Thursday, November 21, 2019

Why Has China's Trade Surplus (Just About) Gone Away?

China's trade surpluses exploded in size after 2001, when China joined the World Trade Organization and its exports soared. But those trade surpluses peaked back before the Great Recession and have dwindled since then to near-zero. Indeed, the IMF predicts that China is likely to have small trade deficits in the next few years. What happened? Pragyan Deb, Albe Gjonbalaj, and Swarnali A.  Hannan tell the story in "The Drivers, Implications and Outlook for China’s Shrinking Current Account Surplus" (IMF Working Paper WP/19/244, November 8, 2019).

As a starting point, here's a graph showing China's overall trade balance (the "current account" line) falling to zero. The green line shows China's trade balance in services. The blue line shows China's trade balance in goods.
Clearly, one big change is that China has started running a trade deficit in services (an area where the US economy runs a trade surplus). The main reason seems to be a large increase in outbound Chinese tourism, because in trade statistics, international tourists are in effect "importing" goods produced in other countries. The IMF economists write: "China’s tourism balance, mostly on account of outbound tourism, has swung from a small surplus of around 5bn USD in 2008 to a deficit of nearly 250bn USD in 2018, driven by the increasing purchasing power of the middle class and an appreciating currency. ... [T]he trend is undeniable. It is also borne out by an almost fourfold increase in the number of Chinese outbound visitors – from 46mn in 2008 to 162mn in 2018."

China's trade surplus in goods has also dropped substantially, especially from about 2007-2010, and has plateaued since then. Several major changes are behind this shift. One is that after China's dramatic expansion of exports, there wasn't a lot of room for additional increases. As the IMF economists put it,
In 2001, when China joined the WTO, the share of Chinese exports to total world exports was around 4 percent. This more than tripled to 13 percent in 2017. In the case of manufacturing, the corresponding figures are 5 and 17 percent respectively ...  China is now the largest goods exporter in the world and its share of world exports declined in 2016 and 2017. ... [D]ividends from joining the World Trade Organization in 2001 have diminished and China already occupies a dominant position in many markets. ... 
Another shift is "rebalancing," which refers to China's gradual move toward being an economy that produces more for domestic consumption and relies less on exports.  In thinking about this shift, it's useful to flash back to China's extraordinary surge of exports after 2001 and up to about 2007. In a flexible economy, this dramatic rise in export sales should have also led to equally dramatic rise in incomes--and thus to rise in consumption. But while China's wages did rise substantially during this time, it wasn't nearly enough to keep up with the export boom. Thus, China's export surge turned into a surge of national saving as well. This figure shows how China's national savings rate went from an extraordinarily high 35% of GDP back in 2000 to an unbelievably high level of more than 50% of GDP at the peak of the export surge around 2007.

However, China's savings rate has now come back down to merely extraordinary levels again. More specifically, the rates of corporate and government saving in China are close to world averages, but China's rate of household saving remains quite high. A common reason given is demography: China is still trying to build up its pension  and social security system, and after four decades of the one-child policy, people don't have enough children to rely on them for old-age support, either. Thus, people saved at very high rates. But as China ages, and older people begin to spend rather than save, the household savings rate should drop, too.

Instead of producing to sell abroad, the share of China's output that is being consumed in China is rising, as the pie charts show. The graph below that focuses on imports of "intermediate" products, which are then used in a production process. Back at the peak of China's trade surpluses around 2007, 43% of China's intermediate imports were being used for products that would be re-exported out of China; now, that share is down to about 30% as a greater share imports of intermediate goods are being used to produce goods consumed inside China.

The IMF economists make the point that looking forward, a common pattern is that a country's imports often grow more-or-less in line with the growth of the domestic economy, while a country's exports often grow more-or-less in line with the growth of the economies of trading partners. If one assumes that even with a modest slowdown in China's growth rate, it will continue to grow faster than the world average, then China's imports in the future are likely to grow faster than its exports.

Finally, one last part of the overall trade picture is called the "income balance," which looks at how much the economy of a country is receiving from its financial investments abroad, and hos much the economy is paying foreign investors for their investments within the country. With China's very large surpluses, it built up very large investments in foreign financial assets. However, it turns out that China's economy earns relatively little from those holdings of foreign assets, because a large share is invested in financial assets like US Treasury bonds that are paying a very low rate of return. Meanwhile, foreign investors in China  are much more likely to own a chunk of a Chinese company or Chinese real estate, and thus have been receiving a much higher rate of return. Thus, even though China holds much more in foreign assets than foreign investors hold in Chinese assets, China's "income balance" is negative. The IMF economists write:
Despite sizeable foreign assets, China’s income account remains in deficit. This is because less than 30 percent of China’s external assets consist of higher yielding risky assets such as direct and equity portfolio investment. Most assets comprise of lower-yielding investments such as international reserve assets, trade credit, and foreign currency deposits. In contrast, 70 percent of China’s external liabilities comprise of riskier and therefore higher (expected) return instruments such as direct and portfolio equity investments.
Putting all these factors together and projecting China's trade balance in the future, the IMF economists write:
Going forward, the [China's] small current account surplus recorded in 2018 is expected to turn into a small deficit in the medium term as the structural factors outlined above continue to drive up imports and moderate exports.
China's shift to a trade balance of zero, or a small deficit, will cause a different set of echoes and consequences in the global economy. For example, there has been talk for some years now of a "global savings glut," driven in substantial part by the very high savings rates in China. n the last 20 years or so, this global savings glut from China is one reason that the US government has been able to sell its Treasury bonds at such a low rate of interest was because of how the global savings glut kept buying those bonds. The global saving glut is often given as a main reason why interest rates around the world are so low. But China's contribution to the global savings glut has been fading away.

