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.

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.)

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."

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.
Full-Text Access | Supplementary Materials

"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.
Full-Text Access | Supplementary Materials


"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.
Full-Text Access | Supplementary Materials

"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.
Full-Text Access | Supplementary Materials


"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.
Full-Text Access | Supplementary Materials


"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.
Full-Text Access | Supplementary Materials


"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.
Full-Text Access | Supplementary Materials


"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. 

Japan: The Challenges of Aging, Slow Growth, and Government Debt

Japan is the third-largest economy in the world, behind the US and China. It'e experience seems to foretell some of the key issues facing other high-income economies, like slow productivity growth, rapid aging, and rising government deficits. But in the last few years, it also seems to have recovered to at least a moderate rate of economic growth. What are some of the main patterns and lessons in Japan?  For background, I'll draw on the work of theOECD, which just published one of its "Economic Surveys" of Japan in April 2019.

Back in the 1980s, a number of popular books and reports published in the US anointed Japan as the future leader of the global economy. A standard claim was that the disorganized competitive market forces of the US economy were unable to keep up with the government-directed cooperative ventures of Japan's economy. Then in the early 1990s, Japan's economy experienced a meltdown in stock and housing prices, and its economy entered a period of near-zero growth. Here's figure comparing Japan's in per capita terms to the rest of the OECD countries.  The left-hand set of bars show that when it comes to per capita output, Japan's growth was lagging well behind and is now catching up. The right-hand set of bars show how this pattern is linked to an aging population. If one looks only at Japan's output relative to its working-age population, it wasn't all that far behind from 1997-2012, and has actually been ahead of average OECD growth since 2012.

Japan's is facing a situation of a declining population and workforce, and the share of the population that is elderly is on the rise. This rising share of elderly has been driving up government spending on pensions and health care, and together with attempts to stimulate its economy through government spending (much of it on infrastructure), Japan has run up an enormous government debt. In the last few years, it has been aggressively using the Bank of Japan to buy and hold its government debt. Meanwhile, productivity growth has been stagnant. Let's say just a bit more about these patterns.

 Here's a figure showing Japan's total population, broken down by age group. The OECD writes: "With Japan’s population projected to fall by one-fifth to around 100 million by 2050, many parts of the country are facing depopulation. Efficiency would be increased by expanding the joint provision of local public services, including health and long-term care and infrastructure, across jurisdictions and developing compact cities."

Here's the change in total population and working-age population from 2000-2018. The working-age population is dropping fast in Japan, near-zero in Germany and Italy. Although it's rising in the other countries, the aging of population in these other countries is coming, too.

The combination of slow growth and a declining population has meant ongoing declines in the price of real estate in Japan for most of the last three decades, before stabilizing in the last few years.

Here's a figure showing Japan's population age 65 and older as a share of the working-age population aged 20-64. The bar shows the level in 2017; the arrow shows where it's headed by 2050. Many high-income countries are getting older, but Japan is an extreme case. The OECD writes: "Half of the children born in Japan in 2007 are expected to live to the age of 107, which has major implications for the labour market. The number of elderly is projected to rise from 50% of the working-age population in 2015 to 79% by 2050 ..."

Supporting the elderly and attempting to stimulate the economy has led to very high levels of government debt in Japan. The OECD writes: "Twenty-seven consecutive years of budget deficits have driven gross government debt to 226% of GDP in 2018, the highest ever recorded in the OECD area. The government projects that population ageing will boost spending on health and long-term care by 4.7% of GDP by 2060. Measures to ensure the sustainability of Japan’s social insurance programmes, as spending rises and the number of working-age persons falls from 2.0 per elderly to 1.3 by 2050, is a priority."

Japan has traditionally had a high savings rate, and in the past, the common pattern was that Japan's government debt was mostly funded by the high savings levels of its citizens. However, in the last few years the Bank of Japan has become much more aggressive that other countries in its "quantitative easing," where the central bank essentially prints money to buy government debt. 

