Economics

In case you weren't aware, the Chairman of the Federal Reserve Board of Governors is appointed by the President to a renewable 4-year term. (The chairman is also a member of the board, obviously, and there is a 14-year term for the regular board members.) Ben Bernanke is currently the "Chairman of the Fed" or "Fed Chair," and his current term ends on January 31, 2014. (His term on the board overall ends on January 31, 2020, since he was originally appointed in 2006.) There has been quite a bit of speculation on who the next Fed Chair will be, and a re-appointed Bernanke has generally been listed among the contenders.

On Monday, however, President Obama may have let the world know that Bernanke is out of the running for the position. Obama mentioned that Bernanke stayed in the position "a lot longer than he wanted or he was supposed to," and he was evasive when asked whether he would reappoint Bernanke if Bernanke wanted the job. Those statements are certainly going to fuel the gossip surrounding Bernanke's potential successor, so stay tuned.

Robert Fogel, Nobel-Prize winning economic historian, passed away last week at the age of 86. The economics community has responded by writing a number of thoughtful pieces about his life and work. (Note that there are three separate links there.)

Fogel had been a professor at the University of Chicago, and his main claims to fame were his research on the economics of slavery and his use of economic theory and fairly rigorous statistical methods (common in economics in general) in the study of history. His work was controversial in large part because it showed that slavery was not, as a lot of people thought, an inefficient system that was doomed to fail. (One could, however, interpret this message as supporting the need for government intervention end the practice.) Fogel received the Nobel Prize in 1993.

Research tells us what a lot of people already assume- namely, that money makes people act like jerks. Economist Dan Ariely probably isn't particularly surprised by this, since he's already shown that the mention of cash moves people from a social norm to a market norm and makes them less likely to help each other out.

Former economic adviser to George W. Bush, Harvard professor, and prolific textbook author Greg Mankiw has an essay forthcoming in the Journal of Economic Perspectives entitled "Defending the One Percent." Technically, the essay should probably be titled "Defending the One Percent who Made Their Money by Creating Value to Society," and it is somewhat characterized by value judgments and assumptions mixed with economic arguments, but it's an interesting read for those who want to learn a bit more about how incentives and utilitarianism (or lack thereof) factor into an intelligent discussion on income distribution.

My favorite line from the essay, despite not being used to make a direct point, is the following: "That is, we shouldn't be concerned about the next Steve Jobs striking it rich, but we want to make sure he strikes it rich in a socially productive way."

Traditional economic theory states that, if you want to get less of something, make it more expensive. An alarm clock like this, then, seems to be a solution that traditional economists could get behind. Behavioral economists, on the other hand, would likely argue that people are not in a "rational" state when they are groggy and this clock could lead to inefficient outcomes overall.

In related news, I wonder what macroeconomists would think about this alarm clock's effect on the money supply. At the very least, we can name it the "anti-Bernanke clock."

Economists are quick to point out that, compared to competitive markets, monopolies raise prices for consumers by restricting supply compared to what would be optimal for society. Economists also point out that advertising and marketing serves to (artificially, in a lot of cases) increase the demand for the products being marketed. Therefore, when you put these two concepts together, you have a double whammy of inefficiency.

This concept is nowhere better illustrated than in the market for diamonds. Essentially, the DeBeers diamond company convinced men (and, by extension, women) a while back that engagement rings were absolutely necessary, and then they went around buying up all of the world's diamonds so that they could release them at a pace that is profit-maximizing for the company. In related news, monopolies are not welcomed in the U.S., so DeBeers was the subject of a class-action lawsuit back in 2008 and is now sending out checks to compensate those whose prices were inflated due to monopoly power.

Another fun fact from the article: Diamonds don't actually hold their value, so don't let an unscrupulous jeweler tell you otherwise.

I was told a number of years ago that Harvard Kennedy School professor Rob Stavins is always very careful to point out to his students that a job created is a cost, not a direct benefit. (Of course, the benefits to the company of hiring another worker may outweigh this cost, but that doesn't make the cost not exist.) It shouldn't be surprising, then, that many of the so-called "job creators" in our society aren't so down with that label unless it's politically convenient.