Wednesday, November 20, 2019

Enhancing Federal Tax Collections by $100 Billion Annually

Maybe instead of arguing over whether or how much to raise tax rates on those with high incomes, we could start by making more of an effort to enforce the actual existing tax laws? Natasha Sarin and Lawrence H. Summers explore what's possible in  "Shrinking the Tax Gap: Approaches and Revenue Potential" (Tax Notes, November 18, 2019).

In the lingo, the "tax gap" is the amount of tax that is owed under existing law, but that for one reason or another goes uncollected. Sarin and Summer estimate that "in 2020 the IRS will fail to collect more than $630 billion, or nearly 15 percent of total tax liabilities. ... Our estimates suggest that it’s reasonable to anticipate that with feasible changes in policy, the IRS could aspire to shrink the tax gap by around 15 percent."

Moreover, this extra tax revenue would come mainly from those with high incomes, in part because that's where much of the underreported income is, and in part because Sarin and Summers would focus their additional enforcement on those with higher incomes.

Sarin and Summers point out that IRS enforcement efforts have been declining. "[T]oday the IRS has fewer auditors than it had at any point since World War II. ... [S]ince 2011 the share of returns audited (across all filing categories) fell by 45 percent, and the additional taxes collected from audits fell by nearly 50 percent. The same is true for audits of high-income individual returns ... Audit rates for individuals making $1 million or more annually peaked in 2011 at 12.5 percent. Since then, they have fallen: In 2018 only 3.2 percent of returns of these high-income individuals were audited. Consequently, the additional revenue generated from examination of millionaires’ individual income tax filings declined by a similar amount (70 percent) over that period. These patterns suggest that it is unlikely that there would be diminishing returns to a substantial increase in IRS examination resources."

They suggest returning to the audit rates that were common all the way back in  2011, with a particular focus on those with more than $1 million in annual income and on corporations. The fact that the decline in audits has been tracked pretty much 1:1 with a corresponding fall in the taxes collected from audits strongly suggests that more audit would be matched with as similar rise in taxes collected. 

Sarin and Summers note that the IRS not only underinvests in human auditors, but also in technology. "Indeed, in 2018 the IRS spent only $2.5 billion on IT investments. By comparison, Bank of America spent around $16 billion but serves only a quarter of Americans. ... By the end of 2017, nearly 60 percent of IRS hardware was past its useable life, and 26 percent of software was two or more releases behind the most up-to-date version. According to the GAO, the IRS Individual Master File and Business Master File systems date back to 1960 and are the two oldest IT systems in the federal government. The national taxpayer advocate has warned that outdated technology is a threat to the stability of the tax system: `By analogy, the IRS has erected a 50-story office building on top of a creaky, 60-year-old foundation, and it is adding a few more floors each year. There are inherent limitations on the functionality of a 60-year-old infrastructure, and at some point, the entire edifice is likely to collapse.”

They write: "Extrapolating from the CBO and Treasury data suggest that $1 of investment in the IRS leads to $11 of additional revenue ..." In other words, their proposed increase in IRS enforcement spending of about $10 billion per year would plausibly bring in about $100 billion per year.  As Sarin and Summers readily admit, their calculations about increase revenue should be regarded as rough and back-of-the-envelope approximations. But the totals also seem to me well within the plausible range. And again, this additional revenue isn't from changing any part of the US tax code, but just from enforcement of what is already written into law.

Tuesday, November 19, 2019

interview with Cass Sunstein: On Abrupt and Unpredictable Social Change

Consider some examples of social movements that led to rapid change: the French Revolution, Russian revolution/ collapse of Soviet Union, the Iranian revolution, the civil rights movements of the 1960s, the rise of environmentalist movement in the 1960s, Brexit, #MeToo, gay marriage, and others.  Robert Wiblin and Keiran Harris at the "80,000 Hours" website have a podcast interview: "Prof. Cass Sunstein on how social change happens, and why it’s so often abrupt & unpredictable" (June 17, 2019). A transcript is also available. 

Sunstein develops a theory based on "preference falsification, diverse thresholds and interdependencies." The basic notion is that many people might disagree with the status quo and be willing to change from the status quo, but they aren't willing to come out in public and say so ("preference falsification"). However, some people are willing to speak up if a few other people do so, and others are willing to speak up if many other people do so ("diverse thresholds"). Thus, a situation may arise where a few people speak up, which leads to others speaking up ("interdependencencies"), which trigger a social change.

