Tuesday, June 19, 2018

Thaler on the Evolution of Behavioral Economics

Richard Thaler won the Nobel Prize in economics in 2017  "for his contributions to behavioural economics.  He tells the story of how the field evolved from early musings through small-scale tests and more comprehensive theories and all the way to public policy in his Nobel prize lecture, "From Cashews to Nudges: The Evolution of Behavioral Economics." It is ungated and freely available in the June 2018 issue of the American Economic Review (108:6, pp. 1265–1287).  Video of the lecture being delivered is here. 

I certainly won't try to recap the readable and accessible lecture here. (One of Thaler's many virtues is that he wears his learning lightly.) But here are three stories that Thaler collected near the start of his career, when mulling over these subjects. Thaler writes:

  • At a dinner party for fellow economics graduate students I put out a large bowl of cashew nuts to accompany drinks while waiting for dinner to finish cooking. In a short period of time, we devoured half the bowl of nuts. Seeing that our appetites (and waistlines) were in danger I removed the bowl and left it in the kitchen pantry. When I returned everyone thanked me. But, as economists are prone to do, we soon launched into analysis: how is it that we were all happy now that the nuts were gone? A basic axiom of economic theory is that more choices are always preferred to fewer—because you can always turn down the  extra option.
  • The chair of the University of Rochester economics department (and one of my advisors), Richard Rosett was a wine lover who had begun buying and collecting wine in the 1950s. For as little as $5, he had purchased some choice bottle that he could now sell to a local retailer for $100. Rosett had a rule against paying more than $30 for a bottle of wine, but he did not sell any of his old bottles. Instead he would drink them on special occasions. In summary, he would enjoy his old bottles worth $100 each, but he would neither buy nor sell at that price. Therefore his utility of one of those old bottles was both higher and lower than $100. Impossible.
  • My friend Jeffrey and I were given two tickets to a professional basketball game in Buffalo, normally a 75-minute drive from Rochester. On the day of the game there was a snowstorm and we sensibly decided to skip the game. But Jeffrey, who is not an economist, remarked, “If we had paid full price for those tickets we would have gone!” As an observation about human behavior he was right, but according to economic theory sunk costs do not matter. Why is going to the game more attractive if we have higher sunk costs? 

For an economist, each of these stories suggests a departure from purely rational behavior. More important, it suggest that the departure from rational behavior is in some way understandable, plausible and predictable as a matter of human psychology.  By understanding the rules of thumb (or "heuristics") that guide such behavior, one can build a branch of economics.

For example, the cashew story describes the issue that people can sometimes lack self-control, in the sense that they give in to short-run temptations even when say that they would prefer not to do so. As Thaler says, there is a "planner" and a "doer" inside each of us--and they are not always in synch. As a result, people look for self-control devices (like moving the cashews out of the room), to  help them act in the way that they wish to do, but seem incapable of actually doing. One can immediately think of applications of this framework in retirement plans to help us save, diet plans to help us eat healthier food, exercise clubs and plans to get us moving, book clubs so we read something worthwhile every now and then, and more.

The wine story is an example of what Thaler would later come to call "the endowment effect" or "status quo bias." People often seem to have a bias to holding on to what they have, in part because the fear of that change will incur a loss is bigger than the lure that change will incur a gain. An interesting application here is that many people will have a tendency to stick with what they've got, even if they learn more about alternatives that might be better: the same quantity of savings in a retirement plan and the same way of investing those savings, the same insurance policies with the same levels of deductibles, and so on. People may originally make a choice for no particular reason--perhaps it was just the default option at the time--but then they become more likely to stick with that default option in the future. If a firm or the government changes the default options, it can also change behavior in a lasting way.

 The ticket story describes an issue of how people perceive losses. As Thaler writes:
"When a family spends $100 to buy tickets in advance of some event, the purchase will not create either pleasure or pain so long as the price is equal to the expected price. However, if there is a snowstorm, there is a $100 purchase that now has to be “recognized” and it will then be experienced as a loss. This helps explain why someone can think that going to the event is a good idea—it eliminates the need to declare the original purchase as a loss. ... When I was thinking about these issues, the United States government’s continued involvement in the Vietnam war seemed best explained in these terms." 
Conversely, when Thaler and his friend were given tickets as a gift, not using the tickets was not perceived as a loss in the same way. This unwillingness to face losses, even when they are sunk costs in the past, shows up in a number of settings: for example, the way in which investors are more likely to continue holding stocks that have declined in value, hoping they will rise again, while being more willing to sell stocks that have risen in price.

The policy version of behavioral economics is often called "nudging," where the notion is to alter the default options or the presentation of information in a way that causes more people to make the choices that people wish they could be making in the first place. Thaler (along with Cass Sunstein) originally referred to this as "libertarian paternalism." I had not known that the "nudge" terminology was suggested by a publisher who turned down their proposed book on the subject. Thaler writes:
"When we were looking for a publisher for the book we found the reaction to be rather tepid, probably in part because the phrase “libertarian paternalism” does not exactly roll off the tongue. Fortunately one of the many publishers that declined to bid on the book suggested that the word “nudge” might be an appropriate title. And so we published Nudge: Improving Decisions about Health, Wealth and Happiness. In this roundabout way, a new technical term came into social science parlance: a nudge. The book Nudge is based on two core principles: libertarian paternalism and choice architecture. It is true that the phrase libertarian paternalism sounds like an oxymoron, but according to our definition it is not. By paternalism we mean choosing actions that are intended to make the affected parties better off as defined by themselves. More specifically, the idea is to help people make the choice they would select if they were fully informed and in what George Loewenstein (1996) calls a “cold state,” meaning, unaffected by arousal or temptation."
Of course, nudges are not just the result of government policies. Instead, we are being nudged all the time, often in ways we don't perceive clearly at the time. Firms can try to use nudges to their advantage, as well, which Thaler nicely describes as "sludge:"
"People have been nudging as long as they have been trying to influence other people. And much as we might wish it to be so, not all nudging is nudging for good. The same passive behavior we saw among Swedish savers applies to nearly everyone agreeing to software terms, or mortgage documents, or car payments, or employment contracts. We click “agree” without reading, and can find ourselves locked into a long-term contract that can only be terminated with considerable time and aggravation, or worse. Some firms are actively making use of behaviorally informed strategies to profit from the lack of scrutiny most shoppers apply. I call this kind of exploitive behavior “sludge.” It is the exact opposite of nudging for good. But whether the use of sludge is a long-run profit maximizing strategy remains to be seen. Creating the reputation as a “sludge-free” supplier of goods and services may be a winning long-run strategy ..."

For those who would like additional doses of Thaler, here are some starting points: links to two interviews and another academic lecture.

Friday, June 15, 2018

Autonomous Vehicles: Here's One Crystal Ball

When it comes to peering ahead into the autonomous vehicle future, some crystal balls are better than others. I recommend the recent report written for a group called SAFE by Charles Carson, Erica Groshen, Susan Helper, John Paul MacDuffie, W. David Montgomery,  and Richard Mudge, America’s Workforce and the Self-Driving Future Realizing Productivity Gains and Spurring Economic Growth (June 2018).  The main report is here, while three background papers behind the main report are available here.

(The authors were brought together as an expert panel by a group called Security America's Energy Future. According to its website, "SAFE unites prominent military and business leaders to develop and advocate for policies that improve America’s energy security by significantly curtailing our dependence on oil and promoting responsible use of our domestic energy resources." It seems to do this mainly by sponsoring reports conferences and reports from expert committees, like this one.)

Here's a list of social gains, with the big ones clearly being accident reduction and consumer time.

As the report notes: "It is highly likely that AVs will revolutionize the American economy in ways that have not been seen since the mid-20th century. In fact, it is hard to foresee any technological or other change on the horizon that can contribute more to economic growth and productivity. ... AVs represent arguably the best opportunity to reduce America’s oil dependence. while also providing
low-cost mobility."

But the most intriguing and controversial issues around autonomous vehicles are not about the possibility of gains, but rather involve involve likely shifts in jobs, patterns of living and commuting, vehicle ownership (or not), and even cityscapes. By their nature, such patterns are hard to foresee. The report offers some discussion of the Interstate Highway System, where building started in the 1950s, as an example of a broad social investment with high and not wholly predictable results.

