James Madison on Why to Fill Out Your Census Form

I saw a news release from the US Bureau of the Census over the weekend that only about one-sixth of US households have responded to the 2020 Census so far. Here's what James Madison had to say, back in 1790, about why to fill out the form.

To set the stage, section 2 of the just-adopted US Constitution called for an enumeration of people to determine the number of members each state would have in the House of Representatives: "The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct." But when the bill to enact the first Census came up in 1790, James Madison (then a member of the House of Representatives) argued that although collecting additional information would add to the difficulties, both the legislators and citizens would proceed with "more light and satisfaction" when they "rest their arguments on facts, instead of assertions and conjectures." 

Our records of Congressional debates from that time do not quote exactly verbatim, but instead are paraphrased. The fuller comments attributed to Madison are below, but here's are some highlights of what he had to say on January 25 and then on February 2, 1790:

This kind of information, he [Madison] observed, all Legislatures had wished for; but this kind of information had never been obtained in any country. ... If the plan was pursued in taking every future census, it would give them an opportunity of marking the progress of the society, and distinguishing the growth of every interest. This would furnish ground for many useful calculations, and at the same time answer the purpose of a check on the officers who were employed to make the enumeration ... I take it, sir, that in order to accommodate our laws to the real situation of our constituents, we ought to be acquainted with that situation. ... If gentlemen have any doubts with respect to its utility, I cannot satisfy them in a better manner, than by referring them to the debates which took place upon the bills, intend, collaterally, to benefit the agricultural, commercial, and manufacturing parts of the community. Did they not wish then to know the relative proportion of each, and the exact number of every division, in order that they might rest their arguments on facts, instead of assertions and conjectures? ... We should have given less encouragement in some instances, and more in others; but in every instance, we should have proceeded with more light and satisfaction.

Afterword: Here is a fuller version of the comments attributed to Madison. Here is the paraphrase of Madison's comments for January 25, 1790:  

Mr. Madison observed, that they had now an opportunity of obtaining the most useful information for those who should hereafter be called upon to legislate for their country, if this bill was extended to as to embrace some other objects besides the bare enumeration of the inhabitants; it would enable them to adapt the public measures to the particular circumstances of the community. In order to know the various interests of the United States, it was necessary that the description of the several classes into which the community is divided should be accurately known. On this knowledge the Legislature might proceed to make a proper provision for the agricultural, commercial, and manufacturing, interests, but without it they could never make their provisions in due proportion. This kind of information, he observed, all Legislatures had wished for; but this kind of information had never been obtained in any country. He wished, therefore to avail himself of the present opportunity of accomplishing so valuable a purpose. If the plan was pursued in taking every future census, it would give them an opportunity of marking the progress of the society, and distinguishing the growth of every interest. This would furnish ground for many useful calculations, and at the same time answer the purpose of a check on the officers who were employed to make the enumeration; forasmuch as the aggregate number is divided into parts, any imposition might be discovered with proportionable ease.

And here is a fuller paraphrase of Madison's comments on February 2, 1790:

And I am very sensible, Mr. Speaker, that there will be more difficulty attendant on the taking the census, in the way required by the constitution, and which we are obliged to perform, than there will be in the additional trouble of making all the distinctions contemplated in the bill. The classes of people most troublesome to enumerate, in this schedule, are happily those resident in large towns, the greatest number of artisans live in populous cities, and compact settlements, where distinctions are made with great ease.

I take it, sir, that in order to accommodate our laws to the real situation of our constituents, we ought to be acquainted with that situation. It may be impossible to ascertain it as far as I wish, but we may ascertain it so far as to be extremely useful, when we come to pass laws, affecting any particular description of people. If gentlemen have any doubts with respect to its utility, I cannot satisfy them in a better manner, than by referring them to the debates which took place upon the bills, intend, collaterally, to benefit the agricultural, commercial, and manufacturing parts of the community. Did they not wish then to know the relative proportion of each, and the exact number of every division, in order that they might rest their arguments on facts, instead of assertions and conjectures? Will any gentleman pretend to doubt, but our regulations would have been better accommodated to the real state of the society than they are? If our decisions had been influenced by actual returns, would they not have been varied, according as the one side or the other was more or less numerous? We should have given less encouragement in some instances, and more in others; but in every instance, we should have proceeded with more light and satisfaction.

Finally, this post repeats some material from a post back in March 2017 about the importance of government statistical agencies. But with the 2020 Census upon us, the message seemed to bear repeating.

Can the Economy Just Be Put on Hold for a Few Months?