Here's Sunstein on preference falsification:  
[W]ith respect to preference falsification, people might say they like an existing status quo when they really don’t or they might change the subject when the status quo is raised, or they might hear a little voice in their head which they turn off. Here’s some words from the best book I’ve ever read on Nazism. It’s the best book because it’s not only revealing, it’s also cheerful. You can read it without crying. It’s written by a journalist who went back to Germany in the 1950s and spoke to former Nazis and found that to his at least mild surprise, he liked everyone.
They were all good people. One of them said this when asked about opposition: the former Nazi named Karl said, “Opposition? How would anybody know? How would anybody know what somebody else opposes or doesn’t oppose? That a man says he opposes or doesn’t oppose depends on the circumstances, where and when, and to whom, and just how he says it and even then, you must still guess why he says what he says.” Now, that’s offhand remarks by someone who wasn’t a social theorist, but who lived under Nazism. Its profound. He’s suggesting that the existence or absence of opposition is contingent on what’s permissible, what social norms are. To that extent, Karl is referring to the fact that in Germany, as in every society, people live in a state of pluralistic ignorance, which means we don’t know what is in other people’s heads. People might seem content with the status quo, or miserable about it, when in fact what they’re thinking inside, if you could see a thought bubble, would be very different. If they’re silent, it’s very hard to know what they’re thinking. ...
On diverse thresholds:
Some people require no support at all before they will say what they think or join a movement. They might be courageous, foolhardy or just deeply committed. We can call them, and this isn’t pejorative, the ‘zeros’ in the sense that they need nothing to join a movement of one or another kind. It could be white nationalism. It could be Nazism. It could be a liberation movement. If no one joins them, they’re going to be marginalized. They’ll look foolhardy, extreme, or possibly nuts. That’s the technical term. ...  Other people are going to require some social support ... I supported my friend, but I needed him to go first. People like this won’t move unless someone else does. If someone else does, they’ll prefer to join, too. Call them the ‘ones.’ Others require more than a little; they need two people ... 
 The ‘twos’ are followed by people who, not shockingly, have numbers assigned to them all the way up to ‘hundreds’ and ‘thousands’, including, eventually, the ‘infinites’ defined as people who, for one or another reason, won’t challenge the status quo no matter what. Okay, here’s the kicker. It’s extremely difficult to observe people’s internal preferences in light of preference falsification. It’s even harder to get at people’s thresholds and we ourselves probably don’t know what our thresholds are. In the Iranian Revolution, people who participated in the revolt were amazed that they did. Some of them turned out to be ‘fours’ and they had no idea. Others turned out to be ‘seventies’ and they might have thought that they were ‘infinites’. 
On interdependencies:
Everything depends on who is seen to have what… done what and exactly when. Diverse thresholds are one thing; whether people are going to move depends on whether the zeros go first and are seen to have told that father to stop hitting his kid, whether the ones are seen to have joined a movement, let’s say, for #MeToo; and then the twos and the threes, and the fours. If that’s what happens, we’re going to see a movement and it’s going to succeed. Everything depends on the distribution of action and the thresholds. If there are no zeros or if no one sees any of them, no rebellion’s going to occur. If there are a few ones, the status quo is going to be safe. If most people are tens, or hundreds or thousands, the same is true even if there are plenty of twos and threes, and fours. Okay, those are my three moving parts.
Perhaps the most obvious examples of these kinds of changes are fairly extreme cases like the fall of the Soviet Union. But does this framework about change also apply in fairly free societies, like the United States or nations of western Europe, where the official constraints on disagreeing with the status quo are quite constrained? Sunstein argues:
Yes. I think a lot, even in the United States and the United Kingdom, and France, and Canada, countries that do have either formal freedom or formal freedom plus cultures of, let’s say, welcoming dissent, I think still a lot. I’ll give a few examples; the movement for same-sex marriage, clearly, it’s the case that the closet was a devastation for the movement for that. As the closet started to open up, then something started to move. It’s much bigger than that, though, that heterosexuals who were fine with same-sex marriage or who were fine with equality or even wanted it, they were closeted, too. The existence of a shifting norm unleashed people like my mother, heterosexual, but my mother talked as if she was homophobic until at a certain point, she said, “That’s ridiculous.” She always had a voice in her head saying, “That’s ridiculous.” That happened to many millions of people in free countries. I think John Stuart Mill was on this point, that we often underestimate the extent to which conformity pressures are squelching behavior even in quite free nations. ...

Yeah, so one big part of the movement for gay marriage is the unleashing through the softening of social norms of gays and lesbians to say, “I love this person. I want to marry him. You’re not allowing me?” The other thing that happened was that many heterosexuals who went around laughing in a homophobic way or thinking, “Same-sex marriage? That’s ridiculous,” but while in their head, they didn’t really think that. They shifted. As you say, you’re quite right that a number of people didn’t think about it much or thought of the ban on same-sex marriage as just part of life’s furniture and as the possibility opened up, they started considering it. What I want to focus on, because I think it’s particularly intriguing for extremely rapid social change, is when a dam breaks and many social movements, large and small, are exercises in dam breaking, where a social norm operated as a tax on behavior, so that you couldn’t do it without facing something like a fine. Then the tax diminishes, or what was once a tax becomes a subsidy, so you’re better off if you say what you think.
Along a different line, I was interested in Sunstein's comments about his time spent in goverment, and about the differing skills and mindsets of what succeeds in academia and what succeeds in government: 
I think academics often do best if they let their minds go to all sorts of places. I had a good friend in government who told me after two years, this is a very good academic and a very good public servant who said, “Get out.” And he said, “Government ruined me. I can’t think academically anymore, and it’s going to ruin you, get out.” I stayed a little while longer than he wanted, but I never forgot his words. ...
Many academics I saw go into the Obama government, who were terrible at it, because they were really good at coming up with creative ideas, but the idea either couldn’t or shouldn’t be implemented, and they weren’t good at doing the solid work of turning a good policy into reality. I tried early on to have my ears big and my mouth small so that I would just learn from people who knew how to do government. The people in government often whom I greatly admired, they wouldn’t be good academics. They’re not writers, and they’re not ‘idea’ people. They’re amazing at figuring out how to pull levers to do something which actually is helpful. It’s a really different skill set.

Monday, November 18, 2019

China's Belt and Road Initiative: Could It All Come Crashing Down?

