Wednesday, November 14, 2018

What Amazon Said, What Amazon Meant

In September 2017, Amazon announced that it was planning to set up a second headquarters. It published a "Request for Proposal" that began:
Amazon invites you to submit a response to this Request for Proposal (“RFP”) in conjunction with and on behalf of your metropolitan statistical area (MSA), state/province, county, city and the relevant localities therein. Amazon is performing a competitive site selection process and is considering metro regions in North America for its second corporate headquarters.
The RFP suggested that within broad parameters, the search was wide-open. It is full of comments like " All options are under consideration" and "We encourage testimonials from other large companies" and "Tell us what is unique about your community." The quick overview of its requirements looked like this:
In choosing the location for HQ2, Amazon has a preference for:
  • Metropolitan areas with more than one million people
  • A stable and business-friendly environment
  • Urban or suburban locations with the potential to attract and retain strong technical talent
  • Communities that think big and creatively when considering locations and real estate options
HQ2 could be, but does not have to be:
  • An urban or downtown campus
  • A similar layout to Amazon’s Seattle campus
  • development-prepped site. We want to encourage states/provinces and communities to think creatively for viable real estate options, while not negatively affecting our preferred timeline
Several hundred cities heard what Amazon said, and sent in proposals. Many of those were no-hopers, of course. Still, now Amazon has announced its choices: New York (technicallly Long Island City) and DC (technically Arlington, Virginia). Wow, some really radical open-minded out-of-the-box thinking there! It seems as if a more accurate list of criteria for Amazon's Request for proposal might have had three elements.

1) Should be an easy commute from one of the homes of Jeff Bezos, CEO of Amazon. Scott Galloway offers a useful info-graphic here:



2) Should either be near the nation's major center of government or near the nation's major center of the financial industry. Or maybe we'll just do both.

3) Should be one of the top two cities for total number of people already employed in computer and mathematical jobs. Alan Berube at Brookings offers this useful table.
Table 1: Tech workers by metro area

There's nothing wrong with these actual criteria. Having a corporate headquarters near the residence of the CEO, especially when the CEO is as closely identified with the company as Bezos is with Amazon, is a long-standing practice. There are obvious advantages to being in New York and DC.

But I do wonder if the folks at Amazon have any clue about how annoyingly cozy this looks to the several hundred other cities that took the time to put in bids. Sure, places like Columbus, Ohio, or Indianapolis, Indiana can get a pat on the head for being on the "short list."  The day before the decision was announced, the major of Jersey City tweeted: "Of course #jerseycity would benefit if it’s in NY but I still feel this entire Amazon process was a big joke just to end up exactly where everyone guessed at the start. No real social impact on a city, no real transformation, no inspiring young residents that never had this" The next time Amazon starts talking with cities about locating a facility anywhere, this process will be remembered.

In the RFP, Amazon talked a good game about the importance of a " local government structure and elected officials eager and willing to work with the company." It talked about a fast permit process for building, and about the importance of smoothly functioning transportation infrastructure. It Amazon becomes mired in the local politics, regulatory disputes, and traffic jams of New York and DC, it shouldn't expect much sympathy from hundreds of other places across the country.

Tuesday, November 13, 2018

Some Economics of World War I

What we now call World War I was known at the time, and for several decades afterward, simply as the "Great War." It wasn't until the arrival of World War II that World War I was re-christened. The Great War ended 100 years ago on November 11, 1918.

Stephen Broadberry and Mark Harrison have edited a collection of 20 essays called The Economics of the Great War: A Centennial Perspective (November 2018, free registration needed). It's a VoxEU.org Book published by CEPR Press, The useful approach of these books is to focus on short and readable essays, often 6-10 pages in length, in which the authors bring out some of the key points from their previous or ongoing  research. Thus, the books offer a gentle introduction to a broader swath of the literature. I'll list the full table of content below. Here, I'll offer a few tidbits. 

As the editors point out, many of the modern discussion so the Great War focus on changes  that happened in the aftermath of the war, many of which are hot topics again a century later. Examples of such topics with echoes for the present day include:  

The Great War marked the end of a period that had shown a strong rise in economic inequality. Walter Scheidel writes: "In the years leading up to World War I, economic inequality in many industrial nations was higher than it had ever been before. In the early 1910s, the highest-earning 1% of adults in France, Germany, Japan, the Netherlands, the UK, and the US received
approximately one-fifth of all personal income. Income inequality then was much greater than it is now, except in the US, where the level of the 1910s has returned. ... Personal wealth was even more concentrated. The UK, where the richest 1% owned almost 70% of all wealth, led the pack. Today’s figure is closer to 20%. The corresponding French, Dutch, and Swedish shares of close to 60% were the highest ever recorded for these countries and between two and three times as large as they are now. Uncharacteristically, the US was lagging behind, even though its wealth concentration was also – if only moderately – greater than it is today ... "

The Great War brought the first great deglobalization of the world economy. David Jacks writes: "I document the evolution of world trade up to the precipice of World War I and the implosion of world trade in the initial years of the war, along with important changes in the composition of trade. Chief among these was the dramatic erosion in the share of Europe in world exports in general, and in the share of Germany in European exports in particular. Turning an eye to more long-run developments, World War I emerges as a clear inflection point in the evolution of the global economy. The diplomatic misunderstandings, economic headwinds, and political changes introduced in its wake can be discerned in the data as late as the 1970s."

The Great War showed how to address a Depression, but the lesson wasn't learned. Hugh Rockoff explains: "Policymakers might have drawn the conclusion from World War I that deficit spending combined with an expansionary monetary policy had propelled the economy toward full employment – a lesson that would have been enormously valuable in the Depression. ... Although lessons about the effectiveness of monetary and fiscal policy could have been drawn from the war, economic theory was not ready. ... The methods used for dealing with shortages during the war, whatever their success in wartime, were simply inappropriate for dealing with the Depression. Although the Roosevelt administration wrestled mightily with the Depression, and produced important pieces of social legislation such as Social Security and the minimum wage, many of its programmes were aimed simply at reallocating resources from one interest group to another, rather than creating the additional demand that would have done the most to ameliorate the Depression."

The Great War marked the end of unrestricted mass migration. Drew Keeling points out: "The war declarations of August 1914 spelled far-reaching alterations to the fundamental character of modern long-distance international mass migration. For most of the preceding century, in the majority of big economies, international human relocation had been largely peaceful, voluntary, and motivated by market incentives. Since then, politically determined quotas and legal restrictions, and flight from war, oppression or similarly fearsome dangers and disasters, have been more salient ..."

