Friday, July 31, 2015

After the Wright Brothers, Why Did US Mostly Lose the Airplane Market?

One of the puzzles of economic history is why, given that Orville and Wilbur Wright invented the airplane and received a patent, why did the US economy almost immediately fall behind in actual manufacturing of airplanes?

The standard answer has been to blame the patent system: in particular, the Wright brothers put a huge amount of time and energy into trying to defend their 1906 patent for a flying machine against Glenn H. Curtiss and others who were seeking to manufacture planes. The argument goes that both firms put so much time into the patent battles that they lost their focus on actually manufacturing planes. An example of this argument from a 2014 opinion piece in the Wall Street Journal is here.
(Ironically, the Curtiss-Wright company would later be formed in 1929 from the merger of these two firms.)

In "Blaming Wilbur and Orville," Tom D. Crouch reviews a couple of recent books on the Wright brothers and the shortcomings of the Wright Company in the Summer 2015 issue of the Business History Review (89:2, pp. 339-343). He writes:

"That America had fallen far behind Europe in aviation by 1917 is beyond doubt. Every American airman who flew into combat in the “war to end all wars” did so in an airplane entirely designed and almost entirely built in Europe, except for those naval aviators operating Curtiss flying boats in search of enemy U-boats. ... 
In fact, while there was much concern at the time, little solid evidence exists to indicate that the patent suits had any serious impact on American aviation. How then are we to explain the fact that the nation that had given birth to the airplane had fallen so far behind?
The answer lies in a 1913 congressional study of aeronautical expenditures by the nations of the world. Germany led the world, with $28,000,000 spent on aviation between 1908 and 1913. France, Russia, Italy, and Austria followed close behind, with England in sixth place with a total national expenditure of $3,000,000 for aeronautics. Having spent only $435,000 for all flight-related activity during that five-year period, the United States was in thirteenth place, behind Japan, Chile, Greece, and Brazil. (All figures are from Aeronautics in the Army, hearing before the Committee on Military Affairs, U.S. House of Representatives, sixty-third Congress, first session, 1913.) In addition to official appropriations, several leading aeronautical powers had also established national subscriptions that provided an additional $7,100,000 in private financial support for their aeronautical industries. Once again, Germany led the way, with $3,500,000 in private funds, followed by France ($2,500,000), Italy ($1,000,000), and Russia ($100,000). According to official U.S. government estimates, the other nations of the world had spent a total of $93,620,000 in public and private funds on aviation between 1908 and 1913. 
That money was spent on direct purchases of aircraft and engines and on government-sponsored research and development programs. Each of the European powers that went to war in 1914 already maintained sophisticated aeronautical research laboratories. In the United States, the National Advisory Committee for Aeronautics was not authorized by Congress until 1915, and its first flight laboratory was not established until 1917. 
In America, ... flying was the domain of aerial showmen out to thrill the crowds at local meets and air shows with old-style pusher biplanes. In Europe, on the other hand, rich prizes were established to promote improvements in airframe and engine technology. Competition encouraged the development of aircraft that could fly higher, faster, and farther. ... With war clouds glowering on the horizon, European nations had invested heavily in a set of new technologies with military potential. Americans, an ocean away from potential conflict, did not see the need to support the embryonic industry. ... [T]he failure of other American aircraft builders to keep up with advances in Europe had little to do with the patent wars and everything to do with a limited market and the low level of public and private investment in flight technology.

I think the overall lesson here is that patents matter, and so do resources expended in fighting over patents. However, a more fundamental determinant of who ultimately wins in market competition isn't about who gets the first patent, but who makes the continual investments in production and in follow-up improvements.

Thursday, July 30, 2015

Pushing on a String: An Origin Story

There's a long-standing metaphor in monetary policy that the central bank "can't push on a string." It means that while a central bank can certainly slow down an economy or even drive an economy into recession with an ill-timed or too-large increase interest rates, the power of monetary policy is not symmetric.  When a central bank reduces interest rates in an attempt to stimulate the economy, it may not make much difference if banks don't think it's a good time to lend or firms and consumers don't think it's a good time to borrow. In other words, monetary policy is like a string with which a central bank can "pull" back the economy, but pushing on a string just crumples the string.

The "can't push on a string" metaphor appears in many  intro-level economics texts. It has also gotten a heavy work-out these last few years as people have sought to understand why either economic output or inflation wasn't stimulated more greatly by having the Federal Reserve's target interest rate (the "federal funds" rate) near zero percent for going on seven years now, especially when combined with "forward guidance" promises that this policy would continue into the future and a couple trillion dollars of direct Federal Reserve purchases of Treasury debt and mortgage-backed securities.

The first use of "pushing on a string" in a monetary policy context may have occurred in hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough (D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p. 377, during a discussion of what the Fed might be able to do to end deflation.

Governor Eccles: Under present circumstances there is very little, if anything, that can be done.
Mr. Goldsborough: You mean you cannot push a string.
Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and, as I have said several times before this committee, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation monetary action can very effectively curb undue expansion.
Mr. Brown: That is a case of pulling the string.
Governor Eccles: Yes. Through reduction of discount rates, making cheap money and creating excess reserves, there is also a possibility of stopping deflation,  particularly if that power is used combined with this broadening of eligibility requirement.
Later in the hearings, several other speakers refer back to the "push on a string" comment, which clearly had some resonance. Although I have seen the "can't push on a string" metaphor attributed to John Maynard Keynes in a number of places, I haven't seen an actual primary source where Keynes used the phrase.

 For those who like digging into monetary policy metaphors, here's a post about the speech where William McChesney Martin coined the metaphor that the job of a central bank is, when the party is just starting to heat up, to take away the punch bowl.

Wednesday, July 29, 2015

Snapshots of the Global Energy

When the BP Statistical Review of World Energy is published each year, I skim through the figures and tables as a way of grounding myself in some basic facts. Here's are a few things that caught my eye this year.

Here's a figure showing the primary global sources of energy and how they have evolved over time. For comparison, the different types of energy are all converted to "oil equivalents." The green area at the bottom is oil; red is natural gas; light orange is nuclear; blue is hydroelectric; darker orange is the non-hydro renewables like solar and wind; and the gray on top is coal. As the report notes: "Oil remains the world’s dominant fuel. Hydroelectric and other renewables in power generation both reached record shares of global primary energy consumption (6.8% and 2.5%, respectively)."

A more detailed breakdown of these sources of energy offers some additional insights. As Bob Dudley notes in his introduction to the report: "The US replaced Saudi Arabia as the world’s largest
oil producer – a prospect unthinkable a decade ago. The growth in US shale gas in recent years
has been just as startling, with the US overtaking Russia as the world’s largest producer of oil and gas." For oil, the big recent shift is the fall in prices, due both to this rising supply and because "[g]lobal primary energy consumption increased by just 0.9% in 2014, its slowest rate of growth since the late 1990s, other than immediately after the financial crisis." Here's the long-term pattern of oil prices, with the inflation-adjusted price in light green. The current price is now under $60/barrel, so you need to imagine that what looks like a relatively small drop in oil prices on the right-hand side of the figure just keeps falling.
For natural gas prices, the interesting fact is that unlike oil, there isn't a single global price. It's much more costly to ship natural gas all over the world, and so the surge of natural gas supply in the US has kept US natural gas prices lower than prices elsewhere in the world, giving US producers who consume energy a competitive advantage. The US price for natural gas is shown by the red line.

The quantity of coal consumed has been rising sharply, especially in Asia, in a way that if it continues will make it essentially impossible to achieve a significant reduction in global carbon emissions.