Brad Parks at the Center for Global Development managed to find a nice way of boiling down the ways that China's Belt and Road Initiative could possibly become a failure and a burden in a short thought experiment ("Chinese Leadership and the Future of BRI: What Key Decisions Lie Ahead?" July 24, 2019). Here's how he describes one possible future a decade from now (I added a couple of paragraph breaks):
It’s 2028. The Belt and Road Initiative (BRI) has been underway for 15 years, but the initial enthusiasm and momentum behind BRI has vanished. Many of the governments that initially joined the initiative have publicly withdrawn or quietly wound down their participation. China’s staunchest allies remain engaged but even they have reservations about the wisdom of the initiative. They are saddled with unproductive public investment projects and struggling to service their debts. Domestic public sentiment towards China has soured, and they have come to view their participation in BRI as more of a political liability than an asset. But they worry about the consequences of alienating their most important patron and creditor. China has also assumed a defensive posture. Lacking the goodwill that it possessed at the beginning of BRI, it is now using inducements and threats to prevent its remaining clients from abandoning the initiative. 
Western donors and lenders watch from the sidelines with a sense of bemusement. They encouraged China to “multilateralize” BRI by establishing a common set of project appraisal standards, procurement guidelines, fiduciary controls, and social and environmental safeguards that other aid agencies and development banks could support. But Beijing chose to go it alone. It opted not to embrace the use of economic rate-of-return analysis to vet project proposals; resisted efforts to harmonize its environmental, social, and fiduciary safeguards with those used by aid agencies and development banks outside of China; and pushed back on the “Western” suggestion that it modernize its monitoring and evaluation practices. China bet that its fast and flexible approach to infrastructure finance would prove to be so compelling that traditional donors and lenders would eventually jump on the bandwagon and co-finance BRI projects. But it miscalculated. Its model was insufficiently attractive on its merits to enlist the participation and support of the other major players in the bilateral and multilateral development finance market. Nor was it sufficiently appealing to sustain elite and public support in partner countries.
China is now substantially weaker at home than it was during the early days of BRI. Its policy banks and state-owned commercial banks faced top-down and bottom-up pressure—from the State Council and cash-poor BRI participants—to fast-track big-ticket infrastructure projects with as little “red tape” as possible. But many of these projects were poorly designed, so the banks are now dealing with unsustainable stock of non-performing loans, leaving them with two equally unattractive choices: restructure the debts of the least creditworthy countries or throw good money after bad by offering new loans to help borrowers repay old loans. 
With lower-than-expected reflows entering the coffers of China Development Bank, China Eximbank, and the “big 4” state-owned commercial banks, the People’s Bank of China sees the writing on the wall and decides to intervene. It recapitalizes the banks once, and then again, and again. As the country’s foreign exchange reserves dwindle, fiscally conservative voices within China grow louder. They call upon the banks to rein in their overseas lending activities and find common cause with the Chinese public, which sees ample evidence of waste and corruption in BRI projects and has a declining appetite for overseas entanglements. As populist and isolationist pressures mount, China’s political leadership concludes that it no longer enjoys domestic support for its international leadership ambitions. 
Just to be clear, Parks isn't predicting that this scenario will definitely happen, only that it could happen. In my own mind, the central issue here is about the nature of debt. When debt is used to finance a successful project or investment, then the loan can be repaid on time and all parties are pleased. But if debt is used to finance a project that fails in narrow economic terms, and is also accompanied by a cavalcade of concerns over waste, political corruption, environmental dangers, and social harms, then the loan isn't going to be repaid on time (or perhaps at all) and all parties will be unhappy. When one country is both lending the money and often taking the lead in planning, building, and managing how the loaned funds are spend, while another country is repaying a loan that brought unwanted side-effects rather than promised benefits, the possibility for conflict and lasting bad feeling is very high.

With any project as enormous as the Belt and Road Initiative, it's safe to predict that there will be both successes and failures. But in many cases, other international lenders had already considered or were in the process of considering the infrastructure projects that China is supporting. The other international lenders had concerns about economic viability, or wanted to put in place certain conditions to reduce risks of corruption, environmental damage, or other unwanted side effects. China's lenders were willing to brush aside these concerns. The future of the Belt and Road Initiative may thus rest on whether other international lenders have been too timid about lending to projects that were good risks, or whether China's lenders have been too aggressive lending to projects that were poor risks.

I've tried to capture some of this dynamic in previous posts on the subject (although not as crisply as in Parks's thought experiment):

For additional follow-up, I'd recommend the article by Parks quoted above, and two other recent essays: "Belt and Road Economics: Opportunities and Risks of Transport Corridors," a report released a couple of months ago by the World Bank; and "Catching the Dragon: Responding to China’s Trillion Dollar Charm Offensive in Developing Countries," by Staci Warden, in the Milken Institute Review (Third Quarter 2019).

Friday, November 15, 2019

Is Opposition to Immigration Primarily Economic or Cultural?

It's clear that there is a considerable hostility to immigration, both in the United States and across much of Europe. Is that opposition rooted primarily in economic factors or in cultural factors? What kind of evidence could help answer the question?

One approach is to look at whether anti-immigrant attitudes are more common among occupations more threatened by immigrant competition or in local areas that have received more immigrants.  If so, this would support an economic explanation for anti-immigrant sentiment. Another approach is the "survey experiment," which involves doing a survey with several different versions that differ in  what questions are asked, and thus seeing what factors are shaping people's attitudes. Both approaches suggest that that cultural factors than economic factors in anti-immigrant sentiment.