The Great War brought an international refugee crisis. Peter Gatrell writes: "Amidst all the current talk of an international ‘refugee crisis’, it is worth pointing out that World War I yielded a harvest of mass population displacement that caught contemporaries by surprise and is only now attracting scholarly attention. It uprooted upwards of 14 million civilians whose suffering generated widespread sympathy and encouraged often impressive programmes of humanitarian aid as well as self-help. In Western Europe wartime displacement did not leave a lasting legacy, because refugees were able to return to their homes. But in Eastern Europe and the Balkans, the situation was complicated by revolution, civil war, the collapse of three continental empires, and a series of population exchanges."

The volume also looks in more detail at the history of the war itself. As an example, Mark Harrison contributes an opening essay, "Four Myths about the Great War." Here's a summary, with citations omitted for readability. 

Myth 1: "How the war began: An inadvertent conflict?"
"There was no inadvertent conflict. The decisions that began the Great War show: • agency, • calculation, • foresight, and • backward induction. Agency is shown by the fact that, in each country, the decision was made by a handful of people. These governing circles included waverers, but at the critical moment the advocates of war, civilian as well as military, were able to dominate. Agency was not weakened by alliance commitments or mobilisation timetables. ... What ruled the leaders’ calculation in every country was the idea of the national interest ... While the ignorant many hoped for a short war, the informed few rationally feared a longer, wider conflict. They planned for this, acknowledging that final victory was far from certain. ... The European powers understood deterrence. No one started a war in 1909 or 1912 because at that time they were deterred. War came in 1914 because in that moment deterrence failed."
Myth 2: "How the war was won: Needless slaughter?"
"Another myth characterises fighting in the Great War as a needless wasteful of life. In fact, there was no other way to defeat the enemy. Attrition was not a result of trench warfare. Attrition became a calculated strategy on both sides. From the Allied standpoint, the rationality of attrition is not immediately clear. The French and British generally lost troops at a faster rate than the Germans. Based on that alone, the Allies could have expected to lose the war. The forgotten margin that explains Allied victory was economic. This was a war of firepower, as well as manpower. ...  When America joined the war and Russia left it, the Allied advantage declined in population but rose in production. On the basis of their advantage, ... the Allies produced far more munitions, including the offensive weaponry that finally broke the stalemate on the Western front."
Myth 3: "How the war was lost: The food weapon?"
"Hunger was decisive in the collapse of the German home front in 1918. Was Germany starved out of the war by Allied use of the food weapon? In Germany, this myth became prevalent and assumed historic significance in Hitler’s words ... It is true that Germany imported 20‐25% of calories for human consumption before the war. Wartime imports were limited by an Allied blockade at sea and (via pressure on neutrals) on land. At the same time, German civilians suffered greatly – hunger-related mortality is estimated at around 750,000. But decisions made in Berlin, not London, did the main damage to German food supplies. ... [T]the effects of the loss of trade were outweighed by Germany’s war mobilisation. Mobilisation policies damaged food production in several ways. On the side of resources, mobilisation diverted young men, horses, and chemical fertilisers from agricultural use to the front line. Farmers’ incentives to sell food were weakened when German industry was converted to war production and ceased to supply the countryside with manufactures. Government initiatives to hold down food prices for the consumer did further damage. Because trade supplied at most one quarter of German calories, and German farmers the other three quarters, it is implausible to see the loss of trade as the primary factor. Germany’s own war effort probably did more to undermine food supplies."
Myth 4: "How the peace was made: Folly at Versailles?"
"Since Keynes (1920), many serious consequences have been ascribed to the treaty of Versailles. ...  Germany actually paid less than one fifth of the 50 billion gold marks that were due. From 1924, there was no net drain from the Germany economy because repayments were covered by American loans. Eventually, Hitler defaulted on both loans and reparations. German governments could have covered most of it [the reparations] by accepting the treaty limits on military spending. Instead, they evaded it by means of a ‘war of attrition’ against foreign creditors. The Allied pursuit of reparations was unwise and unnecessarily complicated Europe’s postwar readjustment, but it is wrong to conclude that it radicalised German politics. The political extremism arising from the treaty was short-lived. In successive elections from 1920 through 1928, a growing majority of German votes went to moderate parties that supported constitutional government. In fact, Weimar democracy’s bad name is undeserved. It was the Great Depression that reawakened German nationalism and put Hitler in power."
____________________

Here's the full Table of Contents





Monday, November 12, 2018

Global Population Pyramids

The Lancet has just published a recent set of papers from the Global Burden of Disease Study. As it notes: "The Global Burden of Disease Study (GBD) is the most comprehensive worldwide observational epidemiological study to date. It describes mortality and morbidity from major diseases, injuries and risk factors to health at global, national and regional levels. Examining trends from 1990 to the present and making comparisons across populations enables understanding of the changing health challenges facing people across the world in the 21st century."

Interested readers will find lots to chew on in these papers. Here, I'll stick to a figure showing "global population pyramids" from the article "Population and fertility by age and sex for 195 countries andterritories, 1950–2017: a systematic analysis for the Global Burden of Disease Study 2017," authored by the GBD 2017 Population and Fertility Collaborators (Lancet, published November 10, 2018; 392: 10159, pp. 1995–2051).



The four panels show four years: 1950, 1975, 2000, and 2017. The red bars show size of female population at different age groups, from younger ages at the bottom to older ages at the top; the yellow bars do the same for men. Horizontal lines show the average and median age for men and women in each year.

A few thoughts:

1) These population pyramids are especially useful for looking at the evolution of the age distribution. "In 1950, the global mean  age of a person was 26·6 years, decreasing to 26·0 years in 1975, then increasing to 29·0 years in 2000 and 32·1 years in 2017.

2) The bulge in the working age population in 2000 and 2017, as opposed to the earlier years, is apparent. " Demographic change has economic consequences, and the proportion of the population that is of working age (15–64 years) decreased from 59·9% in 1950 to 57·1% in 1975, then increased to 62·9% in 2000 and 65·3% in 2017."

3) Over time, the population pyramids has become relatively broader at the bottom; that is, they do not taper as quickly as one moves to older aged. That pattern tells you that the elderly are a rising share of the population. It also suggests that as today's younger generations age, and their number rise up through the global population pyramid, the share of the elderly in the world population will rise substantially.