The COVID-19 pandemic is an intertwined public health and economic event. Here are some comments from Richard Baldwin and Beatrice Weder di Mauro: "The social distancing policies are purposefully inducing an economic slowdown. ... The recession, so to speak, is a necessary public health measure. ... The recession is a medical necessity. That’s a given. But governments can and should try to flatten the economic recession curve. ... The key is to reduce the accumulation of ‘economic scar tissue’ – reduce the number of unnecessary personal and corporate bankruptcies, make sure people have money to keep spending even if they are not working."

The comments are from the "Introduction" to an e-book containing 24 short essays edited by Baldwin and Weder di Mauro, and just released by VoxEU: Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes. This is a follow-up to the ebook they produced less than two weeks ago, which I commented on in "Some Coronavirus Economics" (March 11, 2020). The collection has a lot of interesting analysis about fiscal and monetary policy in the current setting, along with specific discussions of the European Union, the European Central Bank, Italy, Germany,  China, Singapore, South Korea, and so on. 

Here, I want to focus a bit on a theme that comes up in a number of the essays: the idea that sensible economic policy can put the economy in the freezer for a few months, and the pull the economy out of the freezer, thaw it out, and restart it. I find myself in the awkward position here of largely being in agreement with this policy as a short-run approach, and at the same time also feeling that the ultimate consequences of the policy are going to be more difficult than a number of authors are envisaging. 

As one example of this theme in the book, Luis Garicano writes: "[A]t this point standard demand management is useless. Governments do not want to stimulate economic activity —they are doing all they can to stop it (they are asking people to stay at home!). Instead, economic policy is needed to ensure that the economy survives a ‘freeze’ of (hopefully, no more than) three to six months." 

As another, Pierre-Olivier Gourinchas writes: 

[I]n the short run, flattening the infection curve inevitably steepens the macroeconomic recession curve. Consider China, or Italy: increasing social distances has required closing schools, universities, most non-essential businesses, and asking ost of the working-age population to stay at home. While some people may be able to work from home, this remains a small fraction of the overall labour force. Even if working from home is an option, the short-term disruption to work and family routines is major and likely to affect productivity. In short, the – appropriate – public health policy plunges the economy into a sudden stop. ... A modern economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries… Everyone is someone else’s employee, customer, lender, etc. A sudden stop like the one described above can easily trigger a cascading chain of events, fuelled by individually rational, but collectively catastrophic, decisions. ... To a first-order approximation, I would consider that governments may need to provide income support on a scale roughly comparable to the output lost.  

Rather than quote from a number of other authors, I'll try to sum up the economic policy goal in my own words. Sure, in normal times, it makes sense to have a dynamic economy where firms rise and fall depending on whether customers are willing to pay for what they produce, and it makes sense for a churning labor market to reallocate workers back and forth across these companies. 

But the novel coronavirus isn't a normal time. There is no reason to believe that it is a socially useful mechanism for sorting out which firms should expand or contract, or that it is a useful mechanism for reallocating labor across the economy. Instead, the goal of public policy should be to prevent firms from needing to fire workers permanently as a response to the pandemic. If firms need to use short-term layoffs, then government can help to replace lost income until workers get the call-back to return to work. The financial sector should be encouraged or subsidized to hold back on calling in loans or foreclosures. In some broad sense, the costs of an economic "freeze" due the coronavirus pandemic should be socialized. In the US, for example, perhaps the debt/GDP of the federal government rises by 5 percentage points of GDP, as the government provides support for the lost income across the economy.  

As I said earlier, I broadly share this vision of aggressive government action to ease the immediate economic burden of the pandemic. If the issue was as simple as whether to cut interest rates and raise government debt by 5 percentage points, then the policy choice would be simple for me. But ti's not that simple. 

1) As a matter of public health, there's no guarantee that COVID-19 is a one-time event. For example, the Great Influenza Epidemic of 1918-20 happened over three cycles. There is some reason for concern that in a globalized world, outbreaks of pandemics may be more common and spread faster than in the past. Even as we plunge into the immediate economic rescue, it's worth asking: Is this a pattern of public health and economic actions we are planning to repeat each year for the next 2-3 years? If such pandemics recur more frequently, is the the set of policies we are planning to follow once or twice a decade into the foreseeable future? For example, if very large fiscal policy actions to soften the economic blow of pandemics are going to be a recurrent and standard policy moving ahead, governments need to start planning ahead for them. 

