Greg Mankiw's Blog

There has been some debate between Trump critics and Trump defenders about whether tariffs cause inflation. Some defenders, including the Commerce Secretary Howard Lutnick, say that tariffs don't necessarily cause inflation. My view is that these defenders have a point, but not a good one.

Tariffs reduce productivity because they prevent the international marketplace from allocating resources to their best use. Lower productivity means lower real incomes. Lower real incomes could take the form of either (1) a higher price level for given nominal incomes or (2) lower nominal incomes for a given price level. Whether (1) or (2) occurs depends largely on monetary policy.

When Trump critics say that tariffs cause inflation, they are implicitly assuming case (1). That case may be the more likely one, but it is not necessarily the way things will play out. 

Bottom line: Trump critics should say that the tariffs will reduce American living standards (as well as living standards abroad) without invoking the word "inflation."

An intriguing new paper by John Cochrane picks up on a question that Ricardo Reis and I worked on long ago: Which models of the Phillips curve generate realistic dynamics? I have not yet processed all of what John has to say on the topic, but it seems like it might be a big step in the right direction.

It is hard to tell which is worse:

The Trump administration may exclude government spending from GDP

Trump calls for creation of a ‘crypto strategic reserve’

Bad as these ideas are, neither is as dangerous and morally bankrupt as cozying up to the autocratic war criminal who is trying to violently annex his neighbor.

From the wise Owen Lamont.

The Wall Street Journal reports a deeply troubling misunderstanding of economics among President Trump's advisers:

Trump’s team will likely target nations such as European Union members with value-added taxes, or VATs. The president’s trade advisers have long viewed VATs as an export subsidy because companies are given rebates when they export abroad. VATs “will be viewed as a tariff,” Trump said in the Oval Office.

Doug Irwin explains why this is nonsense:

Another fallacy is that other countries’ value-added taxes constitute discrimination against the U.S. Most European countries tax imported goods because they also levy taxes on domestic producers. In the end, VATs are taxes on consumption and don’t discriminate against imports. 

My colleague Eric Maskin would like to draw your attention to this opportunity.

The Wall Street Journal rightly calls the new Trump tariffs "the dumbest trade war in history." One positive side effect, however, is that they led me to stumble upon this old article by Doug Irwin, which I don't recall having previously seen. Though nearly 30 years old, Doug's piece is a great introduction to some of the most important ideas of international economics, which are especially relevant now. Highly recommended to anyone interested in a serious but nontechnical discussion of the key issues.

Apparently, there is an ongoing debate in Trumpworld about whether more H1B visas are a good thing. From an economic perspective, the answer is a clear yes.

From the standpoint of economic efficiency, allowing a highly skilled immigrant to work at a U.S. firm is, for standard reasons, beneficial. The transaction is voluntary, so both the employee and employer are better off.  And there are no obvious negative externalities (not counting, of course, pecuniary externalities). In addition, the U.S. government collects more revenue in the form of payroll and income taxes.

From the standpoint of economic equality, allowing a highly skilled immigrant is again beneficial. The relative wage of skilled versus unskilled workers depends on, among other things, the relative supply of the two types of worker. When highly skilled workers immigrate into the United States, the demand for less skilled workers rises. 

Think of technology firms that need both engineers and janitors. When the supply of engineers rises, the demand for janitors increases, leading to higher janitor wages.

So an increase in H1Bs visas not only expands economic liberty (arguably a good thing in itself) but also increases both efficiency and equality.

Score one for Vivek and Elon.

Update: A friend points out there may be significant positive externalities in form of new knowledge that highly skilled immigrants would produce. I agree. That strengthens the case.

I will be giving a webinar on Wednesday October 23 on The Fiscal Challenges Facing the Next President. For more information, click here.

According to the recent NBC poll, among white voters, those with a college degree favor Harris by a margin of  21 points, while those without a college degree favor Trump by a margin of 28 points.

Races other than white may be similar, but that comparison is not reported in the article.

It had been about 30 years since I first read it. I did not remember it well, but I did remember liking it very much. After the second read this summer, I can report that I liked it just as much, maybe more.

Crossing to Safety is not a book of high drama. It is a book about friendship, marriage, aging, and life's other challenges, focusing on two couples as they traverse their lives from their youth as struggling academics to their later years of greater wisdom and inevitable loss. 

I read somewhere that, though fiction, the book is autobiographical. That makes sense. It reads like a thoughtful and honest memoir, which is a genre I love.