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>> Everybody.
Okay, so for the fest-- for today's festivities,
I'm very excited to web-- for this webcast.
We are very proud to partner with the University
of Central Florida, the National Economics Teaching Association,
and Cengage Learning is very pleased to partner
with the University of Central Florida.
And I'd like to especially thank a great economist educator Pat
Euzent who connected Cengage Learning with the University
of Central Florida for this endeavor, and thank you Pat.
And now to introduce the keynote speaker,
I'd like to introduce Dr. Mark Dickie and he is the chair
of the Economics Department
at the University of Central Florida.
[ Applause ]
[ Pause ]
>> Thank you and welcome to this afternoon's keynote address
by Professor Gregory Mankiw.
By any measure, Professor Mankiw would have to be judged as one
of the leading economists of recent decades in teaching,
in research, and in public affairs.
He teaches at Harvard University and has reached millions
of other students through his textbooks on principles
of economics and intermediate macroeconomics.
His research publications rank him as one
of the most influential economists of the past 30 years
with important contributions on economic growth,
business cycles, consumption and savings,
menu costs, and other topics.
He served as the chairman of the Council of Economic Advisers
and continues to contribute to policy debates
through various avenues including his writings
in the popular press.
As economists, we're familiar
with the long-term fiscal challenges facing us.
And Professor Mankiw will eliminate those problems today
in his talk "The Fiscal Challenge Ahead."
Please join me in welcoming Professor Greg Mankiw.
[ Applause ]
>> Thank you.
It is a delight to be here.
It's actually a bit great time to be an economist, isn't it?
Past few years, one of my colleagues likes to point
out that being an economist during our economic crisis is a
little bit like being undertaker during a plague.
You know, times are sad but business is good.
And for those of us who make our living trying
to understand the economy, there's been a high demand
for our services trying to figure out what's been going on.
There's a lot of issues to talk about and what I'm going
to talk today about is some longer run issues.
Charlie Schultze, the one-time advisor to Jimmy Carter,
Jimmy Carter's chief economist, said there's an easy way
to tell a conservative economist
from a liberal economist, and here is his test.
Charlie said, "Ask someone to fill in the following sentence
with the words long and short."
So I'm going to give you two blanks and you fill
in the words long and short in the sentence.
"Take care of the blank run
and the blank run will take care of itself."
So think about that and think about what you would--
if you had to fill in the words long and short
in that sentence, which would you do?
"Take care of the blank run
and the blank run will take care of itself."
And what Charlie suggested was that liberal economists tended
to believe they should take care of the short run
and let the long run take care of itself.
And by that, they meant think about things
in [inaudible] aggregate demand management, make sure we're
at full employment and as long as we get
to the short run right, well, the long run will be a series
of good short runs and eventually,
we'll be at a good growth path.
Whereas conservative economists say, well, we should think
about long run issues, make sure we get the right tax policy,
the right policy to encourage entrepreneurial growth
and if we have the right long run policies, well,
that'll create confidence in the economy
and that confidence will help improve the economy
in the short run as well.
And I thought that was sort of an interesting test.
Now, of course all economists know
that you can't just look at one run.
You'll look at both the long run and the short run.
But I think it is a pretty good simple test if you had
to apply one to try to figure out who's a liberal economist
and who's a conservative economist.
I'm pretty sure if you forced Alan Blinder
who spoke to you yesterday.
Alan Blinder, by the way, was one of my professors
when I was an undergraduate at Princeton.
He's my senior thesis adviser.
He's also now teaching my daughter
in macroeconomics at Princeton.
So Alan's a good friend of mine but I'm pretty sure
that Alan would-- probably talked more
about the short run macroeconomics yesterday.
And like good-- like [inaudible],
he's very much focused on the short run.
I was an advisor to Mitt Romney
until not 48 hours ago [laughter] and a lot
of our policies that we were talking for that--
Mitt Romney talked about during the campaign were long run
policies, trying to encourage long run economic growth
thinking that a good long run fundamental foundation
and policy would improve the economy
and the short run as well.
So today, I'm going to sort of continue in the tradition,
being a little more conservative by thinking
about longer run issues, but these are issues
that whether you're a conservative or a liberal,
you would need to think about in the coming years for sure.
As we all know, we face a very large budget deficit
and therefore we have to face very large fiscal challenges
and the question's how are we going to meet those challenges.
Well, there's different ways to go
and then there are some people who think that we're going
to go all the way to Zimbabwe and print lots of money and go
down a hyperinflationary route.
I'm not worried about that.
I have enough confidence in the Fed
to think we're not going to do that.
But I'm worried about a couple of other risks
that we might face and those are risks are
that the United States could end up looking a lot more
like Greece or more like France.
And by that, I mean if we don't really do anything
about the very significant budget deficits we face,
eventually the markets will-- so there's incompetence in us.
Eventually, markets will say, "Gosh,
we don't really trust people--
the ability of the US Federal government to have these bonds,
could have a fiscal crisis along that line that Greece has had
over the past several years."
Or if we don't do anything about this, we could just go
down the route of having higher and higher taxes
and having an economy a little bit more like France's
and I'll talk a little bit about the what the
down sides of that might be.
Now, one of the-- in terms of thinking
about whether we could be like Greece,
one of the questions you might ask yourself is why is it
that the bond market seems to trust us?
One thing that's quite striking,
and Paul Krugman has emphasized this a lot in his writings,
one thing that's quite striking is
that the long-term interest rates
in the US are very low, right?
Nominal rates are just a few percent.
Real rates are approximately zero.
Why-- if we're really going to risk going down the route
of Greece, that's a possibility.
Why the bond-- why are bond holders willing
to hold our bonds in such low rates of interest?
And I think basically Winston Churchill had the right
story here.
Winston Churchill once said about Americans
that Americans can always be counted on doing the right thing
if they're exhausting all the alternatives.
And that is pretty much the view of the bond market right now.
I think the bond market believes
that we will eventually do the right thing,
we'll eventually get our fiscal house in order but we've,
in the past few years, has been in the process
of exhausting the alternatives.
And the-- so I want to talk today about what
that right thing might be and once we get-- once we're--
once we stop exhausting the alternatives,
what we're going to have to do?
So what is the long run solution
to our fiscal imbalance is going to be?
What I'm not going to talk much
about is the fiscal cliff that's coming
up in just a couple of months.
I think the fiscal cliff will eventually be negotiated away.
It's not I'm not worried about it.
I think if nothing happens,
if Congress really just lets it happen,
we could risk a recession
as the Congressional Budget Office has recently pointed out.
But I think the Congress will probably either figure
out a deal or most likely push the fiscal cliff off
for a little while and give themselves some breathing room
to eventually to figure out a fiscal deal
over the next year or so.
And so, the question I want to talk about is what the element
of such a fiscal deal might be?
If you have to solve our long-term budget imbalance,
what might you look to?
Well, first of all,
what's driving the long-term fiscal imbalance?
It's not primarily the recent financial crisis
and recession although that contributed to it.
It's primarily longer term trends that have been unfolding
in the economy in Washington for decades, if not, generations.
Primarily, what we face is a situation
of government spending that's going to rise automatically
over time, figure out the taxes that will tend
to produce a certain fraction of GDP in tax revenue.
Well, what's driving government spending going up?
