Thursday, December 5, 2019

Revisiting the Industrial Policy Question in East Asia

Many of the world's main economic growth success stories are clustered in east Asia, including Japan, South Korea, Taiwan, Malaysia, Singapore, and now of course China. Of course, everyone wants to claim credit for success stories: in particular, it's clear that the governments of these countries have often intervened in their economies, and so they are commonly cited as examples of how "industrial policy," rather than just a "free market," is needed for rapid growth. Reda Cherif and Fuad Hasanov resurrect these arguments in "The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy" (IMF Working Paper WP/19/74, March 2019)

As a starting point to sorting out these arguments, it's useful to point out that any proposed dichotomy between "industrial policy" and the "free market" is a gross oversimplification.  It is widely agreed that for sustained growth, a country must address economic fundamentals like high rate of investment in physical capital, education, and health; macroeconomic stability; a well-functioning legal infrastructure that supports an environment friendly to starting and running businesses; pro-competition policies; openness to trade; support for research and development and intellectual property, and so on. Government will play a prominent role in many of these areas, so they cannot be characterized as "free market." However, these policies do not provide direct favors to any existing company or industry; indeed, they may set the stage for types of growth that disrupt or even bankrupt existing companies and industries. Thus, they are not really "industrial policy," either.

If a government decides to carry out policies that favor certain particular industries, rather than just being satisfied with preparing the ground for growth to occur, it will need to make three choices: what industry to favor, what policy tools will be used to favor those industries, and how to decide when these policy tools should be ended (in particular, when the tools have not worked).

Cherif and Hasanov describe their preferred version of industrial policy in this way:
We argue that the success of the Asian Miracles is based on three key principles that constitute “True Industrial Policy,” which we describe as Technology and Innovation Policy (TIP). ... (i) state intervention to fix market failures that preclude the emergence of domestic producers in sophisticated industries early on, beyond the initial comparative advantage; (ii) export orientation, in contrast to the typical failed “industrial policy” of the 1960s–1970s, which was mostly import substitution industrialization (ISI); and (iii) the pursuit of fierce competition both abroad and domestically with strict accountability.
They argue that an emphasis on economic fundamentals is a "snail crawl" approach to growth, while their version of targeted industrial policy is the "moon shot" approach.

You can read their essay for the details of the case in favor of this approach. Here, I'll just point out that the arguments here come in two main categories: the question of whether government are in fact likely to enact the specific type of industrial policy being recommended; and the likely marginal effect of such an industrial policy, over and above a policy of sound economic fundamentals.

Concerning the question of whether a government can enact should enact a policy to favor specific industries, it's wroth emphasizing that their three standards for industrial policy are quite specific, and by no means a blanket endorsement of widespread government intervention in the economy.

For example, their preferred form of industrial policy pushes domestic producers into "sophisticated" industries they would not otherwise have tried. Thus, this argument for industrial policy does not offer support for policies that favor production of existing goods, or for just helping industries as they currently exist to earn higher profits. It does not favor an industrial policy aimed at saving existing jobs. Thus, the challenge is whether government can

Their second goal focuses on the idea that successful industrial policy should focus on expanding export sales, not on trying to replace imported products. Thus, they are explicitly disavowing the "import substitution" approach to economic development that has historically been popular in Latin America and elsewhere. For their preferred type of industrial policy, "tariffs are neither necessary nor sufficient to succeed," although tariffs were often used in combination with more direct financial and credit incentives.

The third goal emphasizes that this growth of "sophisticated" industries should involve both fierce competition, both at home and abroad. The focus on domestic competition means that this approach does not favor government nationalization of an industry, or trying to create a "national champion" firm to compete in foreign markets. As they write: "While specific industries may get support, intense competition among domestic firms was highly encouraged in domestic and international markets," 

When they mention "strict accountability," what they have in mind is that industrial policy in the 1970s and 1980s in places like South Korea and Taiwan set up specific targets that had to be met for a firm to benefit from industrial policy. These targets might involve a certain level of export sales that had to be reached, along with certain levels of investment or R&D effort, or setting up chains of domestic suppliers. "Accountability" means that if these pre-determined targets were not met in a timely manner, the benefits from the industrial policy could and were cut off.

