Relevant and even prescient commentary on news, politics and the economy.

A Rare Economics Post from Me

Yes, I’m still distracted (and under deadlines), but this is too good to pass up.

Greg Mankiw sends us to “Wisdom from Michael Kinsley.” Which turns out to be this:

There is no need to encourage risk-taking entrepreneurship with special tax breaks. Risk takers will take risks, and if the risks work out they shouldn’t mind paying the same level of taxes as everyone else. If the risks don’t work out, they won’t have to.

I agree completely with Kinsley, but am surprised that Mankiw does as well, especially as Kinsley correctly presents the issue in the process of another of his pox-on-Obama’s-house conclusions:

Obama…proposes exempting the sale of small businesses from the capital gains tax, allowing small businesses to avoid the burdens his health care plan would place on big businesses, and so on.

Michael Kinsley has argued that small businesses should pay capital gains taxes, and that they “shouldn’t mind paying the same level of taxes as everyone else.” By extension, the preferential rate for capital gains should be eliminated.

It’s nice to see that Greg Mankiw calls this “Wisdom.”

Tags: , , , Comments Off on A Rare Economics Post from Me | |

Pandering to (Some) Economists: Trade in Ethanol

by Tom Bozzo

Another major energy proposal in the McCain economic plan is ending subsidies for corn ethanol and eliminating the tariff that effectively bars to importation of sugar cane ethanol. Greg Mankiw scored these on behalf of the economics profession as points for McCain over Obama in the NYT over the weekend. I agree that corn ethanol subsidies are best eliminated as soon as possible — though I note that Obama, while not going so far as McCain on subsidies, is pretty straight-talking about the limitations of corn ethanol especially considering that he represents the corn belt and not the desert.

On the McCain plans for promoting trade in cane ethanol — the Shorter Version of which is that he’s proposing to substitute dependence on foreign ethanol for dependence on foreign oil (*) — there are significant issues that go to the suitability of “free” markets for provision of biofuels. Whether or not expanding trade in ethanol is a good thing depends on other institutional arrangements that are not automatic consequences of reducing tariffs and other moves to freer trade. Since critical policy decisions are outside the reach of U.S. policymakers, economists should be concerned about making policy with the institutions we have, and not the institutions we’d like to assume we have.

There’s been a broad dawning that not all biofuels, and not all methods for producing all biofuels, equally satisfy all of the policy goals that they might purport to help satisfy. Those include substituting domestic resources for imported resources, reducing fossil fuel use, and reducing the carbon intensity of liquid fuel use. Land use issues are critical both for the global warming-related goals for biofuel use and for avoiding blowback from high food prices. (Recent research out of UW-Madison shows that redirecting marginal agricultural lands to cane ethanol in fact can be beneficial, but conversions from forests and other uses are not.) The problem is that lowering tariffs on cane ethanol doesn’t guarantee, and indeed in the absence of other interventions would probably work strongly against, desirable land use patterns.

Brazil produces a lot of ethanol by the standards of the ethanol industry, but not a lot relative to U.S. petroleum-based fuel imports. The former was 327,000 barrels/day in ’07, whereas the latter is 13-14 million b/d (unadjusted for the energy densities of the fuels). Growing enough cane to replace U.S. oil imports with ethanol would require on the order of half the arable land area of Brazil; major cane ethanol substitution would necessarily occur at scales where adverse land-use consequences can’t be assumed away. Note that the current food-price spike, largely blamed on biofuel mandates, happened with only a couple percent of arable land devoted to biofuel crops.

Economists certainly can imagine market-based remedies for the problem, such as Pigovian taxes on certain land-use changes, to name one that Mankiw ought to support in principle. But removing U.S. tariffs won’t make land-use regulation in countries suitable to cane growing appear by magic.

It wouldn’t hurt to add in liquid-fuel demand destruction on hitherto unprecedented scales for the U.S. Along those lines, apart from his willingness to commit 15% of one year’s “clean coal” research funds to the cause of battery technology, McCain isn’t explicitly committed to more than the pending tightening of fuel economy regulations. McCain’s long-standing hostility to rail and apparent indifference towards non-automobile transportation modes doesn’t make the job of reducing petroleum-based fuel consumption (and doing it in less painful ways to consumers than letting the price mechanism work its magic) any easier.