The quantity of nuclear power has declined in the last five years or so, especially in the Asia-Pacific region after the Fukushima disaster in Japan in 2011.
Hydroelectric power is also on the rise, especially in the Asia-Pacific region. It is notable how little hydro power there is in Africa, a region that desperately needs more and more reliable electrical power.


While non-hydro remain small slice of total global energy production, if one focuses just on their role in producing electricity, their share is somewhat higher--now above 10% in the Europe and Eurasia region.  Within the EU region alone, the report notes that non-hydro renewables now provide 17% of electrical power (although this has been achieved through hefty public subsidies that are now under reconsideration in a number of countries).


Tuesday, July 28, 2015

What is Discouraging the Registered Voters Who Don't Vote?

After each national election, the US Census Bureau asks questions in its Current Population Survey about whether people voted, and if not, why not. Thom File wrote the July 2015 report called "Who Votes? Congressional Elections and the American Electorate: 1978–2014."  Probably the headline finding of the report is that the percentage of Americans who voted in the 2014 federal elections was the lowest in an off-presidential-year election since the start of this data series in 1978.  The percentage of Americans who voted in presidential elections had been dropping up until about 2000, but since then has rebounded a bit.

The report includes lots of detail on voting rates by different demographic groups, but what caught my eye back in the statistical tables was a listing of the main reasons given by those who didn't vote. The total of 47.6 million is the number of registered citizens who reported not voting: that is, the total doesn't include those who said "don't know" or refused to answer.  Here's the list of reasons for not voting from Table 10 of the most recent data:
For comparison, here's the list of main reasons for not voting (again, among registered citizens who answered this question) after the 2012 presidential election.
What strikes me about the list is, well, how obvious it is. Why don't people vote? Mostly because they are too busy, not interested, forgot, out of town, sick, or don't any of like the candidates. The harder question is whether it should be viewed as an important policy goal to raise the voter turnout rate; at some times and places, voting has even been mandatory. As we endure the steady diet of polling data during the next 16 months of run-up to the November 2016 election, it's worth remembering the old truth that what matters isn't what's said to pollsters, but rather who actually turns out a casts a ballot.

Monday, July 27, 2015

Global Anti-Tobacco Policy

Tobacco use could lead to 1 billion premature deaths in the 21st century. That's the estimate of Prabhat Jha and Richard Peto in their 2014 review article in the New England Journal of Medicine, "Global Effects of Smoking, of Quitting,and of Taxing Tobacco" (January 2, 2014, 370: pp. 60-68).  They write (footnotes omitted):
"On the basis of current smoking patterns, with a global average of about 50% of young men and 10% of young women becoming smokers and relatively few stopping, annual tobacco-attributable deaths will rise from about 5 million in 2010 to more than 10 million a few decades hence, as the young smokers of today reach middle and old age. ...There were about 100 million deaths from tobacco in the 20th century, most in developed countries. If current smoking patterns persist, tobacco will kill about 1 billion people this century, mostly in low- and middle-income countries. About half of these deaths will occur before 70 years of age."
What might be done about it? The World Health Organization offers an overview of policy choices in "WHO REPORT ON THEGLOBAL TOBACCO EPIDEMIC, 2015Raising taxes on tobacco." Here's a figure from the report showing prevalence of smoking around the world. The obvious concern is that rates of smoking will rise as the economies of low-income and middle-income countries grow.
The WHO report looks at a suite of policy options, shown below, but the main emphasis of this year's report is on raising tobacco taxes to at least 75% of the retail price. Here's the full group of policies, and what share of the world population is affected by them.
Like many teachers of economics, I suspect, I use cigarette taxes as an example of elasticity of demand--that is, how does the quantity demanded shift with an increase in price. Here are some comments from the WHO report about tobacco taxes:

"Despite the fact that raising tobacco taxes to more than 75% of the retail price is among the most effective and cost-effective tobacco control interventions (it costs little to implement and increases government revenues), only a few countries have increased tobacco taxes to best practice level. Raising taxes is the least implemented MPOWER measure – with only 10% of the world’s people living in countries with sufficiently high taxes – and is the measure that has seen the least improvement since we started assessing these data. ...
"Research from high-income countries generally finds that a 10% price increase will reduce overall tobacco use by between 2.5% and 5% (4% on average). ... Most estimates from low- and middle-income countries show that a 10% price increase will reduce tobacco use by between 2% and 8% (5% on average). Studies from a number of countries typically show that half of the decline in tobacco use associated with higher taxes and prices results from reduced prevalence (i.e. from users quitting). The remaining half comes from reduced intensity of use (i.e. users consuming less by switching from daily to occasional smoking, or reducing the number of cigarettes smoked each day). 
"In the United States of America (USA), cigarette prices rose nearly 350% between 1990 and 2014, in large part because of a five-fold increase in average state cigarette taxes and a six-fold increase in the national cigarette tax . During this time the number of cigarettes smoked per capita dropped by more than half, and the percentage of adults who smoke fell nearly one third. Tax and price increases in Brazil explain nearly half of the 46% reduction in adult smoking prevalence between 1989 and 2010.
"Tobacco use among young people is very price sensitive, with reductions in tobacco use in this group two to three times larger with a given price increase than among adults.  ... Tobacco use is increasingly concentrated in populations with the lowest income and socioeconomic status, and explains a large proportion of socioeconomic disparities in health. At the same time, lowest-income populations are also more responsive to price increases than higher-income users. The monetary burden of higher tobacco taxes falls more heavily on the wealthiest users, whose tobacco use declines less, while most of the health and economic benefits from reductions in tobacco use accrue to the most disadvantaged populations, whose tobacco use declines more when taxes increase. In Thailand, the Asian Development Bank estimates that 60% of the deaths averted by a 50% tobacco price increase would be concentrated in the poorest third of the population, who would pay only 6% of the increased taxes. ...
"In China, research suggests that raising taxes on cigarettes so that they account for 75% of retail prices –up from 40% of the share of price in 2010– would avert nearly 3.5 million deaths that would otherwise be caused by cigarette smoking."
With tobacco consumption, as with so many other vices that other people have, it's easy to slip into prohibitionist rhetoric. As an inveterate consumer of caffeine myself, and someone who likes a nice glass of wine or a hand-crafted bourbon from time to time, I'm not a supporter of the prohibitionist impulse. There are negative social consequences of making it too highly profitable for producers to evade government rules and overly high taxes and supply something that many people want. But tobacco use poses an enormous public health danger, and I have no problem with government making real efforts to discourage it.

For a US-focused discussion of trends in smoking since the release of the Surgeon General's report that smoking is hazardous to your health, see "Smoking, 50 Years Later" (January 28, 2014). For a discussion of the recent controversies over e-cigs and vaping, see "E-cigs: The Bootlegger/Baptist Opposition" (May 21, 2015)

Friday, July 24, 2015

Parsing a Financial Transactions Tax

[Note: The discussion paper discussed below was later published in the National Tax Journal, March 2016, 69 (1), 171–216.]