The notion that this very specific kind of industrial policy can benefit an economy isn't especially new. Cherif and Hasanov mention a prominent book-length report on this subject published by the World Bank back in 1993, The East Asian Miracle: Economic Growth and Public Policy.  The report argues that by far the main causes of rapid growth in the countries of East Asia were high levels of investment in physical capital, human capital, and technology, occurring in a context of an economy that emphasized market incentives, including intense domestic competition and macroeconomic stability. However, the World Bank report also took care to note (citations omitted): 
In most of these economies, in one form or another, the government intervened--systematically and through multiple channels--to foster development, and in some cases the development of specific industries. Policy interventions took many forms: targeting and subsidizing credit to selected industries, keeping deposit rates low and maintaining ceilings on borrowing rates to increase profits and retained earnings, protecting domestic import substitutes, subsidizing declining industries, establishing and financially supporting government banks, making public investments in applied research, establishing firm- and industry-specific export markets, developing export marketing institutions, and sharing information widely between public and private sectors. Some industries were promoted, while others were not. ... 
At least some of these interventions violate the dictum of establishing for the private sector a level playing field, a neutral incentives regime. Yet these strategies of selective promotion were closely associated with high rates of private investment and, in the fastest-growing economies, high rates of productivity growth. Were some selective interventions, in fact, good for growth? ...
Our judgment is that in a few economies, mainly in Northeast Asia, in some instances, government interventions resulted in higher and more equal growth than otherwise would have occurred. However, the prerequisites for success were so rigorous that policymakers seeking to follow similar paths in other developing economies have often met with failure. What were these prerequisites? First, governments in Northeast Asia developed institutional mechanisms which allowed them to establish clear performance criteria for selective interventions and to monitor performance. Intervention has taken place in an unusually disciplined and performance-based manner. Second, the costs of interventions, both explicit and implicit, did nor become excessive. When fiscal costs threatened the macroeconomic stability of Korea and Malaysia during their heavy and chemical industries drives, governments pulled back In Japan the Ministry of Finance acted as a check on the ability of the Ministry of International Trade and Industry to carry out subsidy policies, and in Indonesia and Thailand balanced budget laws and legislative procedures constrained the scope for subsidies. ... Price distortions arising from selective interventions were also less extreme than in many developing economies. In the newly industrializing economies of Southeast Asia, government interventions played a much less prominent and frequently less constructive role in economic success, while adherence to policy fundamentals remained important ...
I quote here at some length to emphasize that it has been a commonly held and conventional World Bank view for some time that certain focused, disciplined, and strictly accountable industrial policies with an export-push focus can work. It's also possible that some of the most important interventions in these economics were policies that were anti-free market but not industry-specific, like "keeping deposit rates low and maintaining ceilings on borrowing rates to increase profits and retained earnings" or "establishing and financially supporting government banks."

But overall, the practical policy question is whether one wants to encourage governments of developing countries to enact "industrial policy," given the risk that the approach may be neither focused nor disciplined nor accountable. After all, the world is full of countries that have announced the implementation of industrial policies that were not only unsuccessful, but often wasteful and  counterproductive. 

The other main question about industrial policy is how to decide whether, for example, most of the rapid growth in east Asia was due to the extraordinary gains of those countries in economic fundamentals and how much was due to specific industrial policies. The 1993 World Bank report argued that overall, some of East Asia's industrial policies succeeded, others failed, and overall the industry-specific policies didn't much affect the direction of growth. The report says: 
Most East Asian governments have pursued sector-specific industrial policies to some degrce. The best-known instances include Japan's heavy industry promotion policies of the 1950s and the subsequent imitation of these policies in Korea. These policies included import protection as well as subsidies for capital and other imported input. Malaysia, Singapore, Taiwan, China, and even Hong Kong have also established programs--typically with more moderate incentives--to accelerate development of advanced industries. Despite these actions we find very little evidence that industrial polices have affected either the sectoral structure of industry or rates of productivity change. Indeed, industrial structures in Japan, Korea, and Taiwan, China, have evolved during the past thirty years as we would expect given factor-based comparative advantage and changing factor endowments ... 
Of course, it's very hard to separate out different factors that contribute to a country's economic growth and draw lessons that can apply to other countries. Cherif and Hasanov make a case that for Hong Kong, Korea, Singapore, and Taiwan, the industry-targeted incentives were a key and central component. I'm skeptical. My own (only lightly informed) sense is that this case is stronger case for Korea than for the other three. Also, it seems unlikely that the industry-specific incentives would have accomplished much if the strong economic fundamentals had not been in place. 

