Illegal Drugs

A student in ec 10 emails me:

Hi Professor Mankiw,

Friday's Wall Street Journal had an article regarding the shortcomings of U.S. drug policy ("Drugs Beget Thugs in the Americas"), and I was wondering what your thoughts were on the issue.

I recall that in the fall we discussed the different effects of supply and demand shifts on drug quantity and prices. Given the theoretical arguments (supply shift -> higher prices), and the high costs and empirical ineffectiveness of drug interdiction, it seems like the U.S. should reevaluate its policy.

Also, I wanted to thank you for doing a great job with Ec10 this semester. I've really enjoyed the course a lot (to the point where I'm now thinking about economics on my Saturday afternoons).

All the best,
[name withheld]

Here is an excerpt from the Wall Street Journal article:

Nobel economist Douglas North taught us the importance of institutions in development economics. Yet prohibition and the war on drugs are fueling a criminal underworld that handily crushes nascent democratic institutions in countries that we keep expecting to develop. Is it reasonable to blame Mexico for what enormously well-funded organized-crime operations are doing to its political, judicial and law enforcement bodies when we know that Al Capone's power during alcohol prohibition accomplished much the same in the U.S.? These are realities of the market, of supply and demand and prices under prohibition that no amount of wishing or moralizing can change.

My own views on this issue are not fully formed. Two things are clear to me:

1. The use of illegal drugs has a lot of bad effects. My colleague David Laibson, who lectured in ec 10 in the fall, is famous for modeling the self-control problems that lead people to suboptimal behavior such as drug use.

2. The war on drugs has a lot of bad effects. The paragraph I have excerpted above gives a good sense of them.

To go beyond these bland generalities, one has to know a lot of details to weigh the pros and cons of various policy options. I am ignorant enough of these details that I should avoid opining.

My colleague Jeff Miron has studied this issue extensively, however, and he is a proponent of drug legalization. I recommend that ec 10 students look out for Jeff's courses, including ec 1017 (A Libertarian Perspective on Economics and Social Policy) and ec 1471 (Economics of Crime).

John Kenneth Galbraith

John Kenneth Galbraith died yesterday. Here are the reports from the Washington Post and the New York Times. You can find a summary of Galbraith's economics here.

I have long been a fan of Galbraith as a person, even though I disagree with almost all of his conclusions as an economist. Galbraith marched to his own drummer and did not feel compelled to follow the dictates of his profession. A prolific writer, he tried to reach a broad audience, rather than aiming only for the narrow club of economists. And he did it spectacularly well. I recall reading when I was an undergraduate in the 1970s that Galbraith was the economist with the highest name recognition among the general public.

I assigned his most famous book, The Affluent Society, in a freshman seminar at Harvard about five years ago. The students enjoyed it. Even though the book was about half a century old, it did not feel dated, which is quite a feat. (In the new edition of my Principles text, I have a new passage on Galbraith and Hayek, which I previewed in this post.)

I once asked Galbraith the secret to his success as a popular writer. He told me that he revises extensively and puts his books through many drafts. Around the fifth draft, he manages to work in the touch of spontaneity that everyone likes.

When I became chairman of the CEA in 2003, Galbraith wrote me a kind note congratulating me on the job. He said he had some role in the creation of the Council, which was established as part of the Employment Act of 1946, and this was what he had in mind--Harvard professors taking leave from the Ivory Tower to advise the President. He added, wryly, that he had hoped it would be a President of a different party.

For students who want to learn more about this great man, I recommend his memoir A Life in Our Times.

FACE HUNTER IN SWITZERLAND: bugnology 2, loft electroclub (lausanne), 29/04/06

la johnson, espace replay, 27/04/06

pink tv party, il fait beau, 27/04/06

Fundamental Attribution Error

In the psych class I've been auditing, Steven Pinker yesterday talked about a phenomenon called the fundamental attribution error. When evaluating others, people have a tendency to overestimate the importance of personal characteristics and underestimate the role of situation.

Example:
Why am I smiling? Because it is a sunny day.
Why is he smiling? Because he is a cheerful person.