2) The proposed plan as a matter of practical politics and legislation, will be able to turn on the rescue and then turn it off? For example, Olivier Blanchard offers this advice in the book: "[S]pend what you must on crisis containment and commit to wind down everything once the crisis is over. Full stop." The commitment to turning off the support is easy to say, but often hard to do, and the "winding down" process can extend a considerable time. 

3) As another matter of practical politics, support for business often tends to favor the big and the prominent. For example, in a US context there has been talk of assisting the airlines, which are big prominent companies, often with unionized employees, and thus lots of political clout. However, the tourism, entertainment, and restaurant industry is made up of much smaller firms, although as a group, they employ vastly more people.

4) It's easy to say that companies shouldn't be forced into bankruptcy by the coronavirus, and by and large, I agree. But we all know that some economic actors are more prudent than others. Some companies take on very high levels of debt, and some don't. Some people make sure to an amount equal to several months of income on hand, and others (who have similar levels of income) are rolling over large credit-card bills and paying interest from month to month. Yes, the pandemic was unexpected, but some firms and people build in a cushion deal with the unexpected, and some don't. Whenever government steps in to help those who are blindsided by an unexpected event, it benefits those who were not prudent over those who tried to be.

5) Finally, I'll add that any economy is not just a machine that can be switched off and on again. Helping households and firms to limp through the economic effects of this pandemic is worth doing, even at high costs to governments. But the economic disruption has costs of its own. Some number of the projects that companies were working on will be forever uncompleted. Relationships within and across organizations have been disrupted. It seems unlikely that customers and supply chains will simply restart their old patterns after a substantial disruption. Trust in providers will be shaken, sometimes for good reasons and sometimes for trivial ones.  There may be jump-starts toward companies doing more work online, or encouraging telecommuting. In health care, there may be shifts toward virtual consultations, or pharmacists providing more services, or how tests and treatments are approved and used. There may be surge to online education: after all, if online education is good enough for grades and credit at Harvard, Stanford, doesn't that show that it could be online at lots of other places after the pandemic passes? These pattern shifts and many more will outlast the pandemic itself, and will cause economic disruptions and costs of their own.

The Spanish Flu of 1918-20: Health and Macroeconomic Effects

A century ago, the world went through the "Spanish flu," which was actually an epidemic that arrived in three waves from 1918-1920. Robert J. Barro, Jose F. Ursua, and Joanna Weng discuss "The coronavirus and the Great Influenza epidemic: Lessons from the `Spanish Flu'” (AEI Economics Working Paper 2020-02, March 2020). They write (footnotes omitted):

A reasonable upper bound for the coronavirus’s mortality and economic effects can be derived from the world’s experience with the Great Influenza Epidemic (popularly and unfairly known as the Spanish Flu), which began and peaked in 1918 and persisted through 1920. Our estimate, based on data discussed later on flu-related death rates for 43 individual countries, is that this epidemic killed around 39 million people worldwide, corresponding to 2.0 percent of the world’s population at the time. These numbers likely represent the highest worldwide mortality from a “natural disaster” in modern times, though the impact of the plague during the black death in the 14th century was much greater as a share of the population. 

The Great Influenza Epidemic arose in three main waves, the first in spring 1918, the second and most deadly from September 1918 to January 1919, and the third from February 1919 through the remainder of the year (with a fourth wave applying in some countries in 1920). This airborne infection was based on the Influenza A virus subtype H1N1. The coincidence of the two initial waves with the final year of World War I (1918) encouraged the spread of the infection, due to crowding of troops in transport, including large-scale movements across countries. An unusual feature was the high mortality among young adults without existing medical conditions. This pattern implies greater economic effects than for a disease with comparable mortality that applied mostly to the old and very young. 

The epidemic killed a number of famous people, including the sociologist Max Weber, the artist Gustav Klimt, the child saints Francisco and Jacinta Marto, and Frederick Trump, the grandfather of the current U.S. President. Many more famous people were survivors, including Mahatma Gandhi, Friedrich Hayek, General Pershing, Walt Disney, Mary Pickford, and the leaders of France and the United Kingdom at the end of World War I, Georges Clemenceau and David Lloyd George. The disease severely impacted U.S. President Woodrow Wilson, whose impairment likely had a major negative effect on the negotiations of the Versailles Treaty in 1919. Thus, if the harsh terms imposed on Germany by this treaty led eventually to World War II, then the Great Influenza Epidemic may have indirectly caused World War II. ...