Well, the-- you probably all know the usual suspects.
It's a combination of demography and healthcare costs.
People are living longer, that's a good thing.
People are having fewer children.
Well, that's a good thing or bad thing depends
on how well my kids are acting up that day.
But because people are living longer
and having fewer children, we're getting older as a society.
More people are becoming eligible, therefore,
for programs for the elderly, in particular Social Security,
Medicare and Medicaid.
Medicare is the healthcare program for elderly
and Medicaid, well, they're the healthcare program for the poor,
also treats many of the elderly in from a nursing home coverage.
So we have more of the elderly in the economy,
more people eligible for these programs, fewer people paying
in because of lower birth rates.
At the same time, the price of healthcare has been rising
over time and I'll talk about the reasons for that in a bit.
And that's continuing to make these programs more expensive
even on a pro-recipient basis.
So with more recipients, each recipient costs more
and it's driving healthcare--
that's probably driving healthcare cost
and government spending higher and higher over time.
So what are we going to do about it?
Well, there's basically two ways to approach the problem.
We either reduce government spending or we can raise taxes.
And so, what I want to do today is talk about what we might do,
how might we reduce government spending
and how might we raise taxes,
and what are the options on table.
Well, President Obama, a couple of years ago,
appointed a Deficit Reduction Commission called Bowles-Simpson
Commission chaired by Erskine Bowles
and former Senator Alan Simpson.
And they actually came up a lot of good ideas.
They're good ideas have not been implemented
and have not have been wholeheartedly endorsed even
by the president himself.
But I think a lot of interesting ideas on the table and I want
to talk about some of those today and some others.
So one of the ideas that Bowles
and Simpson put forward is a significant reform
of Social Security and reducing the growth
of Social Security spending.
So how might you reduce the projected growth
in Social Security spending over time?
There's a couple ideas that I think make a lot of sense.
One is changing the benefits formulas in a way
that flattens the benefits for high income beneficiaries.
The Social Security you receive when you retire is a function
of how much you paid in over your lifetime,
therefore a function of your life time income.
And in particular,
higher lifetime income people receive more when they retire
than lower lifetime income people do.
They're going to let you--
the higher income people get a lower rate of return
that is it's not strictly proportional,
so they are getting a lower rate of return
if you're higher income, but you still are getting more absolute
dollars out at the end.
And one of the ideas that has floated
around is changing the benefit formulas in a way
that flattens the benefits
so the high lifetime income people get less.
And indeed, the more and most extreme form of that would be
to flatten the benefit to make the Social Security more
of a flat benefit for the elderly rather
than a positive function of a lifetime income.
So that's something that I think we need to think about,
what kind of benefits do we want to have for different age--
different income groups.
A second thing that's been talked
about is raising the retirement age.
That's been done a little bit
since the Social Security progress has put the placement
relatively little.
It's only going up by a couple of years over time.
Life expectancy has gone up a quite a bit
since Social Security was put into place in the 1930s
but the age of eligibility has not risen in tandem.
And indeed, I think if they started this program
and indexed the age of eligibility to life expectancy,
our fiscal situation right now would be a lot less dire.
Now, this idea of raising the retirement age is relatively
popular among economists.
I've seen polls of people like us asking questions
of here are different ways to solve Social Security imbalance
or the fiscal imbalance, what do you think about raising the age
of eligibility for Social Security?
And the answer is that among us, among economists,
it top polls pretty well.
Economists like the idea of raising the retirement age.
For the general public, it polls pretty badly.
Very, very small percentage of the people who polled seemed
to like the idea of raising the retirement age.
In fact, my guess is only the economists
in the sample say they like raising the retirement age.
Everybody else seems want to retire earlier.
I take of that of several things.
One is we must like our jobs better than average.
[Laughter] But secondly, it means that this is going
to be pretty hard sell politically 'cause ultimately
politicians are not going to do something just
because economists think it's a good idea.
They'll only do something if they think they can sell it
to the general public and the general public is quite opposed
to raising retirement age.
One possibility is that general public has a thought through the
down sides of the other options maybe economists have.
But if we're going to-- are going to push in the direction
of raising the retirement age,
which I personally think we should, we have a lot of selling
to do to the general public as to think why that makes sense.
I mean for my personal reason, when I think about it is
if we're going to think about Social Security
as the one place we can cut spending, then we have to ask
who do we [inaudible] spending on.
I think it's very hard to go to the 90-year-old and say,
"We'll cut your spending," or even future 90-year-olds
and say, "We're going to cut spending for you."
If that person is 90, he's really probably really not going
to be able to get a job.
But asking somebody who's 65 or 67 to work an extra a year
or two, I think is a much easier, more compassionate thing
to do than cutting the benefits to the 90-year-old.
But I think it's an argument we need to make
to the general public.
I think, by the way, the fact that we're moving more
and more towards a service-based economy is going
to make it easier and easier for people to work longer.
Physical jobs are harder during your 70's.
Being an economics professor or a greeter
at Disney World is easier to do in your 70's.
Okay, so Social Security, I think there are things we can do
in Social Security that isn't sometimes the easy problem.
Social-- if you look at a Federal budget,
the options for Social Security are relatively easy
because Social Security is a relatively simple program.
Social Security means taking money from some people
and giving it to other people.
It's basically a pay-as-you-go system.
And so, the question is how much money are you going
to give to people?
That's basically-- and who gets it?
So that is a relatively easy question.
The harder question that I must spend a little more time talking
about is healthcare.
Healthcare is a much more difficult problem.
It's a huge problem.
It's growing much faster
than Social Securities in terms of spending.
And it's much more complicated
because it means not just taking money out of somebody's wallet
and giving it into somebody's wallet, it builds fundamentals
of the industrial organization of the healthcare industry
and how we're going to design it in the industrial organization
of the healthcare industry.
And I don't think there are easy answers for that.
Now, those idea floating around which is probably not going
to be talked about as much anymore after two days ago.
But Paul Ryan had this plan to restructure the Medicare system
in terms of moving to what he called premium support.
And the idea being that rather having Medicare be a
fee-for-service plan, well, you go to your doctor
and then he sends the doctor to--
he sends the bill to Medicare.
He wanted you to get some dollars,
the premium support you got from the federal government,
and then choose among competing private plans
with those dollars.
So you be getting and--
so the government would set up exchanges
and you'd choose among those different competing plans
on that private exchange with your Medicare dollars.
And his hope was that competition among private plans
on this government regulated exchange would help drive
down the cost.
So it's basically competition in choice would help keep cost
under control and provide better healthcare.
That's been rejected by people
on the left decided they don't want to move away
from traditional Medicare towards this competing plan.
Well, interestingly, this idea of competing plans
on a government regulated exchange is precisely what is
in President Obama's healthcare plan
for people under the age of 65.
So the idea there of competing private plans is not necessarily
one that left to eject, they just--
so we eject it for as a replacement for Medicare.
Anyways, given the-- how the election turned
out two days ago, I'm guessing we're not going
to spend a lot time talking about premium support.
We have instead in President Obama's Healthcare Reform Bill
is something called the Independent Payments
Advisory Board.
And the idea of the Independent Payment Advisory Board is
that we have a lot of inefficiency in our system,
the healthcare system.
What we really need is smart people
to have identify it and cut it out.