Controversies over a financial transactions tax have a long history in economics (going back Keynes' advocacy of such a tax in the 1930s) and public policy (the British have imposed a "stamp duty" on stock transfers over more than three centuries from 1694 to the present). Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, Jim Nunns, and Steve Rosenthal take stock of the issues in "Financial Transaction Taxes in Theory and Practice," published as a June 2015 discussion paper by the Tax Policy Center. Here's the summary of the arguments for and against (citations omitted):

"Proponents advocate the FTT [financial transactions tax]on several grounds. The tax could raise substantial revenue at low rates because the base—the value of financial transactions—is enormous. An FTT would curb speculative short-term and high-frequency trading, which in turn would reduce the diversion of valuable human capital into pure rent-seeking activities of little or no social value. They argue that an FTT would reduce asset price volatility and bubbles, which hurt the economy by creating unnecessary risk and distorting investment decisions. It would encourage patient capital and longer-term investment. The tax could help recoup the costs of the financial-sector bailout as well as the costs the financial crisis imposed on the rest of the country. The FTT—called the “Robin Hood Tax” by some advocates—would primarily fall on the rich, and the revenues could be used to benefit the poor, finance future financial bailouts, cut other taxes, or reduce public debt. 
"Opponents counter that an FTT is an “answer in search of a question”. They claim it would be inefficient and poorly targeted. An FTT would boost revenue, but it would also spur tax avoidance. As a tax on inputs, it would cascade, resulting in unequal impacts across assets and sectors, which would distort economic activity. Although an FTT would curb uniformed speculative trading, it would also curb productive trading, which would reduce market liquidity, raise the cost of capital, and discourage investment. It could also cause prices to adjust less rapidly to new information. Under plausible circumstances, an FTT could actually increase asset price volatility. An FTT does not directly address the factors that cause the excess leverage that leads to systemic risk, so it is poorly targeted as a corrective to financial market failures of the type that precipitated the Great Recession. Opponents claim that even the progressivity of an FTT is overstated, as much of the tax could fall on the retirement savings of middle-class
workers and retirees."
Their paper offers an overview of the current uses of a financial transactions tax and the existing evidence on these various claims. Without attempting to be in any way exhaustive, here are some of the points that caught my eye:

The US has had financial transactions taxes in the past, and continues to have such a tax at a low level today. 

"From 1914 to 1966, a federal FTT was levied on sales and transfers of stock. The rate
was originally 0.02 percent of the stock’s par value ...In 1959, after firms had become practiced at manipulating par value to avoid tax, the base was changed to market value, and the rate was cut to 0.04 percent. From 1960 to 1966, stocks were taxed at the rate of 0.10 percent at issuance and 0.04 percent on transfer. ... In 1934, the Securities Exchange Act (Section 31) granted the SEC the authority to fund its oversight operations with fees on self-regulatory bodies such as the New York Stock Exchange. At present, a 0.00184 percent fee is levied on sales of securities, and a $0.0042 fee per transaction is levied on futures transactions. Debt instruments are exempt from the tax."

Many other high-income economies have financial transaction taxes now, although others have recently repealed such taxes. 
"Many G20 countries tax some financial transactions. The most common form is a tax on secondary market equity sales at a rate of 0.10 to 0.50 percent. Such taxes were imposed, as of 2011, in China, India, Indonesia, Italy, South Africa, South Korea, and the United Kingdom. Italy, Russia, Switzerland, and Turkey imposed taxes and/or capital levies on debt financing, typically on issuance rather than on secondary markets. But many developed nations have repealed FTTs in recent decades, presumably because of competitive pressures stemming from globalization and technological changes that have made remote trading less costly. Germany, Italy, Japan, the Netherlands, Portugal, and Sweden have repealed STTs [securities transaction taxes] in the last 25 years."
The design of a financial transactions tax requires answering a number of questions, and just listing the questions helps to understand the possibilities for shifting and reformulating financial transactions in ways that would reduce the reach of such a tax. 

"The first design question is the geographic reach of the tax. Should the application of the tax turn on the residence of the issuer of the security; the residence of the buyer, seller, or intermediary; or the location of the trade? ... Second, which securities are covered by the tax: stocks, bonds, derivatives? ... A third issue is which financial markets are subject to the FTT. Does the tax apply only to exchange-based transactions or also to over-the-counter transactions? ... A fourth issue is whether the tax excludes market makers. ... Most recent proposals choose to tax market makers. A fifth issue is whether the tax exempts government debt. ... Turning to the tax rates, there are further questions. Is the tax ad valorem or a flat fee per share traded? ... A final issue is whether the tax is coordinated internationally."
The question of whether a financial transactions tax would hinder financial markets from working well or would discourage speculative trading and pointless volatility is undecided in the research literature. 

"[A]lthough empirical evidence shows clearly that FTTs reduce trading volume, as
expected, it is unclear how much of the reduction occurs in speculative or unproductive
trading versus transactions necessary to provide liquidity. The evidence on volatility
is similarly ambiguous: empirical studies have found both reductions and increases in
volatility as a result of the tax."

Overall, the dogmatic argument that a financial transactions tax is unworkable is clearly false. It operates in a lot of countries. The wide-eyed hope that such a tax can be a truly major revenue source also seems to be false. In part because of concerns over the risk of creating counterproductive incentives--either just to structure transactions in a way that minimizes such a tax or even to react in a way that reduces liquidity and increases volatility in financial markets--the rate at which such taxes are set is typically pretty low. As the authors write, "the idea that an FTT can raise vast amounts
of revenue—1 percent of gross domestic product (GDP) or more—has proved inconsistent with actual experience with such taxes."

The question with any tax is not whether it is perfect, because every real-world tax has some undesirable incentive effects. The question is whether a certain tax might have a useful role to play as part of the overall portfolio of real-world taxes. For what it's worth, this particular review of the evidence leaves me skeptical that expanding the currently existing US financial transactions tax from its very low present level would be a useful step. The authors of this paper are careful to adopt a fairly neutral on-the-one-hand, on-the-other hand pose, without making any firm recommendation. But in the conclusion, they do write:
An FTT at the rates being proposed and adopted elsewhere would discourage all trading, not just speculation and rent seeking. It appears as likely to increase market volatility as to curb it. It would create new distortions among asset classes and across industries. As a tax on gross rather than net activity, and as an input tax that is not creditable and thus cascades, the FTT clearly can most optimistically be considered a second-best solution. Over the long term, it appears poorly targeted at the kinds of financial-sector excesses that led to the Great Recession.


Tuesday, July 21, 2015

Who Will Nudge the Nudgers?

Behavioral economics builds on insights from psychology that show a number of specific ways in which people (spoiler alert!) are not fully rational decision-makers. For example, people have limited self-control, so they may neglect to save money or exercise or invest in the training in such a way that they later come to regret their decisions. People can have a hard time understanding complex decision problems, so when it comes to making decisions about the form of their mortgage or insurance policy or when to start drawing Social Security, they may tend to use rules-of-thumb or stick with a default option even when that approach might not serve them well. People's preferences often have features that are not fully rational, like "loss aversion" in which people value losses as worse than same-sized gains. For example, it turns out that people are less likely to sell stocks or homes that have declined in value, because we are averse to accepting that a loss has in fact occurred.

The writing on behavioral economics often follows this pattern: first explain why people aren't rational, and then suggest a government policy--sometimes called a "nudge"--that could help people to overcome their irrationality by providing certain kinds of information structured in a certain way, or by specifying default options that would work better for most people. But what happens if the insights of behavioral economics are also applied to government? After all, if we are going to take into account that people often display a lack of self-control, have difficulties in understanding complex situations, and preferences that appear quirky in certain situations, then it makes sense to apply these same insights to elected officials and regulators.