4) The increasing area of the pyramids shows the rise in global population since 1950. Less clear to the naked eye is that the rate of growth in the world  population has shifted from being exponential to being linear. 
"From 1950 to 1980, the global population increased exponentially at an annualised rate of 1·9% ... . From 1981 to 2017, however, the pace of the global population increase has been largely linear, increasing by  83·6 million people per year. ... Growth of the global population increased in the 1950s and reached 2·0% per year in 1964, then slowly decreased to 1·1% in 2017." 
5) Although geographic breakdowns aren't shown in this figure, the regional patterns of population growth have also differed substantially. 
"In 1950, the high-income, central Europe, eastern Europe, and central Asia GBD super-regions accounted for 35·2% of the global population but, in 2017, the populations of these countries accounted for 19·5% of the global population. Large increases occurred in the proportion of the world’s population living in south Asia, sub-Saharan Africa, Latin America and the Caribbean, and north Africa and the Middle East. ...  Growth of the population in north Africa and the Middle East increased until the 1970s, and it has remained quite high, at 1·7% in 2017. Population growth rates in sub-Saharan Africa increased from 1950 to 1985, decreased during 1985–1993, increased again until 1997, and then plateaued; at 2·7% in 2017, population growth rates were almost the highest rates ever recorded in this region. The most substantial changes to population growth rates were in the southeast Asia, east Asia, and Oceania super-region, where the population growth rate decreased from 2·5% in 1963 to 0·7% in 2017. ... In central Europe, eastern Europe, and central Asia, the population growth rate dropped rapidly after 1987 and was negative from 1993 to 2008. Growth rates in the high-income super-region have changed the least, starting at 1·2% in 1950 and reaching 0·4% in 2017."

Thursday, November 8, 2018

The Tax Cuts and Jobs Act, One Year Later

The Tax Cuts and Jobs Act was signed into law by President Trump less than a little less than year ago, on December 22, 2017. What are the likely benefits and costs associated with the legislation? The Fall 2018 issue of the Journal of Economic Perspectives (where I work as Managing Editor) includes a two-paper symposium on the subject. Joel Slemrod provides an overview of the main elements of the legislation and its effects in " "Is This Tax Reform, or Just Confusion?" (32:4, pp. 73-96). Alan J. Auerbach focuses on one primary aspect of the law, its shifts in the US corporate income tax, in "Measuring the Effects of Corporate Tax Cuts," (32:4, pp. 97-120).

Here's a flavor of Slemrod's argument:
"The Tax Cuts and Jobs Act is not tax reform, at least not in the traditional sense of broadening the tax base and using the revenue so obtained to lower the rates applied to the new base. Nor, based on its unofficial title, did it aspire to this approach as a main objective. It does, though, contain several base-broadening features long favored by tax reform advocates. 
"or is the Tax Cuts and Jobs Act just confusion. There are coherent arguments buttressing the centerpiece cut in the corporation tax rate. To the extent that the new legislation reduces the cost of capital (which is not obvious), business investment will be higher than otherwise. 
"Its serious downsides are the contribution to deficits and to inequality. The former is less of a concern to the extent that the Tax Cuts and Jobs Act turns out to stimulate growth; the latter is less of an issue the more its centerpiece cuts in business taxation will be shifted to the benefit of workers, especially low-income workers. In both cases, the Tax Cuts and Jobs Act represents a huge gamble on the magnitude of these effects, about which the evidence is not at all clear. My own view is that the stimulus to growth will be modest, far short of many supporters’ claims, and so the Tax Cuts and Jobs Act will increase federal deficits by nearly $2 trillion over the next decade, a nontrivial stride in the wrong direction that promises to shift the tax burden to future generations. How it will affect the within-generation distribution of welfare is the most controversial question of all. Although according to conventional wisdom, the Tax Cuts and Jobs Act delivers the bulk of the tax cuts to the richest Americans, whose relative well-being has been rising continuously in recent decades, other plausible models of the economy, supported by some new empirical evidence, raise the possibility that the gains will be more widely shared. This is the most important question about which we know too little."
Auerbach digs into the tricky issues involved in thinking about who really ends up paying corporate taxes, how they affect investment, and how the answers to these questions may change in a world of multinational corporations operating across borders.

For example, until a few years ago the traditional view had been that corporate taxes reduced the return on investment. Thus, even if the corporate income tax was formally collected from companies, the Congressional Budget Office and others assumed that it was actually paid by those who receive income from capital investment. However, in an economy where corporate investment flows easily across international borders, this assumption may not hold up. A higher domestic tax on corporations could chase capital to other countries and reduce investment, which in turn would reduce productivity and wages of domestic workers over time. Auerbach reports that in "the five decades between 1966 and 2016, the share of the income of US resident corporations that was accounted for by foreign operations rose from 6.3 to 31.1 percent." Thus, since 2012, the CBO now assumes that 75% of the US corporate tax is paid by lower returns on capital income, but the other 25% is paid by lower wages for workers.

But these estimates about how corporate taxes affect domestic investment and thus ultimately productivity and wages are rough, and there is room substantial disagreement.  As Auerbach writes:
"One may trace the controversy over distributional effects of the 2017 tax cut (or other potential tax corporate cuts) to differences over the effectiveness of such tax cuts at promoting capital deepening, differences over the extent to which any such capital deepening would generate increases in wages, and differences over whether a corporate tax cut might increase wages through other significant channels. ...
In summary, the rise of the multinational corporation, with cross-border ownership and operations, and the growing importance of intellectual property in production have broadened the set of relevant behavioral responses to corporate taxation and led governments to participate in a multidimensional tax competition game. In this game, each country chooses not only its statutory corporate tax rate, but also asset-specific provisions applying to domestic investment and rules applying to cross-border investments. Changes in any one instrument may affect firms on several decision margins, and policy changes might influence US investment through several direct and indirect channels. While one may expect a reduction in the US corporate tax rate to encourage US-based investment and production, the effects of other policy changes may be more complex."
And of course, the effects of US corporate tax changes will also be affected by how other countries respond to changes in US corporate taxes, and by what further changes are made to tax law in the future. All that said, there does seem to be some rough commonality in the findings of a number of studies that the 2017 legislation will increase incentives for domestic US investment, and in that way lead to additional growth over a 10-year time horizon. Here's Auerbach:
"The Joint Committee on Taxation (2017b) “projects an increase in investment in the United States, both as a result of the proposals directly affecting taxation of foreign source income of US multinational corporations, and from the reduction in the after-tax cost of capital in the United States.” The average increase in the capital stock over the 10-year budget window is 0.9 percent and the average increase in GDP is 0.7 percent, although the increases are smaller at the end of the period because of the changes in provisions noted above. Congressional Budget Office (2018) projects an average increase in GDP of 0.7 percent over the 10-year budget period. A relatively similar private-sector assessment by Macroeconomic Advisers (2018) finds that potential GDP rises by 0.6 percent by the end of the budget period, “mainly by encouraging an expansion of the domestic capital stock.” The Penn Wharton Budget Model (2017) estimates a 10-year growth in GDP of between 0.6 and 1.1 percent, depending on assumptions about the composition of returns to capital. Barro and Furman (forthcoming, Table 11) estimate that GDP would be higher as a result of an increased capital-labor ratio, by 0.4 percent after 10 years under the law as written, and 1.2 percent if initial provisions were made permanent, with the effects being smaller if deficitinduced crowding out is taken into account."  