And so, the Independent Payment Advisory Board is a group of 15
that are going to be appointed, a combination of doctors
and health policy analysts and health economists,
specifically smart guys who are studying the--
and gals who are studying the healthcare system who can sort
of find out the inefficiencies and then promulgate rules
so we stop paying for stupid stuff.
And the averages of these rules say that, you know,
healthcare is so complicated expecting sort of mere,
you know, laymen to sort of compete--
choose among competing plan is not
to drive down healthcare cost.
So you need people to really understand the details
and system and you need somebody to study
that this procedure is more efficient than this procedure
and this medicine is too expensive
and also that medicine.
We need people to make these judgments that are very subtle,
very sophisticated, and only true--
and only experts are going to do that in a way that will come
to a rational cost saving.
So that's the basic idea
of behind President Obama's healthcare savings.
Now, let me tell you my view on this, on premium support
versus the Independent Payment Advisory Board.
I'm actually skeptic that either of them are likely to work.
I'm personally skeptical that we're going to find any way
to reduce healthcare spending as a percentage of GDP over time.
If you look at the history of healthcare spending
as a percentage to GDP, you know, a generation or two ago,
it was like five percent of GDP, now it's like 17 percent of GDP.
And there are forecasts from good economists
and here I'm particularly thinking of a paper
by Chad Jones and Bob Hall which they forecast that a generation
from now, government spending-- oh not government--
healthcare spending as a percentage of GDP is going
to rise to 30 percent overall economy.
So it's just going to keep rising.
I was writing in a column for the New York Times once
and I cited the Chad Jones-Bob Hall forecast and my editor
at the time said, "That's ridiculous.
We can't possibly have 30 percent
of GDP going to healthcare."
And I said, "Why not?"
He said, "Well, it's just so expensive,
we can't ever afford that."
And I think that was an interesting reaction.
I mean, it's already gone from five to 15,
but I guess this one is five to 17, [inaudible] five
and he said it was going
to 17 people would have said that's ridiculous.
But it happened and the world didn't blow up.
And so, why can't it go to 30 percent?
Why can't it go to 50 percent the generation after that?
The way Hall and Jones put it as following, and look, they say,
"We're getting richer as a society,
technological progress is making us richer and richer.
So how are we going to spend our riches as we get richer?
Do we really need bigger houses, more bathrooms?"
At some point, things were at the diminishing margin utility.
And once you've had a bathroom for every person in your house,
you probably don't need an extra toilet.
But, on the other hand, years of life doesn't seem to run
into diminishing margin utility.
Very few people say, "Oh, I lived for 73 years,
that's enough for me, thank you very much," right?
It seems like years of life is one of those things
that doesn't run into diminishing margin utility quite
as much the number of bathrooms.
And so, they say as we get richer as a society makes sense
to spend higher and higher percentage
of our income on healthcare.
And indeed, that is pretty much my view.
My view is the main driving force behind increasing
healthcare spending is technological progress is making
us richer and also giving us new and better ways
to prolong and enhance life.
Think of all the stuff your doctor provides you
that wasn't available to your grandparents in terms
of healthcare and you think about it and you say,
"That's really terrific.
We should be very, very grateful that we live in a society
with all those healthcare."
Suppose I told you today, you know, healthcare spending
so expensive, I've a way to cut it,
this healthcare spending for you.
I m going to give you the same price of healthcare
that your grandparents paid but the deal is you only got
to get the quality of healthcare your grandparents got.
So if you-- if there's anything that goes wrong with you
that wasn't available to fix it then, you don't get it.
My guess is not a single person in this room would take
out that deal which says that in some instance while we're
spending a lot more than your grandparents
that we're getting value for that and it's worth it.
So my guess is that the main thing driving increasing
healthcare cost is advances in productivity,
in particular healthcare technology
and that's a good thing, something we shouldn't stop,
and it's probably going to continue
as biotechnology improves.
And if you look-- if you think of sort
of where people are doing research, if you think of one
of the great scientists in your universities,
what are they doing, a lot of is biotechnology,
in which they're learning so much from the human body ways
to prolong and enhance life.
It seems unlikely to me that that's going to stop right now.
I'm assuming that we shouldn't want it to stop now.
We want [inaudible] continue.
But it does raise some particularly
difficult questions.
Particularly, it raises the question of how are we going
to allocate this wonderful but expensive technology
for prolonging and enhancing life among the people
as it gets increasingly expensive.
Here's the hypothetical I like to use with my students.
Imagine we invent a healthcare technology
that I will call the Dorian Gray pill.
Dorian Gray as you recall is a character
in the Oscar Wilde's story.
Dorian Gray had this portrait that would get old on his behalf
so he'd never had to get old.
So the Dorian Gray pill is this is a pill that you take it
as once a day, you'll not get sick that day guaranteed,
you'll not die that day guaranteed,
you will not even age that day.
The perfect day, you get to live the whole day, perfect health.
You're not going to get a day older the next day.
The trick with that pill--
the tricky thing with this pill though is it's very expensive
to make.
Let's say it costs 100,000 dollars
to provide a year's supply.
Well, what does that mean?
Well, it means that Bill Gates gets to live forever, right?
100,000 dollars, yeah, that's nothing for Bill Gates, right?
He probably gets that in dividends
in a single day in Microsoft.
Even a pretty successful corporate lawyer could live
forever, right?
I mean 100,000 dollars maybe a lot of money
but for immortality, you'd [inaudible] it up.
But what about the typical American?
Well, the typical American only makes that 40, 50,000 a year.
It's pretty clear that a typical American can't become immortal
if you have this Dorian Gray pill available.
So let's imagine we invented that pill.
How would we as a society choose to allocate it?
Would we say, "If you can afford it, great,
and if we have vast inequality of healthcare outcomes,"
or do we say, "No, it's so expensive,
we cannot let anybody have it."
How-- would we have a lottery saying if you win the lottery,
you get it, if you don't, not?
I mean so we have this wonderful technology
that some people can afford and some people can't,
how'd we choose to allocate it?
And it seems criminally fanciful 'cause obviously we know nothing
like the Dorian Gray technology, but we are moving to a world
where healthcare technology is getting better and better
and more and more expensive, and we're going
to increasingly face the question of how we are going
to allocate it among people.
Are we going to say everybody gets state-of-the-art
that it becomes increasingly expensive or are we going
to say what we-- everybody gets basic healthcare
and if you want the state-of-the-art, well,
then you could buy it yourself and put
up with the resulting inequities.
And I don't know the answer to that but I think
that in some sense the fundamental tension
that we're increasingly facing as a society
that technological progress in healthcare is putting pressure
in government budgets, it makes it hard to pay
for state-of-the-art healthcare for everyone
but we feel very uncomfortable from a moral perspective
of allowing great disparities in healthcare.
So I don't know the answer to that.
It's not only an economic question
but it's a deep philosophical question.
If we decide that we're going
to give everyone state-of-the-art healthcare
over time, well, that's going to mean we have to pay for it.
And that's going to become increasingly expensive
and that means we have higher and higher tax burden
which bring me to my next topic.
Let's suppose you don't want to solve the budget deficit
on the spending side, suppose you want to solve it
on the tax side, what do you want to do?
Well, there've been a lot of proposals out there.
So we talked about some of them, particularly some
of them are some of my favorites.