W. Kip Viscusi and Ted Gayer offer a some early analysis and discussion toward a theory of "Behavioral Public Choice: The Behavioral Paradox of Government Policy," recently published in the Harvard Journal of Law & Public Policy (38:3, pp. 973-1007). For example, they write (footnotes omitted):
"[T]he behavioral economics literature .. frequently recommends “soft paternalism” policies that seek to change the structure of the choices available to individuals in order to encourage a more desirable outcome. But, as behavioral agents themselves, policymakers and regulators are subject to the same psychological biases and limitations as all individuals. Many, although certainly not all, behavioral economics papers focus on the biases and heuristics of ordinary individuals, while seemingly ignoring that regulators are people too and thus subject to the same psychological forces. One study finds that, of the behavioral economics articles proposing paternalistic policy responses, 95.5% do not contain any analysis of the cognitive abilities of policymakers ...  Professor Cass Sunstein observes, “For every bias identified for individuals, there is an accompanying bias in the public sphere.”
Indeed, Viscusi and Gayer point out a number of reasons why less-than-rational behavioral responses may be more prevalent among government decision-makers than for economic actors in the private economy. Here are some examples: 1) Private actors (like consumers and firms) need to bear the immediate costs of their decisions in a direct way, while elected officials and regulators do not. 2) Public policies are often influenced by the loud voice of concentrated special interests, who can overwhelm the quieter and more diffuse voices for the general interest. 3) Market actions evolve from an interaction of many buyers and sellers, and the checks and balances that such a process provides, but government actions can evolve from a much smaller number of potentially overconfident technocrats, who have a personal and career interest in pushing their own agendas.

When you combine these sorts of factors with the behavioral economics insights, it's easy enough to suggest examples where behavioral factors may be potentially leading government policy astray. Here are a few examples drawn from Viscusi and Gayer:


  • People often overestimate risks that have an objectively low probability, but underestimate risks that have an objectively high probability. At an extreme, people worry much more about airplane crashes and shark attacks than the statistics would justify, but worry less about car crashes and high blood pressure. If people driven by news media coverage become highly concerned in the short term about what looks like an objectively small risk, do government regulators act in the same behaviorally driven way? 
  • People are often severely adverse to facing losses, even with the potential for even larger gains. Is the Food and Drug Administration, for example, too loss-averse when it thinks about allowing approving potential new drugs--worrying so much about losses that it doesn't give sufficient weight to potential gains? 
  • People can get tunnel vision, thinking about risk and costs in one context in a way that they wouldn't be comfortable applying in other contexts. Examinations of government regulations suggest that some impose a social cost of $3 million or less per life saved, while others impose a social cost involving billions of dollars per life saved (like the cost of the Environmental Protection Agency Superfund clean-up program). If government regulators across all areas applied a common cost-benefit standard, we could ramp up the cost-effective regulations, cut back the cost-ineffective regulations, and save more lives at lower cost. 

Most of the examples in the paper are draw from government regulatory decisions about health and safety issues, but the arguments they present may have an even broader application. For example, think about elected officials and regulators in the spirit of behavioral economics: they often lack self-control; have a difficult time evaluating complex situations; tend to stick with rules-of-thumb and default options rather than accept the cognitive and organizational costs of re-evaluating their positions; do not evaluate costs and benefits in a consistent way across different contexts; are not good at evaluating risks accurately, instead often respond to limited information and hype; and are overly averse to the risk of taking responsibility for decisions that might turn out poorly.  This perspective must have widespread implications for decisions involving the complexities of the tax code or government budgets, policies affecting the workforce and the environment, openness to new sources of domestic and foreign competition, and foreign policy as well.

Insights from behavioral economics applied to consumers, workers, savers, investors, and firms often suggest some basis for government actions to "nudge" behavior in other directions. But it seems plausible to me that behavioral economics as applied to government will suggest that a number of existing government actions are misdirected or misconceived. And when that happens, it's not clear who will "nudge" government in appropriate directions. Just as the "nudge" policies applied to consumers may sometimes specify what default options should usually be taken, or perhaps limig the number of options available, perhaps behavioral economics as applied to elected officials and regulators suggests the potential importance of specifying their default actions and limiting their choices.

Of course, the problem here is a classic one in political economy. Here's the formulation from the Federalist Papers #51, typically attributed either to James Madison or Alexander Hamilton,

"But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself."
A modern behavioral economist with a focus on public policy might write, "If angels were to govern people, neither external nor internal controls on government would be necessary. But if voters under the influence of behavioral economics elect political leaders who have this same focus, and if those leaders appoint regulators and administrators who are also under the influence of behavioral economics, you must find ways to oblige such a government to control itself.

Or as the Roman poet Juvenal wrote long ago: "Quis custodiet ipsos custodes?" It's usually translated as "who will watch the watchers?" But for the combination of behavioral economics and political economy, perhaps the more apt translation would be: "Who will nudge the nudgers?"





Friday, July 17, 2015

Global Carbon Intensity Rises: A Kaya Decomposition

One way to think about the issues involved in reducing global carbon emissions is to break down the underlying factors in this way. Consider what is called the Kaya decomposition (named after an author who used this approach about 25 years ago):

Carbon emissions = Population x GDP           x Energy used x Carbon  
                                                      Population    GDP                Energy used

This equation is an "identity"--that is, it's a statement that's true by definition, and its purpose isn't to prove anything, but only to organize one's thinking. In this case, even if population growth in the next few decades is lower than expected, global population isn't likely to drop in a way that would bring down carbon emissions. The second term is per capita GDP,  and it is not desireable for this to decline at the global level. As the World Bank reports: "In all, 2.2 billion people lived on less than US $2 a day in 2011, the average poverty line in developing countries and another common measurement of deep deprivation. That is only a slight decline from 2.59 billion in 1981."

The ratio of energy used/GDP is sometimes called "energy intensity." It tends to fall over time as an economy grows in size, and shifts away from manufacturing and toward service industries. The ratio of carbon/energy used is sometimes called "carbon intensity." From a global perspective it had been declining for several decades, but now it has started rising. Jan Christoph Steckel, Ottmar Edenhofer, and Michael Jakob explain why in "Drivers for the renaissance of coal," published online on July 6, 2016, by the Proceedings of the National Academy of Sciences.

Here are some of their figures showing some elements of the Kaya decomposition. The top line show the rise in carbon dioxide emissions over time. The use of primary energy has risen substantially. The bottom gray  line shows that energy intensity has been falling, thus acting to hold down carbon emissions. Carbon intensity was also falling for the global economy during much of the 1970s and 1980s, but started rising in the early 1990s.
Another figure shows patterns of energy intensity by region over time. The dots represent different years from 1971-2011. To get a feeling for what's going on here, look at the pink line showing the OECD90 countries--that is, essentially the high-income countries of the world. Over time, their per capita GDP is rising (the line goes from left to right, at least until the Great Recession and its aftermath in recent years) and their energy intensity is falling (the line goes from higher to lower). This is also the pattern for the world as a whole, and the pattern for Asia and for LAM (Latin America). The patterns for MAF (Middle East and Africa) and for EIT ("economies in transition") look a little different--for example, the EIT group saw a decline in per capita income and rise in energy intensity in the 1990s.

Here's the pattern over time and across regions for carbon intensity. For the high income countries (OECD90), carbon intensity has been falling over time as GDP per capita generally increased. However, the world pattern is U-shaped, with carbon intensity first falling and then starting to rise. In Asia, in particular, carbon intensity was rising sharply until the last few years, but a similar if less extreme pattern also holds in the MAF (Middle East and Africa) region.

