A New Era of Price Discrimination?

"Price discrimination" has a specific technical meaning for economists. It's not about sellers charging more to certain groups because of biased attitudes about gender, race/ethnicity, religion, or sexual orientation. Instead, it's about setting up a varying set of prices in order to charge more to those who are willing to pay more--unlike the standard situation in a plain vanilla market in which everyone pays the same price.

There are lots of examples of price discrimination. When a movie is first released, the ticket prices are typically higher in "first-run" theaters than when the movie arrives at "second-run" theaters a few months later. Books are often released first in more-expensive hard-cover editions, and later in less-expensive paperbacks. Those who aren't sure about going out for dinner are enticed by happy hour and early-bird specials, while those willing to pay more arrive later in the evening. There are discounts for students or senior citizens. There are volume discounts for buying a larger quantity of a good. Such arrangements often seem potentially beneficial to both buyers and sellers.

But there's one more kind of price discrimination called "personalized pricing," in which prices would vary across individuals so that everyone would be charged as much as they were willing to pay. This seems more problematic, and a combination of big data and online retail may be bringing it our way. Ariel Ezrachi and Maurice E. Stucke write about "The rise of behavioural discrimination," in the European Competition Law Review (2016, 12: 485-492; not freely available online). They also refer to an Executive Office of the President report from February 2015, "Big Data and Differential Pricing." That report sets up the issue in this way:

"Economics textbooks usually define three types of differential pricing. Personalized pricing, or first-degree price discrimination, occurs when a seller charges a different price to every buyer. Individually negotiated prices, such as those charged by a car dealer, are an example of personalized pricing. Quantity discounts, or second-degree price discrimination, occur when the per-unit price falls with the amount purchased, as with popcorn at the movie theater. Finally, third-degree price discrimination occurs when sellers charge different prices to different demographic groups, as with discounts for senior citizens.

Big data has lowered the costs of collecting customer-level information, making it easier for sellers to identify new customer segments and to target those populations with customized marketing and pricing plans. The increased availability of behavioral data has also encouraged a shift from third-degree price discrimination based on broad demographic categories towards personalized pricing. Nevertheless, differential pricing still presents several practical challenges. First, sellers must figure out what customers are willing to pay. This can be a complex problem, even for companies with lots of data and computing power. A second challenge is competition, which limits a company’s ability to raise prices, even if it knows that one customer might be willing to pay more than another. Third, companies need to prevent resale by customers seeking to exploit price differences. And finally, if a company does succeed in charging personalized prices, it must be careful not to alienate customers who may view this pricing tactic as inherently unfair. ...

Ultimately, whether differential pricing helps or harms the average consumer depends on how and where it is used. In a competitive market with transparent pricing, the benefits are likely to outweigh the costs.  ...  Ultimately, differential pricing seems most likely to be harmful when implemented through complex or opaque pricing schemes designed to screen out unsophisticated buyers. For example, companies may obfuscate by bundling a low product price with costly warranties or shipping fees, using “bait and switch” techniques to attract unwary customers with low advertised prices and then upselling them on different merchandise, or burying important details in the small print of complex contracts.When these tactics work, the economic intuition that differential pricing allows firms to serve more price-sensitive customers at a lower price-point may even be overturned. If price-sensitive customers also tend to be less experienced, or less knowledgeable about potential pitfalls, they might more readily accept offers that appear fine on the surface but are actually full of hidden charges. ...."

Ezrachi and Stucke point out a number of ways in which these issues are becoming a practical reality. The collection and interconnection of big data from a wide variety of sources creates the possibility that when you shop on-line, the seller may already know quite a lot about you. They write:

"As the volume, variety and value of personal data increases, self-learning pricing algorithms can use the data collected on you and other people to identify subgroups of like-minded, like-price-sensitive individuals, who share common biases and levels of willpower. Pricing algorithms can use data on how other people within your grouping react, to predict how you will likely react under similar circumstances. This then enables the self-learning algorithm to more accurately approximate the user's reservation price, observe behaviour, and adjust. The more time we spend online--chatting, surfing, and purchasing--the more times the algorithm can observe what you and others within your grouping do under various circumstances; the more experiments it can run; the more it can learn through trial and error what your group's reservation price is under different situations; and, the more it can recalibrate and refine (including shifting you to another group). 

"To better train their algorithms and categorize even smaller groups of individuals, firms will need personal data. Among other things, this trend will accelerate the "Internet of Things", as firms compete to collect data on consumers' activities at home, work, and outside. Smart appliances, cars, utensils, and watches can help firms refine their consumer profiles and gain a competitive edge. Thus in making use of our demographics, physical location (via our phones), browser and search history, friends and links on social networks, and online reviews and blog posts, firms can target us with personalised advertisements with ever increasing proficiency. Also, at the point of sale, the categorisation can help sellers approximate our price sensitivity."

It used to be said that when you go to a website, you are like a person with a name-tag at a convention: that is, you could be identified, but others didn't necessarily know much about you. But in the future, when you go to a website, certain sellers at least will already know a great deal about you. With this information, the seller will be able to customize your retail experience by manipulating the information presented about products, choices, prices, and deals in ways that makes someone with your specific characteristics more likely to buy and to pay higher prices.

This could be done in literally dozens of ways. One example from Ezrachi and Stucky is that the first item presented in an online list of possibilities will both be a decoy designed with your characteristics in mind: it will also be higher-priced, and perhaps lacking in some features.  When you scroll down the list, you will find other items that have lower prices or more features. Compared to the decoy item, these look like good deals. A standard example in regular retailing is that many restaurants report that the second most-expensive bottle of wine and the second least-expensive bottle of wine are among their top seller, because those who want to splurge can feel they are being a little thrifty, and those who want inexpensive can feel they aren't being totally cheap. "So we may have originally intended to purchase a cheaper item, but chose a more expensive item with perhaps a few more attributes, as it was relatively more attractive than the personalised decoy option."

Another option is "price-steering," where a website makes it easier to find more expensive options. Or firms can make strategic use of complexity: "To better discriminate, companies can take advantage of consumers' difficulty in processing many complex options. Companies may deliberately increase the complexity by adding price and quality parameters, with the intent to facilitate consumer
error or bias and manipulate consumer demand to their advantage. By increasing their products' complexity, firms can also make it difficult to appraise quality and compare products, increase the consumers' search and evaluation costs, and nudge consumers to rely on basic signalling that benefits the firms. Once the customer is snagged, the complexity in contract terms can increase
the customers' switching costs and increase the likelihood of customers retaining the personalised default option.  This enables firms to inch closer to perfect behavioural discrimination."

Notice that none of these strategies involve the seller actually lying. In fact, one can easily think of circumstances where these options could benefit consumers, by providing them with the selection of products and information that they actually find most attractive. But it's also easy to think of ways in which people can be manipulated. Ezrachi and Stucke write:

The road to near-perfect behavioural discrimination will be paved with personalised coupons and promotions: the less price-sensitive online customers may not care as much if others are getting promotional codes, coupons, and so on, as long as the list price does not increase. Online sellers will increasingly offer consumers with a lower reservation price a timely coupon-ostensibly for being a valued customer, a new customer, a returning customer, or a customer who won the discount. The coupon may appear randomly assigned, but only customers with a lower reservation price are targeted. Indeed, the price discrimination can happen on other, less salient aspects of the purchase. Retailers can offer the same price, but provide greater discounts on shipping (or faster delivery), offer complimentary customer service, or better warranty terms to attract customers with lower reservation prices, greater willpower, or more outside options.

In the brave new world of big data and online purchases. buyers really do need to be wary. And one suspects that the Federal Trade Commission and other consumer protection agencies are going to become active participants in determining what tools sellers can use.

Online Access and Academic Journals

The publisher of my own Journal of Economic Perspectives, the American Economic Association, decided earlier this year to make the journal freely available to all on-line--not only the most recent issues, but the archives going back 12 years or so. Thus, I read with particular interest the article draft report that Mark J. McCabe has done for the National Academy of Sciences: "Online Access and the Scientific Journal Market:
An Economist’s Perspective."   Here are some of his comments, although I have omitted citations for readability.

Conclusion
"Online access to the scientific literature has transformed the distribution of the scientific literature. This literature is now easier to search and read, especially for the producers of new articles: the scientist authors affiliated with research institutions. Unfortunately, the cost of supporting this enterprise has not declined. Ironically, the same technologies that enable immediate access for readers also facilitate bundling and pricing policies by the major commercial publishers that exacerbate rather than alleviate the inflationary pricing trends of the pre-internet era."


