Monday, September 16, 2019

When the University of Chicago Dropped Football

There was a time when football was king at the University of Chicago. Their famous coach, Amos Alonzo Stagg, ran the program from 1892 to 1932. His teams were (unofficial, but widely recognized) national champions in 1905 and 1913. His teams won 314 games, which means that even after all these years he ranks 10th for most wins among college football coachesStagg is credited with fundamental innovations to the way we think about football: the "tackling dummy, the huddle, the reverse and man in motion plays, the lateral pass, uniform numbers."

But in 1939, in a step that seems to me almost inconceivable for any current university with a big-time football program, the President of the University of Chicago, Robert Maynard Hutchins, shut down the University of Chicago football team.

For a sense of how shocking this was, I'll quote from Milton Mayer's 1993 biography, Robert Maynard Hutchins: A Memoir (pp. 139- 140).  Mayer describes the role of Amos Alonzo Stagg, the Grand Old Man, at the University of Chicago.
The Old Man was Chicago's oldest—and only indigenous—collegiate tradition except for the campus carillon rendition of the Alma Mater at 10:06 every night because the Old Man wanted his players to start for bed at 10:00 and to get there when the Alma Mater was finished at 10:06:45. The most reverent moment of the year was the moment at the Interfraternity Sing when the old grads of Psi Upsilon marched down the steps to the fountain in Hutchison Court with the Old Man at their head. If ever there was a granite figure that bespoke the granite virtues, it was his.
In 1892 ... Amos Alonzo Stagg was appointed as an associate professor (at $2,500 a year) with lifetime tenure—the first (and very probably the last) such appointment in history. His job would never depend upon his winning games. But he won them; in his heyday, all of them. As a stern middle-aged, and then old, man he continued to believe in the literalism of the Bible and the amateurism of sports. If (as untrackable rumor had it) some of his latter-day players were slipped a little something—even so much as priority in getting campus jobs—he never knew it. If their fraternity brothers selected their courses (with professors who liked football) and wrote their papers for them, if, in a word, they were intellectually needy, he never recognized it; apart from coaching football, he was not intellectually affluent himself.
The Old Man was sacred, sacred to a relatively small but ardent segment of the alumni, sacred to some of the old professors who had come with him in 1892, sacred to some of the trustees who, in their time, had had their picture taken on the Yale Fence, sacred to the students, who had nothing else to hold sacred, sacred to the local barbers and their customers, sacred, above all, to the local sports writers who, with the Cubs and the White Sox where they were, had nothing much else to write about. The first Marshall Field had given Harper a great tract adjoining the original campus for the student games that Harper spoke of. It was called, of course, Marshall Field, but it had long since become Stagg Field. The Old Man was untouchable—and so, therefore, was football.
But by the 1930s, University of Chicago football had been in decline for some time. As Mayer describes it, the 57,000-seat stadium was about one-tenth full. Part of the reason was that enrollments had grown much more at other schools, and the University of Chicago at that time was attracting large numbers of self-supporting transfer students who rode the streetcars to the school and had little interest in big-time football. In addition, U-Chicago had not bent to accommodate the then-common patterns of big-time college football. About half of all Big Ten college football players at that time majored in physical education, which Chicago did not offer as a major. In addition, it was standard practice at the time for college alumni to subsidize the players, a practice that--by the 1930s--was not encouraged at U-Chicago.  

Hutchins was clearly considering an end to University of Chicago football for several years. In one anecdote, he was asked by a college trustee: "Football is what unifies a university—what will take its place?" Hutchins answered: "Education." Hutchins nudged Stagg out the door after 40 years. By 1938, Hutchins was ready to go public in an essay in the Saturday Evening Post called "Gate Receipts and Glory" (December 3, 1938). It was full of comments like this:
Money is the cause of athleticism in the American colleges. Athleticism is not athletics. Athletics is physical education, a proper function of the college if carried on or the welfare of the students. Athleticism is not physical education but sports promotion, and it is carried on for the monetary profit of the colleges through the entertainment of the public. ... 
Since the primary task of colleges and universities is the development of the mind, young people who are more interested in their bodies than in their minds should not go to college. Institutions devoted to the development of the body are numerous and inexpensive. They do not pretend to be institutions of learning, and there is no faculty of learned men to consume their assets or interfere with their objectives. Athleticism attracts boys and girls to college who do not want and cannot use a college education. They come to college for "fun." They would be just as happy in the grandstand at the Yankee Stadium, and at less expense to their parents. They drop out of college after awhile, but they nre a sizable fraction of many freshman classes, and, while they last, they make it harder for the college to educate the rest. Even the earnest boys and girls who come to college for an education find it difficult, around the middle of November, to concentrate on the physiology of the frog or the mechanics of the price structure. ...
Most athletes will admit that the combination of weariness and nervousness after a hard practice is not conducive to study. We can thus understand why athleticism does not contribute to the production of well-rounded men destined for leadership after graduation. In many American colleges it is possible for a boy to win twelve letters without learning how to write one.
When teaching a college class, I've had the experience of a scholarship athlete coming up to me to apologize and to explain that, while they enjoyed my class, the pressures of early-morning weightlifting, frequent travel, or recovering from injury made it hard for them to study and to perform well. As a teacher, it's a helpless feeling. You can't reasonably tell a student to give up their athletic scholarship. The university was paying these very young adults for their athletic performance, which has for them become a ball-and-chain on their academic performance. 
 
