Larry and the Team

A New Yorker profile of Larry Summers and the Obama economic team.

A Victory for Mundell-Fleming

The multiplier estimates above are from new research by Ethan Ilzetzki, Enrique G. Mendoza, and Carlos A. Vegh. They imply that the effects of fiscal policy depend crucially on whether the exchange rate is fixed or floating (flex), precisely as predicted by the Mundell-Fleming model.

Don't remember Mundell-Fleming? For a review, see my favorite intermediate macro textbook.

Medicare and Freedom

Today, over at the NY Times, Paul Krugman writes:

the modern G.O.P. considers itself the party of Ronald Reagan — and Reagan was a fierce opponent of Medicare’s creation, warning that it would destroy American freedom. (Honest.)

Pretty silly of old Ronald, wasn't it? Well, also today, over at the Wall Street Journal, three past presidents of the American Medical Association write:

the right of patients to privately contract with physicians to ensure they have the medical care they want, without penalty—regardless of what the government pays—must be recognized and protected. Today, if a doctor wants to bill a patient for additional payment over the Medicare reimbursement, he has to withdraw from Medicare entirely for two years. A patient who agrees with this arrangement can't receive any Medicare money for that service, either.

So, if you include the right to sign mutually advantageous contracts and engage in the gains from trade as part of "freedom," then President Reagan was not so far off the mark.

The problem, it seems, is that Medicare sometimes tries to push the prices of medical services below their equilibrium levels (a phenomenon that will likely get more severe with the Medicare cuts being envisioned in the pending healthcare reform bills). Such price controls naturally lead to private attempts to circumvent them, which in turn lead to regulations to prevent that behavior. These new regulations cannot help but impinge on economic freedoms.

Kocherlakota to the Fed

As has been reported, Narayana Kocherlakota is the new President of the Federal Reserve Bank of Minneapolis. A few observations:

1. Bob Lucas told the Wall Street Journal, "He's probably the most abstract thinker ever to head a Federal Reserve bank." That is true and, indeed, an understatement. It is almost like Albert Einstein was hired to be CEO of General Electric.

2. Narayana has done some very interesting research. My favorite is his work on dynamic optimal taxation. But very little of his work is relevant to the day-to-day concerns of central bankers. If Fed watchers want to figure out his views about monetary policy, they will have a hard time finding much in his written work.

3. Why did he want this job? Unlike Ben Bernanke, who had written extensively in applied macroeconomics, Narayana is not pursuing a path that seems natural in light of his past work. I suspect his interest in the job was in part based on a desire for a major change in career path, such as when Michael Spence or Hugo Sonnenschein made the shift from economic theory into university administration. I wonder how much Narayana will enjoy the typical responsibilities of a Federal Reserve Bank President, such as talking about the latest data on local economic conditions with the Minnetonka Chamber of Commerce.

4. Given his unusual background (unusual, that is, for a Bank President), I look forward to hearing Narayana in a few years, after he has had a chance to reflect on the interaction between macroeconomic theory of the sort practiced at the University of Minnesota and the conduct of macroeconomic policy. Is Minnesota-style theory more useful for policymaking than it is usually given credit for in policy circles? If so, how? If not, should it move in new direction? Narayana is now in a position to be a credible messenger between two distant islands within the economics profession. It will be noteworthy to see what messages he chooses to convey.

5. Narayana is very smart and, by all reports, a very nice guy. I wish him luck in his new job.

Unemployment Update

Click here for my interpretation of the graph.

Austan Goolsbee

Barro on Multipliers

My Harvard colleague summarizes his latest research.