"For example, investments in the construction of the Interstate Highway System have returned more than $6 in economic productivity for each $1 invested, by cutting journey times for both goods and labor.  ... [T]he Interstate Highway System defied linear economic thinking, as these technologies provided significant benefits far beyond their originally-designed impact that conventional analysis failed to capture. Traditional economic studies for the interstate network showed that only 33 percent of the mileage could be justified based on traffic in 1956 and claimed that at most one road over the Rocky Mountains made economic sense. Eventually, growing demand led to three highways being built. It is remarkable that, despite an average rate of return on public investment of between 50 and 60 percent, economic benefits did not even  rank in the top three factors cited by supporters for the highway network’s construction when the enabling legislation was passed in 1956. 
As early as 1970, for example, the interstate network had reduced journey times by 10 percent on average, a benefit that rippled through the economy. These technologies also help reduce a wide variety of costs associated with traffic and travel. Tractor-trailer operating costs are estimated to be 17 percent  lower on interstate highways than other highways, for example, which in turn creates economic benefits for businesses that are passed on to consumers. The broad-based gains provided by these technologies are rarely anticipated in advance—contrary to predictions, logistics companies and vehicle manufacturers were not the main beneficiaries of the Interstate Highway System. More than half of all benefits to private industry were realized in services and non-manufacturing. ...

"Another illustrative example is the role of the interstate network in enabling significant and unanticipated growth in retailers. When combined with the deregulation of trucking in 1980, the Interstate Highway System allowed the freight industry to meet the needs of the emerging “big box” distribution and retailing models of Walmart and Target, bolstering their national competitiveness in the process. ...
"In retrospect, the Interstate Highway System constantly outperformed expectations and had a clear and dramatic positive impact on the U.S. economy. However, the forecasts of the network’s impacts significantly under-estimated demand. By 1965, the number of vehicles traveling on the network and the vehicle miles traveled (VMT) served were 11 and 9 percent higher than estimated, respectively. The Interstate Highway System also contributed to a Gross Domestic Product (GDP) that significantly performed above forecasts for that period. In addition, ... the rate of return for investment (ROI) in the Interstate Highway System far exceeds returns on other broad investment classes from 1950 to 1990."
It seems plausible that the range of benefits and effects from autonomous vehicles could be equally eclectic. For example, posit that AVs make travelling easier (less congestion, greater flexibility, and the ability to do something else while riding). It seems plausible that people could more easily go a little further to reach jobs, which means that low-income people in parts of a metropolitan area without many nearby jobs might find it easier to reach jobs elsewhere in the metro area.

For example, the report mentions mobility benefits: "Those previously unable to drive themselves due to a disability, an inability to afford a car, or other mobility issues would also benefit from AVs. Approximately 9 million Americans have a medical condition that affects their mobility, and of these about 8 million have reduced their daily travel. Almost 15 million people have a medical condition that affects their ability to drive, with 11.7 million people reducing their daily travel as a result. This lack of mobility leads to social isolation, reduced economic opportunities, and an inability to participate fully in community life."

Access to jobs and shopping could expand, too: "The lower cost of travel provided by AVs has the potential to enable people to travel farther, significantly increasing access to job opportunities as well as a broader range of retail goods and services. This in turn expands customer bases for local stores, increases the job market for workers and widens the talent pool for employers, creating productivity
gains in the process. Existing studies have shown that a 10 percent improvement in access to labor increases productivity and regional output by 2.4 percent."

If there was an ability for people to be delivered downtown to shop or work, with a low-cost and flexible method that delivered you where you want to go without didn't needing to drive or park, that would be a dramatic change. Imagine further that after these autonomous vehicles have dropped you off, they don't need to park nearby. They could go off to a spot outside the main downtown where they could recharge their electrical batteries. Thus, cities could substantially reduce space now devoted to curbside and ramp parking.

What about potential job loss? The report emphasizes that any such effects aren't going to  happen soon, or all at once. In terms of numbers, the main job category affected by autonomous vehicles is truck drivers. In turn, the question with truck drivers is whether autonomous vehicles are likely to replace a human driver from door to door, or whether the truck-driving market will split into one with human drivers within metro areas who get the trucks to and from the main highways, with autonomous driving on the highways themselves. In any event the estimates here are that the maximum effect of autonomous vehicles on the unemployment rate would be in the range of 0.06-0.13%--and this would happen about three decades in the future when the technology is much better-developed. But more broadly, the lesson from technologies of the past is that while new technology causes dislocation and shifts of jobs, the total number of jobs doesn't fall. The report notes:
"AVs have two simultaneous impacts: The first is that labor in some job categories will be automated to some extent and, therefore, the number of jobs in those categories will decrease. At the same time, AVs will improve productivity and create more demand for transportation and goods. This increased demand will create jobs in several categories:
  • Firms will add jobs directly associated with AVs, such as fleet service technicians or transportation aides for people with disabilities, as AVs are adopted.
  • AV adoption will increase the need for jobs in companies that support AVs, such as parts suppliers or software engineers.
  • Falling product and service costs resulting from AV adoption will free up discretionary income in the broader economy. New consumer demand will attract investment and lead to the growth of entirely new businesses otherwise unrelated to AVs."
In my mind, the primary social discussion around autonomous vehicles should be about what is needed to facilitate their arrival.

Some earlier posts on autonomous vehicles include:

Thursday, June 14, 2018

G-7, G7+, G20

When the G-7 gatherings originated in the 1970s, the included only finance ministers who typically met with little notice or publicity. They were working meetings. But in the 1980s, they became public events with top government leaders present. As the Council of Foreign Relations has noted, it "The G-7 serves as a forum for highly industrialized democracies to coordinate economic, security, and energy policy."

However, the seven countries in the G-7--the United States, Germany, Japan, Canada, France, Italy, and the United Kingdom--represent a falling share of world GDP, as shown in this figure in a short article from Jim O'Neill and Alessio Terzi at the Bruegel website:

They propose a G-7+, which would cover a more sustained share of world GDP. Basically, Germany, France, and Italy combine into one spot for the euro-zone countries. Canada drops out. This frees up spots to add Brazil, India, and China, while still holding to seven members. 

They write: "Crucially, the G7+ would provide leadership and fast-paced decision-making on economic and financial issues of global relevance – but should not replace the G20, which remains an important avenue for discussions of all other issues that call for higher representativeness, ranging from terrorism and food security to tax avoidance and climate change."

The G-20, for those scoring at home, is a broader group that grew out of the G-7: "The G20 is made up of 19 countries and the European Union. The 19 countries are Argentina, Australia, Brazil, Canada, China, Germany, France, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States."

Communication between countries can be valuable, and regular forums can  make that communication flow more easily than continually trying to build new forums. So I'm not exactly opposed to the G-7, or an expanded G-7+, or the G-20. It's certainly useful for the G-7 countries to remind themselves and each other that their global economic and political power is diminishing. But it also seems to me that such groups can easily be taken over by pretentiousness and public relations gestures, and that world leaders might in some cases find their time better-spent in working on problems of their domestic economies.  

For example, the website of the G-20 proclaims: "In 2008, amidst the global financial crisis, the world saw a need for new consensus-building at the highest political level. Since then, the G20 summits have been attended by heads of state or government, and the G20 was instrumental in stabilizing the world economy." I'd be willing to hear a serious case that "the G20 was instrumental in stabilizing the world economy" through "new consensus-building at the highest political level." But I'm skeptical.

Readers who are interested in digging into the ways in which G-7 and G-20 cooperation might influence policy might usefully begin with two essays.  Adam Triggs has written "Do Global Forums Influence Domestic Macroeconomic Policies  Anymore? Results from In-depth Interview with the World's Leaders, Central Bank Governors, Finance Ministers, and Officials" (Global Economy and Development at Brookings, Working Paper 115, April 2018). Triggs shows persuasively that many world leaders at least claim that summits are useful. 

On the other side, Stephen Kirchner expresses a high degree of skepticism about the usefulness and effectiveness of these international organizations in "The G20 and Global Governance," which was published in the Cato Journal (Fall 2016, pp. 485-506).

Wednesday, June 13, 2018

Bangladesh Reaches Middle Income Status

Bangladesh has over 160 million people, which makes it the eighth most populous country in the world (just behind Pakistan and Nigeria, just ahead of Russia, Mexico, and Japan). I can't claim that I've been paying close attention to its economy, but I was nonetheless started to see that Bangladesh has shifted (in the World Bank's classification) from being a "low-income" to a "middle-income" country.

