Responding to emailers who had similar questions on his reasoning that Nate and I had, Greg Mankiw writes:
Economic theory alone does not prescribe what the right level of saving should be: Optimal saving is a function of the subjective rate of time preference, and economists have no basis to say that some intertemporal preferences are better than others. In my savers-spenders model, both savers and spenders may be acting optimally given their own preferences. I am sure, however, that none of these arguments would have convinced my grandmother.
I don't quite follow the "intertemporal preferences" thing. Yes, I understand the meaning of the phrase, I just don't see how it really applies here. If Sotomayor has enough money now, and she'll be getting enough money in the future, then what does intertemporal preference have to do with anything? Is the argument that, if she has a long time horizon, she'll save more now so she can "buy a jet ski made out of diamonds" (in the words of commenter Drew Miller) in a few years? That doesn't make a lot of sense to me. I don't see intertemporal preference as the appropriate analytical concept here.
But Mankiw's last sentence makes me think he's agreeing with my P.S. here. I think he's saying that his grandmother had such a depression mentality that, even though Sotomayor has a well-paying job for life and money in the bank, it wouldn't be enough. Thus, Mankiw was ultimately making more of a claim about his grandmother's attitudes (and, more generally, those of people of her generation) than about Sotomayor's financial choices.
OK, enough about this now. And I promise not to analyze the arguments of Alan Dershowitz, John Yoo, and the rest. Back to data analysis.
30 comments
Thanks for the reconstruction/deconstruction of Mankiw.
I don't blame you for not wanting to do Dershowitz or Yoo. Besides, they've already been done and done again.
The main problem with Mankiw is that despite his rank as one of the most important economists he has either been intellectually dishonest or does not fully understand the latest New Keynesian research. If it is the latter this would be embarassing since he has proclaimed himself a member of this economic school. Brad Delong effectively cleaned Mankiw's clock a few months ago. This is what he wrote:
"My statement:
There appears to be an error in N. Gregory Mankiw's "Economic View" column of January 11, 2009. The error is the association of Christina Romer with the proposition that the tax multiplier--the effect on GDP of a tax cut--is twice the spending multiplier. The Romers' article does not distinguish between the two, referring only to the "substantial multiplier... due to the procyclical behavior of investment" (p. 37 of the working paper version, at
http://tinyurl.com/dl20090111).
David Romer in conversation two years ago characterized the paper to me as "hyper-Keynesian... suggesting very large multipliers..." The Romers believe in a tax multiplier no larger than the spending multiplier, and they certainly do not believe that a balanced-budget equivalent reduction in taxes and spending provide any Keynesian stimulus at all.
Mankiw's comparison of the 1.4 estimated spending multiplier from Valerie Ramey's study with the 3.0 estimated tax multiplier from the Romers' study is inappropriate. The two studies use very different methodologies. They are not comparable. For example, the Ramey study on the effects of government spending--while a superb contribution to the literature, and one that I have assigned to my graduate students--does not fully control for the tax increases that often accompany spending increases. Thus it is very likely to understate the effects of spending increases alone: her study assesses the impact of the Korean-War military spending increase without taking account of the fact that it was accompanied by a large tax increase.
What Romer and Romer's study (and their earlier work on monetary policy) shows is not that tax cuts are uniquely effective, but rather that failing to consider the reasons for policy changes leads to underestimates of the effects of all types of stimulus. Because these issues of omitted variable bias are likely to be as strong for spending as for tax changes, the most reasonable interpretation of their paper is that all types of fiscal stimulus are more potent than conventional estimates would lead us to believe.
It is somewhat puzzling that Mankiw appears to believe that the Romers do think that tax multipliers are larger than spending multipliers, as they do not, and this is something that he could have very easily checked."
http://delong.typepad.com/sdj/2009/01/
the-romer-view-of-tax-
and-spending-multipliers-
revisited.html
"I am sure, however, that none of these arguments would have convinced my grandmother."
Just as no rational argument will convince the wingnuts to give any Democratic nomination a reasonable hearing.
The Republican wingnuts will oppose Sotomayor on the merits -- the merits of her skin color and her singular failure in the ever-important penis qualification.What a bunch of MORANS!
