economics department is now recruiting teaching fellows for its popular undergraduate principles course, Ec 10, for the next academic year.  If you are a Boston-area graduate student with a solid background in economics, please consider interviewing for the chance to introduce the next Andrei Shleifer, Ben Bernanke, or Marty Feldstein (all former Ec 10 students) to the power of economic thinking. 

If interested, email ec10@fas.harvard.edu for more information and to request application materials.

ERP

The Economic Report of the President was released today.

Caplan on Card

In a blog post about the minimum wage, Bryan Caplan makes note of a tension in some of David Card's research.  For those who don't know him, Card is one of the great empirical labor economists of his generation.  In some of his research, joint with Alan Krueger, Card finds that increases in the minimum wage have negligible effects on employment.  In other research, on the Mariel boatlift, Card finds that increases in the supply of unskilled workers have negligible effects on wages and employment of existing workers.

Caplan notes that these results are hard to reconcile: The former suggests that labor demand is highly inelastic, whereas the latter suggests it is highly elastic.  That is a very good point.  While I was well aware of Card's famous research on these topics, I had not put them together and recognized the tension between them.

To me, this brought to mind an econometrics class I took from Frank Fisher many years ago.  Frank used to say that the "iron law of econometrics" is that coefficients are biased toward zero.  He meant that various problems, such as measurement error and misspecification, tend to make it hard for researchers to find an effect even when one really exists.  Fisher's "law" overstates things, which was Frank's style, but his basic point is often right.

Alan Blinder Discusses the Fed's Balance Sheet

Alan Blinder has a piece in the Wall Street Journal on the size of the Fed's balance sheet and why it does and does not matter. Mostly this looks fine, but at the end of the article, he discusses a possible exit strategy from some difficult choices for the Fed:

Is there a way out? Here's one thing that could help. As I have argued for some time, the Fed should reduce the interest rate it pays on the roughly $1.7 trillion of banks' excess reserves. If it did so, banks would keep less cash on deposit at the Fed. The liberated funds would probably flow mainly into the money markets, but some would probably find their way into increased lending—which would give the economy a little boost.

In either case, if banks wanted to hold fewer reserves—a Fed liability—the Fed could, and naturally would, shrink its assets by an equal amount. Balance sheets do, after all, balance. And that would make the eventual exit easier.

This is incorrect. No funds are "liberated" if the Fed reduces the interest rate on reserves. Outside money (currency plus reserves) does not go away unless the Fed actually sells assets. For example, a reduction in the interest rate on reserves from 0.25% to 0% would reduce the willingness of financial institutions to hold reserves, but that can only mean that, ultimately, that currency will increase and reserves will decrease by the same amount, in nominal terms. Prices would have to change as a result. For example, suppose that the demand for currency is fixed in real terms. Then prices have to rise as a result of the reduction in the interest rate on reserves. The balance sheet would be smaller, in real terms. Obviously this is not a "way out," as the key problem has to do with what happens if inflation gets too high and the Fed needs to tighten. See my post on The Balance Sheet and the Fed's Future.

New Rankings

US News and World Report has released its updated rankings of graduate programs in economics.  Click here to see them.  The top programs are:

#1 Harvard
#1 MIT
#1 Princeton
#1 Chicago
#5 Stanford
#5 UC-Berkeley
#7 Northwestern
#7 Yale
#9 Penn
#10 Columbia
#11 NYU
#11 Minnesota
#13 Michigan
#13 Wisconsin
#15 Caltech
#15 UCLA
#15 UC-San Diego
#18 Cornell
#19 Brown
#19 Carnegie Mellon
#19 Duke

Jeffrey Sachs and Keynesian Economics

Jeff Sachs characterizes himself as a progressive. He wrote this piece on "America's New Progressive Era?" and finished it with this:

Implementation of public policy is just as important to good governance as the vision that underlies it. So the next task is to design wise, innovative, and cost-effective programs to address these challenges. Unfortunately, when it comes to bold and innovative programs to meet critical human needs, America is out of practice. It is time to begin anew, and Obama’s full-throated defense of a progressive vision points the US in the right direction.

I'm certainly on board with that. We need vision, but the government needs to find a practical path to getting things done. Government needs to be wise and innovative. There are elements of American society that are a mess and need to be fixed, and some of that fixing needs to be done by the federal government.

A lot of progressives are Keynesians and, not surprisingly, Jeff Sachs appears to be one too. But Keynesians come in many different types. John Taylor is a Keynesian. Ben Bernanke is a Keynesian. So is Greg Mankiw. There are New Keynesians, like Mike Woodford and Mark Gertler. More than likely, if we could re-animate Keynes, he would have a hard time recognizing his work in any of what those people do.

Though Jeff Sachs is a Keynesian, he views himself as a particular kind of Keynesian, and he has taken issue recently with Keynesians he calls "crude Keynesians." Sachs recently wrote this post, which I found interesting. It's pretty bold, actually, and I agree with most of it. The gist of Sachs's piece is in line with some arguments I have made here. For example read this.

Here are some of the juicy parts of Sachs's post. He says that there are four elements of crude Keynesianism, and that all of those positions are "misguided":

(1) The belief that multipliers on tax cuts and transfers are stable, predictable and large;
(2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term aggregate demand management;
(3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession;
(4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.

Sachs characterizes the problems of the U.S. economy as structural, and not the result of some sort of "aggregate demand deficiency."

What are some of the structural problems? These include large-scale offshoring of jobs, large-scale automation of jobs, decline in demand for low-skilled workers, skill mismatches, broken infrastructure, and rising global energy and food prices. These require various kinds of targeted public investment spending, not simply aggregate demand.

I especially like this one:

The US economic emergency in late 2008 and early 2009 wasn't really an aggregate demand crisis but a financial crisis.

That should be pretty obvious, but many people don't seem to get it.

Predictably, the usual cast of characters is calling Sachs an idiot. Someone should take him out to lunch and give him a pat on the back.