If you had to sum up the carbon intensity patterns in one word, it would be "coal." Steckel, Edenhofer, and Jakob write:
"In summary, in recent years non-OECD countries have relied increasingly on coal to meet their energy needs. The poorer a country is and the higher its rate of economic growth, the stronger is this effect. Both effects become more pronounced over time, suggesting that increasing coal use is a general trend among poor, fast-growing countries and is not restricted to a few specific countries. These results confirm the hypothesis of a global renaissance of coal. This conclusion is strengthened by the fact that excluding China and India ... hardly affects the results ... indicating that these two countries are not driving the results but rather are representative for the global sample ... This renaissance of coal has even accelerated in the last decade; this acceleration can be explained by the low prices of coal relative to other energy sources. It is interesting that the availability of domestic coal resources does not seem to have a major influence on this result for poor countries, perhaps because coal can be imported in countries with low endowments ..." 
The authors make the point, bluntly and obviously, that if coal continues to rise, targets for reducing global carbon emissions will not be met.
"Developing economies now account for such a large share of global energy use that the trend toward higher carbon intensity in these countries cancels out the effect of decreasing carbon intensities in industrialized countries. If the future economic convergence of poor countries is fueled to a major extent by coal, i.e., if current trends continue, ambitious mitigation targets likely will become infeasible."
A knee-jerk reaction to this situation is to find ways to restrict or ban coal use. But from a global perspective, making energy more expensive for the poorest people in the world as they try to develop their economies would have what the authors politely call "severe distributional impacts." Instead, they emphaze two other steps. First, countries should be encouraged to pursue the self-interest of the their own citizens take the full social costs of coal into account, including the immediate short-term costs on health and output as a result of diminished air quality. If countries requiring the investment in equipment to reduce the immediate pollutants from coal, it will limit the spread of coal--and also help the health of their own citizens. Second, if coal isn't going to be the answer, other types of low-cost energy need to be encouraged. Possible alternatives in different areas need to consider everything, including dams for hydroelectric power, natural gas, oil, and even nuclear power, not just the choices popular among environmentalists in high-income countries like solar, wind, geothermal, and the like.

It is perhaps paradoxical, but also true, that if you aren't a big supporter of near-term, large-scale, non-coal methods of producing electricity around the world, you aren't really serious about reducing global carbon emissions.

Thursday, July 16, 2015

The Interface Companies of the Sharing Economy

In the world of competitive sports, "bulletin board material" refers to when you collect negative comments from others and post then in  public place to fire up your motivation. In my world, "bulletin board material" refers to comments that I print out and stick to the board beside my office door, in the hope that they will stir some thought among passers-by. In that spirit, here are some thought-provoking comments from a short blog post on March 3, 2015, by Tom Goodwin, who is senior vice president of strategy and innovation at Havas Media.
"Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening. ...
The new breed of companies are the fastest-growing in history. Uber, Instacart, Alibaba, Airbnb, Seamless, Twitter, WhatsApp, Facebook, Google: These companies are indescribably thin layers that sit on top of vast supply systems ( where the costs are) and interface with a huge number of people (where the money is). There is no better business to be in. The New York Times needs to write, fact check, buy paper, print and distribute newspapers to get their ad money. Facebook provides a platform for us to write our own content, and Twitter monetizes the front page of newspapers, which happens to now be the Twitter feed. ... The interface layer is where all the value and profit is. ... The value is in the software interface, not the products. ... In the modern age, having icons on the homepage is the most valuable real estate in the world, and trust is the most important asset. If you have that, you’ve a license to print money until someone pushes you out of the way.

Wednesday, July 15, 2015

Some Economics of the Freedom of Information Act

The Freedom of Information Act passed back in 1967 allows people to request access to records held by federal government agencies. A number of journalists and other researchers often seek to mine these records, while government agencies often push back--either passively by responding very slowly to such requests or more actively by redacting and selecting among records before releasing them. The US government has just announced a pilot program in which any records released under the FOIA would be released pretty much simultaneously both to the party that made the request and also to the general public.

Teachers of intro econ will recognize the problem. As a society, we want people and firms to innovate, because over time that process drives improvements in the standard of living. But we fear that if anyone can just copy successful new innovations, then the rewards of innovation will be too low. Thus, we have laws about intellectual property--about patents, copyrights, trademarks, and trade secrets--that give innovators some partial insulation from competition for a time and thus help them to earn a reward.

Similarly, as a society we want people to delve into government records because it is part of the checks and balances that keep a democratic government accountable. However, the new FOIA policy raises the danger that if the results of such requests are immediately available to the public, then the incentive for journalists and other researchers to spend the time and energy to file and follow-up on such requests will be reduced. A paradox seems to arise here: Is this a case where making any government records from FOIA requests publicly available could lead to a situation where there is less incentive to request such records, thus leading to a situation where fewer government records actually become publicly available?

This paradox in markets for information is well-known among economists, with a classic 1980 paper on the subject by Sanford J. Grossman and Joseph E. Stiglitz titled "On the Impossibility of Informationally Efficient Markets" (American Economic Review, June 1980, pp. 393-408). The main argument of the paper is made in math, rather than in English, but let me suggest how it applies here.

The key insight of Grossman and Stiglitz is that if our society wants people to seek out information, then there need to be incentives for seeking out such information--basically, those who seek it out need to get paid. This basic notion holds true for information related to news coverage, but also for information related to, say, investing in the stock market. However, if all the available information is spread quickly and easily, then it will be very hard for those who seek out the information to get paid. As they write: "There is a fundamental conflict between the efficiency with which markets spread information and the incentives to acquire information." In the case of the Freedom of Information Act, greater efficiency in spreading information--by making the results of all FOIA requests public--is in conflict with the incentive to acquire information.

The solution here seems fairly straightforward. The protection from conventional intellectual property law, like patents, is only supposed to be temporary. The innovation then passes into the public domain. Similarly, it would seem easy enough to give those who make an FOIA request access to that information for, say, three or six months, and then release it into the public realm. Sure, some journalists and researchers will say that they need exclusive access to the information for much longer. Innovators would like their intellectual property rights to be stronger and last longer, too. But a balance needs to be struck.

Tuesday, July 14, 2015

Productivity Growth and the Diffusion Problem

The reason that my standard of living is higher than that of my grandparents, or my great-great-grandparents, isn't that I work longer hours or harder than they did. It's because I have the great good fortune to live in at a time when there have already been decades and centuries of technological and productivity improvements. In the long run, productivity growth is what allows the average standard of living to rise for a country.

There's a voluminous policy agenda on how to raise productivity, but a recent report from the OECD, "The Future of Productivity," offers a new twist. The report argues that slower productivity in high-income countries is not because cutting-edge firms are slowing down in their productivity growth, but rather because other firms aren't keeping up. To put it another way, productivity growth isn't diffusing across economies. Here's a figure showing the pattern.
The panel on the left is for the manufacturing sector; the one on the right is for the services sector. The blue dashed line shows labor productivity for the "frontier firms," with 2001 as the starting point. The frontier firms are the 100 most productive firms in each industry, from an international perspectives, with the underlying data coming from a commercial database called ORBIS. (The report has a discussion of strengths and weaknesses of this data.) The red lines show productivity gains for non-frontier firms. As the report summarizes (footnotes omitted):

GF [Global frontier] firms have become relatively more productive over the 2000s, expanding at an average annual rate of 3½ per cent in the manufacturing sector, compared to an average growth in labour productivity of just ½ per cent for non-frontier firms. While data limitations make it difficult to say whether growth has slowed relative to earlier periods, it is interesting that frontier growth remained robust after 2004, when aggregate productivity in advanced economies (e.g. the United States) began to slow. ...Firms at the global productivity frontier are on average 4-5 times more productive than non-frontier firms in terms of MFP [multifactor productivity], while this difference is more than 10 times with respect to labour productivity (which includes capital intensity). ... Firms at the global productivity frontier are typically larger, more profitable, and more likely to patent, than other firms. Moreover, they are on average younger, consistent with the idea that young firms possess a comparative advantage in commercialising radical innovations and firms that drive one technological wave often tend to concentrate on incremental improvements in the subsequent one. However, the average age of firms in the global frontier has been increasing since 2001. To the extent that this reflects a slowdown in the entry of new firms at the global frontier, it could also foreshadow a slowdown in the arrival of radical innovations and productivity growth. 
In short, this evidence suggests that the possibilities for productivity growth haven't slowed down, but that large parts of the economy are having a harder time putting the practices that lead to faster productivity growth into effect. What factors help productivity growth to spread? The OECD report argues:
Scope for diffusion depends on four key factors. First, global connections, via trade, FDI [foreign direct investment], participation in GVCs [global value chains] and the international mobility of skilled labour. Second, experimentation by firms – especially new entrants –with new ideas, technologies and business models. Third, the efficient reallocation of scarce resources to underpin the growth of innovative firms. Fourth, synergic investments in R&D, skills and organisational know-how – particularly managerial capital – that enable economies to absorb, adapt and reap the full benefits of new technologies.
In particular, I was intrigued by a figure showing that the importance of start-up firms over time has been diminishing not just in the US economy (as I've pointed out here and here, for example), but in most other high-income economies, too. One of the primary ways for the spread of higher productivity is the creation and growth of high-productivity new firms and the shrinkage and exit of low-productivity competitors.



