The New York Times

June 2, 2005

Putting a White House Annual Report to a Test


EACH February, the Council of Economic Advisers issues "The Economic Report of the President." The report, which can be found at, contains useful economic statistics as well as essays by the members of the council.

This year's report, as usual, reflects the priorities and interests of the administration and is worth reading for that alone. The ostensible audience is Congress but the essays are generally accessible and are often assigned reading for college economics classes.

This year's report is particularly noteworthy because it was written by N. Gregory Mankiw, a Harvard professor and the council's chairman at the time. Mr. Mankiw is the author of a best-selling introductory economics textbook who is known for his clear writing. In addition to the standard "state of the economy" discussions, there are essays on tax reform, immigration, property rights, the information economy, H.I.V./AIDS and international trade.

The report is supposed to provide an "accurate assessment of the consensus professional views of economists." Recently The Journal of Economic Literature asked five economists to review the report, posing the question, "Does the discussion in the E.R.P. in fact accurately summarize what we as economists know?"

Space precludes a detailed discussion of all the reviews, so I will focus on the examination of the chapter on property rights by Jonathan Gruber, an economist at the Massachusetts Institute of Technology.

Although Mr. Gruber generally finds the discussion in the chapter to be fair, he disagrees with some of the conclusions. Economists have a saying, "De gustibus non est disputandum," which I like to (mis)translate as "It's disgusting not to dispute."

The chapter points out that property rights help to solve three problems: the tragedy of the commons, which involves overuse of unowned resources; the lack of incentives to invest in unowned resources; and the difficulty of transferring nonowned resources, making trade problematic.

The first example the report gives to illustrate the benefits of property rights is homeownership, citing studies that find that areas with high rates of homeownership have lower crime rates, more educated residents and other positive social indicators.

But, as Mr. Gruber points out, the question of cause is unclear. Does homeownership cause lower crime rates, or do people prefer to buy houses where crime rates are lower? Does homeownership result in higher income, or is it just that those who have higher income can afford houses?

The report fares better with its next example: tradable permits for sulfur dioxide emissions. When this program was introduced by the first Bush administration in 1990, it was widely criticized by environmentalists.

But the program is now considered a success, credited with reducing the costs of meeting 1990 sulfur dioxide targets by at least half.

But Mr. Gruber argues that "it is when the chapter tries to extend these lessons from goods markets to service markets that it runs into trouble."

For example, he argues that the report paints too rosy a picture of voucher programs for school choice. Although there is some recent work indicating that students who use vouchers to move to small private schools improve their performance, there is still debate about what happens to those left behind.

The report cites one study that finds that both those who move and those who do not benefit from vouchers. But this is only one study; other studies find a negative impact over all on student performance. Thus, according to Mr. Gruber, the "jury is still out."

Mr. Gruber also criticizes the president's proposed privatization of Social Security, arguing that "the fundamental reason that the Social Security program exists is to prevent myopes from undersaving for their retirement; how can those same myopes be trusted with the much more difficult decision of portfolio optimization?"

The chapter tends to extol the virtues of privatization, ignoring privatization programs that have not worked out. For example, Mr. Gruber points to the guaranteed student loan program, arguing that it has been a failure.

Rather than making loans directly to students, the government offers a subsidy to banks in the form of guaranteed repayment. Remarkably, banks are not required to bid for the right to issue these loans, and a result has been both an inefficient mechanism for student aid and a windfall for banks.

Mr. Gruber concludes that the chapter offers an "excellent exposition of the case for property rights" but that policies that work well for goods may work less well for certain kinds of services.

The report is certainly correct that property rights should be one of the first places to look for solutions to the problems that bedevil public programs. But they should not be the last place, or the only place, to look.

Hal R. Varian is a professor of business, economics and information management at the University of California, Berkeley.