Plane and train envy

One of the privileges of my job is I get to travel a lot.  In the past year, I have been to Hong Kong, Seoul and Singapore.  All three cities have great airports, and nice, clean, comfortable, fast rail transportation from their central cities to their airports.

By comparison, many airport terminals in the US--including two of our biggest international airports, LAX and JFK--are embarrassing, and transportation options to them are limited.  Perhaps such things don't matter much to economic performance--it is easy to overstate the wonders of nice infrastructure when the cost is being hidden via subsidies.  Nevertheless, there is something about the ability of Asian cities to do infrastructure well that makes me envious.   

Lucid is the eye of the beholder

Ed Glaeser celebrates Tom Sargent in a recent Bloomberg column (h/t my father).  The following statement really struck me:

Two of his lucid monographs, “Macroeconomic Theory” and “Dynamic Economic Theory,” have long been mainstays of macroeconomic education

I am guessing pretty much anyone who went to grad school in econ in the late 1980s was subjected to "Macroeconomic Theory."  It has indeed become a useful reference to me, but lucid is about the last word I would use to describe it.  Lucid writers (within the realm of their academic work) include Paul Krugman, Milton Friedman and....Ed Glaeser.  Michael Intriligator manages to make dynamic optimization intuitive.  I just don't see how Sargent gets in the same category.

For free trade to fulfill its promise, the national government must redistribute income

As a card-carrying economist, I like trade--overall, it potentially enriches countries that engage in it.  The problem is the meaning of enrichment.

Trade theory says that trade enlarges the pie that people share.  But among the most important contributions to trade theory is the Samuelson-Stolper Theorem, which says that relatively scarce factors of production see their returns fall when trade is introduced.  In the context of an economy like the US, this means that low skilled workers see their wages fall in the presence of trade.  The trajectory of wages in the US over the past 20 years or so is consistent with the predictions of Samuelson and Stolper.

NAFTA was sold to the US public as something that would make everyone better off.  And in principle, it could have done so, had some of the gains to those who benefited from NAFTA been redistributed to those who lost as a result of it.  Instead we got the NAFTA but not redistribution.  This likely explains the widening disparity of incomes.

Why Einstein was wrong about being wrong

Why Einstein was wrong about being wrong

h/t Mark Thoma. The piece is a lot of fun.

Urban Population Share and Carbon Footprints

I am teaching Ed Glaeser's Triumph of the City to my undergrads right now; he has a chapter called "Is there anything greener than blacktop."  Just for fun, I plotted urban land share by state (source Demographia) against CO2 emissions per capita by state.  Here is what you get:

The regression line is log-linear.  An R2 of .28 on a bivariate relationship is not awful.  One should never make claims based on such things, but they are kind of fun to look at.

A couple of thoughts on the passing of Steve Jobs

(1) I wish we could have a tax code that could somehow discriminate between the truly productive rich and the, well, rich.  While I agree with Elizabeth Warren that no one gets rich by himself, there are rare people who really do know how to spend their own money better than the government.  The social returns to Steve Jobs must be remarkable.

(2) When politicians (and others) pay fealty to a market economic, their implicit assumption is that markets are competitive and exhibit, among other things, industrial (if not firm specific) constant returns to scale.  But successful enterprises like Apple often exhibit increasing returns to scale, at least for awhile, and certainly do not produce commodities sold into a competitive market.  Apple's innovation gives ii market pricing power, which is why it is so successful.  Without that pricing power, there might never be an Apple.  Yet the fact that success often requires market power implies that policies based on an assumption of a competitive equilibrium might be misplaced, perhaps disastrously so.

My testimony to Senate Finance Committtee on Housing and Tax Reform

I testified today.  Here is how the written testimony opens:

Chairman Baucus and Ranking Member Hatch, I want to thank you for the opportunity today to present my views on the issue of housing and tax reform.  My name is Richard Green, and I am a professor in the School of Policy, Planning and Development and the Marshall School of Business at the University of Southern California.  I have published extensively on the issue of the Mortgage Interest Deduction, and in particular published a paper co-authored with Dennis Capozza and Patric H. Hendershott on housing and fundamental tax reform for the Brookings Institution[1].

My general philosophy is that the tax code should be as broad-based and efficient as possible, while maintaining vertical and horizontal equity to the best extent possible.  I find many of the ideas proposed by Robert Hall and Alvin Rabushka to be quite appealing, and to me, in an ideal world, we would have something quite similar to the tax code they propose, albeit with an earned income tax credit added.  That said, we are manifestly not in an ideal world, and issues of transition matter.  As I wrote in 1996, a rapid change in tax policy could have a traumatic impact on the economy, so it is important that congress phase in any major changes to tax policy involving housing.

That said, I have long thought that the Mortgage Interest Deduction is a residual of the 1913 tax code, accomplishes little that its supporters claim for it, pushes capital away from plant and equipment toward housing, and benefits high income (although perhaps not very high income) households more than the remainder of the country.

I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction.

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[1] Dennis Capozza, Richard Green and Patric Hendershott (1996), Taxes, Mortgage Borrowing and Residential Land Prices in H. Aaron and W. Gale, ed. The Economic Effects of Fundamental tax Reform, Washington, DC Brookings Institution Press: 171-210