One way or another, when explaining the growth pattern of specific economies, it's hard to rule out an element of luck. Cherif and Hasanov are quick to note that when countries have enacted something close to their preferred version of industrial policy, but perform poorly, it could just be a result of bad luck or bad timing. Fair enough. But it may also be that the the East Asian economies benefited from good luck in taking certain policy steps at just the right historical moment. 

At the current historical moment, where political currents are running strongly against an expansion of international trade and the technologies of automation and information technology are transforming manufacturing, it's not clear that import substitution policies in the style of East Asia--focused on exports of increasingly sophisticated manufacturing products--is a workable development strategy for the near future. 

Wednesday, December 4, 2019

About Millennials

The "Millennials" are commonly defined as the generation that grew up and came of age in the opening decades of the 21st century: that is, those born from approximately 1981 to 1996.
Every generation finds itself caught in the twists and pressures of a different set of social and economic challenges, and the Millennials are no exception. For example, those who were struggling to enter the labor market as young adults during the Great Recession of 2007-2009 and the sluggish recovery in its aftermath were Millennials. Those who were trying to buy houses and and attend college in the 2000s, after the prices of those goods had been climbing in recent decades, were Millennials. Some long-run trends, like diminished labor market opportunities for low-skilled workers, continued for Millennials as well.

The most recent issue of Pathways magazine from the Stanford Center on Poverty and Inequality has a collection of short fact-based essays about Millenials, who are now adults in the age bracket from 23 to 38. Here are a few findings that jumped out at me.

It's perhaps no surprise that Millennials are more likely to identify as multiracial or to adopt unconventional gender identities. However, according to Sasha Shen Johfre and Aliya Saperstein,  "they are not outpacing previous generations in rejecting race and gender stereotypes. Their attitudes toward women’s roles and perceptions of black Americans are quite similar to those of baby boomers or Gen Xers."

A number of the essays focus on labor market outcomes for the Millennials. Harry Holzer describes lower labor force participation of Millennials, especially low-skilled male workers.

Labor force activity has declined for all prime-age workers, but the decline among young workers has been especially rapid. This means that millennials. who are currently 25–34 years old are working less than Gen Xers at the same age. Declines are most evident among men, though women’s labor force activity is also lower. Large gaps by education remain, with the highest labor force participation among college graduates.
Florencia Torche and Amy L. Johnson write: "The payoff to a college degree—in terms of earnings and full-time work—is as high for millennials as it’s ever been. But there is a substantial earnings gap between those who are and aren’t college educated. Millennials with no more than a high school diploma have much lower earnings in early adulthood than prior generations."

Michael Hout writes: "American men and women born since 1980—the millennials—have been less upwardly mobile than previous generations of Americans. The growth of white-collar and professional employment resulted in relatively high occupational status for the parents of millennials. Because that transition raised parents’ status, it set a higher target for millennials to hit." As Hout points out, a trend toward less social mobility was already apparent for those born in the 1960s and 1970s, but it has become stronger since then.

Kim Weeden adds some evidence on occupational segregation: "The gender segregation of occupations is less pronounced among millennials than among any other generation in recent U.S. history. By contrast, millennials are experiencing just as much racial and ethnic occupational segregation as prior generations, even though millennials are less tolerant of overt expressions of racism. Both types of occupational segregation—gender and racial-ethnic—are very consequential for wages. Among millennials, occupational segregation accounts for 28 percent of the gender wage gap and 39 to 49 percent of racial wage gaps."

Susan Dynarski argues that Millennials have become the "student debt generation."
Over the last several decades, more students have taken on debt to pay for school, and the size of their debt has grown. According to the National Center for Education Statistics, 46 percent of students enrolled in all degree-granting schools had student loans in 2016, a percentage that pertains to the tail end of the millennial generation. This is up from 40 percent in 2000, when Generation X represented much of the college population. Over the same period, the average loan amount increased by nearly $2,000, from $5,300 in 2000 to $7,200 in 2016. ... As shown in Figure 1, the default rate has increased among all types of borrowers, although the increase is far less pronounced among borrowers for selective schools and graduate schools.2 The simple conclusion: Relative to Generation
X, millennials indeed took out more student loans, took out larger student loans, and defaulted more frequently.

