Friday, January 18, 2019

Trump, Year Two: The Economic Record

When President Trump took office January 20, 2017, I asked "What if Trump Skeptics, Like Me, Turn Out to be Wrong? I wrote then:
If a Trump presidency turns out badly in various ways, then Trump skeptics like me will certainly say so. But if matters don't go wrong, then in fairness, then it seems to me that Trump skeptics should take a pledge to admit and acknowledge in a few years that at least some of our doubts and suspicions were incorrect--and indeed, we should be pleased that we were wrong. Here's my version of that pledge on a few economic issues.
  • If the US economy experiences a resurgence of manufacturing jobs, I will say so. 
  • If US economic growth surges to a 4% annual rate, I'll say so.
  • If the US economy does not actually retreat from foreign trade during four years of Trump presidency (which may well happen, given that globalization is driven by underlying economic forces, not just trade agreements), I will say so.
  • If US carbon emissions fall during a Trump presidency (which may happen with the resurgence of cleaner-burning natural gas and the larger installed base of noncarbon energy sources), I will say so.
  • If the budget deficit does not explode in size during a Trump administration, despite all the promises for tax cuts and a huge boost in infrastructure spending, I will say so. 
  • If the Federal Reserve has maintained its traditional independence after 3-4 years, I will say so. 
  • If the number of Americans without health insurance is about the same in 3-4 years, or even lower, I will say so. 
Well, President Trump has been in office two years.  What's the economic record? The US economy in 2018 continued the economic upswing that started in June 2009,  and by mid-2019, it will become the longest period without a recession in US economic history. However, The unemployment rate has been 4% or below for the last 10 months, and 5% or below for the last 37 months since December 2015. Inflation has stayed low. Despite its drop since late September, stock market values (like the S&P 500 index) are still up by abut 15% since January 20, 2017.

In short, it seems clear that the more dire predictions made back in 2017 about how the economy would immediately tank were based more in animus to Trump than in prescient analysis. Indeed, a lot of the economic patterns like growth and unemployment for the first two year of the Trump presidency look a lot like a continuation of patterns from the last few years of the Obama presidency. What about the specific questions I asked back in January 2017?

On the issue of manufacturing jobs,  total US manufacturing jobs bottomed out at 11.4 million in January 2010, had risen to 12.3 million by January 2017, and were up to 12.9 million by the end of 2018. A pattern set in the Obama administration has continued along with the continued growth of the US economy. .

On the rate of economic growth, the pattern looks much the same as it did in Obama's second term. Trump has had one quarter of growth at a rate faster than 4% (2018, Q2), but there is no particular sign of a jump in growth rates or productivity.

On trade issues, Trump just talked about protectionism in 2017, but actually started implementing it in 2018. However, one of the ironies here is that with the threat of greater protectionism about to kick in, it appears that a number of companies have accelerated their trade plans, boosting their imports ahead of future tariffs. Thus, the US trade deficit will probably grow in 2018 compared to 2017.  I'm not someone who thinks the bilateral US trade deficit with China should much of a focus, but for those who do, 2018 will mark the biggest such deficit ever. Thus, by one of President Trump's preferred measures, the size of the trade deficit, his policies are not a success in 2018. For those of us who worry about a disruption of global trade patterns, the bigger worries are coming in 2019.

On carbon emissions, US carbon emissions have been falling, not rising, while much of the rest of the world has been headed in the other direction. The lesson I would draw here is that too many people put too much faith in signing international agreements as the path to reducing carbon emissions. Focusing on government and industry actions, and how they shape prices, is considerably more important. For the US, I'd trade all the signatures on international climate change agreements for an actual carbon tax.

The ratio of federal debt held by the public to GDP doubled from 36% back in 2008 to about 72% by early 2013, This debt/GDP ratio edged up only a little more to 75% of GDP when Trump took office in early 2017, and had reached 76% by late 2018. But the Historical Tables released from Trump's Office of Management and Budget a year ago estimated that the budget deficit would rise from 3.5% of GDP in 2017 to 4.2% of GDP in 2018 and 4.7% of GDP in 2019 (Table 1.3). The real concern here is that in the middle run, starting about a decade from now, US spending is likely to rise substantially with the aging of the US population, and rather than address or postpone that issue, the $100 billion or so per year in tax cuts in the 2017  Tax Cuts and Jobs Act will make that middle-run debt crisis come a little sooner and be harder to address.

