CEA | Random Observations for Students of Economics

The Ryan Plan

Economics Comments Off

Apr 132011

As I have pointed out before, a bipartisan group of ten former CEA chairs (including your humble blog host) has endorsed the Bowles-Simpson commission report as a starting point for dealing with the long-run fiscal imbalance. So readers might like to know that Bowles and Simpson themselves have called the Ryan plan a positive step.

If you want to learn more about the Ryan plan, you can look at this side-by-side comparison of two plans or read this CBO report.

CBO makes clear that it believes there are substantial budgetary savings in the Ryan plan, but to a large extent these are because “the government’s contribution [to Medicare] would grow more slowly than health care costs, leaving more for beneficiaries to pay.” Many on the left view such a change in entitlements as too draconian, but they have not offered a real alternative. If they did, it would have to include substantial, broad-based tax increases, which those on the right would view as draconian.

That is, the choice we face is between historically high taxes (the left’s unspoken preference) and a fundamental rethinking of the social safety net (such as the plan proposed by Congressman Ryan).

SOTU

Economics Comments Off

Jan 272011

A couple weeks ago, the recently departed CEA chairwoman Christy Romer wrote a good piece explaining what the President should say in the State of the Union. Here is what the President in fact said a couple days ago.

Question for class discussion: Did the President do what his former economic adviser recommended?

The Tax Deal

Economics Comments Off

Dec 072010

I am generally pleased with the compromise over taxes the President and Republicans struck yesterday. (The President should be too, but he seemed dejected at his news conference. Buck up, Mr President! You don’t want anyone to start thinking of the word “malaise.”)

One aspect of the deal struck me as worth discussing with econ students: The compromise includes a one-year cut in the payroll tax by 2 percentage points. The tax cut will be entirely in the employees’ share. Why do you think they designed the policy in this way? Was it the right choice?

One basic lesson of microeconomics is that it doesn’t matter which side of a market the government taxes. As a result, you might think it doesn’t really matter which side of the payroll tax is cut.

But this standard analysis assumes that wages are flexible and thus can reach equilibrium of supply and demand. This assumption might not hold in the short run. Over the course of a year (the time horizon over which this policy is in effect), it may be better to think of the wage as given. In that case, it matters which side of the market gets the tax cut.

As the policy was described yesterday, this payroll tax cut goes entirely to the worker. This increases work incentives, but the main motivation is probably to increase take-home pay, consumer spending, and aggregate demand. CEA chair Austan Goolsbee recently said, “We’re not saying that our long-term recovery ought to be built on trying to increase consumer spending.” Maybe not, but the plans for short-run recovery are very definitely consumption-based.

An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

I should note that, as part of the deal, the President also got his proposal to allow businesses to expense investment spending. As I have said previously, this is a good idea, but the impact is likely to be modest.

Larry and Harvard

Economics Comments Off

Sep 222010

A reader asks the following about Larry Summers:

The media is saying that Larry is leaving the White House in part because his leave from Harvard is almost up and if he stayed away longer, he’d have to reapply for tenure. From your own experience, is that probably true? I thought universities routinely relaxed such policies for star academics like you and Larry. Also, how prestigious is it to be a university professor?

Different universities have different policies regarding faculty leave for policy jobs, and different degrees of enforcement. Harvard allows two years of leave, and it has the reputation of enforcing the rule rather strictly. I can imagine that Larry could have negotiated an extra semester of leave, but I would have been surprised if the university had extended his leave much beyond that. (FYI, I left my CEA job in February 2005 after being in Washington for precisely two years.)

Also, being a university professor is quite a good deal. Top pay with maximum flexibility regarding teaching etc. As I understand it, you do pretty much whatever you want.

Would Larry have been rehired by Harvard if he resigned and stayed another couple of years in Washington? Unclear. The pro case for rehiring would be that Larry is one of the smartest guys around and has a great deal of fascinating experience to share with students. The con case would be that he has been out of the academic research game for quite a while and that in a time of reduced financial resources, faculty slots should be devoted to younger scholars rather than potentially extinct volcanoes. Ironically, if Larry were on the faculty voting on this matter, the con case is the kind of argument he might have made.

So, while I am sure that Larry’s decision had various inputs, Harvard’s leave policy was very plausibly one of them.

I can also say that ec 10 students will likely be among the beneficiaries of Larry’s return. Larry was a regular guest lecturer in the course, and his lectures were always well received. He does a great job illustrating the connections between economic theory and economic reality.

Christy Romer Steps Down

Economics Comments Off

Aug 062010

CEA Chair Christy Romer is leaving the White House.

From my own experience in that job, I know she must be experiencing mixed emotions. On the one hand, it is an exhilarating experience to be a member of a White House team, a part of history, and the leader of a staff of smart, hard-working economists at the CEA. On the other hand, in jobs like this, one loses a great deal of autonomy. People who choose academia as a career often do so because they enjoy the personal and intellectual freedom it offers. Having spent two years without it, I appreciate that freedom all the more. I bet Christy will feel the same, after she recovers from Beltway decompression.

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