For some background on the economy of Bangladesh, the World Bank recently published BangladeshDevelopmentUpdate: Building on resilience (April 2018). Also, the IMF just published its regular overview report of the Bangladeshi economy (Bangladesh 2018 Article IV Consultation, IMF Country Report No. 18/158, June 2018). For example, the IMF writes:
"The Bangladesh economy continues to perform well with robust and stable growth. GDP growth has averaged more than 6.0 percent over the last decade, significantly lifting GDP per capita. Thanks to the ready-made garment (RMG) sector, the economy has diversified away from an agrarian to a more manufacturing-based economy, supported by abundant low-cost labor. Poverty has declined steadily and other social indicators have improved. As a result, Bangladesh is now emerging from a low-income to lower-middle income country status.  More recently, broadly sound macroeconomic policies have contributed to robust growth, stable inflation, moderate public debt, and greater resilience to external shocks."
Let's unpack that a bit. Here's a figure from the IMF report showing per capita GDP (left axis) and GDP growth in Bangladesh since 1991.
Here's one more from the World Bank showing the corresponding drop in poverty rates in Bangladesh.
What are the underlying sources of the surge of growth? Here are comments from a couple of observers closer to the subject.  Kaushik Basu wrote an recent op-ed, "Why is Bangladesh Booming?" (May 1, 2018).  Sajeeb Wazed, who is an information technology adviser to the government of Bangladesh and the son of the prime minister (!) also listed some factors in a recent op-ed:

One issue seems to be a resurgence of the Bangladeshi garment industry. Wazed writes:
"Bangladesh also diversified its economy. Much of its early growth came from the ready-made garment industry. It earned its nickname: T-shirt maker to the world. But now, other industries are flourishing as well, including aquaculture and online services. Even the garment industry is diversifying. Along with basic shirts, Bangladesh also produces high-end sportswear that can be found in Europe’s trendiest stores."
Basu adds: 
"One notable point is that the main garment firms in Bangladesh are large—especially compared to those in India, owing largely to different labor laws. All labor markets need regulation. But, in India, the 1947 Industrial Disputes Act imposes heavy restrictions on firms’ ability to contract workers and expand their labor force, ultimately doing more harm than good. The law was enacted a few months before the August 1947 independence of India and Pakistan from British imperial rule, meaning that both new countries inherited it. But Pakistan’s military regime, impatient with trade unions from the region that would become Bangladesh, repealed it in 1958.
"Thus, having been born without the law, Bangladesh offered a better environment for manufacturing firms to achieve economies of scale and create a large number of jobs. And though Bangladesh still needs much stronger regulation to protect workers from occupational hazards, the absence of a law that explicitly curtails labor-market flexibility has been a boon for job creation and manufacturing success."
Both Basu and Wazed also mention greater gender equity in the workplace and in education as a boost to growth. Wazed writes: "The World Economic Forum validated the government’s success in these metrics last year when it ranked Bangladesh first in gender equality among South Asian nations for the second year in a row."

When it comes to the workplace, the progress in gender equity seems modest compared with how far there is to go. Here's a figure from the IMF showing male and female labor force participation across a range of countries, with Bangladesh highlighted. The countries of South Asia have an enormous untapped resource in the possibility of expanding women's labor force participation. 

In education, the gains in Bangladesh, both overall and in term of gender equity, seem stronger. Wazed summarizes the evidence: 
"Between 2000 and 2016, Bangladesh’s net enrollment rate at the primary school level increased from 80 percent to 99 percent. Secondary school enrollment also increased from 45 percent to 54 percent. In addition, Bangladesh achieved complete gender parity in primary education, with 99.4 percent of all girls attending school. Eighty-one percent of the students who enroll in first grade now reach fifth grade. As a result, the adult literacy rate hit a 12-year high last year and is expected to climb in the years ahead as access to educational opportunities expand across the country."
Finally,  Bangladesh has made a real effort to expand access to the financial sector and to digital technologies.

Basu writes: "The Bangladesh government also deserves credit for supporting grassroots initiatives in economic inclusion ... Among Bangladeshi adults with bank accounts, 34.1 percent made digital transactions in 2017, compared to an average rate of 27.8 percent for South Asia. Moreover, only 10.4 percent of Bangladeshi bank accounts are “dormant” (meaning there were no deposits or withdrawals in the previous year), compared to 48 percent of Indian bank accounts."

Wazed writes: "A country of 163 million people, Bangladesh has more than 145 million mobile phone subscribers, an increase of nearly 59 million in just six years. The adoption of new technologies has led to positive social changes, faster communication and an increased desire for democracy. The government’s “Digital Bangladesh” program has extended internet access and government services to the far reaches of the country."

Bangladesh has its share of economic and political challenges, of course.

There's the challenge of ongoing job creation. As the World Bank notes: "With around two
million young people entering the job market every year, Bangladesh must achieve export-led
growth by breaking into new markets with new products to create more and better employment
opportunities. This in turn requires enhancing private investment in capabilities and innovation
to put growth and employment generation on a healthy and sustainable path."

There is the challenge dealing with  Rohingya refugees flooding over the border from Myanmar. As the IMF notes: "Despite the high influx of refugees starting in August 2017, the Bangladeshi government continues to keep its borders open and provide assistance to incoming refugees in coordination with humanitarian agencies. The government has so far managed the additional spending with support from the international community. However, given the uncertainties surrounding the repatriation process, the crisis impact on host communities and the rest of the country could intensify. In the near-term, refugee camps face significant risks from floods and landslides during the monsoons, highlighting the urgent need to upgrade infrastructure."

The financial sector has its weak spots.  Both the World Bank and the IMF point out that tax collections are extremely low. As the IMF writes: "Tax reforms are urgently needed to increase the very low tax revenues. With tax revenues below 10.0 percent of GDP, there is a pressing need to boost collection. This will create room for increased public investment and improved social safety nets, without undermining fiscal sustainability."

There is a national election scheduled for December 2018. The opposition doesn't trust the incumbent government to hold a fair election, and the previous election in 2014 was marred by boycotts and violence. The incumbent government doesn't trust the opposition to contest an election in an open and nonviolent manner. Extreme terror is always a threat, as well.

Every country and every economy has its troubles. But I think back to when I first paid some attention to the Banglashi economy in the late 1970s, in the aftermath of the terrible famine there in 1974-75. The current problems of Bangladesh are a lot nicer ones to have. 

Along with moving up from low-income to lower-middle-income status in the World Bank rankings, the United Nations Committee for Development Policy announced in March that Bangladesh had met the requirements to be reclassified from a "Least Developing Country" to a "Developing Country," although it needs to maintain its status on various measures until 2024 before the change officially happens. 

Tuesday, June 12, 2018

Blood Plasma: US Paid Donors Dominate Global Market

When market forces of supply and demand become involved with parts of the human body, the result can be a high degree of ambivalence.  In the US, for example, a system has evolved where the health care system primarily relies on volunteers for blood, but on paying those who donate blood plasma. Not coincidentally the system of paid US now supplies nearly two-thirds of all the blood plasma available in the world.

This pattern is under discussion in Canada, which in recent years has relied on imports of US plasma for 83% of its use. An Expert Panel on Immune Globulin Product Supply and Related Impacts in Canada has recently published a report: Protecting Access to Immune Globulins for Canadians.  The report lays out facts and evidence, without taking a specific position on paid donations for plasma. However, a Canadian group called “Ethicists and Economists for Ethical Donation-Compensation Practices” has published an open letter arguing: "Both the ethical and the economic arguments against a compensatory model for blood plasma for further manufacture into PDMPs (hereafter: “the compensatory model”) are weak. Moreover, significant ethical considerations speak in favour of the compensatory model ..."

