Mankiw, The Recovery, and Intellectual Consistency

Greg Mankiw passes along the following image:

And the following analysis:

At face value, it indicates the labor market is almost back to normal. If so, this fact suggests that the Fed may soon need to back off its policy of near zero interest rates, and that the slow pace of economic growth experienced in recent years reflects slow growth in potential due to adverse structural forces rather than inadequate aggregate demand.

If we can go back in time to the heady days of 2012, when Professor Mankiw was going all-out to elect his client Mitt Romney, we will find this post, in which Professor Mankiw purports to "[monitor] this so-called recovery" with the following image:

This image, accompanied only by the phrase "monitoring this so-called recovery," seems to be intended to imply that the recovery from the Great Recession of 2008, which had occurred during the presidency of Governor Romney's opponent, Barack Obama, was tepid. A casual reader may also infer from Professor Mankiw's sparse presentation that he intends readers to place the blame for this tepidity at the feet of President Obama. This is Natural and Good, as, after all, Professor Mankiw had a professional interest in Governor Romney's defeat of President Obama.

So, returning now to the first image, and the attendant commentary. Professor Mankiw now believes that "the labor market is almost back to normal," and that, accordingly, "the slow pace of economic growth experienced in recent years reflects slow growth in potential due to adverse structural forces rather than inadequate aggregate demand."

Since Professor Mankiw was good enough to provide a FRED graph to make his 2012 case, we can easily extend that analysis up through the present-day. Doing so gives us the following image, which shows that the trend has largely continued:

Now, if Professor Mankiw's blog posts were not typically so, ahem, brief, his readers may have enjoyed the gift of his analysis as to why the first image shows that "the labor market is almost back to normal," while the second and third images show a recovery that, in Professor Mankiw's view, may not truly even deserve that label.

An alternate possibility is, of course, that both posts are self-contained drive-by hit pieces that do not reflect any pretense of inter-temporal intellectual consistency. Only Professor Mankiw can know for sure...

Response to Mankiw on community rating (in the unlikely event his questions were genuine)

Greg Mankiw asks "Is Community rating fair?" His contention seems to be that the market has deemed that people with different health risks should pay more for health insurance, much in the way that the market has deemed that people who are statistically more likely to be involved in auto accidents should pay pay more for car insurance and that people who are statistically more likely to die sooner should pay more for life insurance. By way of example, he cites teen drivers (higher car insurance premiums) and old people (higher life insurance premiums, if they can get a policy at all).

Mankiw's complaint is specifically that pregnancy is, for the purposes of the ACA, a "pre-existing condition," the cost of which should not be spread among all of the insured, because pregnancy is a choice. Leaving aside the fact that the degree to which pregnancy is a choice is correlated with, and proportional to, socioeconomic status, Mankiw takes a logical leap that goes something like this:

1. Pregnancy is a choice.
2. Pregnancy is a pre-existing condition.
3. Community rating spreads costs for pre-existing conditions across all insured.
4. Community rating is unfair!!

It should be noted that community rating is primarily meant to remove the penalty of a lifetime of burdensome costs for those of us unlucky enough to be born with genetic conditions, to contract less-than-curable lifetime ailments like Lyme disease, and other catastrophic health scenarios that currently send people down a road toward something that most closely resembles serfdom. It should also be noted that community rating is very similar to the way in which employer-based health insurance plans spread risk, and have done so for decades. It's not like we're landing on Neptune here. Perhaps pregnancy is different in some fundamental way from the sorts of conditions I describe. Then again, maybe it's not. This is a relatively simple technocratic question, not the grand philosophical debate over which Mankiw wastes so much hand-wringing. Perhaps, in a sane political environment, we'd be able to discuss this question and others like it calmly and reach a practical solution.

So, Professor Mankiw, since you asked, yes, fairness is being treated differently here. And further, since you also asked, it's because This Thing isn't like Those Things. And we can't have a rational conversation about this stuff at the legislative level because your political masters can't talk about this stuff without bringing up death panels and the Fugitive Slave Act.