On the issue of the Federal Reserve, it seems fair to say that it has maintained its independence, but also to say that President Trump has challenged its independence in a way that hasn't been seen in the US since President Nixon pressured then-Fed chair Arthur Burns in the lead-up to the 1972 election--and Nixon's pressure was exerted mostly behind the scenes. The Fed has been systematically raising interest rates since December 2015, and if economic growth continues through 2019, I'd expect at least one more increase in 2019, too.

The number of Americans without health insurance hasn't budged much since President Trump took office. 

Looking ahead at 2019 and 2020, it seems to me that the US economy faces several meaningful sources of near-term risk.  Any of these would have a certain irony for the Trump presidency, because they would result in part from issues that President Trump has played a role in creating.

1) A recession could occur if the Federal Reserve raises interest rates too far, too fast. The Fed is fully aware of this danger, and has clearly signaled that it intends to look quite carefully at the evolution of the economy before raising interest rates further. But when President Trump openly criticizes the Fed, he inevitably reduced its perceived independence. If the Fed does not increase rates further, it creates a possibility--which clear-minded and hard-eyed financial markets will take into account--that the Fed is bowing to political pressure. Thus, if the Fed feels a need to assert its independence from President Trump's criticisms, it might feel a need to raise interest rates, rather than be  perceived as under political control.

2) President Trump has emphasized the importance of deregulation.  However, there is a strong case to be made that when it comes to financial regulation, additional steps need to be taken. The Dodd-Frank legislation back in 2010 was heavily focused on banks: having banks hold more capital, having regulators do stress-test scenarios of bank balance sheets, limiting certain risks banks could take, and so on. But banks are a diminishing part of the overall financial system. The so-called "shadow banking" sector is a broad category describing all the ways that borrowers can raise money outside of the banking sector, and investors can then purchase these loans. As a simple example, a money market mutual fund receives money from investors, who can be thought of as "depositors," and then invest the money in bonds, which can be thought of as lending the money to whatever government or private entity issued the bonds. But it isn't a bank.

I've written about the potential risks from "leveraged loans" and corporate debt more broadly. As another example, the new financial rules require many financial derivatives to be traded through a "central clearinghouse"--a company lilke the National Securities Clearing Corporation or the Options Clearing Corporation--but whether these clearinghouses will remain solvent in a financial emergency, and how they should be regulated, is not as clear as it should be. Some countries have the ability to impose rules that might impose, say, loan-to-income ratios if it seems that borrowing is getting out of hand. If that seems like a good idea for the US economy at some point, no US financial agency has that power. In short, whatever the broad merits of reducing the regulatory burden on the US economy, some parts of the financial sector could use a close and proactive look from regulators.

3) President "I am a tariff man" Trump has expressed strong concerns that interactions with the rest of the world are hurting the US economy. I disagree, but set aside the cosmic arguments over free trade and just think about the adjustment issues for a moment. A major pattern in the US and world economy in recent decades has been a shift to "global supply chains." This isn't just a matter of goods, but also international movements of data, services, and e-commerce more generally. A modern supply chain isn't a simple thing: it involves negotiations between sellers and buyers over technical specifications, delivery of output, as well as accounting, legal, and managerial issues. It isn't yet clear to me whether President Trump intends to settle his trade disputes by negotiating small changes and then declaring victory--which is the pattern with the proposed shift from the North American Free Trade Agreement (NAFTA) to a US-Mexico-Canada Trade Agreement (USMCA)--or if he truly intends to deliver a good swift kick to the global trading system as a whole. Even if the Trumpist argument that the US should become less involved in international trade is correct in the long run, a tectonic disruption of global supply chains built up over several decades will impose large and immediate costs on many US firms and their workers, as well as on US consumers.

Just to be clear, listing these kinds of risks should not be taken as a prediction that they are actually about to happen. The most likely prediction for 2019 is that it will be a lot like 2018, or perhaps a bit slower, unless something dramatic happens.

Thursday, January 17, 2019

How Does China's Higher GDP Translate into National Power?

Depending on what exchange rate you use for comparing GDP, China either already has a larger GDP than the US (using a purchasing power parity exchange rate) or will soon have a larger GDP than the US (using a market exchange rate). Stepping outside the economic issues here to the subject of international relations, does this higher GDP translate into greater international power? Michael Beckley tackles this question in "The Power of Nations  Measuring What Matters," appearing in the Fall 2018 issue of  International Security (43:2, pp. 7–44)

Beckley argues that most scholarly studies of international power focus on overall gross indicators like size of GDP, but that this approach can be misleading. He argues instead for a measure of power that combines GDP and per capita GDP, where the second measure is a rough way of capturing the efficiency with which a society employs its resources. By this admittedly rough-and-ready measure, the US remains much more powerful than China, thanks to its much higher productivity levels. 