Hutchins points out that the revenues available from big-time football led schools to an arms race in which they feel compelled to spend ever-more on coaches, practice facilities, and support of teams. It also led to pressure to expand the season (which was then often eight or nine games) to bring in additional revenues. But the overall balance of high spending in the quest for high revenues was that college athletics were a money-losing proposition. That's still true today, when the typical university with big-time athletics loses money on its athletics program: that is, revenue-producing sports like football, basketball, and some places hockey or volleyball are not enough to cover the expenses of the athletic department.

Hutchins offered a few proposals that he surely knew to be doomed. How about nearly free admission to all college athletic events? Hutchins suggested 10 cents. With this change, athletics would become part of the overall university budget, and could make its case for support vs. other possible uses of university funds. A likely outcome might be that an emphasis on intramurals with broad participation across the student body, in activities that people will be to do all their lives (unlike football), will get priority.  How about lifetime tenure for athletic directors and coaches? After all, if they are being hired for their character and knowledge and past record, why should their future employment depend on whether they have a few seasons with a poor won-loss record?  

Hutchins announced the end of football in a relatively short address to the University of Chicago students on January 12, 1940 ("Football and College Life" (Address to undergraduates, Mandel Hall, University of Chicago, January 12, 1940, available in 1940 Essay Annual: A Yearly Collection of Significant Essays Personal, Critical, Controversial, and Humorous, edited by Erich A. Walter, and published by Scott Foresman). A few snippets: 
I think it is a good thing for the country to have one important university discontinue football. There is no doubt that on the whole the game has been a major handicap to education in the United States. ... The greatest obstacle to the development of' a university in this country is the popular misconceptions of what a university is. The two most popular of these are that it is a kindergarten and that it is' a country club. Football has done as much as any single thing to originate, disseminate, and confirm these misconceptions. By getting rid of football, by presenting the spectacle of a university
that can be great without football, the University of Chicago may perform a signal service to higher education throughout the land. ... 
I hope that it is not necessary for me or anyone else to tell you that this is an educational institution, that education is primarily concerned with the training of the mind, and that athletics and social life, though they may contribute to it, are not the heart of it and cannot be permitted to interfere with it. ...  The question is a question of emphasis. I do not say that a university must be all study and no athletics and social life. I say that a university must emphasize education and not athletics and social life. The policy of this university is to co-operate with its students in sponsoring any healthy activity that does not interfere too seriously with their education.
In 1954, Hutchins wrote an article for Sports Illustrated looking back at his decision, called "College Football is an Infernal Nuisance" (October 18). He wrote: 
"But we Americans are the only people in human history who ever got sport mixed up with higher education. No other country looks to its universities as a prime source of athletic entertainment. In some other countries university athletic teams are unheard of; in others; like England, the teams are there, but their activities are valued chiefly as affording the opportunity for them and their adherents to assemble in the open air. Anybody who has watched, as I have, 12 university presidents spend half a day solemnly discussing the Rose Bowl agreement, or anybody who has read—as who has not?—portentous discussions of the "decline" of Harvard, Yale, Stanford, or Chicago because of the recurring defeats of its football team must realize that we in America are in a different world.
Maybe it is a better one. But I doubt it. I believe that one of the reasons why we attach such importance to the results of football games is that we have no clear idea of what a college or university is. We can't understand these institutions, even if we have graduated from one; but we can grasp the figures on the scoreboard. ...
To anybody seriously interested in education intercollegiate football presents itself as an infernal nuisance. ... When Minnesota was at the height of its football power, the president offered me the team and the stadium if I would take them away: his team was so successful that he could not interest the people of the state in anything else. ... Are there any conditions under which intercollegiate football can be an asset to a college or university? I think not.
One comment from that 1954 essay made me laugh out loud. Hutchins thought that the rise of professional football would lead to the demise of college football.
The real hope lies in the slow but steady progress of professional football. If the colleges and universities had had the courage to take the money out of football by admitting all comers free, they could have made it a game instead of a business and removed the temptations that the money has made inevitable and irresistible. Professional football is destined to perform this service to higher education. Not enough people will pay enough money to support big-time intercollegiate football in the style to which it has become accustomed when for the same price they can see real professionals, their minds unconfused by thoughts of education, play the game with true professional polish.
I should add that I'm a long-standing fan of all kinds of sports, both collegiate and professional. College athletes and their competitions can be marvelous. But the emphasis that so many American universities and colleges place on their intercollegiate athletics teams seems to me hard to defend. 

Saturday, September 14, 2019

Classroom vs. Smartphone: One Instructor Surrenders


It's of course possible both to teach and to learn via a video or a book. But there's an implicit vision many of us share about what happens in a college classroom between a professor and students. It involves how a classroom comes together as a shared experience, as the participants develop both a closeness and an openness with each other. There is an underlying belief that the process of learning through an interwoven reaction and counterreaction, sustained in this shared atmosphere, is part of what matters for an education, not just a a score on a test of pre-specified learning objectives. 