All of this is happening against a backdrop of relatively low labor productivity in Japan. This figure compares Japan to countries in the upper half of the OECD nations--that is, those countries that have higher income levels. A common pattern in Japan is that the labor input in Japan is higher than the comparison group, because labor force participation and hours worked in Japan are high. However, the productivity of labor in Japan has been well below the comparison group.  A shrinking labor force and lagging productivity are not a recipe for success. 

So what needs to be done in Japan? Clearly, a main approach has been to try jump-start the economy with large fiscal deficits and aggressively loose monetary policy. While this seems likely to continue, the OECD warns that it's not a strategy that can be pursued forever. Ultimately, an economy needs to have the output of its workforce expand--and for this to happen in a situation where the number of people in the workforce is falling. 

One set of approaches is to get more work from the existing workforce. The OECD notes that as life expectancies head toward 100 years and higher, the traditional patterns of retirement need to change. The report says: 

More than 80% of [Japan's] firms continue to set mandatory retirement at age 60, even though life expectancy at that age is 26 years, up from 17 in 1970. While workers can continue until age 65, most are re-hired as non-regular workers at significantly lower wages and in jobs that make less use of their skills. The right of firms to set a mandatory retirement age should be abolished to allow more workers to continue their careers, while fully utilising their skills. An end to mandatory retirement requires shifting away from seniority-based wage systems by giving more weight to job category and performance. In addition, the pension eligibility age should be raised above 65, as healthy life expectancy has reached 75. Lengthening careers in the era of 100-year life spans also requires lifelong learning and job-related training to avoid the decline in skill levels among older workers. An end to mandatory retirement would increase firms’ incentives to increase such investment in older workers, which is currently low in Japan. Finally, longer working lives would also be facilitated by better work-life balance for all workers by strictly enforcing the new 360-hour annual limit on overtime hours, imposing adequate penalties on firms that exceed it and introducing a mandatory minimum period of rest between periods of work.

The share of Japanese women in the labor force has risen in recent years, with a push from expanded child care programs. But Japan has long had a "dual-track" economy, with one set of workers who have regular work, good pay and benefits, and a career path, and a second track of irregular work, low pay, and little chance for advancement. Women in Japan have often ended up in this second track. The OECD writes:

The employment rate for women has risen sharply over the past five years, from 60.7% in 2012 to 69.6% in 2018, well above the 60.1% OECD average (Table 9). However, half of the new workers are non-regular workers. The working lives of women are interrupted and shortened by the burden of providing care for family members, leaving them under-represented in managerial positions and on boards of directors . ... Removing barriers to women requires policies to: i) improve work-life balance by strictly enforcing the new 360-hour annual limit on overtime; ii) further reduce waiting lists for childcare; and iii) attack discrimination, which tends to exclude women from fast-track career
paths. Breaking down labour market dualism is also essential, as women account for two-thirds of non-regular workers, who are paid substantially less.

Of course, pushing back retirement ages and expanding the existing workforce would also help to improve Japan's long-run budget picture. But the OECD report emphasizes that other efforts like cost-sharing in health care, means-testing of benefits for the elderly, and various kinds of cost-cutting will also be needed. 

How to get more productivity from Japan's workers? This issue has been the heart of Japan's long-run problems for decades. Of course, Japan's economy has a number of well-known world-class companies at highest level of global competitiveness. But it also lots of small and medium enterprises with much lower productivity. The OECD writes: "Despite a high level of public support for SMEs [small and medium enterprises], productivity in large firms was 2.5 times higher than in SMEs in FY 2017 in manufacturing, a large gap by international standards ..." Japan's service industries lag well behind their international peers in productivity, as well.

Subsidizing small and medium enterprises, as long as they remain small, is not a long-run path to higher productivity. Instead, the dropping Japanese workforce offers a chance for these inefficient firms to be combined, reorganize, managed better, and exposed to greater competition. Many of these companies seem to be in a quirky situation where they complain that they don't have enough capacity to produce--but they aren't taking the steps and making the investments to push for higher productivity of their existing workforce. The OECD report talks a lot about reforms to corporate governance, so that Japan's companies would do less sitting on their piles of cash and more looking for growth and efficiency opportunities. But spreading a more productivity-based mindset across all the companies of Japan, not just the world leaders, isn't an easy task. 

