What to Do When the World Desperately Wants to Lend Us Money

Karl Smith has a recent post “Why is the US Government Still Collecting Taxes?: Should Lambs Lay Down with Lions Edition” arguing that we should be dramatically reducing tax collection because interest rates on government bonds are so low that, after correcting for inflation, every dollar in the national debt is shrinking over time. Karl’s post follows up on Ezra Klein’s post “The world desperately wants to lend us money,” and my grad school professor Larry Summers’s post “It’s time for governments to borrow more money.” Ezra and Larry want the government to pay ahead on things it is going to buy anyway and make other productive investments.  

Larry, coming from his experience as Secretary of the Treasury makes a strong argument that the U.S. government should be borrowing long rather than short, in order to lock in amazingly low interest rates on long-term government bonds. Since the U.S. government’s position in relation to the bonds it has issued depends on what the Fed does as well as what the Treasury does, this argues against the Fed buying long-term government bonds when Larry’s argument says we should be selling long-term government bonds on net. Larry has convinced me by what he writes in “It’s time for governments to borrow more money.” The Fed should not be buying long-term government bonds.

But for the sake of stimulating the economy, the Fed needs to be buying large quantities of some type of asset. This is not just my view, implicit as a possibility in my post “Balance Sheet Monetary Policy: A Primer,” but the the official view of the Fed itself, since even the mostly stay-the-course policy the Fed announced at its last FOMC monetary policy making meeting involves buying large quantities of assets. (“Large” is less than “massive.”) So it is unfortunate that the legal authority of the Fed to buy assets is limited to a relatively narrow range of assets. See Mike Konczal’s interview with my undergraduate classmate Joseph Gagnon on the legal constraints the Fed faces. Short of buying foreign assets or otherwise going outside the Fed’s comfort zone, that probably means that the Fed should be buying mortgage-backed securities such as those issued by Fannie Mae. In general, when it uses balance-sheet monetary policy (what the press calls “quantitative easing”), the Fed should lean towards buying assets that have a high interest rate.  

It is important to note that many of the objections to more vigorous use of balance sheet monetary policy in the U.S. are really objections to buying long-term Treasury bonds, not objections to buying other assets. Anytime you see an argument against balance sheet monetary policy, check whether it is an objection to buying any kind of asset or only to buying long-term Treasury bonds. And sometimes there are objections to buying Treasury bonds and other objections to buying mortgage-backed securities that even combined do not apply to other assets. So I wish the Fed had the kind of authority the Bank of Japan has to buy a wide range of assets, including commercial paper (CP), corporate bonds, exchange traded funds (ETF’s), and real estate investment trusts (REIT’s). I got this list of assets from the Bank of Japan’s own website on the range of assets it is buying. See also my post on how the Bank of Japan should use this authority quantitatively: “Future Heroes of Humanity and Heroes of Japan.”

Given the low interest rates the U.S. government is facing, even aside from stimulating the economy it should be spending more–mostly on things it would buy later anyway and other productive investments. On stimulating the economy, my proposal of Federal Lines of Credit is gaining some traction: you can see my posts on what Brad DeLong and Joshua Hausman and Bill Greider have to say recently, as well as what Reihan Salam said early on. In what I write myself on Federal Lines of Credit, including the academic paper “Getting the Biggest Bang for the Buck in Fiscal Policy” that I flag at the sidebar, I emphasize the importance of not ultimately adding too much to the national debt as it will stand, say ten years from now. This is actually consistent with saying that the government shouldbe spending money now on things the government is going to spend money on sooner or later anyway, regardless of which party is in power, such as maintenance of military assets and stores, and the government should be spending money now on things that will add to the productivity of the economy so much that they will generate more than enough tax revenue to pay for themselves.

The existence of government investment that has this property of generating more tax revenue in the future than needed to make the payments on the money the government borrowed to make the investment is the spending counterpart to being on the wrong side of the Laffer curve so that you could cut taxes and get more revenue. I am not sure how many government investments meet this stringent test, but if any do, everyone should be in favor of them, regardless of their political viewpoint.  To have that statement be true, I am assuming that the investment is something noncontroversial that everyone would be glad to have for free (not something like a national stem-cell laboratory). The reason everyone should be in favor of such a self-financing investment is that the American taxpayers would be getting a better deal than “free.”  

Now, a government investment being self-financing in this sense is quite hard because for this, it is not good enough to have benefits great enough to pay for the direct cost to the government (the naive cost-benefit test). The extra payments to the U.S. Treasury alone (typically a minority of the total benefits) must be enough to pay for the investment. If on net the U.S. Treasury is out money at the end of the day for the sake of other benefits, then the dollars from the U.S. Treasury have to be counted as costing more than dollar for dollar since each dollar of government spending typically has a deadweight loss from tax distortion on top of it. (See for example Diewert, Lawrence and Thompson’s paper on this. There is a good discussion in this paper accessible to anyone even before the first equation.) As long as the U.S. Treasury is out money at the end of the day, the sophisticated cost-benefit test can easily flip from thumbs up to thumbs down depending on how big the tax distortions are–and economists don’t agree on that. I am on the side of believing there are relatively large tax distortions. (See my first post, “What is a Supply-Side Liberal,” which is also now at the sidebar.)

Interest rates won’t stay low forever, and the U.S. government, unlike the government of the United Kingdom of Britain and Northern Ireland, does not sell consols that would lock in a low interest rate forever (though maybe it should in the current environment). Moreover, extra debt probably raises the interest rate on existing debt. So the cost of extra debt is higher than the interest rate itself. (This is the monopoly problem from Economics 101: the U.S. government is a monopolist in the original issuance of its own debt, and so has to consider the effect of issuing more debt on the price and interest rates of existing debt.)

The last words in this post are is in response to Karl Smith’s post, which motivated the lamb and lion illustration. (Karl’s “lamb” is the U.S. government, while the “lion” is the bond traders in the financial markets). If, as I think they will, interest rates will some day go above not only inflation, but above the long-run growth rate of the economy as a whole (which matters among other things because it is the growth rate of the tax base), and the government cannot lock in a lower rate forever using consols, then any money the government borrows will cost us sometime in the future. The low interest rates now prevailing will make government borrowing now cost less in the future, but it won’t make the cost zero. Doesn’t that mean that we should do all our taxing later, when the amounts of money will have shrunk rather than now? It would if the cost of getting an extra dollar of tax revenue were constant over time. But a basic result from public finance is that the cost of getting an extra dollar of tax revenue goes up as you try to get more and more tax revenue as a fraction of GDP. That is why I was so confident in my post “Avoiding Fiscal Armageddon” that there is some limit of government spending as a fraction of GDP that we shouldn’t go beyond, even if that limit is higher than the 50% that I used as an example (and as a reasonable representation of my own judgment given my current knowledge.) Given the pressures on the government budget that I talk about in “Avoiding Fiscal Armageddon,” I will be shocked if tax rates are not higher in the future than they are now. So if the cost of getting an extra dollar of tax revenue goes up with the rates you already have, then there is an argument for moving toward raising tax rates at times such as now when tax rates are low compared to what they will be later. This “tax smoothing” argument counterbalances the implications of current lower interest rates, which favor lower taxes now. On balance, given the low interest rates the U.S. government is paying, tax rates should certainly be lower now than we expect them to be in the future, but there is a question of how much. 

Why is this called a “tax smoothing” argument? The reason is that raising tax rates when you think tax rates will be higher in the future–or following similar logic, lowering tax rates when you think tax rates will be lower in the future–tends to equalize tax rates now relative to expected tax rates in the future. I have not personally done any research on tax smoothing, but I learned about it from proofreading all of the math in Greg Mankiw’s paper “The Optimal Collection of Seigniorage: Theory and Evidence,” when I was Greg’s research assistant in graduate school, and I have heard more about it from my colleagues at the University of Michigan.  

Corporations are People, My Friend

The title is one of my cousin Mitt’s most famous quotations. This statement has not served him well politically, but I want to agree with him. There are two potential meanings of this statement, and I want to agree with both: 

  1. When the government taxes a corporation, the tax ultimately falls on some human being.
  2. When a corporation makes a decision, some set of human beings is behind that decision, and they are morally responsible for that decision.

Mitt wanted to emphasize the first point: that any tax on corporations is ultimately paid by some human being. That is a sound principle in the academic field of Public Finance. The big problem with corporate taxes is that, despite efforts on the part of many economists, economists don’t have that good a handle on exactly who ends up paying them. Whatever someone says on this score, I think I can guarantee that it will be controversial even at the purely academic level–though I would be happy to learn of a widespread academic consensus on this that I missed somehow. So if the intent is to make taxes depend on income, for example, it is a lot easier to get the intended effect on that score by taxing people directly rather than by taxing corporations.

I want to focus more on the second meaning: when a corporation makes a decision, some set of human beings is behind that decision, and they are morally responsible for that decision. By and large, those who have the most power in important corporations are well paid, and so count as members of “the rich.” So I will hold “the rich” responsible for decisions that corporations make. When a corporation makes a decision or takes an action that respects truth, I will attribute that decision to “the honest rich.” Whenever a corporation makes a decision or takes an action that does not respect truth, I will attribute that decision to “the dishonest rich.” To my mind, that adds moral clarity compared to talking about the decisions of, say, “Microsoft” or “Lehman Brothers.” When approaching corporate decisions ethically, it minces words not to recognize the people behind the decisions, even when their exact identities are not clear.