There's a strong case to be made for the gains from using various forms of information technology to learn (more on that in a moment). But the tradeoff of IT-enabled learning is that this vision of shared classroom space is changed beyond recognition. Tim Parks offers a personal lamentation for what is lost in "The Dying Art of Instruction in the Digital Classroom," at the New York Review of Books "Daily" website (July 31, 2019). He writes: 
The combination of computer use, Internet, and smart phone, I would argue, has changed the cognitive skills required of individuals. Learning is more and more a matter of mastering various arbitrary software procedures that then allow information to be accessed and complex operations to be performed without our needing to understand what is entailed in those operations. This activity is then carried on in an environment where it is quite normal to perform two, three, or even four operations at the same time, with a general and constant confusion of the social, the academic, and the occupational.

The idea of a relationship between teacher and class, professor and students, is consequently eroded. The student can rapidly check on his or her smartphone whether the professor is right, or indeed whether there isn’t some other authority offering an entirely different approach. With the erosion of that relationship goes the environment that nurtured it: the segregated space of the classroom where, for an hour or so, all attention was focused on a single person who brought all of his or her experience to the service of the group. 
As Parks acknowledges, a crappy teacher will fail to build such a relationship. He writes: "I can think of no moments of my life more utterly squandered than my last high school year of math lessons with a pleasant enough man whose only aim seemed to be to get out of the classroom unscathed." But his theme is has become harder to build the classic college teaching relationship. He writes: 
Last year, the university told me they could no longer give me a traditional classroom for my lesson. So I have thirty students behind computer screens attached to the Internet. If I sit behind my desk at the front of the class, or even stand, I cannot see their faces. In their pockets, in their hands, or simply open in front of them, they have their smartphones, their ongoing conversations with their boyfriends, girlfriends, mothers, fathers, or other friends very likely in other classrooms. There is now a near total interpenetration of every aspect of their lives through the same electronic device.
To keep some kind of purpose and momentum, I walked back and forth here and there, constantly seeking to remind them of my physical presence. But all the time the students have their instruments in front of them that compel their attention. While in the past they would frequently ask questions when there was something they didn’t understand—real interactivity, in fact—now they are mostly silent, or they ask their computers. Any chance of entering into that “passion of instruction” is gone. I decided it was time for me to go with it. 
Parks notes that IT-enabled learning has definite and real advantages.
My youngest daughter recently signed on for a higher-level degree in which all the teaching is accessed through the Internet. Lectures are prepared and recorded once and for all as videos that can be accessed by class after class of students any number of times. You have far more control, my daughter observes: if there’s something that’s hard to understand, you can simply go back to it. You don’t have to hear your friends chattering. You don’t have to worry about what to wear for lessons. You don’t miss a day through illness. And the teachers, she thinks, make more of an effort to perfect the lesson, since they only have to do it once.
But many colleges and universities are moving to combination of courses that are explicitly online with courses where the students are there in body, but their spirits are online. Perhaps the gains from this shift outweigh the losses, and in any event, the pressures of cost constraints and cultural expectations mean that there's little to done to stem the tide. As faculty and students have less experience with the old pedagogical model, they will all become less well-equipped to participate in it, and it will look even less attractive. Parks is offering a reminder of what is being lost:
[I]t’s also clear that this is the end of a culture in which learning was a collective social experience implying a certain positive hierarchy that invited both teacher and student to grow into the new relationship that every class occasions, the special dynamic that forms with each new group of students. This was one of the things I enjoyed most with teaching: the awareness that each different class—I would teach them every week for two years—was creating a different, though always developing, atmosphere, to which I responded by teaching in a different way, revisiting old material for a new situation, seeing new possibilities, new ideas, and spotting weaknesses I hadn’t seen before.  It was a situation alive with possibility, unpredictability, growth. But I can see that the computer classroom and smartphone intrusion are putting an end to that, if only because there’s a limit to how much energy one can commit to distracting students from their distractions.

Friday, September 13, 2019

Is the US Economy Having an Engels' Pause?

Consider a time period of several decades when there is a high level of technological progress, but typical wage levels remain stagnant while profits soar, driving a sharp rise in inequality. In broad-brush terms, this description fits the US economy for the last few decades. But it also fits the economy of the United Kingdom during the first wave of the Industrial Revolution in the first half of the 19th century.

Economic historian Robert C. Allen calls this the "Engels' pause," because Friedrich Engels, writing in books like The Condition of the Working Class in England in 1844, described this confluence of economic patterns. Allen laid out the argument about 10 years ago in "Engels’ pause: Technical change, capital accumulation, and inequality in the British industrial revolution," published in Explorations in Economic History (2009, 46: pp. 418–435).

