Knowing and Making

Sorry, I couldn't resist the title. If you'd like to meet Greg Mankiw in person, just head over to the ASSA (Allied Social Science Associations) meeting next week and sign up for his discussion on economic policy . More to the point, the American Economics Association conference is also taking place at the same time. You can get an interesting insight into the concerns and priorities of the discipline by running some keyword searches on the preliminary programme, which is available here . Some topics of interest to me: cognitive : appears 12 times, though mostly related to cognitive and noncognitive skills, particularly with relevance to the labour market. There is one mention of cognitive biases and one of cognitive economics  - which highlights a study called CogEcon of which I wasn't aware. Again though, it appears to mainly focus on a cognitive skills measure for Americans over 50, rather than a more general exploration of how cognition affects economic behaviour...

Brad DeLong complains that Obama is cutting spending in next year's budget . Greg Mankiw complains that Obama is increasing spending in next year's budget . Fortunately there is no discrepancy here, because both of them are saying the same thing: the President isn't doing what I want him to, therefore he's wrong.

Greg Mankiw apparently thinks insider trading is a good idea...at least, he links approvingly to this defence of it by Donald Boudreaux in the Wall Street Journal [ An analysis of Greg Mankiw's clever "link deniability" strategy is coming in another posting ]. An intriguing notion. It is broadly based on the idea that information is going to be hidden by companies anyway, so we may as well hope that insiders accidentally give it away by buying and selling stock. Doesn't that seem rather defeatist? If public companies aren't providing the right information to investors, so the investors can't make accurate decisions, shouldn't we find a mechanism to make them do so? Insider trading, because it enriches executives at the expense (at least in the short term) of other investors, destroys the trust which is a key variable in how well capital markets work. There is always an agency problem inherent in one person managing an asset on behalf of another. Trust is ...

Surprising but (I think) nice news that Barack Obama has won the Nobel Peace Prize. I thought it was a joke when I first saw it, but on balance it is a good decision. Obama's inspiring message, philosophy and personal example are worth remembering, especially when obscured by fights over healthcare and climate change policy. It's a somewhat risky prize - presuming a successful presidency before it's a quarter (and probably not even an eighth) finished. But the Peace Prize committee is a strange beast - always keen to be topical, even more than is the Economics committee. Talking of which, Greg Mankiw has a sneak preview of the winner of that prize. Update : Michael Tomasky's well-judged take on how Obama should respond and the political consequences.

I heard somewhere that what people do on blogs is write comments about what other people said on blogs. I guess I do a bit of that, but I'm sure my rate is below average. Therefore time to catch up. In this post I'll look at a couple of interesting points on the American healthcare debate: Megan McArdle looks at rates of insurance among unhealthy people and finds that the adverse selection theory is wrong . But I think there's a serious flaw in her argument. Her finding is that since uninsured people are about as healthy as insured people, adverse selection can't be happening. But she relies on the following assertion: "we would expect the uninsured to be sicker than the general population". I don't think that's correct at all. Surely sick people have far more incentive to get insured than healthy, and so we'd expect the uninsured to be substantially healthier than the average? After all, we would assume that people who don't own cars probabl...

Greg Mankiw wonders why he was kicked off a jury by one of the lawyers in a medical malpractice lawsuit. "Why does being a professor of economics at Harvard make one an undesirable juror in such a case?" he asks. I have another theory. Perhaps it was this quote from 2005 : Greg Mankiw, the administration's chief economist, noted in early December: "The president's economic agenda involves removing obstacles to growth. One such obstacle is the considerable burden placed on everyone by excessive lawsuits." Or this one from 2004 : The President's economic policies are precisely aimed at encouraging businesses to expand and create jobs in the United States. In addition to the tax cuts, he wants to reduce the burden of frivolous lawsuits, contain the growth of health costs... Lawyers have Google too, you know.

Most economists are inclined to agree with Greg Mankiw that a high tax on carbon, reflecting the best estimate of its social cost, is the best way to mitigate the effects of carbon emissions. [ Edit : In this posting I consider a carbon tax to be roughly equivalent to cap-and-trade - of course there are differences but my point applies to both mechanisms ] In theory, this should encourage the right mix of reduced growth in consumption, development of energy-efficient technology, and compensation to those affected by climate change. Economic theory says that the market will respond in the most efficient way to a tax which fully reflects the external costs of the activity (known as a Pigovian tax after economist Arthur Cecil Pigou who was an early proponent of the concept). In particular, it should not be necessary for the government to subsidise research into green technologies - they might pick the wrong ones, and they will probably end up wasting more money than the market would if...

Greg Mankiw complains that this article in the New York Times which mentioned his blog did not generate a significant bump in traffic. He speculates that this might be because it described his blog as "heavy on theory" (followed by our favourite headline about the unit root hypothesis). I'm afraid it's just as likely to be the description as "a conservative blog" that's responsible. This is the New York Times, after all.

I am not sure what to call this category of articles, though I tend to agree with them and have my own series of postings coming up along similar lines: Amartya Sen has called for " capitalism beyond the crisis " (via Economist's View ) which means a better understanding of economic psychology (he likes Pigou in particular) Willem Buiter objects to " the unfortunate uselessness of much 'state of the art' academic monetary economics " and would like to see practising economists use behavioural theory and complexity theory Colander, Follmer, Haas, Goldberg, Juselius, Kirman and Lux (whew) lament " the financial crisis and the systemic failure of academic economics " and would like to see economics that reflects the real world better, and is more oriented towards genuine practical concerns instead of navel-gazing Robert Shiller's new book says that "Animal Spirits" need to be revived to end the recession Dani Rodrik proposes " ...

There are a few things I want to comment on today, but I'll start with a quick analysis of the latest Krugman-Mankiw debate. The Obama administration projects that when the recession ends, growth will be faster than the long-term average, as the economy catches up with its permanent trend. This is called the trend-stationary assumption -  Paul Krugman supports it  and  Greg Mankiw disagrees , citing an alternative hypothesis called unit-root . Though I often disagree with Mankiw, this time I fear he is right. Both parties are citing different analyses of historical data. In economics, data is always easy to argue about, especially macroeconomic time series data of which there are rarely enough to make unambiguous inferences. Neither are going into detail about their answer in terms of an underlying theoretical model. Of course, models are also easy to argue about, but in this case it seems relatively easy to at least expose the implicit assumptions, if not to know which are right...

Greg Mankiw asks us to spare a thought for the top ten percent of earners who apparently bear the main burden of the economic downturn. I wish he had figured out how to measure whose utility  has been hurt the most, as opposed to just whose consumption  has fallen. Unfortunately this is a blind spot of many economists. Poor people simply get more value out of a dollar than rich people. This also means that they are hurt more by a smaller fall in income. Diminishing marginal returns have been part of economic theory for two hundred years, so I'm not sure why people keep forgetting it.

Greg Mankiw is not in favour of a "Buy American" clause in the expected US fiscal stimulus package. I don't like protectionist rules myself, and normally you wouldn't find many economists arguing for them. But I have a feeling now that we might see support among some economists for variations of this "Buy American" rule. For example, a condition that spending can go only to countries that have also passed a major fiscal stimulus package. This might just come from people feeling peeved at Germany. It might come from instinctive protectionists finding a respectable way to get their point across. It might come from strong Keynesians who are worried about the damage to the fiscal multiplier from propensity-to-import. It may be unfair to him, but I predict that Paul Krugman may be a flagbearer for this argument. He has just won a Nobel Prize for his New Trade Theory work, which argued (among other things) that some protectionist policies might be justified if th...