For a sampling of the evidence on this point, I'll draw upon some comments in a couple of papers in the Fall 2019 issue of the Journal of Economic Perspectives: "The Surge of Economic Nationalism in Western Europe," by Italo Colantone and Piero Stanig (pp. 128-51) and "Economic Insecurity and the Causes of Populism, Reconsidered, by Yotam Margalit (pp. 152-70). 

For example, Colantone and Stanig looked at areas that had received more immigrants and found: 
Public opinion research consistently finds that direct competition with immigrants on the labor market is not an important predictor of anti-immigration sentiments. Instead, anti-immigrant views are mostly driven by generalized fears of potential economic or social harm caused by immigration, perceived as a threat to national culture (Hainmueller and Hopkins 2014). ... 
Empirical evidence suggests that economic hardship of different origin may be a more important predictor of anti-immigration sentiments than the actual presence of immigrants in a region. As one vivid example, immigration was one of the single most important issues motivating Leave voters in the Brexit referendum of 2016 (Ashcroft 2016; Ipsos MORI 2016). Yet there is no robust evidence of higher Leave vote shares in regions where a larger fraction of the population is foreign born, or where relatively more immigrants arrived in the years prior to the referendum (Colantone and Stanig 2018a). Consistently, our own empirical evidence shows that negative attitudes about immigration at the individual level are driven not by the share of foreign-born population in the region of residence, nor by the recent arrival rates of immigrants. Rather, what seems to explain nativist attitudes is contextual economic distress—for instance, driven by the exposure to the Chinese import shock (Colantone and Stanig 2018a). Economic distress also seems to drive more cultural concerns about immigration, such as the belief that immigrants do not make a positive contribution to the national cultural life (Colantone and Stanig 2018a, b). In a situation of poor economic performance, it can be easy and politically rewarding to blame immigrants, even when the underlying economic grievances have very different origins, as in the case of globalization. 
Margolit found that opposition to immigration doesn't seem linked with whether one works in an occupation more likely to be disrupted by immigrant labor:
Furthermore, my collaborators and I find that workers employed in very different segments of the labor market, such as meat-packing, education, and finance—differing in terms of skill specificity, penetration by foreign labor, and value added per worker—share remarkably similar preferences in terms of the skill profile of the immigrants they are willing (or not) to accept (Hainmueller, Hiscox, and Margalit 2015). This finding does not sit well with a prediction that natives will be more opposed to immigrants with skill levels similar their own, or indeed with any model that predicts that different segments of native workers will have different preferences regarding the desired type of immigrants.
Margolit also describes "survey experiments," where several slightly different surveys are given, and then the results can be compared to get a sense of what is affecting people's beliefs--especially about issues like bias against immigrants of different ethnic or cultural background. Here's an example: 
For example, a survey experiment in the United Kingdom varied the information it provided to participants about the skill mix of immigrants coming into the country, their region of origin, and the impact of immigration numbers on the long-term share of white Britons. The study finds that even when controlling for the information about skill mix and region of origin, the very mention of the immigrants’ impact on the share of white Britons almost halves support for current immigration levels (reducing it by 17–22 percentage points to about 20 percent of the public) (Kaufmann 2018). Experiments conducted in the United States find a similar effect, in which prompting (or reminding) white Americans about the impending racial shift and future loss of their majority status magnifies their racial bias, particularly toward Hispanics, and increases support for restrictive immigration policies (Craig and Richeson 2014; Major, Blodorn, and Blascovich 2018).
Another kind of survey experiment is a "list experiment," which Margolit describes in this way: 
In a study using this method, Janus (2010) randomly divided a national sample of US non-Hispanic whites into two groups and asked them to read a list of several statements. After reading the list, respondents in both groups were asked to report the total number of statements they “oppose or are against,” without having to report their view on each specific statement. For the control group, the list included three statements on issues on which concerns with social desirability are unlikely to be a problem, such as whether or not they oppose “Professional athletes making millions of dollars per year.” For the treatment group, the list contained the same three nonsensitive statements, but with an addition of a fourth statement: “Cutting off immigration to the United States.” In this experiment, the difference in the mean number of statements reported by participants in the control group (1.77) and the mean number reported by participants in the treatment group (2.16) is attributable only to the additional sensitive item and to sampling error.
In doing surveys about attitudes concerning immigration, one of the strongest results is that those with less education are much more likely to be opposed to immigration, while those with more education are likely to favor immigration.  The key point here is that those with high education levels favor more immigration of those with both high and low skill levels, which presumably includes support for immigration of those who would be competing with them for jobs. Conversely, those with low education levels tend to oppose immigration of those with both high and low skill levels, which means they oppose immigration both of those who might be competing with them for jobs and also those who are unlikely to be competing with them. This pattern suggests cultural attitudes about immigration correlated with higher and lower levels of education are driving the results.
The message that current hostility to immigration is primarily cultural is consistent with recent research on US opposition to immigration a century ago. Marco Tabellini published "Gifts of the Immigrants, Woes of the Natives: Lessons from the Age of Mass Migration," in the Review of Economic Studies, which is waiting in line in the form of corrected proof pages to be published (as of May 6, 2019).  Here's the abstract of Tabellini's article:
In this article, I jointly investigate the political and the economic effects of immigration, and study the causes of anti-immigrant sentiments. I exploit exogenous variation in European immigration to U.S. cities between 1910 and 1930 induced by World War I and the Immigration Acts of the 1920s, and instrument immigrants’ location decision relying on pre-existing settlement patterns. I find that immigration triggered hostile political reactions, such as the election of more conservative legislators, higher support for anti-immigration legislation, and lower redistribution. Exploring the causes of natives’ backlash, I document that immigration increased natives’ employment, spurred industrial production, and did not generate losses even among natives working in highly exposed sectors. These findings suggest that opposition to immigration was unlikely to have economic roots. Instead, I provide evidence that natives’ political discontent was increasing in the cultural differences between immigrants and natives. Results in this article indicate that, even when diversity is economically beneficial, it may nonetheless be socially hard to manage.
In the United States, as in many other countries, immigration is a relatively small factor in its effect on either levels of wages or inequality of wages. (For discussion of the US situation in particular. see  Giovanni Peri, "Immigrants, Productivity, and Labor Markets," Journal of Economic Perspectives, Fall 2016, 30:4, pp. 3-30.) The enormous political energy surrounding immigration issues grows from non-economic roots.