Here's some background, drawing heavily on the Canadian Expert Panel report:
"Plasma is a yellowish coloured liquid component of blood that normally holds the blood cells in whole blood in suspension. It makes up about 55% of the body's total blood volume (TBV). It is the raw material manufactured into a range of medications used by Canadians both inside and outside the hospital setting. ... Over the years, the use of immune globulins (IG), the most widely used product derived from human plasma, has expanded from the treatment of patients who do not make antibodies to protect themselves from infection (immunodeficiencies) to patients across a broad spectrum of illnesses (hematologic, neurologic, rheumatologic, dermatologic) where it is used as an immune modifier."
Dramatically more plasma is collected in the countries where paying donors is widespread: the US, Austria, Czech Republic, and Germany. The Expert Panel again:
"The only 4 countries that are considered 100% self-sufficient in IG are those that had both voluntary and paid donors as seen in Table 3.2. ...  Overall, the US supplies 64% of all plasma collected globally and 74% of all source plasma. In 2015, the US supplied 83% of the plasma used to make IG and PDPs for Canadian patients. The Panel was unable to find any evidence that saturation of the US plasma collection market (i.e. maximum number of plasma donors or source plasma collections has been reached) was a significant risk in the medium term. There were specific geographic regions highlighted in the US where the intensity of plasma collection activity is increasing significantly. In these areas, this concentration of source plasma collection centres drives up competition for plasma donors, which is reflected in the compensation being paid to those donors, however, there were no metrics or evidence submitted to the Panel that suggested that saturation was imminent."

There is considerable variation across countries in the use of immunoglobulin products derived from blood plasma The US, with its plentiful supplies and high tech approach to medicine, leads the way. But the substantial rise in use of these products is not just a US phenomenon.

Here's a figure showing the growth in demand for immunoglobulin products, which come from blood plasma

And here's a figure showing hat the number of plasma collection centers in the US is on the rise.

In thinking about payment to blood plasma donors, a few issues immediately arise. We don't have a problem in a market economy with paying workers for tasks that are physically exhausting or even tasks that have a degree of risk. But being paid for plasma impose health costs  that should be a concern? Also, does paying for  plasma raise a risk of attracting unhealthy donor, in a way that might compromise the healthiness of the plasma supply? 

The Economist describes the process for plasma donation, along with the other isssue, in a couple of articles about paying for plasma in the May 12 issue: a leader called "Lift bans on paying for human-blood plasma: The limited medical and social risks are dwarfed by the benefits" and a longer article called "Bans on paying for human blood distort a vital global market: The market in life-saving blood-plasma products depends on Americans who are paid for it."
"The global demand for plasma is growing, and cannot be met through altruistic donations alone. Global plasma exports were worth $126bn in 2016—more than exports of aeroplanes. ... Plasma today is mostly collected via apheresis, a process where whole blood is extracted, spun in a centrifuge, and the plasma is skimmed off. Red blood-cells are then mixed with an anticoagulant and transfused back into the donor. Blood-donation can take just 10-15 minutes. Apheresis usually takes at least an hour. Plasma replenishes more quickly than red blood-cells. So donors can give more at one session, and far more frequently. In most countries whole-blood donors can give around 500ml of blood, which yields just 250ml of plasma, at most once every two months. Plasma donors can give up to 800ml of plasma—and in America are allowed to do so twice a week. This quickly adds up. In a year a plasma donor could give over 80 litres of the stuff, compared with just 1.6 litres from a whole-blood donor."
In terms of potential health dangers from plasma, there is now a powerful combination of ways of both testing plasma and treating it. Thus, the Canadian Expert Panel notes: "As noted above, the multiple safety steps and ongoing oversight and surveillance by various agencies have resulted in an impressive safety record for PDPs [plasma derived products] with no confirmed case of transmission of infectious disease by PDPs in over 20 years." 

One of the responses to the dominance of paying for plasma is to advocate a big push for more donations of blood plasma. I certainly have nothing against a push for more volunteer donations. But if (or when) such a push falls dramatically short of the rising demand for immunoglobulins and other plasma-derived products, it seems to me that payment for plasma should be acceptable. The risks to donors are not high, and the methods of monitoring and testing have become quite good. 

After all, when you think of the chain of companies and health care providers involved in the development, production, and clinical use of immunoglobulins and other plasma-derived products, it's hard for m to see why the plasma donors are expected to be volunteers while all the other parties are being paid for their services.

The Canadian Expert Panel notes that the line between "voluntary" and "paid" blood donors seems to be turning into more of a continuum over time, in which various kinds of compensation falling short of cash payments becoming more common.
"To further complicate things, over the last 2 decades there has been an evolving continuum of donor compensation, incentives, and rewards in the voluntary donor sector. There is no longer a clear delineation between a “volunteer” donor and a “paid” donor. In the global non-profit blood operator community, a wide array of monetary and non-monetary incentives have been developed to recruit and sustain blood and/or plasma donors – these incentives include cash payments, vouchers, discount coupons, gifts, event tickets, health checks, or time off work ... Survey results from 2014 document the variety of monetary and non-monetary incentives in use for volunteer apheresis plasma and/or blood donors in Europe ... . The fixed sums offered to volunteer blood and plasma donors ranged from 16-30 Euros in the countries where donor payment was allowed (Germany, Czech Republic, and Austria), while the Netherlands, offers a 20 Euros incentive to reimburse travel costs to volunteer donors. In addition, of 28 respondent EU countries, 11 offer 1 or 2 full days off work for both blood and plasma donations, yet only 3 of those countries consider these  benefits an incentive / payment for the volunteer donor. Some argue that it is incongruous that such high-value practices are not considered forms of payment."

Monday, June 11, 2018

US Intergenerational Mobility: An International Perspective

Intergenerational economic mobility has two aspects. "Absolute" mobility refers to the difference between one generation and the next. In an economy that grows substantially over time, absolute intergenerational mobility can be widespread--that is, most adults currently in the workforce would have higher income than did their parents at the same age. In contrast, "relative" mobility refers to whether the ranking of current adults--say, whether they are in the top 10% or the bottom 10%--is correlated with the ranking of their parents.

It's possible for there to be upward absolute intergenerational mobility for most people (if the economy is growing), but also to have not much relative intergenerational mobility (if adults tend to have the same ranking in the economy that their parents did). It's also possible not to have much absolute or relative intergenerational mobility: this would be a static economy in which people have similar income to their parents and also a similar ranking.
The World Bank summarizes much of the evidence on this question in Fair Progress? Economic Mobility across Generations around the World, by Ambar Narayan, Roy Van der Weide, Alexandru Cojocaru, Christoph Lakner, Silvia Redaelli, Daniel Gerszon Mahler, Rakesh Gupta N. Ramasubbaiah, and Stefan Thewissen (May 2018). Although the report looks at evidence from all around the world, I'll focus here on comments about the US economy.

The US has had relatively slow productivity growth for most of the period since the 1970s (although with a nice little spurt of growth in the dot-com years of the late 1990s and early 2000s). In addition, income inequality within any given year has been rising over that time period, too. The combination of slower growth and greater inequality means that absolute intergenerational mobility for the typical adult in the US hasn't been very good in recent decades. Moreover, studies that separate out out whether absolute intergenerational mobility in the US has bee more affected by slower growth or by rising inequality tend to point to rising inequality as the main culprit. The report notes:
"Absolute upward IGM [intergenerational mobility] is likely to be high in a society in which rising prosperity is broadly shared and sustained. Growth in average incomes, which increases the size of the economic pie, is necessary but not sufficient for a high rate of absolute mobility, which also requires a more equitable distribution of the benefits of growth. For example, the sharp decline in absolute mobility in the United States between individuals born in the 1940s and those born in the 1980s was driven more by the unequal distribution of economic growth than the slowdown in aggregate growth since the 1940s. ...
"Research conducted recently in the United States starkly illustrates the importance of not just growth, but also the distribution of growth for  absolute IGM. The share of individuals earning more than their parents in the United States, a reasonable measure of absolute IGM, fell from 90 percent among individuals born in the 1940s to 50 percent among people  born in the 1980s, who are the latest generation of adults of earning age. The decline was driven more by the unequal distribution of economic growth than the slowdown in aggregate growth since the 1940s. 
"In a simulated U.S. economy in which GDP is maintained at the current level, but distributed across income groups as it was distributed among individuals born in the 1940s, absolute mobility among people born in the 1980s would have been 80 percent, which is 60 percent higher than what is observed. In contrast, if GDP growth since the 1980s were restored to the level of GDP in the 1940s and 1950s, but distributed across income groups as GDP is distributed today, 62 percent of the 1980s generation would have been earning more than their parents (Chetty et al. 2017)."
When it comes to relative intergenerational mobility, the US econonomy  has long had a reputation for being quite high, but the facts show that a number of other countries have similar levels. Part of the issue here is that the US distribution of income is more spread out that that of many other countries, and as a result, going from (say) the bottom third of the US income distribution to the top third requires a bigger jump than would be involved in a country with a more equal distribution of income, where the bottom third and top third are closer together.  Here's the report:
"Low relative mobility also implies that privilege and poverty alike are highly persistent across generations in many societies. For example, in the United States, a quarter of the sons born to fathers in the top 10 percent of earnings are also among the top 10 percenters as adults, and most sons born to top 10 percent fathers are at least in the top 30 percent. By contrast, 22 percent of sons born to fathers in the bottom 10 percent remain in the bottom decile as adults, and half remain in the bottom 30 percent. ... [P]erceptions of mobility can also diverge from actual mobility, particularly if comparisons are made across countries. For example, perceived mobility is higher among Americans compared with Europeans, despite mounting empirical evidence that relative IGM is lower in the United States than in several European countries."
Here's a figure showing the overall connection between higher relative intergenerational mobility and lower income inequality.