Monday, July 13, 2015

The Declining Number of Illegal Immigrants

The number of illegal immigrants in the United States rose very sharply through the 1990s and for almost the first decade of the 21st century, but the total peaked in 2009, and since then has declined somewhat. Jeffrey S. Passel lays out the evidence in his testimony submitted to
a hearing of the U.S. Senate Committee on Homeland Security and Governmental Affairs
on March 26, 2015.  Passel's testimony draws on two recent Pew reports, available here and here.)

Here's an overall figure, showing the total number of illegal immigrants. For those interested in methodology, these specific numbers are based on Census survey--specifically, the American Community Survey and the Current Population Survey. These surveys ask about whether someone is "foreign-born," but don't ask whether they are in the United States legally. Thus, one can take the total number of foreign-born, subtract out the number of legal immigrants, and get an estimate of the "unauthorized" population. Of course, one can raise various questions about this methodology. However, it's also possible to cross-check these numbers in various ways: for example, by looking at estimates based on data from Mexico and on evidence from local US surveys. Taking the cross-checking into account, the estimates based on the Census surveys seem plausible.



Illegal immigrants make up about 5.1% of the US workforce. Here's a list of states where the total is at that average or above.  

Here's a table showing the industries in which illegal immigrants are more heavily represented. 

As I've argued in the past, the drop-off in illegal immigration is likely due to a confluence of forces. 

1) The US economy was in recession from 2007-2009, and employment growth was slow for several year after that, so the economic "pull" attracting immigrants was reduced. 

2) Mexico's economy has performed better over time, with better prospects for well-paid jobs, as well as better performance in areas like education and healthcare. 

3) Mexico's demography has shifted with fewer women per children and an aging population, so the population of young adults who might be thinking about heading for the US has declined. 

4) US immigration enforcement is way up, both at the border and  in terms of deportations. 

I'll sidestep here the broader policy questions posed by immigration policy. But I will say that the key questions are somewhat different in a  situation in which the number of illegal immigrants is relatively low but expanding rapidly (as in the 1990s and start of the 2000s), compared with a situation where the number of illegal immigrants is relatively high but declining slightly (the situation now). In the earlier time period, it made sense to have a greater priority on finding ways to reduce the inflows of immigrants; now, it makes sense to have a greater priority on what should happen with the 5% of the US workforce that is already here without legal authorization. 

Friday, July 10, 2015

Keynes, Secular Stagnation, and Investment Shortfalls

The buzzword "secular stagnation" has come to refer to all sorts of arguments about why economic growth has been slow, ranging from concerns about a lack of technological opportunities, a lack of investment in education and infrastructure, the aftermath of the financial crisis when it becomes hard for firms to get the capital they need to invest, and when a lack of aggregate demand in an economy means that business don't feel that they have an incentive to invest.

But the original meaning of the term as put forward in 1938, as I discussed in "Secular Stagnation: Back to Alvin Hansen" (December 12, 2013), was a speech in which  Alvin Hansen expressed a concern that in the depressed economy of his time, with lower birthrates and a lack of discoveries of new resources and territories, the push of new inventions would not be enough to keep investment levels high and the economy growing. When Larry Summers resurrected the "secular stagnation" term in a series of speeches in 2013 and 2014 (for example, here), he emphasized the lack of incentives for investment, and offered as a possible policy solution a considerable expansion in infrastructure investment. I've written previously about some of the potential explanations for "Sluggish U.S. Investment" (June 27, 2014).

For several decades after Alvin Hansen's 1938 speech, there was considerable concern among economists that it might be perpetually difficult for an economy to reach full employment, because of a tendency for demand to be insufficient. There was often a policy recommendation that the government might need to bolster investment in some way. Here are some thoughts that John Maynard Keynes had related to this subject in a little essay on "The Long-Term Problem of Full Employment," dated May 25, 1943. It's available in volume 27 of The Collected Writings of John Maynard Keynes edited by Donald Moggridge, pp. 320-325.

Keynes begins by stating: "It seems to be agreed to-day that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure ... The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the saving which may be expected to emerge ...."

Writing in 1943, Keynes then predicted "three phases" that would appear after the end of World War II. In the first phase after the war, there would be an investment boom, which in his view the government should act to tamp down:
"It is, however, safe to say that in the earliest years investment urgently necessary will be in excess of the indicated level of savings. ... In the first phase, however, equilibrium will have to be brought about by limiting on one hand the volume of investment by suitable controls, and on the other hand the volume of consumption by rationing and the like."
In the second phase, after a period which "might last five years," then those controls could be ended. At that point, Keynes' prescription was that government would influence a large share of investment and steer it to the right level so that it would stabilize the economy. He wrote:
"If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducinjg the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy."
Keynes predicts that the second state "might ... last another five or ten years." The third section is then what Keynes calls the "golden age." In this stage, not as much investment will be desirable or needed. The goal will only be to have enough investment to replace capital equipment as it depreciates. Rather than pumping up investment, the goal of government should be to reduce savings and encourage people to spend on leisure activities. Keynes writes:
"It becomes necessary to encourage wise consumption and discourage saving,--and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours. ... The object will be slowly to change social practices and habits to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required." 
In this third stage, if there is a need for countercyclical fiscal policy, Keynes suggests that it might be carried out by "varying social security contributions according to the state of employment."

From a modern perspective, Keynes' arguments are remarkable in a number of ways. For example, they presume a very high level of activist macroeconomic policy. When investment is high, government should tamp it down. When investment is medium, government should control "two-thirds or three-quarters" of it to limit economic fluctuations." When investment inevitably becomes low, then to avoid the problem of secular stagnation, government will need to boost consumption and leisure.

I suppose that one can theoretically imagine a situation in which all these government controls are general in nature--that is, government wouldn't be favoring or disfavoring specific industries or sectors, and would not be interfering in specific investment or consumption decisions,  Keynes approvingly quotes another writer on the merits of how the state might "fill the vacant  post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather only doing so on the merits of the case and not at the behests of dogma." Of course, in the real world of politics, this kind of beneficent neutral interventionism that operates "n the merits of the case and not at the behests of dogma" seems rather unlikely.

Finally, the "golden age" imagined by Keynes sounds like a time of economic stasis, what old-time 19th century economists used to call the "stationary state." The notion that the leading economies of the world were about to reach that stationary state back in the 1950s or 1960s doesn't seem like one of Keynes's best predictions. But the notion that such a view was widespread perhaps helps to explain why Great Britain made a series of business and policy decisions at about this time that helped bring about slower growth for a few decades.

