Friday, July 20, 2018

Early Childhood Education Fails Another Randomized Trial

Public programs for pre-K education have a worthy goal: reducing the gaps in educational achievement that manifest themselves in early grades. I find myself rooting for such programs to succeed. But there are now two major randomized control trial studies looking at the the results of publicly provided pre-K programs, and neither one finds lasting success. Mark W. Lipsey, Dale C. Farran, and Kelley Durkin report the results of the most recent study in "Effects of the Tennessee Prekindergarten Program on children’s achievement and behavior through third grade" (Early Childhood Research Quarterly, 2018, online version April 21, 2018). 

The Tennessee Voluntary Pre-K Program offers support for families with low-income levels. In 2008-2009, the program only had sufficient funding to cover 42% of applicants. Admission to the program was thus decided by a lottery. This selection procedure makes the eyes of academic researchers light up, because it means that there was random selection of who was in the program (the "treatment" group) and those who were not (the "control" group). As these students continue into Tennessee public schools, there is follow-up information on how these two groups performed. The result was that that students in the pre-K program has a short-term boost in performance, which quickly faded. The abstract of the study says:
"Low-income children (N = 2990) applying to oversubscribed programs were randomly assigned to receive offers of admission or remain on a waiting list. Data from pre-k through 3rd grade were obtained from state education records; additional data were collected for a subset of children with parental consent (N = 1076). At the end of pre-k, pre-k participants in the consented subsample performed better than control children on a battery of achievement tests, with non-native English speakers and children scoring lowest at base-line showing the greatest gains. During the kindergarten year and thereafter, the control children caught up with the pre-k participants on those tests and generally surpassed them. Similar results appeared on the 3rd grade state achievement tests for the full randomized sample – pre-k participants did not perform as well as the control children. Teacher ratings of classroom behavior did not favor either group overall, though some negative treatment effects were seen in 1st and 2nd grade."
The previous major randomized control trial study of an early childhood education program was done on the federal Head start program. I discussed it here. Lipsey, Farran and Durkin summarize the finding in this way:
"This study [of Head Start] began in 2002 with a national sample of 5000 children who applied to 84 programs expected to have more applicants than spaces. Children were randomly selected for offers of admission with those not selected providing the control group.The 4-year-old children admitted to Head Start made greater gains across the pre-k year than nonparticipating children on measures of language and literacy, although not on math. However, by the  end of kindergarten the control children had caught up on most achievement outcomes; subsequent positive effects for Head Start participants were found on only one achievement measure at the end of 1st grade and another at the end of 3rd grade. There were no statistically significant effects on social–emotional measures at the end of the pre-k or kindergarten years. A few positive effects appeared in parent reports at the end of the 1st and 3rd grade years, but teacher and child reports in those years showed either null or negative effects."
Of course, the fact that the two major studies of publicly provided pre-K find near-zero results by third grade doesn't prove that such programs never or can't work. There are many studies of early childhood education programs. The results of the Tennessee and Head Start studies don't rule out the possibility of benefits from narrower programs specifically targeted at children with certain needs. Also, some studies with longer-term follow-up found that although measures of educational performance didn't move much. pre-K programs had longer-term effects on outcomes like high school graduation rates.

But the case for believing that publicly provided  pre-K programs will boost long-term educational outcomes for the disadvantaged is not very strong. If positive results were clear-cut and of meaningful size, it seems as if they should have shown up in these major studies.

Some researchers in this area have suggested that interventions earlier than pre-K might be needed to close achievement gaps. For example, some evidence suggests that the black-white educational achievement gap is apparent by age 2. It may be, although the evidence on this point isn't clear, that some of the funding now being spent on pre-K programs would have a bigger payoff if spent on home visits to the parents of very young children. Greater attention to the health status of pregnant women--including both personal health and exposure to environmental risks--might have a substantial payoff for the eventual educational performance of their children, too.

Thursday, July 19, 2018

Conflict Minerals and Unexpected Tradeoffs

The cause seemed worthy, and the policy mild. Militia groups in the Democratic Republic of the Congo (DRC) were taxing and extorting revenue from those who mined like tin, tungsten, and tantalum. Thus, Section 1502 of the Dodd-Frank Act of 2010 required companies to disclose the source of their purchases of such minerals. The hope was to reduce funding for the militias, and thus to benefit people in the area. Human rights advocacy groups supported the idea. The Good Intentions Paving Company was up and running.

But tradeoffs are no respecters of good intentions. Dominic Parker describes some research on the tradeoffs that occurred in  "Conflict Minerals or Conflict Policies? New research on the unintended consequences of conflict-mineral regulation" (PERC Reports, Summer 2018, 37:1, pp. 36-40). Parker writes:
"First, Section 1502 initially caused a widespread, de facto boycott on minerals from the eastern DRC. Rather than engaging in costly due diligence to identify the sources of minerals—and risking being considered a supporter of rebel violence—some U.S. companies simply stopped buying minerals from the region. This de facto boycott had the intended effect of reducing funding to militias, but its unintended effect was to undercut families who depended on mining for income and access to health care. The decreases in mineral production rocked an artisanal mining sector that had supported an estimated 785,000 miners prior to Dodd-Frank, with spillovers from their economic activity thought to affect millions.
"Second, the legislation changed the relative value of controlling certain mining areas from the perspective of militias, who changed their tactics accordingly. Before the boycott, the militias could maximize revenue by taxing tin, tungsten, and tantalum at or near mining sites. They therefore had an interest in keeping mining areas productive and relatively safe for miners. After the legislation, the militias sought to make up for reduced revenue in other ways. According to the evidence, they started to loot civilians who were not necessarily involved in mining. They also started to fight for control over other commodities, including gold, which was in effect exempt from the regulation."
One result of the economic losses in the area was a sharp rise in infant mortality rates: "The combined evidence suggests that Dodd-Frank increased the probability of infant deaths (that is, babies who died before reaching their first birthday) from 2010 to 2013 for children who lived part of or all of their first year in villages targeted by the legislation and mining ban. The most conservative estimate is that the legislation increased infant mortality from a baseline average of 60 deaths per 1,000 births to 146 deaths per 1,000 births over this period—a 143 percent increase."


The level of violent conflict affecting civilians actually seemed to rise, rather that fall: "At the end of 2010, after the passage of Dodd-Frank, looting in the territories targeted by the mining policies became more common and remained that way through much of 2011 and 2012, when our study period ended. ... The incidence of violence against civilians also increased in the policy regions after the legislation ..."

One economic insight here is the "stationary bandit" theory that when a bandit remains in one location, there are incentives for the bandit to keep local workers and companies safe and productive.

The political insights are fuzzier. One can't rule out that if the Dodd-Frank provisions had been better thought-out or better targeted, maybe the effects would have been better, too. Or maybe this is a case where long-run benefits of these provisions will outweigh short-run costs. But it's also possible that an alternative strategy for bolstering the economy and human rights in the area might have worked better. And it's quite clear that those who supported this particular conflict mineral policy did not predict or acknowledge that their good intentions could have these adverse consequences.

Tuesday, July 17, 2018

On Preferring A to B, While Also Preferring B to A

"In the last quarter-century, one of the most intriguing findings in behavioral science goes under the unlovely name of `preference reversals between joint and separate evaluations of options.' The basic idea is that when people evaluate options A and B separately, they prefer A to B, but when they
evaluate the two jointly, they prefer B to A." Thus, Cass R. Sunstein begins his interesting and readable paper "On preferring A to B, while also preferring B to A" (Rationality and Society 2018,  first published July 11, 2018, subscription required)

Here is one such problem that has been studied: 

Dictionary A: 20,000 entries, torn cover but otherwise like new
Dictionary B: 10,000 entries, like new

"When the two options are assessed separately, people are willing to pay more for B; when they are assessed jointly, they are willing to pay more for A." A common explanation is that when assessed separately, people have no basis for knowing if 10,000 or 20,000 words is a medium or large number for a dictionary, so they tend to focus on "new" or "torn cover." But when comparing the two, people focus on the number of words.

Here's another example, which (as Sunstein notes is "involving an admittedly
outdated technology":

CD Changer A: Can hold 5 CDs; Total Harmonic Distortion = 0.003%
CD Changer B: Can hold 20 CDs; Total Harmonic Distortion = 0.01%


"Subjects were informed that the smaller the Total Harmonic Distortion, the better the sound quality. In separate evaluation, they were willing to pay more for CD Changer B. In joint evaluation, they were willing to pay more for CD Changer A." When looking at them separately, holding 20 CDs seems more more important. When comparing them, the sound quality in Total Harmonic Distortion seems more important--although most people have no basis for knowing if this difference ins sound quality would be meaningful to their ears or not.