Wow, all this niggling to cast doubt on a Supreme Court appointee? It's just so... oh wait, is Obama still doing land deals with Rezko?
It's like they're bowling, but in the wrong lane... and getting gutter balls.
Nate. You are a godsend. Keep up the good work!
If there's a serious Republican attempt at a filibuster, I reserve the right to mock any and every Republican with the phrase "He/she/it deserves an up or down vote" for the rest of my natural life (And perhaps well into my unnatural one).
In this case, God sent Andrew.
wv: boygo (and you go girl, too)
She has 6-12 months of expenses saved up, that's pretty much what most people suggest and which is percentage-wise far more than the majority of Americans has (for whom the average saving is -10000 $ on 5.8 credit cards).
I don't really see what this guy's grandmother would have to say against this, this is pretty decent financial behaviour.
So if a lot of people are dissecting and vivisecting Mankiw's comments, and we still can't figure out what he's trying to tell us, even after he issues a clarification, does that say more about Mankiw or the hundreds (thousands? tens of thousands?) trying to figure out what he's trying to tell us?
If this is the manner in which he writes his economic textbooks, he must have some excellent editors going over the material before it's published if so many say his textbooks are some of the best available.
Either that, or the ones who consider the textbooks so good are certified members of the American wingnuttery factionMike in Maryland
My Blogger ID is http://www.blogger.com/profile/02848893412251095965.
I love these two articles. However, in the absence of proper economics, I reckon I could still safely disregard anyone who begins their little aphorisms with, "there are x kinds of people in the world."
Gee, maybe human nature is more complicated than binaries, or even spectra of limited dimensions...
Leslie, there are 6,706,993,152 types of people in this world, and you're one of 'em
No, there really are only two types of people in the world - just ask Dick Cheney and George Bush. Are you good or evil?
My explanation of intertemporal time preferences:
When you got a candy, did you choose to crunch it up right away, or to suck on it for a long time?
Intertemporal time preferences are your relative preference for immediate consumption versus delayed gratification. So, from an economic point if view, it is not irrational for somebody making 180,000/year to save almost nothing because he/she may be:
1. Not very risk-averse (or even risk-loving)
2. May get more out of spending right away (eg. if I was terminally ill, or if I was an instant gratification kinda guy)
3. Alternately, you could argue that Sotomayer doesn't need to save. She has a job she can do till she is very old, providing a steady income stream for most of her life.
As to whether Sotomayer violates the lifetime income hypothesis that depends. She may have expected (correctly, if she survives nomination) that her income would get much higher (or that she could continue working much longer than most people - also a correct assumption.
I would like to add a few piece of information.
Once upon a time (back in 1900's) economists (such as Fisher and Bohm Bawerk) discussed why people should always prefer presente to future and...
They could't prove this, and since then economist just take this for granted without any further justifications.
It's ok iw we want to make some models, but argue that people shoud prefer presente to future?
That's non sense
Mankiw closed comments on his blog a while back. The reason wasn't that his comments section was being spammed, or stuffed with trolls, it was that Greg 'Hahvahd Econ Professor' Mankiw was no match for commenters with access to facts and logic.
In the end, Mankiw is simply a right-wing hack who sold out.
-Barry
@Leslie
There are 2 kinds of people: those who think there are two kinds of people and those who don't.
@Leslie, Ed and jdk,
There are actually 10 kinds of people; those who get binary notation and those who don't.
Maybe we should just give him Mankiw a break. Sometimes (like more often than not), bloggers write stuff that in retrospect and under scrutiny doesn't make any sense. In this case, what is he really saying: 1) His grandmother is a saver. 2) And the Judge didn't seem to be a saver to his grandma, based upon a Washington Post article which did not (because it could not) report on how much the Judge was socking away in the TSP (like a 401(k)).