Part of the reason for the modest level of intergenerational mobility in the US economy is that the level of education for adults has a fairly high correlation with the level of education received by their parents. The World Bank report summarizes this way:
"In a large majority of economies across the world, one’s chances of reaching the top quarter of the ladder of educational attainment depend largely on where one’s parents stood on that ladder (figure 3.6). This share would be 0.25 if one’s ability to obtain an education did not depend on how well-educated one’s parents are. However, there are few economies in which the share exceeds 0.20. The developing world dominates on the list of economies with the lowest share among the 1980s generation. Among the bottom 50 economies, 46 are developing, whereas only 4 are high income, including the United States."

Thus, it seems plausible that in the US, higher education is acting in part as a way of passing economic success between generations. As a result, the US is not making full use of the talents of many of its citizens. As the report notes: 
"Bell et al. (2017) provide a telling example from the United States on the effect of lost human potential due to low social mobility. They find that the probability a child will become an inventor is many times greater among children in rich families than among children in lower-income families and that a large share of this innovation gap can be attributed to differences in childhood environment. Thus, improving opportunities for social mobility could benefit not only the disadvantaged children, but also the overall society by increasing the rate of innovation and economic growth. More generally, realizing the wasted human potential would generate a rise in the overall stock of human capital in an economy, which could have a strong impact on long-term growth."
It's easy to say that everyone is in favor of a high degree of intergenerational economic mobility, but I don't think that's quite true. Sure, most people favor absolute economic mobility across generations--people having more income than their parents did at the same age. But when it comes to relative economic mobility, we tend to favor it only for those outside our own families. As I wrote a few years ago in an earlier post:
"It's easy to say that "we're all in favor" of mobility between generations, but of course, in practice, many of us aren't. After all, the highest level of intergenerational mobility would mean zero correlation between incomes of parents and children. I earn an above-average income, and I invest time and energy and money make location choices so that my children will greater human capital and earn above-average incomes, too. Thus, I must admit that I do not favor completely free mobility of incomes. I'm sure I'm not alone. Divide the income distribution into fifths, and think about parents in the top fifth. How many of them would like to live in an economy where their children have an equal chance of ending up in any of the other fifths of the income distribution?"
For some earlier posts on intergenerational economic mobility, see: 

Friday, June 8, 2018

What's the Value of a QALY?

QALY is an abbreviation for "quality-adjusted life-year." It refers to gains in health, which combine a time dimension and an adjustment for quality of life. Peter J. Neumann and Joshua T. Cohen offer a quick overview in "QALYs in 2018—Advantages and Concerns," a "Viewpoint" article written for the Journal of the American Medical Association (May 24, 2018). Thus, even if you strongly dislike the idea of a QALY, you might want to be aware that your doctors and health care administrators are paying attention to them.

Here's an explanation from So how much is it worth to save a QALY? on the basic concept:
"A year in the hypothetical state of “perfect health” is worth 1 QALY. Being deceased is worth 0 QALYs. Other health states fall between these bounds, with less desirable states closer to 0. QALYs are useful because they combine mortality and morbidity into a single metric, reflect individual preferences, and can be used as a standard measure of health gains across diverse treatments and settings.
"Consider, for example, calculation of QALYs accrued by a hypothetical individual after age 70 years who develops cancer at age 74 years and who dies at age 76 years. If the health utility weight for a typical healthy individual in his or her 70s is 0.95 and the health utility weight while living with this particular cancer is 0.75, then after age 70 years, this individual accrues (4 years × 0.95) + (2 years × 0.75) = 5.3 QALYs. If screening leads to elimination of the cancer before symptom onset and extends the individual’s life from age 76 years to age 80 years, then with screening, the individual accrues 10 years × 0.95 = 9.5 QALYs."
Notice that a QALY is a more flexible tool than just talking about the value of a stastistical life saved (discussed here and here), because a QALY includes both a measure of how long life expectancy is extended and what the quality of life is during that time.

So how much is it worth to save a QALY? Neumann and Cohen summarize the current conventions in this way: 
"Typical value benchmarks in the United States have historically ranged from approximately $50 000 to, more recently, as high as approximately $150 000 per QALY. Those benchmarks purport to represent the “value” of a QALY; ie, the “willingness to pay” to gain 1 QALY of health. The benchmark could also be conceived as a measure of opportunity cost in terms of the health outcomes of the marginal intervention that must be relinquished to provide resources for a new intervention. Interventions with lower cost-effectiveness ratios below the benchmark are said to have favorable value because they “buy” QALYs relatively inexpensively; ie, at a cost below the value indicated by the benchmark. Interventions with higher ratios “buy” QALYs expensively and hence have unfavorable value. The United Kingdom’s National Institute for Health and Care Excellence, which is charged with assessing health technology value for that country’s National Health Service, has used more stringent benchmarks. With a number of exceptions, favorable value has generally corresponded to cost-effectiveness ratios below £20 000 (about $28 000) per QALY, and unfavorable value has generally corresponded to ratios exceeding £30 000 (about $42 000) per QALY."
For some additional detail on current estimates of the value of a QALY, a place to start is the work of the nonprofit Boston-based Institute for Clinical and Economic Review and its "Final Value Assessment Framework: Updates for 2017-2019" (2017).
"The primary measure by which the incremental cost-effectiveness of different care options will be compared will remain the cost per quality-adjusted life year (QALY). The QALY is the established benchmark for capturing benefits for patients through lengthening life and/or improving the quality of life, and it is the standard used by academics, manufacturers, patient groups, and governments around the world. ICER participates in the global dialogue around the best methods for evaluating the value of health services and is always attuned to new developments that might provide a better and fairer system of measuring benefits across different kinds of interventions and patients. ...

"The range of incremental cost-effectiveness ratios used by ICER for several years in its calculation of value-based price benchmarks has been $100,000 to $150,000 per QALY. Current benchmarks for cost-effectiveness thresholds are frequently justified by estimates of “societal willingness to pay,” which, based on earlier consensus efforts at the World Health Organization have commonly been cited as approximately 1-3 times the per capita GDP of the country per additional QALY. For the US this range is now approximately $57,000 to $171,000. Among others organizations, the American College of Cardiology has adopted a range of $50,000-$150,000 per QALY for its methods of incorporating value judgments in clinical guidelines.

"Studies of individual willingness to pay (by trading off salary for additional years of life) have widely varying results but many are in the range of two times the individual’s salary. Given the mean personal income in the US in 2015 was $44,510, this would suggest a threshold of approximately $90,000 per QALY. The third, and in many ways most relevant information to guide the setting of cost-effectiveness thresholds is information on the true opportunity cost at the margin of health spending. Recently, empiric studies have been performed in upper- and medium-income countries in Europe and Latin America that have found that to reflect true opportunity costs the costeffectiveness threshold should be set lower than 1 times the per capita national GDP (approximately $24,000-$40,000 per QALY by extrapolation for the US)."
It's easy to come up with objections that a QALY-based approach doesn't reflect either what people actually think or what people should think. Neumann and Cohen mention a number of these concerns, which I will number here just for clarity:

1) "For example, respondents [to surveys about QALY values]tend to favor interventions that help individuals most in need of care (eg, patients with cancer), regardless of whether these options are efficient from a QALY-optimizing standpoint."
2) "Moreover, there are concerns that cost-per-QALY ratios potentially discriminate on the basis of age and disability by favoring younger and healthier populations that have more potential QALYs to gain (although in many circumstances results from cost-per-QALY analyses favor older and disabled groups)."