Among some of those who viscerally reject the statement that “corporations are people” I think there is a hidden impulse that is quite dangerous: the impulse to read CEO’s and other key corporate decision makers out of the human race. Even when a CEO commits evil, he or she is still a human being, and needs to be treated with the dignity that everyone deserves for being a human being, despite his or her crimes. 

Now, although corporations are people, typically a corporation is not a person, but instead many people. To the extent that corporate decisions reflect the outcome of a game  among many people (in economists’  technical sense of the word “game”), the actions of a corporation may not reflect any coherent objective function, as I discuss in my post Jobs And in that post, one of my key recommendations is each corporation be encouraged or even required by law to articulate what its objective function is intended to be, as a fictive legal person. Then its actions can be judged in relation to the intended objectives of the corporation. In that way, we can try to protect people from Frankenstein monsters of corporations that are doing things no one intends because of internal games being played. And this policy of asking corporations to articulate their objective function would help somewhat in clarifying whether the moral responsibility key decision makers in corporations bear is a responsibility for intending what the corporation did, or a responsibility for letting the corporation become a Frankenstein monster that is doing something no one intends.

As I wrote the last paragraph, I was reminded of Adam Smith’s invisible hand of the free market that leads to good results that go beyond what the participants in the market intend. But unless a corporation were structured internally very much like a market, I don’t know of any theorem suggesting that an invisible hand will work within a corporation to make good things happen that no one intended. And the wisdom of literature such as Scott Adams Dilbert or TV shows such as The Office suggest, to the contrary, that entropy often reigns–so that corporations often do less well than the intentions of the people in them.

Even in the small world of the University of Michigan and the medium-sized world of the Economics profession, I have seen how simple justice usually requires someone to put in serious time and effort to make that justice happen. Sadly, justice–or any kind of good behavior on the part of an organization–doesn’t come for free. I honor those who help make good things come from organizations, and hold responsible those who don’t, even if it is from inaction.

Putting together everything I have said about the ethical sense of “corporations are people,” I come to a key point. For anyone who has a modicum of power within a corporation, it is possible to be a member of “the dishonest rich” by my definition without ever lying and deceiving personally, if by inaction one makes no efforts to prevent one’s corporation from lying and deceiving. 

See my first post on Mitt: “Rich, Poor and Middle-Class,” inspired by Mitt’s saying “I am not concerned about the very poor …‘ 

Will the Health Insurance Mandate Lead People to Take Worse Care of Their Health?

I am here in Toulouse, in the south of France (not far from Spain), at a conference on “Risk and Choice.” The conference is in honor of Louis Eeckhoudt, my good friend and beloved coauthor, who is also a good friend and beloved coauthor of many, many people who do research on the economics of risk and the economics of insurance. Louis is here with us, enjoying the conference.

The most provocative presentation so far has been one by Isaac Ehrlich, on “The Problem of the Uninsured–Implications for Health Insurance.” (His picture is below, along with a link to his website.) Isaac is legendary to me for an interesting reason. In “A More Personal Bio: My Early Tweets” at the sidebar, I tell about competing in high school forensics. I went to the National Forensics tournament in Seattle in 1977 as a state champion in Extemporaneous speaking. Unlike Larry Summers, who was a college champion in debate, I didn’t do as well at debate. But I did compete seriously at debate for a while. At debate camp in the Summer of 1976 at Georgetown University, I ran a case arguing for the abolition of the death penalty along with my partner Tom S. Hales (not the now famous mathematician, Thomas C. Hales, who was one of my closest friends and classmates, but another classmate with almost the same name). The biggest obstacle we faced in our quest for victory were quotations from Isaac Ehrlich’s paper finding an apparent deterrent effect of the death penalty.

At the “Risk and Choice” conference in honor of Louis Eeckhoudt, Isaac has presented “The Problem of the Uninsured: Implications for Health Insurance,” which is coauthored with Yong Yin. The point of this paper, indicated in the title of my post, reminds me of another paper quoted a lot by high school debaters in 1976-1977: Sam Peltzman’s argument that requiring people to wear seat belts would make them feel safer, and therefore lead them to drive faster. This is now called the Peltzman effect, and I will refer you to Greg Mankiw’s post on “The Peltzman Effect” for a discussion of it.

In his presentation, Isaac points out that there will be the same kind of effect if you require people to have health insurance. They will feel safer in relation to their health, and so will take more risks. For example, a young person who has to pay full price for the visit to the doctor for antiobiotics to treat an STD may be more careful to use or insist on a condom. He and his coauthor Yong Yin have a theoretical model showing that such effects can be substantial in size.

Notice that it should be possible to get good empirical evidence on such effects. This is a great dissertation project for a graduate student in labor economics, public finance or health economics who wants to do empirical work in the “natural experiment” tradition. All it will take is finding a time when the government changed health insurance coverage in a reasonably exogenous way, plus data on behaviors that might plausibly be changed by feeling more safe given health insurance. If you know of anyone has done this already, please write in a comment.

When we talked during the break, Isaac pointed out to me that people who have looked have often found very little relationship between having health insurance and good health in places where they expected to see a relationship. He argues that this suggests some negative effect of health insurance on health like the “take more risks” effect he was talking about to cancel out the simple direct positive effect of health insurance on health that one would think must be part of what is going on. (By the way, I am reporting everything Isaac said to me with his permission.)

That leads to my last thought. Suppose that Isaac is right, and health insurance causes some category of people to take enough more risks that their health is about the same as it was before, overall. In theory, there would still be a redistribution argument for subsidizing health insurance for poor individuals in this category, but the welfare benefits from the redistribution would not show up as better health, they would show up as those individuals being able to enjoy taking greater risks with their health. This is not a line of argument likely to be pushed by advocates for expansion of health insurance, particularly since taking risks with one’s health often has negative effects on other people besides the person choosing to take the risk.

The Isaac Ehrlich-Yong Yin paper “The Problem of the Uninsured–Implications for Health Insurance” is not yet available. Given its timeliness, I encouraged Isaac to do what he can to get his paper with Yong Yin out as a working paper as soon as possible.

Update: Here I am talking with Isaac. He says that at the time, investigating capital punishment was a way of trying to show there was some deterrent effect of the criminal justice system, which was in doubt at the time. Often in empirical work it is useful to look at the extreme–in this case, the extreme sanction of capital punishment–in order to most clearly identify effects. Although as I high school student reading quotations on note cards in debate boxes, I thought of his technique as “multiple regression,” in fact he was implementing one of the first simultaneous equations models ever estimated in the economics of crime.

As I type, Isaac has been emphasizing that the effects are different for people who didn’t have health insurance because they were free-riding on the health safety net (such as hospital emergency rooms, charitable organizations, the Hippocratic oath that obligates doctors to help people, etc.) than for people who didn’t have health insurance because they were being careful to do everything possible to stay healthy. The “take more risks” effect is coming primarily from the people who didn’t have health insurance because they are going to do everything possible to stay healthy. But most of the policy discussion has been about people free-riding on the health safety net.

Bill Greider on Federal Lines of Credit: "A New Way to Recharge the Economy"

In my second post, “Getting the Biggest Bang for the Buck with Fiscal Policy,” I wrote about my interview with Bill Greider and promised I would let you know when his article came out. Bill Greider is national affairs correspondent for The Nation, and the author of Secrets of the Temple, a history of the Federal Reserve. And at the link under the picture, you can see a short clip of Bill Greider talking to Bill Moyers that will give you some of the experience I had in meeting Bill Greider. Bill’s article is out now, on The Nation’s blog. Here it is. The simple summary is that Bill is pushing my proposal of Federal Lines of Credit as hard as he can, while connecting it to some of his own longstanding interests. 

Let me say what I hope is obvious: this blog and my relatively accessible academic paper “Getting the Biggest Bang for the Buck in Fiscal Policy” are authoritative about what I am proposing in relation to Federal Lines of Credit, not Bill Greider’s post. (See also the Powerpoint file for my presentation at the Federal Reserve Board.) But though Bill’s nuances are very different from mine, the only serious issue I have with his post is that Bill makes it sound as if I want to have a less independent Fed. Far from it! What I actually said in my paper “Getting the Biggest Bang for the Buck in Fiscal Policy” is this:

The lack of legal authority for central banks to issue national lines of credit is not set in stone. Indeed, for the sake of speed in reacting to threatened recessions, it could be quite valuable to have legislation setting out many of the details of national lines of credit but then authorizing the central bank to choose the timing and (up to some limit) the magnitude of issuance. Even when the Fed funds rate or its equivalent is far from its zero lower bound at the beginning of a recession, the effects of monetary policy take place with a significant lag (partly because of the time it takes to adjust investment plans), while there is reason to think that consumption could be stimulated quickly through the issuance of national lines of credit. Reflecting the fact that national lines of credit lie between traditional monetary and traditional fiscal policy, the rest of the government would still have a role both in establishing the magnitude of this authority and perhaps in mandating the issuance of additional lines of credit over the central bank’s objection (with the overruled central bank free to use contractionary monetary policy for a countervailing effect on aggregate demand).

