Help Me Revise

My duties as chairman of the Harvard economics department have left me too little time to work on textbook revisions. As a result, I have decided to crowdsource the next edition. Anyone who wants to make a change in the book is free to do so. Like Wikipedia. If you want to learn more about how you can participate in the revision, click here.

Yes, this was an April 1 joke.

Mideast Tragicomedy: Iraq's '$4B Bailout' of Egypt

It is no big secret that Egypt has been scrounging around the Middle East for emergency funding insofar as it has been unable to conclude an IMF deal. Famously, mercurial Qatar has stepped into the breach, but has been unwilling to extend more money as of late. More good money after bad and all that jazz. We can only presume it too would welcome (surprise!) an IMF deal that would indicate that Egypt is truly committed to shaping up even if there will be turmoil over conditionalities that involve, among other things, trimming healthy food and energy subsidies at a time of crisis.

Nevertheless, this one took me by surprise. So Iraq has energy revenues that Egypt practically has none of. Still, the near-civil war situation in Iraq among Shia, Sunni and Kurdish factions doesn't strike me as a particularly stable status quo: Apropos for the season, if Iraq can't save itself, how can it save others? Hard as it may be to fathom, though, talks are ongoing between Iraq and Egypt over some emergency funding. From al-Arabiya:

An Iraqi official says Baghdad has rejected a request from Egypt for a $4 billion bond to be deposited in Egypt’s central bank to bolster its faltering economy. The official said on Friday that it’s "too risky" to deposit such a large sum in Egypt but that talks are continuing for a smaller amount. The official didn’t elaborate. He spoke on condition of anonymity because he wasn’t authorized to talk to the media. In Egypt, the presidency’s media office confirmed in a statement to The Associated Press that discussions with Iraq are ongoing. Egypt’s planning minister, Ashraf el-Araby, visited Iraq this week...

Egypt has sought help from several oil-wealthy Arab countries after the central bank’s foreign currency reserves have tumbled to $13.5 billion as an aftermath of Hosni Mubarak’s 2011 ouster, covering little more than two months’ imports, as tourism and investment have diminished. So the central bank is rationing U.S. dollar supplies in auctions, making it hard for firms to get hold of dollars through the banking system.

It is not yet clear how much imports have been hit by the hard currency shortage, which has become more serious in the last three months. According to the most recent official data, imports rose to $16.4 billion in the final three months of 2012 from $14.6 billion a year earlier, but the increase was essentially due to higher costs for importing energy.

Given these factoids, I'd think that reduced-price guarantees for oil imports should be what Egypt seeks instead of stopgap funding to tide them over to whenever the IMF finally inks a deal with the Muslim Brotherhood. If it (sort of) works for Cuba with regard to Venezuela, what more Egypt and its near-neighbours?

The Long-run Budget Path

Click here to read my column in Sunday's NY Times.

Yale Journal of Economics

Students at Yale have started a new journal, called the Yale Journal of Economics, which aims to publish the best undergraduate papers, not just from Yale, but from any school. Click on the link to read the first issue or to find out how to submit.  The editors hope professors will encourage their students who write noteworthy papers to send them in.

Yesterday, I had the pleasure of being the featured speaker at the event where the inaugural issue was released.  Below is a picture of me with the new journal's editorial board after a dinner at Mory's, the classic Yale eating establishment.

Greening the tax system works

It has been some time that I have not mentioned the virtues of greening the tax system. By that I mean levying taxes on activities that exert negative externalities on others, such as pollution or congestion, while reducing standard taxes such as the income tax and even subsidizing activities that have a positive externality, such as getting educated. Yet, despite that great virtues of greening the tax system, it happens only moderately. Maybe it is because it bears some short-term costs before yielding longer term benefits.

Walid Oueslati confirms this using an endogenous growth model. In the long run, growth and welfare are indeed enhanced by environmental taxes if the proceeds are used to reduce wages taxes (but not capital taxes, a surprise given the optimal capital tax literature). In the short run, however, the impact on both can be negative due to the reallocation of factors during the transition to the new steady state. These disruption are similar to the sort-term costs of freeing up international trade. If you add it some temporary transfers to those who suffer in the transition, all is good and current opponents trying to protect some rents should be willing to go along. So, what are we waiting for?

PS: This must be the worst-looking working paper cover I have seen so far. The abstract is unreadable. Why this choice of colors?

Is money a factor of production?

An easy trick question to ask students about factors of production is whether money is one. Of course it is not, unless you consider burning it to fuel an oven. A factor of production is an input to the production process, such as capital, labor, raw materials, energy, etc. Money is only a facilitator in the acquisition of those goods. And if money or credit are constraining production, this belongs in a separate constraint, not in the production function.

Why do I mention this? Because money is occasionally put in a production function, and Jonathan Benchimol makes it even the focus and title of his paper. Why does he do that? He wants to estimate a New-Keynesian model and see whether money would matter in such a way. It does not. But who could really blame him for trying, as these models either have money in the utility function (few people enjoy money per se, most people enjoy what you can do with it, and that is already in the utility function) or no money at all (at still manage to draw lessons for monetary policy). In the kingdom of the blind men, those who are blessed with one eye are kings.

What is the purpose of insurance?

A friend points me to this passage:

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can't be compared to the comprehensive coverage available under the law. "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus," she said. "They're really mortgage protection, not health insurance."

I have the same problem with my other insurance policies.  My homeowner insurance doesn't cover the cost when my gutters need cleaning, and my car insurance doesn't cover the cost when I need to fill the tank with gas. Instead, the policies cover only catastrophic events, like my house burning down or a major accident. Now that the Obama administration has fixed the health insurance system, I trust they will soon move on to solve these other problems.