On the "journals crisis"
"Starting in at least as far back as the 1980s, and continuing to the present day, prices for these journals have increased at rates far exceeding general inflation rates, and faster than the growth in overall library budgets. This trend and its negative impact on institutional journal collections are often referred to as the “journals crisis.” With the emergence of low-cost internet-based distribution of content in the late 1990s, as well as open access journals, there was some hope in the library community that this crisis might abate, and access prices might even decline. However, prices continued to increase at or above economy-wide rates of inflation."

[I'd add that my own journal published one of the early papers documenting and discussing this subject in our Fall 2001 issue: "Free Labor for Costly Journals? by Theodore Bergstrom.]

How has the journal market evolved with on-line publication? 
"By 2000 or so, most of the changes wrought by the internet that are visible today were in
evidence. They include:
1. Current journal content is sold primarily as part of large publisher-specific journal bundles, or
“Big Deals,”and normally includes access to content back to the 1990s. Print
is still available for a surcharge.
2. Bundle prices are institution-specific; access is sold on an annual subscription basis.
(Contrast this with the absence of price discrimination in the print era, and the lack of bundling.)
3. The emergence of commercial and non-profit open access (OA) journals. OA journals can be
accessed online at no charge, and recover their costs through some combination of author fees
and grant monies and government funding. The Directory of Open Access Journals or DOAJ currently catalogues more than 6000 titles, many of which are peer-reviewed.
4. Publisher sell their electronic journal backfiles for a one-time charge; 3rd parties provide
electronic access to backfile content from multiple publishers on an annual subscription basis,
e.g. via Ebsco or JSTOR.
5. In addition to the open access working paper repositories mentioned earlier, dozens of major
research universities and funding organizations have adopted (open access) self-archiving
mandates. (go to http://roarmap.eprints.org/ for a list of the organizations and the repository
websites).
6. Google Scholar. This search tool was not introduced until late 2004 but has quickly emerged
as a powerful complement to the content available online."

How online access to journals has entrenched incumbent publishers
"The conceptual/theoretical analyses of journal bundling discussed earlier suggest that the adoption of Big Deal contracts are likely to deter new entry (and/or encourage exit), and enhance the market power of the largest incumbent firms. In other words, although online distribution did lower distribution costs it obviously did not change the basic demand conditions in this market; if anything this new technology augments their exploitation, since it has facilitated cost effective bundling and price discrimination. The annual 7% price increases should continue until those demand conditions change."

Do articles in open access journals get more citations?
"Although open access journals have begun to proliferate, perhaps in response to publisher bundling, their long-term viability in lieu of subsidized author fees remains uncertain. One of the chief benefits of OA is supposed to be greater readership and impact (and this assumption is important in providing the economic justification for the OA business model). However, the evidence in support of this claim remains uncertain. Although initial studies of this question revealed large positive benefits of online access (including open access), more recent papers on this subject have identified a series of data and econometric problems that when addressed eliminate most but not all of the presumed benefits."

Glenn Loury on Discrimination

Douglas Clement has yet another in his fine series of interviews with economists, this one with Glenn Loury, published in the June 2014 issue of The Region, a publication of the Federal Reserve Bank of Minneapolis. Here are a few insights from Loury's work on discrimination, but the interview also touches on crime and incarceration, inequality, and the evolution of economic theory. 

A standard approach to studying discrimination in labor markets is to collect data on what people earn and their race/ethnicity or gender, along with a number of other variables like years of education, family structure, region where they live, occupation, years of job experience, and so on. This data lets you answer the question: can we account for differences in income across groups by looking at these kinds of observable traits other than race/ethnicity and gender? If so, a common implication is that the problem in our society may be that certain groups aren't getting enough education, or that children from single-parent families  need more support--but that a pay gap which can be explained by observable factors other than race/ethnicity and gender isn't properly described as "discrimination." Loury challenges this approach, arguing that many of the observable factors are themselves the outcome of a history of discriminatory practices. He says:

"By that I mean, suppose I have a regression equation with wages on the left-hand side and a number of explanatory variables—like schooling, work experience, mental ability, family structure, region, occupation and so forth—on the right-hand side. These variables might account for variation among individuals in wages, and thus one should control for them if the earnings of different racial or ethnic groups are to be compared. One could put many different variables on the right-hand side of such a wage regression.

Well, many of those right-hand-side variables are determined within the very system of social interactions that one wants to understand if one is to effectively explain large and persistent earnings differences between groups. That is, on the average, schooling, work experience, family structure or ability (as measured by paper and pencil tests) may differ between racial groups, and those differences may help to explain a group disparity in earnings. But those differences may to some extent be a consequence of the same structure of social relations that led to employers having the discriminatory attitudes they may have in the work place toward the members of different groups.

So, the question arises: Should an analyst who is trying to measure the extent of “economic discrimination” hold the group accountable for the fact that they have bad family structure? Is a failure to complete high school, or a history of involvement in a drug-selling gang that led to a criminal record, part of what the analyst should control for when explaining the racial wage gap—so that the uncontrolled gap is no longer taken as an indication of the extent of unfair treatment of the group?

Well, one answer for this question is, “Yes, that was their decision.” They could have invested in human capital and they didn’t. Employer tastes don’t explain that individual decision. So as far as that analyst is concerned, the observed racial disparity would not be a reflection of social exclusion and mistreatment based on race. ...  But another way to look at it is that the racially segregated social networks in which they were located reflected a history of deprivation of opportunity and access for people belonging to their racial group. And that history fostered a pattern of behavior, attitudes, values and practices, extending across generations, which are now being reflected in what we see on the supply side of the present day labor market, but which should still be thought of as a legacy of historical racial discrimination, if properly understood.

Or at least in terms of policy, it should be a part of what society understands to be the consequences of unfair treatment, not what society understands to be the result of the fact that these people don’t know how to get themselves ready for the labor market.

When I'm giving a talk on these issues, I point out that there are a variety of kinds of discrimination. One kind of discrimination is when an employer treats two people with the same qualifications differently because of race or gender. Another kind of discrimination can cause social conditions that lead to people being more likely to have different qualifications in the first place. I have argued that this pattern means that suing employers for discrimination should thus have a smaller place, and trying to equalize qualifications should have a bigger place. But Loury has a thought-provoking response to this approach.

In one of his papers, Loury considers various kinds of interventions that have a goal of reducing the effects of discriminatory behavior. He draws two distinctions. You can intervene early--say, trying to assure better grade-school performance, a better high school graduation rate, and a higher level of college attendance. Or you can intervene later, when people are actually applying for jobs. You can also intervene in a :"blind" way, which favors a broad group that will be disproportionately of a certain race, or in a "sighted" way that favors the group specifically. Thus, expanding government funding for preschool programs for low-income families is in these terms an early "blind" intervention. A quota for hiring a certain percentage of African Americans or other ethnic groups to certain jobs is a late "sighted" intervention.

I tend to favor the first kind of intervention, to which Loury offers a couple of counterarguments. One is that a later "sighted" policy is also an incentive for skills acquisition at an earlier age. As Loury puts it:

One of our key insights is that under sightedness (again, overt discrimination in favor of a particular group), the very act of boosting people’s access to slots—that is, putting a thumb on the scale in their favor at the point where they compete for positions—implies a subsidy to their acquisition of skills. ... [I]f a later intervention is properly anticipated, then an earlier intervention may not be necessary; it may be redundant. ... Now, this result—that we find quite interesting—requires the assumption I just referred to: that when making their decisions about how to invest in the development of their skills, people be farsighted enough to anticipate the consequences of their being favored at the point of slots allocation. That assumption will not be plausible in every case (youngsters can be unnervingly short-sighted...)."

However, if one is willing to grant the possibility that knowing certain jobs are likely to be available will tend to encourage skills acquisition earlier, Loury then offers another point. There is a classic question in the economics of taxation that considers whether a country should impose taxes on a variety of inputs to the production process, or instead a tax on outputs. The general finding is that the negative effects of the tax are smaller if you impose them at the end of the production process, because then the taxes don't also have a distortionary effect on the process of production itself. There's a related classic question in the economics of monopolies, which asks whether it's worse for an economy to have a monopolist that raises the price on an input used by many producers, or for a monopolist to raise the prices to consumers. Again, the negative effects of monopoly are smaller if they result in higher prices at the end of the production process.

Loury and a co-author create a model that applies similar reasoning to the question of when to intervene to stop discrimination, with the implication being that intervention at the later stage of being hired may be less burdensome to an economy than intervention at the earlier stage. Loury says:

"The distortion (in our case, preferences for a disadvantaged group) should take place “downstream,” at the point of competition for final positions, rather than “upstream,” at the point where people are investing in their own productivity. ... Now, you’d think that for affirmative action it might be different, that, well, it’s always better to go early. ... Pre-K is something people are advocating these days. And, indeed, there may be other reasons, not in our model, having to do with cycles of development and so forth, which would explain why early intervention of a different kind is warranted. But if it’s purely in the framework of our model, I think our finding is explicable in terms of intuitions that you find in other areas of economics."

