Voodoo economics revisited

"Bush was competing with Ronald Reagan for the Republican nomination in 1980. Reagan suggested that tax cuts would pay for themselves, i.e., actually raise revenue – a notion that became known as “supply side” economics. There’s nothing wrong with worrying about the disincentive effect of higher taxes, but the extreme version put forward by Reagan did not really apply to the United States. When you cut taxes, you get lower revenue, which means a bigger budget deficit." Read Simon Johnson's column on Project Syndicate here.

Libertarian Paternalism Is Not an Oxymoron

Long-term unemployment: In the bleak midwinter

Fifteen million Americans are now unemployed, according to the most recent jobs report. The unemployment rate for November inched up to 9.8%. The grimmest numbers, however, are for the long-term unemployed: 6.3m people, 42% of those unemployed, have been jobless for more than 26 weeks. That number does not include 2.5m people who want a job but who have not looked for a month or more, or the 9m who want full-time work but can only find part-time openings. Read the complete article in The Economist here.

Interpreting the Great Depression: Hayek versus Keynes.

Robert Skidelsky: "This is not intended to be a purely historical paper. I am interested in the light the Keynesian and Hayekian interpretations of the Great Depression throw on the causes of the Great Recession of 2007-9 and in the policy relevance of the two positions to the management of today’s globalizing economy. In my recent book, Keynes-The Return of the Master, I committed myself to the view that the present crisis was at root not a failure of character or competence but a failure of ideas, and quoted Keynes to the effect that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly supposed. Indeed, the world is ruled by little else’. So any enquiry into policy failures –assuming that these were at least partly responsible for the two crisis –inevitably turns into an enquiry into the ideas in the policy-makers’ minds, which are in turn, at least partly, the product of the economic models in the economists’ heads." Read the complete paper here.

I found it on the website of the Institute for New Economic Thinking. Founded in October 2009 with a $50 million pledge by George Soros, the New York City-based Institute for New Economic Thinking is a nonprofit organization providing fresh insight and thinking to promote changes in economic theory and practice through conferences, grants and education initiatives.The Institute recognizes problems and inadequacies within our current economic system and the modes of thought used to comprehend recent and past catastrophic developments in the world economy. The Institute embraces the professional responsibility to think beyond these inadequate methods and models and will support the emergence of new paradigms in the understanding of economic processes. Have a look at their website, an impressive and interesting bunch of people!

The bipartisan compromise on taxes, unemployment benefits and jobs

President Obama thinks there are 5 things you should know about the bipartisan compromise. Read it here.

Political Competition, Policy and Growth: Theory and Evidence from the United States

This LSE paper develops a simple model to analyze how a lack of political competition may leadto policies that hinder economic growth. We test the predictions of the model on panel datafor the US states. In these data, we find robust evidence that lack of political competition in astate is associated with anti-growth policies: higher taxes, lower capital spending and areduced likelihood of using right-to-work laws. We also document a strong link between lowpolitical competition and low income growth.

Fairness and Tax Policy: a response to Mankiw's proposed Just Deserts

Read Jonathan Weinstein's short paper here. The author is a professor at the Kellogg School of Management, Northwestern University.

White House White Board: Goolsbee on Tax Cuts, Unemployment Insurance & Jobs

How much do upper-income tax cuts reduce unemployment?

Read the complete article in The Economist here

The Bowles-Simpson plan

Read the co-chair draft plan here.

Alternatives to Austerity

Rapid recession-fueled growth in public debt has led many governments to adopt austerity measures. But, for the US – and perhaps for some other countries – there is a better way to boost efficiency and promote growth, based on greater public investment and deep cuts in defense spending and corporate welfare. Read the opinion article by Columbia professor and Nobel price laureate Joseph Stiglitz on Project Syndicate here.

A Tax Reform Vision

"I have a vision. Sometime over the next couple of weeks, President Obama issues a statement that reads: “Over the past several months, Republicans and Democrats have been fighting over what to do with the Bush tax cuts. I have my own views, but it’s not worth having a big fight over a tax code we all hate. Therefore, I’m suspending this debate. We will extend the Bush rates for everybody for one year, along with unemployment benefits. But during that year we will enact a comprehensive tax reform plan." Read David Brooks' column in The New York Times here.

My Agnosticism about Unemployment Insurance - Gregory Mankiw

Here is what Gregory Mankiw says about extending unemployment insurance benefits on his blog:
"A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits. I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI. But perhaps it would be useful to explain my agnosticism.