Darrick Hamilton and Christopher Famighetti discuss housing: "Young millennials have lower rates of homeownership than Generation X, baby boomers, and the Silent Generation at comparable ages. We have to reach back to a generation born nearly a century ago—the Greatest Generation—to find homeownership rates lower than those found today among millennials. The racial gap in young-adult homeownership is larger for millennials than for any generation in the past century. Although the housing reforms after the civil rights era reduced the racial homeownership gap, all those gains have now been lost."

Bruce Western and Jessica Simes point out: "The recent reversal in overall incarceration rates takes the form of an especially prominent decline in rates of imprisonment for black millennial men in their late 20s. The decline is far less dramatic for other population groups—such as white and Hispanic men—that never experienced the extremely high rates that black men experienced. The imprisonment rate for black millennial men—approximately 4.7 percent—nonetheless remains extremely high."

Monday, December 2, 2019

Whose Charitable Giving (And for What Purposes) Gets a Tax Break?

When people who itemize deductions on their taxes donate to charity, they can take a tax deduction. When people who don't itemize deductions donate to charity, they don't get a tax deduction. Only about 11% of taxpayers itemize deductions, usually those with higher income levels. So the charitable priorities of this group gets a tax break, while others don't. Robert Bellafiore lays out these facts and offers some possible policy suggestions in "Reforming the Charitable Deduction," written for the Social Capital Project of the Joint Economic Commitee (SCP REPORT NO. 5-19, November 2019). Here are some background facts:

Overall charitable giving as a share of GDP (including both those who itemize deductions and those who don't) had a step-increase in the 1990s, and has stayed at that higher level since then.

However, the share of Americans giving to charity has been declining in the last couple of decades. The bright blue line shows the overall decline, while the rest of the lines show that the decline cuts across income groups.
These patterns have a strong effect on what kind of charitable giving gets a tax break. The figure below shows the total amount given by those in four big income groups. For example, the total amount given by households with under $100,000 in income is considerably more than the total amount given by households with incomes of over $1 million. However, about two-thirds of the giving of those with under $100,000 goes to religious charities, while only about one-sixth of the giving  of those with over $1 million in income goes to religious charities. Those in the lower income group give much more to "helping meet basic needs," while the higher income group gives more to arts, education, and health care nonprofits. Because those in the $1 million and more income category are far more likely to itemize deductions, their charitable priorities get a tax break.
In addition, the share of charitable giving that comes from individuals has been gradually falling, while the share coming from foundations has been rising. 
The report quotes a 2013 article in the Atlantic on the very largest individual gifts given by those with the highest incomes:
Of the 50 largest individual gifts to public charities in 2012, 34 went to educational institutions, the vast majority of them colleges and universities, like Harvard, Columbia, and Berkeley, that cater to the nation’s and the world’s elite. Museums and arts organizations such as the Metropolitan Museum of Art received nine of these major gifts, with the remaining donations spread among medical facilities and fashionable charities like the Central Park Conservancy. Not a single one of them went to a social-service organization or to a charity that principally serves the poor and the dispossessed. More gifts in this group went to elite prep schools (one, to the Hackley School in Tarrytown, New York) than to any of our nation’s largest social-service organizations, including United Way, the Salvation Army, and Feeding America (which got, among them, zero).
The tax deduction for charitable giving reduced federal tax revenues by $56 billion in 2018. Because more than 90% of those with over $200,000 in annual income itemize deductions, the overwhelming share of this tax break goes to those with higher income levels.

The JEC report calculates that for someone in the middle or bottom of the income distribution, giving $100 to charity cost about $100, because so few take the tax break. But for those in the top 1%, giving $100 to charity costs only about $71 after the tax deduction is taken into account. 

What are some proposals for altering the tax break for charitable contributions? The JEC report focuses on ways to expand the tax break for charitable contributions to everyone, not just those who itemize deductions. 

For example, one possible is to allow everyone to deduct their charitable contributions from their income before paying taxes, whether you itemize or not. Another option would be to create a tax credit, which might let everyone take 25% off their income taxes of any amount given to charity. Both of these proposals would expand the tax break for charitable giving, probably resulting in a reduction of $20-$30 billion per year in total federal tax revenues.  They would also probably increase the amount of charitable giving and perhaps also the share of people making charitable contributions. 