3) "Another concern is that QALYs are not “patient-centric.” Some research supports this contention; QALYs may not reflect certain goals and priorities individuals have in treatment decisions, such as their effect on family circumstances (eg, desiring a therapy because it may increase the chance of attending an upcoming family wedding)." 

4) "Moreover, QALYs do not inherently distinguish between a long period spent in a moderately diminished health state and a shorter period spent in a more severe health state."

5) "Additional concerns about QALYs are directed at the idea of an authority, such as policy makers or economists, placing numbers on what people are “worth.” In addition, meaningful measurement of the utility weights that underlie QALY estimates poses challenges." 

6) "However, important conceptual issues will also remain. An example is the question of whose preferences should form the basis of the quality-of-life weights used to construct QALYs: those of patients or members of the general population."
This list of concerns could doubtless be extended. At a more primal level, noneconomists often just hate the idea of putting a monetary value on benefits of saving a life or improving health. Frankly, a lot of economists aren't very fond of the idea, either. But economists also recognize that one way or another, government, health care providers, and industry are going to look at a wide range of possible choices, whether for setting common standards or spending money. Choosing between those rules will will often often involve a comparison of costs and benefits, and thus whether one likes it not, the decisions involve placing a value on health benefits. QALYs can be tweaked and adjusted in different settings. But in the end, a QALY is just a way of pushing us to be explicit about our health care and public safety choices. 

Thursday, June 7, 2018

"What Money Can't Buy:" A Michael Sandel Video Series

The Institute for New Economic Thinking has posted video of a six-part series: "What Money Can't Buy."  The series revolves around philosopher Michael Sandel, who has thought about the intersection of economic motivations with other values as deeply as anyone. At times, Sandel discusses questions with prominent economists (Greg Mankiw, Richard Posner, Joseph Stiglitz, Lawrence H. Summers, and others). But most of the videos are a seminar-style discussion with Sandel and 12 students.

Episode 1: Sex Sells, But Should It? (Should We Be Able to Discriminate Based on Looks?)
Episode 2: The Body Market (Should You Be Able to Sell Your Kidney?)
Episode 3: The Walrus Quota (Should We Be Able to Sell Refugees?)
Episode 4: Supply Shock (Should You Be Able to Sell Water In A Disaster?)
Episode 5: The Golden Door (Should We Pay People to Vote?)
Episode 6: The Death Pool (Should We Be Able to Profit Off of Death?)

For an example of Sandel's style, one starting point is his article in the Fall 2013 issue of the Journal of Economic Perspectives, "Market Reasoning as Moral Reasoning: Why Economists Should Re-engage with Political Philosophy" (27:4, pp. 121-40). When it comes to ideas, Sandel is a poker and a prodder, putting forward possible hypotheses and pushing their edges, always on the lookout for potential qualifications, exceptions, and counterbalancing factors. His answers, to the extent that he offers any, are often provisional and hedged. But you can learn a lot about the terrain of these arguments and about philosophical reasoning by following along.

Wednesday, June 6, 2018

Snapshots of the Salubrious US Labor Market

The US unemployment rate has been less than 4% for the last couple of months, which might seem sufficient reason for breaking out the champagne. But the sense of celebration has been generally restrained.

Some of the reasons for hesitancy are probably just politics. My strong suspicion is that if a Democrat was sitting in the White House, a lot of Democrats would find reason to think that a 3.8% unemployment rate was excellent news. And while President Trump is happy to claim credit for a 3.8% unemployment rate, he is not willing to draw the inference that the need for a trade war to "save US jobs" is apparently pretty low just now. But beyond politics, my sense is that a lot of people don't realize that a number of the concerns over the labor market that were relevant a few years have since mostly gone away.

For a vivid example of the strength of the US labor market, consider this figure from the Job Openings and Labor Turnover Survey of the Bureau of Labor Statistics. It shows the ratio of unemployed persons per job opening. Back at the worst of the Great Recession, there were more than six unemployed people for every job opening. In the most recent data, there are actually more job openings than unemployed people. 

Or consider the concern that although unemployment has dropped, a substantial portion of the decline is due to adults who have become discourage, left the workforce and are no longer looking for jobs, or who have taken part-time jobs but would prefer full-time. Here's a figure from the Bureau of Labor Statistics showing several different measures of unemployment. The red line at the bottom is the standard unemployment rate. The light green line just above it adds the "discouraged" workers who would like a job. and looked for a job in the previous year, but have stopped looking because they don't think one is available. The teal line above that adds both discouraged and "marginally attached" workers, who looked for a job in the previous year and have stopped looking (even though they recognize that jobs are available). The top purple line includes the unemployed, discouraged, marginally attached, and those who are working part-time but would rather work full-time.

Overall, there are a lot of ways to look at unemployment, but whatever measure you choose, the measure is essentially back to what it was before the Great Recession.
Or here's the employment rate for 25-54 year-olds, with separate lines for males (red line), females (green line), and total (blue line). The focus here is on "prime-age" workers, leaving out young adults who are attending college at increasing rates and near-retirees. There is a downward trend for men and an upward trend for women over the decades. But the current levels have rebounded back pretty much to where they were before the Great Recession. 

What about growth of wages and employee compensation? Here's a figure showing percentage growth in the last 12 months in the Employment Cost Index (blue line), which is commonly used because it covers all civilian workers and their benefits. The green line is a measure of the inflation rate faced by consumers called the Personal Consumption Expenditures Index, Less Food and Energy, which is the measure of inflation to which the the Federal Reserve pays attention.  Yes, growth in compensation is not as far above inflation as it was in the years before the Great Recession. But the gap does seem to be widening. 
What about the concern that although overall unemployment rates are down, those who are unemployed are more likely to be long-term unemployed. This concern still has some bite, but less than a few years ago. This figure shows median (blue line) and average (red line) duration of unemployment. Median is the number where half are above and half are below. The average is higher than the median because those who are unemployed for a long time pull the average higher. The median duration of unemployment is back to what it was before the Great Recession, and comparable to what it was in the mid-1990s. 
The share of unemployed who had had been out of a job for more than 27 weeks spiked much higher during the Great Recession than during previous recessions. But even that share has come down to levels that are at least comparable to the highs of the past, although not yet the lows. 
There is no heaven on Earth, and there is no ultimate perfection to be found in real-world labor markets. But the current US labor market situation is really quite good. After looking at the recent numbers, the New York Times ran a headline "We Ran Out of Words to Describe How Good the Jobs Numbers Are" (in a story by Neil Irwin, June 1, 2018). Among the descriptors suggested there are "splendid," "excellent," and "salubrious." 

Tuesday, June 5, 2018

The Shifting Connections from Education to Job Skills

The Council on Foreign Relations has published The Work Ahead Machines, Skills, and U.S. Leadership in the Twenty-First Century, which is an Independent Task Force Report chaired by John Engler and Penny Pritzker,  Some of the discussion goes over familiar ground: innovation is needed, technology is changing work, economic growth is important, we should redesign unemployment assistance and sick leave for the modern work force, we should do more to assist displaced workers, and so on.  But I want to focus on one chapter of the report, "Education, Training, and the Labor Market," and its discussion of that how the interaction between education and job training has been shifting.