And one more example:

Baseball Card Package A: 10 valuable baseball cards, 3 not-so-valuable baseball cards
Baseball Card Package B: 10 valuable baseball cards


"In separate evaluation, inexperienced baseball card traders would pay more for Package B than for Package A. In joint evaluation, they would pay more for Package A (naturally enough). Intriguingly, experienced traders also show a reversal, though it is less stark." When comparing them, choosing A is obvious. But without comparing them, there is something about getting all valuable cards, with no less valuable cards mixed in, which seems attractive.

And yet another example:

Congressional Candidate A: Would create 5000 jobs; has been convicted of a misdemeanor
Congressional Candidate B: Would create 1000 jobs; has no criminal convictions

"In separate evaluation, people rated Candidate B more favorably, but in joint evaluation they preferred candidate A." When looking at them separately, the focus is on criminal history; when looking at them together, the focus is on jobs.
And one more: 

Cause A: Program to improve detection of skin cancer in farm workers
Cause B: Fund to clean up and protect dolphin breeding locations

When people see the two in isolation, they show a higher satisfaction rating from giving to Cause B, and they are willing to pay about the same. But when they evaluate them jointly, they show a much higher satisfaction rating from A, and they want to pay far more for it." The explanation here seems to be a form of category-bound thinking, where just thinking about the dolphins generates a stronger visceral response, but when comparing directly, the humans weigh more heavily. 

One temptation in these and many other examples given by Sunstein is that joint evaluation must be more meaningful, because there is more context for comparison. But he argues strongly that this conclusion is unwarranted. He writes: 
"In cases subject to preference reversals, the problem is that in separate evaluation, some characteristic of an option is difficult or impossible to evaluate—which means that it will not receive the attention that it may deserve. The risk, then, is that a characteristic that is important to welfare or actual experience will be ignored. In joint evaluation, the problem is that the characteristic that is evaluable may receive undue attention. The risk, then, is that a characteristic that is unimportant to welfare or to actual experience will be given excessive weight."
In addition, life does not usually give us a random selection of choices and characteristics for our limited attention spans to consider. Instead, choices are defined and described by sellers of products, or by politicians selling policies. They choose how to frame issues. Sunstein writes: 
"Sellers can manipulate choosers in either separate evaluation or joint evaluation, and the design of the manipulation should now be clear. In separate evaluation, the challenge is to show choosers a characteristic that they can evaluate, if it is good (intact cover), and to show them a characteristic  that they cannot evaluate, if it is not so good (0.01 Total Harmonic Distortion). In joint evaluation, the challenge is to allow an easy comparison along a dimension that seems self-evidently important, whether or not the difference along that dimension matters to experience or to people’s lives. ... Sellers (and others) can choose to display a range of easily evaluable characteristics (appealing ones) and also display a range of others that are difficult or impossible to assess (not so appealing ones). It is well known that some product attributes are “shrouded,” in the sense that they are hidden from view, either because of selective attention on the part of choosers or because of deliberative action on the part of sellers." 
We often think of ourselves as having a set of personal preferences that are fundamental to who we are--part of our personality and self. But in many contexts, people (including me and you) can be influenced by the framing and presentation of choices. Whether the choice is between products or politicians, beware.

Monday, July 16, 2018

Carbon Dioxide Emissions: Global and US

US emissions of carbon have been falling, while nations in the Asia-Pacific region have already become the main contributors to the rise in atmospheric carbon dioxide. These and other conclusions are apparent from the BP Statistical Review of World Energy (June 2018), a useful annual compilation of global trends in energy production, consumption, and prices. 

Here's a table from the report on carbon emissions (I clipped out columns showing annual data for the years from 2008-2016). The report is careful to note: "The carbon emissions above reflect only those through consumption of oil, gas and coal for combustion related activities ... This does not allow for any carbon that is sequestered, for other sources of carbon emissions, or for emissions of other greenhouse gases. Our data is therefore not comparable to official national emissions data." But the data does show some central plot-lines in the carbon emissions story.



A few thoughts: 

1) The US has often had the biggest declines in the world in carbon emissions in absolute magnitudes in recent years. Granted, this is in part because the quantity of US carbon emissions is so large that even a small percentage drop is large in absolute size. Still, better down than up. The BP report notes: "This is the ninth time in this century that the US has had the largest decline in emissions in the world. This also was the third consecutive year that emissions in the US declined, though the fall was the smallest over the last three years. ... Carbon emissions from energy use from the US are the lowest since 1992, the year that the UNFCCC came into existence.:

2) Anyone who follows this topic at all knows that China leads the world in carbon emissions. Still, it's striking to me that China accounts for 27.6% of world carbon emissions, compared to 15.2% for the US. On a regional basis, the Asia Pacific region--led by China, India, and Japan, but also with substantial contributions from Indonesia, South Korea, and Australia--by itself accounts for nearly half of global carbon emissions. If you're concerned about carbon emissions, you need to think about proposals that would have strong effects on China and this region. 

3) Total carbon emissions from the three regions of South and Central America, the Middle East, and Africa total 13.8% of the global total, and thus their combined total is less than either the United States or the European/Eurasian economies. However, if the carbon emissions for this group of three regions keeps growing at about 3% per year, while the carbon emissions for the US economy keeps falling at 1% per year, their carbon emissions will outstrip the US in a few years.

4) In an interconnected global economy, it's worth remembering that the country where energy is used doesn't always reflect where the final product is consumed. If China produces something through an energy-intensive process that is later consumed in the US, it counts as energy use in China--but both countries play a role.

For some more US-specific data, here's some data from the Monthly Energy Review (June 2018) published by the US Energy Information Administration. This table shows total carbon emissions for the US, emissions per capita, and emissions relative to GDP, going back to 1950.


A few comments: 

1) US carbon emissions on this measure peaked around 2007, and have generally declined since then.  An underlying pattern here is a reduction in the use of coal and rise in the use of natural gas, along with greater use of renewables. US emissions are now back to the levels from the late 1980s and early 1990s. 

2) Carbon emissions per capita in the US economy have fallen back to the level of the early 1950s. 

3) Carbon emissions relative to GDP produced have been falling pretty steadily for the almost 70 years shown in this data. 


Friday, July 13, 2018

Time to Reform Unemployment Insurance

The best time to fix your roof is when the weather is sunny and warm, not when it's rainy, cold--and actually leaking. In a similar spirit, the best time to fix unemployment insurance is when the unemployment rate is low. Conor McKay, Ethan Pollack, andAlastair Fitzpayne offer some ideas in "Modernizing Unemployment Insurance for the Changing Nature of Work" (Aspen Institute, January 2018). They write:

The UI [Unemployment Insurance] program — which is overseen by the U.S. Department of Labor and administered by the states — collects payroll taxes from employers to insure workers against unexpected job loss. Eligible workers who become unemployed through no fault of their own can receive temporary income support while they search for reemployment. In 2016, the program paid $32 billion to 6.2 million out-of-work individuals. UI is one of America’s most important anti-poverty programs for individuals and families, serving as a key counter-cyclical stabilizer for the broader economy. In 2009, the worst year of the Great Recession, the UI program kept 5 million Americans out of poverty, and prevented an estimated 1.4 million foreclosures between 2008 and 2012."

So what's wrong with UI as it stands? The system was designed for full-time workers, who have been with an employer for some time, losing full-time jobs. It doesn't do a good job of covering independent contractors, freelancers, short-timers, and part-timers. However, if you are receiving unemployment insurance and you take a freelance or part-time or self-employed job, your benefits usually stop. The share of unemployed workers who are actually covered by unemployment insurance is falling over time.

Many of the reforms mentioned here have been kicked around before, but it's still useful to have them compiled in one place.

The main conceptual difficulty is that unemployment insurance needs someone to pay into the system on a regular basis, but only to withdraw money from the system when it's really needed. Some legislative creativity may be needed  here. But for example, independent and freelance workers could pay unemployment insurance premiums while employed, and if they did so for some period of time (maybe a year or more), they could become eligible for some level of unemployment insurance payouts.  Figure out ways to offer some protection to those who hold multiple jobs, but are not currently eligible for unemployment insurance from any single employer. Figure out how to offer at least some protection to self-employed and temporary workers.

Alternatively, nontraditional workers could be allowed to set up tax-free savings accounts that they would only use if they became unemployed. Such an account could be combined with a retirement account: basically, a worker with a short-term financial need could withdraw some money from the account, but only up to a certain maximum--while the rest stayed in the retirement account.

Finally, it seems wise not to be too quick to cut off unemployment benefits for those who try to work their way back with a part-time job or by starting their own company. Or unemployment insurance could be designed to encourage workers to conduct a long-distance job search and consider moving to another city or state. 

