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The Government Deficit and the Fed

April 13, 2017 1 comment

The Federal Reserve recently announced an increase in the interest rate which it sets. This has implications for the government deficit which may not be well understood by the average person so I thought that it might make sense to discuss the connection between the Federal Reserve and the government deficit. What this discussion reveals is that the Fed has been helping to finance the government deficit in the U.S.

The Consolidated Government Budget Constraint

There is a relationship between the government and the Fed known as the Consolidated Government Budget Constraint that is written below.

Spending + Interest Payments + Net Transfer Payments =

Tax Receipts + Change in the Stock of Debt + Change in the Monetary Base

The items on the left side of the equal sign are the uses of the government’s funds. Spending refers to the fact that the government buys goods and services, it makes interest payments to the holders of government debt, and it makes transfer payments to individuals in the economy. The right side of the equation is the list of sources for the government’s spending. It receives tax payments, it issues or retires bonds, and the last item reflects bond purchases or sales by the Federal Reserve. It is these last two items that reflect the connection between the Fed and the government deficit. Read more…

Preference Revelation

February 27, 2017 2 comments

The late Paul A. Samuelson was the first Nobel laureate in economics and is widely regarded to be the most outstanding American economist to date. He wrote many papers that had a profound influence on the thinking of economists but he wrote one paper that, to me, is a great tool for all of us, not just economists. The paper is entitled “Consumption Theory in Terms of Revealed Preference” and, in a nutshell, here is what it says. If you want to know what another person is up to, watch what they do because you can, from their actions, infer their motives or preferences. Below is an example of how useful it can be to observe people’s actions when matched against what they say. Read more…

Categories: Education, Uncategorized

Minimum Wages: A Survey of the Evidence

January 3, 2017 4 comments

With the new year, minimum wages are rising in many cities and states, including Michigan where I live. I have written before on this subject (a link is given below) but I ran across a nice article containing a very readable summary of the evidence on this subject. It is a nice read for non-economists because it has no equations (gasp!) and it is not very long but it does provide an accessible summary statement of the empirical scientific evidence on the effects of the minimum wage. But I have another motive in providing this summary of the evidence.

The nature of scientific inquiry is that not all studies on a subject produce the same answer. As a result, more than one study is necessary because, as the evidence emerges, hopefully a consensus forms about the problem that is being studied. So undoubtedly there are studies suggesting that there is no connection between smoking and cancer but it seems quite likely that the preponderance of the evidence, and the highest quality work, reveals a link between smoking and cancer. I once saw Barack Obama “cherry-pick” evidence, citing one particular study indicating that minimum wages do not cause unemployment. But one study isn’t important; the entire literature is and here is a summary of what that literature shows.

An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.

This statement is taken directly from the article linked above. The Neumark and Wascher (2007) article is a scholarly study providing a more thorough analysis of the evidence.

The good news for an economist like me is that what we tell students in Econ 101 is correct: minimum wages cause unemployment. Some workers gain and some lose and the tragedy of the policy is that it harms those in our society who are the least-able to deal with a job loss and the loss of skill-accumulation that goes along with working. Namely, the policy harms people at the low end of the income distribution. This is just another example, in a long list of examples, of how a government can harm some of its citizens while the politicians, implementing the policy, claim that it helps those citizens. As long as the public is unaware of the evidence, politicians can get away with this destructive behavior.

Previous Post on Minimum Wages: minimum-wages-to-rise-in-2013

Fixing Obamacare

November 15, 2016 Leave a comment

Now that the election is over and President-Elect Trump has begun the transition to his administration, there has been some discussion of reforming the market for health insurance. I have written previously that Obamacare is in the process of collapsing because of its structural defects. For example, the Obamacare feature of guaranteed issue has caused a phenomenon known as adverse selection which is driving insurance companies out of the health insurance exchanges (links to other posts on Obamacare are given below). Here I thought it would be useful to outline some changes that seem to be sensible reforms to the currently-available flawed system.

Read more…

The Business Cycle and the 2016 Election

November 9, 2016 Leave a comment

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…

Equal Pay and Occupational Choice

September 28, 2016 Leave a comment

It is election season and the bombast is relentless about the so-called problems that politicians need to fix. Equal pay is one such issue. Hillary Clinton contends that, if she is elected President of the United States, she will work to ensure that women are paid equally to men. But the “evidence” that is often offered to support the existence of this problem is simply the incomes of men and women which I have argued in a previous blog post is worthless (that post is here). The reason is that income data must be adjusted for hours worked, occupations, and possibly other reasons to make the comparisons sensible. These adjustments are typically not made and so one wonders if there is really any problem to be solved.

Here I thought I would provide an example of occupational differences which I suspect is at the heart of measured pay differences. The Bureau of Labor Statistics (www.bls.gov) provides data on incomes by occupation. To illustrate the point that occupations matter in equal pay discussions, consider two occupations: chemical engineers and elementary and middle school teachers. BLS reports a mean (average) income for chemical engineers of $103,960 and teachers in elementary and middle schools is $58,060. Now consider the following table.

Teachers Engineers
Man $58,060 Man $103,960
Woman $58,060 Man $103,960
Woman $58,060 Woman $103,960
 Total Incomes
Men $265,980
Women $220,080

In the table, there are three people in each occupation. In engineering, there are two men and one woman and, in teaching, there are two women and one man. Note that within each occupation, each person makes exactly the same income so there is no evidence here about discrimination by employers. But men, in the aggregate, make 21 percent more than women ($265,980 is about 21 percent larger than $220,080). So while there is no discrimination by employers, there is a 21 percent aggregate income gap due to occupational differences between men and women.

The point of this example is that if one is to argue for gender bias, the evidence must involve the choices made by men and women, not just the wages paid by firms employing them. I doubt seriously that this would ever happen. What is more likely to happen is that another layer of bureaucratic oversight will be imposed, involving data that must be provided by the private sector to government searching for discrimination. That raises the supply price of the goods and services we buy, thus raising their prices.

I am willing to believe that discrimination exists in our society but I am not willing to believe it on the basis of worthless analysis.

Economists Running for Office

August 31, 2016 Leave a comment

I have tried to stick to economics on this blog, meaning that I do not get involved in expressing political opinions for any reason. But I learned something today that I felt should be passed on to my readers.  And that is that two economists, Lawrence Kotlikoff and Edward Leamer, are running for President and Vice President of the U.S. Their web site is kotlikoff2016.com.

These are two established and highly competent economists but, let me be clear. I am not expressing my endorsement of them. I am merely passing on the information to those who might be interested.

Given the turmoil that we are seeing in this election season, it is quite interesting to see two economists feel that they should get on the ballot. It really is true that the U.S. economy has extremely serious problems that are not being addressed by either of the two mainstream candidates running for President. I will be interested to see just how far these two economists get to the jobs they seek.

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A blog by John B. Taylor

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