Let me explain that “National Lines of Credit” is just another name for “Federal Lines of Credit” that I use in the paper because that name of the program works better in Europe, where it is most likely to be done by individual nations rather than by the Eurozone as a whole.

What I want is amore powerful, but still fully independent Fed.  In particular, I want a Fed that is in charge of aspects of policy that are in between traditional fiscal policy and traditional monetary policy and a Fed permitted by law to purchase a wider range of assets, as the Bank of Japan is. (See my post “Future Heroes of Humanity and Heroes of Japan.”) I believe that the Fed is doing less stimulus than it otherwise would because it is not fully comfortable with balance sheet monetary policy on the scale required. (See my post “Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy.”) In other words, I am claiming that if the Fed had been given the authority by Congress to use Federal Lines of Credit as a tool, it would have done more stimulus, and the economy would be in better shape. (On my respect for the Bernanke Fed, see the lead-in to my first list of “save-the-world” posts.)

Two things I hope that Bill mentions if he returns to this topic in the future, as I hope he does, are

  1. the evidence from history that Federal Lines of Credit will work that is flagged in my post “Brad DeLong and Joshua Hausman on Federal Lines of Credit,” and 
  2. my proposal to use the timing of the Federal contributions for Medicaid as a way of getting States to spend more in recessions.  See my post Leading States in the Fiscal Two-Step, and the comparison with Mark Thoma’s related proposal in my post “Mark Thoma on Rainy Day Funds for States.”

I hope to have many more interactions with Bill Greider in the future, both in cyberspace and in person.

Reply to Mike Sax's Question "But What About the Demand Side, as a Source of Revenue and of Jobs?"

Mike Sax writes about my exchange with Karl Smith, starting with my post “Why Taxes are Bad,” Karl Smith’s reply “Miles Kimball on Taxing the Rich” and finally my post “Rich, Poor and Middle-Class.” He has at least three different lines of questions. In this post I want to answer two that might be summarized as “But what about the demand side, as a source of revenue and a source of jobs?” Here is what Mike says:

One more point: Implicit is the idea that rich are the "job creators.“ It’s not wholly true that the Occupy Wall Street presumed that most wealthy people are rich through personal chicanery. Much of their indignation is directed to what they see as systemic injustice-I for one do believe that capitalism is the most efficient and potentially most just allocator of resources, though I’m skeptical of too much laissez-faire.  What I see in Supply Side analysis is no recognition that 70% of GDP is consumer demand. So who is exactly the job creators?

http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

 

If there’s no money in people’s pockets there’s no demand and no job creation. Again, my position is a "Demand Sider” I’d like to find ways to reduce the demand side taxes-the taxes that the poor and middle income have to pay, from high payroll taxes, to the litany of state sales taxes, and fees-traffic fees, meters, indeed, insurance. As I suggested in my first reply to Miles nothing gets my goat more than this Cato canard that’s repeated ad nauseum that “45% of Americans pay no tax.”

Even the wino on a park bench pays tax every time he gets his hands on demon rum.

 

Does Miles recognize the distortions that come from the demand side of income-the taxes that the nonrich pay? Again, I poise these questions to Miles as I appreciate his contributions to the debate. Hopefully he understands the spirit that I poise these questions. I’ve certainly changed my opinion some on the “progressive consumption tax”-not enough to take the scare quotes away yet, of course!-and am willing to be persuaded on supply side issues.

Mike is absolutely right that the poor and middle class pay substantial amounts of sales taxes and taxes on earnings such as Social Security taxes. When people want to argue that the tax system is unfair to the rich, they often skew things by only talking about the income tax. But a key point to make here is that almost all countries that devote a higher fraction of GDP to government spending than the U.S. tax the middle-class a lot through a national sales tax or a value added tax (VAT) which is a lot like a sales tax except that it is harder to evade because much of the tax is collected from companies long before the good gets to the final consumer. The European model, in particular, is to tax the middle-class heavily in order to give benefits to the middle class. I believe that the resultant tax distortions are why so many Europeans work many fewer hours per year than Americans. They used to work roughly the same amount as Americans when they had lower tax rates. (These are facts that Ed Prescott has made much of.)   

Why not just tax the rich to pay for benefits for the middle class? The basic problem is that there aren’t enough rich people. I found this video by Tyler Durden etertaining and revealing on this topic. I can’t verify what he says exactly, though I think the basic point is right. You have to include at least the upper middle class in your tax in a big way, or you can’t get enough extra revenue to do a big expansion of social programs. 

So the “demand side” is a big source of potential revenue, if by that you mean some kind of sales tax of VAT tax. But to get a lot of revenue, you have to include people who don’t think of themselves as rich, and whose acquaintances might not even think of them as rich. Maybe we should do it anyway, but it won’t feel like what people imagine a tax on the rich would feel.  Here I remember Senator Russell B. Long’s parody:

“Don’t tax you, don’t tax me, tax that man behind the tree.”

There just aren’t enough “men behind the tree” who don’t seem like you or me.

What about the demand side as a source of jobs?  (This is a more typical meaning of “demand-side.”) Here, my answer is that, despite the floundering of policy makers lately, it is fundamentally easy to get enough aggregate demand. On this, just click the sidebar link on the June+ 2012 table of contents and look at all the posts on monetary policy and short-run fiscal policy, together with the recent post on evidence that Federal Lines of Credit should work: “Brad DeLong and Joshua Hausman on Federal Lines of Credit.” (My post “Dissertation Topic 1: Federal Lines of Credit (FLOC’s)” is also useful, but is pretty heavy.)  The bottom line is that monetary policy can provide plenty of aggregate demand, and if the Fed won’t do what it takes, we can use Federal Lines of Credit and the change in the timing of Federal payments to the states for Medicare that I talk about in “Leading States in the Fiscal Two-Step” to get enough aggregate demand without adding too much to the national debt. So, you wouldn’t know it from the news or from big chunks of discussion in the blogosphere, but getting enough aggregate demand is the easy problem. Raising aggregate supply while getting the revenue we need is the hard problem.

Tyler Cowen Reminisces about Our Days in Graduate School

Because I was packing and in the air over the Atlantic yesterday on my way to Toulouse, I only now had a chance to read Tyler Cowen’s wonderful reminiscences of our time together in graduate school and the people we knew. He has some very kind words about me, my daughter Diana, and this blog that warm my heart. Tyler also reminisces about our classmates Abhijit Banerjee, Steve Kaplan, Mathias Dewatripont, Alan Krueger, Nouriel Roubini and Brad Delong.

P.S. Reports of my death in the comment thread for Tyler’s post are greatly exaggerated.

Miles's April 9, 2006 Unitarian Universalist Sermon: "UU Visions"

If you have been reading this blog, it won’t surprise you to learn that I am a preacher. I grew up a Mormon. (Indeed, my grandfather, Spencer Woolley Kimball, was the 12th President of the Mormon Church, from 1973 to his death in 1985. That puts him in a line of Mormon Prophets that begins with Joseph Smith and Brigham Young.) In the middle of my undergraduate years, I served a Mormon mission, preaching Mormonism in the Tokyo North Mission in Japan from 1979 to 1981. And it is hard to count how many Mormon sermons and lessons I gave both before and after my missionary service in Japan.

But I am a Unitarian Universalist now. For all practical purposes, I left Mormonism early in 2000, though I am still technically a Mormon Priest and Elder. Since the Fall of 2000, I have been a member of the First Unitarian Universalist Congregation of Ann Arbor, Michigan. Every Spring since 2005, by invitation, I have given a sermon as a lay preacher at a nearby congregation: the Community Unitarian Universalists in Brighton (CUUB). This is my second sermon at CUUB, which is the one most relevant to what I have been trying to do so far with this blog: present a vision of how the world could be. 

This post jumped the gun a little. I intended to just put the text of the sermon in a Tumblr draft to edit later. Doing that as I was packing for my trip to an economics of risk and uncertainty conference in Toulouse, I published it. In any case, this was the introduction it needed. You can see in it some of the beginnings of themes I have pursued in this blog. And I will use this concept of a “vision” in future posts. 

UU Visions

One of the scriptures that Bill Clinton quoted on the campaign trail was from Proverbs, chapter 29, verse 18: “Where there is no vision, the people perish.”He was using the word “vision” not in the sense of a divine revelation, but in the sense of an ideal—an image of how the world could be and should be, and some ideas of how to work toward that goal.Each one of us, in our personal lives, is guided by visions of how our own lives could be and should be and how to work toward those goals; and in our public lives, we are each guided by visions of how the world could be and should be and our ideas of how to work toward those goals.These visions are every bit as much a part of who we are as our beliefs about the origin of mankind, God, heaven, hell, and the reason evil exists.