Allen summarizes his argument about the arrival and then the departure of the Engels' pause in this way: 
According to the Crafts-Harley estimates of British GDP, output per worker rose by 46% between 1780 and 1840. Over the same period, Feinstein’s real wage index rose by only 12%. It was only a slight exaggeration to say that the average real wage was constant, and it certainly rose much less than output per worker. This was the period, and the circumstances, described by Engels in The Condition of the Working Class. In the next 60 years, however, the situation changed. Between 1840 and 1900, output per worker increased by 90% and the real wage by 123%. This was the ‘modern’ pattern in which labour productivity and wages advance at roughly the same rate, and it emerged in
Britain around the time Engels wrote his famous book.
The key question is: why did the British economy go through this two phase trajectory of development? ... Between 1760 and 1800, the real wage grew slowly (0.39% per annum) but so did output per worker (0.26%), capital per worker, and total factor productivity (0.19%). Between 1800 and 1830, the famous inventions of the industrial revolution came on stream and raised aggregate TFP growth to 0.69% per year. This technology shock pushed up growth in output per worker to 0.63% pa but had little impact on capital accumulation or the real wage, which remained constant. This was the heart of Engels’ Pause ... In the next 30 years 1830–1860, TFP growth increased to almost one percent per annum, capital per worker began to grow, and the growth in output per worker
rose to 1.12% pa. The real wage finally began to grow (0.86% pa) but still lagged behind output per worker with most of the shortfall in the beginning of the period. From 1860 to 1900, productivity, capital per worker, and output per worker continued  to grow as they had in 1830–1860. In this period, the  real wage grew slightly faster than output per worker (1.61% pa versus 1.03%). The ‘modern’ pattern was established.
In short, technological growth first led to a period where wages did not keep up with economic growth, and then to a period where wages rose faster than economic growth. 
Of course, historical parallels are never perfect. The prominent inventions of the first half of the late 18th and early 19th century--mechanical spinning, coke smelting, iron puddling, the power loom, the railroad, and the application of steam power--did not have an identical interaction with labor markets and workers as the rise of modern technologies like information technology, materials science, genetics research, and others. 

In addition, historical parallels do not dictate what the appropriate policy response should be. 
As one example, the kinds of active labor market policies available to governments in the 21st century (for discussion, see here, here, and here) are quite different from the United Kingdom in the 19th century. The problems of modern middle-income workers in high-income countries are obviously not the same as the problems of UK workers in 1840. 

Also, modern economic historians argue over whether UK wages were really not rising much in the early 1900s, and current economist argue over the extent to which increases technology and variety suggest that the standard of living of typical modern workers is growing by more than their paychecks might suggest. 

But historical parallels are nonetheless interesting. But it's interesting that the original Engels' pause led to calls for socialism, and that socialism as a broad idea, if not necessarily a well-defined policy program, has re-entered the public discussion today. Historical parallels offer a reminder that when sustained shifts in an economy occur over several decades--a rise in inequality, wages rising more slowly than output, sustained high profit levels--the causes are more likely to involve shifts in economic output and organization driven by underlying factors like technology or demographics, not by factors like selfishness, conspiracies, or malevolence (whose prevalence does not shift as much, and are always with us). Finally, the theory of the Engels' pause suggests that underlying economic forces can drive patterns rising inequality, high profits, and stagnant wages can persist for decades, but nonetheless can have a momentum that leads to their eventual reversal, although my crystal ball is not telling me when or  how that will happen. 

Wednesday, September 11, 2019

Latin America: Missing Firms, Slow Growth, and Inequality

The economies of Latin America have gone through a series of different periods in the half-century or so. There was an "import substitution" period back in the 1960s and 1970s, where the idea was that government would direct industrial development in a way that would remove the need for imports from high-income countries. This was followed by the "lost decade" of the 1980s, a period of very high inflation, slow growth, and defaults on government debt. The 1990s was sometimes labeled as at time of economic liberalization or the so-called "Washington consensus." Starting around 2000, there was a "commodity supercycle" when first a global rise in commodity prices led to faster growth across much of Latin America, but then more recently a drop in commodity prices slowed down that growth.

Many pixels have been spent arguing over these changes. But as these different periods have come and gone, you know what hasn't much changed? The region of Latin America has been slowly falling farther behind the high-income countries countries of the world in economic terms, while remaining the region with the most unequal distribution of income. The McKinsey Global Institute lays out these patterns and offers some analysis in "Latin America’s missing middle: Rebooting inclusive growth" (May 2019).

Her's a figure showing per capita GDP in Latin America since 1960, relative to high income countries. Over that period, the region has been falling behind, not converging. Moreover, the middle income "benchmark" countries--which in this figure refers to a weighted average of to China, Indonesia, Malaysia, Philippines, Poland, Russia, South Africa, Thailand, and Turkey--has gone from less than one-third of the Latin American level to above it.