Recently, entrepreneur Nick Hanauer got the chance to essentially say as much to the U.S. Senate. A few points in the remarks are worth noting:

• I'm not sure that I entirely buy the supposed direct relationship between taxes and hiring, if for no other reason than labor costs are an expense to a business and thus not part of its taxable income. It is, however, possible that higher corporate taxes make it less attractive to produce on the margin and therefore companies might not expand as much, but even this argument is challenging since the taxes wold affect all businesses that people put their resources into. (This isn't even considering the fact that much of the "job creators" talk focuses on personal rather than business taxes.)
• The argument that Hanauer makes perfectly characterizes the demand versus supply debate that exists in macroeconomics. Clearly, an economy needs both demand and supply to function, but which comes first? This is basically the macroeconomic equivalent of the chicken and egg problem. (On the other side of the argument from Hanauer you have Say's law, which was sarcastically co-opted by John Maynard Keynes as "supply creates its own demand.") I'm inclined to take Hanauer seriously on this point, since he is clearly speaking from experience.
• I think the statement "the goal of every business--profit-- is largely a measure of our relative ability to not create jobs compared to our competitors" is one of the best parts of the speech. Really, how many companies can you think of that will certainly try everything to get more work out of existing employees (and existing salaries) before bringing in new people?
• From a policy perspective, fiscal stimulus (read, tax cuts that increase the deficit) are attractive because they get people to consume more. Like Hanauer, I've often wondered if policy makers realize that rich guys often don't use but a small portion of their money for consumption. (Talking to you, Waren Buffett. Also, I think the term Hanauer is looking for is "low marginal propensity to consume.") In some cases, there could still be aggregate demand benefits to tax cuts for rich people if they put their extra income into savings, since savings ultimately funds investment. At the present time, however, interest rates (i.e. the cost of borrowing to invest) are already so low that these effects would be greatly muted.
• It's important to understand that the lower tax rate on capital gains as opposed to income is at least partially a result of the fact that the profits causing the capital gains are already taxed at the corporate level whereas labor is a pre-tax expense for companies. (In other words, just because somebody's not physically writing a check doesn't mean that he's not paying a tax.)

You can take or leave Hanauer's normative statements on inequality, but, either way, the guy makes some decent and realistic economic points and highlights some areas that require more nuanced thinking.

Hey party people, it's that time of the month again when we get new unemployment numbers from the Bureau of Labor Statistics. So how's the economy doing? Let's go to the report:

• The nonfarm economy added 175,000 jobs and the unemployment rate rose a tiny bit to 7.6%. (If you are confused about how both of these things can happen at the same time, you haven't been doing your reading.)
• This translates to 11.8 million unemployed people in the U.S.
• Notable industry employment gains were in professional and business services, food services and drinking places, and retail trade.
• Federal government employment fell by 14,000 this month, for a total decline of 45,000 over the last 3 months. (This is mainly the sequester in action.
• Average workweek hours wages basically stayed the same from last month, at 34.5 hours and $23.89, respectively.

Overall, the jobs report was in line with what people were expecting, though some say it's better than expected, and a few others even seem to think it's the most important thing ever. The market reaction to the report appears to be positive for stocks but negative for gold and Treasury securities.

For further reading, I recommend white House Chief Economic Adviser Alan Krueger's take on the matter, or, for the visually inclined, Dylan Matthew's jobs report in charts.

If you've been watching or reading the news in the last couple of weeks, you've probably noticed the proliferation of the term "Abenomics" and much discussion about wither it will work. So what is Abenomics, anyway?

The term is a reference to Japan's Prime Minister, Shinzo Abe, and it's clearly the same play on words that got us Reaganomics, Freakonomics, and so on. (Sidenote: if you want an -onomics named after you, just run a country or sell a few million books!) Abenomics has actually been around for a while, since Abe was reelected in December 2012 and introduced most of his policies at that time. Abe's goal is to reinvigorate the Japanese economy and bring it out of the general stagnation that it has been experiencing over the last couple of decades. (In fact, China surpassed Japan in 2010 to become the world's second-largest economy.) The specific plans include a mix of inflation, government spending, and growth initiatives, and the specific points are as follows:

• Targeting inflation at 2% per year.
• correcting or at least mitigating the appreciation of the yen that has made it hard for Japan to exports to other countries,
• Lowering interest rates to bring them (at least in real terms) into negative territory,
• Quantitative easing,
• Public investment in infrastructure projects.

Prominent economists such as Joe Stiglitz approve of Abe's plan, and we're starting to see the effects it is having on the Japanese economy. So far, the plan seems to be working, at least by some measures, but others say it is faltering for a number of reasons or that it is overshooting on the currency front. Regardless, it provides an important case study for the rest of the world.

Alan Krueger is currently the chair of the White House Council of Economic Advisers (often just referred to as "Chief Economic Adviser"), but there is a rumor circulating that he will be leaving Washington and returning to Princeton soon. It's not unusual for such economic advisers to not stay on for an entire presidential term, if for no other reason than most economic advisers are university professors and their employers usually have rules about how long they can be away and still keep their tenure.

Krueger's rumored replacement is Jason Furman, who is currently the Deputy Director of the National Economic Council. Greg Mankiw, a former economic adviser to President Bush, approves of the choice, and Tyler Cowen agrees. So far, the most notable feature of Furman's rumored appointment is that he is one of the few people slated for this role that have spent more time in Washington than they have as academic economists. Whether that is a positive or a negative remains to be seen, and you can read a bit more about his particular views here.

In the meantime,