I wonder if this common error can help explain some unfortunate impulses in economic policy.

Example:
Why did I raise my price? Because demand increased more than supply.
Why did the gasoline station raise its price? Because oil companies are greedy price gougers.

Similarly, in judging policymakers, perhaps we give too much credit to those who were simply lucky and too much blame to those who were unlucky. In this paper, I did not refer to the fundamental attribution error, but I was following its logic:

If you were to poll monetary historians, most of them would tell you that Alan Greenspan is a hero among central bankers and that Arthur Burns is a goat. Just as Greenspan gave us low and stable inflation, together with robust and stable growth, Burns gave us high and rising inflation, together with anemic and volatile growth. The standard assessment of these two men is easy to understand.

Yet, in looking back at these polar two experiences, I wonder whether we exaggerate the role of policy decisions and understate of role of luck. One reason is that the bad inflation performance of the 1970s and the good inflation performance of the 1990s were not limited to the United States. Most developed countries had about the same experience. If there was a policy failure in the 1970s and success in the 1990s, the blame and credit go to the world community of central bankers, not to the single person leading the Federal Reserve.

I suspect, however, that the difference cannot be fully explained by policy at all. These two eras saw very different exogenous supply shocks. The relative price of food and energy was extraordinarily volatile during the 1970s and extraordinarily tame during the 1990s. The standard deviation of this relative price differs in these two decades by a factor of almost three. (Table 1.3, Mankiw 2002) Moreover, the 1970s witnessed an unexpected slowdown in productivity growth and an increase in the natural rate of unemployment, whereas the 1990s witnessed an unexpected acceleration in productivity growth and a decline in the natural rate of unemployment. The favorable supply-side developments of the 1990s were not caused by monetary policy, but they did make the job of monetary policymakers a lot easier. Luck plays a large role in how history judges central bankers.

The same could be said of Presidents. I have long thought that Bill Clinton gets too much credit for the booming economy of the 1990s, and Jimmy Carter gets too much blame for the lousy economy of the 1970s. Now I have a term for it: the fundamental attribution error.

Update: Arnold got here first.

Krauthammer on Oil Prices

Columnist Charles Krauthammer writes about what's happening in the oil market, using economists' two favorite words--Say It With Me: Supply and Demand.

Feldstein on the Dollar II

In today's Wall Street Journal, my colleague Martin Feldstein continues his call for the dollar to weaken in foreign-exchange markets:

the primary reason for wanting the dollar to become more competitive in the near future is that we may need an improved trade balance over the next few years to sustain the economy's expansion. Although forecasters generally believe that the likely outlook for the economy in 2006 and 2007 is a continuation of solid economic growth, there is a serious risk that the combination of falling house values and an end to the low-interest incentive to refinance mortgages will cause consumer spending to decline relative to incomes. A sharp slowdown in consumer spending could cause an economic downturn.

What can take the place of the lower consumer spending to maintain overall aggregate demand? Business investment is unlikely to rise faster when sales to consumers are declining. Housing construction is already in decline. The key to maintaining aggregate demand, i.e., the key to our continued expansion if consumer spending slows, must be a shift in our trade balance -- increased exports, lower imports and more spending on goods and services produced in the U.S. For this, the dollar must decline to make U.S. goods and services more attractive.

Even if the dollar does decline during the coming months, the delays in the response of exports and imports to the more competitive dollar will mean that the increase in aggregate demand from this source may not happen for a year or more. That's why the U.S. needs to shift to a more competitive dollar as soon as possible.

vernissage "the wrong store ", galerie fr�d�ric giroux, 27/04/06

How Not to Respond to High Gas Prices

Reuters reports:

Senate Republicans unveiled a proposal on Thursday to soften the blow of rapidly rising gasoline prices by giving taxpayers a $100 check and suspending a retail fuel tax....The proposal was similar to a Democratic measure first proposed by Senate Minority Leader Harry Reid of Nevada.

One might be tempted to applaud this sudden rush of bipartisanship. But let's first consider the economics of the proposal. I can see four drawbacks.