Applying the flu death rates from the Great Influenza Epidemic to current population levels (about 7.5 billion worldwide in 2020) generates staggering mortality numbers. A death rate of 2.0 percent corresponds in 2020 to 150 million worldwide deaths. The number of deaths in the United States would be 6.5 million at the global death rate of 2.0 percent and 1.7 million at the U.S. death rate of 0.5 percent. However, these numbers likely represent the worst-case scenario today, particularly because public-health care and screening/quarantine procedures are more advanced than they were in 1918-1920.

The main purpose of the Barro, Ursua and Weng paper is to estimate macroeconomic effects of the Great Influenza Outbreak. It should be noted that this is a working paper, subject to later revision. The broad approach is to look at how outbreaks of flu intensity varied across countries and over time, and to draw inferences about changes in economic output accordingly. (For example, not all countries that had outbreaks of flu were much involved in World War I.).  But as the authors are quick to poiunt out, the quality of country-level data for this time period often isn't great. There is also the task of separating effects of flu from after-effects of World War I, including postwar depression and, in some countries, inflations on their way to becoming hyperinflations. Those with a taste for working through econometrics will certainly find other questions to raise.

Nonetheless, as an early take on events, the results caught my eye. By their calculations, the Great Influenza Outbreak was the fourth-worst global economic event since 1870, lagging behind only World War I, World War II, and the Great Depression. (Of course, Americans have a tendency to think of World War II as a time of rising economic output, but this was not the experience of the war across Europe and Asia).  Barro, Ursua, and Weng conclude this way:

The implications of our findings from the Great Influenza Epidemic for the ongoing coronavirus epidemic are unsettling. As noted before, the flu death rate of 2.0 percent out of the total population in 1918-1920 translates into 150 million deaths worldwide when applied to the world’s population of around 7.5 billion in 2020. Further, this death rate corresponds in our regression analysis to declines in the typical country by 6 percent for GDP and 8 percent for consumption. These economic declines are comparable to those last seen during the global Great Recession of 2008-2009. The results also suggest substantial short-term declines in real returns on stocks and short-term government bills. Thus, the possibility exists not only for unprecedented numbers of deaths but also for major global economic dislocation. Although these outcomes for the coronavirus are only possibilities, corresponding to plausible worst-case scenarios, the large potential losses in lives and economic activity justify substantial outlays to attempt to limit the damage. However, extreme mitigation efforts—such as widespread cancellations of travel, meetings, and major events—will themselves contribute to the depressed economic activity

A number of points here are worth reflection. For example, this kind of pandemic can be something that echoes over several years, not just a three-week or three-month event. The effects of a major outbreak will echo over time, both in terms of an effect on the lives of prominent people, but also through health effects that may not manifest themselves until decades later in life. At least so far, the mortality rate of coronavirus seems higher among the elderly and those with previous conditions, which is one of the several main reasons why this historical parallel is imperfect. Indeed, there is some argument--for example, expressed here by Nicholas Christakis--that COVID-19 may be closer to the quite 1957-8 outbreak of "Asian flu," rather than the 1918-1920 experience.

An overview from the CDC on the 1918 pandemic is available here.

Given the kerfuffle over whether to refer to viral outbreaks or diseases by using geographic names, I did find myself smiling at the comment from Barro, Ursua, and Weng about what I long-ago learned to call the "Spanish flu" of 1918-20:

Spain was not special in terms of the severity or date of onset of the disease but, because of its neutral status in World War I, did have a freer press than most other countries. The greater attention in news reports likely explains why the flu was called “Spanish.” In terms of mortality rates and total persons killed, it would be more appropriate to label the epidemic as the Indian Flu, although the highest mortality rate out of the total population, above 20 percent, may have been in Western Samoa. There is controversy about the origin point of the epidemic, with candidates including France, Kansas, and China.

US and International Stock Market Premiums in the Long Run

Stock markets can be volatile and risky in the short- and even the medium-run. But as a long-run average, stock markets (in the US, at least) have provided rewarding returns. Elroy Dimson, Paul Marsh, and Mike Staunton provide some useful background in the Credit Suisse Global Investment Returns Yearbook 2020.  The "Summary Report" is freely available on-line.

Here are a couple of figures showing nominal and real rates of return on stocks, bonds, and Treasury bills for the US market from 1900-2019. (Thanks to the authors for permission to reproduce the figures shown here.) In real terms, US stock market returns have risen at a 6.5% annual rate over this time, compared to 2.0% for bonds and 0.8% annually for bills. This is the "equity premium," the name given to the pattern that if you invest in stocks for the long term--and thus ride through the hills and valleys--your patience will be rewarded after a decade or two.