Inequality in the Latin American region has remained high as well throughout this time period. This figure shows that if you look at the share of income received by the bottom 50%, or by the bottom 90%, it's lower in Latin America than in any other region.
How can these dual problems of slow productivity growth and high levels of inequality be addressed? the MGI report argues that the underlying problem is a business climate in Latin America which appears to be strangling medium-sized and larger firms. As a result, a large share of the population is trapped in small, low-productivity, informal employment, with no prospect for change. The report notes:
The business landscape in Latin America is polarized. The region has some powerful companies, including some with very high productivity that have successfully expanded from their strong local base to become global companies or “multilatinas”—regional powerhouses operating across Latin America. They include AB InBev, America Movil, Arcor, Bimbo, CEMEX, Embraer, FEMSA, Techint Group, among others. By comparison with large firms in other regions, such companies are fewer in number and less diversified beyond energy, materials, and utilities. At the same time, Latin America has a long tail of small, often informal companies that collectively provide large-scale employment, but whose low productivity and stagnant growth hold back the economy.
Missing is a cohort of vibrant midsize companies that could bring dynamism and competitive pressure to expand the number of productive and well-paying jobs in Latin America, much as these firms do in many high-performing emerging regions. ...
The causes of this firm distribution and dynamics are rooted in common legacies of import substitution that favored a few private licenses or large state-run firms in many sectors. Other reasons are differing ways in which state companies were privatized and, especially in Brazil’s case, tax and compliance-heavy regulation that favors either large scale or informality. Unequal access to finance, weak infrastructure, and high input costs also squeeze the middle. The result is a weak level of innovation and specialization needed for future growth. ... Much of Latin America’s labor force is trapped in a long tail of small, unproductive, and
often informal firms ...
The MGI report suggests how a focus on digital technologies might help, making it "easier for companies to open businesses, register property, and file taxes over the internet, reducing the cost of red tape. Digital can facilitate more efficient markets from land and jobs to local services. Digital platforms make it possible for small and midsize companies to become `micromultinationals' able to compete with much larger competitors by offering their goods and services through online marketplaces regionally or globally."

That's not a bad suggestion, but my sense is that Latin America's failure to provide a business climate that fosters middle-sized and larger firms runs deeper.  For example, an earlier post on  "Mexico Misallocated" (January 24, 2019) describes how many government rules about companies and employment are based on the size of the firm. Taken together, these rules in combination have led to a bias in favor of new firms, but against the growth of existing firms. Moreover, the existing laws and regulations in Mexico have led to a common pattern of high-productivity firms exiting markets, while low-productivity firms enter them.

Throughout the world, the success stories of economic development have been led by the growth of private-sector firms of medium- and large-scale. The governments and people of Latin America need to think more deeply about public policy is hindering the growth of such firms.

Tuesday, September 10, 2019

Universal Basic Income--Combined With What Else?

The idea of  a "universal basic income" has some immediate attraction. If we can land an astronaut on the moon, etc., etc. But along with other slogans like a guaranteed government job or single payer health insurance, the devil is in the details.

Three recent essays offer a useful overview of the choices and tradeoffs. Melissa S. Kearney and Magne Mogstad have written "Universal Basic Income (UBI) as a Policy Response to Current Challenges" for the Aspen Institute Economic Strategy Group (August 23, 2019). Also, the most recent issue of the Annual Review of Economics, published in August 2019, has a three-paper symposium on the universal basic income.
For those who don't have access to the Annual Review of Economics, the first paper is freely available here, the second paper is available as an NBER working paper here, and the third paper is freely available here.

An underlying theme of these discussions is that it is essentially meaningless to discuss the idea of a universal basic income in isolation. Whether you are talking about cost, or effects on distribution of income, or effects on work incentives, it matters considerably whether the universal basic income is views as an addition to any existing income transfer programs, or as a replacement for at least some of those programs.

For example, consider the question of cost.  Hoynes and Rothstein explain this way:
A universal payment of $12,000 per year to each adult U.S. resident over age 18 would cost roughly $3 trillion per year. This is about 75 percent of current total federal expenditures, including all on- and off-budget items, in 2017. (If those over 65 were excluded, the cost would fall by about one-fifth.) Thus, implementing this UBI without cuts to other programs would require nearly doubling federal tax revenue; even eliminating all existing transfer programs – about half of federal expenditures – would make only a dent in the cost. ...
A truly universal UBI would be enormously expensive. The kinds of UBIs often discussed would cost nearly double current total spending on the “big three” programs (Social Security, Medicare, and Medicaid). Moreover, each of these programs would likely be necessary even if a UBI were in place, as each addresses needs that would not be well served by a uniform cash transfer. Expenditures on other existing programs sum up to only a small fraction of the cost of a meaningful UBI. This suggests that a full-scale UBI would require substantial increases in government revenue. The impacts of whatever taxes are imposed to generate this revenue are likely of first-order importance in evaluating the impact of a UBI.
This insight helps to explain why no high-income country has actually adopted a "universal" basic income, and why most proposals for a "universal" basic income aren't really a simple universal payment. Instead, such proposals often include various phaseouts of the payments as other income rises, or rules that some of the money must be spent on purchasing health insurance, and so on and so forth.

On the issue of how a universal basic income would affect the distribution of income, the answer again depends on the extent to which is might replace other programs. The United States, like many other countries, uses "tagging" in its transfer programs, which means that transfer payments are often linked to some characteristic other than income. For example, payments may be linked to age (like Social Security), or to disability, or to whether or how many children are in a household (like Medicaid, the earned income tax credit, food stamps, and others).