1. The economy is at or near full employment, and the Fed is raising interest rates to prevent the economy from overheating. Any stimulus to consumer spending would likely cause the Fed to increase interest rates to higher levels than it otherwise would have. The end result would be more consumption and less investment.

2. A lump-sum tax rebate has no supply-side incentive effects. Indeed, the history of such proposals is that the payments often phase-out as income rises. If so, this would be an increase in the effective marginal tax rate, which has adverse supply-side effects.

3. The federal budget is already on an unsustainable path. From the standpoint of the government budget constraint, this is a step in the wrong direction.

4. If gasoline taxes are suspended whenever prices go up, then consumers are partly insulated from price increases, making the effective demand curve for oil products less elastic. To the extent that prices are set by a supplier with market power (OPEC), a less elastic demand curve means higher prices.

Fortunately, the Senate proposal is a bit better than it might at first appear because

To pay for the lost revenues, [Senator] Thune said, the legislation "would suspend a number of tax credits and royalty waivers received by oil corporations."

I don't know enough of the details to say whether these "tax credit and royalty waivers" should be suspended. But it seems that these policies should be judged on their own merits. The evaluation of these provisions need not be coupled with a lump-sum tax rebate and lower gasoline taxes, which are hard to defend on economic grounds.

Related link: Economist Jim Hamilton discusses President Bush's proposals to deal with higher gasoline prices.

I'm with Arnold

Arnold Kling, that is, who writes:

The problem is that Social Security and Medicare payments are on course to rise to unprecedented levels as a percent of GDP....The solution, as I have argued for several years, is to raise the age of government dependency for workers now in their 30's and 40's. This is a painless solution, because (a) it does not affect anyone who currently receives or is counting on government entitlements and (b) it does not really affect people now in their 30's and 40's.

For people in their 30's and 40's today, the age of government dependency is only a promise. As of now, projected entitlement benefits to young workers are only promises that, under conservative assumptions, the government will be unable to meet.

Rich Dad, Poor Dad

Yesterday's Washington Post contained a story about the intergenerational transmission of inequality. It began as follows:

Rags-to-riches dream an illusion: study
By Alister Bull

WASHINGTON (Reuters) - America may still think of itself as the land of opportunity, but the chances of living a rags-to-riches life are a lot lower than elsewhere in the world, according to a new study published on Wednesday.

The likelihood that a child born into a poor family will make it into the top five percent is just one percent, according to "Understanding Mobility in America," a study by economist Tom Hertz from American University. By contrast, a child born rich had a 22 percent chance of being rich as an adult, he said.

"In other words, the chances of getting rich are about 20 times higher if you are born rich than if you are born in a low-income family," he told an audience at the Center for American Progress, a liberal think-tank sponsoring the work.

He also found the United States had one of the lowest levels of inter-generational mobility in the wealthy world, on a par with Britain but way behind most of Europe.

"Consider a rich and poor family in the United States and a similar pair of families in Denmark, and ask how much of the difference in the parents' incomes would be transmitted, on average, to their grandchildren," Hertz said.

"In the United States this would be 22 percent; in Denmark it would be two percent," he said

I am struck by how much "spin" there is here. The last number on the U.S. economy (22 percent) is consistent with other things I have seen, but one can just as easily put the point in a different light:

How much does income inequality persist from generation to generation? After two generations, 78 percent of the benefit of being born into a wealthy family has dissipated.

I think many people would find this to be a surprisingly small degree of persistence.

(I don't know much about Denmark, other than that it is a society with a lot less inequality than the United States. Here is a conjecture: Persistence of inequality is lower in nations where there is less inequality. I am guessing that it is easier to make it from the bottom to the top of the income distribution when it is a smaller jump.)

One might ask why being born into a high-income family means you will likely have higher income. Is it the good genes that you inherited from your successful parents or the nice neighborhood and expensive private schools that their high income could purchase for you? Is it nature or nurture?