This general pattern of higher stock market returns holds across many countries, but it's stronger in the US than in most others. Here's a figure showing the return on equities from 1900 to 2019 for a range of countries. Sweden's (fairly small) stock market is at the top, with the US just a bit behind. Some of the stock markets that existed in 1900, like those in China and Russia, were  wiped out altogether. (Russia represented about 6% of global stock market capitalization in 1900).

The high returns for US stock market mean that over time, US stock market capitalization has become a substantially larger share of the global total. For example, the US stock market was 15% of total global stock market capitalization in 1899 (top pie graph), but was 54.5% of global stock market capitalization in 2019 (bottom pie graph).

This pattern raises some obvious questions. What specifically is it about US stock markets that has enabled them to grow so robustly over the long-term? In particular, are the key factors more closely related to events and patterns in the US economy as a whole? To characteristics of US corporations? Or to something in the US institutional/financial/legal framework which gives US shareholders a well-founded belief that their stock ownership gives them an actual claim on corporate profits that will be respected in the future? Naturally, these questions also raise concerns about whether US stock market investors with long-term horizons--like pension accounts, insurance companies, and retirement accounts held by individuals--will be able to count on higher stock market returns in the future, too.

The report by Dimson, Marsh, and Staunton  has a lot of other material of interest, as well: how factor investing has worked over time; the "golden age" of US bond markets from 1982-2014; environmental, social and governance investing; and more.

Federal Debt in a Time of Pandemic

In the midst of 1,001 ways that the government could increase spending or reduce taxes to blunt the immediate economic effect of the coronavirus pandemic, spare a moment for the existing level and trend of federal debt. The Congressional Budget Office has issued "Federal Debt:A Primer" (March 2020).

Here's the ratio of federal debt held by the public to GDP, going back to 1790. The "held by the public" means that when one part of the federal government loans money to another part of the federal government--like when the Social Security Trust Fund invests in US Treasury debt--this doesn't require the federal government to borrow from outside the government, and thus isn't counted in the total.

The historical spikes in the debt/GDP ratio are named easily enough. You can point out the rising levels of debt for the Revolutionary War, the Civil War, World War I, the Great Depression, World War II, the tax cuts and defense build-up of the 1980s, and the Great Recession. The current debt/GDP ratio is second-highest in US history, and trending toward highest. 

Much of the report focuses on the specific financial instruments that the Treasury uses to borrow:  short-term Treasury "bills" that are repaid in periods from one month up to one year; Treasury "notes" that are repaid over periods from two to 10 years; long-term Treasury "bond" repaid over 30 years; Treasury Inflation-Protected Securities (TIPS) where the principal value of the borrowing is adjusted for inflation twice a year; and Floating Rate Notes (FRNs) where the interest rate adjusts up and down based on the interest rate for 13-week Treasury bills. The report notes:

Since the late 1990s, Treasury notes typically have accounted for more than half of all outstanding marketable securities, peaking at 67 percent in 2013 . Treasury bills made up between 20 percent and 30 percent of marketable debt until 2010, when the Treasury began to issue fewer short-term instruments. Those securities declined to just 11 percent of marketable debt in 2015 before rising back to 15 percent in 2019. By the end of 2019, bonds accounted for 14 percent of the Treasury’s outstanding marketable debt, in line with their typical share since the end of the 1990s. TIPS were first issued in 1997 and—after an initial growth phase through 2004—have represented between 7 percent and 10 percent of outstanding marketable debt since then. By the end of 2019, the share of debt taken up by FRNs, which were introduced in 2014, was just 3 percent. ...

Offerings that best meet investors’ needs typically will lower the Treasury’s overall cost of borrowing. Short-term instruments generally have lower interest costs, but they expose the government to the risk of paying higher interest rates when it refinances the issues. Conversely, long-term securities typically involve higher rates but provide more certainty about the future costs of interest payments because they require less frequent financing.

Putting all of these together, the average time to maturity for federal borrowing hasn't changed much in the last two decades: as the figure shows, it got a little shorter during the Great Recession, but now it's back to roughly the same level as 2001.

How much of the Treasury borrowing has come from domestic sources and how much from foreign sources? About half comes from abroad, much of that from China and Japan.

One interesting point I had not considered before is the how higher student debt has played a role in raising federal debt. The CBO explains:

In 2011, the federal student loan program stopped providing loan guarantees to banks and instead began lending to borrowers directly, with the result that the magnitude of federal holdings of financial assets began to increase markedly. In total, at the end of 2019, the government’s financial assets—loans as well as cash—had an estimated value of nearly $1.8 trillion. Subtracting that amount from the $16.8 trillion in debt held by the public leaves about $15.0 trillion in debt held by the public net of financial assets. Debt held by the public at the end of 2019 was equal to about 79 percent of gross domestic
product; debt net of financial assets was about 71 percent of GDP.