Early in the 20th century, for example, the US experienced an enormous surge in high school completion rates, and for most of those graduates, the high school education was good and sufficient preparation for moving into the workforce. The report notes (footnotes omitted):
"From 1910 to 1940, just as modern techniques of mass production were being spread across the country, the number of fourteen- to seventeen-year-old Americans attending high school rose from 18 to 73 percent, and high school completion rose from 9 to 51 percent. No other country even came close to achieving these levels until decades later. Most of the progress was led by state and local governments and citizen groups seized with the urgency of extending free education to as many young people as possible, not by the federal government. The lack of accessible educational opportunities that are clearly and transparently linked to the changing demands of the job market is a significant obstacle to improving work outcomes for Americans. Most of these students did not go on to college but rather went directly into the workforce, with high school completion marking the essential credential needed for most to succeed."
For jobs in the modern economy, a high school education often isn't enough. But frankly, a college education often isn't enough either--because a gap has developed between the skills that employers want and the outcome of many college degrees. The report says: 
Increasingly, the challenge is not just providing more education but providing better-targeted education that leads to better work opportunities, even as the target will continue to shift as new technologies are adopted. The number of job openings nationwide—nearly six million—is near record level, yet many employers say they struggle to find the employees they need. The challenges exist not only in higher-paying jobs in information technology and business services, but also in a range of middle-wage jobs, from nursing to manufacturing to traditional trades. The primary focus of the educational system has continued to be formal education for young people—increasing high school completion rates and expanding college enrollment and completion. But that system is too often inadequate in preparing Americans for many of the faster-growing, better-paying
jobs in which employers are looking for some mixture of soft skills, specific technical skills, some practical on-the-job experience, and a capacity for lifelong learning. 
But while employers complain about what the education system isn't providing, they mostly haven't taken an active role in trying to get what they need.  Many employers have scaled back on on-the-job training. The report says: 
"Employers, for their part, have been slow to develop or expand their own training systems to fill in the gaps from the educational system. ...  Personnel hiring decisions may be the most important ones that any employer makes, yet most employers make those decisions entirely on the spot market. No company would leave its acquisition of critical raw materials or components to the last moment, but most hiring decisions are made as jobs come open. Employers find themselves competing for often scarce pools of talent, without developing and deepening those talent pools themselves. According to a Harvard Business School survey, just one-quarter of  companies have any type of relationship with local community colleges to help prepare employees with the skills they need. Not surprisingly, given their lack of involvement, many companies complain that too few graduates leave school with skills that employers are demanding.  ... A successful workforce model for the twenty-first century will require a different mind-set. Employers need to think about not just competing for talent, but also how to develop the pipeline of talent they need to build their workforce. That will require greater collaboration not just with educational providers but also with other, even competing, employers. Employers should embrace collaborative approaches to talent development; big gains could be made, for example, by industry sectors working together to ensure a steady flow of properly educated and trained students for their future workforce. ... Such work-experience programs are too rare—just 20 percent of adults report having received any sort of work experience as part of their education, and most of that was concentrated in health care and teaching." 
The report is full of cheerful, chipper examples: collaborations between a company and a community college, apprenticeship programs, companies that offers mid-career retraining options, and so on. All good things! But it feels to me as if the scale and scope of the necessary shift is very large--indeed, so large that I am uncertain as to whether the currently constituted educational-employer complex can handle it. 

The report says:  "Making job preparation an education priority will require transformations that are every bit as dramatic as those that came about in the early part of the twentieth century." Take that thought seriously for a moment. As noted above, from 1910 to 1940, "the number of fourteen- to seventeen-year-old Americans attending high school rose from 18 to 73 percent, and high school completion rose from 9 to 51 percent." I'm not seeing a groundswell of change for the education system or its relationship to jobs that in any way even remotely approaches this scale of change 

Most people in education (like me) are comfortable in a process of learning through books and classrooms. When given a task like "job skills preparation," we can talk a good game about change (we're good at talking), but our natural instinct is to find a textbook on the subject and start drawing up homework assignments. Follow up with some standardized written tests to confer some newfangled set of credentials, and we academics feel as if we've done a pretty good job. But that approach only functions well for a subset of future workers. 

Meanwhile, the online labor market is a chaos of websites run by companies and by third parties. Those who can navigate the system are often the same ones who are comfortable filling out forms in classrooms and doing book reports. Again, it only functions well for a subset of future workers. The education-employer system is dramatically ill-equipped to help large number of mid-career workers retool and retrain as technology evolves.

But American public opinion believes that education should offer clear connections to work. As the report says: 
"Americans increasingly believe that job preparation is a crucial mission for educators. The 2017 Phi Delta Kappa poll on attitudes toward public schools found that Americans want schools to “help position students for their working lives  after school. That means both direct career preparation and efforts to develop students’ interpersonal skills.” Specifically, while support for rigorous academic programs remains strong, 82 percent of  Americans also want to see job and career classes offered in schools, and  86 percent favor certificate or licensing programs that prepare students for employment."
It seems to me that a lot of employers would prefer not to be involved in training, and just want educators to do it, while a lot of educators would prefer that employers remain at arms-length from their curriculum and classrooms. I think some of the discomfort of Americans with the US labor market, despite the very low unemployment rates, comes from a concern that our society is not coming to grips with issue of building job skills that lead to secure and productive careers. 

Monday, June 4, 2018

The Not-So-Triumphant Return of the Marshmallow Test

The marshmallow test is one of those legends of social science that a lot of non-social-scientists have heard about. Relatively young children are offered a choice: they can either eat a marshmallow (or some other attractive treat) right now, or they can wait for some period of time (maybe 15-20 minutes) and then have two marshmallows. If you follow up on these children some years later, the legend goes, you find that those who were able to defer gratification early in life will have more success later in life. A satisfyingly moralistic policy recommendation follows: If we could teach young children to defer gratification, that skill might help them as they advance in life.

It's a great story. Is it true? Tyler W. Watts, Greg J. Duncan, and Haonan Quan call it into doubt in their  study "Revisiting the Marshmallow Test: A Conceptual Replication Investigating Links Between Early Delay of Gratification and Later Outcomes," just published in the journal Psychological Science (2018). 

They go back to the original 1990 study: Shoda, Y., Mischel, W.,  and Peake, P. K. (1990). "Predicting adolescent cognitive and self-regulatory competencies from preschool delay of gratification: Identifying diagnostic conditions." Developmental Psychology, 26(6), 978-986.  The original sample for this study was collected over a period of six years (1968-1974) among preschool students at the Bing Nursery School at Stanford University, described in the study as "mostly middle-class children of faculty and students from the Stanford University community." The studies included 653 preschool children, average age about four years. About 10 years later, surveys were mailed to parents whose addresses could be located, ending up with follow-up data on 185 children.

The study found that there was a positive correlation between children who were more likely to defer gratification at age 4, and those who were later rated by their parents as "more likely to exhibit self-control in frustrating situations, less likely to yield to temptation, more intelligent, and less distractable" compared to their peers. There was also some mild evidence (because there wasn't data for many of the students on this point) that SAT scores were higher for those who deferred gratification at age 4.

The more recent study used data from the National Institute of Child Health and Human Development (NICHD) Study of Early Child Care and Youth Development (SECCYD). This study draws on 10 different sites around the country, and tracks and studies a group of children up to age 15. Using this data, the researchers could look at children who had done a delay-of-gratification test by the age of four years, six months, and where they had follow-up data on behavior and educational achievement at age 15. The total sample size was 918. Of that group, the mothers of 552 of the children had not completed college when the child was one month old, which allows the researchers to split the sample into children whose mothers had completed college, and those who had not.

Before describing the results, just consider the samples. The second study is not a nationally representative sample. But it's larger in size and more representative than a single nursery school on the Stanford campus.

The follow-up study did find positive correlations between deferred gratification and some later measures, but the correlations were small, when they existed at all. In addition, the follow-up study was able to study whether the differences in deferred gratification might instead be picking up other factors. For example:

"[D]elay of gratification was strongly correlated with concurrent measures of cognitive ability ... This implies that an intervention that altered a child’s ability to delay but failed to change more general cognitive and behavioral capacities would likely have limited effects on later outcomes. If intervention developers hope to generate program impacts that replicate the long-term marshmallow test findings, targeting the broader cognitive and behavioral abilities related to delay of gratification might prove more fruitful."
The follow-up study did have problems of its own. For example, the study asked children to defer gratification for 7 minutes, rather than the 15-20 minutes in the earlier studies. But for the group of children whose mothers had completed a four-year college degree, most of the children waited the full seven minutes. Thus, it wasn't possible within this group to draw meaningful conclusions about deferred gratification and later behaviors.

Of course, this finding suggests that a higher education for the mother can be relevant to whether a four-year-old can defer gratification, but even in this case, "most of the achievement boost for early delay ability was gained by waiting a mere 20 s." In other words, in the part of the sample for mothers who had not completed college, children who barely waited at all did perform less well, and waiting even 20 seconds was mildly associated with later gains for this group.