I have little confidence in the kind of activist macroeconomic policy and government control over investment and consumption that Keynes describes here, and no confidence at all that the high income economies of the world are near a stationary state. However, the problem that when the economy is already slow, firms have little incentive to invest, and so the economy stays slow for longer, seems like a real one to me. While I have no particular disagreement with the need for more  investment in fixing roads and bridges, the real prosperity of the future isn't going to depend mainly on fewer potholes and more multi-lane roads. I fear that we settle on fixing roads and bridges as a motherhood-and-apple-pie solution for investment shortfalls because we have a hard time agreeing on how to encourage or even to allow other kinds of investment, like pipelines for oil and gas, new intercity rail tracks, or more resilient grids for electricity and communications. We also seem to have a hard time boosting research and development, or raising the skills of workers, which provides the ideas and the employees for new business investment to take place. We seem to have a hard time talking about whether its possible to shape all the rules and regulations and laws that affect business investment and expansion in a way that still accomplishes desired public goals, but with a reduced disincentive for firms to invest and expand.

Thursday, July 9, 2015

China's Stock Market Performance: A 25-Year View

The recent decline in China's stock market is big global economic news, and it deserves to be. China is close to overtaking the US economy as the biggest of any country in the world, and large movements in its stock prices have both economic and political implications. That said, how about just a little dose of perspective on the level of China's stock prices?

Here's a figure (from Yahoo Finance) showing the level of the SSE Composite Index--that is the benchmark Shanghai Stock Exchange Composite Index--going back to 1990. Clearly, the recent spike and fall in stock prices is real and severe. Also clearly, the current spike and fall are dwarfed by what happened before and after the previous peak in October 2007. In fact, even with the recent decline, China's benchmark stock index is still well above its level at the start of 2015. The stock market losses that are now being suffered are just offsetting a portion of the upward price spike from a few months ago.



China has some real difficulties in its financial system. It's level of credit relative to GDP has risen very sharply in the last few years (for some background, see the posts here and here). At a deeper level, China's economy has had a hard time rebalancing itself as it has grown so rapidly, with one of the most prominent signs being that its level of consumption as a share of GDP had fallen to only about 35%, roughly half the level that's common in advanced economies (for discussion, see here and here). In China, this economic pattern was sometimes criticized as the "nation rich, people poor" policy. China is trying to increase consumption--thus, allowing and encouraging higher levels of credit and debt--but a lot of that buying power seems to be flowing into the stock market--thus, making frothy bubbles of price spikes and declines more likely.  

Peak Farmland, Peak Timber, Peak Car Travel, Peak Child

Every now and again, it's bracing to read a bold essay that makes strong pronouncements with a minimum of hedging. If you'd like an environmentalist essay along these lines, I recommend "Nature Rebounds," by Jesse H. Ausubel, written for a January 2015 seminar presentation.

Here's Ausubel's overall perspective:

"[A]bout 1970 a great reversal began in America’s use of resources. Contrary to the expectations of many professors and preachers, America began to spare more resources for the rest of nature, first in relative and more recently in absolute amounts. A series of decouplings is occurring, so that our economy no longer advances in tandem with exploitation of land, forests, water, and minerals. American use of almost everything except information seems to be peaking, not because the resources are exhausted, but because consumers changed consumption and producers changed production. Changes in behavior and technology liberate the environment."
Ausubel on peak farmland (references to figures omitted):

"Then, in America, in about 1940 acreage and yield decoupled. Since about 1940 American farmers have quintupled corn while using the same or even less land. Corn matters because it towers over other crops, totaling more tons than wheat, soy, rice, and potatoes together. Crucially, rising yields have not required more tons of fertilizer or other inputs. The inputs to agriculture have plateaued and then fallen, not just cropland but nitrogen, phosphates, potash, and even water. ... The story is precision agriculture, in which we use more bits, not more kilowatts or gallons. Importantly, the average yield of American farmers is nowhere near a ceiling. ...
"Steadily, the conversion of crops, mostly corn, to meat, has also decoupled, because the meat game is also one in which efficiency matters. From humanity’s point of view, cattle, pigs, and chickens are machines to make meat. A steer gets about 12 miles per gallon, a pig 40, and a chicken 60. Statistics for America and the world show that poultry, land’s efficient meat machines, are winning.
"High grain and cereal yields and efficient meat machines combine to spare land for nature. In fact, we have argued that both the USA and the world are at peak farmland,not because of exhaustion of arable land, but because farmers are wildly successful in producing protein and calories. ... In America alone the total amount of corn fed to cars grows on an area equal to Iowa or Alabama, as mentioned. Think of organizations like the Long Now Foundation turning all those lands that are now pasture for cars into refuges for wildlife, carbon orchards, and parks. The area is about twice the area of all the US national parks outside Alaska. " 
Ausubel on peak forest:
"Foresters refer to a “forest transition” when a nation goes from losing to gaining forested area. France recorded the first forest transition, about 1830. Since that time French forests have doubled while the French population has also doubled. Forest loss decoupled from population. Measured by growing stock, the USA enjoyed its forest transition around 1950,and measured by area, about 1990. In the USA, the forest transition began around 1900, hen states such as Connecticut had almost
no forest, and now encompasses dozens of states. The thick green cover of New England, Pennsylvania, and New York today would be unrecognizable to Teddy Roosevelt, who knew them as wheat fields, pastures mown by sheep, and hillsides denuded by logging."

Ausubel on the increase in global biomass:
"[G]lobal greening ... [is] the most important ecological trend on Earth today. The biosphere on land is getting bigger, year by year, by 2 billion tons or even more. Researchers are reporting the evidence weekly in papers ranging from arid Australia and Africa to moist Germany and the northernmost woods. Probably the most obvious reason is the increase of the greenhouse gas carbon dioxide in the atmosphere. In fact, farmers pump CO2 into greenhouses to make plants grow better. Carbon dioxide is what many plants inhale to feel good. It also enables plants to grow more while using the same or less water. Californians David Keeling and Ralph Keeling have kept superfine measurements of CO2 since 1958. The increasing size of the seasonal cycle from winter when the biosphere releases CO2 to the summer when it absorbs the gas proves there is greater growth on average each year. The increased CO2 is a global phenomenon, potentially enlarging the biosphere in many regions."
Ausubel on peak car travel and peak car:

"[T]ravel in personal vehicles seems to have saturated. America may be at peak car travel. If you buy an extra car, it is probably for fashion or flexibility. You won’t spend more minutes per day driving or drive more miles. Unlike the car companies, I would not bet on selling a lot more cars either. The beginning of a plateau in the population of cars and light trucks on US roads suggests we are approaching peak car. The reason may be that drone taxis will win. The average personal vehicle motors about an hour per day, while a car shared like a Zip Car gets used eight or nine hours per day, and a taxi even more. As venture capitalists here know, driverless cars can work tirelessly and safely and accomplish the present mileage with fewer vehicles."
Ausubel on peak child:
"[G]lobally it appears that Earth is passing peak child. Swedish statistician and physician Hans Rosling estimates that the absolute number of humans born reached about 130 million in 1990 and has stayed around that number since then. With fertility declining all over the world, the number of newcomers should soon fall. While momentum and greater longevity will keep the total population growing, technical progress can counter the likely mouths. A 2 percent annual gain in efficiency can dominate a growth of population at 1 percent or even less."
There's much more in this short essay, about peak commodity use, how to feed the future world population with fish farming and flavored microorganisms, and how the patterns described here are spreading around the world.

For the record, Ausubel is someone with the professional pedigree to make him worth listening to, even if you feel a need for a dollop of skepticism now and then. He is Director of the Program for the Human Environment at The Rockefeller University, and his background includes being one of the main organizers of the first UN World Climate Conference in Geneva in 1979. As his bio page says in the report: "In the late 1990s he helped initiate and then lead the Census of Marine Life, an international observational program to assess and explain the diversity, distribution, and abundance of life in the oceans. Beginning in 2002 he helped found the Barcode of Life Initiative, which provides short DNA sequences that identify animal, plant, and fungal species. During 2006–2007 he served as the founding chair of the Encyclopedia of Life project to create a webpage for every species."