Now, one thing that Bowles-Simpson did is they--
Bowles-Simpson came and they proposed the classic recipe
for tax reform.
The classic recipe for tax reform is just a few simple
words, broaden the base, lower rates.
Broaden the base, lower rates.
So get rid of all those loop holes, exclusions, deductions
and lower tax rates, and if you can do in a way
as revenue neutrally, you can do that, raise some tax revenue,
we can have lower rates than we have today.
Now, that all sounds good if I just stop right there.
Usually when politicians talk about it, they stop right there
because when we actually say what does broadening the base
mean, you have to get to the specific deductions
and exclusions which are politically dicey.
So let me sort of talk about a few those
since I don't have to run for office.
I've got tenure.
[Laughter] First, the mortgage interest deduction.
I think there's good reasons that we should get rid
of the mortgage interest deduction or the very,
very at least, scale it way, way back.
We economists usually like to evaluate public policies
from a standpoint of efficiency and equality.
And if you would think about it from those two perspectives,
the mortgage interest deduction fails both tests.
It doesn't fail the efficiency test 'cause what it is,
is a subsidy through residential capital relative
to corporate capital.
That means that too much of the capital stock is misallocated
into residential capital rather than in business capital work
and increase the demand for labor and increase your wages.
But doesn't it even fit-- but either you can--
you could put up with that inefficiency if you think, "Aw,
this make great strides forward for equality," but it doesn't do
that either because it tends to be higher income people
who benefit most for the mortgage interest deduction,
poor people much more likely to be renters.
There's no particular reason why the tax code to discriminate
against renters relative to homeowners.
So we look at the numbers, you realize here's a tax deduction
that benefits the wealthy,
that misallocates the economy's capital stock,
why do we have it?
We have this as politically popular.
And so, we economists I think need
to do a better job explaining
to the general public why this is not a necessarily a good way
to set up a tax system.
At the very least, we could certainly change the margin
interest deduction in a way that makes it available only
for middle and low income people.
Right now, you can deduct interest on a mortgage
up to a million dollars.
Very few middle income people have a million dollar mortgage.
There's absolutely no reason you couldn't lower that cap
down to 300,000 without affecting a single middle income
person and raise some revenue for the government.
State local tax deduction.
And right now in your Federal taxes,
you get to deduct state and local taxes.
So that means you have two towns next door to each other,
one decides to have a small town government,
the other town decides to have a town pool and lots of town parks
and a town health center that everybody belongs to
and they have high taxes to pay for it, well, the--
that second town gets subsidized in the federal government,
and therefore, this first town has to be taxed more.
Well, I don't know why the federal government should be
taxing the towns with far more services than the others.
I'm perfectly-- I actually like local services.
I tend to vote for higher local services
but I don't know why other towns should be subsidizing my
local services.
So I personally think the state and local tax deduction is one
that we should put on the table.
Health insurance exclusion.
If your employer decides to provide you free auto insurance
for your car as part of your compensation package for work
at the university, that auto insurance would be taxable
at compensation.
That's why they don't-- that's why they give you cash,
and they go have you buy your own auto insurance.
But imagine that we passed a law
that said auto insurance that's provided
by the employer is taxed--
is not taxed, it is excluded from the tax base.
Well, then everybody would start asking the employer, "Look,
why don't you cut my wages a little bit from a--
probably auto insurance to work.
I want to get me a really good auto insurance that sort
of covers not just so it cover wreck but it covers stuff
like when my headlight burns out and my oil change.
In fact, why don't my auto insurance covers gasoline?
I notice every week, it needs to fill up with gas.
Why don't my auto insurance cover that?"
And of course, if we're all tax preferred, if tax subsidies,
you wouldn't-- of course it'd be great to have auto insurance
to cover all those things.
Well, we don't have that for auto insurance
but for historical reasons,
we do have that for health insurance.
And as a result,
health insurance probably covers more stuff than it should.
It tends to have a routine expenditures not
just catastrophic.
Immediate-- I was in the health insurance
for catastrophic stuff.
You get sick, you need-- get 300,000 dollar operation
or cancer treatment, sure.
But when your kids get an ear ache, that's kind of a pretty--
that's like gasoline and oil change
or having your headlight burnt out.
It's not clear that should be covered by insurance.
So I think one of the things we should do
in reforming the tax system is start including health insurance
as part of taxable compensation.
So those are the ones that I-- from my perspective,
the easy based broadeners.
Again, not easy from politically, but easy from--
as a from a policy wonk standpoint.
Let me give you a couple of base broadeners
that are probably going to be on the table
that I feel more mixed about.
The charitable interest deduction.
I personally like the charitable interest deduction.
I think it sort of encourages private charity
and I think private charities often provide services in ways
that are more efficient than government services.
So I like the fact the government is incentivizing
private charity, but that's one that's officially will be
on the table if we'd think of base broadening.
And maybe one of the reasons I like private charities is I work
for a nonprofit organization.
So maybe it's purely self-interest on my part
but I think it's more than that.
I think actually-- I think encouraging charitable giving is
a good thing.
Savings incentives, things like 401(k) plans,
IRAs, I tend to like those.
I like the fact that's moving the income tax system toward
more like consumption tax 'cause I think there's a large
economics literature
that suggests consumption taxes are more efficient
than income taxes.
And so, I like things like IRAs and for 401(k)s, 403(b) plans,
but that-- they also might be on the table if we think
about base broadening.
So that's sort of, I think, one of the things we're going
to talk about in the next year
and a half is fundamental tax reform
and those are the-- some of the issues.
Now, another thing that Bowles-Simpson proposed in terms
of raising revenue was increase in the gasoline tax.
That, I am very supportive of.
I'm a big fan of gasoline taxes.
My only complaint was with the Bowles-Simpson Commission here
was they were much too modest.
They proposed a 15-cent increase in the gasoline tax.
I would increase the gasoline tax by about a dollar and a half
to about two dollars a gallon.
Now, if you ask me why that is, it only goes back to Econ 101
or we call Ec 10 at Harvard which is corrective taxes.
Arthur Purgue [phonetic] told us with their externalities,
one of the easiest, simplest, least intrusive ways
to correct externalities is to tax externality--
negative externality producing activities.
And I think there's all sorts of stuff associated with driving
that it creates negative externalities.
One is obviously global warming, so I think there's an argument
for a global-- carbon tax.
But even if you do not believe in global warming,
even if you think it's a big hoax.
which I don't, but even if you thought of it as a big hoax,
I think you could still make a pretty compelling argument
for a gasoline tax because there's lots
of externalities associated with driving
that are much more concrete and less speculative,
less contentious, I should say, than global warming.
So for example, when more people drive, there's more congestion.
When more people drive, there's more accidents.
When more people drive, there's more local pollution.
And not just carbon emissions and global warming,
but [inaudible] just be local smog.
Those stuff are pretty uncontroversial.
And when people have added up all those extra dollar costs
of those externalities associated with driving,
they get to a optimal gasoline tax about two dollars a gallon.
And you can even add a little more
to extend you [inaudible] worry about global climate change.
So for me in my perspective, the 15-cent increase--
basically, we're about 40 cents a gallon now.
So they want to go to about 55 cents a gallon
in Bowles-Simpson.
That's I think was a step in the right direction
but a much too modest step.