I'm not sure I'm persuaded! But Loury's tight analysis and probing insights are always worth reading. If you would like to read more of Loury laying out these ideas, a possible starting point is an article he wrote for the Spring 1998 of the Journal of Economic Perspectives, called "Discrimination in the Post-Civil Rights Era: Beyond Market Interactions." Like all JEP articles, it is freely available on-line courtesy of the American Economic Association. (Full disclosure: I've been Managing Editor of the JEP since the inception of the journal in 1987.)

Winter 2016 Journal of Economic Perspectives Available Online

For about 30 years now, my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which back in 2011 made the decision--much to my delight--that the journal would be freely available on-line, from the current issue back to the first issue in 1987. Here, I'll start with Table of Contents for the just-released Winter 2016 issue. Below are abstracts and direct links for all of the papers. I will almost certainly blog about some of the individual papers in the next week or two, as well.

______________________

Symposium: The Bretton Woods Institutions

"The International Monetary Fund: 70 Years of Reinvention," by Carmen M. Reinhart and Christoph Trebesch
A sketch of the International Monetary Fund's 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a "demand driven" theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively "new" IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became the key focus after the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in th e developing economies and have now migrated to advanced economies. As a consequence, the IMF has engaged in "serial lending," with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency; this has been most evident in Greece since 2010. We conclude with the observation that the IMF's role as an international lender of last resort is endangered.
Full-Text Access | Supplementary Materials


"The IMF's Unmet Challenges," by Barry Eichengreen and Ngaire Woods
The International Monetary Fund is a controversial institution whose interventions regularly provoke passionate reactions. We will argue that there is an important role for the IMF in helping to solve information, commitment, and coordination problems with significant implications for the stability of national economies and the international monetary and financial system. In executing these functions, the effectiveness of the IMF, like that of a football referee, depends on whether the players see it as competent and impartial. We will argue that the Fund's perceived competence and impartiality, and hence its effectiveness, are limited by its failure to meet four challenges—concerning the quality of its surveillance (of individual countries, groups of countries, and the global system); the relevance of conditionality in loan contracts; the utility of the Fund's approach to debt problems; and the Fund's failure to adopt a system of governance that gives appropriate voice to different stakeholders. These problems of legitimacy will have to be addressed in order for the IMF to play a more effective role in the 21st century.
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"The New Role for the World Bank," by Michael A. Clemens and Michael Kremer
The World Bank was founded to address what we would today call imperfections in international capital markets. Its founders thought that countries would borrow from the Bank temporarily until they grew enough to borrow commercially. Some critiques and analyses of the Bank are based on the assumption that this continues to be its role. For example, some argue that the growth of private capital flows to the developing world has rendered the Bank irrelevant. However, we will argue that modern analyses should proceed from the premise that the World Bank's central goal is and should be to reduce extreme poverty, and that addressing failures in global capital markets is now of subsidiary importance. In this paper, we discuss what the Bank does: how it spends money, how it influences policy, and how it presents its mission. We argue that the role of the Bank is now best understood as facilitating international agreements to redu ce poverty, and we examine implications of this perspective.
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"The World Bank: Why It Is Still Needed and Why It Still Disappoints," by Martin Ravallion
Does the World Bank still have an important role to play? How might it fulfill that role? The paper begins with a brief account of how the Bank works. It then argues that, while the Bank is no longer the primary conduit for capital from high-income to low-income countries, it still has an important role in supplying the public good of development knowledge—a role that is no less pressing today than ever. This argument is not a new one. In 1996, the Bank's President at the time, James D. Wolfensohn, laid out a vision for the "knowledge bank," an implicit counterpoint to what can be called the "lending bank." The paper argues that the past rhetoric of the "knowledge bank" has not matched the reality. An institution such as the World Bank—explicitly committed to global poverty reduction—should be more heavily invested in knowing what is needed in its client countries as well as in international coordination. It should be consi stently arguing for well-informed pro-poor policies in its member countries, tailored to the needs of each country, even when such policies are unpopular with the powers-that-be. It should also be using its financial weight, combined with its analytic and convening powers, to support global public goods. In all this, there is a continuing role for lending, but it must be driven by knowledge—both in terms of what gets done and how it is geared to learning. The paper argues that the Bank disappoints in these tasks but that it could perform better.
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"The World Trade Organization and the Future of Multilateralism," by Richard Baldwin
When the General Agreement on Tariffs and Trade was signed by 23 nations in 1947, the goal was to establish a rules-based world trading system and to facilitate mutually advantageous trade liberalization. As the GATT evolved over time and morphed into the World Trade Organization in 1993, both goals have largely been achieved. The WTO presides over a rule-based trading system based on norms that are almost universally accepted and respected by its 163 members. Tariffs today are below 5 percent on most trade, and zero for a very large share of imports. Despite its manifest success, the WTO is widely regarded as suffering from a deep malaise. The main reason is that the latest WTO negotiation, the Doha Round, has staggered between failures, flops, and false dawns since it was launched in 2001. But the Doha logjam has not inhibited tariff liberalization far from it. During the last 15 years, most WTO members have massively lowered barriers to tr ade, investment, and services bilaterally, regionally, and unilaterally—indeed, everywhere except through the WTO. For today's offshoring-linked international commerce, the trade rules that matter are less about tariffs and more about protection of investments and intellectual property, along with legal and regulatory steps to assure that the two-way flows of goods, services, investment, and people will not be impeded. It's possible to imagine a hypothetical WTO that would incorporate these rules. But the most likely outcome for the future governance of international trade is a two-pillar structure in which the WTO continues to govern with its 1994-era rules while the new rules for international production networks are set by a decentralized process of sometimes overlapping and inconsistent mega-regional agreements.
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"Will We Ever Stop Using Fossil Fuels?" by Thomas Covert, Michael Greenstone and Christopher R. Knittel
Scientists believe significant climate change is unavoidable without a drastic reduction in the emissions of greenhouse gases from the combustion of fossil fuels. However, few countries have implemented comprehensive policies that price this externality or devote serious resources to developing low-carbon energy sources. In many respects, the world is betting that we will greatly reduce the use of fossil fuels because we will run out of inexpensive fossil fuels (there will be decreases in supply) and/or technological advances will lead to the discovery of less-expensive low-carbon technologies (there will be decreases in demand). The historical record indicates that the supply of fossil fuels has consistently increased over time and that their relative price advantage over low-carbon energy sources has not declined substantially over time. Without robust efforts to correct the market failures around greenhouse gases, relying on supply and/or demand forces to limit greenhouse gas emissions is relying heavily on hope.
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"Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," by Christiane Baumeister and Lutz Kilian
It has been 40 years since the oil crisis of 1973/74. This crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks. In recent years, a large literature on the economic determinants of oil price fluctuations has emerged. Drawing on this literature, we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014. We then discuss why oil price fluctuations remain difficult to predict, despite economists' improved understanding of oil markets. Unexpected oil price fluctuations are commonly referred to as oil price shocks. We document that, in practice, consumers, policymakers, financial market participants, and economists may have different oil price expectations, and that, what may be surprising to some, need not be equally surprising to others.
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"Using Natural Resources for Development: Why Has It Proven So Difficult?" by Anthony J. Venables
Developing economies have found it hard to use natural resource wealth to improve their economic performance. Utilizing resource endowments is a multistage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy. Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures. This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.
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Articles