UPDATE: Matt Yglesias adds his inimitable take.

Mankiw Reality-Disconnect of the Day

From an outpost on the narrow edge of the fever swamp:

Woodward seems to believe that if we had a President more like Bill Clinton, a fiscal deal could have been struck. President Obama is described as distainful of schmoozing with other pols, as mishandling the negotiation process, and as unwilling to move sufficiently toward the political center to get a deal done. One gets the sense that the Democratic President who signed the 1996 welfare reform would have more easily reached a compromise with House Republicans.
This story brought to my mind recent research by Baker, Bloom, and Davis, which suggests that policy uncertainty has impeded the economic recovery. If Baker et al. are right that uncertainty depresses the economy, and if Woodward is right that the uncertainty we now face with the upcoming "fiscal cliff" is attributable mostly to the inability of Barack Obama to work with Congress, then the implication is clear: The meagerness of this recovery is not simply a hangover from a financial crisis, but rather a reflection of a fundamental political failure. The price of politics, indeed. [link and emphasis added]

There are several obvious rebuttals to this idea; my favorite comes to us via the Heritage Foundation. Take it away, Senator:

If you didn't immediately recognize him, that was Senator McConnell of Kentucky, the Minority Leader. That these people are continually reelected is testament to the validity of Jay Gould's Law.

Mankiw-Reality-Disconnect of the Day

What Greg Mankiw leaves unsaid, but seems to want his readers to believe, is that executives are not really paid as much as we think they are, and that, maybe, their pay is not actually that outsized. I think he'd rather his readers not glance casually at the y-axis of the graph. That's the axis that shows the ratio of average executive pay to that of workers. If you look closely, you'll see that it is 'only' 231. It's no wonder Mitt Romney likes this guy so much.

On a related note, Dr Mankiw has got to exercise a lot more care in choosing his sources. If he keeps looking at the EPI, he may learn some uncomfortable truths.

Fact of the Day: CEO Pay:

Source. 

The relative pay of CEOs skyrocketed during the 1990s and has since fallen by about half.

The Shallow End of the Charles

It seems the sort of people who whine about overpaid government employees are the same sort of people who claim executive compensation is driven by market forces.

A better explanation of how all of this tricky business works can be found here.

Robin Wells on Mankiw and the Future of Economics Education

We Are Greg Mankiw… or Not?
by ROBIN WELLS

On Nov. 2^nd, a group of students in Harvard University Ec10, the introductory economics class taught by Greg Mankiw, staged a walk-out. In an open letter, the students lambasted Greg’s course and his textbook for “espous[ing] a specific – and limited – view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today…..There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.” 

I am sure that many of us who have taught introductory economics or who have written an intro economics textbook (a much smaller subset, and I fall into both) felt a pang of sympathy for Greg when we heard about the walk-out.  If you have ever faced a large lecture hall of restive intro econ students, or coped with a voluble student with an ax to grind, you can feel some solidarity: we are Greg Mankiw too. 

But just how far should that sympathy extend?  Is Mankiw simply the target of fuzzy-minded youth who are more intent on making a statement than engaging in reasoned inquiry? Or, is Mankiw – and much of the profession, for that matter – getting a needed reality check about the need to re-orient the way we teach economics? 

First, let me say what this essay is not.  It is not an attempt to promote my textbook over Mankiw’s nor an exercise in partisan jousting.  I don’t find a walk-out a useful way to communicate displeasure with an instructor – better to invite him or her to a friendly debate with opposing views. This essay is not a critique of Mankiw’s teaching approach: I was not there to witness it, and every instructor will differ in political preferences and emphasis.  And neither will this essay advocate a root-and-branch re-think of how to teach introductory economics for both pedagogical and practical reasons.  I consider standard microeconomics to be an invaluable introduction to how to reason about the allocation of scarce resources.  Moreover, most intro econ instructors are stretched far too thin to contemplate a wholesale revision of their courses.   