Here's a taste of Beckley's argument (footnotes omitted):
Unfortunately, however, most scholars measure resources with gross indicators, such as gross domestic product (GDP); military spending; or the Composite Indicator of National Capability (CINC), which combines data on military spending, troops, population, urban population, iron and steel production, and energy consumption. These indicators systematically exaggerate the wealth and military capabilities of poor, populous countries, because they tally countries’ resources without deducting the costs countries pay to police, protect, and serve their people. A country with a big population might produce vast output and field a large army, but it also may bear massive welfare and security burdens that drain its wealth and bog down its military, leaving it with few resources for power projection abroad. ... 
Standard gross indicators are not good enough; they are logically unsound and empirically unreliable, severely mischaracterizing the balance of power in numerous cases, including in some of the most consequential geopolitical events in modern history. ... The hype about China’s rise, however, has been based largely on gross indicators that ignore costs. When costs are accounted for, it becomes clear that the United States’ economic and military lead over China is much larger than typically assumed—and the trends are mostly in America’s favor.
As an alternative, Beckley hearkens back to a suggestion originally made by the historian Paul Bairoch in a 1976 article, when he argued that the “strength of a nation could be found in a formula combining per capita and total GDP.” Beckley writes:
Bairoch did not elaborate on this point, but subsequent research supports his intuition: as noted, scholars already believe that GDP represents the gross size of a state’s economic and military output, and there is a large literature showing that GDP per capita serves as a reliable proxy for economic and military efficiency. ... Military studies also show that the higher a country’s GDP per capita, the more efficiently its military fights in battle. The reason is that a vibrant civilian economy helps a country produce advanced weapons, train skillful military personnel, and manage complex military systems. ... GDP per capita thus provides a rough but reliable measure of economic and military efficiency. ... Combining GDP with GDP per capita thus yields an indicator that accounts for size and efficiency, the two main dimensions of net resources. ...
To create a rough proxy for net resources, I follow Bairoch’s advice by simply multiplying GDP by GDP per capita, creating an index that gives equal weight to a nation’s gross output and its output per person. ... Future studies can experiment with ways to improve this measure by adjusting the weights or, even better, by expanding the databases created by the World Bank and the United Nations or developing new measures of net stocks of resources. For now, however, multiplying GDP by GDP per capita yields a primitive proxy that scholars can use to evaluate the importance of net resources in international politics.
Beckley applies this measure of power to a number of major international conflicts in the past that would otherwise be perplexing. One example is the conflicts between Britain and China from 1839-1911. China's GDP and defense budget were more than twice the size of Britain's, and yet Britain kept winning the battles. But China was a low-income country. "By standard indicators, China looked like a superpower in the nineteenth and early twentieth centuries. It had the largest GDP and military in the world until the 1890s, and the second largest GDP and military until the 1930s. During this time, however, China suffered a “century of humiliation” in which it lost significant territory and most of its sovereign rights, fighting at least a dozen wars on its home soil—and losing every single one of them."

Beckley offers a number of other  historical examples, but the case of modern China is perhaps of most immediate interest. He writes:

"OSince the 1990s, and especially since the 2008 financial crisis, hundreds of books and thousands of articles and reports have asserted that the United States’ economic and military edge over other nations is eroding and that the world will soon become multipolar. The main evidence typically cited for these trends is China’s rising GDP and military spending and various statistics that are essentially subcomponents of GDP—most notably, China’s massive manufacturing output; volume of exports; trade surplus with the United States; infrastructure spending; consumer spending; and large government bureaucracy and scienti¬™c establishment. The problem, however, is that these are the same gross indicators that made China look like a superpower during its century of humiliation: in the mid-1800s, China had the world’s largest economy and military; led the world in manufacturing output; ran a trade surplus with Britain; presided over a tributary system that extended Chinese trade and investment, infrastructure projects, and soft power across continental East Asia; and was celebrated in the West for its consumer market potential and tradition of bureaucratic competence and scientific ingenuity.

Obviously China is not as weak today as it was in the nineteenth century, but neither is it as powerful as its gross resources suggest. China may have the world’s biggest economy and military, but it also leads the world in debt; resource consumption; pollution; useless infrastructure and wasted industrial capacity; scienti¬™c fraud; internal security spending; border disputes; and populations of invalids, geriatrics, and pensioners. China also uses seven times the input to generate a given level of economic output as the United States and is surrounded by nineteen countries, most of which are hostile toward China, politically unstable, or both. Accounting for even a fraction of these production, welfare, and security costs substantially reduces the significance of China’s rise.