"Power Laws in Economics: An Introduction," by Xavier Gabaix
Many of the insights of economics seem to be qualitative, with many fewer reliable quantitative laws. However a series of power laws in economics do count as true and nontrivial quantitative laws—and they are not only established empirically, but also understood theoretically. I will start by providing several illustrations of empirical power laws having to do with patterns involving cities, firms, and the stock market. I summarize some of the theoretical explanations that have been proposed. I suggest that power laws help us explain many economic phenomena, including aggregate economic fluctuations. I hope to clarify why power laws are so special, and to demonstrate their utility. In conclusion, I list some power-law-related economic enigmas that demand further exploration.
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"Roland Fryer: 2015 John Bates Clark Medalist," by Lawrence F. Katz
Roland Fryer is an extraordinary applied microeconomist whose research output related to racial inequality, the US racial achievement gap, and the design and evaluation of educational policies make him a worthy recipient of the 2015 John Bates Clark Medal. I will divide this survey of Roland's research into five categories: the racial achievement gap, education policies and reforms, economics of social interactions, the economics of discrimination and anti-discrimination policies, and further topics involving the black-white racial divide.
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"Retrospectives: What Did the Ancient Greeks Mean by Oikonomia?" by Dotan Leshem
Nearly every economist has at some point in the standard coursework been exposed to a brief explanation that the origin of the word "economy" can be traced back to the Greek wordoikonomia, which in turn is composed of two words: oikos, which is usually translated as "household"; and nemein, which is best translated as "management and dispensation." Thus, the cursory story usually goes, the term oikonomia referred to "household management", and while this was in some loose way linked to the idea of budgeting, it has little or no relevance to contemporary economics. This article introduces in more detail what the ancient Greek philosophers meant by "oikonomia." It begins with a short history of the word. It then explores some of the key elements of oikonomia, while offering some comparisons and contrasts with modern economic thought. For example, both Ancient Greek oikonomia and contemporary economics study human behavior as a relationship between ends and means which have alternative uses. However, while both approaches hold that the rationality of any economic action is dependent on the frugal use of means, contemporary economics is largely neutral between ends, while in ancient economic theory, an action is considered economically rational only when taken towards a praiseworthy end. Moreover, the ancient philosophers had a distinct view of what constituted such an end—specifically, acting as a philosopher or as an active participant in the life of the city-state.
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"Recommendations for Further Reading," by Timothy Taylor
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"The Doing Business Project: How It Started," correspondence from Simeon Djankov
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Notes on "Eternal Vigilance is the Price of Liberty"

Who said: "Eternal vigilance is the price of liberty?" Well, it wasn't Thomas Jefferson, at least not according to the official Jefferson Library. However, a few years ago a blogger named Anna Berkes at the Jefferson library website took a deep dive to search out the source of the quotation. Berkes found that "eternal vigilance" and "price of liberty" were used more than 700 times in close proximity in various newspapers and books during the first half of the 19th century.

For this post-Fourth-of-July ramble, I'll follow in Berkes's footsteps, but add a different kind of detail. Specifically, I'll take a look at five notable earlier appearances of this phrase. My focus will is on what specifically were the early users of the quotation suggesting that we liberty-loving people need to be eternally vigilant about?

1.  The first time that we know the terms "eternal vigilance" and "price of liberty" were used in close proximity was by an Irishman named John Philpott Curran in 1790, discussing the rules for electing the Lord-Mayor of London.
2. The first time we know that the the entire phrase was used together was during in an 1809 discussion of how James Jackson helped fight off the "Yazoo land grab" in western Georgia. 
3. The first use by a US president, in Andrew Jackson's Farewell Address in 1837, was about the need to fight off the Bank of the United States.
4. The first use by someone who would later be a  US president was when James Buchanan applied the phrase to discussing the merits of the presidential veto.
5. The use of the term in its more modern meaning, as pushing back against encroachments on personal liberty, in the speeches and writings of Frederick Douglass starting in 1848 and continuing to the years after the Civil War. 

Example #1: John Philpott Curran and the rules for electing the Lord-Mayor of Dublin

John Philpott Curran (1750-1817) was a lawyer who is probably best-remembered today as an advocate for freedom in Ireland. At the time of the election of the Lord-Mayor of Dublin in 1790, Philpott gave a speech pointing that while the Lord Mayor had traditionally been elected, a situation had evolved in which Alderman of the city had both become the only ones eligible for the position of Lord Mayor, but also decided among themselves who would hold that position. Thiw quotation is from The speeches of the Right Honourable John Philpot Curran, published in 1865 (July 10, 1790, p. 105, italics added). 

"The Lord Mayor of this city hath, from time immemorial, been a magistrate, not appointed by the crown, but elected by his fellow citizens; from the history of the early periods of this corporation, and view of its charters and bye-laws, it appears that the Commons had from the earliest periods, participated in the important right of election to that high trust; and it was natural and just that the whole body of citizens, by themselves or their representatives, should have a share in electing those magistrates who were to govern them, as it was their birthright to be ruled only by laws which they had a share in enacting. The Aldermen, however, soon became jealous of this participation, encroached by degrees upon the Commons, and at length succeeded in engrossing to themselves the double privilege of eligibility and of election of being the only body out of which, and by which the Lord Mayor could be chosen. 

Nor is it strange that, in those times, a board consisting of so small a number as twenty-four members, with the advantages of a more united interest, and a longer continuance in office, should have prevailed, even contrary to so evident principles of natural justice and constitutional right, against the unsteady resistance of competitors so much less vigilant, so much more numerous, and, therefore, so much less united. It  is the common fate of the indolent to see their rights become a prey to the active. The condition upon which God hath given liberty to man is eternal vigilance, which condition if he break, servitude is at once the consequence of his crime, and the punishment of his guilt. 

In this state of abasement the Commons remained for a number of years; sometimes supinely acquiescing under their degradation; sometimes, what was worse, exasperating the fury, and alarming the caution of their oppressors, by ineffectual resistance. The slave that struggles, without breaking his chain, provokes the tyrant to double it; and gives him the plea of self-defence for extinguishing what, at first, he only intended to subdue.

Example #2: Thomas Charlton, James Jackson, and the Yazoo Land Fraud

The earliest use of the exact phrase, "eternal vigilance is the price of liberty," dates to an 1809 book called The Life of Major General James Jackson, by Thomas U.P. Charlton. James Jackson was a member of first Continental Congress and was in the US Senate in early 1790s. He became Governor of Georgia, and then later returned to the US Senate. The specific issue here is the "Yazoo land fraud," in which the Georgia legislature--some of whom had been bribed--sold large quantities of land in the western part of the state.  Jackson made a political issue of sale, was elected Governor, and overturned it, also using the opportunity to disgrace a number of his political opponents. Here is the sympathetic and florid passage from Charlton's book (pp. 84-87), which is only a portion of the surrounding paragraph (!). Notice that Charlton puts the phrase of interest in quotation marks (and I've put it in italics), which might either mean that the phrase was already well-known to his readers, or else that he is just setting off a phrase of his own invention for ease of reading.

"In 1793, 1794, and 1795, he [Jackson] was a senator in congress. Recalled by his fellow citizens, who (inflamed almost to madness, and discerning around them, in every quarter, their rights trampled upon by men of highest character) passed resolutions in their primary county meetings demanding his aid at home, he resigned his honorable station, and immediately embarked all the faculties of his mind, all the firmness of his nature, and all the reputation he had acquired, in indefatigable exertions to effect a repeal of the act by which Georgia had sold to companies of speculators millions of acres of her western territory. To recall the memory of her degradation, to assist in extending remembrance of her shame, can give no satisfaction to her sons. The biographer approaches the subject with loathing, impelled to it by the obligations he has assumed. His painful duty will be comparatively light, if he can convince himself that his succinct presentation of the speculation shall have the least effect in fastening upon the minds of the American people the belief, that "the price of liberty is eternal vigilance"; and in convincing them that, whilst a just confidence is given to their public servants, they should be watched with eyes that never sleep. A majority of the Georgia legislature had been bribed by promises of shares— some by certificates of shares, for which they were never to pay—others by expectations of slave property. The foulest treason had been perpetrated, under the guise of legislation. Citizens of the most exalted standing from several States, some of them high public functionaries: one a senator from Georgia, whose duty required him to have been at his post in Congress; others judges, generals, revolutionary characters, whose popularity and past services made them more dangerous, and served ultimately to heap degradation upon their heads, had attended at Augusta, in January, 1795, and executed their unhallowed purpose. Georgia had been robbed of her domain—her own law givers corrupted and consenting and an indelible stigma fixed upon her fame, her own children blackening her escutcheon. The full iniquity of this nefarious legislation—if usurpation can be denominated legislation—was exposed by General Jackson in a series of letters addressed to the people under the signature of "Sicilius." At the following session he was a member. The all-absorbing subject, with the petitions, remonstrances, memorials, and other proceedings of the people, was referred to a committee of which he was chairman. Testimony was taken upon oath, which established deep and incontrovertible guilt. The rescinding law was passed. It was drawn and reported by General Jackson, and adopted as it came from his pen. The merits of this latter act— its constitutionality—its consistency with republican principles—its necessity—its justice—have all been freely and ably discussed in our country, in private circles, in pamphlets, in the public gazettes, in the Congress of the Union, in the Supreme Court. The decision of the country, perhaps, has been against the power of the rescinding legislature, so far as innocent purchasers under the fraudulent grants were interested; but, whether constitutional or not, nothing is more certain than that the honest of every section of the United States; all who detest corruption, admire virtue, and regard an honest representation as the bulwark of the public liberties, have considered its action upon the Yazoo speculation as pure, and its motives patriotic. The citizens of Georgia, especially, have held in horror and detestation the authors and abettors of her humiliation; and have consecrated with their best affections the memories of those who were faithful to the State. The Yazoo act repealed, every vestige and memorial of its passage expunged from the public records, and burnt with all the ceremony and circumstance which popular indignation demanded, the popularity of General Jackson became unrivalled.  

