Principle #4: People respond to incentives

A student at Benedictine College saw this sign and notes, "I could not help but smile and appreciate the presence of the economic theory of incentives in my everyday life."

On the Spending Stimulus

Click here to read my piece in tomorrow's NY Times.

Obama's Multipliers

Team Obama has released its analysis of fiscal stimulus, coauthored by CEA Chair-designate Christina Romer and Vice President-elect adviser Jared Bernstein. If you go to the penultimate page, you can find the fiscal policy mutlipliers they assume. For government purchases, their multiplier is 1.57; for taxes, 0.99.

These are reasonable figures in light of mainstream models. But, as I pointed out in an earlier post, these models might well have things backward. Apparently, Team Obama is not convinced by the recent research of Christina and David Romer, who conclude:

tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent.

That is, Team Obama assumes that tax changes are less than half as potent in influencing the economy as the new CEA Chair estimated them to be in her own research.

Of course, it is prudent to take any research, including that of the very careful, very sensible Romers, with a grain or two of salt. The same can be said of the mainstream models on which Team Obama is relying.

Another Member

...of the Pigou Club:

The chief executive of Exxon Mobil Corp. for the first time called on Congress to enact a tax on greenhouse-gas emissions in order to fight global warming. In a speech in Washington, Rex Tillerson said that a tax was a "more direct, a more transparent and a more effective approach" to curtailing greenhouse gases than other plans popular in Congress and with the incoming Obama administration.

Reported by the Wall Street Journal.

Fama on Recapitalizing Banks

The great financial economist explains how he would do it. (This piece is at his new blog with Ken French, which will be well worth following for those interested in finance.)

Varian on Stimulus

Hal weighs in.

My Favorite Textbook (3e)

A friend sends along this photo of a sock puppet, created by (believe it or not) some White House interns. I am told the puppet is supposed to be of a generic "smart person." He certainly has good taste in reading material.