For a rough image the US-China power balance by different metrics, the first figure compares GDP. The second figure is the CINC measurement mentioned above. The third figure multiplies the size of GDP by per capita GDP. In this third sense, the US remains far more powerful than China.

The world is in the process of shifting from a situation in which the largest economies also tend to be high in per capita GDP to a situation in which many of the largest economies are populous middle-income countries, so Beckley's argument matters a lot. 

Wednesday, January 16, 2019

What Message is the Beveridge Curve Sending?

"The Beveridge Curve ... plots the job openings rate with respect to the unemployment rate. During an expansion, the job openings rate is high and the unemployment rate is low moving to points along the curve up and to the left. During a contraction, the job openings rate is low and the unemployment rate is high moving to points along the curve down and to the right. A shift in the Beveridge curve can indicate a structural shift in the economy due to industry-based structural mismatch and geography-based structural mismatch. For example, if the job openings rate and the unemployment rate are both high, this could shift the entire curve up and to the right."
These various patterns are apparent if you look at a recent Beveridge curve, which is published each month as part of the press release for the most recent Job Openings and Labor Turnover Survey statistics. This is the figure published in early January, which includes monthly data from December 2000 up through November 2018.
The key point here is that the Beveridge curve seems to have shifted since the start of the economic upswing back in 2009. Starting in 2000, through the recession of 2001, the upswing from 2001 to 2007, and the start of the Great Recession, the data on job openings and unemployment basically moves back and forth along the same line. As the Great Recession deepened, the Beveridge curve stretched out to the far lower right. But then when the economic recovery started in 2009, the Beveridge curve relationship did not retrace the earlier pattern from 2000-2009; instead, it moved out to the right, as shown by the purple line in the figure.

What does this shift in the Beveridge curve relationship mean? In a literal sense, it means that for a certain unemployment rate (on the horizontal axis), there is a higher rate of job openings (on the vertical axis). To put it another way, employers in the years after 2009 seemed more reluctant to fill their job openings, or as economists say, it appeared to be harder for employers to find a match when they listed a job among the workers who were applying for those jobs. The "matching efficiency" of the US labor market had declined.

Shifts in the matching efficiency of the labor market are not a new thing. Here's a figure from an article in the Journal of Economic Perspectives a few years ago, showing the Beveridge curve relationship from 1950 to 2011. The curve seems to have shifted out from the 1950s to the 1960s and 1970s, but then shifted back in the 1990s, 

Jessie Romero provides a short overview of the recent evidence about skill-based and geographic mismatch in "Help Wanted: Employers are having a hard time hiring. Not enough workers or not the right skills?" in Econ Focus (Federal Reserve Bank of Richmond, Third Quarter 2018, pp. 8-10). Romero cites various studies to the effect that in the Great Recession and its aftermath, mismatch of labor demand and supply across industries, places, and skill levels may have pushed up the unemployment rate by as much as one-third. These studies also suggest that while this higher level of mismatch often follows a recession, it usually lasts about three years. However, the Great Recession was so severe that the period of mismatch was extended.

As shown in the first figure above, the most recent Beveridge curve data has now looped all the way back around so that the combination of the job openings rate and the unemployment rate--and the extent of labor market mismatch--is similar to the US economic experience back around 2000.  While this is generally good news, Romero ends on a cautionary note:
"In addition, although the Beveridge curve has largely looped back to its pre-recession position, it still remains further to the right than it was for much of the postwar era. According to research by Thomas Lubik of the Richmond Fed and Luca Benati of the University of Bern (Switzerland), with each successive recession since the 1950s, matching efficiency has gone down — the unemployment rate implied by a given job vacancy rate has increased. A likely explanation for these successive rightward movements is technological change whose effects on the labor market are hastened by recessions. A large body of research has documented how such change has tended to benefit workers with more skills and more education. These forces might be masked by a hot economy for a time, but if things cool off, some workers, especially the more recent entrants to employment, might once again find themselves without a match."
In a post back in 2012 on the Beveridge curve, as it started to shift out to the right and loop upward, I finished with this thought:
[The]  Beveridge curve is apparently one more manifestation of an old pattern in academic work: Curves and laws and rules are often named after people who did not actually discover them. This is sometimes called Stigler's law: "No scientific discovery is named after its original discoverer." Of course, Steve Stigler was quick to point out in his 1980 article that he didn't discover his own law, either!
But William Beveridge is a worthy namesake, in the sense that he did write a lot about job openings and unemployment. For example, here's a representative comment from his 1944 report, Full Employment in a Free Society:
"Full employment does not mean literally no unemployment; that is to say, it does not mean that every man and woman in the country who is fit and free for work is employed productively every day of his or her working life ... Full employment means that unemployment is reduced to short intervals of standing by, with the certainty that very soon one will be wanted in one's old job again or will be wanted in a new job that is within one's powers.”