Example #3: Andrew Jackson and Opposition to the Bank of the United States

In President Jackson's Farewell address on March 4, 1837, he took a few whacks at his old adversaries who favored the founding of a Bank of the United States. He said (italics added):

"The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States, and the evil consequences which followed may warn us of the danger of departing from the true rule of construction and of permitting temporary circumstances or the hope of better promoting the public welfare to influence in any degree our decisions upon the extent of the authority of the General Government. Let us abide by the Constitution as it is written, or amend it in the constitutional mode if it is found to be defective.

"The severe lessons of experience will, I doubt not, be sufficient to prevent Congress from again chartering such a monopoly, even if the Constitution did not present an insuperable objection to it. But you must remember, my fellow-citizens, that eternal vigilance by the people is the price of liberty, and that you must pay the price if you wish to secure the blessing. It behooves you, therefore, to be watchful in your States as well as in the Federal Government. The power which the moneyed interest can exercise, when concentrated under a single head and with our present system of currency, was sufficiently demonstrated in the struggle made by the Bank of the United States."

Example #4: James Buchanan and the Presidential Veto

In 1842, the US Senate was considering a bill that would alter the US Constitution to eliminate the presidential veto: that is, what Congress passes by majority vote becomes law. James Buchanan, who would later become president from 1857-1861, just before the Civil War, gave a speech "On the Veto Power" on February 2, 1842. This is from volume 5 of The Works of James Buchanan published from 1908-1911 (p. 130).  Buchanan said (italics added):

"This veto power was conferred upon the President to arrest unconstitutional, improvident, and hasty legislation. Its intention (if I may use a word not much according to my taste) was purely conservative. To adopt the language of the Federalist, " it establishes a salutary check upon the legislative body, calculated to guard the community against the effects of faction, precipitancy, or of any impulse unfriendly to the public good, which may happen to influence a majority of that body," [Congress.] Throughout the whole book, whenever the occasion offers, a feeling of dread is expressed, lest the legislative power might transcend the limits prescribed to it by the Constitution, and ultimately absorb the other powers of the Government. From first to last, this fear is manifested. We ought never to forget that the representatives of the people are not the people themselves. The practical neglect of this distinction has often led to the overthrow of Republican institutions. Eternal vigilance is the price of liberty; and the people should regard with a jealous eye, not only their Executive, but their legislative servants. The representative body, proceeding from the people, and clothed with their confidence, naturally lulls suspicion to sleep; and, when disposed to betray its trust, can execute its purpose almost before their constituents take the alarm." 

Example #5: Frederick Douglass and the Fight against Slavery and Racial Discrimination

Our proverb of interest was something of a favorite for Frederick Douglass. In Wolfgang Mieder's 2001 book, No Struggle, No Progress: Frederick Douglass and His Proverbial Struggle for Civil Rights, Mieder lists seven times when Douglass used the term spanning the years from 1848 to 1889, The first time was in an essay in Douglass's journal The North Star, on March 17, 1848 (the Library of Congress has a manuscript of the essay here). Douglass wrote (italics added):

"It is in strict accordance with all philosophical, as well as experimental knowledge, that those who unite with tyrants to oppress the weak and helpless, will sooner or later find the groundwork of their own liberties giving way. "The price of liberty is eternal vigilance." It can only be maintained by a sacred regard for the rights of all men. The people of the North have sought to attain and secure their rights, by a most flagrant infringement of the rights, liberty and happiness of others. They have consented to stand side by side with the tyrant; with their heels on the hearts of fettered millions, leaving them to perish under the weight of what they call "our glorious Union", and in doing so, have given the Southern slaveholder the most effective power to control and govern the North." 

Douglass's usage made the eternal vigilance a matter of universal civil rights and human rights, not just about rules for electing the Lord Mayor or being opposed to arguably ill-considered legislation. On the 26th anniversary of emancipation on April 16, 1888,  Douglass gave a speech in Washington, DC, now often titled, "I Denounce the So-Called Emancipation as a Stupendous Fraud." He focused on the dire situation of blacks in the South (where he had just returned from a visit),

"It is well said that "a people may lose its liberty in a day and not miss it in half a century," and that "the price of liberty is eternal vigilance." In my judgment, with my knowledge of what has already taken place in the South, these wise and wide-awake sentiments were never more apt and timely than now. ... 

"I have no taste for the role of an alarmist. If my wishes could be allowed to dictate my speech I would tell you something quite the reverse of what I now intend. I would tell you that everything is lovely with the Negro in the South; I would tell you that the rights of the Negro are respected, and that be has no wrongs to redress; I would tell you that he is honestly paid for his labor; that he is secure in his liberty; that he is tried by a jury of his peers when accused of crime; that he is no longer subject to lynch law; that he has freedom of speech; that the gates of knowledge are open to him; that he goes to the ballot box unmolested; that his vote is duly counted and given its proper weight in determining result; I would tell you that he is making splendid progress in the acquisition of knowledge, wealth and influence; I would tell you that his bitterest enemies have become his warmest friends; that the desire to make him a slave no longer exists anywhere in the South; that the Democratic party is a better friend to him than the Republican party, and that each party is competing with the other to see which can do the most to make his liberty a blessing to himself and to the country and the world. But in telling you all this I should be telling you what is absolutely false, and what you know to be false, and the only thing which would save such a story from being a lie would be its utter inability to deceive.

The first quotation from Douglass in this passage, about how "a people may lose its liberty in a day," is commonly attributed to Montesquieu, but I don't know the original source. (And I wouldn't dream of putting any faithful reader who has stuck with me this far through another search!)

Some Thoughts

1) I suppose that the economist in me likes the phrase "eternal vigilance is the price of liberty" because it is a prominent example of a nonmonetary price. But maybe that reason  doesn't resonate with everyone!

2) The word "vigilance" is powerful and interesting. Vigilance is about a heightened level of perception and responsibility, about being present not just physically, but also emotionally. For example, a sentry who is responsible for the safety of others may keep vigil, or there are vigils before certain religious events, or people might sit vigil near a with someone who is dying or already dead.

3) "Vigilance" leaves open the question of what political tactics are appropriate at a given point in time. Vigilance doesn't mean that you react on a hair-trigger, or that you react in a dramatic way--although sometimes those responses may be advisable. Vigilance is about awareness and sensitivity and noticing.

4) The idea that vigilance must be "eternal" is pleasing to me, because it suggests a hard-headed view both of political actors and of ordinary people. It suggests both that political actors and social groups will always and inevitably be trying to encroach upon liberty.

5) In a broad sense, this sentiment is not just political in its meaning. Back in 1956, in the previous to a CBS Radio adaptation of his novel Brave New World, Aldous Huxley said (January 27, 1956): 
"The price of liberty--and even of common humanity--is eternal vigilance." I suspect that Frederick Douglass would have agreed, although some of the earlier users of the term might have felt that Huxley was missing the point.

Origins of the Body Mass Index

Body Mass Index is commonly used as an indicator of obesity, and thus as a sign that a person might be a risk for various health problems (including worse health effects from contracting COVID-19).  But where did the measure come from? 

The definition is straightforward. As the Centers for Disease Control notes: "Body Mass Index (BMI) is a person’s weight in kilograms divided by the square of height in meters." For adults (of any age or gender), the usual guideline is that below 18.5 is "underweight" 18.5-24.9 is "normal or healthy weight," 25.0-29.9 is "overweight," and 30 or above is "obese." For an adult is who is 5' 9" (or 1.8 meters), the range for a normal or healthy weight would be 125-168 pounds (or 57 to 76 kilograms). 

The original formula dates back to a Belgian statistician named Adolphe Quetelet (1796–1874). Garabed Eknoyan provides an overview of his story in "Adolphe Quetelet (1796–1874)—the average man and indices of obesity" (Nephrology Dialysis Transplantation, January 2008, 23: 1,  pp. 47-51). 

Quetelet was quite a guy. Eknoyan reports that while still a teenager: "But it was his love of the humanities that dominated his early years. He published poetry, exhibited his paintings, studied sculpture, co-authored the libretto of an opera and translated Byron and Schiller into French." At age 23, he was the first recipient of a doctorate in science from the newly founded University of Gent. He became fascinated with probability theory after spending time in Paris with  Joseph Fourier (1768–1830), Simeon Poisson (1781–1840) and Pierre Laplace (1749– 1827). He became interested in seeking out probability distributions of the human form, including the creation of the first height-and-weight tables. Eknoyan continues: 

His subsequent conceptual evolution in the study of man evolved from the study of averages (physical characteristics), to rates (birth, marriage, growth) and ultimately distributions (around an average, over time, between regions and countries) [12]. The latter was the basis of one of his contributions to statistics; the demonstration that the normal Gaussian distribution, typical throughout nature, applied equally to physical attributes of humans, including body parts, derived from large-scale population studies. ... 