UI has pros and cons. The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn. The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed. To me, all these pros and cons seem significant. I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.

So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks? If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?

It is plausible to me that UI benefits should last longer when the economy is weak. The need for increased aggregate demand is greater, and the impact on job search may be weaker. But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right. It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.

I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general. I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around." That issue is, as I tell my students, more a matter of political philosophy than it is of economics."

The joyless or the jobless

This article has been suggested to me by Karien. Should governments pursue happiness rather than economic growth? Read the answer in The Economist here.

Tea Party Economics

Here is an interesting article I found on Forbes about the Tea Party protests approached from an economic perspective. It tackles such issues as public choice, private interests and rational ignorance and predicts further populist protests as Obamaspending continues. Read the complete article here.

Hedonism and the experience machine - Robert Nozick in "Anarchy, State, and Utopia"

I. The Machine!
Remember that Bentham claimed the following: "Pleasure and only pleasure is good."

Now, consider the following thought experiment:
Suppose there was an experience machine that would give you any experience you desired. Super-duper neuropsychologists could stimulate your brain so that you would think and feel you were writing a great novel, or making a friend, or reading an interesting book. All the time you would be floating in a tank, with electrodes attached to your brain. Should you plug into this machine for life, preprogramming your life experiences? [...] Of course, while in the tank you won't know that you're there; you'll think that it's all actually happening [...] Would you plug in? (44-45)

Do you want to plug in? As Nozick puts it, “What else can matter to us, other than how our lives feel from the inside?” (613).
Nozick provides the following suggestions:
1. We want to do certain things and not just have the experience of having done them.
2. We want to be certain people – to plug in is to commit a form of “suicide” (613).
3. We are limited to a human-created reality.

We thus learn according to Nozick that there are things which matter to us more than simply having certain experiences. Nozick concludes, “Perhaps what we desire is to live (an active web) ourselves, in contact with reality.” (614)

II. What Does Nozick’s Argument Show?
Presumably, Nozick’s argument is as follows:

1. If all that mattered to us was pleasure, then we would want to plug into the experience machine.
2. However, we would not want plug-in.
3. Hence, there are things which matter to us besides pleasure.

The problem with Bentham’s view is that it does not make sense of our considered moral beliefs. (A considered moral belief is a moral belief you have after having reflected upon it or would have if you had reflected upon it). Any good normative theory of value should make sense of the views we hold. However, Bentham’s views don’t appear to do that. We can see this in the following way; consider the following two possible worlds:
In world 1, you are in love with a person A, and A loves you back. You have a variety of experiences with A, and these experiences make you extremely pleased.
In world 2, you are in love with A, but A only pretends to love you back. In this world; however, A hates you. A puts up with you only because you buy A things. A cheats on you on a regular basis, but you never catch on to this. In fact, the experiences you have in this world are identical to the experiences you have in world1.

According to Hedonism, you have no reason to pick world 1 as opposed to world 2 since the amount of pleasure experienced with be the by hypothesis. But clearly, world 1 is better than world 2. This only makes sense if Hedonism is false. Thus, Hedonism is incoherent with respect to our considered moral judgments.

Writing Assignment due 01/20/2011

The writing assignment is due by Thursday the 20th of January 2011 at 2 pm. Please write a minimum of 500 words and a maximum of a 1000 words on ONE of the following subjects:

1. You're the new columnist of the New York Times economic pages. You have posters of Paul Krugman and David Leonhardt above your bed, and you're a vegetarian the whole year, except during the summer. Janet L. Robinson, your big boss, asks you to write a piece on the economic consequences of the midterm elections for America.

2. You're a member of staff of Hilda Solis, President Obama's Secretary of Labor. Fox News has given your boss 5 uninterupted minutes on "The O'Reilly Factor" to defend the administration's undertakings to save and boost American jobs. Write her speech.

3. You're a junior analist at The Heritage Foundation. You want to write a note for your think-tank's website on extending the Bush tax cuts while keeping the budget deficit under control. Don't forget that your job is to promote "the principles of free entreprise, limited government, traditional American values and a strong national defence" AND to advance relatively concrete policy proposals in order to achieve just that.

You can send me your papers by email or hand them to me during class. Please try to put yourself as much as possible in the situations described above. The paper will account for 25% of the final mark. Don't forget to mention the sources you used at the very end of your article. Good luck!