The other way to go would be to reduce the existing tax break for charitable giving. For example, the Congressional Budget Office estimates revenue gains from two change to the charitable contributions deduction. One would allow donors to deduct only the amount that is greater than 2% of their adjusted gross income.  Another approach would require that only cash donations to charity would be eligible for a deduction. This change would be aimed at the common practice where someone owns an asset--say, a share of stock--which was bought for a lower price in the past, and then is donated to charity for its higher current value. If that asset first had to be sold and then converted into cash, capital gains taxes would need to be  paid before the charitable donation is made. CBO estimates that either change would increase revenue by about $15 billion per year in a few years.

I'm not wedded to any particular change, but a situation where the charitable giving of the top 1% gets a tax break for contributions that disproportionately goes to education, arts, and health institutions heavily used by that same 1% doesn't seem equitable.

For a brief history of the deduction for charitable contributions, see "The Charitable Contributions Deduction and Its Historical Evolution" (September 26, 2019).

Friday, November 29, 2019

Production, Use and Fate of All Plastics Ever Made

Back in 2005, the American Film Institute released a list of the 100 most memorable and lasting bits of film dialogue of all time. The first two, for example, were ""Frankly, my dear, I don't give a damn"
and "I'm gonna make him an offer he can't refuse." Number 41 on the list was "Plastics." from the 1967  film The Graduate, which won Oscars for Best Picture, Best Director, Best Actor (Dustin Hoffman) and Best Actress (Anne Bancroft).

In that movie, the dazed-and-confused soon-to-be college graduate Benjamin Braddock, played by Dustin Hoffman, is drifting through a dinner party full of his parents' friends. One of his father's well-meaning and clueless friends named Mr. Maguire, played by Walter Brooke, traps Benjamin into this conversation:
Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it?
For those who are thinking about it, Roland Geyer, Jenna R. Jambeck, and Kara Lavender Law have written ""Production, use, and fate of all plastics ever made" (Science Advances, July 19, 2017,  3:7, e1700782). They write:
Although the first synthetic plastics, such as Bakelite, appeared in the early 20th century, widespread use of plastics outside of the military did not occur until after World War II. ... plastics’ largest market is packaging, an application whose growth was accelerated by a global shift from reusable to single-use containers. As a result, the share of plastics in municipal solid waste (by mass) increased from less than 1% in 1960 to more than 10% by 2005 in middle- and high-income countries. ... By identifying and synthesizing dispersed data on production, use, and end-of-life management of polymer resins, synthetic fibers, and additives, we present the first global analysis of all mass-produced plastics ever manufactured. 
They look at all the purposes for which plastic is used, and then the periods of time these products are in use, from short-term uses like packaging to long-term uses like construction. They write: 
Global production of resins and fibers increased from 2 Mt in 1950 to 380 Mt in 2015, a compound annual growth rate (CAGR) of 8.4% (table S1), roughly 2.5 times the CAGR [compound annual growth rate] of the global gross domestic product during that period. The total amount of resins and fibers manufactured from 1950 through 2015 is 7800 Mt. Half of this—3900 Mt—was produced in just the past 13 years. Today, China alone accounts for 28% of global resin and 68% of global PP&A [polyester, polyamide, and acrylic] fiber production ...  
We estimate that 2500 Mt of plastics—or 30% of all plastics ever produced—are currently in use. Between 1950 and 2015, cumulative waste generation of primary and secondary (recycled) plastic waste amounted to 6300 Mt. Of this, approximately 800 Mt (12%) of plastics have been incinerated and 600 Mt (9%) have been recycled, only 10% of which have been recycled more than once. Around 4900 Mt—60% of all plastics ever produced—were discarded and are accumulating in landfills or in the natural environment
Here's a figure showing some their estimates of plastic waste generation and disposal since 1950 and projected up through 2050. The calculations suggest that even with a substantial rise in incineration and recycling of plastic, the cumulative amount of plastic discarded will rise substantially in the next few decades,

As the authors note, we are essentially carrying out an uncontrolled global experiment on how plastic waste may affect the environment:
Plastic waste is now so ubiquitous in the environment that it has been suggested as a geological indicator of the proposed Anthropocene era ... None of the mass-produced plastics biodegrade in any meaningful way; however, sunlight weakens the materials, causing fragmentation into particles known to reach millimeters or micrometers in size. Research into the environmental impacts of these “microplastics” in marine and freshwater environments has accelerated in recent years, but little is known about the impacts of plastic waste in land-based ecosystems. ...
The growth of plastics production in the past 65 years has substantially outpaced any other manufactured material. The same properties that make plastics so versatile in innumerable applications—durability and resistance to degradation—make these materials difficult or impossible for nature to assimilate. Thus, without a well-designed and tailor-made management strategy for end-of-life plastics, humans are conducting a singular uncontrolled experiment on a global scale, in which billions of metric tons of material will accumulate across all major terrestrial and aquatic ecosystems on the planet. The relative advantages and disadvantages of dematerialization, substitution, reuse, material recycling, waste-to-energy, and conversion technologies must be carefully considered to design the best solutions to the environmental challenges posed by the enormous and sustained global growth in plastics production and use.