Wednesday, November 7, 2018

Why Quantitative Easing Will Return

Traditional monetary policy, as practiced in the decades up to 2007, faces a problem looking ahead. The shared areas in this figure show recessions.  During a typical recession, the Federal Reserve cut its policy target interest rates--the so-called federal funds rate--by about 5 percentage points.
But it looks as if the step-by-step rise in this policy interest rate that the Federal Reserve has been following in the last few years is going to top out with the federal funds rate at about 3% or maybe a little higher. Thus, when (not if) the next recession hits, it will be impossible to cut that policy interest rate by the traditional 5 percentage points. (Yes, some countries have experimented with very slightly negative policy interest rates, applied mainly to banks holding reserves, but having a central bank impose substantially below-zero interest rates would be an untried experiment.)

There are underlying reasons why these policy interest rates have trended down over time, not only in the US but all over the world: a combination of continuing low inflation and also a combination of supply-and-demand forces in global markets like the "global savings glut" of high savings in China and other Asian countries.

But whatever the reasons why  policy interest rates or lower, the problem remains: When the next recession hits, reducing the the policy interest rate by the traditional 4-5 percentage points will be impossible. The same issue applies to major central banks all around the world: the European Central Bank, Bank of England, Bank of Japan, and so on.

So the Federal Reserve and other central banks are likely to turn to the same set of policy tools they used in the previous recession: specifically, to the "quantitative easing" tool in which a central bank expands the money supply by direct purchases of financial assets. For the Federal Reserve, this has meant purchases of US Treasury securities and some mortgage-backed financial securities. In other countries, it has sometimes included purchases of other private sector financial securities, too.

For an overview of how these tools of unconventional monetary policy work, I recommend the two-paper symposium in the Fall 2018 issue of the Journal of Economic Perspectives (full disclosure, I'm the Managing Editor of the journal). Kenneth Kuttner focuses on US experience and Federal Reserve decisions in "Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond" (32:4, pp. 121-46).  Giovanni Dell'Ariccia, Pau Rabanal, and Damiano Sandri focus on three other major central banks in "Unconventional Monetary Policies in the Euro Area, Japan, and the United Kingdom" (32:4, pp. 147-72).

For those who prefer to absorb this content by watching video, the authors presented their papers at at conference held at the Hutchins Center on Fiscal and Monetary Policy at Brookings on October 17. Video of the presentations is available here. Slides are available hereKuttner's 15-minute presentation of his paper on the Fed may work especially well for US economics classrooms.

For a flavor, here are some of Kuttner's conclusions:
"A preponderance of evidence nonetheless suggests that forward guidance and quantitative easing succeeded in lowering long-term interest rates. Studies using micro data have documented tangible effects of quantitative easing on firms and financial intermediaries. Macro models suggest that the interest rate reductions are likely to have had a meaningful impact. The adverse side effects appear to have been mild, and are dwarfed by the costs of the more protracted recession in the United States that likely would have occurred in the absence of the unconventional policies. The benefits of unconventional policy therefore probably outweighed the costs.

"Some questions are not entirely settled. First, the persistence of the effects on interest rates remains unclear. Second, disentangling the effects of quantitative easing from those of forward guidance is difficult. Third, the effects of these policies may have been in part a function of turbulent financial conditions, or may have diminished over time as the novelty wore off."
Finally, for another nice recent over view of quantitative easing, how it works, and what is likely to happen next time, interested readers might turn to "QE: A User’sGuide," written by Joseph E. Gagnon and Brian Sack (Peterson Institute for International Economics, Policy Brief 18-19, October 2018).

Tuesday, November 6, 2018

Where Voting is Mandatory

A trivia question for this US election day. What do the following 21 countries have in common?

Argentina
Australia
Belgium
Bolivia
Brazil
Costa Rica
Democratic Republic of the Congo
Dominican Republic
Ecuador
Egypt
Greece
Honduras
North Korea
Luxembourg
Mexico
Nauru
Paraguay
Peru
Singapore
Thailand
Uruguay

According to the CIA World Factbook 2017, these are the countries of the world that have compulsory voting.

I'm not in favor of compulsory voting, but for elections held in nonpresidential years, when decisions are made and directions are set for national government with relatively low levels of turnout, the option does come to mind. 

Clifford Geertz and Radical Objectivity

My current office sits near the anthropologists, who have posted this comment from Clifford Geertz on the departmental bulletin board. It appears near the end of the "Introduction" to his 1983 collection of essays, Local Knowledge: Further Essays in Interpretative Anthropology. Geertz wrote:
To see ourselves as others see us can be eye-opening. To see others as sharing a nature with ourselves is the merest decency. But it is from the far more difficult achievement of seeing ourselves amongst others, as a local example of the forms human life has locally taken, a case among cases, a world among worlds, that the largeness of mind, without which objectivity is self-congratulation and tolerance a sham, comes.
Geertz is writing about people viewing themselves within the context of a variety of cultures: in passing, he mentions "American ethnographers, Moroccan judges, Javanese metaphysicians, or Balinese dancers." But near what feels like an especially divisive election day, it seems worth posing his insights as a challenge for all of our partisan beliefs.

While I am not a member of the Religious Society of Friends, I attended a college with Quaker roots and married a 22nd-generation Quaker. The Quakers have a term called a "query," which refers to a question--sometimes a challenging or pointed question-- that is meant to be used as a basis for additional reflection. So here is Geertz, reformulated as queries to myself.
  • What effort do you make to see yourself as those from the other sides of the partisan divides see you? 
  • Do you have the "merest decency" to see those with other political beliefs as sharing a nature with you? 
  • Do you see yourself and your political beliefs "as a local example of the forms human life has locally taken, a case among cases"?
  • To what extent is your objectivity a matter of self-congratulation?
  • To what extent is your tolerance a sham? 

Lobbying vs. Campaign Spending

One of my pet peeves about arguments over the role of money in elections is that the discussion usually focuses so heavily on campaign contributions, while leaving out other intersections of money in politics--like the role of lobbying.

To illustrate, here's data on the total cost of elections to the candidates from the ever-useful Center for Responsive Politics its Open Secrets website. The yellow bars show costs of Congressional elections, while the green bars show costs of presidential races.  Thus, this year's election will cost Congressional candidates about $5 billion, while the total cost of the 2016 Congressional and Presidential campaign was more like $6 billion.
I'll say in passing that the idea of Congressional and Presidential political candidates spending $5-$6 billion on their campaigns doesn't strike me as all that high, not in the context of a country with 250 million or so adults who are potential voters and an economy approaching $20 trillion. For example, Comcast and Proctor & Gamble, the two US companies that do the most advertising, spent $5.7 billion and $4.4 billion on advertising in 2017, respectively.  The Journal of Economic Perspectives (where I work as Managing Editor) ran an article back in the Winter 2003 issue  called "Why is There so Little Money in U.S. Politics?" by Stephen Ansolabehere, John M. de Figueiredo, and James M. Snyder Jr., and that still strikes me as the relevant question.