Unitarian Universalists have the tradition of credos: personal statements of belief.This sermon advocates a corresponding Unitarian-Universalist tradition of sharing “visions”: personal statements of the kind of world we would each like to work towards creating.Just as there are now classes on “Building Your Own Theology” there could be classes on “Creating Your Own Vision,” culminating in the sharing of those visions with the congregation.In the meantime, before such classes exist, we can struggle on our own to write down our individual visions and share those with each other.

Professionally, one of the big mysteries I struggle with is the fact that rich nations like the United States and Japan have been getting much richer, but not any happier.[Scientific note: Betsey Stevenson and Justin Wolfers have argued persuasively that this is not true for Japan.I had not yet read their paper at the time I gave the sermon.] The fact that we [the U.S.] are not getting any happier does not necessarily mean that we are making a mistake in our way of life.For example, some of our riches are spent on medical care that lengthens our lifespans, which is surely, other things being equal, a good thing.And there are many other worthy goals one might have besides happiness.But the fact that we are getting richer does mean that we have more and more choices (at least as a society), and we need to be ever more thoughtful about the choices that we do make.If, as a society, we are not managing to turn our greater riches into greater happiness, we should either figure out how to be more effective at adding to national happiness, or make sure that we are on the way to achieving some other goal that we value as much or more.

As the set of choices we have increases, one of the most precious resources we can have is a knowledge of our own deepest desires.What is truly important? What is it that I really want most of all? Why do I want it? Is there something deeper that stands behind that desire? If I had to choose, which would I choose? We deal with these questions of what we really want every day.For example, setting priorities often means deciding what you don’t have time to do, because there are more important things to do.

One clue to our deepest desires is what lights us up and gives us an inner glow just to think about it.This kind of enthusiasm is especially valuable when one of the things that lights us up and gives us an inner glow is getting in touch with a desire for the welfare of others as well as ourselves.

Today is Palm Sunday.Two of the things we know most solidly about Jesus are that he came to Jerusalem at this season to meet his death and that he taught as a central principle the Golden Rule: “Love your neighbor as yourself” and “Do unto others as you would have others do to you.”As my friend and fellow UU economist Chris Carroll said to me two weeks ago when I saw him at a conference in Madrid, “Love your neighbor as yourself” was a big shift from the Roman quest for “undying fame.”Jesus was a magnet who permanently shifted the ethical compass of Europe and every place in the world influenced by the descendants of the Roman World, however often people ignore that compass.

Kant translated the Golden Rule into his Categorical Imperative, which I think of as having two parts:First, think of how you would like the world to be.Then, act in a way that would bring about that world if everyone else also acted that way.In other words, Kant was saying that we need to create a vision of the world as it should be, then act according to that vision.

Desire and love generate the image of a world as we want it to be, not only for ourselves, but for all people and for the whole web of life.Once we have an image of where we want to go, a crucial ingredient for making our plans before we pour our hope and faith into action is to ground ourselves in reality.I feel that Science is a sacred calling because it helps us to build a better world on a foundation of the truth about physical nature and the truth about human nature.Of course, any sacredness Science has comes from the sacredness of truth.Scientific truth, however hard to hear, however hard to bear, must never be sacrificed for the sake of politics, or we will not be able to see our way clearly to get where we want to go.In particular, a lack of devotion to the truth about what won’t work can leave us tilting at windmills like Don Quixote.But our knowledge will always be imperfect.Once we have learned as much and thought as hard as we can, we have to make a choice about what we will do.This is where hope and faith come in.Hope lights our way a little beyond the edge of our knowledge, and faith gives us the courage and energy for the ongoing struggle to help move the world toward the ideal we have chosen.

How would a tradition of UU Visions work in practice?

Visions, like credos, will be idiosyncratic.No two people will have exactly the same vision of how the world should be or of how to get there.Although our common humanity will generate many common threads in different people’s visions, these common threads may be obscured behind different political views, different modes of expression, and different beliefs about how the world works.

The key to making a tradition of UU Visions work is to take our hard won tradition of tolerance for different beliefs about the origin of mankind, God, heaven, hell, and the reason evil exists and practice tolerance toward different visions.On the part of the one sharing a vision, the more personal the presentation, making clear the autobiographical and human wellsprings of one’s vision, the easier it will be on the listeners.But it would be sad indeed if people felt they could not share deeply felt aspects of their visions because they did not accord with the reigning political fashions.

Indeed, in America as a whole it is sad that people find it harder and harder to talk calmly and productively about their political differences.Surely, we for whom tolerance is a birthright can do better—honoring that tradition of tolerance which was bought for us by the blood of martyrs for religious freedom.

I think the reward for the hard work of sharing and listening and the even harder work of tolerance, would we would find common ground we had not realized, identify new directions for social action, and harness a greater fraction of our collective emotional energy toward doing good in the world.Collectively, we would be better able to lead the way toward prescriptions that will work in the 21st century, rather than relying on prescriptions developed in the 19th and 20th centuries.By bridging—or at least understanding—the differences in opinionamong ourselves, we will gain some morsels of wisdom that will help us to heal this divided land.

Having proposed this explicit tradition of UU Visions, it would not be unreasonable for you to think that I had thereby volunteered to go first.So here goes.I hope what I have said up to now draws general approval, but from here on, I will get more idiosyncratic, and I am sure you will find something to disagree with.But that is the nature of visions.

When I was a child growing up in Madison, Wisconsin, my father instilled in me a confidence that the world was a reasonable place, while my mother drove me to a high level of ambition.I was a miser, seldom spending much money except when I had a chance to go downtown to bookstores where I could by used Science Fiction books.I read many Science Fiction novels with heroes who, while human, possessed an amazing range of special skills, abilities and insights. They regularly saved the world, or more often, the galaxy.In the absence of videogames, I loved boardgames, especially wargames with little cardboard pieces on hexagonal grids.

When I was 13, my family moved to Provo, Utah, where my father took a position as a professor at Brigham Young University’s new law school.Provo is in the heart of Mormon country, where every group of ten square blocks or so constitutes its own Mormon congregation.As a teenager, I appreciated having the neighbors know who I was and stop to talk to me as I made my way through the neighborhood.Growing up in a liberal Mormon household, at that time in my life Mormonism seemed open-ended.Indeed, the idea that esoteric wisdom could be found in a treasure trove of ancient documents and 19th century church doctrines fired my mind with the promise of intellectual discovery.I also found that praying hard led to subjective spiritual experiences that I valued highly.

I went East to college, and decided to become an economist, since I thought it would be too hard to make my mark among aspiring physicists, and Sociology didn’t have a wide enough choice of classes.One thing I learned was that the objective of economics was not to make people rich but to help people in general to get what they want, whatever it was that they wanted.Every week I attended the University Branch of the Mormon Church in Cambridge, Massachusetts, where I heard very interesting lessons about psychological or spiritual virtues such as faith, hope and love and became more aware that the Book of Mormon put taking care of the poor as one of the highest religious duties, while the revelations of Joseph Smith taught that one should devote all of one’s money, time and other resources to the building of “Zion,” where “Zion” was a word referring to the ideal society, imagined as a society with the Mormon Church at its center, centered on families, extended families, and community.

In addition to marrying and raising a family, and beginning my career as an economist, the next two decades led to my estrangement from the Mormon Church, as you heard last time.This process led me to a greater appreciation for freedom, especially freedom of thought.I remember being deeply moved by one of my children’s patriotic school plays, filled with gratitude for this country that could produce the Bill of Rights.I also learned something of the trials of fire people often go through to champion the truth in the simple sense of “just the facts.”I learned that someone has to work hard to generate every bit of justice there is in the world.Finally, I realized to my dismay how inegalitarian I had been in my marriage, despite being what I had thought was a very enlightened Mormon male.

Bereft of the particular world-changing plans of Mormonism, I find myself trying to recover a sense of mission by trying to figure out how I can make a difference in the world.I find myself studying happiness in hopes there is a way to help people be happier.I do think it is important whether as a nation, fifty years from now we are a rich and happy country or a rich and unhappy country.

As an economist, I also find myself trying to identify more precisely what people want the most so that public policy can make appropriate tradeoffs.Among other things, identifying what people want tells how they will respond to incentives, and some of the research I have been involved in suggests that people are likely to respond quite strongly to tax incentives.My graduate school advisor, Greg Mankiw, recently stepped down as the head of the President’s council of Economic Advisors.I told him that I was one of the few supply-side liberals.

There are so many important things for the government to do: make sure people have good medical care, and that burgeoning epidemics are stopped in their tracks, control crime, support scientific research andmanage the complexities of foreign affairs, including promoting democracy and economic development around the world.But every bit of taxation has the potential to distort the economy and thereby hurt people’s welfare.Some tax revenue can be raised by penalizing things that should be penalized anyway, such as carbon dioxide emissions, legal drug usage and purchases of goods for which displaying social status is a big part of the motivation.But we will still need more revenue to do all of the things that need to be done, and I worry about where we can get that tax revenue without causing the kind of relative economic stagnation I see in France and some of the other European countries.If we can find a way to do that, what it will look like is an arrangement in which we are all caused to work very hard in order to help those in need and otherwise make sure that the things that need to get done get done.