The OECD Employment Outlook 2018 that was just published includes a chapter on unemployment insurance issues across high-income countries. The problem of limited coverage of unemployment insurance is common.
"Across 24 OECD countries, fewer than one-in-three unemployed, and fewer than one-in-four jobseekers, receive unemployment benefits on average. Coverage rates for jobseekers are below 15% in Greece, Italy, Poland, Slovak Republic, Slovenia and the United States. Austria, Belgium and Finland show the highest coverage rates in 2016, ranging between approximately 45% and 60%: In countries with the highest coverage in the OECD, at least four-in-ten jobseekers still report not receiving an unemployment benefit."
Unemployment insurance systems differ quite a bit across countries: qualifications to receive benefits (like what kind of job you previously had, for how long, and how long you have been unemployed from that job), level of benefits, time limits on benefits, whether you are required to get training or some kind of job search assistance while unemployed--and how all of these factors were adjusted by political systems during and after the rise in unemployment during the Great Recession.

But the OECD report emphasizes that unemployment insurance doesn't just help those who are unemployed--it also provides a mechanisms for government to focus on what kinds of assistance might help the unemployed get jobs again. The chapter in the OECD report ends (citations omitted):
"[U]nemployment benefits provide the principal instrument for linking jobless people to employment services and active labour market programmes to improve their job prospects. In the absence of accessible unemployment benefits, it can be difficult to reach out to those facing multiple barriers to employment, who therefore risk being left behind. In these cases, achieving good benefit coverage can be essential to make an activation strategy effective and sustainable. For this reason the new OECD Jobs Strategy calls for clear policy action to extend access to unemployment benefit within a rigorously-enforced `mutual obligation' framework, in which governments have the duty to provide jobseekers with benefits and effective services to enable them to find work and, in turn, beneficiaries have to take active steps to find work or improve their employability ..." 

Thursday, July 12, 2018

China Stops Importing Waste Plastic

For a few decades now, the US and Europe have been managing their plastic waste by shipping it to China and other countries in east Asia for recycling and reuse. But in the last few years, China has been tightening up what it was willing to import, wanting only plastic waste that is uncontaminated. In 2017, China announced that in the future it was banning the import of nonindustrial plastic waste--that is the plastic waste generated by households.

Amy L. Brooks, Shunli Wang, Jenna R. Jambeck look at some consequences in "The Chinese import ban and its impact on global plastic waste trade," published in Science Advances (June 20, 2018). Here's a figure showing patterns of exports and imports of plastic waste, in quantities and values, based on UN data. In theory, of course, the lines for imports and exports should match exactly, but the data is collected from different countries and errors of classification and inclusion do creep in. Still, the overall pattern of a dramatic rise, leveling off in the last few years as China imposed additional restrictions, is clear.
Brooks, Wang, and Jambeck summarize in this way:
"The rapid growth of the use and disposal of plastic materials has proved to be a challenge for solid waste management systems with impacts on our environment and ocean. While recycling and the circular economy have been touted as potential solutions, upward of half of the plastic waste intended for recycling has been exported to hundreds of countries around the world. China, which has imported a cumulative 45% of plastic waste since 1992, recently implemented a new policy banning the importation of most plastic waste, begging the question of where the plastic waste will go now. We use commodity trade data for mass and value, region, and income level to illustrate that higher-income countries in the Organization for Economic Cooperation have been exporting plastic waste (70% in 2016) to lower-income countries in the East Asia and Pacific for decades. An estimated 111 million  metric tons of plastic waste will be displaced with the new Chinese policy by 2030. As 89% of historical exports consist of polymer groups often used in single-use plastic food packaging (polyethylene, polypropylene, and polyethylene terephthalate), bold global ideas and actions for reducing quantities of nonrecyclable materials, redesigning products, and funding domestic plastic waste management are needed."
The pattern of high-income countries sending their recycling to lower- and middle income countries is common. The share of plastic waste going to China seems to actually be greater than the 45% mentioned above. The authors write: "China has imported 106 million MT of plastic waste, making up 45.1% of all cumulative imports. Collectively, China and Hong Kong have imported 72.4% of all plastic waste. However, Hong Kong acts as an entry port into China, with most of the plastic waste imported to Hong Kong (63%) going directly to China as an export in 2016." 

I don't have a solution here. The authors write: "Suggestions from the recycling industry demonstrate that, if no adjustments are made in solid waste management, and plastic waste management in particular, then much of the waste originally diverted from landfills by consumers paying for a recycling service will ultimately be landfilled." Other nations of east Asia don't have the capacity to absorb this flow of plastic waste, at least not right now. There doesn't seem to be much market for this type of plastic waste in the US or Europe, at least not right now. Substitutes for these plastics that either degrade or recycle more easily do not seem to be immediately available. But there is a mountain of plastic waste coming, so we will have a chance to see how the forces of supply, demand, and regulation deal with it. 

For short readable surveys of the study, I can recommend Ellen Airhart, "China Won't Solve the World's Plastics Problem Anymore," in Wired (June 20, 2018) and Jason Daley, "China’s Plastic Ban Will Flood Us With Trash," in Smithsonian (June 21, 2018).

Wednesday, July 11, 2018

When Growth of US Education Attainment Went Flat

Human capital in general, and educational background in particular, are one of the key ingredients for economic growth. But the US had a period of about 20 years, for those born through most of the 1950s and 1960s, where educational attainment barely budged.  Urvi Neelakantan and Jessie Romero provide an overview in "Slowing Growth in Educational Attainment," an Economic Brief written for the Federal Reserve Bank of Richmond (July 2018, EB18-07).

Here's a figure showing years of schooling for Americans going back to the 1870s. You can see the steady rise for both men and women up until the birth cohorts, when the educational gains for women slow down and those for men go flat.


In their essay, Neelakantan and Romero argue that this strengthens the case for improving K-12 education, and offer some thoughts. Here are a few related points I would emphasize.

1) Lots of factors affect productivity growth for an economy. But rapid US education growth starting back in the 19th century has been tied to later US economic growth. And it's probably not just a coincidence that when those born around 1950 were entering the workforce in the 1970s, there is a sustained slump in productivity that lasts about 20 years--into the early 1990s.

2) One reason for the rise in inequality of incomes that started in the late 1970s is that the demand for high-skilled workers was growing faster than the supply. For example, the wage gap between college-educates worker and workers with no more than a high school education increased substantially. As Neelakantan and Romero write: "This slowdown in skill acquisition, combined with growing demand for high-skill workers, contributed to a large increase in the `college premium' — the higher wages and earnings of college graduates relative to workers with only high school degrees." When educational attainment went flat, it also helped to create the conditions for US inequality to rise.

3) When a society has a period of a couple of decades where educational attainment doesn't rise, there's no way to go back later and "fix" it. The consequences like slower growth and higher inequality just march on through time. Similarly, the current generation of students--all of them, K-12, college and university--will be the next generation of US workers.

Monday, July 9, 2018

Three Questions for the Antitrust Moment

There seems to be a widespread sense that many problems of the US economy are linked to a lack of dynamism and competition, and that a surge of antitrust enforcement might be a part of the answer. Here are three somewhat separable questions to ponder in addressing this topic. 

1) Is rising concentration a genuine problem in most of the economy, or only in a few niches?

The evidence does suggest that concentration has risen in many industries. However, it also suggests that for most industries the rise in concentration is small, and within recent historical parameters. For example, here's a figure from an article by  Tim Sablik, "Are Markets Too Concentrated?" published in Econ Focus, from the Federal Reserve Bank of Richmond (First Quarter 2018, pp. 10-13). The HHI is a standard measure of market concentration: it is calculated by taking the market share of each firm in an industry, squaring it, and then summing the result. Thus, a monopoly with 100% of the market would have a HHI measure of  1002 , or 10,000. A industry with, say, two leading firms that each have 30% of the market and four other firms with 10% of the market would have an HHI of 2200. The average HHI across industries has indeed risen--back to the level that prevailed in the late 1970s and early 1980s.



A couple of other points are worth noting:

In some of the industries where concentration has risen, recent legislation is clearly one of the important underlying causes. For example, healthcare providers and insurance firms became more concentrated in the aftermath of restrictions and rules imposed by the Patient Protection and Affordable Care act of 2010. The US banking sector became more concentrated in the aftermath of
Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank act). In both cases, supporters of the bill saw additional concentration as a useful tool for seeking to achieve the purported benefits of the legislation.

