Another by Uwe Reinhardt

What if universities were run like our health care system?

Why the French are to blame for the banking crisis

Uwe Reinhardt explains. I note with favor that Reinhardt offered a solution similar to what I was peddling last year: rather than bailing out the banks that got us into this mess, the government could take the same money and create new banks that would keep lending going. (I proposed using existing entities like the Federal Reserve, Small Business Administration, Department of Education, etc. to keep loans flowing in vital areas of the economy. I also proposed capitalizing healthy banks that had kept their noses clean during the boom. But it amounts to essentially the same idea.)

A bold suggestion from the Chronicle of Higher Education

The Percolator blog: Let's Stop Publishing Research Papers

Percolator blog, I'm way ahead of you!

It's still a recovery

Recent data is all indicating that the economic recovery is back on track (if not the best of all possible tracks) after some tense moments over the summer. Initial jobless claims have started falling again, stocks are up, exports are up,... Earlier this month the Bureau of Labor Statistics reported that hours worked in the second quarter of 2010 rose at the highest rate since the first quarter of 2006. Since October 2009 aggregate hours worked in the private sector has increased 2.4 percent. This would translate into 2.5 million private sector jobs if the workweek stayed constant; the reason we have seen an increase of only 755,000 private sector jobs over that time is that much of the increase in hours showed up as an increase in hours worked per week. Average weekly hours fell from about 34.6 to 33.8 during the recession and have crawled back to 34.2. That is, we've erased about half of the fall in weekly hours. This suggests that meaningful job growth is not too far in the future.

The latest piece of good news is retail sales: up 0.4 percent overall in August, 0.6 percent excluding motor vehicles and parts.



Alan Krueger says there's hope for meaningful recovery in the months ahead. Most interestingly, he argues that the reason recoveries have been "jobless" in the last few decades is that companies use recessions to increase productivity by restructuring. That phase of this business cycle, he says, is over.

So I'm starting to get optimistic again.

Greg Mankiw makes a good point about the investment tax credit

An investment tax credit is probably less effective when interest rates are very low, as they are now, than in normal times. As Greg Mankiw explains:

However, the impact will be relatively modest. Notice that expensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.

Golf ball hitting steel at 150 mph

I wonder what a ball being shanked off the side of a driver at 30 mph looks like. Just curious.

Thomas Sargent on modern macroeconomics

Another entry in the debate begun by Paul Krugman as to whether the developments of the last 30 years - from the New Classical revolution to Real Business Cycles to New Keynesian macroeconomic theory - was all a waste of time. Here Mark Thoma presents an interview with Thomas Sargent, who defends "modern macro":

The criticism of real business cycle models and their close cousins, the so-called New Keynesian models, is misdirected and reflects a misunderstanding of the purpose for which those models were devised.⁶ These models were designed to describe aggregate economic fluctuations during normal times when markets can bring borrowers and lenders together in orderly ways, not during financial crises and market breakdowns.

But isn't that just Krugman's point? The profession has made tremendous progress on models of an economy where everything is going pretty well. But it is when markets break down and the world is hurtling toward depression that policymakers pick up the phone and ask macroeconomists what the hell is going on and how do we get out of this mess? And when they got that call in 2008, "modern" macroeconomists had no answer. The old fuddy-duddy Keynesians did.

The sentences following Keynes' most famous quote are relevant here: "Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."

(The preceding sentence: "In the long run, we are all dead.")

Some cool macroeconomics

Naryana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, kicked up a dust storm when he suggested that by raising interest rates the Fed may be able to increase inflation and pull the economy out of a deflationary spiral (that is, if we are in fact in such a spiral).

Paul Krugman and Nick Rowe jumped all over this, arguing that Kocherlakota was making mistakes in logic that we would not tolerate if they were made by undergraduate economics students. Steve Williamson came to Kocherlakota's defense with the aid of a simple macro model. The debate thus far is between the neoclassical economists (Kocherlakota and Williamson) who appeal to high-tech new-fangled macro theory, and Keynesians (Krugman, Rowe (maybe?)) who argue that the neoclassicals have been so obsessed with the beauty of their models that they have forgotten some simple macroeconomic lessons that we used to teach undergraduates and graduate students back in the 1970s.

Now comes along George Evans, the high-techest of the high-techies when it comes to New Keynesian models with adaptive learning. Mark Thoma gets him on film walking through some state-of-the-art macro models in a remarkably lucid fashion to prove that Kocherlakota is absolutely, 100 percent wrong. High tech, low tech, it doesn't matter - you don't raise interest rates when your economy is in recession on the verge of deflation. Watch the movie!

David Leonhardt on tax cuts

David Leonhardt makes the point in yesterday's NY Times that I have been thinking about for awhile. If President Obama is smart (and I know he is) and if he hasn't given up on trying to save the economy from a double dip and save Congress from falling to the Republicans (of that I'm not so sure), here's what he does: propose legislation to extend the Bush tax cuts for all but the highest income earners; let the tax cuts for the top earners expire, but take the proceeds for the next two years and use them to fund a set of tax cuts that moderate Democrat, Republican and independent voters will understand and approve. These include a payroll tax holiday and investment tax credit. I'd toss in the support for community banks to finance loans to small businesses if we can all avoid calling it TARP for small banks. It's good for the economy, and it's good politics.

There's a lot of disagreement out there as to whether tax cuts of any kind, but especially tax cuts for the rich, have a stimulative effect on the economy. Leonhardt presents a very strong argument that tax cuts for the rich have very little effect: we've tried that twice in the past (1981 and 2001) and each time the tax cuts were followed by many months of continued declines in employment. Not an airtight case, but certainly if you do something twice and it doesn't work, you might want to think again about doing it a third time.

The Social Security "crisis"

The Center on Budget and Policy Priorities notes that the long-run deficit in Social Security is almost precisely equal to the cost of extending the Bush tax cuts for upper-income taxpayers.

Anyone who argues that Social Security is unsustainable in its current form should also be willing to say that we cannot afford to extend the Bush tax cuts.