The evidence suggests that nature trumps nurture. In a fascinating paper, Dartmouth economist Bruce Sacerdote asks "What happens when we randomly assign children to families?" He examines a data set in which adopted children were, literally, assigned randomly--a great natural experiment for studying these issues. He reports:

Having a college educated mother increases an adoptee's probability of graduating from college by 7 percentage points, but raises a biological child's probability of graduating from college by 26 percentage points. In contrast, transmission of drinking and smoking behavior from parents to children is as strong for adoptees as for non-adoptees. For height, obesity, and income, transmission coefficients are significantly higher for non-adoptees than for adoptees.

Sacerdote suggests that income is like height. Having a tall father means you are likely to be tall, but it is because he has given you the tall gene, not because he has created an environment that fosters height. The same appears to be true for income. Sacerdote's Table 3 shows that although there is a positive correlation between the incomes of parents and their biological children, the positive correlation disappears when we examine the incomes of parents and their randomly-assigned adopted children.

Alesina on Italy

My friend and colleague Alberto Alesina opines about his homeland's economy:

In Denmark, it takes two days to open a new business; in Italy, two months. Alberto Alesina, the Nathaniel Ropes Professor of Political Economy, mentioned this fact to emphasize the economic reforms that Italy's new prime minister, Romano Prodi, must bring about if he hopes to change Italy's current status as "the sick man of Europe."...

"Italy has very serious economic problems," Alesina said. "It needs an injection of free-market, liberal, economic reforms." Among the reforms he recommended were reducing the high income tax rate, cutting back on bloated public employment and the overly generous pension system, enhancing the service sector, and making it easier to fire workers.

vernissage "en fran�ais sous l'image", espace edf electra, 26/04/06

A Comeback for Pigou?

In the past few days, I have run across a couple of articles (here and here), admittedly in relatively minor places, arguing for higher Pigovian taxes, such as a tax on gasoline or a tax on carbon. As all ec 10 students know, Pigovian taxes both produce government revenue and correct a market failure arising from an externality like pollution. I have long thought that Pigovian taxes are underused.

How about this for a political compromise?

The Democrats say they want more environmental protection. The Republicans say they want to make permanent the recent cuts in income, dividend, and estate taxes. Everyone says they want a smaller budget deficit. We can achieve all of these objectives by agreeing to higher Pigovian taxes, such as taxes on gasoline or carbon. The Republicans concede that government revenue will be higher than it is under the President's proposed budget, and the Democrats concede that the President's tax cuts on income, dividends, and estates will be permanent.

Please don't post a comment saying how politically naive this is. I know it is. But I bet I could convince a majority of the American Economic Association to sign on!

The Many Facets of Macro

In the previous post, a student in ec 10 expressed puzzlement about how to fit the pieces of macroeconomics together. One way to try to fit the pieces together is to look at the big, complicated macro picture all at once. What follows is an excerpt from my intermediate macro book that tries to do this.

Warning: This material is more mathematical than other things I post on this blog. Proceed at your own risk!

Appendix to Chapter 13:
A Big, Comprehensive Model

In the previous chapters, we have seen many models of how the economy works. When learning these models, it can be hard to see how they are related. Now that we have finished developing the model of aggregate demand and aggregate supply, this is a good time to look back at what we have learned. This appendix sketches a large model that incorporates much of the theory we have already seen, including the classical theory presented in Part Two and the business cycle theory presented in Part Four. The notation and equations should be familiar from previous chapters.

The model has seven equations:

Y = C(Y-T) +I(r) + G + NX(e), Goods Market Equilibrium

M/P = L(i, Y), Money Market Equilibrium

NX(e) = CF(r-r*), Foreign Exchange Market Equilibrium

i= r+pe, Relationship between Real and Nominal Interest Rates

e=eP/P*, Relationship between Real and Nominal Exchange Rates

Y = Yn + a(P - Pe), Aggregate Supply

Yn = F(K, L), Natural Level of Output

These seven equations determine the equilibrium values of seven endogenous variables: output Y, the natural level of output Yn, the real interest rate r, the nominal interest rate i, the real exchange rate e, the nominal exchange rate e, and the price level P.