It really should have a much higher gasoline tax.
Some people, some of us worried about the distributional effects
of gasoline taxes but a couple of things to point out.
One is the poor tend not to drive as much.
The poor tend in inner cities, take public transportation.
So it's-- the middle class are hit for sure
but the poor are not particular hit hard
by gasoline taxes as a group.
And certainly an [inaudible], you're worried
about distribution of gasoline taxes.
You can always change other taxes like payroll taxes
to change-- to achieve whatever distributional--
distribution of the tax burden you want.
Evaluated tax.
One idea that I think is going to get some attention
of the next decade, maybe not near term,
but over the next decade is if we really want
to solve this problem with tax revenue,
maybe we need a new kind of tax altogether
that we don't have it all now.
And one issue that's come
up occasionally is the value added tax.
Nancy Pelosi mentioned it in an interview
with Charlie Rose a couple of year ago, even Paul Ryan
who had had an idea of floating
around to eliminate the corporate income tax
and replace it with something
that he called the business activities tax
that is actually a very similar to a value added tax.
So I think there's leaders on both side
of the political islands who see some virtues in something
like a value added tax.
Now, the political right tends dislike the value added taxes.
Economists by the way like it.
We tend to think this is a consumption tax.
It tends to be efficient.
But for political reasons, some people on the right tend
to dislike a value added tax 'cause they're afraid there's a
hidden tax and a hidden tax is too easy
for the government to raise.
And in particular, they look at Europe and they say, "Look,
Europe has these value added taxes
and they have these huge governments."
Another interpretation of the Europe, of course,
is that they have the governments
that need efficient social taxes revenue, therefore,
they turn to value added taxes.
It's very hard to just look at Europe
and sort out cause and effect.
We know that the VAT cause the government to grow,
the growth of the government caused them to lead to--
policy makers to go to a VAT.
I suspect it's the latter
but I think you can debate that both ways.
The politics of a VAT are hard.
Nobody is out there and saying they want a VAT,
but I think a lot of people understand that if you're going
to want to raise more revenue and you don't want
to go the route and say gasoline taxes
and value added tax does make some sense economically.
Larry Summers had a quip about the politics
of a value added tax and I thought got things about right.
He once said that Republicans don't like a value added tax
because it's a money machine and Democrats don't
like a value added tax 'cause it's aggressive.
Well, finally-- we will finally get a value added tax he said
when Democrats realize it's a money machine
and the Republicans realize it's aggressive.
[Laughter] But anyway, so we may see a value added tax,
I don't know.
Actually, I think it does have some--
a lot of things to recommend it.
We're probably going to see this year some discussion
of a corporate income tax.
Both President Obama and Mitt Romney have come out in favor
of a lowering the corporate income tax.
We have now one of the highest corporate income taxes
in the world right now.
It's probably one of the least efficient taxes in terms
from the deadweight loss standpoint.
And so, I think there's a compelling case
about that we should cut the corporate income tax.
How much we're going to do that, how much it's going
to cost I think is on debate.
And there are some details in particular about the treatment
of overseas subsidiaries of multinational corporations
which the different parties disagree on.
And a few people-- if you want to talk about that during the Q
and A session, I'm happy to do so.
This brings me to like sort of-- the last thing I want to sort
of raise before turning to Q and A which is, okay,
let's suppose we don't cut spending very much.
Let's suppose my pessimistic scenario not being able
to reduce healthcare cost is right.
Let's suppose we don't--
people don't feel comfortable raising retirement age.
Let's suppose the government does just keep growing
inexorably and we decide we don't want to become Greece
so we end up raising taxes, either the raise from the base
or we put gasoline tax or put a value added tax.
Let's suppose we do that.
Then what risks do we face?
And I think the risk we face,
as I said earlier, was becoming France.
And what's wrong with France?
They have great food.
Why do we worry about becoming France?
We're becoming France basically because I've looked at the data
on how much Europeans work.
And here's a fact that I think was pretty uncontroversial.
European-- particularly Continental Europeans,
I figure you're thinking about the French and the Germans,,
and Italians, they work fewer hours than Americans.
So if you look at the number of hours worked
over their lifetime, they just work fewer hours than Americans.
They tend to retire earlier, too early as we've seen in Greece.
They tend to take more holidays, more vacations.
Work weeks are shorter.
So from almost every dimension you look at,
they're working less than Americans.
And not surprisingly if you work less,
you earn less income and you're poor.
And I think that's the fundamental--
that is a fundamental fact [inaudible] Continental European
and the United States.
They work less and the result, pay--
they pay the consequences of having lower per capita income.
Now, that fact is uncontroversial.
What is more controversial among economists is why do Europeans
work less?
And there's three hypotheses floating around.
One is there's a differences in tastes.
The French has this "joie de vivre" if we don't we have.
So they enjoy spending more time in leisure activities.
And second possibility is difference in unions.
Unions play much more important role
in negotiating working conditions in Continental Europe
than in United States.
Maybe it's more powerful role of unions.
Well, the third hypothesis which I associate most prominently
with Ed Prescott who pushed this
in a paper a few years ago is that its taxes.
And what Prescott suggests is the reason
that the Europeans don't work is they face much higher marginal
tax rates on average than we do.
And as a result, this doesn't make sense for them to work.
It's the rational response and it's completely classical model
to higher to tax rates to work less.
Now, Pres-- you know, to get the conclusion,
Prescott needs certain parameters and we can debate
on whether the parameters are too big and so on.
But I think the Prescott hypothesis is plausible
and maybe the most plausible one, although it's the one
that we haven't proved.
Now, what I really don't want is the United Sates
to become a testing ground just at Ed Prescott's hypothesis.
And the reason I'm really worried about doing all this
on the tax side because I think this is one
of the reasons I was supporting Mitt Romney rather
than Barack Obama in this recent election is I think we do too
much on the tax side and we're going
to be testing Prescott hypothesis.
We should really keep the social safety that we have.
We don't fundamentally rethink social safety net.
We let more and more people become eligible for more
and more benefits and spending has to go up,
then we really won't have any choice but to test
that Prescott hypothesis.
Well, the question we'd be asking ourselves a generation
from now is are your children and grandchildren spending
as much time in outdoor cafes as the French do today?
But-- so that's the question we face
and maybe we'll know the answer when I come
to this 58th Annual Economics Teaching Conference.
So let me stop there and I'm happy to take questions from--
on anything I said or anything I didn't say.
I do note, by the way, this is all being webcast.
Hi, out there.
[Laughter] If anybody's watching on the web,
so why don't you speak into a microphone
so they can hear your question?
>> This matches with your--
the comment you were just making in--
I mean clearly you can concur with Prescott's.
So what-- all I'm asking is from what I've read
and clearly I have no basis for this other than what I've gone
through but what happens them with the higher
and higher tax rates is that we get more and more corruption
and more and more people avoiding taxes,
and then we get the Greek system because there are plenty
of what very wealthy people in Greece and there are plenty
of people who have their, you know, cover job
and then they have their actual job
and so then their actual job is the one
that they pay no taxes on.
And then we've got this kind of corrupt system that--
so we're kind of spreading corruption by raising the rates,
we're forcing people to become corrupt,
then they avoid the system then we have the collapse
as in Greece.