Consider the proposal that is sometimes made for taking all the funds now spent on income transfers, and instead using that money for cash payments in the form of a universal basic income. (In "Universal Basic Income: A Thought Experiment" (July 29, 2014), I discuss one proposal along these lines for the US.)  As Hoynes and Rothstein explain, even if you cannibalized all spending on Social Security, Medicare, Medicaid, and every other program that involves government transfers, it wouldn't be enough to support a universal basic income of $12,000 per person. But set aside the cost arguments and instead focus on how the redistribution of income would be affected by moving away from a "tagging" system.

Hoynes and Rothstein do various calculations of how a universal basic income that replaces other government programs would affect who receives the funds. It shouldn't be any surprise that if you stop targeting the elderly, the disabled, and families with children, then households with those characteristics will get less. In contrast, households that are nonelderly, nondisabled, and with no children get tent to get more. They write:
This implies that were we to eliminate current income support programs and apply the funds towards a pure UBI, there would be a relative redistribution from low-earners to zero earners, but the first-order effects would be a massive distribution up the earnings distribution, along with a redistribution from the elderly and disabled towards those who are neither, primarily but not exclusively those without children.
As Kearney and Mogstad write: "The complexity of existing redistribution problems is a real issue, but the complexity is in large part based on seeking to address specific needs for specific groups: health care, housing, food, energy costs, and so on." For those attracted by the simplicity of just paying a flat cash amount to everyone, not linking benefits to family status or type of service, it's important to think seriously about what this shift away from tagging would be giving up.

Another main set of arguments about a universal basic income involves its interaction with labor markets. There are several arguments here that do not necessarily dovetail very well with each other. For example, some supporters of a universal basic income suggest that it will be needed in the future after the robot apocalypse makes most of human labor obsolete. When this actually happens, I'm ready to revisit this argument. But at present, the unemployment rate has been 4% or less for more tha a year and there are plenty of previous warnings about technological change would lead to permanent mass unemployment (here are examples from 1927, 1964, and 1982) that did not come to pass.

A gentler version of this argument is that a universal basic income would be a way of helping low-wage or low-income workers. But if helping a specific group of low-wage, low-income workers is the goal, then a "universal" payment is a peculiar way of accomplishing it. Instead, it would seem like an expansion of support for low-wage workers, perhaps designed in a way that is linked to work and provides an additional incentive to work, would make more sense.

Would a universal basic income discourage work? The direct evidence on this point remains thin. There have been studies of a few programs that make universal payments to certain groups, like the Alaska Permanent Fund (based on oil revenues from Alaska) or the Eastern Cherokee Native American tribe payments from gaming revenues, but the size of these payments is too small to be a stand-alone income. There have been experiments with something close to a universal basic income in Finland and Ontario, but these experiments were cancelled after a couple of years. There is some evidence from lottery winners, or from increases in disability insurance payments.

 Kearney and Mogstad provide an overview of the available evidence and argue that both economic theory and the existing evidence suggest that a true universal basic income--that is, an income received without any linkage to other income received, will tend to reduce work. In contrast, programs like wage subsidies, job training, or job subsidies seem likely to increase work. They write (citations omitted):
Studies of transfers that are more comparable in size to the types of UBI payments being proposed imply more negative labor supply effects. For example, a study of lottery winners find that, with an average annual prize of $26,000, each $100 in additional earnings reduced labor market earning by $11. A more recent study of lottery winners in Sweden also provides evidence of reduced earnings in response to winning a lottery prize. This study finds that winning a lottery prize leads to an immediate and persistent reduction in earnings. In addition, the effects of any guaranteed income program are likely to most strongly affect those marginally attached to the labor force. On this point, the lessons from expanded access to disability insurance payments is potentially instructive. Economists have found that the marginal beneficiary of a disability insurance award would have been almost 30 percentage points more likely to work had they not received benefits.
An intriguing thought that emerges from several of these papers is that the arguments for a universal basic income may be stronger for low-income countries. As Ghatak and Maniquet emphasize, most low income countries share several characteristics. A larger share of the population is close to subsistence, compared to high-income countries. As a result, a universal payment can help to raise a larger share of population out of poverty, and at a relatively low cost. In addition, the governments of low-income countries often have a hard time implementing detailed tax and welfare policies; for example, such governments may not be able to observe income levels or hours worked very accurately. Thus, linking government payments to income, as well as to disability, number of children, and even age may be more difficult. As they write, "UBI might be more appropriate in developing countries, especially those in which UBI could help circumvent the imperfections of government institutions in charge of helping the poor."