The rise in bigness that seems to bother people the most is the dominance of Apple, Alphabet,  Amazon, Facebook, and Microsoft. The possibility that these firms raise anticompetitive issues seems to me like a very legitimate concern. But it also suggests that the competition issues of most concern apply mostly to a relatively small number of firms in a relatively small number of tech-related industries.

2) Is rising concentration the result of pro-competitive, productivity-raising actions that benefit consumers, or anti-competitive actions that hurt consumers? 

The general perspective of US antitrust law is that there is no reason to hinder or break up a firm that achieves large size and market domination by providing innovative and low-cost products for consumers. But if a large firm is using its size to hinder competition or to keep prices high, then the antitrust authorities can have reason to step in. So which is it? Sablik writes:

"Several recent studies have attempted to determine whether the current trend of rising concentration is due to the dominance of more efficient firms or a sign of greater market power. The article by Autor, Dorn, Katz, Patterson, and Van Reenen lends support to the Chicago view, finding that the industries that have become more concentrated since the 1980s have also been the most productive. They argue that the economy has become increasingly concentrated in the hands of `superstar firms,' which are more efficient than their rivals." 
"The tech sector in particular may be prone to concentration driven by efficiency. Platforms for search or social media, for example, become more valuable the more people use them. A social network, like a phone network, with only two people on it is much less valuable than one with millions of users. These network effects and scale economies naturally incentivize firms to cultivate the biggest platforms — one-stop shops, with the winning firm taking all, or most, of the market. Some economists worry these features may limit the ability of new firms to contest the market share of incumbents.  ...  Of course, there are exceptions. Numerous online firms that once seemed unstoppable have since ceded their dominant position to competitors. America Online, eBay, and MySpace have given way to Google, Amazon, Facebook, and Twitter."
There is also international evidence that leading edge firms in many industries are pulling ahead of others in the industry in terms of productivity growth. Here seems to me reason for concern that well-established firms in industries with these network effects have found a way to establish a position that makes it hard--although clearly not impossible--for new competitors to enter. For example, Federico J. Díez, Daniel Leigh, and Suchanan Tambunlertchai have published "Global Market Power and its Macroeconomic Implications" (IMF Working Paper WP/18/137, June 2018). They write:

"We estimate the evolution of markups of publicly traded firms in 74 economies from 1980-2016. In advanced economies, markups have increased by an average of 39 percent since 1980. The increase is broad-based across industries and countries, and driven by the highest markup firms in each economic sector. ... Focusing on advanced economies, we investigate the relation between markups and investment, innovation, and the labor share at the firm level. We find evidence of a non-monotonic relation, with higher markups being correlated initially with increasing and then with decreasing investment and innovation rates. This non-monotonicity is more pronounced for firms that are closer to the technological frontier. More concentrated industries also feature a more negative relation between markups and investment and innovation."
In other words, firms may at first achieve their leadership and higher profits with a burst of innovation, but over time, the higher profits are less associated with investment and innovation.


An interrelated but slightly different argument that what the rise in concentration is telling us is less about the behavior of large firms, and more about a slowdown in the arrival of new firms. For example, it's no surprise that concentration was lower in the 1990s, with the rise of the dot-com companies, and it's no surprise that concentration then rose again after that episode.  Jason Furman and Peter Orszag explore these issues in "Slower Productivity and Higher Inequality: Are They Related?" (June 2018, Peterson Institute of International Economics, Working Paper 18-4). They argue that the rise of "superstar" firms has been accompanied by slower productivity growth and more dispersion of wages, but that the underlying cause is a drop in the start-up rates of new firms and the dynamism of the US economy. They write:
"Our analysis is that there is mounting evidence that an important common cause has contributed to both the slowdown in productivity growth and the increase in inequality. The ultimate cause is a reduction in competition and dynamism that has been documented by Decker et al (2014, 2018) and many others. This reduction is partly a “natural” reflection of trends like the increased importance of network externalities and partly a “manmade” reflection of policy choices, like increased regulatory barriers to entry. These increased rigidities have contributed to the rise in concentration and increased dispersion of firm-level profitability. The result is less innovation, either through a straightforward channel of less investment or through broader factors such as firms not wanting to cannibalize on their own market shares. At the same time, these channels have also contributed to rising inequality in a number of different ways ..." 
Here are a couple more articles I found useful in thinking about these issues, and in particular about the cases of Google and Amazon. 

Charles Duhigg wrote "The Case Against Google," in the New York Times Magazine (February 20, 2018). He notes that a key issue in antitrust enforcement is whether a large firm is actively undermining potential competitors, and offers some examples of small companies are pursuing legal action because they felt undermined. If Google is using its search functions and business connections to disadvantage firms that are potential competitors, then that's a legitimate antitrust issue. Duhigg also argues that if Microsoft had not been sued for this type of anticompetitive behaviour about 20 years ago, it might have killed off Google.

The argument that Google uses its search functions to disadvantage competitors reminds me of the longstanding antitrust arguments about computer reservation systems in the airline industry. Going back to the late 1980s, airlines like United and American build their own computer reservation systems, which were then used by travel agents. While in theory the systems listed all flights, the airlines also had a tendency to list their own flights more prominently, and there was some concern that they could also adjust prices for their own flights more quickly. Such lawsuits continue up to the present. The idea that a firm can use search functions to disadvantage competitors, and that such behavior is anticompetitive under certain conditions, is well-accepted in existing antitrust law.

As Duhigg notes, the European antitrust authorities have found against Google. "Google was ordered to stop giving its own comparison-shopping service an illegal advantage and was fined an eye-popping $2.7 billion, the largest such penalty in the European Commission’s history and more than twice as large as any such fine ever levied by the United States." As you might imagine, the case remains under vigorous appeal and dispute.

As a starting point for thinking about Amazon and anticompetitive issues, I'd recommend Lina M. Khan's article on "Amazon's Antitrust Paradox"  (Yale Law Journal, January 2017, pp. 710-805).  From the abstract:
"Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny.
"This Note argues that the current framework in antitrust—specifically its pegging competition to `consumer welfare,' defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors."
This passage summarizes the conceptual issue.  In effect, it argues that Amazon may be good for consumers (at least in the short-run of some years), but still have potential "harms for competition." The idea that antitrust authorities should act in a way that hurts consumers in the short run, on the grounds that it will add to competition that will benefit consumers in the long run, would be a stretch for current antitrust doctrine--and if applied too broadly could lead to highly problematic results. Khan's article is a good launching-pad for that discussion.

3) Should bigness be viewed as bad for political reasons, even if it is beneficial for consumers?

The touchstone of antitrust analysis has for some decades now been whether consumers benefit. Other factors like whether workers lose their jobs or small businesses are driven into bankruptcy do not count. Neither does the potential for political clout being wielded by large firms. But the argument that antitrust should go beyond efficiency that benefits consumers has a long history, and seems to be making a comeback.

Daniel A. Crane discusses these issues in "Antitrust’s Unconventional Politics The ideological and political motivations for antitrust policy do not neatly fit the standard left/right dichotomy," appearing in Regulation magazine (Summer 2018, pp. 18-22).
"Although American antitrust policy has been influenced by a wide variety of ideological schools, two influences stand out as historically most significant to understanding the contemporary antitrust debate. The first is a Brandeisian school, epitomized in the title of Louis Brandeis’s 1914 essay in Harper’s Weekly, “The Curse of Bigness.” Arguing for `regulated competition' over `regulated monopoly,' he asserted that it was necessary to `curb[...] physically the strong, to protect those physically weaker' in order to sustain industrial liberty. He evoked a Jeffersonian vision of a social-economic order organized on a small scale, with atomistic competition between a large number of equally advantaged units. His goals included the economic, social, and political. ... The Brandeisian vision held sway in U.S. antitrust from the Progressive Era through the early 1970s, albeit with significant interruptions. ...
"The ascendant Chicago School of the 1960s and 1970s threw down the gauntlet to the Brandeisian tendency of U.S. antitrust law. In an early mission statement, Bork and Ward Bowman characterized antitrust history as `vacillat[ing] between the policy of preserving competition and the policy of preserving competitors from their more energetic and efficient rivals,' the latter being an interpretation of the Brandeis School. Chicagoans argued that antitrust law should be concerned solely with economic efficiency and consumer welfare. `Bigness' was no longer necessarily a curse, but often the product of superior efficiency. Chicago criticized Brandeis’s `sympathy for small, perhaps inefficient, traders who might go under in fully competitive markets.' Preserving a level playing field meant stifling efficiency to enable market participation by the mediocre. Beginning in 1977–1978, the Chicago School achieved an almost complete triumph in the Supreme Court, at least in the limited sense that the Court came to adopt the economic efficiency/consumer welfare model as the exclusive or near exclusive goal of antitrust law ..."
As Crane points out, the intellectual currents here have been entangled over time, reflecting our tangled social views of big business. The Roosevelt administration trumpeted the virtues of small business, until it decided that large consolidated firms would be better at getting the US economy out of the Great Depression and fighting World War II. After World War II, there was a right-wing fear that large consolidated firms were the pathway to a rise of government control over the economy and Communism, and Republicans pushed for more antitrust. In the modern economy, we are more likely to view unsuccessful firms as needing support and subsidy, and successful firms as having in some way competed unfairly. One of the reasons for focusing antitrust policy on consumer benefit was that it seemed clearly preferable to a policy that seemed focused on penalizing success and subsidizing weakness.

