We're number 1!

Ec 10 is still the largest course at Harvard.

Are federal government workers overpaid?

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.

How much would a Buffett Tax raise?

Robert Samuelson has the numbers:

Obama’s still-vague Buffett Tax would apparently impose a minimum 30 percent tax rate on incomes exceeding $1 million....In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimates $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that’s all.

The Artist Replies

In his post complaining about John Cochrane, Brad DeLong says

The problem is that there are a lot of influential bullshit artists out there. Cochrane is at least willing to try to engage. Lucas, Fama, Prescott, Posner, etc., etc. are not even willing to do that.

Seems to indicate some desire to engage with people on discussions concerning serious economic questions of the time, right? Wrong. In response to my appeal for engagement (combined, you might add, with some mild admonishment), DeLong responds with this old news, from 17 months ago. So much for that. This is my family's favorite joke, actually. Second-stupidest man alive. Always gets a good belly laugh around the dinner table.

Speaking of jokes. It's a little late for college admission essay-writing, but here's an essay assignment. Suppose your plane crashes in the mountains. You're trapped in the snow and have been waiting months for help. You have eaten all the food, and have long since abandoned the taboo on cannibalism. Brad DeLong and Newt Gingrich are on the plane, and both alive and well. Which one do you eat first? 200 words or less.*

Addendum: Seriously, though. Krugman in particular wants to propagate the view that what he calls "freshwater macroeconomics" (which has actually ceased to exist, but whatever) is hermetically sealed and unwilling to engage. DeLong seems to feel the same way. Thoma fancies himself to be an open-minded individual, but goes along. Why am I singling those three out? They seem to lead the Old Keynesian blogosphere. If you are an economist and interested in blogging, in a way that might be controversial from the point of view of those three people, don't think they want to engage. They do not. Their interest is in reverse-engineering policy recommendations, not in thinking seriously about new ideas. Their arguments consist of calling people stupid and/or making out that their opponents are somehow morally reprehensible. They are engaged in political journalism, not economic discussion.

*Let me explain further, in case you don't get it. The whole situation is totally disgusting, in many ways, just like this blog exchange. But you're faced with a quandary, and have to weigh the costs and benefits. There are the costs and benefits to society. There are personal costs involved. You're going to have to sit in the snow for a long time with the one who lives, and they are both REALLY hard to be around.

Brad DeLong: B.S. Artist

Old Keynesians with blogs seem to have an unhealthy obsession with John Cochrane. Maybe it's his boyish charm. Who knows?

At the head Mark Thoma's daily list of writings-that-Mark-agrees-with is this post by Brad DeLong.

DeLong makes two points:

1. He seems to think that John has changed his mind about "stimulus spending," and quotes from Cochrane's blog post to try to make the point. If you actually read Cochrane's blog post I don't think you will come away with the same impression. I certainly did not. Here's a section:

The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare. Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. Yes, endorsed by Krugman because it "feels like a job" (his back must not hurt like mine does) and by DeLong: "anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all."

The "targeted," "infrastructure," and the whole worthy apparatus to monitor the wisdom of "stimulus" spending (see John Taylor) is, in the Keynesian model, beside the point, or at best a smokescreen to befuddle the ignorant masses. It would in fact be better if the money were stolen. Thieves have high marginal propensity to consume, and they can get that "spending" out fast in an economy with few "shovel-ready" projects.

Stimulus is a remarkable proposition, because micro fallacies morph into macro wisdom. We all lambaste mayors who tax small businesses (or borrow against future taxes) to build showpiece "jobs" projects. This way lies Buffalo. Yet for the economy as a whole, stimulus says, it's true. The hurricane should have been bigger, so the government would have spent more money to rebuild. Many stimulus advocates point to WWII spending. Think about what that means: all those tanks, ships, and airplanes on the ocean floor were not a terrible economic sacrifice we paid to win a desperate war. Every ship the Germans sunk let the government buy another ship, and gain a ship and a half worth of GDP in the process!

Hardly a pro-stimulus guy, I think.

2. DeLong seems to think that John's statements on public policy somehow ruined the 2008 stimulus package:

Perhaps Cochrane misled Michael McKee and Oliver Staley because he had simply not done his homework--had not thought the issues through at an Econ 1 level. Perhaps he was playing for Team Republican and knowingly telling them lies when they called him up and asked him about Jim Tobin.

I really don't care which.

What I do know is that his intervention made Christina Romer and Larry Summers and company's technocratic job more difficult at a crucial moment.

Well boo-hoo. The key problem with the stimulus was that, in fact, it was driven by Econ 1 thinking. That's the way that Brad DeLong and Christina Romer think. At best they are doing IS-LM, but mostly this is Keynesian Cross. There are plenty of good reasons why that just does not cut it. We can do a lot better. Any student educated in a top PhD economics program today has much better tools to address the question of what the fiscal authority should do in a recession. Cochrane is not perfect, but he's thinking about the right things.

Here's my recent thinking about the general issues at stake. I'm pretty much in agreement with Jim Bullard, though we may differ on some of the monetary policy issues. Bullard argues, basically, that Friedman and Mankiw were right. Fiscal policy is mainly about the long run. We should decide how large the government should be and what it should do, and there should be essentially no discretionary countercyclical fiscal actions. That doesn't say that we can't have appropriate social insurance - what some people would call "automatic stabilizers," such as unemployment insurance - that imply greater transfers, for example, in a recession than in a boom. Or, as Cochrane points out, there may be sound reasons - tax-smoothing for example - that imply that we should run a deficit during a recession and a surplus in a boom.