I mean I'm assuming that you're not saying
that that would happen or you're saying that that--
>> Well I think it's--
>> -- we're moving towards that.
>> No, I think that's-- I mean whenever taxes go up,
the question of enforcement becomes an important issue.
I don't think it's the level of taxation in Greece
that caused the high levels
of noncompliance with tax code there.
One of the reasons by the way the people
like a VAT is people think it has less compliance problems
than other issues.
Like for example, a VAT is really a lot
like a retail sales tax to its economic effects.
We collect the tax along the chain of production rather
than on the retail level.
The public finance experts that study this tell me
that collecting along the chains of production is better
for compliance reasons.
It's easy to do enforcement
if you're doing along the chain rather than collecting all
at once at the last stage.
So as taxes go up as a percentage of the economy,
for sure, we have to think about enforcement issues.
I recently read a book about a small town doctor.
This doctor is actually lives in [inaudible] Nantucket
and he's one of the local doctors
and this just tells his experiences there.
And in one part of the book, the doctor says, oh, he-- a lot of--
he deals with lots of people who sometimes will pay him in kind.
So the like, you know, the farmer bring him vegetables or,
you know, the payment kind,
or the plumber will fix his toilet or--
in the exchange for his medical services.
And the doctor says, "Oh, the reasons I like this is
that I don't have to pay taxes on it."
Obviously, he didn't-- the doctor--
so the doctor didn't know this.
But you know, when you're paid in kind,
you still pay taxes on it.
He didn't-- he thought he was like avoiding the taxes
because he-- there wasn't any cash involved.
If he-- he basically confessed to tax fraud in his book.
He probably didn't know that but what's going
to happen is increasingly people will find the way around taxes
and sometimes they'd be aware that they're cheating.
Although, like this doctor's not aware he's cheating.
He's just going to find alternative ways
of reining his life to be right.
So that's something we need to think about.
And that provides a limit.
I don't believe we're at the peak
of the Laffer curve right now.
I think we could still collect higher taxes
as a percentage of GDP.
But I don't-- but there's certain effects
in that direction both in terms of behavior and in terms
of some not-- just work effort but also
in terms of noncompliance.
>> Yes, my question might be a little bit easier for you.
It has to do with Social Security.
And as you probably remember, a lot of people
on this room remember the last real of reform was that in 1983
and it was basically imposed on people that were 23 years
and under, people born after 1960 have
to work a couple more years.
When you mentioned that the public wouldn't buy
in to increasing the retirement age, one part of the public
that simply doesn't care because they don't think
about it would be our students.
And so-- no, I mean, seriously, when I--
you know, retirement to them is a theoretical--
it's an abstract idea that's way off.
And I was wondering, in your opinion, what's the feasibility
of them increasing retirement for, say,
people that would be born after 1980
which would be coincidentally next year, 23 years just
like what we did nearly 30 years ago.
And what's the feasibility of that happening
in the next couple years?
And in your opinion, how high should it go?
>> That's a-- those are great questions.
I think the-- doing something very slowly and gradually
that doesn't start for a while assuming that has a lot
of appeal politically for obvious reasons
because all the people who might otherwise organize
against it aren't going to be affected and therefore say,
"Okay, it's not-- doesn't affect to me."
The problem is that the fiscal imbalances we face are so large
over the next decade or two that something that, say,
we're going to solve this problem a long,
long time for now maybe not sufficient, but--
exempting everybody would be great
if we'd solve this problem while ago.
And we could have.
I mean do you remember back in--
when we were [inaudible] budget surpluses in the '90s?
Some people in Congress were saying we should cut taxes
and Bill Clinton didn't want to and the line he used
at the time was "save Social Security first."
[Inaudible] for why we shouldn't use a surplus
to [inaudible] taxes.
But there was no Social Security proposal.
So he wanted to save Social Security first
and instead there's a looming problem,
but he didn't necessarily say, "Okay,
and therefore let's change it
in the falling ways," there's no changes.
No-- [inaudible] just you said was back
in '83 we had the last major changes.
>> I have question here.
Question from the internet.
Abeck [phonetic] asks, Professor Mankiw, what do you think
about taxing interest payments on debt
and a simultaneous investment tax credit?
>> Paying into-- oh, you mean did--
you mean getting rid of the deduction?
I'm assuming he means getting rid of the deduction
at the corporate level for [inaudible] on debt.
There-- I think we think about the fundamental tax reform,
we want to think about the corporate tax system
more broadly.
And one of the issues we want to think
about is the current corporate income tax tends
to encourage leverage 'cause you don't get--
you got to deduct the interest on debt that-- as you--
that pay out, but [inaudible] deduct dividends,
you pay as to-- so debt
and equity are treated asymmetrically
in the corporate income tax.
And that, as many Congress have point out before me,
tends to encourage leverage.
And there were-- it rules
out taxes [inaudible] tells they are--
you're neutral to leverage in a world do you--
we have the corporal taxes like we have, firms are encouraged
to level themselves more for tax purposes.
And I think fundamentally,
we need to sort of-- to rethink that.
And I think that's sort of one of the--
that's one thing that should probably [inaudible] should be
on the table.
>> A question here.
>> Professor Mankiw, I have a question.
I know there is a debate right now about whether it makes sense
to go sort of the copycat route in terms of technology
and innovation or whether entrepreneurship actually
makes sense.
How do you see healthcare moving forward given our current
political situation or what happens?
>> Well, yeah, that's a great question.
One of my fears about healthcare reform is
that it will stifle innovation.
In particular, the United States is a leader in a lot
of healthcare innovations.
Much of the rest of the world are free riders.
So to give you a concrete example, pharmaceuticals.
Pharmaceuticals cost more in the United States
than they do abroad in many European countries.
And the way they cost less in many European countries is
that their price controls, this won't pay as much.
But then it means that the-- to comply the innovation,
the profits need to provide--
incentivize innovation are coming disproportionally
from Americans.
Now, to be honest, I feel perfectly comfortable for people
in Sub-Saharan Africa to pay less than we do, okay.
That's-- as we know as economist,
price information get sometimes improve efficiency of a market.
So if we say this is some age drug that made in United States
and sell it coast to coast in Sub-Saharan Africa,
I feel okay with that.
But I'm not sure the French and the Germans and a lot
of other Europeans at a price controls or either Canadians,
I'm not sure that they're-- this should be in a special category
where they can sort of free ride
on innovation of the United States.
Now, there's some people who say that we lower prices here
and do the same kind of price controls
that we have in other countries.
And people talk about they want Medicare to bargain
with providers of pharmaceuticals.
That when you're-- I mean when you're basically
as the sole provider of all elderly,
bargaining basically means pretty much price controls.
And we could do that.
We would save money doing that but I would really--
we do since the incentive for innovation.
And that really-- that scares me a lot 'cause if I think
about what's going to make my children healthier
when they're my age or when they're my grand--
my mother's age, their grandmother's age,
it's going to be-- the stuff that we haven't any thought
of today and that we need to pay--
incentivize people to think about.
So, I don't want us to become the copycatters.
I want us to stay at the cutting edge of technology.
In particular, healthcare technology even thought it means
that we Americans end up paying more
for a healthcare in the intro.
>> So you mentioned demographics--
demographic changes going on and it seems to me one
of the ways we could deal with that would be
with a different immigration policy, a more, you know,
better laxed, more liberal immigration.