The CBO report is focused on laying out trends and patterns, not on ringing the gong about possible dangers. However, there's a brief discussion of risks and effects at the end of the report.

1) "If federal debt as a percentage of GDP continues to rise at the pace of CBO’s current-law projections, the economy would be affected in two significant ways: Growth in the nation’s debt would dampen economic output over time, and higher interest costs would increase payments to foreign debt holders and thus reduce the income of U.S. households by rising amounts."

2) "The increases in debt that CBO projects would also pose significant risks to the fiscal and economic outlook, although those risks are not currently apparent in financial markets. ... High and rising federal debt increases the likelihood of a fiscal crisis because it erodes investors’ confidence in the government’s fiscal position and could result in a sharp reduction in their valuation of Treasury
securities, which would drive up interest rates on federal debt because investors would demand higher yields to purchase Treasury securities. However, the debt-to-GDP ratio has no identifiable tipping point because the risk of a crisis is influenced by other factors, including the long-term budget outlook, near-term borrowing needs, and the health of the economy. Moreover, because the United States currently benefits from the dollar’s position as the world’s reserve currency and because the federal government borrows in dollars, a financial crisis—similar to those that befell Argentina, Greece, or Ireland—is less likely in the United States. Although no one can predict whether or when a fiscal crisis might occur or how it would unfold, the risk is almost certainly increased by high and rising federal debt."

3) "Not all effects of the projected path of debt are negative, however. In addition to allowing policymakers to maintain current-law spending and revenue policies, that path would cause underlying interest rates to be higher than they otherwise would be, giving the Federal Reserve more flexibility in implementing monetary policy."

4) At the current moment, I'd emphasize one other reason mentioned briefly: "In addition, high debt might cause policymakers to feel constrained from implementing deficit-financed fiscal policy to respond to unforeseen events ..."  The enormous and fundamentally healthy US economy can take on more debt in response to the coronavirus. But it's just a fact that if you have already loaded up on borrowing, and your future tax and spending plans already have you locked into pattern of additional borrowing, then your flexibility is lower. The idea of taking steps to hold down the rise in federal borrowing is never going to be  popular. It feels as if it's all discipline and no benefit--right up to when a situation arises when you would like to be able to borrow with confidence in an unconstrained way to meet the challenge of a pandemic. 

Some Ruminations from Mars on Organizations and Informal Jobs

In high-income developed economies like the United States, we tend to take for granted that a large share of economic activity is organized within companies, and that these companies will hire workers and then organize and direct their efforts. However, in lower-income countries the notion of employment through firms cannot be taken for granted--as shown by a lack of "formal" jobs in those economies. .

For an extremely high-level view of the importance of business organizations--indeed, a view from Mars--a passage from Herbert A. Simon (Nobel '78) about two decades ago in an article he wrote for the Journal of Economic Perspectives ("Organizations and Markets, Spring 1991, pp. 25-44). Simon wrote:

A large part of the behavior of the system now takes place inside the skins of firms, and does not consist just of market exchanges. Counted by the head, most of the actors in a modern economy are employees, who either do not spend their days in trading, or if they do (for example, if they are salesmen or purchasing agents) are assumed to trade as agents of the firm rather than in their own interest, which might be quite different. ...

A mythical visitor from Mars, not having been apprised of the centrality of markets and contracts, might find the new institutional economics rather astonishing. Suppose that it (the visitor—I'll avoid the question of its sex) approaches the Earth from space, equipped with a telescope that reveals social structures. The firms reveal themselves, say, as solid green areas with faint interior contours marking out divisions and departments. Market transactions show as red lines connecting firms, forming a network in the spaces between them. Within firms (and perhaps even between them) the approaching visitor also sees pale blue lines, the lines of authority connecting bosses with various levels of workers. As our visitor looked more carefully at the scene beneath, it might see one of the green masses divide, as a firm divested itself of one of its divisions. Or it might see one green object gobble up another. At this distance, the departing golden parachutes would probably not be visible.

No matter whether our visitor approached the United States or the Soviet Union, urban China or the European Community, the greater part of the space below it would be within the green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of "large green areas interconnected by red lines." It would not likely speak of "a network of red lines connecting green spots."