There are many exogenous variables that influence these endogenous variables. They include the money supply M, government purchases G, taxes T, the capital stock K, the labor force L, the world price level P*, and the world real interest rate r*. In addition, there are two expectation variables: the expectation of future inflation pe and the expectation of the current price level formed in the past Pe. As written, the model takes these expectations as exogenous, although additional equations could be added to make them endogenous.

Although mathematical techniques are available to analyze this seven-equation model, they are beyond the scope of this book. But this large model is still useful, because we can use it to see how the smaller models we have examined are related to one another. In particular, many of the models we have been studying are special cases of this large model. Let's consider six special cases.

Special Case 1: The Classical Closed Economy Suppose that Pe = P, L(i, Y) = (1/V)Y, and CF(r-r*) = 0. In words, this means that expectations of the price level adjust so that expectations are correct, that money demand is proportional to income, and that there are no international capital flows. In this case, output is always at its natural level, the real interest rate adjusts to equilibrate the goods market, the price level moves parallel with the money supply, and the nominal interest rate adjusts one-for-one with expected inflation. This special case corresponds to the economy analyzed in Chapters 3 and 4.

Special Case 2: The Classical Small Open Economy Suppose that Pe = P, L(i, Y) = (1/V)Y, and CF(r-r*) is infinitely elastic. Now we are examining the special case when international capital flows respond greatly to any differences between the domestic and world interest rates. This means that r = r* and that the trade balance NX equals the difference between saving and investment at the world interest rate. This special case corresponds to the economy analyzed in Chapter 5.

Special Case 3: The Basic Model of Aggregate Demand and Aggregate Supply Suppose that a is infinite and L(i, Y) = (1/V)Y. In this case, the short-run aggregate supply curve is horizontal, and the aggregate demand curve is determined only by the quantity equation. This special case corresponds to the economy analyzed in Chapter 9.

Special Case 4: The IS-LM Model Suppose that a is infinite and CF(r-r*) = 0. In this case, the short-run aggregate supply curve is horizontal, and there are no international capital flows. For any given level of expected inflation pe, the level of income and interest rate must adjust to equilibrate the goods market and the money market. This special case corresponds to the economy analyzed in Chapters 10 and 11.

Special Case 5: The Mundell-Fleming Model with a Floating Exchange Rate Suppose that a is infinite and CF(r-r*) is infinitely elastic. In this case, the short-run aggregate supply curve is horizontal, and international capital flows are so great as to ensure that r=r*. The exchange rate floats freely to reach its equilibrium level. This special case corresponds to the first economy analyzed in Chapter 12.

Special Case 6: The Mundell-Fleming Model with a Fixed Exchange Rate Suppose that a is infinite, CF(r-r*) is infinitely elastic, and e is fixed. In this case, the short-run aggregate supply curve is horizontal, huge international capital flows ensure that r=r*, but the exchange rate is set by the central bank. The exchange rate is now an exogenous policy variable, but the money supply M is an endogenous variable that must adjust to ensure the exchange rate hits the fixed level. This special case corresponds to the second economy analyzed in Chapter 12.

You should now see the value in this big model. Even though the model is too large to be useful in developing an intuitive understanding of how the economy works, it shows that the different models we have been studying are closely related. Each model shows a different facet of the larger and more realistic model presented here. In each chapter, we made some simplifying assumptions to make the big model smaller and easier to understand. When thinking about the real world, it is important to keep the simplifying assumptions in mind and to draw on the insights learned in each of the chapters.

Micro versus Macro

An ec 10 student emails me:

I really enjoyed microeconomics, but have not enjoyed macroeconomics nearly as much. I feel like it's all thrown together haphazardly, with random connections being made without much justification being given for them.

One thing that particularly bothers me is the long term - short term distinction. In micro, the distinction made sense because when looking at firms one could focus on an individual firm and see over what time frame all costs were variable. In an economy as a whole, no such abstraction is even feasible for me.

Isn't the long term just a series of short term decisions? Don't central banks just decide each year what trade off they want to make on the phillips curve, and over the course of 20 years those 20 decisions will determine inflation and unemployment?