In developing his index, Quetelet had no interest in obesity. His concern was defining the characteristics of ‘normal man’ and fitting the distribution around the norm. Much like Dublin a century later, he encountered difficulty in fitting the weight to height relationship into a Gaussian curve and began his quest for a solution. In 1831–1832, he conducted what has been considered the first cross-sectional study of newborns and children based on height and weight, and extended it to the study of adults. ...

[I]n an 1835 book, A Treatise on Man and the development of his aptitudes, Quetelet wrote: ‘If man increased equally in all dimensions, his weight at different ages would be as the cube of his height. Now, this is not what we really observe. The increase of weight is slower, except during the first year after birth; then the proportion we have just pointed out is pretty regularly observed. But after this period, and until near the age of puberty, weight increases nearly as the square of the height. The development of weight again becomes very rapid at puberty, and almost stops after the twenty-fifth year.' 

Quetelet was famous in his own time, and a major influence on other pioneer statisticians like Francis Galton. A statue of him stands on one corner of the  Places des Palais in Brussels, at the entrance to the
Palais des Academies. A century after his death, Belgium put his picture on a postage stamp. But although Quetelet originated the formula, he did not discuss or draw conclusions about obesity. 

However, the Quetelet index was not re-baptized as the Body Mass Index until 1971, in research by a physiologist named Ancel Keys (1904-2004). Nicolas Rasmussen tells this story in "Downsizing obesity: On Ancel Keys, the origins of BMI, and the neglect of excess weight as a health hazard in the United States from the 1950s to 1970s" (Journal of the History of the Behavioral Sciences, Autumn 2019, pp. 299-318). Rasmussen also tells the story of efforts by life insurance companies in the early 20th century to pool their data and try to find out if causes of death like heart disease, cancer, and stroke could be predicted based on individual characteristics and behaviors.  Rasmussen writes: 

Big insurance companies began pooling data in quasiprospective collaborative studies around the turn of the century, in which length of life was correlated to a range of risk factors recorded on initial health examinations (Bouk, 2015; Czerniawski, 2007). These intercompany studies were massive, far larger than anything public sector epidemiologists could do at the time. In the landmark Medico‐Actuarial Mortality Investigation (MAMI) of the early teens, over 440,000 insured individuals were examined (representing equal numbers of men and women) for a span of 10–25 years up to 1909—millions of life‐years of observation (Association of Life Insurance Medical Directors & Actuarial Society of America, 1912). MAMI was followed by the similarly designed and executed Medical Impairment Study, which included data on 667,000 men issued policies since 1909, followed through 1928 (Actuarial Society of America & Association of Life Insurance Medical Directors, 1931). Both studies mainly looked at overall mortality rates associated with physical “impairments” and occupations, rarely attempting to identify predictors of particular causes of death (prudently, given the variability in how doctors completed death certificates). Insurance actuaries had tried a number of measures to gauge obesity such as girth for spine length, but the statisticians found that weight for height had the best predictive power for longevity (Czerniawski, 2007; Marks, 1956). And the association between weight and mortality was strong and consistent, changing very little between the generations represented by the two big studies (for people older than 25). In the Medical Impairment Study, for example, men categorized as 25% or more above average weight for their height suffered 30–40% higher mortality rates (depending on age). Similar findings were reported for women, although the mortality penalties of high weight were not quite as severe (Marks, 1956).

By 1900, insurance firms were already screening out applicants well above or below the average weight for their height and, unsurprisingly, after the big intercompany studies, the firms revised their rates and standard height‐weight tables to reflect greater mortality penalties for overweight (and smaller mortality penalties for underweight, as tuberculosis was in retreat). Tables of a normal or healthy weight for each height category were widely distributed by insurance companies and ubiquitous in doctors’ offices during the early 20th century (Weigley, 1984). Thus, the insurance industry informed the understanding of proper body weight among doctors and patients alike, during the period when it first became a matter of popular concern (evidenced, for instance, by rapid diffusion of weighing scales; Jutel, 2001). ...

Life insurance firms stiffened their price discrimination; that is, the overweight paid more for their “substandard” policies, if they could get them at all (Czerniawski, 2007; Weigley, 1984). Later, by 1930s, it was something like a universally accepted medical fact that obesity contributed to early death, especially from heart disease. ...

The National Heart Institute was created in 1948 to promote research in this area. But perhaps surprisingly, Ancel Keys--who would originate the label for Body Mass Index--was an opponent of the conventional wisdom about the linkage from weight to health. Instead, he argued that concerns about being overweight were often just moralistic lectures (what some today would call "body-shaming"). 

As Rasmussen explains it,  Keys agreed that obesity was unhealthy. However, he argued that measurements of excess weight-for-height were not a reliable measure of obesity. "Based on the observation that, because muscle is denser than fat, extraordinarily lean and  muscular men like varsity football players (and apparently, himself) registered as overweight on standard tables despite being unusually fit, he launched around 1950 into a campaign to replace relative weight measures of obesity with a measure of body fatness or adiposity." In addition, Keys argued that fat in one's diet was the key predictor of negative health consequences like coronary heart disease: "Thus, in the 1950s Keys took a strong position arguing that dietary fat intake, not caloric intake or its weight gain consequence, was the cause of high serum cholesterol and therefore a major driver of coronary disease. So he sought to discount weight as a heart disease predictor."

Keys thus explored other methods of measuring body fatness. For example, one approach was to submerge someone in water to calculate their volume, then divide by weight to get their density, and then infer body fat from this density. However, this approach was tricky. You had to take into account factors like residual air in the lungs. The extrapolation from density to fat content was at that time based on data from guinea pig dissection experiments. And it was hard to imagine a really large-scale study (or a life insurance policy) that involved dunking all the subjects. 

Another possible approach involves "skinfold measures," which basically  involved using certain calipers and pressures of pinching at specific places around the body. After experimenting with many pinching practices, the concensus seems to be that "the best sites for measuring skinfolds were the

back of the upper arm when extended 90° and just below the scapula, on the back."

Keys led a famous "Seven Countries" study that looked at how obesity might predict coronary heart disease, and when the study was published in 1972, it included three measure of obesity: skinfold measures, weight-for-height, and what Rasmussen calls "a heretofore obscure measure—BMI (weight in kilograms divided by height in meters squared, first proposed a century earlier by Quetelet)." The statistics suggested that the skinfold measures offered no difference in predictive power over the weight measures: "So at this point, after more than 20 years of conspicuous efforts to showcase skinfold and the body fatness it measured as a more rigorously scientific and predictively effective index of obesity than relative weight, Keys just dropped the topic of skinfold and adiposity and embraced BMI ..." However, in his study, BMI had only a very mixed record in predicting coronary heart disease. 

Simple measures, like the Body Mass Index, are going to be imperfect. There are longstanding concerns that dividing by height isn't quite right, and can lead to short people seeming thinner and tall people seeming fatter. There are other methods. Skinfold techniques are still used. There have been studies that suggest looking at waist-for-height measures, either alone or perhaps together with BMI. 

There are also methods that seek to measure body fat more directly. The approach of submerging someone in water, calculating density, and inferring body fat now rejoices in the name of "air displacement plethysmography." There are also approaches which involve shining infrared light ("near-infrared interactance") or different levels of photons ("dual energy X-ray absorptiometry") through the body, and then calculating body fat based on the idea that fatty tissues absorb more infrared light or attenuate photons differently than lean muscle.

For studies of large populations, Body Mass Index is a useful measure in part because height and weight are relatively easy to collect. There are also historical records of height-and-weight, which were often kept for large population groups like soldiers being drafted into a nation's armed forces. Also, the research since Keys has established strong linkages that groups with higher rates of obesity as measured by BMI do on average have a higher rate of adverse health outcomes. But individuals can and do vary considerably, the specific numbers and labels that the Centers for Disease Control place on BMI should be viewed as useful guidelines for groups, not as a firm judgement applying to every person. 

Work is What Funds Retirement

The US population and workforce is aging. The median age of Americans--that is, half are above this age and half are below--was 28.1 years back in 1970, 32.9 years in 1990, and now is up to about 38 years. If one looks only at the US workforce, the median age rose from  38.3 years in 1996 to 42.0 years by 2016.  By 2035, the Census Bureau projects that the number of over-65 Americans will exceed the number of under-18 Americans for the first time in US history.