Of the papers I've mentioned here, Ghatak and Maniquet is the only one with a hefty share of math, and thus is likely to be a hard read for the unintiated. However, Banerjee, Niehaus, and Suri dig into the issues of a universal basic income for lower-income countries in more detail. They point out that while we don't have good evidence on pure universal basic income programs in low-income countries (although experiments are underway in some countries), we do  have a lot of evidence on programs in low-income countries that pay cash to recipients under various conditions. They write (citations omitted):
With the most current available data as of 2018, the World Bank identified 552M people living in the developing world who receive some form of cash transfer from their government. While none of these schemes were (to our knowledge) labelled as UBI, they all shared the common and crucial feature that recipients were given the freedom to do what they want with their money. Many transfers (particularly in South and Central America) were paid out conditional on certain conditions being met, but many others (particularly in Africa) were not. And in some cases - pensions, for example - these transfers have a structure (size, frequency, and duration) quite similar to UBI payments, though they are not universal.
What have we learned from the evaluation of these schemes? ...
First, evaluations generally have not found the negative impacts that many feared. Reviewing evidence on “temptation goods,” Evans and Popova (2017) find that transfers had on average reduced expenditure on temptation goods by 0.18 standard deviations. In other words, far from blowing their transfers on alcohol and tobacco, recipients appear to drink and smoke less. This finding in no way diminishes the seriousness of substance abuse as an issue for the poor, but it does suggest that lack of money may be a cause of substance abuse rather than a constraint on it. Turning to “dependency” ...  Banerjee et al. (2017b) find no systematic evidence that transfers discourage work.
Second, evaluations have found a great diversity of positive impacts. To give some sense, a partial list of outcomes affected in a positive way in one study or another ... includes income, assets, savings, borrowing, total expenditure, food expenditure, dietary diversity, school attendance, test scores, cognitive development, use of health facilities, labor force participation, child labor migration, domestic violence, women’s empowerment, marriage, fertility, and use of contraception, among others. ...
This variety implies that recipients value the flexibility that cash transfers provide: they reveal a preference for many different things. It also implies that a UBI is unlikely to appeal to a technocrat seeking cost-effective ways to increase any particular, narrow outcome.
In addition, they point out that a universal basic income may help economic growth in low-income countries by making it possible for low-income people to deal with the day-to-day risks they face and to make modest investments in small-scale entrepreneurship. And a universal benefit might build political support for a rudimentary social safety net in countries that do not yet have one.

On the other side, even if it is harder for a low-income country to run a precisely targeted income transfer program, imperfect targeting can still be useful. Rema Hanna and Benjamin A. Olken make this case in "Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries," in the Fall 2018 issue of the Journal of Economic Perspectives. They point out that a number of emerging-market countries make transfer payments conditional on behaviors, like whether children attend school or doctor visits, or else on observable characteristics like whether a home has a dirt floor, or a certain kind of roof or appliances. In some places, a "universal" payment requires taking enough time to register for the program or to undertake some work effort that those with higher income see no benefit from applying. In a few places, transfer payments are given to a community, which then must have a formal and open process for distributing those payments among the members of the community. They argue that a truly universal program, with payments going to people of all income levels, is less effective at addressing inequality than a program with imperfect targeting of benefit payments.

Here's a final comparison between universal basic income in high-income and low-income countries that struck as interesting, from the Banerjee, Niehaus, and Suri paper. They point out that one of the arguments for a universal basic income in low-income countries is that employment in such countries is often sporadic, with many people working a variety of part-time gigs rather than a single steady job, which is part of what makes it hard for the government in a low-income country to adjust benefits in response to income and work status. But of course, there is also concern that a greater share of workers in high-income countries are ending up in the "gig economy"  with a series of part-time jobs, which in turn makes it more challenging for high-income countries to set up programs where transfer programs will make sporadic payments in the gaps between sporadic jobs. Banerjee, Niehaus, and Suri write:  
"[D]eveloping countries already look like one possible future for the developed ones: few people hold stable full-time jobs, many work a variety of part-time gigs instead, and as a result, public policy has never been based on an assumption of universal full-time employment. Perhaps in this there is something the rich countries can learn from the poor."

Saturday, September 7, 2019

China and India Build Internal Supply Chains

One of the key questions in the escalating US trade disputes with China and other countries is how much the economy of other countries depends on trade. The answer helps to determine how much leverage the US has in trade disputes. Thus, it's interesting to note that starting about a decade ago, both India and China started reducing their dependence on exports as a source of growth, while doing more to build internal supply chains and relying more on domestic products.

A group of authors from McKinsey Global Institute published "Asia’s futureis now" in July 2019, including Oliver Tonby, Jonathan Woetzel, Wonsik Choi, Jeongmin Seong, and Patti Wang. Here'a a figure showing how the reliance of China and India on exports has been falling.