Thursday, November 14, 2019

Can Job Training Work for Mature Adults?

Most workers learn additional skills throughout their work-life. In that sense, it's obvious that job training in some contexts works for adults. But for many of us, the additional learning happens in the context of remaining in the same job, or at least on the same broad career path. The harder question is whether it's possible to do the kind of job training with adults, perhaps adults who have just experienced a negative shock to their previous job, that jump-starts them on a career path. Paul Osterman offers a useful discussion of these issues in "Employment and training for mature adults: The current system and moving forward" (Brookings Institution Future of the Middle Class Initiative, November 2019). Here are a few themes from his report that stuck with me: 

Overall Perspectives on Adult Training in the United States
The United States does not have a training system for adults if what is meant by the term “system” is a well-articulated set of programs or opportunities that fit together in a logical stepwise way and which are readily accessible to all those who are interested or need assistance. What the United States does have is a diverse set of opportunities, some large and some small, and for some of these we know what is best practice and for some we are in the dark about effectiveness. ... According to the OECD in 2016 Germany spent six times more than the U.S. relative to GNP on pubic training programs and France spent ten times more.
Many Employers Seem to be Trying to Hand Off Job Training the Public Sector
Firms have long been at the center of the American system of job training and the classic model has been that schools provide general skills training while the skills for specific jobs are provided by employers. ... [T]he historical division of labor between firms and public training organizations that has underwritten the U.S. system appears to be in doubt. Although the data are weak there is at least reason to believe that firms are expecting public training institutions to play a greater role than they have in the past in providing specific vocational training. ... It is difficult to assess the extent to which this arrangement continues because reliable data on the firm based training are simply not available with the last national survey a decade old. ... The rhetoric of the employer community regarding the importance of public training systems, especially community colleges, suggests a possible effort to shift training costs to the public sector. A benign explanation would be shorter job tenures which make recouping of training costs more difficult or, alternatively, that skills are becoming more general, perhaps due to the increased importance of computer skills. A less benign explanation is simply cost shifting. Until we have better data we will not have an answer about trends or explanations.
Community Colleges are Underfunded but Work Well--For Those Who Complete a Degree
The good news about community colleges is that when students complete a degree or certificate the rate of return is good. ... All this said, there are important concerns regarding community colleges the most central of which is retention and graduation. Reported rates are weak—nationally 39.2 percent of community college full or part-time students who enrolled in 2012 earned a credential from either a two or four year school within six years of initial enrollment ...
Community colleges are at scale but face several challenges, the first of which is that they are underfunded. Per pupil operating expenditures is less than half that of four year bachelor’s (not masters and not research) private colleges and state higher education funding streams have yet to attain levels in 2008 prior to the Great Recession. Another way of seeing this is to note thatt he U.S. Department of Education estimates that in 2016-2017 the instructional costs per full-time equivalent student in public 2-year institutions were about $6,900 compared to $12,700 in public four year schools. The consequences are both higher tuition levels, which challenge access, as well as inadequate support systems which have significant implications for retention and completion. 
Intermediary Systems, Where Industry or Employers Partner with an Intermediary or Community College Can Work Well
The core best practice components of intermediaries are close relationships with employers (the so-called dual customer model), support services and counseling for clients, and substantial investments in training. Depending on the specific program the actual training is either done by the intermediary itself or by a community college. If the training is the responsibility of the community college the intermediary works closely with that institution around issues of scheduling and support. In order to achieve the close relationship with employers intermediary staff become knowledgeable about the nature of the industry and the needs of employers. Intermediaries which adhere to this broad model may be sponsored by community groups, business associations, or unions. ...  A strong example is Project QUEST in San Antonio which was subject to an RCT with a nine year follow up. QUEST exemplifies the best practice elements described above. From year three to year nine participants earned significantly more than the control group and by year nine the gap was over $5,000 per year in annual earnings. These impacts are not unique to QUEST and other rigorous evaluations of best practice intermediaries also find positive results.
We Don't Have Successful Models of Retraining Mature Adults Who Have Lost Their Jobs
Mature adults who lose their jobs are a distinctive group, representing a challenging population, for obvious reasons: on average lower levels of education and embedded personal and family commitments that often limit options. In addition the stigma of job loss is an additional burden given that potential employers may fear that it is a negative signal. There are very few credible assessments of training interventions for this group. The raw data from the Trade Adjustment Assistance Program (which only captures a subset of the dislocated worker population) are not encouraging: in 2017 72.5 percent of program participants entered employment post program participation and of these the earnings replacement ratio for 40-49 year olds was 83.9 percent and for 50-59 year olds 75.3 percent (the earnings replacement ratios were much better for young people).40 A Mathematica evaluation of TAA using the experience of the early 2000’s found between a zero and a negative impact on earnings although, again, younger participants did better.
We Don't Yet Have Good Evidence on Some New Alternative Training Models
[W]e have little understanding regarding the scope and performance of new training models—boot camps, on-line programs, and certificate programs offered by non-traditional institutions. It is clear that this is a heterogenous collection and it seems likely there is diversity in performance and in what lessons can be learned about delivering skill.
My own bottom line is that there's a lot of talk about how new entrants to the job market need more training, and how current workers and those between jobs need both training in their current work and sometime to pick a different career path. But the actual commitment to making this happen has not come close to matching the rhetoric. Two basic steps would to raise spending on community colleges by $20 billion or so, and to work much harder on involving business leaders in a conversation of what skills and training they are ready and willing to hire and promote. 