The working assumption of current antitrust policy is that no one policy can (or should) try to do everything. Yes, encouraging more business dynamism and start-ups is a good thing. Yes, concerns about workers who lose their jobs or companies that get shut down are a good thing. Yes,  certain rules and restrictions on the political power of corporations are a good thing. But in the conventional view (to which I largely subscribe), antitrust is just one policy. It should focus on consumer welfare and specific anticompetitive behaviors by firms, but not become a sort of blank check for government to butt in and micromanage successful firms.

Friday, July 6, 2018

Skeptical about Cryptocurrencies

Cryptocurrencies like Bitcoin have many interesting properties as financial assets, but are they ever likely to become money? The Bank for International Settlements (BIS) devotes Chapter V of its Annual Report 2017-18 (released June 24, 2018) to the topic "Cryptocurrencies: looking beyond the hype."  Here's the main thrust of the argument:
"[T]he essence of good money has always been trust in the stability of its value. And for money to live up to its signature property – to act as a coordination device facilitating transactions – it needs to efficiently scale with the economy and be provided elastically to address fluctuating demand. ... The chapter then gives an introduction to cryptocurrencies and discusses the economic limitations inherent in the decentralised creation of trust which they entail. For the trust to be maintained, honest network participants need to control the vast majority of computing power, each and every user needs to verify the history of transactions and the supply of the cryptocurrency needs to be predetermined by its protocol. Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded. Not only does this call into question the finality of individual payments, it also means that a cryptocurrency can simply stop functioning, resulting in a complete loss of value. Moreover, even if trust can be maintained, cryptocurrency technology comes with poor efficiency and vast energy use. Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value. Overall, the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of  money. That said, the underlying technology could have promise in other applications, such as the simplification of administrative processes in the settlement of financial transactions. Still, this remains to be tested."
Here are some figures that caught my eye on the energy consumption and scaling issues that face cryptocurrencies



On the issue of energy use, as the "miners" who update the system while solving computational problems burn energy to do so: "Individual facilities operated by miners can host computing power equivalent to that of millions of personal computers. At the time of writing, the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland, and other cryptocurrencies also use ample electricity. Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster."

Verifying a cryptocurrency transaction through the blockchain is not only costly in terms of electricity, it's slow. This slowness isn't a bug; it's a feature--that is, it's built in to how the blockchain verifies transactions.  "[A]t the time of writing, the Bitcoin blockchain was growing at around 50 GB per year and stood at roughly 170 GB. Thus, to keep the ledger’s size and the time needed to verify all transactions (which increases with block size) manageable, cryptocurrencies have hard limits on the throughput of transactions."




The underlying architecture of crytocurrencies is that they are updated in blocks, which can only be added an prespecified intervals of time after earlier blocks have been completed. When demand for transactions gets high, the system becomes congested and transactions sometime wait several hours before being verified. "Another aspect of the scalability issue is that updating the ledger is subject to congestion. For example, in blockchain-based cryptocurrencies, in order to limit the number of transactions added to the ledger at any given point in time, new blocks can only be added at pre-specified intervals. Once the number of incoming transactions is such that newly added blocks are already at the maximum size permitted by the protocol, the system congests and many transactions go into a queue. With capacity capped, fees soar whenever transaction demand reaches the
capacity limit . And transactions have at times remained in a queue for several hours, interrupting the payment process. This limits cryptocurrencies’ usefulness for day-to-day transactions such as paying for a coffee or a conference fee, not to mention for wholesale payments. Thus, the more people use a cryptocurrency, the more cumbersome payments become."

Here's a figures showing spikes in daily average transaction fees for several cryptocurrencies:
Put these issues of high and volatile transactions costs together with the extreme volatility in the price of cryptocurrencies, even those that are supposedly designed to have relatively stable values, and their widespread use as  "money" seems implausible.

But the underlying blockchain technology might prove itself useful in other ways, "in niche settings where the benefits of decentralised access exceed the higher operating cost of maintaining multiple copies of the ledger." These uses often will not involve cryptocurrencies, but will instead be "cryptopayment" systems where the blockchain technology is used by a group of players who have permission to be on the system to handle long-distance payments. For example, the World Food Programme’s ran a blockchain-based cryptopayment system to send funds for food aid serving Syrian refugees in Jordan. More broadly, a blockchain based system might cut transaction costs for the global remittance flows of $540 billion annually. Or a "smart contract" system might be set up to facilitate trade financing, such that exporters can be reassured that they will be paid and importers can be reassured that what they paid for has actually shipped.

My own sense is that blockchain is likely to be one more entry in the list of technologies that were invented for one purpose--in this case, cryptocurrency--but ended up instead being most useful for other purposes, from targeted finance to safe-recordkeeping to keeping track of supply chains. For more on Bitcoin and blockchain, see:









Thursday, July 5, 2018

Was the American Revolution Good for Liberty?

Of course, the American Revolutionary War detached the United States from England, but from a broader standpoint of human liberty the simple fact of this political separation was not a major event. Were there actually more substantial human gains for human liberty? Jeffrey Rogers Hummel discusses some outcomes in "Benefits of the American Revolution: An Exploration of Positive Externalities," published at the Library of Economics and Liberty website (July 2, 2018). Hummel suggests four main benefits to liberty for those living in the new country:
1. The First Abolition: Prior to the American Revolution, every New World colony, British or otherwise, legally sanctioned slavery, and nearly every colony counted enslaved people among its population. As late as 1770, nearly twice as many Africans were in bondage throughout the colony of New York as within Georgia, although slaves were a much larger percentage of Georgia’s population. Yet the Revolution’s liberating spirit brought about outright abolition or gradual emancipation in all northern states by 1804. ...  In 1786, the Confederation Congress also prohibited the extension of slavery into the Northwest Territory.
There is a tendency to minimize this first emancipation because slavery had been less economically entrenched in the northern colonies than in the southern colonies and because in many northern states slavery was eliminated gradually. But emancipation had to start somewhere. ... Even in southern colonies, the Revolution’s assault on human bondage made some inroads. Several southern states banned the importation of slaves and relaxed their nearly universal restrictions on masters voluntarily freeing their own slaves. Through resulting manumissions, 10,000 Virginia slaves were freed, more than were freed in Massachusetts by judicial decree. ...
2. Separation of Church and State: ... Although the British colonies prior to the Revolution already practiced a relatively high degree of religious toleration, only four of thirteen colonies had no established, tax-supported church: Rhode Island, New Jersey, Pennsylvania, and Delaware. As a result of the Revolution, the five other southern states and New York disestablished the Anglican Church. With the adoption of the Constitution and then the First Amendment, the United States become the first country to separate church and state at the national level. Several of the New England states, however, retained their established Congregational Church, with Massachusetts becoming the last to fully abolish tax support as late as 1833. In our modern secular age, it is too easy to take these accomplishments for granted, but they were unprecedented.
3. Republican Governments: As a result of the Revolution, nearly all of the former colonies adopted written state constitutions setting up republican governments with limitations on state power embodied in bills of rights. ...  The new state constitutions often extended the franchise, with Vermont being again the first jurisdiction to adopt universal male suffrage with no property qualifications and explicitly without regard to color. Going along with this was a reform of penal codes throughout the former colonies, making them less severe, and eliminating such brutal physical punishments as ear-cropping and branding, all still widely practiced in Britain. ...
4. Extinguishing the Remnants of Feudalism and Aristocracy: ... All the new states abolished primogeniture (the sole right of inheritance to the firstborn son) and entail (a prohibition of the sale, break up, or transfer to outside the family of an estate) where they existed, either by statute or by constitutional provisions. Doing so not only eliminated economically inefficient feudal encumbrances on land titles but also was a blow against hereditary privilege and the patriarchal family, because it undermined traditional patterns of inheritance and facilitated the rights of daughters and widows to possess property. ...
The U.S. Constitution’s prohibition on titles of nobility may seem trivial and quaint to modern eyes. But such titles, still prevalent throughout the Old World, always involved enormous legal privileges. This provision is, therefore, a manifestation of the extent to which the Revolution witnessed a decline in deference throughout society. ... White employees no longer referred to their employers as “master” or “mistress” but adopted the less servile Dutch word “boss.” Men generally began using the designation of “Mr.,” traditionally confined to the gentry. ... In the Revolution’s aftermath, indentured servitude for immigrants withered away, and most states eliminated legal sanctions enforcing long-term labor contracts for residents, thus giving birth to the modern system of free labor, where most workers (outside of the military) can quit at will. 
There's much more of interest in the essay, including discussion of how, in the years before the US Revolution, "British hard-liners intended to fasten on North America an imperial regime in many respects similar if not identical to British rule in India."