Of course, if the vehicle hovered over central Africa, or the more rural portions of China or India, the green areas would be much smaller, and there would be large spaces inhabited by the little black dots we know as families and villages. But the red lines would be fainter and sparser in this case, too, because the black dots would be close to self-sufficiency, and only partially immersed in markets. But let us, for the present, restrict our attention to the landscape of the developed economies.

When our visitor came to know that the green masses were organizations and the red lines connecting them were market transactions, it might be surprised to hear the structure called a market economy. "Wouldn't 'organizational economy' be the more appropriate term?" it might ask. The choice of name may matter a great deal. The name can affect the order in which we describe its institutions, and the order of description can affect the theory.

In low-income countries, as Simon pointed out, the "green areas" of business organizations are far less prominent. As a result, jobs are more likely to be "informal," in the sense that they are people working on their own or as part of their own family, without regular wages. Here's are some columns from a table from the World Employmentand Social Outlook: Trends 2020 published by the International Labour Organization in January 2020. As the report points out, around the world about 60% of workers have informal jobs; in low-income countries, it's more like 90% (first column) Conversely, it's not a coincidence that in low income countries less than 20% of workers have jobs with wages and salaries (second column).

The ILO discusses these patterns in a section on "Paid work and the problem of decent work." Indeed, a main distinction in lower-income countries between the poor and the middle class in those countries is that the middle class are far more likely to have a formal job that pays a regular wage or salary.

When thinking about Simon's "green areas," there's no need to to the rhetorical extreme of extremes of Nicholas Murray Butler, president of Columbia University, who said in a 1911 speech: "The limited liability corporation is the greatest single discovery of modern times." But it's worth pointing out that a lot of public commentary is a more than a little schizophrenic about the social value of the "green areas." There is often strong criticism that the green areas are following their own logic and goals, which in a number of contexts (pollution is a leading example, direct assistance to the poor is another), may not line up with broader social goals.

Amidst the criticism, one can lose track of the reality that the green areas are the way that advanced economies around the world provide desired and secure jobs for their populations. The green areas are also a major social mechanism for organizing production and pursuing innovation. Indeed, many of the concerns about workers in the "gig economy" in high-income countries are about how workers may suffer if they don't have a well-defined and ongoing connection to a green area.

In lower-income countries, one of the major social challenges is how to generate decent jobs for growing populations (for discussion, see here , here, here). For these countries, providing the legal, social, and financial conditions where Simon's green areas can develop and sustain themselves--thus providing a foundation for secure jobs and future growth--is an important policy goal. Indeed, it seems to me that in many settings the arguments that favor free markets or express concern about free markets are not actually about "markets" per se: instead, they are about decisions being made inside the green areas and how to define the rules and responsibilities that should govern those decisions.

Sick Pay Benefits: A Labor Market and Public Health Issue

Providing sick pay to workers is often discussed in terms of fairness or social insurance against the risk of declining income, but it also has an important public health dimension. Employers might prefer that sick workers remain at home, rather than passing on their illness to the rest of the workforce. But workers who do not have sick pay won't get paid if they don't show up.

Most high-income countries in the world have government-required provision of sick pay. Researchers at the World Policy Analysis Center at UCLA compiled data in a 2018 report "Paid Leave for Personal Illness: A Detailed Look at Approaches Across OECD Countries."  They write that of 34 OECD countries, only the US and Korea do not have a guarantee of paid leave for personal illness. The details of implementation vary across  countries, of course. For example, two of these countries make employers solely responsible for paying for sick leave, nine countries have government solely responsible, and 21 have a mixture of the two. In the mixed systems, a common pattern is that employers pay for the first few weeks of sick leave, and then government takes over after that up to some limit like three or six months. A common pattern in these countries is that sick leave is 80% of regular pay.

In the US, sick leave is much less likely in lower-paying jobs. Here's a figure showing the pattern from the Kaiser Family Foundation:


Efforts to have federal sick pay rule in the US have gone nowhere. However, starting with San Franciso in 2007, a number of state and local governments have passed such rules in the last few years. Twelve states now have such laws, and a couple of dozen more cities, including New York City, Chicago, Philadelphia, Washington DC, Seattle, and Portland.  The typical pattern for these laws is that all employees earn  one hour of paid sick leave for every 30 to 40 hours worked. Of course, the idea behind this design is that a worker can't take a job and then immediately take paid sick leave, but a worker will accumulate roughly a day of paid sick leave for every 8 weeks worked. For a detailed and updated  "Interactive Overview of Paid Sick Time Laws in the United States," see the A Better Balance website.