Finally, DeLong finishes with this gem:

The problem is that there are a lot of influential bullshit artists out there. Cochrane is at least willing to try to engage. Lucas, Fama, Prescott, Posner, etc., etc. are not even willing to do that.

I'm wondering who those "influential bullshit artists" are. Honestly, I have no idea what he is talking about. I'm also wondering why he's picking on Lucas, Fama, Prescott, and Posner. Those people are all septuagenarians. Personally, I'm quite happy that Lucas and Prescott are still engaged in what they do well. They regularly talk about economics in public, and participate in academic conferences. They are both a pleasure to talk to - I learn something from Bob and Ed whenever I see them. What more do we want from those guys? We want them to write blogs? What for? Fama and Posner are not even macroeconomists. Who gives a crap what they think of the stimulus package?

Well, Brad. I'm here and willing to engage. What's on your mind?

Lacker Dissent

Jeffrey Lacker explains his dissent on the recent FOMC decision in this press release. He says:

"I dissented because I do not believe economic conditions are likely to warrant an exceptionally low federal funds rate for so long. I expect that as economic expansion continues, even if only at a moderate pace, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures. This increase in interest rates is likely to be necessary before late 2014.

"In addition, the Summary of Economic Projections (SEP) now contains detailed information on the forecasts of Federal Reserve governors and Reserve Bank presidents for the evolution of economic conditions and the federal funds rate under appropriate policy. My dissent also reflected the view that statements about the future path of interest rates are inherently forecasts and are therefore better addressed in the SEP than in the Committee's policy statement.

His reasoning, which I agree with, is that the Fed is going to get itself in trouble by making the commitment that it did, and that any useful foreward guidance we might get from the policy statement is already in the SEP, without the bad commitment.

Optimal Inflation

Paul Krugman takes issue with the Fed's now more-or-less-explicit long-run inflation target of 2%. He thinks it should be 4% or 5%.

Here's the offending part of his blog post:

But why is the inflation target only 2 percent?

Actually, I understand why; the inflation hawks are still a powerful force that must be appeased. But the truth is that recent experience has made an overwhelming case for the proposition that the 2 percent or so implicit target prior to the Great Recession was too low, that 4 or 5 percent would be much better. Even the chief economist at the IMF says so. (OK, in real life it’s Olivier Blanchard, who is a very smart and also flexible-minded macroeconomist who just happens to be at the IMF for now — and I’m glad that he is!)

Comments:

1. The "inflation hawks" are NOT a powerful force on the FOMC. The Committee just voted, with one dissenting vote, to keep the target for the fed funds rate in the range 0-0.25% until the end of 2014. That's hardly a hawkish policy, and the Fed has already engaged in some massive and unprecedented quantitative easing, that is far from hawkish and conservative. Indeed, it is quite risky, and favored by the majority of FOMC members, who are basically old and new Keynesians, if they know any economics at all. Actually, the moniker I would prefer to apply to the "inflation hawks" is "serious economists" (for the most part - Fisher is not an economist).

2. The Blanchard paper that Krugman is referring to is this one. Here is what it says about the central bank's inflation target:

The crisis has shown that large adverse shocks can and do happen. In this crisis, they came from the financial sector, but they could come from elsewhere in the future—the effects of a pandemic on tourism and trade or the effects of a major terrorist attack on a large economic center. Should policymakers therefore aim for a higher target inflation rate in normal times,
in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?

The paper goes on to discuss the costs of the inflation, in more-or-less standard textbook terms. There's nothing new there. So, did Krugman actually read the paper or not? It doesn't really matter. The key point is that Blanchard is not recommending anything, he's just asking a question. There's no report on any research to answer the question; this is just Blanchard musing with his staff about how recent history might change how we think about monetary policy. Thus, Krugman's statement that "Even the chief economist at the IMF says so," is false.

But what of Krugman's argument? Krugman says (repeating the above):

But the truth is that recent experience has made an overwhelming case for the proposition that the 2 percent or so implicit target prior to the Great Recession was too low, that 4 or 5 percent would be much better.

He certainly seems convinced; "truth" and "overwhelming" are strong words. It's hard to see why, though, and he doesn't tell us. If you read Blanchard's paper, and look for the reasoning, you might see what Krugman has in mind. The basic idea is that a higher inflation rate gives the central bank more room to move. By Fisherian logic, if the real interest rate is constant in the long run, and the long-run Fisher effect holds, the long-run nominal interest rate will rise one-for-one with the long-run inflation rate. Having more room to move means that, if you subscribe to New Keynesian logic, then if the long-run inflation rate is 4% rather than 2%, on average you have an extra 2% by which you can lower the central bank's nominal interest rate target so as to correct sticky price distortions. There are at least 3 problems with this:

1. This presumes that the long-run costs of inflation are negligible, but to me this looks like an argument for wearing a sweater in July. You can always take it off if you want to cool down. I have written more on the costs of inflation here. Potentially the long-run costs of inflation are much larger than conventionally measured. Anyone who lived through the 1970s or, even better, comes from a country with a serious inflationary history, understands that inflation is bad.

2. If the key macroeconomic inefficiencies we are faced with are the relative price distortions coming from sticky prices, those inefficiencies might more appropriately be corrected with fiscal policy than monetary policy. Krugman seems to be thinking that the zero lower bound is a big problem, but the zero lower bound need not bind.

3. Blanchard, like Krugman, seems to fear the zero lower bound because bad stuff can happen there. Well, we have been in our modern-day liquidity trap for more than three years now, and apparently we have not yet been sucked into the deflationary vortex with ever-increasing output gaps that these characters seem to be concerned with.