(*) Economists wouldn’t tend to be bothered by this, but it’s at odds with McCain’s energy independence rhetoric.

Tags: , , , Comments Off on Pandering to (Some) Economists: Trade in Ethanol | |

How to Devalue Your Brand, Greg Mankiw Version

Greg Mankiw, clearly distracted by his former collaborator’s wife having been denied a tenured position at Harvard, quotes Fred Bergsten in the WSJ, Instapundit-style:

By effectively killing “fast track” procedures that guarantee a yes-or-no vote on trade agreements within 90 days, lawmakers in Washington, led by House Speaker Nancy Pelosi, have destroyed the credibility of the U.S. as a reliable negotiating partner.

Which leads to the obvious conclusion: Republicans “destroyed the credibility of the U.S. in 1998 when they did the same thing to President Clinton.

Strangely, Greg Mankiw (Fortune, January 12, 1998) “knew better.”

Policy and politics diverged again in the fast-track debate. Clinton was asking Congress for something all recent Presidents have had–the authority to negotiate trade deals that Congress would consider without amendment. This power is crucial if the President is to continue the multilateral process that over the past half-century has moved the world toward freer trade and greater prosperity.

Although economists are united in support of free trade, opinion polls show the American public is more skeptical. The public’s view is partly based on the false analogy that trade is like war–some countries must lose for others to win….

Because of the public’s ambivalence–and the opposition of interest groups that fear foreign competition–fast track went down to defeat. This may put an end to the multilateral approach to opening up world trade. But it need not mean an end to the free-trade movement.*

Got it? If it’s a Democratic Congress, then Pelosi is a “problem.” If it’s a Republican Congress doing the same thing, it’s Through No Fault of Their Own.

And by not pointing out that he himself used to know better, Greg Mankiw destroys not Fred Bergsten’s credibility, but his own.

Cross-posted from Marginal Utility.

(See also Dani Rodrik, who gives the lie to the whole line of “reasoning.”)

*Yes, I omitted Mankiw’s framing issue (tomatoes), but if he really wants to claim George W. “Steel Tariffs” Bush was different, the only possible response is “Bring it on.”

Tags: , , Comments Off on How to Devalue Your Brand, Greg Mankiw Version | |

Greg Mankiw Gives Us Another Reason to Scream "Yours!"

I think he may believe it’s good news that the S&P 500 forward valuation (what we believe we might make next year, having nothing necessarily to do with current earnings or actual sales) has returned, approximately, to the level of 1998.*

The problem, as I noted more than two years ago, is that, even ignoring that the numbers are more WAG than analysis, it’s still well above the historic levels that promise good returns.

So this, again, seems a good time to reproduce a graphic borrowed Burton G. Malkiel (it was on page 257 of a previous edition):

UPDATE: I wasn’t clear enough in my initial post, so I’m pulling vtcodger from comments:

Mankiw has a chart there. The label says it is S&P500 PE Ratio. The numbers it shows are in the high 20s — which is consistent with my gut feeling that the stock market has been substantially overvalued for the past 15 years. Over the very long term PE ratios for healthy markets have typically been below 15.

Now, it’s possible that something has changed since 1993 to make higher ratios more attractive. But I wouldn’t bet that way, though Brad DeLong, for one, appears to do so (though his argument is one of Relative, not intrinsic, Value).

*That is, two years after Saint Alan mumbled something about “irrational exuberance” and turned Robert Shiller into a popular author.

Tags: , Comments Off on Greg Mankiw Gives Us Another Reason to Scream "Yours!" | |

Are Real Interest Rates Negative?

Greg Mankiw points us to one of the many inflation-adjusted interest rates reported by this source and writes:

In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.

A good description for why real interest rates are indeed low. I would just add that low growth expectations may also cause a drop in investment demand. All three explanations send shivers down my spine as far as the prospect for avoiding a recession this year.

But back to our source, which is FRED® (Federal Reserve Economic Data). There are lots of different notes with different maturities and due dates. There are only two other reported series that show negative real rates with several of them reporting real rates closer to 1%. So why is the 5-year note that is due on April 15, 2010 the one to watch?

Tags: , Comments Off on Are Real Interest Rates Negative? | |