But the bigger issue is that we can see pretty clearly what campaign spending goes for: advertising, mailing, travel appearances, and so on. That spending needs to be disclosed and accounted for. Contrary to what a lot of commentary seems to imply, campaign contributions are not personal income to politicians. In contrast, spending on lobbyists is cloaked in mystery. The amounts spent on lobbying are supposed to be disclosed, but what precisely is included in lobbying is often not very clear. The activities of lobbyists, and in particular how they influence or even just write the fine print that affects their employers, does not happen in public. The effects of lobbying are typically not known or disclosed.

From the Open Secrets website, here is spending with officially registered lobbyists, which is almost certainly a substantial understatement of total spending on activities that bear a strong resemblance to lobbying. (For example, corporate charitable contributions are often given in a way that seems designed to exert political influence.)
Notice that the spending on lobbying is annual, while the above spending on campaigns is every other year. To put it another way, spending on lobbying doesn't go away in-between elections. Over time, it exceeds campaign spending. And remember that when many politicians leave office, their future stream of income comes in large part from using their political connections and lobbyists--whether they officially register to do so or not.

I do worry about whether the low and emotive campaign ads I see, from all sides of the political spectrum, have much effects. Are the people who write and place such ads really understanding what moves voter turnout or voting decisions? But that said, the lobbying that I don't see seems to me a  more serious issue for what ends up being written into laws and rules.

Monday, November 5, 2018

The Scandinavian Style of Capitalism

It is a truth universally acknowledged that arguing about the definitions of terms like "capitalism" and "socialism" is a waste of time. So rather than argue, I will simply assert that the world has many flavors of capitalism: among them, US/British, Japanese, Scandinavian/northern European, German, Spanish/French/Italian southern European, and doubtless others. Within the United States, one might further identify a spectrum of capitalist beliefs.

I've known some true socialists. But the overwhelming majority of the people I run into who talk a "socialist" game aren't actually in favor of having the government own the means of production, which includes the government making decisions about what will be produced and how it is priced--and which might also be taken to include government decisions about who gets hired, what jobs they do, what workers get paid, what rate of return is paid on invested money.

Instead, most of the self-labelled socialists I meet are in favor of a policy agenda that includes a greater emphasis on social protection and a reduction in economic inequality. Referring to  "socialism" gives them that college-sophomore thrill of being daringly different and appalling the bourgeoisie.  But when asked for real-world examples, they do not typically point to other countries which display primarily government ownership of the means of production. Instead, they point to national health insurance and to various European countries--in particular, to northern European countries like Sweden, Denmark, Norway, and sometimes Finland.

The true socialists I know see this point of view as selling out to capitalism. And the Scandinavians themselves are quick to say that they are not an example of socialism. For example, the prime minister of Denmark gave a talk at Harvard back in 2015 and said:
"I know that some people in the US associate the Nordic model with some sort of socialism. Therefore I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy ... The Nordic model is an expanded welfare state which provides a high level of security for its citizens, but it is also a successful market economy with much freedom to pursue your dreams and live your life as you wish,”
Or as Paul Krugman wrote last week in his New York Times column in a discussion of the standards of living in northern European countries: "[T]hey aren’t `socialist,' if that means government control of the means of production. They are, however, quite strongly social-democratic."

Of course, at some level the "socialist" or "capitalist" labels is not really the issue here. If we avoid the s-word and instead just refer to a Scandinavian style of capitalism, what are some of the key elements of that economic model?

Before digging into those elements, it's worth noting that just because the Sweden and Denmark and Norway are countries, and the United States is also a country, public policy may not be easily transplantable between the two. For perspective, the combined population of Sweden (population 10 million) Denmark (population 5.8 million), Norway (5.3 million) is roughly equal to the 20.3 million people who live in the greater New York City metropolitan area (that is, the New York-Newark-Jersey City, NY-NJ-PA Metro Area). These countries have close economic ties to the much larger European Union, which clearly helps trade with close neighbors, but have kept their own currencies and don't use the euro. Norway has considerable oil wealth.

It's also worth noting that the Scandinavian style of capitalism has gone through several stages in the last 50 years ago. For a nice overview how these changes played out in Sweden, I recommend the article by the Swedish economist Assar Lindbeck, "The Swedish Experiment, which appeared in the September 1997 issue of  the  Journal of Economic Literature (35:3, 1273-1319, available via JSTOR or here). Lindbeck tells the story of how Sweden had relatively rapid growth after about 1870. He writes:
Increasingly ambitious welfare state arrangements and full employment after World War II also provided exceptionally high economic security, generous provision of public-sector services, and a relatively even distribution of income. It therefore seems natural that, especially during the early postwar decades, Sweden was generally regarded as having been able to combine economic equality, generous welfare state benefits, and full employment with high economic efficiency and rather fast productivity growth. But slower economic growth from about 1970, a collapse of full employment in the early 1990s, a recent widening of income differentials, and retreats of various welfare-state benefits have made the picture of the "Swedish model" less idyllic.
Lindbeck describes a number of problems that arose, including "disincentive effects, problems of moral hazard and cheating with taxes and benefits, deficiencies in competition in markets for products and services, as well as inflexible relative wages .... [and] the ever higher ambitions of politicians to expand various government programs, and the gradually rising ambitions of union officials to compress the distribution of wages as well as to expand the powers of unions."

Writing in 1997, Lindbeck describes how Sweden had come to grips with these issues earlier in the 1990s. For example, there was a broad recognition that as a small open economy, Sweden needed healthy companies with an exchange rate that let them be competitive in global markets. Many government benefit programs were rolled back. The pension system was redesigned to limit its growth. There was a ceiling on public spending. Sweden's ratio of GDP to national debt ratio has been falling from 80 per cent in 1995 to 41 per cent in 2017. In short, the Swedes themselves didn't think that the Swedish system was working all that well in the 1980s and early 1990s, and carrried out a substantial hard-headed resdesign. 

It's hard to sum up the Scandinavian system of capitalism and its key tradeoffs in a few words. because the system is different from a US model in so many ways. Here, I'll take a look from three different angles.

First, the Scandinavian model of capitalism offers a lot more social protection and economic equality--and it also clearly recognize that this means that average people need to pay more in taxes. The overall tax burden in the Scandinavian countries is almost half, while the combined spending of all levels of government in the US is about 38% of GDP. 