Thursday, November 28, 2019

Thanksgiving Origins: Sarah Josepha Hale Writes to Abraham Lincoln

Thanksgiving is a day for a traditional menu, and part of my holiday is to reprint this annual column on the origins of the day:

The first presidential proclamation of Thanksgiving as a national holiday was issued by George Washington on October 3, 1789. But it was a one-time event. Individual states (especially those in New England) continued to issue Thanksgiving proclamations on various days in the decades to come. But it wasn't until 1863 when a magazine editor named Sarah Josepha Hale, after 15 years of letter-writing, prompted Abraham Lincoln in 1863 to designate the last Thursday in November as a national holiday--a pattern which then continued into the future.

An original and thus hard-to-read version of George Washington's Thanksgiving proclamation can be viewed through the Library of Congress website. The economist in me was intrigued to notice that some of the causes for giving of thanks included "the means we have of acquiring and diffusing useful knowledge ... the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best."

Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as an example of unwanted and inappropriate federal government interventionism. As reported by the Papers of George Washington website at the University of Virginia.
The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”
Here's the transcript of George Washington's Thanksgiving proclamation from the National Archives.
Thanksgiving Proclamation
By the President of the United States of America. a Proclamation.
Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”
Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.
and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.
Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.
Go: Washington
Sarah Josepha Hale was editor of a magazine first called Ladies' Magazine and later called Ladies' Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here's a PDF file of the Hale's actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale's letter to Lincoln:
"You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. ... For the last fifteen years I have set forth this idea in the "Lady's Book", and placed the papers before the Governors of all the States and Territories -- also I have sent these to our Ministers abroad, and our Missionaries to the heathen -- and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. ... But I find there are obstacles not possible to be overcome without legislative aid -- that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; -- or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject ..."
William Seward was Lincoln's Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale's September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here's the text of Lincoln's Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:
Washington, D.C.
October 3, 1863
By the President of the United States of America.
A Proclamation.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.
By the President: Abraham Lincoln
William H. Seward,
Secretary of State

The Dominance of Peoria in the Processed Pumpkin Market

As I prepare for a season of pumpkin pie, pumpkin bread (made with cornmeal and pecans), pumpkin soup (especially nice wish a decent champagne) and perhaps a pumpkin ice cream pie (graham cracker crust, of course),  I have been mulling over why the area around Peoria, Illinois, so dominates the production of processed pumpkin.

[In honor of pumpkin pie, I'm repeating this blog published in 2017.]

The facts are clear enough. As the US Department of Agriculture points out (citations omitted):
In 2016, farmers in the top 16 pumpkin-producing States harvested 1.1 billion pounds of pumpkins, implying about 1.4 billion pounds harvested altogether in the United States. Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States (Figure 2).
Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States.

Not only does Illinois produce more pumpkins, but a much larger share of pumpkins from this state end up being processed, rather than used fresh. The USDA reports:
Illinois harvests the largest share of processing pumpkin acres among all States—almost 80 percent. Michigan is next with a little over 10 percent. Other States harvest less than 5 percent processing pumpkins.

It's not really the entire state of Illinois, either, but mainly an area right around Peoria. The University of Illinois extension service writes: "Eighty percent of all the pumpkins produced commercially in the
U.S. are produced within a 90-mile radius of Peoria, Illinois. Most of those pumpkins are grown for processing into canned pumpkins. Ninety-five percent of the pumpkins processed in the United States are grown in Illinois. Morton, Illinois just 10 miles southeast of Peoria calls itself the `Pumpkin Capital of the World.'"