But what I will say is this: something is shifting out there, and we ignore it at our peril. It would be very easy to dismiss the student walk-out as an exercise in intellectual laziness and grandstanding.  (After all, as many have pointed out, Keynesian models can’t be taught until second semester of Harvard Ec10.)  But perceptive instructors know that sometimes a stupid question is more than a stupid question.  And a really perceptive instructor will take a seemingly stupid question and turn it into the insightful question that the student should have asked. 

Right now the general public views the economics profession with a large measure of distrust and in some cases outright contempt. Students are entering the worst job market in well over a generation, without much prospect of improvement.  Many of them have seen their parents’ lives turned upside down by financial troubles.  They face being members of the first generation in American history with a lower standard of living than their parents.  Income inequality has reached levels not seen since the Gilded Age.  There are over 4 million long-term unemployed.

In this environment, instructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics.

But how does an instructor do this in an introductory economics?  I think it’s largely a matter of shifting our perspective to let go of the certainties that were part of our economic training and admit to the painful economic uncertainties that many Americans now inhabit.  Here are four ways to help bring that shift to the classroom:

Provide Context.   Compared to past years, instructors need to acknowledge the limits of free markets earlier in their courses. Students should understand the difference between the conceptual importance of free markets and their real world limitations. Explain that much of the current economic distress arises from markets that don’t behave competitively — the labor and financial markets.

Build Trust.  Trust is built when the instructor compensates for the one-sided nature of the relationship by treating students’ viewpoints with respect.  And this is where the art of the perceptive instructor is most likely to be needed.  For example, to the microeconomics student who protests that Keynes and Adam Smith should be given equal time, respond that the issue boils down to why some economists believe that the labor market doesn’t always clear while others believe that its does.  Then take a few minutes to discuss each side of the debate.   Yet, also make clear that valuable class time won’t be wasted on debating viewpoints that are contradicted by the data.

Address Distributional Issues.  The dramatic rise in U.S. income inequality compels us as instructors to address it.  While international trade and educational differences have clearly contributed to some of the rise, it’s clear that they are only partial explanations: they can’t explain the explosion of income gain at the top 1% of the income distribution, and particularly at the top 0.1%.  We shouldn’t extol the benefits of markets while ignoring today’s highly skewed distribution of the benefits.  While there is no single definitive explanation, there are many factors that are feasible topics in class: moral hazard and the setting of CEO compensation, the decline of countervailing forces such as unions and higher marginal tax rates at the top end, deregulation, asset bubbles and the financialization of the U.S. economy.  And then discuss: to what extent is the level of income inequality a legitimate policy target?

Finally, Adopt Some Humility.  It’s true that those of us who weren’t in the business of teaching Gaussian pricing formulas for CDO’s or touting the benefits of homeownership via sub-prime mortgages aren’t directly responsible for the economic mess we’re in.  But in the eyes of many students we are culpable to the extent that we dismiss the need for some re-think of the deference accorded to free markets in how we teach economics as applied to the real world.  Again, I want to emphasize that we make the distinction between communicating the importance of free markets as an intellectual building block and the frequent mis-use of free market concepts when it comes to making real world policy choices.  Lastly, in a world of liquidity-trap macroeconomics, soaring income inequality and an exploding Eurozone, we are going to have to admit that there are areas in which the profession just doesn’t know what the right answer is.  

And remember, there is such a thing as a first-mover advantage.  So schedule a teach-in before your classroom is occupied.

via INET blog

One of the central issues here is that many economics departments are the unabashed representatives of business interests. The austerity in academia advocated by, among others, the Wall Street Journal has allowed powerful captains of industry to step in and provide much needed research funding. That largess comes with a quid pro quo, of course. Thus, economics departments begin to offer courses focused on "economic freedom," "free exchange," "morality of markets," "spontaneous order," and other such Orwellian shorthand for "you're on your own."

For those with a genuine interest in expanding students' understanding of markets, their interactions, and their failures, Dr Wells offers a sober and sane prescription. Unfortunately, at the institutions most in need of her advice, this essay is likely to be regarded as collectivist noise.