Inflation expectations and rational behavior

Ask people on the street (à 24-hour news channel that needs to fill time) about the inflation rate, and I am quite sure you get an very upward biased estimate. Or at least this is what I would have expected, but the data seems to contradict me: comparing US inflation expectations from the University of Michigan Consumer Survey and the realized CPI, there is no obvious bias visible, meaning they seem to have rational expectations:

However, are these consumers rational all the way, that is, do their actions follow their expectations? Olivier Armantier, Wändi Bruine de Bruin, Giorgio Topa, Wilbert van der Klaauw and Basit Zafar design an experiment where payoffs depend on future inflation. By and large, participants seems to act in a way that is consistent both qualitatively and quantitatively with expect utility theory. The only ones that stray away and not surprisingly less educated consumers, but their impact is rather small (in numbers, and me now that zero-intelligence traders have no impact on markets). My faith in the US consumer is restored.

The Gray Lady's Misleading Headline

Over my coffee this morning, I read the following headline on the front page of The New York Times: "Complaints Aside, Most Face Lower Tax Burden Than in the Reagan ’80s."  Below it was a graphic comparing average tax rates for various income groups in 1980 and 2010.

The problem is that Reagan did not become president until January 1981, and his tax policy was not fully implemented until a couple of years later (and arguably not until his second term, when we got very significant tax reform).  So the headline should have read, "Complaints Aside, Most Face Lower Tax Burden Than in Carter's 1980."  That makes the story very different, as 1980 was the year the incumbent Carter was defeated by the challenger Reagan, who was proposing significant tax reduction as a key part of his campaign.

By the way, the online version of The Times omits the mention of Reagan in the headline.  There, the headline is the more accurate "Complaints Aside, Most Face Lower Tax Burden Than in 1980."

Addendum: Using the Times online interactive graphic, you can compare the average tax rates between any two years.  Here, by income level, is how the average tax rate changed from 1988, Reagan's last year in office, to 2010, the most recent year available.

0 to 25K, fell by 4 percentage points
25 to 50K, fell by 3 percentage points
50 to 75K, fell by 2 percentage points
75 to 100K, fell by 2 percentage point
100 to 125K, fell by 1 percentage point
125 to 150K, fell by 1 percentage point
150 to 200K, unchanged
200 to 350K, rose by 2 percentage point
350K+, rose by 1 percentage point

That is, according to the Times numbers, since Reagan left office, tax rates have risen at the top and fallen for the middle class and especially the poor.

Quick Movie Reviews

Over the last week, I saw two of the movies that critics have been raving about: Lincoln and Argo.  Lincoln was okay but a bit disappointing compared to expectations.  It is too hagiographic for my taste.  Argo was great.

What to do about climate change: looking beyond the discount rate controversy

When the Stern Review, which discussed global climate change from an economic perspective, came out, it generated a lot of discussion because of some of the assumptions that were taken. Biologists objected to the use of a discount rate even if it was only 0.1%, and economists William Nordhaus (2%) and Richard Tol (1 to 3%) objected to the value of the discount rate that was chosen. This controversy about the discount rate was reflected in a few posts of mine (I, II, III).

Etienne Espagne, Baptiste Perrissin Fabert, Antonin Pottier, Franck Nadaud and Patrice Dumas point out that the controversy between Nicholas Stern and William Nordhaus goes beyond the discount rate: the choice of the growth rate of technological progress in abatement and the sensitivity of climate to pollution. Using a climate policy model, they show that that changing these two values to their respective extreme values generates about as much variation in results in terms of the social cost of carbon as for the discount rate. But the discount rate cannot explain the differences in policy recommendations between Nordhaus and Stern, while the other two parameters can. We can thus somewhat discount the discount rate controversy and focus more on abatement technology and the climate models.

Research and teaching are complements in terms of quality

Are good teachers also good researchers? Does spending more time on research improve one's teaching? Or does research get in the way of good teaching performance? It seems everyone has his own theory about this, some thinking that teaching and research are substitutes (you hear that mostly in teaching colleges) or complements (research universities think that). What about some empirical evidence on the matter?

Aurora García-Gallego, Nikolaso Georgantzís, Joan Martín-Montaner and Teodosio Pérez-Amaral provide this for a Spanish university. It turns out research and teaching are complements, at least for that university. What I find striking is that the professors who perform the most research also teach the most, and do it better. Those doing no research are among the worst teachers. That seems like the way a social planner would do it: Get the best people to work their ass off, while the worst should be kept away from anything productive. That is the way to increase productivity. That does not seem very fair, though, unless pay is tied to performance, which is not likely in this case. And how this study can generalize to other universities is not clear, especially as we do not know much about the university in this case.

The Coming Tax Hikes

Donald Marron of the Urban-Brookings Tax Policy Center explains the tax increases that are part of the upcoming fiscal cliff.

Dividing Household Chores

Advice from economist Emily Oster.  A good reading to assign when teaching the theory of comparative advantage.