Tuesday, January 15, 2019

The Flynn Effect (Rising IQ Scores Over Time) Reverses

The "Flynn effect" refers to a pattern observed by James Flynn, a professor at the University of Otago in New Zealand. It points out that for most of the 20th century, scores on IQ tests have been rising.  The reasons behind this pattern have been a subject of controversy.  For example, are the rising IQ scores a result of some factor like improved nutrition, both prenatally and for young children? Are they a result of improved schooling? Or a  job environment that puts greater emphasis on cognitive skills? Is there something about the design of IQ tests, perhaps combined with  that has made scores go up even if underlying intelligence hasn't moved?

It's clear that intelligence has a genetic aspect: studies that looked at twins who were separated at birth and raised in different environments show a high correlation of their IQ scores. But rising average IQ scores over a couple of generations is clearly not the result of a sharp genetic shift; instead, the Flynn effect strongly suggests that differences in measured intelligence are not purely genetic, but also have a strong environmental component.  However, the Flynn effect now seems to be moving in reverse.

As a starting point, Flynn offers a readable overview of his perspectives on IQ research  in "Reflections about Intelligence over 40 Years" (Intelligence, September-October 2018, 70: pp. 73-83). A few snippets (citations omitted): 
A few years later, I documented what became called the `Flynn effect'. The 20th century had been dominated by massive IQ gains from one generation to another. Americans had gained 14 IQ points on the standard IQ tests (Stanford-Binet, Wechsler) between 1932 and 1976; and 14 nations had made massive gains on a whole range of IQ tests, the largest on Raven's Progressive Matrices. ... This phenomenon now covers at least 34 nations and is accepted by all scholars. The 21st century may well be different, with gains tailing off or reversing in some nations beginning in 1995, although
not in the US. ... 
After a few years of inactivity, my Catholic Youth Organization (CYO) basketball team came back to play the current team. They killed us. They had all sorts of skills we lacked, they could shoot with either hand, could pass with either hand, do fade-away jump shots. I doubt that any of them had superior genes for basketball. Rather it was the passage of time that had given them a basketball environment a world away from our own. I take it that it is easy to apply this to the realm of cognition. Within  a cohort, genetic quality tends to dictate how you respond at school, how hard you work, whether you join a book club, how you will do in high school, what university you attend – your genetic quality will eventually tend toward a matching quality of environment for cognition. Between cohorts spaced over time, different forces operate.
Since the industrial revolution began, social change has caused new cognitive exercise ... more schooling, more cognitively demanding work, and more cognitively demanding leisure. These environmental factors initially triggered a mild rise in average performance, but this rise was greatly magnified by feedback mechanisms and over a century average IQ escalated. As the average years of schooling rose, the rising mean itself became a powerful engine in its own right as people chased it to keep up. ...

I want to make it clear that although enriched environment dominated the 20th century, IQ gains are not destined to persist like the law of gravity. Factors that were immediate triggers of IQ gains included more adults per child in the home, more and better schooling, more people at university, more cognitively demanding jobs, and better  health and conditions of the aged. There are signs that these are beginning to show diminishing returns.
What are some of the "signs" which Flynn is referring? For an overview of the recent findings about recent reversals in the Flynn effect, Flynn and Michael Shayer wrote "IQ decline and Piaget: Does the rot start at the top? (Intelligence, January–February 2018, 66: 112-121). They write:
The IQ gains of the 20th century have faltered. Losses in Nordic nations after 1995 average at 6.85 IQ points when projected over thirty years. On Piagetian tests, Britain shows decimation among high scorers on three tests and overall losses on one. The US sustained its historic gain (0.3 points per year) through 2014. The Netherlands shows no change in preschoolers, mild losses at high school, and possible gains by adults. Australia and France offer weak evidence of losses at school and by adults respectively. German speakers show verbal gains and spatial losses among adults. ...