As as society ages, it needs to redraw the common expectations of when work will end and retirement will begin. Of course, from an individual perspective, retirement age isn't a one-size-fits-all choice. But from an overall social perspective,  Robert L. Clark and John B. Shoven write:

The retirement crisis is in no small measure caused by trying to do the impossible. What we mean by this is that it is nearly impossible to finance 30-year retirements with 40-year careers. Yet with today’s average retirement ages (62 for women and 64 for men), we are trying to do just that. If a 64-/62-year-old couple retired today, the survivor of the couple would have about a 40 percent chance of living an additional 30 years. This division of adult life between work and retirement is at the heart of the financial problems of Social Security and state and local pension plans, and it threatens the adequacy of retirement resources for millions of Americans. 

The Brookings Institution and the Kellogg School of Business hosted a conference on these issues in late January. Here, I'll draw on three discussion papers written for that conference:

• "Working longer policies: Framing the issues," by Martin Neil Baily and Benjamin H. Harris (January 31, 2019)
• "Enhancing work incentives for older workers: Social Security and Medicare proposals to reduce work disincentives," by Robert L. Clark and John B. Shoven (January 31, 2019)
• "Proposals to keep older people in the labor force," by Alicia H. Munnell and Abigail N. Walters (January 31, 2019)

Some of the adjustment in which longer life expectancies are accompanied by rising labor force participation is already underway. For example, the graph shows the share of those 55 and older who remain in the workforce. Back in the 1950s, about 42-43% of over-55s were in the labor force. By the early 1990s, the proportion had dipped below 30%. It then started rising again--although the upward momentum stalled, at least for now, around the Great Recession.



From the Baily and Harris paper, here's a figure showing labor force participation for older age groups: 55-59, 60-64, 65-69, 70-74, and 75+. Overall labor force participation is rising for each of these groups.

Indeed, many people continue to work after starting to claim Social Security. Here's a figure from the Baily-Harris paper:

Again, a later retirement age isn't for everyone, of course. But it's worth reconsidering the economic incentives that affect people's decision to keep working, and whether a few more years of accumulating assets and postponing Social Security payments, might be a good choice. After all, as Baily and Harris note: "In July 2018, the Social Security Administration reported that the average monthly benefit paid to retired workers was $1,415 per recipient, a rate of $16,980 a year. This is often insufficient to allow a worker to maintain in retirement the same standard of standard of living enjoyed during their working years. Even if there are two people in a household collecting benefits at this rate, $2,830 a month amounts to a still-modest $33,960 a year. Payments for Medicare coverage and out-of-pocket health costs must be paid for out of this total."

The three papers between them have several suggestions that would tend to have the effect of encouraging those who are on the margin to push back retirement a little, while still leaving open the option of earlier retirement. 

1) Reframe the message from Social Security. Baily and Harris suggest that one basic step might be just to reframe the message that people receive from Social Security. They write:

When a worker first signs on at the Social Security Administration and discusses their choices for collecting benefits, the framing they are given is about their “full retirement” age. This is 66, rising to 67. Many people take away from this conversation the fact that they should start collecting benefits at the full retirement age, even though they may be much better off to wait until age 70. Waiting increases the level of benefits by about 8 percent for each year until age 70. The message given to older people should be that their maximum benefit comes at age 70 and, though they can collect earlier, this comes at a price in lower benefits for life, and perhaps lower benefits for their spouse.

Munnell and Walters push this theme a little harder by arguing that from a practical and  historical perspective: "A strong case can be made that age 70 is the nation’s real retirement age.18 It is the age that maintains the same ratio of retirement to working years as in 1940, the age at which Social Security provides solid replacement rates, and the age at which most people are assured of retirement security ..."

Consider their table below. Start back in 1940, when the retirement age was 65. Think about the average years remaining of life expectancy at that time. Because of expanding life expectancies, by the year 2000 a retirement age of 70 years would imply the same expected number of retirement years; by 2020 it would be a retirement age of 71 years, and rising. Thus, a retirement age of 70 now actually means slightly more years of expected retirement than a retirement age of 65 did back in 1940. Similarly, if one looks at the ratio of years of expected retirement to working years, that ratio will also rise over time with life expectancy. The second column shows that if one retires at 69 in 2020, the ratio of retirement years to working years is the same as for a person retiring at age 65 back in 1940.



Notice that this particular proposal is all about making public announcements and managing expectations. It's just letting people know, in a clear way, that the current retirement system is set up for them to retire at 70, and that retiring earlier comes with costs in terms of Social Security benefits and long-term financial security.

2) Restructure Social Security and Medicare to reduce work disincentives. The current structure of Social Security and Medicare has some features that look like disincentives to work. The overall idea is that when you hit a certain age like 65 or 70, but you decide to keep working, you should be be able to stop paying into Social Security and Medicare. At that point, you can be considered "paid-up." In addition, you should be able to enroll in Medicare even if you are still working, so your employer don't have to buy health insurance for older individuals. And if you start getting Social Security payments, those payments should not be scaled back or penalized in any way if you continue working. Clark and Shoven offer a set of three policies along those lines:

With this in mind, we advocate three policies that could be adopted to make working longer more financially attractive. They are (1) eliminating the Social Security earnings test, (2) establishing a paid-up category for the Social Security payroll tax, and (3) also establishing a paid-up category for the Medicare payroll tax and simultaneously switching Medicare from secondary to primary payer status. We think the most obvious of our policy proposals is eliminating the earnings test. It is widely misunderstood and produces no long-run revenue for Social Security. It discourages work, not because of what it actually is but because it appears to be a major tax on work for those between the ERA [Early Retirement Age] and the FRA [Full Retirement Age]. Both the paid-up idea and the MPP [Medicare as a primary payer] idea have major appeal. 

We estimate if both our second and third proposals were adopted, the net wage would go up by about 40 percent for workers over age 65. This is exactly the age group that is most responsive to wages. In fact, with the higher wages and the resulting additional labor supply, IRS revenues would increase to substantially offset the cost of these programs to Social Security and Medicare. We think the reasonable range for the IRS offset is between 44 and 116 percent of the cost of these new policies. This means, at a minimum, that the offset is significant. With two reasonable assumptions—a labor supply elasticity of 3.0, and a tax rate of 22 percent—the IRS would collect more than enough revenue to completely offset the cost of the initiatives to Social Security and Medicare. Some of these policies, such as the earnings test, were initially implemented during the Great Depression with the explicit goal of encouraging people to retire. We think it is time to turn this thinking on its head and come up with policies to encourage people to work longer.

3) Training older workers to update their digital skills. The symposium authors disagree on whether this kind training is likely to pay off. Baily and Harris describe the mildly optimistic view for at least trying some pilot programs in this way:

Munnell and Walters are skeptical of the potential value of training for older workers, and they are not alone in their skepticism. They point out that the United States spends almost nothing on worker training and that evaluations of worker training programs are often negative. In what may be a triumph of hope over experience, we respectfully disagree, and we think it is worth trying to provide greater training opportunities for older workers using new teaching technologies. One of the reasons companies give for choosing younger workers is that older workers lack proficiency with digital technologies. This is an area where online instruction can make a difference. With guidance from instructors, older workers can improve their capabilities with the programs necessary for both white- and blue-collar jobs. Given what is at stake, it would be worthwhile to establish pilot programs to test whether older workers are willing to take courses and to see whether their employment outcomes are improved as a result.

4) Re-create a Mandatory Retirement Age at 70.  The argument against a mandatory retirement age is that it is a form of age discrimination, and was outlawed (although with a number of exceptions) by amendments passed in 1986 to the Age Discrimination in Employment Act of 1967. But there are also arguments for a mandatory retirement age at age 70: mainly, if employers thinking about hiring someone who is 60 or 65 need to worry that it will be very hard to fire this person without a lawsuite, and in addition that they may be responsible for high health care costs, employers will lean against hiring such workers. Munnell and Walters write:

One tool could be the restoration of some form of mandatory retirement at age 70 (which is substantially higher than mandatory retirement ages in the past), indexed to the age at which Social Security provides the maximum benefit. While employers can dismiss older workers who can no longer do their job, the process is unpleasant and employers worry about age discrimination lawsuits. But employers cannot legally dismiss older workers whose health insurance premiums have risen too high or who have come down with very expensive medical problems. Mandatory retirement would limit the employer’s exposure to the problem of compensation outpacing productivity that typically emerges as workers age. This limit could be key as, given the decline in career employment, hiring decisions have become more important. Putting a lid on tenure could make hiring workers in their 50s and early 60s more attractive, especially for low- and averagewage workers with employers that offer health insurance. ...

A default retirement age would have benefits for both retirement planning and workforce management. On the employee side, it would provide a more formal process to enable workers to plan to work longer, begin partial retirement, or enter into full retirement at age 70. On the employer side, a default retirement age would give employers a way to separate from an employee whose compensation outpaces his or her productivity, increasing the attractiveness of hiring older workers.