At least, in his textbook, he seems to have gotten this part correct regarding Henry George,
http://books.google.com/books?id=cNZMGdsJ2HMC&pg=PA159&lpg=PA159&dq=Mankiw+Henry+George&source=bl&ots=t9TcTDoket&sig=tCwPELITOLDbq7Y55fdWOtoPK6w&hl=en&ei=GZ8eSurpNYK8M-P5ze8F&sa=X&oi=book_result&ct=result&resnum=3
And he's in good company:
* Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them. -- Adam Smith (Wealth of Nations)
* Pure ground rent is in the nature of a 'surplus,' which can be taxed heavily without distorting production incentives or reducing efficiency. -- Paul Samuelson, Nobel laureate
* In my opinion the least bad tax is the property tax on the unimproved value of land [not the value of the buildings], the Henry George argument of many, many years ago. -- Milton Friedman, Nobel laureate
* It is important that the rent of land be retained as a source of government revenue. -- Franco Modigliani,Nobel laureate
* For efficiency, for adequate revenue, and for justice, every user of land should be required to make an annual payment to the local government equal to the current rental value of the land he or she prevents others from using. -- Robert Solow, Nobel laureate
* While the governments of developed nations with market economies collect some of the rent of land, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies -- taxes on such things as incomes, sales, and the value of capital goods. -- William Vickrey, Nobel laureate
Let's run some numbers:
What would the effect of a national land value tax (apportioned among the states) be on savings and consumption?
Would a national tax on land value (not the building value) be more progressive than the income tax?
Since the bulk of land value is owned by corporations, how could it not be?
"Once upon a time (back in 1900's) economists (such as Fisher and Bohm Bawerk) discussed why people should always prefer presente to future and...
They could't prove this, and since then economist just take this for granted without any further justifications."
Uh, what the hell? Economists do not "take that for granted" - they don't even agree with that statement.
People have different preferences about the timing of consumption. Some people are impatient, for instance.
They tend to argue saving is a good thing, not from an individual perspective but from a macroeconomic one. Savings are converted into capital accumulation. Even then, everybody since Solow has tried to incorporate technology and other factors into the model (Romer is probably the most successful).
Manoel -
I think you may be confusing the "time value of money" with "preference for timing of consumption".
The time value of money refers to the fact that if payments are to be received in the future, there is always some associated risk about receiving them, and a delay in the ability to put them to use.
One can use mathematics to derive the present value of a future stream of payments, although certain assumptions have to be made, for example.
The time value of money is completely factual and has never been questioned by anyone. Its proof is trivial (if you are going to give me a dollar right now, or a dollar tomorrow, right now is better, as long as we concede that there is some probability, however low, that I either might want to spend it before tomorrow, or might not be able to receive it tomorrow).
The time value of money is not changed by the fact that different people have different consumption and saving preferences. (*Different people can have different estimates of discount rates and so on, but that's not the same thing*).
I can boil down the piece from thejewishweek.com that quotes Dershowitz, Stern, and others on Sotomayor's nomination - "Is it good for the jews?" The answer seems to be a qualified "yes."
jdk,
All those quotes about ground rent - do you know what ground rent actually is?
Not many in the US know what ground rent is, thinking, if they have ever heard of it, that it is some form of property tax one pays to the government.
It is NOT.
The Maryland legislature just passed several laws reforming the ground rent system in the state because of abuses.
Mike in Maryland
My Blogger ID is http://www.blogger.com/profile/02848893412251095965
Basically, Mankiw is saying that he agrees with Nate over the issue of his grandmother. Intertemporal preferences is how much you want to consume now versus how much you want to consume in the future.
According to neoclassical economic theory, (whose basic approach is approved by New Keynesians) a consumer maximizes his/her utility function subject to his/her budget constraint. Generally, utility is a function of current consumption and future consumption or C(t) and C(t+1). Usually, they are expressed in an additive form (i.e. C(t) + C(t+1)). But to study addictive behavior, it will often be expressed in multiplicative form. When writing out the utility function, there are coefficients associated with C(t) and C(t+1). These coefficients are determined subjectively by the consumer's taste, and determine the weight the consumer gives on current versus future consumption.
I know that you're done with this topic, or have moved on to a discussion of the economic theory rather than the facts, but I'd just like to point out that Sonia Sotomayor
apparently owns her condo in the West Village. It's worth $1.4 million, and her outstanding mortgages are $450k, so she has $950,000 in home equity. You don't have to disclose the value of your home on these disclosure forms, which is why Mankiw missed it.