Even if tax revenue can be raised in a way that does not do too much damage, social programs to help people can also have bad incentives.One big exception is that as far as I can tell, giving all children a good education has only positive incentives.I feel that the fact that we fail many children in this duty of giving them a good education is one of our biggest moral failings as a nation, and anyone who stands in the way of achieving that goal of a good education for all children should feel very bad.We should do whatever it takes.In particular, we should experiment with many different approaches, with no holds barred, until we find the one that works.

Many things that need to be done to make a Great Society are not the work of government at all, but the proper work of companies, families and churches.In the coming century, besides managing technological progress and the integration of the world economy so that all people in the world can be rich, one of the key tasks of employers is to figure out how to make jobs more challenging, rewarding and fun.I believe that making jobs fun will be one of the key sources of competitive advantage in the coming years, so I am hopeful that companies will rise to this challenge.If they do manage to make jobs more challenging, rewarding and fun, many people may want to retire later, perhaps rescuing Social Security from insolvency.

Strong marriages, parent-child relationships, sibling relationships and extended families that love and support one another are important for people’s health and well-being.Life seems a lot more meaningful when someone close to you cares about you as an individual.I am deeply moved when I see many places in the world and some places even in our country extending the benefits of marriage to gays and lesbians, as well as heterosexuals.Beyond the family, churches serve many functions, providing a sense of community, friendships, inspiration, ideas, comfort and a place to celebrate life’s transitions.I see agnostic religions, such as Unitarian-Universalism as important because they provide the benefits of religion without requiring people to believe things they simply cannot believe.I have a hope that Plato was wrong about the necessity of a “noble lie” to make a community work.If we are skillful enough, can’t we build a wonderful tight-knit community on a foundation of truth and freedom?

Besides a legacy of political and economic freedom, policies that do not bankrupt the nation, and the countless instances of individual mentoring of the next generations, the greatest gift we can give to the 22nd century is the scientific and technological research that we do and the enduring literature, art, movies and games that we create.I have not lost my enthusiasm for the Science Fiction goals of exploring and colonizing the Solar System and ultimately the Galaxy.I love the notion of my Planetary Scientist friend John Lewis in his book Mining the Sky that colonizing the Solar System will make it possible to support many more artists, writers and directors, so that we will have more works that can thrill as many people as the Harry Potter series, or rise to the level of Lost.

In the even more distant future, truly amazing things may happen.I hesitate to spell out all my hopes and dreams for that more distant future, lest I sound as if I am off my rocker, but I do think we should forge ahead laying the foundation for future wonders.Perhaps some day human beings will overcome death itself.Unfortunately, I believe that all of us here today will die, but perhaps we will be part of one of the last few generations of human beings to die.Like all human beings since the beginning of history a few thousand years ago, we belong to the critical years of the Dawn of Humanity.Let us rise to the challenge of envisioning a good future for humanity.I believe that Unitarian-Universalism in particular can make a big contribution to such a future, since as a religion, we have faced up to our own responsibility for the future of our world and of our species.

Brad DeLong and Joshua Hausman on Federal Lines of Credit

World War I veterans in 1920, who later had the chance to borrow against their bonus

Brad Delong not only praises Federal Lines of Credit, he managed to identify some empirical evidence that suggests they should indeed be more powerful than tax rebates! Here is what he says:

The interesting thing is that we have done this before. In 1931 and 1936 the Congress (over the objections of President Hoover in the first case and President Roosevelt in the second) gave World War I veterans the option to borrow against the WWI Veterans’ Bonus that they were going to be paid in the future:

Then Brad cites a study of letting veterans back then borrow against their bonus by Berkeley graduate student Joshua Hausman. Here is Brad’s summary of the results:

Because the bonus was paid to veterans and only veterans, Josh has substantial cross-section identification off of the different proportions of veterans in the several states. The (preliminary) figures and regression results are, to my eye, awesome: a cash-flow multiplier that looks to be 0.8 or so.

Federal Lines of Credit are an extraordinarily effective recession-fighting policy when mental accounts or liquidity constraints are important, and it looks as though they were very important in the 1930s.

Rich, Poor and Middle-Class

Today I want to react to my friend Karl Smith, to my cousin Mitt Romney, and to the part of the American electorate Mitt was trying to pander to when he said:

I’m not concerned about the very poor — we have a safety net there. If it needs repair, I’ll fix it. I’m not concerned about the very rich — they’re doing just fine. I’m concerned about the very heart of America, the 90-95 percent of Americans who right now are struggling.

I think Mitt has things exactly backward here. Fortunately, I have high hopes that he said it precisely because it isn’t true: that he is concerned about the very poor and the very rich, but has a lot of trouble connecting emotionally with the middle-class. So, since he might be our next president, oh may it be true that Mitt, in his heart of hearts, agrees with me when I say this:

I am deeply concerned about the poor, because they are truly suffering, even with what safety net exists. Helping them is one of our highest ethical obligations. I am deeply concerned about the honest rich–not so much for themselves, though their welfare counts too–but because they provide goods and services that make our lives better, because they provide jobs, because they help ensure that we can get good returns for our retirement saving, and because we already depend on them so much for tax revenue. But for the middle-class, who count heavily because they make up the bulk of our society, I have a stern message. We are paying too high a price when we tax the middle class in order to give benefits to the middle-class–and taxing the rich to give benefits to the middle-class would only make things worse. The primary job of the government in relation to the middle-class has to be to help them help themselves, through education, through loans, through libertarian paternalism, and by stopping the dishonest rich from preying on the middle-class through deceit and chicanery. 

With that statement in hand, it is easy to answer Karl Smith, whowrites this in response to my post “Why Taxes are Bad”:

If we agree that benefits reduce work effort, while taxes reduce utility then basic tax transfer mechanisms seem to offer us exactly the tradeoff we want.

Welfare benefits discourage the poor from working. However, the poor have a low marginal productivity of labor.  So, society loses little when poor people work less.

On the other hand rich people have a low marginal utility of income. So if we extract their utility by extracting their income society loses little.

However, when we redistribute money to the poor society gains a lot because the poor have a high marginal utility of income.

Isn’t this exactly the trade we are looking for?

On the part of the poor, my answer is “Of course we should help the poor more, and should not worry much about any resulting lost output by the poor.” However, we do need to be concerned that for many, a job is an important contributor to self-esteem, in a way that the poor do not always fully take into account when they let tax and benefit incentives influence whether or not they work.

As for the rich, as I write above, it is not so much their welfare I am concerned about, though that counts too, but getting incentives right to encourage them to work hard for the benefit of the rest of society. Among other things, the best of the rich provide a crucial decentralized guiding role for our economy.

But Karl’s point that benefits reduce work effort is a big problem when those benefits go to the middle class. The middle class make up the bulk of our society and produce the bulk of GDP. So if government benefits cause them to work less–for example, to retire earlier than they otherwise would–we all end up poorer.

Two last points: First, it will take me at least a hundred posts to develop, clarify and defend my views about taxation and related aspects of public policy. Second, many readers will be surprised that I think Romney might care about the poor (though not so much about the middle class) in his heart of hearts. This could be my familial bias talking, but I try to back up this view in my post “Will Mitt’s Mormonism Make Him a Supply-Side Liberal?”

Also inspired by a saying of Mitt’s:                  

“Corporations are People, My Friend”

Inspired by a saying of Barack’s:

“You Didn’t Build That: America Edition”

Miles's Best 7 "Save-the-World" Posts, as of July 7, 2012

There is a hint of gentle self-mockery in my title above, since I am not blind to my station in the world, which makes it hard for me to sway the policies of governments, central banks, or even economics departments. Indeed, one of my first papers, “Optimal Advice for Monetary Policy” (with Susanto Basu, Greg Mankiw and David Weil) was sparked by an early recognition that advice is not always heeded. But it seems more honest to admit to the hope of making the world a better place even beyond my immediate circle than to hide behind a tamer phrase such as “Posts relevant to important policy concerns.”

Moreover, the phrasal adjective “save-the world” gives better guidance for deciding what makes the list. I will use six criteria. The top ten list is decided by you, my loyal readers,  together with highly-appreciated newcomers, based on Google Analytics data. But I get to decide the list of best “save-the-world” posts giving policy proposals or advice, based on my judgment of 

  1. how certain I currently am of the value of the proposal,
  2. expected total benefit to world welfare, added up over time,
  3. urgency, 
  4. importance of having many people know about the idea,  
  5. avoiding duplication with other posts on the list in the policy proposal it addresses, and
  6. avoiding duplication with proposals that already have many other people pushing them hard, unless I have at least a slightly new angle on the argument for the proposal.  

For example, my post “Jobs” has an important policy proposal in it, but doesn’t make the list because the proposal there is too new to my thinking for me to be fully confident of it, and so it fails according to criterion 1. But it or a future post developing the idea further might make the list someday if I become more confident of that proposal. Also, the complexity and subtlety of monetary policy issues in the United States is great enough, and–relative to the sweep of history–the Bernanke Fed has been impressive enough, that a shred of remaining modesty has prevented me from having any suggestion about U.S. monetary policy of sufficient magnitude to belong on the list at this point. That is so even at a time when my undergraduate classmate Joe Gagnon has very strong words for the Fed in his post “The Fed Shirks Its Duty.” I take Joe’s views (and similar views from others) very seriously, but I am not there yet.    