Wednesday, November 13, 2019

Is Trade Still a Viable Path to Development? World Development Report 2020

Many of the world's development success stories in recent decades followed a broadly similar pattern. The countries became more involved with the world economy, often by exporting manufactured goods produced by low-wage workers. The rise in exports brought economic growth and income to their economics, but perhaps just as important, it also helped to foster a range of managerial, financial and technological skills. In this way, exporting was a fundamental step on the path to economic development.

The World Development Report 2020, subtitled "Trading for Development in the Age of Global Value Chains," asks whether that step is still available for countries trying to develop their economies.
International trade expanded rapidly after 1990, powered by the rise of global value chains (GVCs). This expansion enabled an unprecedented convergence: poor countries grew faster and began to catch up with richer countries. Poverty fell sharply. These gains were driven by the fragmentation of production across countries and the growth of connections between firms. Parts and components began crisscrossing the globe as firms looked for efficiencies wherever they could find them. Productivity and incomes rose in countries that became integral to GVCs—Bangladesh, China, and Vietnam, among others. The steepest declines in poverty occurred in precisely those countries.
Today, however, it can no longer be taken for granted that trade will remain a force for prosperity. Since the global financial crisis of 2008, the growth of trade has been sluggish, and the expansion of GVCs has slowed. The last decade has seen nothing like the transformative events of the 1990s—the integration of China and Eastern Europe into the global economy and major trade agreements such as the Uruguay Round and the North American Free Trade Agreement (NAFTA).
At the same time, two potentially serious threats have emerged to the successful model of labor-intensive, trade-led growth. First, the arrival of labor-saving technologies such as automation and 3D printing could draw production closer to the consumer and reduce the demand for labor at home and abroad. Second, trade conflict among large countries could lead to a retrenchment or a segmentation
of GVCs.
What does all this mean for developing countries seeking to link to GVCs, acquire new technologies,and grow? Is there still a path to development through GVCs?
World Bank reports often have a certain kind of can-do spirit. When you ask "is there still a path to development?" the answer is pretty much always an appropriate qualified "yes." Thus, a substantial amount of the report offers useful evidence that developing countries (or regions of countries) which have become part of global value chains have indeed experienced substantial benefits. Moreover, the report argues that development countries which pursue domestic economic reforms and open trade, along with social and environmental protections,  can still benefit. There is the expected call for more and better-designed international trade agreements.Here, I want to focus on the theme  "Technological Change" and trade as discussed in Chapter 6 of the report.