So Sotomayor's not poor. She's just house-poor - like a heck of a lot of New Yorkers.
I suspect that whatever she has left after supporting her mother in Puerto Rico, she's pretty much poured into her house. Mankiew's mother's silliness aside, that $950k will sure come in handy when she's trying to buy someplace to live in the DC area.
To:MikeInMD
I am an attorney from MD, I am quite sure no more than a dozen people in the country know more about the private system "ground rents" in MD as opposed to the "ground rent" that is being described in the quotations, than I do.
"Ground Rent" is an economic term.
from Labor the fruit is called Wages
from Capital the fruit is called Interest
from Land the fruit is called Rent
When these economist write about "ground rent" they are talking about using the "rent from land", as a source of public revenue.
In Maryland, there is a system of PRIVATE ground rents, in which the land is not owned in fee simple.
The building/home is owned by the "owner" while the land is owned by someone else who charges an annual fee to the homeowner for leasing the land. There are certain statutory procedures which allow a homeowner to buy (pursuant to a redemption table based on the year of the establishment of the ground rent) the land converting the leasehold into a fee simple.
The abuses had to do with what happens if you fail to pay this PRIVATE ground rent (almost always less than a couple of hundred bucks a year), which previously gave the right to the ground owner to evict with little notice or due process protections.
The entire problem is that these were PRIVATE rent gathering schemes rather than a public revenue source as George had envisioned. Ironically, the largest owner of ground rents in MD is the city of Baltimore!
The historical origins of this private system are somewhat interesting.
First, the Catholic Church owned a lot of land when MD was a colony.
In order to fund relief for orphans, widows and the poor, the Church started to divest itself of land but retained a ground rent as a source of funding for alms activities.
Later, the private sector coopted that system, initially in order to create more affordable housing. A "developer" had the bucks to get a large parcel of land, he'd then build row houses, in order to sell the houses more cheaply he'd just sell the house but "rent" the land to the homeowner. So even this system of privatization of the ground rent, had an arguable positive purpose.
At some point, speculators stepped in and started to buy the ground rents, the developers having long since recouped their purchases.
These speculators figured easy money for doing nothing (the whole problem of real estate speculation in a nutshell until there is crying and the economy has been ruined) with the added kicker that every now and then the ground renter would screw up and they be able to seize the land, which would be a total wind-fall especially as prices escalated.
This is what the Legislature just fixed.
But, it could have all be fixed more easily if the land value had been highly taxed in lieu of the normal property tax which taxes both the land AND the building. A high land value tax prevent the speculation in real estate, whether real estate in fee or leasehold real estate.
All economic cycles including this current one have come from land/real estate speculation. Indeed it was the boom bust cycle that was the beginning point for Henry George's inquiry in 1879, Progress and Poverty.
Anyone else notice that Mankiw used a bunch of big words that look almost like legalese? It's like "I'm full of crap, but here's a wall of text to make it look like I'm still right."
http://gregmankiw.blogspot.com/2006/06/jd-vs-phd-my-story.html
@jdk,
I am also interested in tax reform. I fascinated that someone like you, an attorney, would find this an interesting topic.
I live in Delaware. We have a community here in my state called Arden. Arden (as you probably well know) was founded in 1900 by sculptor Frank Stephens and architect Will Price, based on ideas such as Henry George's single tax and William Morris’s Arts and Crafts principles. The single-tax movement, popular in the U.S. and other countries from the 1890s until the 1930s, believed that the best way to raise government money was by a single tax on land only. The tax would be based on its assessment, whether the land was improved or not, thus recovering the value of natural resources and public-created value (like roads) for the public, and not impeding labor and capital from profiting from their efforts. William Morris, an Englishman, rebelled against modern cities and industry. He advocated a return to craft production, good design, and village life. While Kropotkin was primarily an anarchistic communist, many of his ideas regarding social and community living were used by the founders of Arden to advance William Morris' ideas for the return to village life.
I wonder what you think about Arden?
@Sadowski
Jak sie masz
Why don't you email me directly.
I think if you click on jdk it will take you to my blog thingy where my email is.
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