Why does this area have such dominance? Weather and soil are part of the advantage, but it seems unlikely that the area around Peoria is dramatically distinctive for those reasons alone. This also seems to be a case where an area got a head-start in a certain industry, established economies of scale and expertise, and has thus continued to keep a lead. The Illinois Farm Bureau writes: "Illinois earns the top rank for several reasons. Pumpkins grow well in its climate and in certain soil types. And in the 1920s, a pumpkin processing industry was established in Illinois, Babadoost [a professor at the University of Illinois] says. Decades of experience and dedicated research help Illinois maintain its edge in pumpkin production." According to one report, Libby’s Pumpkin is "the supplier of more than 85 percent of the world’s canned pumpkin."

The farm price of pumpkins varies considerably across states, which suggests that it is costly to ship substantial quantities of pumpkin across moderate distances. For example, the price of pumpkins is lowest in Illinois, where supply is highest, and the Illinois price is consistently below the price for other nearby Midwestern states. This pattern suggests that the processing plants for pumpkins are most cost-effective when located near the actual production.

While all States see year-to-year changes in price, New York stands out because prices have declined every year since 2011. Illinois growers consistently receive the lowest price because the majority of their pumpkins are sold for processing.

Finally, although my knowledge of recipes for pumpkin is considerably more extensive than my knowledge of supply chain for processed pumpkin, it seems plausible that pumpkin is neither the most lucrative of farm products, nor is demand for pumpkin it growing quickly, so it hasn't been worthwhile for potential competitors in the processed pumpkin market to try to establish an alternative pumpkin-producing hub somewhere else.

An Economist Chews Over Thanksgiving

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change in turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there's anything wrong with that. [This is an updated, amended, elongated, and cobbled-together version of a post that was first published on Thanksgiving Day 2011.]

The last time the U.S. Department of Agriculture did a detailed "Overview of the U.S. Turkey Industry" appears to be back in 2007, although an update was published in April 2014  Some themes about the turkey market waddle out from those reports on both the demand and supply sides.

On the demand side, the quantity of turkey per person consumed rose dramatically from the mid-1970s up to about 1990, but then declined somewhat, but appears to have made a modest recovery in the last few years The figure below is from the website run by the National Turkey Federation.

On the production side, the National Turkey Federation explains: "Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing - from breeding through delivery to retail." However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys. Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:
"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.
Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.
Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.
Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."
The 2014 report points out that the capacity of eggs per hatchery has continued to rise (again, references to charts omitted):
"For several decades, the number of turkey hatcheries has declined steadily. During the last six years, however, this decrease began to slow down. As of 2013, there are 54 turkey hatcheries in the United States, down from 58 in 2008, but up from the historical low of 49 reached in 2012. The total capacity of these facilities remained steady during this period at approximately 39.4 million eggs. The average capacity per hatchery reached a record high in 2012. During 2013, average capacity per hatchery was 730 thousand (data records are available from 1965 to present)."
U.S. agriculture is full of examples of remarkable increases in yields over perionds of a few decades, but they always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time from the 2007 report.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here's a list of top turkey producers in 2017  from the National Turkey Federation, as measured by millions of pounds of liveweight processed.

Given this reasonably competitive environment, it's interesting to note that the price markups for turkey--that is, the margin between the wholesale and the retail price--have in the past tended to decline around Thanksgiving, which obviously helps to keep the price lower for consumers. However, this pattern may be weakening over time, as margins have been higher in the last couple of Thanksgivings  Kim Ha of the US Department of Agriculture spells this out in the "Livestock, Dairy, and Poultry Outlook" report of November 2018. The vertical lines in the figure show Thanksgiving. She writes: "In the past, Thanksgiving holiday season retail turkey prices were commonly near annual low points, while wholesale prices rose. ... The data indicate that the past Thanksgiving season relationship between retail and wholesale turkey prices may be lessening."

In the past, the US turkey industry has at some times suffers from outbreaks of HPAI
(Highly Pathogenic Avian Influenza): for discussion of the 2015 outbreak, see the November 17, 2015 issue of the "Livestock, Dairy, and Poultry Outlook" from the US Department of Agriculture, where Kenneth Mathews and Mildred Haley offer some details. But for Thanksgiving 2019, supply seems to have remained strong and wholesale turkey prices have stayed low.

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing?

Anyway, the starting point for measuring inflation is to define a relevant "basket" or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and since 1986, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The cost of buying the Classic Thanksgiving Dinner was essentially unchanged from 2018 to 2019, rising by a penny from $48.90 in 2018 to $48.91 in 2019. The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The lower line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate.

Thanksgiving is a distinctively American holiday, and it's my favorite. Good food, good company, no presents--and all these good topics for conversation. What's not to like?