For now, if a post makes the list, I will just put it in chronological order of when I posted it. Here is the list:

  1. Getting the Biggest Bang for the Buck in Fiscal Policy.
  2. National Rainy Day Accounts
  3. “Henry George and the Carbon Tax”: A Quick Response to Noah Smith
  4. Leading States in the Fiscal Two-Step
  5. Avoiding Fiscal Armageddon
  6. Health Economics
  7. Future Heroes of Humanity and Heroes of Japan

A few notes:

First, the Federal Lines of Credit (FLOC’s) proposal in “Getting the Biggest Bang for the Buck in Fiscal Policy” is a very simple, but powerful, idea that macroeconomists and policy makers seem to have missed–one that could be of enormous help to both the United States and to Europe in their current economic troubles. I should not have been the one to come up with this proposal: someone could easily have come up with it 40 years ago, but as far as I know, no one did. And it is unfortunate that no one did. “Leading States in the Fiscal Two-Step” is in a similar spirit.

Second, “Avoiding Fiscal Armageddon” really has three proposals, with the proposal referred to in the title the least important of the three.

Third, I mean what I say in the title of “Future Heroes of Humanity and Heroes of Japan.” No monetary policy move would mean more for the world, given the powerful demonstration value this move would have.

Dissertation Topic 3: Public Savings Systems that Lift the No-Margin-Buying Constraint

QUESTION: Miles, I am a 2nd year Phd student at the University of Athens,Greece and i would like to write a strong proposal to continue the Phd abroad (I don’t think you need details about why, just read the headlines!). I was reading your papers about precautionary savings and i was thinking to study the impact of social security on savings and investment behavior of the households. What do you think and where should I focus my attention? Thank you in advance!

I find this subject intriguing because I believe that the relation between healthcare systems, saving and macro performance is strong. The first two have been investigated extensively, but not for Europe despite the fact that the “experiment” is interesting due to the diversity between countries with respect to healthcare systems since data are relatively recent (thanks to S.H.A.R.E.). For the second pair I think that distorted saving affect the economy severely. Households savings are substituted by government and this could potentially affect the structure of the economy. For example some countries regulate the investing decisions of public institution and constrain to invest nationally and safely (usually national bonds!). Ideally i would like to focus in the most fruitful research topic and construct a theoretical model with heterogeneous agents and test it empirically.I understand that my questions are very broad and i need to narrow them.

ANSWER: In this area, I think there is a very interesting contrarian research project. Given even a modest positive equity premium (expected returns of stocks higher than expected returns of bonds), models of optimal life-cycle saving and portfolio choice suggest that–if only they could freely do margin-buying at the Treasury-bill rate and with no extra investment fees–young people should typically have what seem like very large investments in the stock market because the present value (total asset value) of their many years of future labor earnings is in the hundreds of thousands, or even millions of dollars, making substantial stock-holdings reasonable. Even at my age, if I knew how to do margin-buying conveniently at the Treasury-bill rate with no fees in order to effectively borrow to hold more stock than the total value of my retirement savings plan, I would do it, but I can’t. But government retirement savings programs could make this possible. Moreover, if the political flak could be survived, a public program is a way to overcome the fact that most people don’t understand the principle that they should integrate future labor earnings into their financial investment decisions.  (There is a lot of evidence to back up the fact that in the real world most people don’t understand this, even though in standard economic models, all of the “agents” serving are theoretical stand-ins for human beings understand this principle with perfection.)

As someone writing an economics dissertation, the political flak that such a program would entail is not your problem. Showing that it would substantially raise welfare if it ever happened would be very interesting. I think this is a research project that would intrigue people because it sounds so counter-intuitive, especially in the context of the current economic troubles, yet is so firmly founded in sound economic theory.

By the way, the idea that people ought to have large stock holdings even if the expected returns on stocks are only modestly above the expected returns for bonds is dramatically reinforced if one is willing to follow Raj Chetty in estimating risk aversion using labor supply behavior. I love this paper:

Raj Chetty, “A New Method of Estimating Risk Aversion”

American Economic Review, 96(5), 1821-1834, December

Using Raj’s numbers for risk aversion amounts to saying that only declining marginal utility is a sound reason for avoiding risk and that any aspect of apparent risk aversion that comes from departures from the standard expected utility theory does not deserve respect in thinking about the normative (prescriptive) question of how much risk people should take on in order to get higher expected returns.

I personally would find a job market paper that pursued this idea seriously and well quite exciting, and I don’t think I would be alone.  

This project would be computationally intensive. For style of paper, you might want to consider something like my paper “Portfolio Rebalancing in General Equilibrium” with Matthew Shapiro, Tyler Shumway and Jing Zhang or the partial equilibrium counterpart to that paper.

Miles's Linguistics Master's Thesis: The Later Wittgenstein, Roman Jakobson and Charles Saunders Peirce

In between receiving a 1982 bachelor’s degree and a 1987 Ph.D. in Economics from Harvard, I received a 1984 Master’s degree in Linguistics from Brigham Young University (completed in the Summer after I had already done a year towards an Economics Ph.D.) Here is a download of my Master’s thesis (advised by John Robertson), which has a title longer than some of my posts:

Language, Linguistics and Philosophy: A Comparison of the Work of Roman Jakobson and the Later Wittgenstein, with Some Attention to the Philosophy of Charles Saunders Peirce.

With the emphasis in my thesis on the Later Wittgenstein and Charles Saunders Peirce, I felt I had earned by junior philosopher’s wings when I finished this thesis. 

More generally, my Linguistics degree made me feel I could make my own decisions about English usage with an eye toward effective communication. And it has given me an interest in carefully delineating terminology to describe new ideas in Economics.

I had already been accepted to the Economics Ph.D. program at Harvard when I started the Linguistics Master’s program and had no intention of pursuing Linguistics professionally. Among other personal motivations, my much-less-expensive Linguistics degree was my answer to Harvard’s attempt to get me to forgo the benefits of Advanced Placement and pay for a fourth year as an undergraduate at Harvard. My interest in Linguistics in the first place is due to the influence of my Biblical Hebrew and Historical Linguistics professor Thomas Lambdin, author of a widely used Biblical Hebrew textbook. 

Update: I found out that my favorite teacher from my K-12 years, Joyce Nelson (photo below), died on July 3, 2012. When I asked her advice about whether it made sense to do a Master’s degree in Linguistics, she encouraged me, saying that knowledge always becomes valuable in one way or another.  

Joyce Nelson

Joyce Nelson

Miles's Presentation at the Federal Reserve Board on May 14, 2012 (pptx)

Here is a download of the Powerpoint file for the presentation I gave at the Federal Reserve Board on May 14, 2012, as recounted in my second post “Getting the Biggest Bang for the Buck in Fiscal Policy.” It had an element of discussing Stefan Nagel’s longer presentation immediately before, a presentation based in part on his paper with Ulrike Malmendier “Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking,” but ranges beyond that to a wider discussion. My most important idea in this presentation is Federal Lines of Credit (FLOC’s) as a way to provide fiscal stimulus without adding much to the national debt–an idea laid out in full detail in my academic paper about Federal Lines of Credit: “Getting the Biggest Bang for the Buck in Fiscal Policy.” As academic papers go, this one is quite accessible to non-economists.

Dissertation Topic 2: Multisector Models

QUESTION:

Hi Miles. I am a PhD student just commencing the thesis writing process. I have been focussing on the literature that has evolved from your paper ‘Sticky Price Models and Durable Goods’. Much of the work following this paper focusses on solving the co-movement problem between durable and non-durable consumption with sticky prices, sticky wages and/or credit frictions. I would like to ask your opinion on interesting research directions in this area.  –chrisp1979

ANSWER:

Not everything the economy produces is alike in how it affects the economy as a whole. So in my view, considerably more research effort should be devoted to macroeconomic models of the economy that treat different sectors of the economy as different in important ways. And how goods relate to the time-dimension (durable like cars or nondurable like fast food) is one of the most important differences between different categories of things the economy is producing.

In giving more specific advice, I worry a little about whether my taste conflicts with the taste of those you need to appeal to. You should keep in mind that I am, in the first instance, a macro theorist.  (Indeed, early on in graduate school I thought I would grow up to be a micro theorist.) In any case, I feel we know so little about the behavior of multisector models that it is premature to try to get a particularly result.  In this area where we don’t even know very basic things from a theoretical point of view, I have thought it too bad that so many researchers rush so fast to try to get a model that has a particular result–in this case comovement of the sort you are mentioning. What I think we need is much more understanding of multisector models in general. 

I would much rather have someone study a range of multisector models that seem reasonable based on first principles and see what they do rather than just contrive something with no particular plausibility that gets this particular comovement. If you set out to understand what multisector models want to do without coercion, I think that is a valuable addition to knowledge. Better to find that a reasonable, plausible model doesn’t seem to match what is happening in the world–and so have an interesting question to mull over about what is going on in the real world that makes it act differently than the model–than to search through model space to find an unreasonable, implausible model that can match one particular fact.