When I first studied economics as a freshman, I had a similar reaction. I liked micro a lot more than macro. Given this initial reaction, it may seem odd that I ended up a macroeconomist. Two things happened.

First, macro started to make more sense to me over time. The pieces started fitting together a bit better in my second course in macro (the intermediate course, which is ec 1010b and 1011b at Harvard). Because macro involves the whole economy at once, it is harder for introductory students to see immediately how the pieces fit together. But the more a person thinks about the issues, the clearer the overall picture becomes. I don't want to overstate things, however: Macro is less fully developed than micro. There is simply more we don't know, and so the field is intrinsically messier.

Second, even if the models of micro were more appealing to me, I became attracted to the questions of macro. When you read the newspaper, most of the big economic issues are macro issues, not micro issues. I know some microeconomists will take offense at this claim, but I think it is true. Consider: Economic growth, the business cycle, inflation, unemployment, fiscal policy, monetary policy, trade imbalances--these are things that laymen think economists should have insight into. And they are right: We should. I think this is what draws a lot of macroeconomists into the field.

On the other issue raised in the email: Isn't the long run simply the result of a series of short runs? Yes, that is true, but that is not always the most fruitful way to think about it.

Let me give you an analogy. Biological phenomena are simply the result of things happening at the level of subatomic particle physics, aggregated up. But that is not a particularly useful way to proceed if you are a biologist. Instead, biologists ignore particle physics (for the most part) and start with theories more directly useful for the things they want to study. Similarly, long-run economic models (such as growth theory) can ignore much of what is crucial for understanding short-run economic fluctuations (such as sticky prices and monetary nonneutrality).

Nonetheless, it would be nice if you could see one mega-model that incorporated both short-run and long-run forces. If you keep you studying macroeconomics, you will get there. (For a taste of more complete macro models, see my next post.)

An iTunes Puzzle

Economist Tyler Cowen poses a puzzle and explores some answers: Why are all songs the same price on iTunes?

On Just Deserts

Okay, Harvard students: As a group, you are smarter than average, more athletic than average, more musical than average, better looking than average, and taller than average. (I admit: I made some of that stuff up, but I bet it is all true.) You have a whole range of innate talents, which means, after you graduate, you will make more money than the average person. Do you deserve it?

Bryan Caplan (libertarian, econ prof, and blogger) says YES. He thinks people with more talent deserve the fruits of those talents.

By contrast, the standard approach to optimal taxation says NO. The same is true of Rawls�s approach to economic justice.

According to optimal tax theory, taxing income or consumption is a second-best solution. Those taxes distort incentives and cause deadweight losses. What we would really like to tax, the theory posits, is innate talent. We could then provide �social insurance� against the unfortunate outcome of being born with less talent in a way that does not distort incentives.

Behavioral geneticists tell us that a large fraction of the variation in life�s outcomes (50 percent or more) can be explained by the genes you have when you are born. Suppose that one day we could identify the high-IQ gene, the attractive symmetrical face gene, the tall gene, and so on. Optimal tax theory says that we should levy special taxes on the lucky people with those genes. After all, you don�t deserve the fruits of those genes.

Or do you? As an economist, rather than a moral philosopher, I have no idea about the answer.

U.S. Hegemony

Economic columnist Gerard Baker writes in today's Times of London that the United States will likely stay on top of the world economy:

In an era in which China embodies the hopes and fears of much of the developed world, the US, with a growth rate of half that of China�s, is adding roughly twice as much in absolute terms to global output as is the Middle Kingdom, with its GDP (depending on how you measure it) of between $2 trillion and $4 trillion....

The only real threat to American economic hegemony, I suspect, is the willingness of its people to continue to tolerate the pains associated with its success. Income and wealth inequalities have grown rapidly in the past ten years � even as the long-term growth rate has accelerated � and, given the continuing direction associated with globalisation, they may get even worse over the next 20 years.