Japan has other issues beyond aging, budgets, and productivity. For example, Japan seems likely to bear costs of rising trade disputes involving China and around the world, even if if often isn't directly involved in the complaints. But the success which Japan has in addressing its challenges, for better or for worse, will shape how other high-income countries like the US view similar policy choices in the decades ahead. 

For some additional perspective on Japan's economy, Tanweer Akram has written "The Japanese Economy: Stagnation, Recovery, and Challenges," in the Journal of Economic Issues (June 2019, pp. 403-410).

Uber: What are the Real Economic Gains?

A common accusation against Uber and other web-facilitated car-hire services is what looks like a competitive advantage only arises because they operate under a different and more lax set of rules than regular taxicabs. In other words, the newfangled service looks great until you are in a situation with an unsafe and undermaintained vehicle, along with an untrained or underinsured driver. In "The Social Costs of Uber,"  Brishen Rogers points out two sources of genuine economic gains from Uber and similar firms (The University of Chicago Law Review Dialogue, 2015, 82: pp. 85-102). He also describes the evolving negotiations over rules that Uber and other companies seem sure to face.

A company like Uber offers two sources of genuine economic gains: reduced search costs for both passengers and drivers, and gains from horizontal and vertical integration. Here's Rogers on the mess that search costs on the part of both drivers and passengers create for conventional taxicab markets, and how Uber addresses them (with footnotes omitted).

"[B]oth regulated and deregulated taxi sectors suffer from high search costs. Riders have difficulty finding empty cabs when needed. Taxis therefore tend to congregate in spaces of high demand, such as airports and hotels. Deregulation arguably made this worse. Since supply went up, cab drivers had even greater incentives to stay in high-demand areas, and yet they had to raise fares to stay afloat.

High search costs and low effective supply may also reduce demand for cabs in two ways. First, if consumers have difficulty finding cabs because cabs are scarce, they may tend not to search in the first place. Second, high search costs may create a vicious cycle for phone-dispatched cabs. Riders who get tired of waiting for a dispatched cab may simply hail another on the street; drivers en route to a rider may also decide to take another fare from the street, rationally estimating that the rider who called may have already found another car. In some cities, the result is that dispatched cabs may never arrive—full stop.

Uber has basically eradicated search costs. Rather than calling a dispatcher and waiting, or standing on the street, users can hail a car from indoors and watch its progress toward their location. Drivers also cannot poach one another’s pre-committed fares. This is a real boon for consumers who don’t like long waits or uncertainty—which is to say everyone. Uber can also advise drivers on when to enter and exit the market—for example, by encouraging part-time drivers to work a few hours on weekend nights.

The article cite some evidence from a few years back in San Francisco that fewer than half of the attempts to dispatch a cab to a certain address ended up with a cab actually arriving.

For economists, "vertical integration" refers to whether a few or many economic actors are involved in number of steps along the chain of production from start to finish. In contrast, "horizontal integration" refers to whether a few or many are involved in a particular stage of the production process. Rogers argues that the taxicab industry has evolved in ways that don't involve much vertical or horizontal integration, and Uber and other ride-sharing services are creating efficiency gains bringing greater integration in these ways. Rogers writes:

Uber is also extremely important for another reason that has received little attention: it is encouraging vertical and horizontal integration in the car-hire sector. ... In Chicago, for example, medallion owners often lease their operating rights to management companies; management companies in turn purchase or lease cars and outfit them as required per local regulations; drivers then lease those cars from management companies on a weekly, daily, or even hourly basis. Other cities have different licensing systems, but any licensing system that does not mandate owner operation or direct employment of drivers will encourage similar vertical fragmentation. Taxi companies will rationally (and lawfully) lease cars to drivers rather than employ drivers in order to avoid the costs associated with employment, which include minimum wage laws, unemployment and workers’ compensation taxes, and possible unionization. Uber is now reducing such vertical fragmentation, since it has a direct contractual relationship with its drivers. It is also integrating the sector horizontally as it gains market share within cities. Meanwhile, the company is compiling a massive database of driver and rider behavior. Those data are essential to Uber’s price-setting and market-making functions but would be all-but-impossible to compile in a fragmented industry. 