You think that might help, you know, with Social Security
and Medicare by bringing in, you know,
workforce to replace our aging workforce?
>> Yes. In particular, an educator workforce.
There's absolutely definitely no reason why someone who's highly
educated shouldn't like-- assuming they're not a criminal,
they're highly educated, they shouldn't be sort
of coming here automatically, right?
If somebody comes like--
I have student in Harvard who's finishing up his PhD,
he should be like, he-- a green card should be like stapled
to that degree [laughter], right?
And some think [applause]-- now, I think--
I'm even sympathetic to unskilled immigration
but it raises more complicated issues.
In particular, it raises questions of towards
that they're coming here and taking advantage
of our social safety net.
And it's also they come here, they compete
against the American workers and tend to increase wage
and equality [inaudible] change the [inaudible] mix
of what's called an unskilled worker.
So I tend to be more liberal,
I think the egalitarian is the better word on--
about immigration issues in general.
But I want-- I wish to recognize that,
I think skilled immigration is like of no-brainer,
unskilled immigration [inaudible] were difficult
tradeoffs that [inaudible] face up to.
>> I've got another question from the internet.
She says, it's Genevieve, and she says Value Added Tax,
how is that efficient when it's going
to add government overseeing of economic activity at all levels
and it adds an additional tool for politicians
to sneak in rate changes?
>> Well, okay, the politicians sneaking
in the rate change is precisely the reason why some people
in the right are skeptical of a Value Added Tax.
And I have sympathy for that.
But then I'm not so sure if that's sneaky.
I think people in Europe are aware they're paying a Value
Added Tax.
I don't think it's really that hidden.
So I'm less worried about that than some people in the right.
The reason economists often think it's efficient is
because it's the consumption tax rather than income tax.
And one thing that income tax does is it encourages you
to spend the money you earn today rather in the future
because if you spend in the future, you're going
to earn interest on it and pay tax again.
Whereas a consumption tax is, okay, you earn some money,
we're not going to pay you in tax [inaudible]
at all 'til you decide to consume it.
And so, as a result, any kind
of a consumption tax whether it's done through a VAT
or retail sales tax or an income tax with a lot--
with very generous I rate deductions.
There's lots of ways to implement the consumption tax.
But consumption tax fundamentally doesn't
discourage saving.
And I think we want to encourage people to prepare
for their own future, their own retirement, for example,
their own health contingencies.
And so that if I want the tax code to not discourage saving.
>> So we saw Professor Blinder [phonetic] yesterday
and you said he would be someone that judges--
you know, if you take care of the short run,
the long run will take care of itself.
And I understand what metrics you could use to judge yourself
as an economist with that kind of a methodology.
But if you're somebody that views himself as you take
of the long run and the short run will take care of itself,
how do you ever gauge if you're correct or not?
>> Well, I mean, I think it's hard.
I think one of the basic things
about judging economic policy in general is hard.
One thing we see in presidential campaigns is a lot
of focus how the economy is doing at that moment
or the previous four years
and judging the president by that alone.
And I think economists are much more skeptical of that
because they recognize that economic policy is only one
of many things that influences the economy.
And as a result, a president could be lucky or unlucky
and get credit or blame when it's not really deserved.
So for example, there's lots of talking in the 1990s
of how Clinton's-- you know, [inaudible]--
Bill Clinton raise taxes and the economy did great,
went to budget surplus.
It's really mentioned that all those internet bubble to which
of course start collapsing as he is leaving office.
And that-- these are bubbles driving the economy forward,
driving tax revenue forward,
driving the economy toward surplus.
And I don't think anybody would--
any economist I know would go so far
as to say the Clinton's '93 tax increase caused internet bubble.
Then the bubble suddenly had happened, it had good effects,
it had bad effects to different years but a lot
of stuff that's happening that Eric [phonetic] really can't--
the story of the '90s can be told without crucial role
of how the high tech level during that time.
So how do you evaluate policy in light of that?
Well, I think it's hard and that's why economists disagree,
or Becker Connors [phonetic] disagree,
and Al Blind [phonetic] is a very close friend of mine but he
and I disagree lots of stuff
because I don't think it draws simple inferences from the data.
What you need to do is you get trained as an economist,
you see lots of studies, you see--
you decide how much to weight empirical evidence such as it is
with economic models such as they are.
And then ultimately reach a judgment, but it's hard.
I think it's very hard.
I think economists in judging presidents, by the way,
I'm more likely to look at the policy they've implemented
and said, "Do I think this is the right policies,
and so look at the results."
I think the general public doesn't really
understand policy.
The general public play doesn't have a view about territorial
versus global corporate income taxes.
It's too complicated.
So they don't look at that and they say, "Okay, well,
what's the unemployment rate doing?"
And the unemployment rate is a pretty noisy indicator
of whether the policy has been good or bad.
>> Hi, excuse me, I'm a little nervous
but thanks for being here.
I wanted to ask about your gas tax idea because I would love
to live in a place where I could really rely
on public transportation but it turns
out where we live, it's kind of a joke.
It takes about an hour to get, you know, five miles away
if you try to take a bus.
And so, I was wondering if you try to create incentives
for people to drive less,
what role you think the government would need to have
if you think they would need to have a role in sort
of building the infrastructure that would allow us
to drive less and bring, you know,
populations in from outside the working heart in the city?
>> Oh yeah, I think if gasoline taxes were higher,
then the demand for public transportation would go up
and I think a lot of states and localities would step
up to meet the demand.
Some of it would be things like busses
and so on, other-- subways.
It would also be sort of more smaller things.
You know, I remember, when I was going up,
the dads in my neighborhood would often carpool to work.
I remember when I get-- I went to my TAs, I was talking
to Bob Solo once and he was saying, "Oh yes, a bunch of--
some IT professors, all of them in [inaudible] together
so they carpooled to work every morning and would leave them--
we totally would sort of have a little faculty meetings
in our car as we carpooled from [inaudible] into MIT."
How many colleagues do you know now who carpool to work?
I don't know anybody in Harvard Economics Department
who carpools to work.
Carpooling is something people don't do.
And I think if you-- price of gas is high enough,
people would carpool to work,
that sort of public transportation
at a very micro level.
I don't see busses and subways are sort of more micro level,
but I think there's lots of ways that we can adjust at the margin
to when prices change.
You know what, in this edition of my textbook, I have this box
on how people respond to gasoline prices.
I think it's in chapter one actually.
And I-- like this is coming--
actually came from my blogs when this--
in 2008, there was a big spike in gasoline prices
and I started collecting all the way
to which people adjusted their behavioral in response
to high gasoline prices.
Just-- this wasn't tax driven
but taxes would have similar effect.
And all sorts of things that on people providing more new
bicycles, they were getting their scooters repaired,
people were moving closer to train stations.
P. Diddy Combs, the hip-hop artist would stop taking his
private jet across the country [inaudible] cost him a price
of about 100,000 dollars per flight
and so he'd start flying first class instead--
I mean commercial.
So people behave just because-- people's behavior can change
in many ways and that's why I much prefer incentivizing people
wanting-- change their behaviors they see fit rather
than the heavy regulations that we tend to have instead.
We have-- instead of gasoline taxes,
we have things like CAFE standards.
These corporate average fuel economy standards
which are crazy in a lot of ways.