That could tempt Americans to turn their backs on the very free markets that have been the foundations of their continuing prosperity.

vernissage, �cole nationale sup�rieure des beaux-arts, 25/04/06

Becker on Rising Inequality

Economist Gary Becker opines on the increase in economic inequality the United States has experienced over the past few decades:

Should not an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than unfavorable development? Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applicable to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (just as the initial effect of higher returns on physical capital is widen income inequality), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

I conclude that the forces raising earnings inequality in the United States is on the whole beneficial because they were reflected higher returns to investments in education and other human capital.

Not Sustainable

Blogger Angry Bear draws attention to a great chart put out by the White House. I suggest every member of Congress carry a copy in his or her pocket.

Update and clarification: The terms "mandatory" and "discretionary" can be confusing to those not schooled in the Washington budget process. "Mandatory spending" includes entitlement programs such as Social Security and Medicare, which are provided by law rather than through the annual appropriations process. "Discretionary spending," which includes defense, homeland security, farm subsidies, and education, are those types of spending that the president and Congress set through the annual appropriations process. Of course, all government spending can be changed through legislation, so no spending is really "mandatory."

Why Economists Love Wal-Mart

An article in yesterday's Pittsburgh Times-Review explains why economists have a more favorable view of Wal-Mart than, it seems, everyone else:

A larger complaint against Wal-Mart charges that the giant retailer comes in and wipes out main street, puts an end to all those mom-'n-pops that are selling everything from hammers to salmon.

The other side of the story is that salmon is no longer a high-end delicacy, beyond the reach of the average household. With fresh fillets selling for $4.50 a pound in Wal-Mart's display cases, the price for an 8-ounce dinner portion is 44 cents lower than the current price of a Cheeseburger Happy Meal at McDonald's.

The end result is better nutrition in America, especially among lower-income households, and less poverty and unemployment in Wal-Mart's primary supply regions in southern Chile.

Altogether, Wal-Mart's prices, according to a study by M.I.T. economist Jerry Hausman and USDA economist Ephraim Leibtag, are saving U.S. consumers more than $50 billion a year, money that's spent elsewhere, boosting volume at other businesses and creating new enterprises, including mom-'n-pops.

The net impact? The director of economic policy for the 2004 Kerry-Edwards campaign, New York University economist Jason Furman, contends that Wal-Mart is "a progressive success story." With Wal-Mart's prices ranging from 8 percent to 40 percent lower than people would pay elsewhere, states Furman, the increase in buying power that Wal-Mart delivers, disproportionately to lower-income families, more than offsets any impact that the company has allegedly produced in the earnings of retail workers.

By the way, Jason Furman was a former student of mine at Harvard. (We had some interesting dinner conversations while I was at the CEA and he was working to unseat my boss.) You can find Jason's study of Wal-Mart here.

Orrenius on Immigration

Pia Orrenius, a senior economist at the Federal Reserve Bank of Dallas, has an op-ed in today's Wall Street Journal. I was fortunate to have Pia on my staff at Council of Economic Advisers from 2004 to 2005, when she was the lead author of the chapter on immigration in the 2005 Economic Report of the President.

An excerpt from today's article:

The stereotype of the hard-working immigrant still rings true in our country. Male immigrants have labor force participation rates of 81%, exceeding U.S.-born men's participation rate of 72%. Illegal immigrant men have even higher participation rates -- around 94%....

Economists have noted time and again that the effect of immigration on natives' wages is small. In a study with Madeline Zavodny of Agnes Scott College, we found that during the mid- to late-1990s, immigration had a small negative impact on manual laborers' wages -- about 1% -- but did not adversely affect the wages of professionals or service workers....

Immigration's impact on wages has little relevance on the debate over how we deal with the 12 million illegals in this country -- because there has been virtually no interior enforcement of immigration laws, these immigrants have largely been incorporated into the labor force, and prices and wages have already responded to their presence. It is estimated that over half of the illegal immigrants are working "on the books," paying income and payroll taxes. Bringing the rest of them into compliance will actually raise the cost of employing them. This aspect of legalization should even the playing field and help, not hurt, native-born workers.

You can read an interview with Pia here.

vernissage priv� "ultra peau" (nivea), palais de tokyo, 24/04/06