After our analysis, we will suggest two tentative hypotheses. First, trends on conventional tests show those at most risk of IQ decline are high school students aged 14 to 18. However, Piagetian results in Britain imply losses at earlier ages. Second, Piagetian tests signal something extra: conflicting trends between top scorers (those at the highest or formal level of cognitive development) and those in the early stages of the next level (concrete generalization). Large losses at the formal level may be accompanied by gains at the concrete level.
A recent study from Norway struck me as especially interesting, because in Norway many men 18-19 years of age were given standardized IQ tests as part of assessment for compulsory national service. With data from 1970-2009, one can look both at trends for 18-19 year-olds, but also look link together the scores of fathers and sons--and include other variables about a given family.  Using this data, Bernt Bratsberg and Ole Rogeberga argue that the "Flynn effect and its reversal are both environmentally caused" (PNAS,  June 26, 2018, 115, #26).
The results show that large positive and negative trends in cohort IQ operate within as well as across families. This implies that the trends are not due to a changing composition of families, and that there is at most a minor role for explanations involving genes (e.g., immigration and dysgenic fertility) and environmental factors largely fixed within families (e.g., parental education, socialization effects of low-ability parents, and family size). While such factors may be present, their influence is negligible
compared with other environmental factors.
The questions of how intelligence translates into economic outcomes and into broader human well-being are big ones, and I won't make even a feeble gesture at tackling them here. But intelligence is a real thing, albeit hard to measure, and it shapes lives and society. What looks like a reversal of the Flynn effect, apparently for broad-based reasons environmental reasons that reach across families, is worth some thought.

Monday, January 14, 2019

What if Most Americans Don't Care That Deeply about Trade?

"In fact, recent public opinion polling uniformly reveals that, first, foreign trade and globalization are generally popular, and in fact more popular today than at any point in recent history; second, a substantial portion of the American electorate has no strong views on U.S. trade policy or trade agreements; third, and likely due to the previous point, polls on trade fluctuate based on partisanship or the state of the U.S. economy; and, fourth, Americans’ views on specific trade policies often shift depending on question wording, especially when the actual costs of protectionism are mentioned. These polling realities puncture the current conventional wisdom on trade and public opinion—in particular, that Americans have turned en masse against trade and globalization ..."

Thus argues Scott Lincicome in "`The “Protectionist Moment' That Wasn’t: American Views on Trade and Globalization," written as an installment of the Free Trade Bulletin from the Cato Institute (November 2, 2018).

If you disagree with the statements above, your disagreement isn't with Lincicome (or with me), it's with the array of polling data that Lincicome presents. For example, on the issue of how Americans feel about trade: 
  • Pew (May 2018) found that American support for free trade agreements rebounded to pre-2016 levels, only a couple percentage points off its all-time high in 2014.
  • WSJ/NBC News (March 2018) found “Americans overwhelmingly think trade is more of an opportunity to boost the economy than it is a threat to it . . . by a 66%–20% margin. And that feeling transcends party lines, as Republicans, independents and Democrats agree that foreign trade is an opportunity for economic growth.”
  • Gallup (March 2018) found that “[a] strong majority of U.S. adults (70%) see foreign trade as an opportunity for U.S. economic growth through increased exports rather than a threat to the economy from foreign imports (25%)”—down from an all-time high in 2017 of 72 percent. Before that, “no more than 58% had held the positive view of trade.”
  • Monmouth (June 2018) found that 52 percent and 14 percent, respectively, of Americans in 2018 think that “free trade agreements are good or bad for the United States” up dramatically from 24 percent good and 26 percent bad in November 2015.
But perhaps the deeper lesson of the polling data seems to be that American opinions about free trade do not seem especially strong or robust. For example, my own guess is that some of the rise in support for trade is a reaction against President Trump's anti-trade rhetoric and policies--but that some of the same people who express support for trade now could switch sides if tariffs were imposed on imports by a politician or party that they supported.  

This figure shows the range of opinions from "very strong opposition" to "very strong support" on a range of issues. The black line shows that a much larger share of the opinions about trade are in the "neither favor or oppose" category than is true for the other issues.
Also, while it's always true that the phrasing of questions in a survey will affect the results, this affect seems especially strong on trade issues. Here are a couple of examples from Bloomberg surveys. If you ask a trade question like this, you get a strongly protectionist answer: 
“Generally speaking, do you think U.S. trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices?” 
But if you ask a trade question like this, you get a strongly free trade answer:
“Are you willing to pay a little more for merchandise that is made in the U.S., or do you prefer the lowest possible price?”
This difference also seems to reflect actual consumer/voter behavior. American may cheer for politicians who promise "to protect American jobs," but they aren't very eager to pay actual higher prices to make this occur. Lincicome summarizes the evidence this way:
"[P]rotectionist policies emanating from the United States government today are most likely a response not to a groundswell of popular support for protectionism but instead to discrete interest group lobbying (e.g., the U.S. steel industry) or influential segments of the U.S. voting population (e.g., steelworkers in Pennsylvania). Protectionism therefore remains a classic public-choice example of how concentrated benefits and diffuse costs can push self-interested politicians into adopting polices that are actually opposed by most of the electorate."
It's interesting that President Trump has a number of times defended his protectionist policies as a necessary negotiating step to greater free trade. From a trade policy perspective, this justification is the tribute that vice pays to virtue.