The short lesson here is not to freak out if your four-year-old gobbles some candy. The longer lesson is that level of mother's education is relevant to children's development, and that improving cognitive skills at younger ages can matter. Fpr some additional discussion of the results, see these short pieces in the Atlantic and the Guardian.

Friday, June 1, 2018

Sweden Heads Toward a Cash-Free Economy

Sweden seems headed toward a cash-free economy. Here are some comments from Stefan Ingves, Governor of Sveriges Riksbank, the central bank of Sweden, in a short essay called "Going Cashless:
The governor of the world’s oldest central bank discusses his country’s shift toward digital money" (Finance & Development, March 2018, 55:2, pp. 11-12):
"Sweden is rapidly moving away from cash. Demand for cash has dropped by more than 50 percent over the past decade as a growing number of people rely on debit cards or a mobile phone application, Swish, which enables real-time payments between individuals. More than half of all bank branches no longer handle cash. Seven out of ten consumers say they can manage without cash, while half of all merchants expect to stop accepting cash by 2025 (Arvidsson, Hedman, and Segendorf 2018). And cash now accounts for just 13 percent of payments in stores, according to a study of payment habits in Sweden (Riksbank 2018). ...

I am convinced that within 10 years we will almost exclusively be paying digitally, both in Sweden and in many parts of the world. Even today, young people, at least in Sweden, use practically no cash at all. This demographic dimension is also why I believe that cash’s decline can be neither stopped nor reversed. While the Nordic countries are at the forefront, we are not alone. It is interesting to see how quickly the Chinese payments market, for instance, is changing.
Ingves mentions some issues that are likely to arise with this transition. One is that "it will likely further limit financial access for groups in society that currently lack any means of payment other than cash." Other issues are the extent to which the new payments infrastructure, which may shift in substantial part from central banks to private firms, will be safe, secure, rapid, and low-cost.

I would also add that the prospects of a cash-free society offers an interesting angle on proposals to eliminate large-denomination bills (for example, see "Eliminate High-Denomination Bills" (March 18, 2016). The usual justification for such a step is that it will make life much harder for criminals and drug dealers, and also that it could help a central bank to run a more expansionary monetary policy if interest rates have already been pushed down to near-zero (as happened in the US after the Great Recession). If most people find that they are no longer using cash at all, the practical difficulties of eliminating high denomination bills are likely to look more surmountable. 

Thursday, May 31, 2018

Two Issues for an Aging Japan: Financial Gerontology and the Rise of Robots

Japan is aging fast. Here are some trends on total population and age distribution, according to projections from the National Institute of Population and Social Security Research in Japan,

The report notes that the 2015 Census gives a total Japanese population of 127 million in 2015, which in a middle-variant prediction will fall to 88 million--a fall of roughly one-third--in the next 50 years. 

Here's a breakdown for what share of the population will be over 65, under 15, and in-between. The working-age share of Japan's population was about 66% in the 1970s and 1980s, but is now down to 60%, and the long-term projections suggest that it will fall to about 50% in the next 30 years.
Aging and lower birthrates have been happening all over the world, but Japan is an extreme case. Two articles recently caught my eye about  a couple of the many adjustments that Japan's economy will need to make in the years to come. 

One adjustment is "financial gerontology," which is the study and policy related to how older folks will manage their money--especially in cases of Alzheimer's or other kinds of diminished capacity. 
Keiichiro Kobayashi, a professor of economics at Keio University and a Faculty Fellow at Japan's Research Institute of Economy, Trade and Industry (REITI), sketched this issue in a short essay on "Issues Concerning Japan’s Economic Policy," written as part of a collection of essays from REITI on Priorities for the Japanese Economy in 2018 (January 2018). Kobayashi writes (paragraph breaks inserted):
"[F]inancial gerontology ... refers to a policy area that seeks to address the question of how to ensure proper management of assets owned by elderly people with dementia or other problems in making decisions to support their livelihoods, while at the same time maintaining the vitality of the Japanese economy as a whole. Elderly people aged 65 and over, totaling some 30 million at present, own more than half of the 1.8 quadrillion yen worth financial assets held by Japanese households. Approximately five million of them are suffering dementia. The number is expected to rise to seven million in 2030, meaning that well more than 100 trillion yen worth of assets will be owned by those with senile dementia. 
"At present, most of those assets are held in cash. Reportedly, significant amounts of assets are left dormant—rather than invested in equity securities—because self-imposed industry regulations prohibit securities firms from recommending elderly customers to make new investments. The guardianship system for adults, which was established under the jurisdiction of the Ministry of Justice exclusively for the purpose of ensuring the proper management of property owned by elderly people with dementia, reportedly allows investments only in the form of principal-protected cash equivalent assets such as bank deposits because family courts tend to operate the system conservatively. 
"It might be too much to ask family courts, which have no economic expertise, to have a mindset to increase returns by taking appropriate risks. However, guardians would be doing no good for their wards as well as for Japan unless they take some risks in balance with returns. Performing the task of guardians, which is to manage property, needs sufficient economic knowledge and a way of thinking. It was probably wrong to have designed the system originally in a way to leave the entire task to the legal community. Also, it is often pointed out that guardians often lack coordination with caregivers and welfare specialists in undertaking their activities despite the fact that their task is to look after elderly people with dementia. It takes a broad spectrum of cooperation encompassing not only the legal, financial, and economic communities but also professionals specialized in elderly welfare to ensure the proper management of property owned by elderly people. However, a system for such cross-sectoral cooperation is hardly in place."
To me, this insight suggests that one reason why Japan can continue to run enormous budget deficits is that Japan's elderly own a large amount of wealth, which often ends up in very safe assets. Japan's economy would plausibly be better off if some of these funds ended up in well-diversified investments in private sector firms.

For example, Todd Schneider, Gee Hee Hong, and Anh Van Le discuss "Land of the Rising Robots: Japan’s combination of artificial intelligence and robotics may be the answer to its rapidly shrinking labor force," in the June 2018 issue of Finance & Development (pp. 28-31). They write:
"Japan’s estimated population fell by a record-breaking 264,000 people in 2017. Currently, deaths outnumber births by an average of 1,000 people a day. ... Japan’s domestic labor force (those ages 15–64) is projected to decline even faster than the overall population, dropping by some 24 million between now and 2050. ...  Japan is no stranger to coping with limited resources—including labor—and has historically been a leader in technological development. Automation and robotics, either to replace or enhance human labor, are familiar concepts in Japanese society. Japanese companies have traditionally been at the forefront in robotic technology. ...
"[T]he gap in productivity growth between the manufacturing and services sectors in Japan is extremely wide. While there are many causes, the largest gains in industrial productivity have been closely correlated with increased use of information and communication technology and automation. Perhaps it is no coincidence that the most productive manufacturing sectors in Japan—automotive and electronics—are the ones whose production processes are heavily reliant on automation. By contrast, the services sector, which accounts for 75 percent of GDP, has seen little annual productivity growth—only about half that of the United States. Labor productivity has roughly tripled since 1970 in manufacturing, but improved by only about 25 percent in the nonmanufacturing sector.
"The coming wave of automation technology and artificial intelligence promises new possibilities for replacing or augmenting labor in the nonmanufacturing sector (for example, in transportation, communications, retail services, storage, and others). According to several government reports (including the Bank of Japan’s Regional Economic Report and the annual survey on planned capital spending by the Development Bank of Japan), even small and medium-sized firms are embracing new technology to compensate for scarce labor and stay competitive. For example, Family Mart, a Japanese retail convenience store chain, is accelerating implementation of self-checkout registers, while the restaurant group Colowide and many other restaurant operators have installed touch-screen order terminals to streamline operations and reduce the need for staff. Other examples abound in health care, financial, transportation, and other services—including robot chefs and hotel staff. ....
"Surveys support the view that both the volume and quality of services in Japan are in decline. Recent work by the research arm of Japan’s Research Institute of Economy, Trade and Industry (Morikawa 2018) shows that the quality of services is eroding as a result of labor shortages. Most critically affected are parcel delivery services, hospitals, restaurants, elementary and high schools, convenience stores, and government services."
Japan's prospects for future economic growth seem likely to be intertwined with how the country can mobilize the enormous savings of its elderly to focus on the wave of robotic and AI technology that will be needed to complement its shrinking workforce.