Another interesting speculation is that if Britain had held on to the American colonies, then Britain might not have been able to muster a political majority to abolish slavery in 1833. Britain's move to abolish slavery at that time was able to overcome the opposition from British sugar planters in the West Indies. Hummel speculates: "If American cotton, tobacco, rice, and sugar planters had still been under British rule, they inevitably would have allied with West Indian sugar planters, creating a far more powerful pro-slavery lobby. ... Thus it is likely that, without U.S. independence, slavery would have persisted in both North America and the West Indies after 1834 and, indeed, possibly after 1865." 

Wednesday, July 4, 2018

Melting Pot, Salad Bowl, Chocolate Fondue

Here's my attempt to resolve all the issues of shared American identity in under 1,000 words. It was published back in 2013 as an opinion piece in the (Minnesota) Star Tribune newspaper.


"Analogies for America: Beyond the Melting Pot"
Timothy Taylor


Melting pot or salad bowl? For decades now, these two contestants have been slugging it out in the contest for most appropriate metaphor for how the cultures and ethnicities of America fit together. But my preference is to think of America as chocolate fondue.

The popularization of “the melting pot” metaphor is usually traced to a soppy, sentimental and very popular play of that name by an immigrant named Israel Zangwill that opened in Washington in 1908. The melting pot metaphor is a way of expressing “E pluribus unum” — “Out of many, one” — the already old saying adopted in 1782 for the Great Seal of the United States (and which you can see on the back of the $1 bill). “E pluribus unum” has also been imprinted on U.S. coins since the 18th century.

The traditional criticism about the melting pot was that what is special about American culture isn’t its homogeneity, but rather its ability to absorb the elements of many cultures, then pass them around to everyone. For example, as John F. Kennedy wrote in his 1958 book, “A Nation of Immigrants”: “One writer has suggested that a ‘typical American menu’ might include some of the following dishes: ‘Irish stew, chop suey, goulash, chile con carne, ravioli, knockwurst mit sauerkraut, Yorkshire pudding, Welsh rarebit, borscht, gefilte fish, Spanish omelette, caviar, mayonnaise, antipasto, baumkuchen, English muffins, gruyère cheese, Danish pastry, Canadian bacon, hot tamales, wienerschnitzel, petit fours, spumoni, bouillabaisse, mate, scones, Turkish coffee, minestrone, filet mignon.’ ”

In our multicultural and individualist age, the common complaint is that the metaphor says that Americans should surrender our cultural and ethnic identities. This critique strikes me as overwrought. Yes, the culture of the country where you live is constraining. But what’s distinctive about modern America is the looseness of these constraints, and the array of available choices.

However, it does bother me that the melting pot metaphor is a relic of a bygone time, when melting different metals together was a common for many industrial workers. It also bothers me that melting different metals together produces a desired outcome only if you adhere to a formula. Bronze is copper and tin. Brass is copper and zinc. If you just dump different metals into a melting pot, what comes out is likely to be flawed and brittle, not strong or useful. When supporters of the melting pot metaphor start talking, it often turns out that they have a clear mental formula for what it means to be American — and it isn’t always my formula.

The notion of America as a salad bowl seems to have been popularized by the eminent historian Carl Degler. His book “Out of Our Past: The Forces that Shaped Modern America” was a commonly used textbook from the 1950s up through the 1980s. In the 1959 edition, he wrote: “[S]ome habits from the old country were not discarded; in those instances the children of immigrants even into the third and fourth generations retained their differences. In view of such failure to melt and fuse, the metaphor of the melting pot is unfortunate and misleading. A more accurate analogy would be a salad bowl, for, although the salad is an entity, the lettuce can still be distinguished from the chicory, the tomatoes from the cabbage.”

While the salad bowl metaphor has a healthy, crunchy “eat your vegetables” ring to it, it seems awkward to me as well. After all, who is the pale and crunchy iceberg lettuce? Who is arugula? Who are the artificial bacon bits? Who are anchovies? Salad ingredients are not all created equal.

Salad is always falling apart, and you can almost never get all of the ingredients, in just the right proportions, into your mouth at the same time. Imagine the oversized modern salad bar, with multiple kinds of lettuces and vegetables, but also seeds and nuts, tuna salad, slices of chicken or ham, bean salad, hard-boiled eggs, crackers and popcorn, along with choice of soup and dessert. It misses what is cohesive and distinctive about America to see the country as a long buffet of ingredients, which we all choose to exclude or include according to our transient appetites of day.

My own suggestion is that America is chocolate fondue. Our different cultural and ethnic backgrounds are the strawberries, pineapple, and cherries, the graham crackers and cookies, the pound cake and brownies, the rice crispy treats and marshmallows, the popcorn and the peppermint sticks. Then we are dipped in America. We swim in America. We are coated in America. Because Americans can and do come from all ethnicities and races, we all look like Americans.

Of course, chocolate doesn’t always deliver on its promise. It can become grainy, rancid, burnt and bitter. Some people have no taste for chocolate, or are even allergic to it. America has often not lived up to its promises and ideals. But when I think consider all the human beings who have ever lived, in all the different places and times around the world, I feel profoundly fortunate to be living in modern America.

There’s an old story about when heavyweight boxing champion Joe Louis decided to enlist in the U.S. Army in 1942. A friend of his objected, and said: “It’s a white man’s Army, Joe, not a black man’s Army.” But Joe Louis had observed the Nazi propaganda machine close up, as the result of his two epic fights against the German Max Schmeling (who was not a Nazi, but whom the Nazis attempted to exploit). So Louis told his friend: “Lots of things wrong with America, but Hitler ain’t going to fix them.”

In that spirit, I’d say lots of things are wrong with America, but often, the best answers for what’s wrong with America are a bigger dose of what’s right with America. On the Fourth of July, I choose to sit with family and friends, and to savor the textures and sweetness of our shared American experience.

------------

Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at ­Macalester College in St. Paul. He blogs at http://conversableeconomist.blogspot.com.

"The Seeds of the Declaration of Independence Are Yet Maturing"

John Quincy Adams, the sixth President of  the United States (and son of the second president John Adams and his wife Abigail) started a diary when he was 12 in 1779, and added to it continuously for almost 70 years. Some days the long entries were more than 5,000 words. There's one stretch of 25 years where he didn't miss a day. It sums up to more than 14,000 handwritten pages, and the magic of the Internet lets you see images of the 51 volumes here.

In thinking about the July 4 holiday, here's a comment from Adams's diary on December 27, 1819, about one of the basic questions confronting Americans of that time--and our own time. Thomas Jefferson both wrote the Declaration of Independence, and also was a slave-owner. As Adams writes: "With the Declaration of Independence on their lips, and the merciless scourge of slavery in their hands, a more flagrant image of human inconsistency can scarcely be conceived ..." Of course, modern Americans and their leaders can sometimes have the Declaration on their lips and injustice in their hands, too.

Facing that contradiction, Adams responded in a way that was both ominous and, at least in my reading, tinged with hope. He wrote: "The seeds of the Declaration of Independence are yet maturing," and that the result would be the "terrible sublime." Here's the passage, taken from John Quincy Adams, The Memoirs of John Quincy Adams (volume 4, pp. 492-493) available through the magic of the internet at the HathiTrust Digital library.
"[Thomas] Jefferson is one of the great men whom this country has produced, one of the men who has contributed largely to the formation of our national character — to much that is good and to not a little that is evil in our sentiments and manners. His Declaration of Independence is an abridged Alcoran of political doctrine, laying open the first foundations of civil society; but he does not appear to have been aware that it also laid open a precipice into which the slave-holding planters of his country sooner or later must fall. With the Declaration of Independence on their lips, and the merciless scourge of slavery in their hands, a more flagrant image of human inconsistency can scarcely be conceived than one of our Southern slave-holding republicans. Jefferson has been himself all his life a slave-holder, but he has published opinions so blasting to the very existence of slavery, that, how ever creditable they may be to his candor and humanity, they speak not much for his prudence or his forecast as a Virginian planter. The seeds of the Declaration of Independence are yet maturing. The harvest will be what West, the painter, calls the terrible sublime."
A couple of the references here might bear a bit more explanation. The reference to the "Alcoran," was a common contemporary spelling of what the AP Stylebook now spells as the "Quran." It's interesting to see a future US president in 1819 referring to the Quran as a parallel for the Declaration of Independence.