For one, they encourage people to drive more
because if your car is more efficient,
you're going to drive it more.
So it's why-- it reduces gasoline directly,
it has an indirect effect of increase in gasoline consumption
by people driving more.
And there's also some other margins of adjustment
that it doesn't encourage whether it's carpooling
or public transportation and so on.
There's an executive for GM who's talking about--
his name is Bob Lutz if I recall.
And he was talking about the CAFE standards as a way to get--
reduce gasoline consumption.
And he said, "The CAFE standards are a little bit
like fighting obesity by requiring--
[inaudible] manufacturers,
[inaudible] manufacturers small sizes."
The point being, you know, it's not--
that's not what people want.
People don't want efficient cars.
And telling them-- telling get--
car [inaudible] they have to make them is kind of peculiar.
What we want to do is we want-- we had to incentivize people
to want more efficient cars
and a gasoline tax would do exactly that.
>> Yes, Professor Mankiw.
I teach my macroeconomic students that increasing labor
of productivity is the key
to increasing a nation's standard of living.
But there seems to be a gap that's developed now
between growth in the real median wage and--
the median real wage and labor productivity.
Do you have comment on that gap?
>> Oh yeah, I think there's couple of things going on there.
One is that there has been some change in the labor share.
One of the sort of stylish facts about economics is that,
in the United States, the role of constancy
of the labor share are sort, you know,
65 or 70 percent [inaudible].
But it's not-- well, it's a roughly constant at 65 or 70,
it's not exactly constant.
And over the past several years, the labor share is falling.
So that's part of it.
And why that is, is a little bit puzzle but that's a
as accounting matter, that's I think true.
The other thing is inequality has been going up.
Since the 1970s, inequalities between some high wager earners
and low wager earners have increased substantially.
Now, what that means is that the median is going to--
will tend not to keep up with an average productivity.
The product-- we look at productivity as closer
to the average than is to a median.
And so, my guess is you're going to find the closer match
between average wages and productivity
and you would median wage and productivity
and that's a reflection of the fact
that inequality has been rising.
Now, why inequality is rising is a whole other itself
which I think is a fascinating topic.
But that's the short answers here to your question.
>> Okay, we have one question over here.
>> Yes. In principle, I am for increasing the tax rates on gas.
I understand the substitution effect toward
public transportation.
At being a regressive tax, you did indicate that we can upset
that to a payroll for people in certain income brackets.
But then what about the effect on the transportation cost
for businesses 'cause that's going to raise the cost
of production for them.
And now, obviously it may have something to do then
with the competitive of that industry-- competitiveness.
Somebody might suggest, well, we'll do the same thing
as for the low income people by upsetting that through taxes.
And the question then becomes, how do we do that?
Is it on the basis of numbers of the trucks they have?
Is it on a basis of the mileage they drive or how do you go
about dealing with that?
Thank you.
>> Yeah, that's a great question.
Whenever you raise-- taking your taxes ripple effects in lots
of different industries and lots of different sectors and lots
of ways you that always anticipate.
I know some people are-- they view the corporations of people,
but I wouldn't-- in this context,
I probably wouldn't put it quite that way.
So I wouldn't actually worry about effects in the businesses.
I worry about the effects on the people.
And so, that's why I think if you want to put a gasoline tax
and then sort of say we're not going to--
we're going to adjust the payroll tax in some way
so the low income people can--
going to be offset, I think that's fine.
But I'm not going to worry
about the businesses per se, they will adjust.
And they should adjust.
I mean so for example, if you're deciding which vegetable to buy
and one vegetable is grown locally
and one vegetable is grown a thousand miles away and shipped
over by trucks, well, the one that's shipped thousand miles
away, it's price is going to up relative
to the one that's grown locally and that's part of the response.
That's part of the optimal response.
If you think that we're consuming too much gasoline,
say, because of global warming, then you want people
to start growing-- buying local produce, right?
There's a-- you know, one of the lefts going to come--
the bumper stickers is, you know, buy local.
Well, one way to get people
to buy local is maybe raising transportation costs.
Well, I guess that's actually more effective
than bumper stickers.
[Laughter]
>> Okay, we have one last question from the web.
It's from an instructor actually,
which is Nice Susan [phonetic] and she says it's nice
to hear someone actually talking about solving this problem,
the fiscal cliff, et cetera.
Given your insight into Washington DC,
are they taking these problems seriously
and can you see Congress actually addressing in trying
to fix these problems with some
of the taxes you have just discussed?
Also in discussing these issues with students, is there any way
to give them a sense that they do have some say
over their future?
>> When I think the main way they can have--
students can have a say on their future is by paying attention
to the issues in [inaudible] their congressman
and expressing their opinions 'cause I think these issues
of the long run fiscal imbalance, how we're going
to address it is fundamental to the next generation.
The way I put it to my students at Harvard is to say, "Hey look,
my generation of baby boomers have promised their selves a
certain level of benefits in our retirement
and we've promised you'll pay for it.
[Laughter] How do you feel about that?"
'Cause that is fundamentally the question that we're facing.
So it's a general question to a large extent
on how much are we going to ask the next generation
to support us in retirement both healthcare and income support.
And the question of whether they're planning
to take it seriously, I think they are taking very seriously.
I think both John Boehner, for example,
the Speaker of the House
and Barack Obama are taking it very seriously
but they're both playing a little bit of a game of chicken
because they have different views
of how they want this to be resolved.
And one thing he knows is
that when you're playing you a chicken, right,
two people are driving against each other
like these old James Dean movies, it's really helpful
if the other person thinks you're nuts [laughter]
and because if the other person think you're nuts, he says,
"Look, this guy's nut.
[Inaudible], I better get
out his way 'cause otherwise I'll be dead."
And so-- so you're playing you chicken,
looking like you're nuts can be a bit beneficial.
And I think that's why Washington often looks a little
nuts 'cause I think they're trying [inaudible] the other guy
to blink.
Now, let me just say something just you know sort
of the gridlock in Washington.
I know I experienced when I was--
I worked in Washington for two years
and one thing that's very frustrating when you work
in Washington is the sense
that it's very hard to get stuff done.
It's very, very hard to get stuff done
because there's [inaudible] two parties, these two Houses
of the legislature, you know, just the same,
in the House of Representatives.
You know, the Republicans used
to say the Democrats are the opposition,
the Senate, those are the enemy.
So there's a huge skepticism of, you know,
in between the different Houses of the legislature
and obviously its tension between the hill
and the executive branch
and then even the Supreme Court comes along once
in a while with an opinion.
So there's a lot of stuff to make it--
in Washington to make it very, very hard to get stuff done
which is very, very frustrating
if you think things should get done.
But here's the hopeful sign that I'll leave you with.
The fact that it's hard
to get stuff done is not a bug but a feature.
Madison and our founding fathers wanted it
to be hard to get stuff done.
They didn't want somebody to go to Washington and be able
to make change easily because if one person goes to Washington
and they change easily,
that person could easily make the wrong kind of change
and it could become a tyranny.
And so, if you're ever go to--
if you ever take a job at Washington and you said,
"My God, this job is so damn frustrating,
we can't get anything done," you should say,
"Thank you James Madison."
Let me stop there.
>> Okay. [Laughter & Applause] Thanks Greg.