In other words, I think many papers written these days (particularly in this topic area) misunderstand the task, which is to find plausible reasons that are likely to be true for why some aspect of the world is the way it is rather than some reason that could possibly explain a fact about the world.

Judgments about plausibility of assumptions are key. That is why I would rather have someone pursue a model with good assumptions (some combination of plausibility and simplicity), study it carefully to see what it does, and help the economics profession gradually learn about the mapping between various attractive assumptions and the implications that flow from those assumptions.

But given an open mind, trying to understand how the models work, multisector models are a great area, and many different models would be very interesting, worthy dissertation topics. As long as you start with what you think is a good multisector model that you study to see where it leads rather than starting with a particular result you want to get, I think I would personally find it interesting. 

An example of some good research in this area is the work of the Bank of Japan’s Nao Sudo that has focused on the input-output structure of the economy, which is a very plausible, non-forced mechanism for generating comovement between sectors. Nao’s paper is slated to come out in the JMCB.

Jobs

Jobs and the nature of work are central to the issues I laid out in my first post “What is a Supply-Side Liberal?” I am prompted to write about jobs and the nature of work today by the interesting debate about giving up freedom to get and keep a job kicked off by Chris Bertram, Corey Robin and Alex Gourevitch at Crooked Timber, answered by Alex Tabarrok and Tyler Cowen at Marginal Revolution, who in turn are answered by John Holbo. Adam Ozimek at Modeled Behavior provides clarity to the debate.  And the hive mind of Karl Smith and Adam Ozimek at Modeled Behavior asked me by tweet to weigh in. I won’t try to do a blow-by-blow, but I have some things to say. If you don’t have the energy to read the whole debate, everything I say below can be understood from just reading this litany of limitations on employee freedom from the post that started it all: Chris Bertram, Corey Robin and Alex Gourevitch at Crooked Timber.

1. Abridgments of freedom inside the workplace:

On pain of being fired, workers in most parts of the United States can be commanded to pee or forbidden to pee. They can be watched on camera by their boss while they pee. They can be forbidden to wear what they want, say what they want (and at what decibel), and associate with whom they want. They can be punished for doing or not doing any of these things—punished legally or illegally (as many as 1 in 17 workers who try to join a union is illegally fired or suspended). But what’s remarkable is just how many of these punishments are legal, and even when they’re illegal, how toothless the law can be. Outside the usual protections (against race and gender discrimination, for example), employees can be fired for good reasons, bad reasons, or no reason at all. They can be fired for donating a kidney to their boss (fired by the same boss, that is), refusing to have their person and effects searched, calling the boss a “cheapskate” in a personal letter, and more. They have few rights on the job—certainly none of the First, Fourth, Fifth, Sixth, and Seventh Amendment liberties that constitute the bare minimum of a free society; thus, no free speech or assembly, no due process, no right to a fair hearing before a panel of their peers—and what rights they do have employers will fight tooth and nail to make sure aren’t made known to them or will simply require them to waive as a condition of employment. Outside the prison or the military—which actually provide, at least on paper, some guarantee of due process—it’s difficult to conceive of a less free institution for adults than the average workplace.

2. Abridgements of freedom outside the workplace

In addition to abridging freedoms on the job, employers abridge their employees’ freedoms off the job. Employers invade employees’ privacy, demanding that they hand over passwords to their Facebook accounts, and fire them for resisting such invasions. Employers secretly film their employees at home. Workers are fired for supporting the wrong political candidates(“work for John Kerry or work for me”), failing to donate to employer-approved candidates,challenging government officials, writing critiques of religion on their personal blogs (IBM instructs employees to “show proper consideration…for topics that may be considered objectionable or inflammatory—such as politics and religion”), carrying on extramarital affairs, participating in group sex at home, cross-dressing, and more. Workers are punished for smoking or drinking in the privacy of their own homes. (How many nanny states have tried that?) They can be fired for merely thinking about having an abortion, for reporting information that might have averted the Challenger disaster, for being raped by an estranged husband. Again, this is all legal in many states, and in the states where it is illegal, the laws are often weak.

To me the ethical question of whether work requirements are morally justified is very closely tied to the economic question of whether or not those requirements are necessary for the effective production of the goods and services the job is intended to produce. To make this ethical point, let me give the example of our volunteer military–a comparison that Chris Bertram, Corey Robin and Alex Gourevitch allude to.

In my view, our volunteer military system is one of the glories of our republic. I cannot see how the drastic governmental coercion of a military draft could ever be justified if a volunteer military can do the job of protecting our country and policing the world as well as our volunteer U.S. Military has. (In this post let’s leave aside questions about the morality of decisions by our Commanders in Chief–here I am only talking about the overall effectiveness of the U.S. Military.) But as it is, men and women voluntarily choose to join the the U.S. Military. Once they join, many are sent far away from home into the face of hostile attacks. Moreover, they are all subject to a wide range of commands from superior officers and to military discipline. If they are fired–that is, dishonorably discharged–there is a due process procedure, but one that respects the needs of the military to do what it takes to be an effective fighting force. As long as the effects (both intended and collateral) of what the U.S. Military is doing on those outside the U.S. Military itself are on net positive, I don’t see an ethical problem with allowing people to choose to become soldiers and subject themselves to military orders and discipline.

On the ethical question of unfreedom at work, the only difference between the volunteer U.S. Military and other employment is (1) the high level of importance of the U.S. Military’s task, and (2) what the U.S. Military needs from its employees to be effective at its task. In my view, in jobs that are voluntarily taken, and can be voluntarily left, job strictures that are necessary for a firm to be effective at producing the goods and services it specializes in are ethically OK.

I am troubled, however, when a firm takes freedom away from its employees unnecessarily. This can easily happen, for example, when the owners of a firm are not easily able to monitor the underbosses they employ, and these underbosses use their power over the employees under them at least in part for personal gain rather than for the sake of the firm’s mission. A firm may also take freedom away from its employees out of ignorance. In our paper “The Decline of Drudgery and the Paradox of Hard Work,” which is not yet ready to circulate, Brendan Epstein and I argue that figuring out how to make jobs more pleasant without using too many resources to do so is an important dimension of technological progress. At the cutting edge, this kind of technological progress can give a firm a competitive advantage. And once any bit of technological progress has happened, the ignorance of the way things were done before becomes apparent. But many firms are nowhere near the cutting edge of the on-the-job-utility/productivity frontier; many operate far below the level of current best practice.

Since organizations involve many people, they do not always coherently pursue their declared mission. (And indeed, even individuals do not always behave coherently.) In judging unfreedom at work, I think we should judge according to an organization’s declared mission or missions. This is a little like the legal principle that things the government does should have a rational basis. An organization could declare that its mission is making profits, protecting endangered species from extinction, fostering a particular religion or political point of view, seeking truth or raising economic welfare. Whatever it declares its mission to be, it should only ask its employees to sacrifice their freedom for the sake of furthering that mission. Now if an organization declared that its mission was to make life miserable for its employees, within limits that might be allowable too, but only if the organization clearly declared that to be its mission in advance.

What is a good set of institutions to prevent organizations from taking freedom away from their employees unnecessarily? The key is to have the judgment made by others who are sympathetic to the organization’s general type of mission, and who will have appropriate deference to the organization’s specialized knowledge about what works and what doesn’t, but without ties to the organization itself. For organizations whose mission is to make a profit, I think it is important to have the judgment made by a panel of others who have met a payroll and worried about their firms going under. This may seem overly favorable to firms, but remember that it represents a higher level of due process for workers than current law in most states.   

The reason I don’t think a regular jury can adequately judge job dismissals is that it would be hard for most people to ignore the fact that something very valuable has been taken from someone who is fired from a job. It is not easy to remember that the person hired to replace the one fired gains something equally valuable. And it is not that easy for most people to appreciate how necessary is the threat of firing (or where firing is impossible, how important is the threat of some sort of demotion) at a systems level to undergird those dimensions of workplace discipline that are necessary for a firm to fulfill its missions of making a profit and effectively producing goods and services that improve people’s lives. 

Let end with a point that ties into the concerns I raised in my first post “What is a Supply-Side Liberal?” The fact that employees are willing to put up with so much for the sake of keeping their jobs indicates just how valuable jobs are to the typical employee. Economists tend to use simple models with no preexisting distortions to illustrate the benefits of low taxes. In simple models with no preexisting distortions, workers actually don't value their existing jobs much at all–they can always get another job. The fact that, in the real world, jobs are very valuable to people makes the destruction of jobs by taxes and unwise regulations much worse than if people didn’t value jobs.

The simple models are nice because what happens in the absence of taxes is clean and neat and attractive.  But the benefits of low marginal tax rates are actually much greater in more advanced models where, in ways I will discuss down the road, (a) imperfect competition is already leading firms to underproduce and (b) minimum wages, union power, occupational licensing, and the need to obtain worker cooperation lead to jobs being valuable to people, as jobs are valuable to people in the real world.