The final sentence refers to the painter Benjamin West, and presumably to paintings like his 1796 "Death on a Pale Horse."



On July 4, I like to think that "the seeds of the Declaration of Independence are yet maturing," with a full recognition that this process will not always provide its positive results through a happy cheerful parade of good feeling, but instead will sometimes be confrontational, wrenching, and difficult.

Edmund Burke: Six Reasons Why Americans Love Liberty

The British statesman and philosopher Edmund Burke gave a "Speech on Conciliation with the Colonies" on March 25, 1775. He sought to explain why those pesky Americans were so strident and obsessive about their love of freedom and liberty. He said:
"In this character of the Americans, a love of freedom is the predominating feature which marks and distinguishes the whole ... This fierce spirit of liberty is stronger in the English colonies probably than in any other people of the earth; and this from a great variety of powerful causes; which, to understand the true temper of their minds, and the direction which this spirit takes, it will not be amiss to lay open somewhat more largely."
Burke then proceeded to explain six causes why "a fierce spirit of liberty has grown up" in America. Here is my list of his six causes, with some snippets from his speech.

Cause #1: Seeing the power to control one's own taxes as as central part of liberty. 
They are therefore not only devoted to liberty, but to liberty according to English ideas, and on English principles. ... Liberty inheres in some sensible object; and every nation has formed to itself some favourite point, which by way of eminence becomes the criterion of their happiness. It happened, you know, Sir, that the great contests for freedom in this country were from the earliest times chiefly upon the question of taxing. Most of the contests in the ancient commonwealths turned primarily on the right of election of magistrates; or on the balance among the several orders of the state. The question of money was not with them so immediate. But in England it was otherwise. On this point of taxes the ablest pens, and most eloquent tongues, have been exercised; the greatest spirits have acted and suffered. ... The colonies draw from you, as with their life-blood, these ideas and principles. Their love of liberty, as with you, fixed and attached on this specific point of taxing. 
Cause #2: A love of popular representation in government. 
"Their governments are popular in a high degree; some are merely popular; in all, the popular representative is the most weighty; and this share of the people in their ordinary government never fails to inspire them with lofty sentiments, and with a strong aversion from whatever tends to deprive them of their chief importance."
Cause #3: Religious belief, and especially the Protestantism of the northern colonies
"Religion, always a principle of energy, in this new people is no way worn out or impaired; and their mode of professing it is also one main cause of this free spirit. The people are Protestants; and of that kind which is the most adverse to all implicit submission of mind and opinion. This is a persuasion not only favourable to liberty, but built upon it. ... All Protestantism, even the most cold and passive, is a sort of dissent. But the religion most prevalent in our northern colonies is a refinement on the principle of resistance; it is the dissidence of dissent, and the Protestantism of the Protestant religion. This religion, under a variety of denominations agreeing in nothing but in the communion of the spirit of liberty, is predominant in most of the northern provinces; where the Church of England, notwithstanding its legal rights, is in reality no more than a sort of private sect, not composing most probably the tenth of the people. The colonists left England when this spirit was high, and in the emigrants was the highest of all ... "
Cause #4: Those who live with slavery, especially in the southern colonies, tend to see liberty as more noble 
"It is, that in Virginia and the Carolinas they have a vast multitude of slaves. Where this is the case in any part of the world, those who are free, are by far the most proud and jealous of their freedom. Freedom is to them not only an enjoyment, but a kind of rank and privilege. Not seeing there, that freedom, as in countries where it is a common blessing, and as broad and general as the air, may be united with much abject toil, with great misery, with all the exterior of servitude, liberty looks, amongst them, like something that is more noble and liberal. I do not mean, Sir, to commend the superior morality of this sentiment, which has at least as much pride as virtue in it; but I cannot alter the nature of man. The fact is so; and these people of the southern colonies are much more strongly, and with a higher and more stubborn spirit, attached to liberty, than those to the northward. ... In such a people, the haughtiness of domination combines with the spirit of freedom, fortifies it, and renders it invincible."
Cause #5: Lots of lawyers, and lawyerly thinking. 
"In no country perhaps in the world is the law so general a study. The profession itself is numerous and powerful; and in most provinces it takes the lead. The greater number of the deputies sent to the congress were lawyers. But all who read, and most do read, endeavour to obtain some smattering in that science. ... This study renders men acute, inquisitive, dexterous, prompt in attack, ready in defence, full of resources. In other countries, the people, more simple, and of a less mercurial cast, judge of an ill principle in government only by an actual grievance; here they anticipate the evil, and judge of the pressure of the grievance by the badness of the principle. They augur misgovernment at a distance; and snuff the approach of tyranny in every tainted breeze."
Cause #6: Geographical distance from England encourages thoughts of liberty. 
"Three thousand miles of ocean lie between you and them. No contrivance can prevent the effect of this distance in weakening government. Seas roll, and months pass, between the order and the execution; and the want of a speedy explanation of a single point is enough to defeat a whole system. ...  In large bodies, the circulation of power must be less vigorous at the extremities. Nature has said it.  ... Spain, in her provinces, is, perhaps, not so well obeyed as you are in yours. She complies too; she submits; she watches times. This is the immutable condition, the eternal law, of extensive and detached empire."
Burke points out that the issue was not whether these arguments were virtuous or moral, or whether the American spirit of liberty was in some way unreasonable or excessive. When faced with the reality of liberty-loving Americans was what to do:
"I do not mean to commend either the spirit in this excess, or the moral causes which produce it. Perhaps a more smooth and accommodating spirit of freedom in them would be more acceptable to us. Perhaps ideas of liberty might be desired, more reconcilable with an arbitrary and boundless authority. Perhaps we might wish the colonists to be persuaded, that their liberty is more secure when held in trust for them by us (as their guardians during a perpetual minority) than with any part of it in their own hands. The question is, not whether their spirit deserves praise or blame, but--what, in the name of God, shall we do with it?"
Obviously, Burke's six reasons apply to the time and place in which he was writing, but it seems to me that they they have echoes in the American character that persist.

For example, Americans continue to have a intense focus on taxation. The idea of direct representation of people in government is a civic religion (especially when it feels as if it is not being properly accomplished). For many Americans, of all faith traditions, their religion is in some way "a refinement on the principle of resistance; it is the dissidence of dissent." The aftermath of American slavery has made the call of "freedom" perhaps even stronger. Public gatherings often involve broad claims about desirability of freedom, and the sense that people are in some way being denied their freedom. The country is full of lawyerly thinkers who are "acute, inquisitive, dexterous, prompt in attack, ready in defence, full of resources," and who "augur misgovernment at a distance; and snuff the approach of tyranny in every tainted breeze." And the geographic location (and sheer size) of the United States means that American liberty is not under threat from neighboring countries in the way that is experienced by people in so much of the world.

On July 4, it's worth noting some of these continuities and divergences in the American experience. And in looking ahead, one can do worse that repeat Burke's question: The question is, not whether their spirit deserves praise or blame, but--what, in the name of God, shall we do with it?"

Monday, July 2, 2018

Black-White Income and Wealth Gaps

Black-white gaps in income and in wealth have been fearsomely persistent over time. Here, I'll mention some main themes from two studies, one focused on income differentials and one on wealth differentials.  

On the topic of income differentials, Raj Chetty, Nathaniel Hendren, Maggie R. Jones, and Sonya R. Porter have written a research paper, "Race and Economic Opportunity in the United States:An Intergenerational Perspective" (March 2018, also available as NBER Working Paper #24441). The authors have written a nice readable summary of main findings for the VoxEU website (June 27, 2018).