Friday, January 11, 2019

A Global Human Capital Index

Finding ways for people to be healthier and better-educated is both a useful goal in itself, and also an investment that increases future economic production. When I find myself worrying, as one does, that the world is falling to pieces, it's useful to remember basic facts: 
"The world is healthier and more educated than ever. In 1980 only 5 in 10 primary school-age children in low-income countries were enrolled in school. By 2015 this number had increased to 8 in 10. In 1980 only 84 of 100 children reached their fifth birthday, compared with 94 of 100 in 2018. A child born in the developing world in 1980 could expect to live for 52 years. In 2018 this number was 65 years."
This is from the start of Chapter 3 of the 2019 World Development Report from the World Bank, which focuses on the theme "The Changing Nature of Work."  The report contains chapters about technology, jobs, firms, and issues of social protection in an evolving economy. But I found myself drawn to the discussion of what economists call "human capital"--the investments in people that lead to future economic output. This version of the WDR introduces a "Human Capital Index," described in this way (footnotes and references to figures are omitted):
"The new index measures the amount of human capital that a child born in 2018 can expect to attain by age 18 in view of the risks of poor education and poor health that prevail in the country in which she was born. ... It has three components: (1) a measure of whether children survive from birth to school age (age 5); (2) a measure of expected years of quality-adjusted school, which combines information on the quantity and quality of education; and (3) two broad measures of health—stunting rates and adult survival rates."
On this figure, the horizontal axis measures countries of the world by per capita GDP. For those not used to reading per capita income levels converted to logarithms (!), $60,000 is equal to about 11. The vertical index scales human capital from zero to one. Here's how countries of the world look: 
It's perhaps useful to say a bit more about the components of this index. The first component, the share of children who survive to the age of 5, is fairly self-explanatory. 

The second component, based on education, has at least two issues worth noting. One issue is that, as emphasized in the 2018 World Development Report, many countries have succeeded in getting children to attend school but not necessarily in teaching them very much. Thus, the World Bank researchers wanted a measure of how much education was actually being achieved, not just how many butts were in the classroom seats. The report notes: 
"The World Bank Group and its partners are developing a comprehensive new database of international student achievement test scores covering  around 160 economies to benchmark what children learn. The database harmonizes results from international and regional testing programs so they are comparable. For the first time, learning is measurable in nearly all countries using the same yardstick. The differences in learning are dramatic. Country-level average test scores range from around 600 in the best-performing countries to around 300 in the worst-performing. To put these numbers in perspective, a score of roughly 400 corresponds to a benchmark of minimum proficiency set by the Programme for International Student Assessment (PISA), the largest international testing program. Less than half of students in developing countries meet this standard, compared with 86 percent in advanced economies. In Singapore, 98 percent of students reach the international benchmark for basic proficiency in secondary school; in South Africa, only 26 percent of students meet that standard. Essentially, then, all of Singapore’s secondary school students are prepared for a postsecondary education and the world of work, while almost three-quarters of South Africa’s young people are not."
A second point is that the index focuses on education level by age 18. Thus, a perfect score on this index would be someone who starts preschool at age 4 and attains 14 years of education by age 18.  As the report notes: "High enrollment rates throughout the school system bring many rich countries close to the 14-year benchmark. But in the poorest countries, children can expect to complete only half of that." This cutoff at age 18 of course means that higher education is not included in the figure. To put it another way, countries where a higher share of students attend school after age 18 get no boost in this figure, which tends to make the education gap between higher income countries and the rest look smaller. 

On the two proxies for health in the third component of the index, "adult survival rates" is fairly self-explanatory. As to the other measure, "Stunting measures the share of children who are unusually small for their age. It is broadly accepted as a proxy for the prenatal, infant, and early childhood health environment, and it summarizes the risks to good health that children are likely to experience in their early years—with important consequences for health and well-being in adulthood." 
There are worthwhile arguments to be had over how best to measure the education and health aspects of human capital, and even rthwhile arguments to be had over how to improve human capital in a given country. But at a deeper level, it's worth remembering that improved health and education represent greater social and economic empowerment and greater well-being--and that that there are considerable gains to be made in many countries, including the US, on both dimensions. 

Wednesday, January 9, 2019

Daniel Kahneman: "People Don't Want to be Happy"

The great utilitarian philosopher Jeremy Bentham famously argued that "it is the greatest happiness of the greatest number that is the measure of right and wrong." This principle was revolutionary in its own way. It treated people as equal. It did not emphasize the happiness of one gender over another, or one race or religion over another, or the happiness of nobles over commoners. It gave consideration to the happiness of the poor, prisoners and slaves. But it also opened up a number of deeper questions, like what actually makes people happy.