The authors also note:
As consumption rises, more of what gets made in these countries is now sold locally instead of being exported to the West. Over the decade from 2007 to 2017, China almost tripled its production of labor-intensive goods, from US$3.1 trillion to US$8.8 trillion. At the same time, the share of gross output China exports has dramatically decreased, from 15.5 percent to 8.3 percent. India has similarly been exporting a smaller share of its output over time (Exhibit 2). This implies that more goods are being consumed domestically rather than exported. Furthermore, as the region’s emerging economies develop new industrial capabilities and begin making more sophisticated products, they are becoming less reliant on foreign imports of both intermediate inputs and final goods. The previous era of globalization was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labor costs—and often their supply chains ran through Asia. Now labor arbitrage is on the wane. Only 18 percent of today’s goods trade now involves exports from low-wage countries to high-wage countries—a far smaller share than most people assume and one that is declining in many industries. ....
Asian consumers have long had a strong preference for foreign luxury goods and brands. But things are changing. The post-90’s generation is starting to lose this bias against domestic brands; in fact, they are starting to choose them over foreign brands more often. ...
Wages in China have risen substantially in the last couple of decades. As a result, the rising manufacturing hubs in Asia are now in places like Vietnam and Indonesia. In addition, many of the international economic ties are within Asian countries, rather than being between China and the United States. 
Historically China was known as the “factory to the world.” But while low-cost labor was its original competitive advantage, the wage gap between China and the rest of Asia is closing. In 1996, wages in Japan were 46 times higher than in China; by 2016, they were only four times higher. China is moving up the value chain, and as it transitions, other locations around Asia are stepping into some of its former niches. Vietnam, in particular, has become a hub of labor-intensive manufacturing for export. The country has attracted a flood of greenfield investment into cities such as Hai Phong. In addition to Hai Phong (Vietnam), Ho Chi Minh City (Vietnam), Bekasi (Indonesia), and Xi’an (China) are rising makers of electronics. As new places assume new roles in industry value chains, a new set of cities begins to benefit from the influx of capital. Investment in factories leads to new roads, new jobs, and urbanization. Much of the capital flowing into Vietnam comes from South Korea and Japan. These new manufacturing hubs speak not only to the rise of emerging Asian countries but also to a region that is more connected and co-invested.
 This helps to explain why, when the US puts economic pressure on trade with China, it affects US trade with China, but not necessarily China's trade with other countries of Asia or patterns of US trade with the Asian region as a whole.

Friday, September 6, 2019

US Multinationals Bring Foreign Earnings Back Home

The Tax Cuts and Jobs Act of 2017 largely eliminated taxes on US multinational corporations when they bring profits earned in other countries back to the use. As a result, there has been a dramatic rise in the dividends that U.S. parent companies received from their their foreign affiliates. Sarah A. Atkinson and Jessica McCloskey of the US Census Bureau offer some striking illustrations of this change, alnog with other data on international flows of investment in and out of the US economy,  in "Direct Investment Positions for 2018: Country and Industry Detail," published in the August 2019 Survey of Current Business

For example, here's a look at "outward direct investment" of US multinationals abroad. In any given year, the amount of outward direct investment can change for several reasons, but one key issue is whether earnings from other countries are reinvested abroad, or whether they are returned to the US. As the figure shows, US multinationals have been reinvesting about $300 billion per year in foreign earnings in other countries. In 2018, they instead brought almost $300 billion back to the US economy.

Chart 4. Change in the Outward Direct Investment Position by Component, 2009–2018. Line Chart.


Atkinson and Jessica McCloskey explain:
Reinvestment of earnings—the difference between the U.S. parents’ share of their foreign affiliates’ current-period earnings and dividends paid by the foreign affiliates to their U.S. parents—shifted to net inflows of $251.9 billion in 2018 from net outflows of $306.5 billion in 2017. The shift was largely due to the repatriation of accumulated prior earnings by U.S. multinationals from their foreign affiliates, largely in response to the TCJA [Tax Cuts and Jobs Act]. Current-period earnings of foreign affiliates of U.S. MNEs [multinational enterprises] can either be repatriated to the parent company in the United States in the form of dividends or reinvested in foreign affiliates. Dividends can be paid from either current-period earnings or prior-period earnings that had been reinvested. When dividends exceed current-period earnings, reinvested earnings (calculated as a residual) are negative, indicating a withdrawal of equity assets. In 2018, reinvestment of earnings of −$251.9 billion reflected the difference between direct investment earnings of $524.6 billion and dividends of $776.5 billion ..." 
The figure below shows the pattern described in the previous text: that is, in 2018 total earnings of US multinationals on their foreign investments was $524.6 billion. However, total dividends paid to US corporate parents was $776.5 billion. Thus, the overall reduction in the stock of US foreign investment abroad was a drop of $251.9 billion.
Chart 5. Components of Outward Direct Investment Earnings, 1987–2018. Line Chart.

The authors also point out the countries from which these repayments to US corporate parents are arriving. They add:
Almost one-half of the dividends were from affiliates in Bermuda and the Netherlands, and the next largest share of dividends was from affiliates in Ireland. The largest increases in dividends by industry of U.S. parent were in the chemicals manufacturing, computers and electronic products manufacturing, and information industries. 
Of course, the actual physical location of US multinationals abroad is not mainly in Bermuda, Netherlands, and Ireland. Instead, these locations are where US multinationals have been holding large quantities of assets in an effort to reduce cases. For example, here's a discussion of the "Double Irish Dutch Sandwich" method for moving profits across international borders to reduce corporate taxes, and here's a broader discussion of "How US Multinationals Shifting Income to Foreign Countries Reduces Measured GDP."

As US multinationals bring home profits earned abroad, it will be interesting to track the results. Is some of the money paid out to shareholders? Will it be invested in new corporate projects, or will it be held as a liquid asset? Will this repatriation of profits affect stock market prices?