Homage: I ran across mention of this report at Arnold Kling's always interesting askblog website.

Tuesday, July 7, 2015

Greece and its Slow Growth Problem

I knew that Greece has not traditionally been the economic dynamo behind growth in the EU economy. I had not quite realized how far the Greek economy has lagged behind over the last several decades. Here's a figure from an IMF report on "Greece: Preliminary Draft Debt Sustainability Analysis" (June 26, 2015, Country Report 15/165).

Greece joined the European Union in 1981. The The horizontal axis shows growth of "total factor productivity," or TFP, for countries of Europe from 1981 to 2014. Greece lags well behind the other countries with an annual productivity growth rate of 0.1%. The vertical axis shows growth in real GDP over time. Again, Greece lags behind with an average annual growth rate of 0.9%. Again, these are not numbers just for the last year or two, but instead are averages during a period of 33 years.


The future prospects for economic growth in Greece are, if anything, worse--indeed, one plausible projection would be for negative future GDP growth for the foreseeable future. The IMF writes:
What would real GDP growth look like if TFP growth were to remain at the historical average rates since Greece joined the EU? Given the shrinking working-age population (as projected by Eurostat) and maintaining investment at its projected ratio of 19 percent of GDP from 2019 onwards (up from 11 percent currently), real GDP growth would be expected to average –0.6 percent per year in steady state. If labor force participation increased to the highest in the euro area, unemployment fell to German levels, and TFP growth reached the average in the euro area since 1980, real GDP growth would average 0.8 percent of GDP. Only if TFP growth were to reach Irish levels, that is, the best
performer in the euro area, would real GDP growth average about 2 percent in steady state. With a weakening of the reform effort, it is implausible to argue for maintaining steady state growth of 2 percent. 
I'm sure that Greece's economic and debt woes have many dimensions, but it's a symptom of all these issues when it become plausible to project future GDP growth as negative (even with a bounceback in investment). The IMF report is mostly a detailed breakdown of Greek debt, financing costs, needs for concessional financing and extending debt maturities, and so on, and readers who want detail on the parameters if the IMF arguments can go there. Here, let me just offer a few other snapshots of the Greek economic woes.

Here's a figure from the IMF showing the rise in Greek public debt in the last decade. The near-doubling in debt/GDP ratio from 2004 to 2011 is remarkable, and since then the problem has been one of damage containment. (The projections for the future assume that various reforms are undertaken, so they should only be swallowed with a skeptical tablespoon of salt.) As you can see, essentially all of the debt is in euros.

Here's a perspective on the size of the GDP in Greece, generated by the ever-helpful FRED website run by the Federal Reserve Bank of St. Louis. In the figure, GDP for 2010 is set equal to 100. Thus, from 1981 up through the early 2000s, you can see a gradual rise in growth that seems to be taking off after about 2000--of course, fed at that time by the huge accumulation of government borrowing and spending. You can also see the Depression-sized drop in output, with the economy falling by roughly one-third in size in the last 6-7 years.
That collapse in the size of Greece's economy brought sky-high unemployment with it. The lower blue line shows the unemployment rate for those aged 15-64: it rises from under 10% (already a disturbingly high level) around 2008 to more than 25%. The red line shows the unemployment rate for those 15-24. One expects the unemployment rate for this group to be higher than average: still, having it spike to almost 60% is a sign of an economy in extraordinary disarray.

Monday, July 6, 2015

Earnings Inequality Between Companies

The basic fact that inequality of US earnings has been generally rising over the last several decades is well-known, but here's a question I haven't seen previously addressed: Is the rise in earnings inequality for individuals happening within individual firms? Or is it happening because the average pay between firms is also becoming more unequal?

Jae Song, David J. Price, Fatih Guvenen, and Nicholas Bloom explore this question in "Firming Up Inequality," written as Discussion Paper #1354 for the Center for Economic Performance at the London School of Economics (May 2015). They use a sample of data from the Master Earnings File
(MEF), which is compiled and maintained by the U.S. Social Security Administration. Because employers need to report what you earned to the Social Security Adminstration, this data includes both individuals and employers (although any identifying traits for individuals and employers are stripped out before the data is released to researchers). Here are some of their conclusions: "Except at the very top, the highest-paid individuals now work at higher-paying firms, but are not higher paid relative to those firms ... Wage dispersion between firms is increasing, while dispersion within firms has been stable."

Here's a quotation from their findings. The first sentence makes the point that earnings have risen faster for those in the highest percentiles, which means that rise in inequality has occurred. The rest of the quotation makes the point that essentially all of the rising inequality of earnings is reflected in a rising inequality of the average amount paid by firms.

(To make sense of what follows, some readers may need bit of explanation about what is meant  "log points" and percentages. As an example, consider an increase from 50 to 60. This is a rise of 20%--that is, (60-50)/50. But there is alternative way to approximate this percentage change, which is to take the natural logarithm of the ratio (60/50). Punch it into a calculator, and ln(60/50)= .18232, which is sometimes referred to as "log points." Notice that the log calculation is an approximation of the percentage change. I won't try to explain here why it's often useful to work in terms of log values, but as a matter of calculation, it's straightforward to switch back and forth between log points and percentages--so which one to emphasize in the exposition is just a choice of the author.)

"Between 1982 and 2012, the middle of the income distribution saw an increase in real wages of 18 log points (20 percent), while the top one percent saw an increase of 66 log points (94 percent). This change is roughly mirrored in their firms: individuals in the middle of the income distribution worked at firms with mean real wages 23 log points (25 percent) higher in 2012 than in 1982, but individuals in the top one percent worked at firms with mean real wages 72 log points (105 percent) higher. If we calculate the increase in individual inequality during that time period as the difference between the change at the top end with the change at the middle—a 48 log point difference—then virtually all of that increasing individual inequality is explained by the 49 log point difference between the firms of individuals at the top, versus firms of individuals in the middle. These trends are consistent across regions and industries, remain true when restricting by sex, age, and tenure, and are robust to various changes to the sample selection criteria."
This is the kind of result that makes you want to sit down for awhile and think about what it means. The authors suggest a couple of basic explanations for this pattern. Perhaps firms have become more specialized over time, so that some firms have become in recent decades more likely to hire a bunch of higher-earnings workers while others are more likely to hire a bunch of lower-earnings workers. Or as a complementary explanation, perhaps productivity differences between firms are rising over time, leading to greater dispersion of average wages between firms.

Of course, these kinds of explanations just raise the question of why firms might have become more specialized over time, or why productivity differences between firms are rising. As I try to sort out my thinking on these broader questions, there are a couple of other implications worth considering.

This evidence suggests that inequality of earnings within a typical workplace has not increased much in recent decades. As the authors point out, this may "suggest an explanation for why many do not feel that there has been an increase in inequality: on average, individuals’ inequality with their coworkers has changed little over the past three decades."

I would add the evidence also implies that as the inequality of earnings has risen, there has also arisen a separation between those with higher levels of earnings. The old-time story of someone who starts in the mail-room and works up to the top within a current employer is in this sense becoming less possible, because someone who starts at the bottom will tend to be with an employer with lower-paying jobs, and to get near the top of the earnings distribution is more likely to need a shift to the employers who tend to have higher-paying jobs. We know that many people hear about possible jobs through co-workers past and present. The growing inequality of earnings apparently also reflects a growing disconnect between the workplace networks of those with different levels of earnings.