But before listing those findings, it's perhaps interesting to note the data on which the study is based, because it represents a new kind of empirical work that has become possible in the social sciences, which draws on extremely large datasets that are linked together, but in a way where the names and identifying characteristics of individuals are blocked from the researchers. Thus this study uses "newly-available longitudinal data from the U.S. Census Bureau that covers virtually the entire American population from 1989-2015. ... [W]e use de-identified data from the 2000 and 2010 decennial Censuses linked to data from federal income tax returns and the 2005-2015 American Community Surveys to obtain information on income, race, parental characteristics, and other variables. We focus on children in the 1978-1983 birth cohorts who were born in the U.S. or authorized immigrants who came to the U.S. in childhood. Our primary analysis sample consists of 20 million children, approximately 94% of the total number of children in the birth cohorts we study. ... [W]e characterize intergenerational gaps by race. We measure children’s incomes as their mean household income in 2014-15, when they are in their mid-thirties. We measure their parents’ income as mean household income between 1994 and 2000, when their children are between the ages of 11 and 22."
In short, this is a very large and very detailed sample of what happened to this particular generation of children. For key findings, I'll just quote from the authors of the study in their VoxEU piece--but there is more detail and illustrative figures there.
Finding #1: Hispanic Americans are moving up in the income distribution across generations, while Black Americans and American Indians are not. ...
In contrast, black and American Indian children have substantially lower rates of upward mobility than the other racial groups. For example, black children born to parents in the bottom household income quintile have a 2.5% chance of rising to the top quintile of household income, compared with 10.6% for whites.

Growing up in a high-income family provides no insulation from these disparities. American Indian and black children have much higher rates of downward mobility than other groups. Black children born to parents in the top income quintile are almost as likely to fall to the bottom quintile as they are to remain in the top quintile. By contrast, white children born in the top quintile are nearly five times as likely to stay there as they are to fall to the bottom. ...
Finding #2: The black–white income gap is entirely driven by differences in men’s, not women’s, outcomes. ...
Finding #3: Differences in family characteristics – parental marriage rates, education, wealth – and differences in ability explain very little of the black–white gap. ...
Finding #4: In 99% of neighbourhoods in the United States, black boys earn less in adulthood than white boys who grow up in families with comparable income.
One of the most prominent theories for why black and white children have different outcomes is that black children grow up in different neighbourhoods than whites. But, we find large gaps even between black and white men who grow up in families with comparable income in the same Census tract (small geographic areas that contain about 4,250 people on average). Indeed, the disparities persist even among children who grow up on the same block. These results reveal that differences in neighbourhood-level resources, such as the quality of schools, cannot explain the intergenerational gaps between black and white boys by themselves. Black–white disparities exist in virtually all regions and neighbourhoods. Some of the best metro areas for economic mobility for low-income black boys are comparable to the worst metro areas for low-income white boys, ...
Finding #5: Both black and white boys have better outcomes in low-poverty areas, but black-white gaps are bigger in such neighbourhoods. ...
Finding #6: Within low-poverty areas, black–white gaps are smallest in places with low levels of racial bias among whites and high rates of father presence among blacks. ...
Finding #7: The black–white gap is not immutable: black boys who move to better neighbourhoods as children have significantly better outcomes.

On the issues of black-white inequality in wealth, William Darity Jr., Darrick Hamilton, Mark Paul, Alan Aja, Anne Price, Antonio Moore, and Caterina Chiopris offer an overview of some key findings in "What We Get Wrong About Closing the Racial Wealth Gap" (April 2018, Samuel DuBois Cook Center on Social Equity at Duke University). The report is in the form of myths and then counterpoint evidence drawn from a variety of sources. Again, there is much more evidence and argument in the report, but here are some main findings (citations and footnote omitted for readability).
Myth 1: Greater educational attainment or more work effort on the part of blacks will close the racial wealth gap. ...
At every level of educational attainment, black families’ median wealth is substantially lower than their white counterparts. White households with a bachelor’s degree or post-graduate education (such as with a Ph.D., MD, and JD) are more than three times as wealthy as black households with the same degree attainment. Moreover, on average, a black household with a college-educated head has less wealth than a white family whose head did not even obtain a high school diploma. It takes a post-graduate education for a black family to have comparable levels of wealth to a white household with some college education or an associate degree ...
As one would expect, the median household wealth is higher for employed families than for unemployed families in both races. However, white households with an employed head have more than ten times higher wealth than similar black households. Furthermore, white households with an unemployed head have a higher net worth than black households with a head who is working full time.
Myth 2: The racial homeownership gap is the “driver” of the racial wealth gap. ...
For those households who do not own a home, wealth levels are low for both white and black households; however black non-homeowner households have a mere $120 in net worth – insufficient to feed a family for a week. The data indicates that white households who are not home-owners hold 31-times more wealth than black households that do not. Among households that own a home, white households have nearly $140,000 more in net worth than comparable black households. ...
Myth 3: Buying and banking black will close the racial wealth gap. ...
Black-owned banks also are miniscule in the context of the general scale of American banking. The largest five black owned banks recently were estimated to have assets totaling $2.3 billion, while J.P. Morgan alone had an estimated $2 trillion in assets. Thus, the top five black banks’ assets were a tiny 0.1 percent of Morgan’s assets (Fontinelle 2017). This indicates that the existing infrastructure of black-owned banks lacks the capacity to produce wide and substantial increases in black wealth. ...
Myth 4: Black people saving more will close the racial wealth gap. ...
[T]here is no evidence that black Americans have a lower savings rate than white Americans once household income is taken into account ...
Myth 5: Greater financial literacy will close the racial wealth gap...
The problem with assigning differences in cost of finance and asset portfolios to difference in financial acumen is its directional emphasis. Meager economic circumstances—not poor decision making or deficient knowledge—constrain choices and leave asset-poor borrowers with little to no other option but to use predatory and abusive alternative financial services. A negligible level of economic resources readily explains why blacks, specifically, use more predatory financial institutions. ...
Myth 6: Entrepreneurship will close the racial wealth gap. ....
When we compile the data even those members of marginalized communities who manage to enter into entrepreneurship largely fail. This is due to a number of factors ranging from under-capitalization, limited market access, or outright theft or destruction. Blacks are far less likely to own a business, and for blacks that do own a business they have far less equity. ... In reality the data paints a daunting picture for diversity in entrepreneurship. According to the U.S. Census Bureau’s Survey of Business Owners (SBO), which is conducted every five years, over 90 percent of Latino and black firms do not have even one employee other than the owner. The proportion of owner only firms reaches a high of close to 98 percent for the sub-group of black female led businesses. When blacks do own a business the return to that business is lower than that of whites and falls well short of closing the racial wealth gap. ... No amount of tutorials or online courses from wealth experts can change the reality of the racialized advantages and disadvantages that undergird entrepreneurship in America. ...
Myth 7: Emulating successful minorities will close the racial wealth gap. ...
In short, so-called “successful” immigrant groups actually retrieve a comparable class position as the one they held in their country of origin. Their pre-migration capital, whether embodied in their education and training or their financial resources, is critical in determining their outcomes in the United States. ... In short, the argument that intergroup disparities in wealth are borne out of group based cultural/behavioral deficiencies is misleading and misdirected. Instead, we should focus on the long exposure of low wealth racial/ethnic groups to theft of wealth and blockades on wealth accumulation. To suggest that blacks and racialized Latino, and Native Americans should emulate other supposedly successful “minority” groups perpetuates the false narrative that their asset poverty is due to a lack of hard work, effort, or ambition. ...
Myth 8: Improved “soft skills” and “personal responsibility” will close the racial wealth gap.
Black men already are largely located in service sector jobs that require, or depend, on “soft-skills.” It is not “soft skills” requirements that distinguish black and white male sites of employment. It is relatively lower pay in the jobs held by the former and relatively higher pay in jobs held by the latter ... While some individuals can indeed “get ahead” or “beat the odds,” the larger structural conditions, well-document wage and unemployment gaps, demonstrate that even when black people “do the right thing”, it does not close the racial wealth gap.
Myth 9: The growing numbers of black celebrities prove the racial wealth gap is closing. ...
Unfortunately, from “The Cosby Show” to Michael Jackson’s multi-platinum albums to Will Smith’s meteoric rise to the present day mega couple Jay-Z and Beyoncé, black celebrity has masked black poverty, rather than contributed to closing the racial wealth gap. No ethnic or racial group-- not Asians, not Latinos, and not whites -- has been framed so dramatically through celebrity status as black Americans. Despite recently released 2016 Federal Reserve data showing that the median black family has a net worth of about $17,600, while the median white family has a net worth closer to $170,000 (Jan 2017), black life has come to be seen through the lens of radically exceptional cases, rather than typical ones.
Myth 10: Black family disorganization is a cause of the racial wealth gap. ...
However, marriage does little to help equalize wealth among white and black women with a college degree. For example, married white women without a bachelor’s degree are in households where they have more than two and a half times the wealth of married black women with a degree. Racial wealth disparities widen among married women with a bachelor’s degree; married white women are in households that have more than five times the amount of wealth as their black counterparts. White households with a single white parent have more than two times the net worth of two parent black households ...
There are of course lots of questions one can raise about specific findings in this body of research, or raise questions about underlying causes and policy options. Studying the trees is worthwhile but one shouldn't lose sight of the forest. African-American households are experiencing real and severe economic disadvantages in the US economy.