In the US, there is sometimes a claim that a Scandinavian level of social protection can be financed by taxing corporations and the rich. The Scandinavians themselves gave up on that idea back in the 1990s. As small open economies, dependent on exporting firms, the Scandinavian countries choose not to have high corporate taxes. Given that these countries have a much more equal distribution of income to begin with, and wants to attract companies and entrepreneurs, collecting a large share of GDP by "taxing the rich" isn't a realistic option.  Indeed, Sweden recently abolished its estate tax. On the distribution of taxes in these countries, an October 2018 report from the Council of Economic Advisers recently noted (footnotes omitted: 
"The Nordic countries themselves recognized the economic harm of high tax rates in terms of creating and retaining businesses and motivating work effort, which is why their marginal tax rates on personal and corporate income have fallen 20 or 30 points, or more, from their peaks in the 1970s and 1980s. ...
Regardless of whether they are rich, poor, or in between, Nordic households are required to pay an additional VAT of 24 or 25 percent on their purchases, on top of all the other taxes that they pay. By comparison, sales taxes vary by U.S. State, but none is that high, and the national average rate is about 6 percent.
Even without the VAT, the high Nordic rates apply to everyone, not just the rich. The OECD prepares a measure of progressivity that is the share of nationwide household taxes paid by the top 10 percent of citizens (ranked by their income), expressed as a ratio of the share of national aggregate income. The ratio would be 1 if the household taxes were a fixed proportion of income. A regressive (progressive) tax would have a ratio less (greater) than 1, respectively. ... Four of the Nordic countries have essentially proportional household taxes. The average progressivity of all five countries is 1.01, which is 0.34 less progressive than in the U.S."
A second angle on the Scandinavian model of capitalism is to look at how these high taxes on average workers serve to finance lots of government programs and services that have a tendency to encourage employment. Henrik Jacobsen Kleven made this argument in "How Can Scandinavians Tax So Much?" in the Fall 2014 issue of the Journal of Economic Perspectives. Kleven calculates what he calls the "participation tax rate," which is basically how much workers improve their income level by participating in the labor market, after taxes and the loss of benefits is considered. Kleven writes: 
The contrast is even more striking when considering the so-called “participation tax rate,” which is the effective average tax rate on labor force participation when accounting for the distortions due to income taxes, payroll taxes, consumption taxes, and means-tested transfers. This tax rate is around 80 percent in the Scandinavian countries, implying that an average worker entering employment will be able to increase consumption by only 20 percent of earned income due to the combined effect of higher taxes and lower transfers. By contrast, the average worker in the United States gets to keep 63 percent of earnings when accounting for the full effect of the tax and welfare system.
Kleven also focuses on government policies that can be thought of as encouraging people to work--in particular, "provision of child care, preschool, and elderly care. He writes:
Even though these programs are typically universal (and therefore available to both working and nonworking families), they effectively subsidize labor supply by lowering the prices of goods that are complementary to working. That is, working families have greater need for support in taking care of their young children or elderly parents. ... [H]igher public support for preschool, child care, and elder care is positively associated with the rate of employment. Moreover, the Scandinavian countries are strong outliers as they spend more on such participation subsidies (about 6 percent of aggregate labor income) than any other country. ... Broadly speaking, countries tend to be divided into those with relatively small tax-transfer distortions and at the same time small subsidies to child care and elderly care (such as the United States and countries of southern Europe) and those with a lot of both (like the countries of Scandinavia).
A third angle on the Scandinavian model of capitalism is presented in the recent op-ed column by Paul Krugman mentioned above. He presents a useful figure put together by Janet Gornick, which seeks to estimate the income level for people at different points in the income distribution for the Nordic countries and the US. The essential message of the figure is that below about the 30th percentile of the income distribution, income levels are higher in Nordic countries, thus showing both the greater equality of wages and greater government support for economic equality in those countries. For perspective, the 30th percentile of the US income distribution is roughly $32,000 per year
The figure is worth contemplation. Just to to be clear, the underlying data seeks to measure income after taxes are paid and after transfer payments are received: in a US context, this means "including all cash transfers and several near-cash and non-monetary components as well: SNAP, LIHEAP, housing vouchers, school lunches, also EITC." However, health care benefits provided through government programs would not be counted, in either the Scandinavian or US context. (The omission is interesting to consider. US health care spending per person is so much more than in other countries that including Medicaid in the US and government-funded health care spending in the Scandinavian countries would probably close the gap at lower levels of income to some extent.)

The figure uses a ratio on the vertical axis, and it's useful to focus on what that means. Consider a low-income person at the 10-20th income percentile: the people at that location in the income distribution in Denmark or Finland have income about 20% above the US person at that place in the income distribution. Now think about those a little above the middle of the income distribution in the the 55th-60th percentile, where those in Finland and Denmark are 20% below the similar person located at the same place in the US income distribution. The percentages are the same--20% higher, 20% lower--but the absolute amounts are not. After all, 20% higher applies to low incomes, and so it's going to be substantially less than the 20% higher applied to middle incomes. Thus, if measured in absolute terms, the amount that those at the top of the US income distribution are above the Nordic countries would be a lot more than the amount that those at the bottom of the US income distribution are below those in the Nordic countries.  The figure thus does not reveal that average income levels are about 20% higher in the United States.

Of course, income isn't everything. I mentioned above the availability of preschool, child care, and elder care services. US workers have much less vacation than those in European countries in general countries. Parental leave is much longer in European countries.

I won't try to make the case here either for or against the Scandinavian model of capitalism. Strong majorities of people living in those countries seem to like the tradeoffs,  which is all the justification that is needed.

If you want to cite the Scandinavian countries as an economic model for the US, that's of course fine--but then you should also feel some obligation to be aware of what that model actually includes. I've already mentioned parts of that model: strong support for international trade and participation in global markets; much higher taxes on the middle class, and lower taxes on corporations; much higher levels of social services and benefits related to labor market participation. It's a model where the decisions about production, investment, pricing, job choice, and consumption happens in the context of private-sector decision-makers.

Here are a few more aspects of the Scandinavian model of capitalism. Again, my point isn't to advocate for or against the overall model, but just to suggest that it's not just a political slogan of elastic meaning; instead, it's a real-world system with real-world tradeoffs, many of which are not what Americans who advocate "a Scandinavian  model" have in mind.

For advocates for a higher US minimum wage, it's perhaps worth noting (as the CEA report notes) that the "Nordic countries do not have minimum wage laws, although the vast majority of jobs have wages limited by collective bargaining agreements."  Rates of unionization are typically in the range of 70-90% of the workforce in Norway, Denmark, and Sweden, as opposed to about 11% of the US workforce. Of course, negotiating pressure from these unions is a powerful reason for the greater equality of wages and benefits for labor.