Dissertation Topic 1: Federal Lines of Credit (FLOC's)

blog.supplysideliberal.com tumblr_m6lp8aO09K1r57lmx.jpg

A Depiction of “The Miracle of the Seagulls” from Mormon History

QUESTION

Miles, I greatly enjoy your blog. I am 3rd year econ phd with a burgeoning interest in the impact of fiscal policy and government expenditure during recessions. Much of the literature simply attempts to calculate a jobs or GDP multiplier, but there are many other impacts of fiscal policy. What are important costs and benefits of fiscal policy that you feel are understudied? Who are the winners and losers from stimulus expenditure? I have a particular interest in firm and worker outcomes. Thanks! – markcurti

ANSWER

The answer here is easy for me. There has been no formal modeling of my Federal Lines of Credit proposal in my second post

“Getting the Biggest Bang for the Buck in Fiscal Policy.”

 This is a serious proposal–and in my view an extremely important proposal–that deserves formal modeling, but I am not going to do that formal modeling myself. (Why don’t I do this myself? See on my CV at the sidebar the number of other research projects I have in progress–many more than the number of my publications!) So it definitely counts as understudied. Here again is the link to the full article that I have submitted to a professional economics journal laying out the proposal in some detail. I even have an NBER Working Paper by the same name that you can cite, though I recommend reading the one I link to rather than the NBER Working Paper. 

When I say “formal modeling,” I am thinking this is one place where a Dynamic Stochastic General Equilibrium (DSGE) model would be quite appropriate in order to get some sense of likely magnitudes. Since analyzing Federal Lines of Credit requires modeling borrowing constraints and heterogeneity, as well as modeling sticky prices so that aggregate demand matters for output, there would be plenty of chances to develop and show off technical skills. I would be truly delighted to have someone do this analysis. 

Since I think the corresponding National Lines of Credit are even more important for Europe than Federal Lines of Credit are for the United States, if you want to do something empirical, to me the key issue is measuring the degree of spillover in fiscal stimulus from one country in the Eurozone to another. Similarly, you could look at the degree of spillover in fiscal stimulus from one U.S. state to another given a state-level fiscal stimulus. However, in general, the amount of empirical precision available for empirical studies of fiscal policy is not great, so this may not be that promising in the end. In either case, DSGE modeling of fiscal spillovers from one Eurozone country to another or from one state to another could be useful. 

July 8, 2012 Update

For other readers, let me translate my statement “the amount of empirical precision available for empirical studies of fiscal policy is not great”:

Despite many claims, aside from military spending, there is not much evidence about the overall effects of short-run fiscal policy on the economy one way or another.  

I would be glad to have this claim contested, but I can say that I have seen a lot of economics seminars lately with empirical estimates of the effects of short-run fiscal policy that are all over the map. Valerie Ramey (who has done work on fiscal policy with my colleague Matthew Shapiro) is one of the experts on what evidence exists. Here again is what she had to say about a recent short-run fiscal policy paper by Brad Delong and Larry Summers:

Valerie’s Powerpoint file and Valerie’s writeup of her discussion. There is an active thread on Twitter from my tweeting the link to Valerie’s writeup and calling it devastating.

Now I am not so sure. There are many objections being voiced to Valerie’s discussion. Anyway, the twitter thread backs up the idea that it is hard to get definitive empirical evidence in this area. 

By the way, Mark, please leave a comment below giving some indication of your likelihood of pursuing this. If you definitely aren’t pursuing it, letting us know will reassure others that there isn’t too much competition on this research topic.

A Note for Graduate Students in Economics Looking for Ph.D. Dissertation Topics

In addition to using the “Ask me anything” button for substantive economic questions, I encourage any of you who are graduate students looking for Ph.D. dissertation topics to send me a detailed description of what kinds of things you are interested in (research preferences), and I will try to think of research topics that I think are important within the range of things you are interested in doing research about. Three warnings:
  1. I will almost always suggest a different topic than the one you are already working on. For this to be helpful to you, you have to be open to the possibility of a new topic. This is easiest psychologically if you are near the beginning of the process of choosing a research topic. 
  2. I am likely to want to publish my reply, so in the unlikely event that many are eager to follow my advice on research topics, you may have competition on the research topic I suggest.
  3. I can’t actually supervise the research long distance, only suggest a topic. And there is some chance I can’t think of anything in your area of interest. But I have many opinions in many areas.
  4. When you write in, please tell me how many different tools you are prepared to use for your dissertation: mathematical analysis, empirical analysis, or computations.
  5. Also, make sure you tell me something about why you were attracted to the area you mention, so I can understand your preferences better.    
Please use the “Ask me anything” button for such questions about potential research topics. You can do more than one message with the button if the length restriction binds. (Don’t use the comment section below to ask about a dissertation topic; it is for comments about the general process.)
If I write a post to answer you, please write in the comment section how likely you are to pursue the dissertation topic I suggest so that others won’t be worried about too much competition if you aren’t going to do it. In general, the comments section of one of the “Dissertation Topic n” posts is an appropriate place for economists to coordinate on doing research in the area I suggest, including economists who already have their Ph.D.

Is Taxing Capital OK?

The “Dark Satanic Mills” that Made England Rich

QUESTION

Hi Miles. As an English Literature Graduate with wider interests and intro Economics Classes, I wanted to ask you about something I read recently. Ostensibly, Joseph Stiglitz in his new book talked of a world where movement of labour was unimpeded, and cities and countries competed for the best workers; something that would be financed by taxing capital. This is deeply attractive to me, but I don’t know if it is possible, economically/demographically, even if political issues,permit. Thoughts? – workedspace

ANSWER

I haven’t read the Stiglitz book, so I will have to answer from general principles. Let me know if Stiglitz somehow has a way around the problems I will point out.

In simple economic models taxing capital has one of the biggest long-run negative effects on the economy of any tax. It looks OK in the short run, but with lower investment, the capital stock gradually declines. In this spirit you would be better off taxing land a la Henry George, since the amount of land won’t decline even if you tax it. But taxing the buildings on top of the land is like taxing any other kind of capital. (However, right now we tax houses very lightly compared to factories, so if it weren’t for the housing bubble’s aftermath, we would be better off taxing houses more and factories—which employ people—less.)

One way to tax capital some in a way that won’t hurt capital formation is to shift from labor taxation (such as Social Security taxes) to consumption taxation, since in the long run the shift to consumption taxation increases taxes on people who have the wealth to consume more than they earn. But in the shorter run, the shift to consumption taxation hits people who are temporarily having to consume more than they earn. Also, consumption taxation has a big life-cycle element. The biggest category of people who have the wealth to consume more than they earn is senior citizens. 

To return to the negative effects of capital taxation, the short-run temptation is much like the short-run temptation to have rent control. In the short run, the supply of apartments is inelastic, so rent control looks like a pure transfer from landlords to tenants, but in the long run rent control is a disaster because it makes it unattractive to build new apartments or even keep the old apartments in good repair. The stories of evil landlords not taking care of apartments that pop up under rent control are oh so predictable from economic theory.

At the beginning I said that in simple economic models, taxing capital has one of the most negative effects of any tax. That is true if the tax on capital is constant. If the government taxes capital now and promises never to tax it again, the story gets more interesting. In theory, forcing all companies to issue non-voting stock to the government worth 90% of a firm’s value would have no distorting effects, and so would be the perfect tax as long as people believed the government would never do it again. But if the government will do this once, what is to stop it from using the same logic to do it again? This is called the “dynamic inconsistency” problem.

Getting government institutions set up to block the recurrence of this ultimately self-contradictory logic behind taxing capital a lot now and promising never to do it again is actually one of the trickiest problems implicit in “Leveling Up: Making the Transition from Poor Country to Rich Country.” I think often here of the history of England. Confiscating accumulated wealth was always attractive to the king. Only the evolution of limitations on the King’s power to take accumulated wealth (the essence of the “one-time” capital tax) in the end allowed England to get the development of factories that helped it to become rich.

Note

This is the first published answer to a question using the “Ask me anything” button.

Update

There is a further Twitter discussion of this issue in this thread

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Miles's University of Michigan Website

With the help of the free html editor Blue Griffin on my Mac, I did some very basic improvements to my University of Michigan website. Most importantly, I put so many links leading to this blog at the top that anyone who happens upon my University of Michigan website can’t miss them!

In any case, some of you may be interested in one or more of the academic working papers on my University of Michigan website. A warning: some papers there are quite preliminary, but the key ideas should be there. Also, at this moment I am far behind in the task of putting up links to my recent working papers.  

Some of the best material on my University of Michigan website is accessible through the class links Economics 611 (“Business Cycle Theory”) and Economics 609 (“Advanced Mathematical Methods for Macroeconomics,” which focuses on mathematically characterizing value functions in stochastic dynamic programming problems).  

In other blog mechanics news, if you are at supplysideliberal.com itself, you can see that I am continuing to make improvements to the sidebar. I added a “Top 10 Posts” link and in a minute, I will change the “Miles’s CV” link at the sidebar to a link to my U of Michigan website.