5) Provide information to employers and the public about the benefits of older workers.  Munnell and Walters write:

Older workers today are healthier, better educated, and more computer savvy than in the past and, in terms of these basic characteristics, look very much like younger workers. In addition, they bring more to the job in terms of skills, experience, and professional contacts. Finally, they are more likely to remain with their employer longer, and longer tenure enhances productivity and increases profitability for the employer. All of these benefits more than offset any remaining cost differentials between older and younger workers.

They offer a number of interesting details and figures along these lines. This figure offers some comparisons between those in the 30-35 and 55-60 age group. If you are an employer hoping to hire someone who will contribute immediately and reliably, and then stay with your company for the long run, the differences between these groups in health, college degree, and use of a computer at home are not large. Of course, job experience is likely to be much greater for the older group. 

As another example, here's a study of the number of severe errors  (measured by the cost) made on a Mercedes-Benz assembly line. At least in this study, older workers were much less likely to have severe screw-ups.

Some economic choices can be made frequently, for small stakes, like where to order a pizza. There are plenty of chances for consumers to learn from experience and for producers to have incentives for for efficiency and experimentation. But other economic choices get made only once in a lifetime. The chance to learn from personal experience is close-to-nonexistent. The transition from work to retirement is that kind of choice. It will be heavily shaped by the design of retirement programs, as well as by the norms and common beliefs of employers and workers. But in a time period when life expectancies are rising, then the design of those retirement programs, as well as the common beliefs of employers and the public about retirement, can become out of synch with reality. Time to consider how some adjustments might happen.

Value of a Statistical Life? $9.1 Million

The costs of regulations can be measured by the money that must be spent for compliance. But many of the benefits of regulation are measured by lives saved or injuries avoided. Thus, comparing costs and benefits requires putting some kind of a monetary value on the reduction of risks to life and limb. For example, the US Department of Transportation estimates the "value of a statistical life" at $9.1 million in 2012. In a memo called "Guidance on Treatment of the Economic Value of a Statistical Life in the U.S. Department of Transportation Analyses," it explains how this number was reached. I'll run through the DoT estimates, and then raise some of the broader issues as discussed in a recent paper by Cass Sunstein called "The value of a statistical life: some clarifications and puzzles," which appeared in a recent issue of the Journal of Benefit Cost Analysis (4:2, pp. 237-261).

There are essentially two ways to estimate what value people place on a reduction in risk. Revealed preference studies look at how people react to different combinations of risk and price. For example, one can look at what workers are paid in jobs that involve a greater risk of death or injury, or at what people are willing to pay for safety equipment that reduces risks.  As DoT explains: "Most regulatory actions involve the reduction of risks of low probability (as in, for example, a one-in-10,000 annual chance of dying in an automobile crash).  For these low-probability risks, we shall assume that the willingness to pay to avoid the risk of a fatal injury increases proportionately with growing risk.  That is, when an individual is willing to pay $1,000 to reduce the annual risk of death by one in 10,000, she is said to have a VSL of $10 million.  The assumption of a linear relationship between risk and willingness to pay therefore implies that she would be willing to pay $2,000 to reduce risk by two in 10,000 or $5,000 to reduce risk by five in 10,000.   The assumption of a linear relationship between risk and willingness to pay (WTP) breaks down when the annual WTP becomes a substantial portion of annual income, so the assumption of a constant VSL is not appropriate for substantially larger risks."

As the report also points out, while the result of this calculation is called the "value of a statistical life," it's not actually putting value on a life, but on a reduction in risk. "What is involved is not the valuation of life as such, but the valuation of reductions in risks."

The alternative method is called a "stated preference" approach, in which people work their way through a sophisticated survey tool that informs them about various combinations of risks and costs, and seeks to elicit their preferences. This method is sometimes called "contingent valuation," and it's a controversial subject as to whether the values that are inferred from surveys can capture "real" preferences. (For a three-paper symposium on the use of contingent valuation techniques in estimating environmental damages, see the Fall 2012 issue of the Journal of Economic Perspectives.) When it comes to estimating value of reductions in risk, the DoT dismisses this method, on these grounds: "Despite procedural safeguards, however, SP [stated preference] studies have not proven consistently successful in estimating measures of WTP [willingness-to-pay] that increase proportionally with greater risks."

The DoT gets its value of $9.1 million with a literature review: specifically, it looks at nine recent studies that consider risk and pay in various occupations and that seem methodologically sound, and takes the average value from those studies. DoT also looks at costs of health or injury, as measured by research on what are called "quality-adjusted life years," which sets up criteria for categorizing the severity of an injury. They set up a scale with six levels of severity of injury: minor, which is worth .003 of the value of a statistical life, moderate, .047 of a VSL; serious, .105; severe, .266; critical, .593, and unsurvivable, 1.0. 

The DoT memo lays out where its numbers come from, but quite appropriately, it doesn't venture into a broader discussion of using the value of a statistical life in the first place. Cass Sunstein was for several years Administrator of the Office of Information and Regulatory Affairs in the Obama White House, so his views are of more than ordinary interest. While he supports using the value of a statistical life, he is also clear and thoughtful about a number of the tricky issues involved. Here are some of the tough questions raised by his article.

1) If the benefits of a regulation outweigh the costs, why is the regulation even necessary? Presumably, the answer is that there is some reason that buyers and sellers in the market cannot coordinate on an appropriate safety outcome. Potential reasons might include that people lack information or a range of choice between safety and price options.

2) Should the value of a statistical life be different across people? For example, perhaps reducing the risks faced by a child who lacks capacity to weigh and measure risk should be weight more heavily than risks faced by an adult. Or perhaps reducing the risks for a young adult, with a long life expectancy, should carry a higher value than reducing the risks faced by an elderly person. This point seems logically sound, but administratively and politically difficult.

3) If the reduction in risk is based on willingness to pay, then don't those with low incomes end up with less protection than those with higher incomes? Sunstein faces up to this point and accepts it. As he writes: "The reason is not that poor people are less valuable than rich people. It is that no one, rich or poor, should be forced to pay more than she is willing to pay for the reduction of risks." Guaranteeing low-income people a level of safety where the costs are higher than what they wish to pay ultimately doesn't make sense. "Government does not require people to buy Volvos, even if Volvos would reduce statistical risks. If government required everyone to buy Volvos, it would not be producing desirable redistribution. A uniform VSL has some of the same characteristics as a policy that requires people to buy Volvos. In principle, the government should force exchanges only on terms that people find acceptable, at least if it is genuinelyconcerned with their welfare."

4) What if the costs of risk reduction are carried by one group, but the benefits are received by another? Sunstein points out that in some cases, like regulation of drinking water, much of the cost of safer water is passed along in the form of higher water prices, and thus paid by everyone. Similarly, the cost of the worers' compensation program basically means that the benefits received by (nonunionized) workers are essentially offset by lower take-home pay. However, in regulation of air pollution, it's quite possible that the costs are spread across companies that pollute and their shareholders, while the benefits are realized by people regardless of income. Here, Sunstein points to the classic and controversial argument that if overall benefits for society exceed overall costs to society, even if there are some individual winners and losers, the policy can be justified. But he argues that redistribution is not the right goal for regulatory policy: "It is important to see that the best response to unjustified inequality is a redistributive income tax, not regulation – which is a crude and potentially counterproductive redistributive tool ..."

5) Maybe people aren't knowledgeable or rational their thinking about costs and benefits of risk reduction? Maybe they place a high value on avoiding some risks, but not on avoiding others, even though the objective level of risk seems much the same? Sunstein takes the technocratic view here: "Regulators should use preferences that are informed and rational, and that extend over people’s life-histories."

6) Instead of thinking about willingness to pay to reduce risk, the problem instead can be formulated as one of rights: that is, people have a right not to have certain risks imposed on them. Sunstein argues that this idea of rights applies in situations where the risk is extremely high, but doesn't apply well to issues of changes in statistically small risks. He further argues that if the issue is one of rights, then the cost-benefit calculation no longer applies (as implied in the DoT quotation above). Sunstein notes that in issues involving, say race and gender discrimination or sexual harassment, we quite rightly don't apply a cost-benefit calculation. But a regulatory issue like what kinds of bumpers should be put on cars to reduce risks during a crash is not a "right" in this sense, and so a cost-benefit calculation becomes appropriate.

Ultimately, Sunstein is a supporter of using the value of a statistical life in setting regulatory policy. As he notes, there are easier and harder cases for applying this principle. What he doesn't emphasize in this article is that if we can figure out which regulations have greater benefits for their cost, and which regulations have lower benefits for their cost, we should then be able to tighten up the very cost-effective regulations and loosen up the cost-ineffective regulations, and end up helping more people at the same or even lower cost.