College tuition in the Nordic countries is free to the student. However, it also seems true that college education in these countries doesn't provide much economic payoff. As a result, Americans are more likely to attend college, even needing to pay for it. Quoting again from the CEA report:
"The same OECD study estimates that, while many American students pay tuition, Americans are somewhat more likely to attain tertiary education on average. In comparison with the tertiary schooling returns in the Nordic countries, American college graduates get their tuition back with interest, and also a lot more. To put it another way, the rates of return to a college education in Nordic countries are low, and propensities to invest are not high, despite the fact that such an investment requires no tuition payments out of pocket."
Sweden's social security system is based on mandatory contributions to individual accounts, with people having a wide range of several hundred possible investment options for their account, or a default fund mostly invested in stocks. 

One of the early 1990s policy changes in Sweden is that its equivalent of the US K-12 school system gives every family vouchers, which can be used for education at public, private, and for-profit schools.

Although the Scandinavian system has greater government regulation of labor markets than the US, it has less regulation of product markets and companies.  The CEA report again: "[T]he OECD ranks all five Nordic countries as having less product-market regulation than the United States, largely due to Nordic deregulation actions over the past 20 years. In comparison with the Nordic countries, the study finds the United States to be especially high on price controls and command-and-control regulation of business operations."

The Scandinavian countries do have national programs of health insurance coverage, but in these systems, users of health care typically have substantial co-payments with an annual cap for health care spending.  For example, OECD data suggests that out-of-pocket health care spending is only a little lower in Norway than in the United States.

I'm all for studying alternative approaches to capitalism, considering the tradeoffs, and seeing what lessons can be learned. I suspect that a number of the lessons to be learned from studying the actual real-world Scandinavian style of capitalism are different from what many Americans might expect. 

Friday, November 2, 2018

Fall 2018 Journal of Economic Perspectives Available On-line

I was hired back in 1986 to be the Managing Editor for a new academic economics journal, at the time unnamed, but which soon launched as the Journal of Economic Perspectives. The JEP is published by the American Economic Association, which back in 2011 decided--to my delight--that it would be freely available on-line, from the current issue back to the first issue. Here, I'll start with Table of Contents for the just-released Fall 2018 issue, which in the Taylor household is known as issue #126. Below that are abstracts and direct links for all of the papers. I may blog more specifically about some of the papers in the next week or two, as well.

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Symposium on Climate Change

"An Economist's Guide to Climate Change Science," by Solomon Hsiang and Robert E. Kopp
This article provides a brief introduction to the physical science of climate change, aimed towards economists. We begin by describing the physics that controls global climate, how scientists measure and model the climate system, and the magnitude of human-caused emissions of carbon dioxide. We then summarize many of the climatic changes of interest to economists that have been documented and that are projected in the future. We conclude by highlighting some key areas in which economists are in a unique position to help climate science advance. An important message from this final section, which we believe is deeply underappreciated among economists, is that all climate change forecasts rely heavily and directly on economic forecasts for the world. On timescales of a half-century or longer, the largest source of uncertainty in climate science is not physics, but economics.
Full-Text Access | Supplementary Materials


"Quantifying Economic Damages from Climate Change," by Maximilian Auffhammer
Climate scientists have spent billions of dollars and eons of supercomputer time studying how increased concentrations of greenhouse gases and changes in the reflectivity of the earth's surface affect dimensions of the climate system relevant to human society: surface temperature, precipitation, humidity, and sea levels. Recent incarnations of physical climate models have become sophisticated enough to be able to simulate intensities and frequencies of some extreme events, like tropical storms, under different warming scenarios. In a stark juxtaposition, the efforts involved in and the public resources targeted at understanding how these physical changes translate into economic impacts are disproportionately smaller, with most of the major models being developed and maintained with little to no public funding support. The goal of this paper is first to shed light on how (mostly) economists have gone about calculating the "social cost of carbon" for regulatory purposes and to provide an overview of the past and currently used estimates. In the second part, I will focus on where empirical economists may have the highest value added in this enterprise: specifically, the calibration and estimation of economic damage functions, which map weather patterns transformed by climate change into economic benefits and damages. A broad variety of econometric methods have recently been used to parameterize the dose (climate) response (economic outcome) functions. The paper seeks to provide an accessible and comprehensive overview of how economists think about parameterizing damage functions and quantifying the economic damages of climate change.
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"The Cost of Reducing Greenhouse Gas Emissions," by Kenneth Gillingham and James H. Stock
Most countries, including the United States, have an array of greenhouse gas mitigation policies, which provide subsidies or restrictions typically aimed at specific technologies or sectors. Such climate policies range from automobile fuel economy standards, to gasoline taxes, to mandating that a certain amount of electricity in a state comes from renewables, to subsidizing solar and wind electrical generation, to mandates requiring the blending of biofuels into the surface transportation fuel supply, to supply-side restrictions on fossil fuel extraction. This paper reviews the costs of various technologies and actions aimed at reducing greenhouse gas emissions. Our aim is twofold. First, we seek to provide an up-to-date summary of costs of actions that can be taken now using currently available technology. These costs focus on expenditures and emissions reductions over the life of a project compared to some business-as-usual benchmark—for example, replacing coal-fired electricity generation with wind, or weatherizing a home. We refer to these costs as static because they are costs over the life of a specific project undertaken now, and they ignore spillovers. Our second aim is to distinguish between dynamic and static costs and to argue that some actions taken today with seemingly high static costs can have low dynamic costs, and vice versa. We make this argument at a general level and through two case studies, of solar panels and of electric vehicles, technologies whose costs have fallen sharply. Under the right circumstances, dynamic effects will offer a justification for policies that have high costs according to a myopic calculation.
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Symposium on the Tax Cuts and Jobs Act

"Is This Tax Reform, or Just Confusion?" by Joel Slemrod
Based on the experience of recent decades, the United States apparently musters the political will to change its tax system comprehensively about every 30 years, so it seems especially important to get it right when the chance arises. Based on the strong public statements of economists opposing and supporting the Tax Cuts and Jobs Act of 2017, a causal observer might wonder whether this law was tax reform or mere confusion. In this paper, I address that question and, more importantly, offer an assessment of the Tax Cuts and Jobs Act. The law is clearly not "tax reform" as economists usually use that term: that is, it does not seek to broaden the tax base and reduce marginal rates in a roughly revenue-neutral manner. However, the law is not just a muddle. It seeks to address some widely acknowledged issues with corporate taxation, and takes some steps toward broadening the tax base, in part by reducing the incentive to itemize deductions.
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"Measuring the Effects of Corporate Tax Cuts," by Alan J. Auerbach
On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA), the most sweeping revision of US tax law since the Tax Reform Act of 1986. The law introduced many significant changes. However, perhaps none was as important as the changes in the treatment of traditional "C" corporations—those corporations subject to a separate corporate income tax. Beginning in 2018, the federal corporate tax rate fell from 35 percent to 21 percent, some investment qualified for immediate deduction as an expense, and multinational corporations faced a substantially modified treatment of their activities. This paper seeks to evaluate the impact of the Tax Cuts and Jobs Act to understand its effects on resource allocation and distribution. It compares US corporate tax rates to other countries before the 2017 tax law, and describes ways in which the US corporate sector has evolved that are especially relevant to tax policy. The discussion then turns the main changes of the Tax Cuts and Jobs Act of 2017 for the corporate income tax. A range of estimates suggests that the law is likely to contribute to increased US capital investment and, through that, an increase in US wages. The magnitude of these increases is extremely difficult to predict. Indeed, the public debate about the benefits of the new corporate tax provisions enacted (and the alternatives not adopted) has highlighted the limitations of standard approaches in distributional analysis to assigning corporate tax burdens.
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Symposium on Unconventional Monetary Policy

"Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond," by Kenneth N. Kuttner
In November 2008, the Federal Reserve faced a deteriorating economy and a financial crisis. The federal funds rate had already been reduced to virtually zero. Thus, the Federal Reserve turned to unconventional monetary policies. Through "quantitative easing," the Fed announced plans to buy mortgage-backed securities and debt issued by government-sponsored enterprises. Subsequent purchases would eventually lead to a five-fold expansion in the Fed's balance sheet, from $900 billion to $4.5 trillion, and leave the Fed holding over 20 percent of all mortgage-backed securities and marketable Treasury debt. In addition, Fed policy statements in December 2008 began to include explicit references to the likely path of the federal funds interest rate, a policy that came to be known as "forward guidance." The Fed ceased its direct asset purchases in late 2014. Starting in October 2017, it has allowed the balance sheet to shrink gradually as existing assets mature. From December 2015 through June 2018, the Fed has raised the federal funds interest rate seven times. Thus, the time is ripe to step back and ask whether the Fed's unconventional policies had the intended expansionary effects—and by extension, whether the Fed should use them in the future.
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"Unconventional Monetary Policies in the Euro Area, Japan, and the United Kingdom," Giovanni Dell'Ariccia, Pau Rabanal and Damiano Sandri
The global financial crisis hit hard in the euro area, the United Kingdom, and Japan. Real GDP from peak to trough contracted by about 6 percent in the euro area and the United Kingdom and by 9 percent in Japan. In all three cases, central banks cut interest rates aggressively and then, as policy rates approached zero, deployed a variety of untested and unconventional monetary policies. In doing so, they hoped to restore the functioning of financial markets, and also to provide further monetary policy accommodation once the policy rate reached the zero lower bound. In all three jurisdictions, the strategy entailed generous liquidity support for banks and other financial intermediaries and large-scale purchases of public (and in some cases private) assets. As a result, central banks' balance sheets expanded to unprecedented levels. This paper examines the experience with unconventional monetary policies in the euro zone, the United Kingdom, and Japan. The paper starts with a discussion of how quantitative easing, forward guidance, and negative interest rate policies work in theory, and some of their potential side effects. It then reviews the implementation of unconventional monetary policy by the European Central Bank, the Bank of England, and the Bank of Japan, including a narrative of how central banks responded to the crisis and the evidence on the effects of unconventional monetary policy actions.
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Symposium on Development and State Capacity

"Ending Global Poverty: Why Money Isn't Enough," Lucy Page and Rohini Pande
Between 1981 and 2013, the share of the global population living in extreme poverty fell by 34 percentage points. This paper argues that such rapid reductions will become increasingly hard to achieve for two reasons. First, the majority of the poor now live in middle-income countries where the benefits of growth have often been distributed selectively and unequally. Second, a reservoir of extreme poverty remains in low-income countries where growth is erratic and aid often fails to reach the poor. If the international community is to most effectively leverage available resources to end extreme poverty, it must ensure that its investments in institutions and physical infrastructure actually provide the poor the capabilities they need to craft an effective pathway out of poverty. We term the human and social systems that are required to form this pathway "invisible infrastructure" and argue that an effective domestic state is central to building this. By corollary, ending extreme poverty will require both expanding state capacity and giving the poor power to demand reforms they need by solving agency problems between citizens, politicians, and bureaucrats.
Full-Text Access | Supplementary Materials

"Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries," by Rema Hanna and Benjamin A. Olken
Of the 17 Sustainable Development Goals articulated by the United Nations, number one is the elimination of extreme poverty by 2030. While future economic growth should continue to reduce poverty, it will not solve the problem by itself; thus, there is a potentially important role for national-level transfer programs that assist poor families in developing countries. Such programs are often run by developing country governments. Many countries have implemented transfer programs that seek to target beneficiaries: that is, to identify who is poor and then to restrict transfers to those individuals. Some people have begun to advocate for "universal basic income" programs, which dispense with trying to identify the poor and instead provide transfers to everyone. We begin by considering the universal basic income as part of the solution to an optimal income-taxation problem, focusing on the case of developing countries, where there is limited income data and inclusion in the formal tax system is low. We examine how the targeting of transfer programs is conducted in these settings, and provide empirical evidence on the tradeoffs involved between universal basic income and targeted transfer schemes using data from Indonesia and Peru—two countries that run nationwide transfer programs that are targeted to the poor. We conclude by linking our findings back to the broader policy debate on what tools should be preferred for redistribution, as well as the practical challenges of administering them in developing countries.
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Features

"Retrospectives: On the Genius Behind David Ricardo's 1817 Formulation of Comparative Advantage," by Daniel M. Bernhofen and John C. Brown
Last year marked the 200th anniversary of Ricardo's famous "four numbers" paragraph on comparative advantage, which is one of the oldest analytical results in economics. Following the lead of James Mill (1821), these four numbers have been interpreted as unit labor coefficients. This interpretation has provided the basis for the development of the 'Ricardian model' from John Stuart Mill (1852) to Eaton and Kortum (2002). However, if we accept the labor unit interpretation of these numbers, Ricardo's exposition in his 1817 Principles of Political Economy and Taxation makes little logical sense. Building on Sraffa's (1930) interpretation of Ricardo's numbers as labor embodied in trade, our discussion reveals the amazing simplicity and generality of Ricardo's comparative advantage formulation and gains-from-trade logic.
Full-Text Access | Supplementary Materials

"Recommendations for Further Reading," by Timothy Taylor
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Thursday, November 1, 2018

The Problem with Green Jelly Beans

Those who have faced issues of "statistical significance" and the use of a p-value of 5%  might appreciate this cartoon from xkcd.com. It's an oldie from back around 2011, but a goodie.

For a punchline, you can imagine the follow-up headline: "So, uh, we did the green study again and got no link. It was probably a-- "RESEARCH CONFLICTED ON GREEN JELLY BEAN/ACNE LINK; MORE STUDY RECOMMENDED!""