What are the effects of these laws? Stefan Pichler and Nicolas R. Ziebarth have written "Labor Market Effects of U.S. Sick Pay Mandates," forthcoming in the Spring 2020 issue of the Journal of Human Resources (55:2, pp. 611–659). They look at employment and wage data over a time frame from 2001 to 2016 for nine cities and four states that have enacted sick pay rules. They create what is called a "synthetic control group," which is a set of cities and states that historically have followed the same patterns of employment and wages, but did not adopt a sick pay rule. Then, they can see whether adopting sick pay causes a change in  employment and wages compared to this control group. They find no evidence of such a change.

In a follow-up study, Johanna Catherine Maclean, Stefan Pichler, and Nicolas R. Ziebarth have published a working paper, "Mandated Sick Pay: Coverage, Utilization, and Welfare Effects" (March 2020, NBER Working Paper #26832, not freely available, but readers may have access through their institutiosn).  This study focuses on state-level sick-pay mandates, with data from 2009-2017. During this time, states are adopting sick pay mandates at different times. Thus, for these states and in comparison with other states, one can look for how patterns of sick leave coverage change when sick-pay mandates are adopted. They find:

Within the first two years following mandate adoption, the probability that an employee has access to paid sick leave increases by 18 percentage points from a base coverage rate of 66%. The increase in coverage persists for at least four years without rising further. Over all post-mandate periods covered by this paper, we find a 13 percentage point higher coverage rate attributable to state mandates. As a result of the increased access to paid sick leave, employees take more sick days ...  newly covered employees take two additional sick days per year. Employer sick leave costs also increase, but effect sizes are modest. On average, the increase amounts to 2.7 cents per hour worked ... Further, we find little evidence that sick pay mandates crowd-out non-mandated benefits such as paid vacation or holidays. Likewise, we find no evidence that employers curtail the provision of group policies such as health, dental, or disability insurance.

These studies are focused on labor market issues, and do not take public health effects into account. However, in a different working paper, Stefan Pichler, Katherine Wen,  Nicolas R. Ziebarth study 
"Positive Health Externalities of Mandating Paid Sick Leave" (February 2020).  Looking at state-level data, they find that in the first year after a state enacts sick pay, rates of doctor-certified influenza-like illness fell by about 11%.

This offered broad confirmation of results from an earlier study by Stefan Pichler and Nicolas R. Ziebarth, "The pros and cons of sick pay schemes: Testing for contagious presenteeism and noncontagious absenteeism behavior" (Journal of Public Economics, December 2017, pp. 14-33).  Looking at Google Flu data, they found that when U.S. employees gain access to paid sick leave, the general flu rate in the population decreases significantly, which suggests the possibility of less transmission of flu at work.

They also look at sick pay outcomes in Germany, a country with generous sick pay provisions. However, when Germany legislative changes allowed some flexibility to reduce sick pay from 100% of previous salary to 80%, the result was a large drop in more nebulous claims sickness claims like "back pain" but little drop for sickness claims related to infectious illnesses. This pattern suggests a plausible tradeoff: very generous sick pay can lead to workers taking time off for reasons not related to public health, but as sick pay becomes less generous, it will also lead to "contagious presenteeism" where contagious workers become more likely to show up at the job.

(In passing, I was also struck by this historical comment about Germany sick pay in the Pichler and Ziebarth 2017 paper: "Historically, paid sick leave was actually one of the first social insurance pillars worldwide; this policy was included in the first federal health insurance legislation. Under Otto van Bismarck, the Sickness Insurance Law of 1883 introduced social health insurance in Germany, which included 13 weeks of paid sick leave along with coverage for medical bills. The costs associated with paid sick leave initially made up more than half of all program costs, given the limited availability of (expensive) medical treatments in the nineteenth century ...")

Some US companies are now discovering that sick pay may matter to their business: for example,
"Amazon announces up to 2 weeks of paid sick leave for all workers and a 'relief fund' for delivery drivers amid coronavirus outbreak."  But the kinds of sick pay laws that have been gradually spreading through certain states and cities are partial and incomplete. The novel coronovirus outbreak suggests that a national sick pay policy--probably with employers responsible for the first weeks and then government serving as a back-up--is an issue with broad public health consequences, not just an argument over whether government should require companies to provide certain benefits. Sitting here in March 2020, it would have been nice to have a national sick-pay policy in place a few years ago, as a way of reducing the spread of coronavirus and cushioning the loss of income for those who become sick. But it's not too early to start prepping for the next pandemic.