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Monthly Archives: May 2007

The following is taken from Greg Mankiw’s blog, an econ prof at Harvard.  I am a big fan of his and all of his posts can be found here: http://gregmankiw.blogspot.com/

Inequality among Dentists

In Congressional Testimony (via Luskin), Cornell economist Robert Frank discusses his views on economic inequality. Here is an interesting tidbit:

Others have argued that inequality has increased in the United States because globalization has put unskilled American workers in competition with low-wage workers from other lands. Yet the basic pattern of inequality growth has been the same even among dentists, who are largely immune from foreign competition. Most dentists today earn little more than their counterparts from 1979, but the best paid dentists earn almost three times as much.

Somewhat oddly, however, Frank then advocates a superstar theory of increasing inequality.

The basic idea, originally from labor economist Sherwin Rosen, is that technological change now allows the highest quality producers to service a larger share of the markets in which they operate. If Jon Stewart is the funniest guy around, television allows the entire world to enjoy his comedy. This gives Stewart a huge income but leaves little for second-tier comics.

I like the theory as applied to some professions. But it it does not work particularly well for dentists.

The following is taken from Greg Mankiw’s blog, an econ prof at Harvard.  I am a big fan of his and all of his posts can be found here: http://gregmankiw.blogspot.com/

Price Gouging

The Associated Press reports:

With gas prices increasing, New Jersey lawmakers moved on Monday toward toughening gas gouging penalties that haven’t been changed since Franklin D. Roosevelt was finishing his first term as president.

An Assembly committee released a Senate-approved bill to boost the state’s gas gouging penalty to as much as $3,000 per violation, compared to current law, unchanged since 1938, that brings fines as low as $50. The bill can now be considered by the full Assembly. It was approved 35-0 by the Senate in February.

Meanwhile, Democratic leaders are pursuing similar efforts at the national level.

On Tuesday, House Speaker Nancy Pelosi(D-Calif.) told the Energy and Commerce Committee to mark up a bill proposed by Rep. Bart Stupak (D-Mich.) that would give the federal government more power to pursue accusations of price gouging.

A student asks me (and I paraphrase), “I understand the arguments that economists like you and Gary Becker make against anti-gouging legislation, but what about more left-leaning economists? Are they also opposed to such regulation?”

I believe the answer is yes, but I could not think of a good reference off the top of my head. Does anyone know of a well-regarded economist of more moderate or liberal views opining on these anti-gouging laws? Please post your citations in the comments section.

The following is taken from Greg Mankiw’s blog, an econ prof at Harvard.  I am a big fan of his and all of his posts can be found here: http://gregmankiw.blogspot.com/

Free Lunch Thinking at Harvard

“There is no such thing as a free lunch” is as good a slogan as any I know. Whenever I hear someone propose a reform and suggest that it does not involve any costs, my first reaction is to think that they aren’t being honest. Life is full of hard tradeoffs. If you think otherwise, you probably haven’t thought enough.

I see some students being lulled into free lunch thinking when discussing raising wages of low-income workers at Harvard. Even putting aside any possible adverse side effects of above-equilibrium wages, advocates of higher wages need to confront the real question of limited resources. If Harvard is to raise wages above the going market levels, the money to pay those wages has to come from somewhere, such as higher tuition, less financial aid, or fewer faculty. Saying “Harvard has a large endowment” is not an answer–the endowment represents future spending on items the university values.

Harvard administrators are lulled into free lunch thinking when discussing teaching quality. An article in yesterday’s NY Times offers this insight into the issue:

The aim of the report is not to de-emphasize research in any way, but to bring about a greater institutional focus on teaching, Professor Ulrich said. “This is not a report that says we’re going to hire teachers who are not also scholars,” she said. “We want both.”

But better teaching is not a free lunch. If the university puts more weight on teaching in its hiring and promotion decisions, it must put less weight on research. Sure, there are some scholars who are great at both activities, but those are not the marginal hires.

You will know the university is serious about increasing teaching quality when it says it is willing to hire scholars with less distinguished research records in order to get better teachers, or when it says it will spend more money to compete more vigorously with Princeton and Yale for the best professors (and tells you where that money will come from). But unless the university says it is willing to confront the hard tradeoffs, it is just posing.

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Update: Some commenters point out that sometimes the world does offer Pareto improvements, such as the gains from trade in a Ricardian trade model, and that these are free lunches. True enough. Slogans are more rules of thumb than theorems. Experience suggests, however, that purported free lunches are vastly more numerous than actual free lunches.

I should note that purported free lunches are found on both sides of the political divide. Politicians on the right like to claim that their proposed tax cuts will completely pay for themselves with extra economic growth. Politicians on the left like to claim that their proposed spending programs are investments that will yield returns so great that the spending becomes self-financing. Either outcome is possible in theory, but skepticism is usually the best response in practice.

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Reed Offers Bill to Block Foreclosures (American Banker)
Builders’ Permit Requests Tumble (Washington Post)
Changes Planned for FICO Method (Los Angeles Times)
Global Coalition to Make Buildings Energy-Efficient (New York Times)
New Bid for New Century (New York Post)
Fannie, Freddie Step Up PAC Donations (Washington Post)
New Database Targets Homeowners (DM News)

Credit Standards Rise for Subprime Loans (Wall Street Journal)
Lenders Get Tougher (Wall Street Journal)
Freddie Mac Urges Subprime Oversight (Washington Post)
Groups Seek Foreclosure Delay (Los Angeles Times)
Big Lender Enters Mortgage Niche (Wall Street Journal)
Mortgage Lenders Licensure Bill Heads to Governor (SitNews)
Wide Scope in Ohio AG’s Subprime Legal Plans (American Banker)
Countrywide to Add 2,000 Staffers (Los Angeles Times)
Bad U.S. Loans Plague HSBC (Wall Street Journal)
Mortgage Industry Weighs In on Proposed REMIC Changes (National Mortgage News)