In short, the economics behind Uber and other ride-sharing services suggests the possibility of substantial and real economic gains. Rogers quickly mentions some other gains, as well: "For example, Uber reduces consumers’ incentives to purchase automobiles, almost certainly saving them money and reducing environmental harms. As consumers buy fewer cars, Uber also opens up the remarkable possibility of converting parking spaces to new and environmentally sound uses. Uber may also reduce drunk driving and other accidents."

But even if Uber isn't just a case of those who can sidestep existing regulations having a cost advantage, it is nonetheless true that Uber like any company providing service to the public is going to find itself facing some rules and regulations. For example, basic checks on driver competence, as well as rules about vehicle safety and appropriate insurance, seem to be on their way.

What is perhaps more interesting is that the web-enabled car-hire model raises some questions that didn't arise in the same way in the previous taxicab industry.

For example, there are a combination of old and new concerns about discrimination. The old concern is that taxis may not be available for hire in certain neighborhoods, or drivers may not pick up riders from certain racial or ethnic groups. A web-connected car-hire service seems likely to reduce this problem. The new concern is that Uber riders are expected to evaluate drivers. What if such evaluations carry a dose of racial/ethnic or gender prejudice?

Another issue is whether the Uber drivers should be treated as "employees." Rogers doubts that ultimately Uber drivers will be treated in this way, and refers to mentions that there are similar cases involving whether FedEx drivers are employees. He writes:

The most analogous recent cases, in which courts have split, involve FedEx drivers. Those that found for the workers have noted, for example, that FedEx requires uniforms and other trade dress, that it requires drivers to show up at sorting facilities at designated times each day, and that it requires them to deliver packages every day. Uber drivers are different in each respect. They use their own cars, need not wear uniforms, and most importantly they work whatever hours they please.

But ultimately, as these kinds of regulations are discussed and debated, the very success of Uber and similar services is likely to help in enacting and enforcing certain standards. As Rogers notes: "These developments could make it relatively simple to ensure that Uber complies with the law and plays its part in advancing public goals. The reason is simple: as scholars have documented, large, sophisticated firms can detect and root out internal legal violations—and otherwise alter employees’ and contractors’ behavior—far more easily than public authorities or outside private attorneys."

In other words, Uber and similar companies are not going to be both enormous commercial successes and also untouched by regulatory concerns. Instead, Uber's huge and growing database of drivers, fares, prices, time-of-day, locations, accidents, evaluations of drivers by passengers, evaluations by passengers of drivers, will all tend to provide information that can be used to monitor what happens and to motivate improvements where needed. Moreover, if enough potential customers or drivers are discontented with Uber and the existing web-enabled car hire companies, the barriers to entry for other firms to start up Uber-like companies on a city-by-city basis are not very high. As Rogers writes:

Moreover, it is not clear that Uber’s position at the top of the ride-sharing sector is stable. While Uber’s app is revolutionary, it is also easy to replicate. Uber already faces intense competition from Lyft and other ride-sharing companies, competition that should only become more intense given Uber’s repeated public relations disasters. While Uber’s success relies in part on network effects—more riders and drivers enable a more efficient market—the switching costs for riders and drivers appear to be fairly minimal. Uber may become the Myspace or Netscape of ride sharing—that is, a pioneer that could not maintain its market position. Concerns about monopoly therefore seem premature.   

Those interested in this subject might also want to check out an earlier post on "Who are the Uber Drivers?" (February 18. 2015).