Information and communications technology is making it much easier to coordinate production chains and suppliers across countries.
High-speed Internet enables firms in developing countries to link to GVCs [global value chains]. The introduction of fast Internet in Africa and China has spurred employment and export growth, as recent studies of the economic effects of the rollout have shown. In Africa, the gradual arrival of submarine Internet cables led to faster job growth (including for low-skilled workers) in locations that benefited from better access to fast Internet relative to those that did not, with little or no job displacement across space. Increased firm entry, productivity, and exporting are among the drivers of the higher net job creation in these locations. Similarly, in China provinces experiencing an increase in the number of Internet users per capita also witnessed faster export growth, with more firms competing in international markets and a higher share of provincial output sold abroad. These examples attest to the potential of ICTs [information and communication technologies] to help countries become part of international supply chains. They also show that the uneven provision of ICT infrastructure can aggravate spatial inequalities ...
In many developing countries, the costs of dealing with customs as goods cross the border and are transported within countries is high. Digital technologies can help here, too.
Digital technologies can improve customs performance by automating document processing and making it possible to create a single window for streamlining the administrative procedures for international trade transactions. In Costa Rica, a one-stop online customs system increased both exports and imports. Similarly, in Colombia computerizing import procedures increased imports, reduced corruption cases, bolstered tariff revenues, and accelerated the growth of firms most exposed to the new procedures. ...
Some robotics and artificial intelligence applications might further reduce logistics costs, the time to transport, and the uncertainty of delivery times. At ports, autonomous vehicles might unload, stack, and reload containers faster and with fewer errors. Blockchain shipping solutions may lower transit times and speed up payments. The Internet of Things has the potential to increase the efficiency of delivery services by tracking shipments in real time, while improved and expanded navigation systems may help route trucks based on current road and traffic conditions. Although the empirical evidence on these impacts is limited, it is estimated that new logistics technologies could reduce shipping and customs processing times by 16 to 28 percent ... 
In addition, developing countries face large intranational trade costs, which determine the extent to which producers and consumers in remote locations are affected by changes in trade policy and international prices. For example, the effect of distance on trade costs within Ethiopia or Nigeria is four to five times larger than in the United States. Intermediaries capture most of the surplus from falling world prices, especially in more distant locations. Therefore, consumers in remote locations see only a small part of the gains from falling international trade barriers. Despite recent advances in the provision of ICT infrastructure, the scope for further expanding access to high-speed Internet in developing countries remains huge. .... For many goods traded in GVCs, a day’s delay is equal to imposing a tariff in excess of 1 percent.
Computerized translation between languages reduces a barrier to trade, too.
Machine learning also reduces the linguistic barriers to trade and GVC participation. One application of machine learning—machine translation—has improved in recent years. For example, the best score at the Workshop on Machine Translation for English to German rose from 15.7 to 28.3, according to a widely used comparison metric, the BLEU score. The introduction of machine translation from English to Spanish by eBay has significantly boosted international trade between the United States and Latin America on this platform, increasing exports by 17.5 percent. These effects reflect a reduction in translation-related search costs and show that artificial intelligence has already begun to boost trade in North and South America.
There have been concerns that in a world economy full of automation, robots, 3D printing, and other technology, that developing countries may face a risk of "premature deindustrialization"--that is, they won't be able to use their natural comparative advantage of cheap labor to enter global value chains in manufactured goods. But at least so far, robots and automation seem to be boosting international trade between high-income countries and emerging markets, rather than leading to "reshoring" of previous imported products and a reduction in trade.
Despite the concerns about the effects of automatization, the evidence that reshoring will result is very limited. ... Thus far, the rising adoption of industrial robots and 3D printing seems to have promoted North–South trade. Greater robot intensity in production has led to more imports sourced from lower-income countries in the same broad industry—and to an even stronger increase in gross exports (which embody imported inputs) to those countries. The surge in imports from the South has been concentrated in intermediate goods such as parts and components. The positive impact of automation on imports, particularly on imports of intermediates, attests to the importance of examining the effects of robotization on trade through a GVC framework. More-traditional trade models would predict the increase in exports by the North but fail to foresee the surge in imports from the South in the same industry. Rather than reducing North–South trade, robotization seems to have been boosting it, although it is uncertain whether this trend is likely to continue.
The rise of information technology, and its effects on reducing transportation costs have caused a wave of not-previously-traded products to become part of international trade. In many cases, these are intermediate and unfinished goods where it now makes economic sense to ship them across national borders. In other cases, they are brand-new goods--even services or digital goods.
Since the 1990s, many new types of products have entered global trade, primarily intermediate goods, further demonstrating the increasing fragmentation of production and the emergence of entirely new  products. Indeed, the trade in new products has grown dramatically. In 2017, 65 percent of trade was in categories that either did not exist in 1992 or were modified to better reflect changes in trade. Trade in intermediate goods (parts and components and semifinished goods) expanded, and entirely new products entered global trade. For example, trade in IT products tripled over the past two decades, as trade in digitizable goods such as CDs, books, and newspapers steadfastly declined from 2.7 percent of the total goods trade in 2000 to 0.8 percent in 2018. Technological developments are likely to continue to produce product churning. Because of technological progress, more goods and services are likely to become tradable over time. For example, platforms such as Upwork and Mechanical Turk make it easier for businesses to outsource tasks to workers who can perform them virtually. And new goods and services are likely to be developed, including ones not even imaginable today, thereby boosting the incentives to trade.
One potential source of productivity for developing countries is that international trade raises the rewards for organizing into larger firms and increasing the scale of production:
In part because of high trade costs, firms in low-income countries tend to operate on a small scale and are less likely to export or import. A typical modal manufacturing firm in the United States has workers, and larger firms tend to be more productive and pay higher wages and are more likely to export and import. By contrast, a modal firm in most developing countries has one worker, the owner. Among firms that do hire additional workers, most hire fewer than 10. In India, Indonesia, and Nigeria, firms with fewer than 10 workers account for more than 99 percent of the total.
But behind all these legitimate reasons for overall enthusiasm, some potential problems lurk. It's interesting and useful to discuss the ways that technology is likely to increase global trade, and how it can still serve as a pathway to higher growth for developing countries. However, technology typically brings a mixture of winners and losers, both within and across countries. Some of the international trade success stories from developing economies will happen as potential competitors are crowded out. For a hint of these negative possibilities, ere are a couple of paragraphs from near the end of the chapter. I have inserted boldface type for the various qualifications, the "maybes" and the "likelys" and the tradeoffs. As is so often true when thinking about the effects of new technology, reading the passage without emphasizing these qualifications is a soothing and positive experience; reading it while emphasizing these qualifications is worrisome. Both reactions are valid!
Although predicting the future is a treacherous exercise, new technologies will likely reduce trade costs and make it easier to participate in global markets. Such outcomes may offer developing countries new opportunities to link into GVCs. However, the attendant intensification of competition may make it more challenging for countries to succeed. Platform firms, for example, are making it easier to connect, but their reputation mechanisms for verifying supplier quality tend to foster concentration and make it harder for entrants to grow. They are creating new challenges for regulators both because they wield market power and because their interactions with agents in different parts of the value chain may create potential conflicts of interest and enhance the scope for anticompetitive conduct.
Automation anxiety is not warranted for all developing countries. Although some countries are likely to lose manufacturing employment because of greater competition in output markets, countries that are part of GVCs and supplying inputs to other countries that are automating may see an increase in the demand for their goods, and consumers everywhere will enjoy lower prices. The primary challenge arising from new production technologies is to ensure that the benefits are shared and that losers are compensated both across and within countries. Among the countries adopting these technologies, labor market disruptions are likely to be significant, skill premiums are likely to rise, and labor’s share of income may decline further.