Daniel Kahneman (Nobel '02) is one of the progenitors of behavioral economics, which seeks to integrate economic analysis with insights from psychology. In several recent discussions and interviews, he has argued that "people don't want to be happy." For examples, see his 2010 TED talk, which has been viewed almost 5 million times. Or more recently, you can listen to his December 19, 2018, podcast with Tyler Cowen at "Conversations with Tyler." For some popular discussions of these arguments, Ephrat Livni writes in Quartz on "A Nobel Prize-winning psychologist says most people don’t really want to be happy" (December 21, 2018), Cassie Mogilner Holmes discusses in the Harvard Business Review "What Kind of Happiness Do People Value Most?" (November 19, 2018), and Amir Mandel writes in Haaretz "Why Nobel Prize Winner Daniel Kahneman Gave Up on Happiness" (October 7, 2018).

These articles and others describe a range of well-known paradoxes that arise when you ask people about their level of happiness. For example, people who experience a good thing (winning the lottery) or a bad thing (a disabling injury) often have a short-term movement in happiness, but then tend to rebound back to the level of happiness before the event. Our level of happiness with regard to a certain event can be quite different if we are anticipating a certain event, experiencing the event or looking back on the event. Our happiness is affected by what context or standard of comparison is being suggested to us at a certain time. As Kahneman says in his TED talk: "The word happiness is just not a useful word anymore because we apply it to too many different things."

In the HBR article mentioned above, Holmes writes:
Nobel Prize winner Daniel Kahneman described this distinction as “being happy in your life” versus “being happy about your life.” Take a moment to ask yourself, which happiness are you seeking?
This might seem like a needless delineation; after all, a time experienced as happy is often also remembered as happy. An evening spent with good friends over good food and wine will be experienced and remembered happily. Similarly, an interesting project staffed with one’s favorite colleagues will be fun to work on and look back on.
But the two don’t always go hand in hand. A weekend spent relaxing in front of the TV will be experienced as happy in the moment, but that time won’t be memorable and may even usher feelings of guilt in hindsight. A day at the zoo with one’s young children may involve many frustrating moments, but a singular moment of delight will make that day a happy memory. A week of late nights stuck at the office, while not fun exactly, will make one feel satisfied in hindsight, if it results in a major achievement.

In the interview with Cowen, Kahneman argues that people often don't make it a top priority to make time for doing the things that they say make them "happy," like spending time with family and friend. Instead, Kahneman argues, "They actually want to maximize their satisfaction with themselves and with their lives. And that leads in completely different directions than the maximization of happiness."

Livni writes in the Quartz article mentioned above:
"The key here is memory. Satisfaction is retrospective. Happiness occurs in real time. In Kahneman’s work, he found that people tell themselves a story about their lives, which may or may not add up to a pleasing tale. Yet, our day-to-day experiences yield positive feelings that may not advance that longer story, necessarily. Memory is enduring. Feelings pass. ... Still, it’s worth asking if we want to be happy, to experience positive feelings, or simply wish to construct narratives that seems worth telling ourselves and others, but doesn’t necessarily yield pleasure."
Or as Mandel taking with Kahneman in Haaretz:
"I gradually became convinced that people don’t want to be happy,” he [Kahneman] explained. “They want to be satisfied with their life.” A bit stunned, I asked him to repeat that statement. “People don’t want to be happy the way I’ve defined the term – what I experience here and now. In my view, it’s much more important for them to be satisfied, to experience life satisfaction, from the perspective of ‘What I remember,’ of the story they tell about their lives." 
This distinction captures many of my own feelings about  how I spend time and conduct my life. Many of the things I do are not necessarily "happy" in the moment, like dragging my butt out of bed to cook hot breakfast for the family each morning, but it gives me satisfaction and fits with a narrative I like to tell myself about my life. Actually writing the entries for this blog isn't necessarily "happy," but it gives me satisfaction to do so. 

Conversely, my sense is that a lot of the "unhappiness" in the modern world is often about a disruption of narrative. Most people don't mind working hard, and they are OK with the reality that they won't ever be rich or famous. They don't expect every day to be full of grins and giggles, either; they know there will be times of hardship, sadness, and loneliness.  Nonetheless, people want to know that they there is a pathway to life satisfaction, or at least to be within shouting distance of such a pathway.  If people don't see how their life and work and experiences fit into a broader and satisfying life narrative, they suffer grievously.