Thursday, February 21, 2019

China's High Savings Rate

China has a remarkably high savings rate in a typical year--and sometimes its higher than that. In fact, the main reason for China's high trade surpluses is that with such a high savings rate, China doesn't consume either a lot of imports or domestically produced goods. A reason that China can invest so much, year after year, is that the investment is financed by high savings rates. A standard recommendation for China's economy for at least the last 15 years or so is to "rebalance" toward being an economy driven by domestic consumption, not by investment.

A team of economists from the IMF--Longmei Zhang, Ray Brooks, Ding Ding, Haiyan Ding, Hui He, Jing Lu, and Rui Mano--discuss these issues and others in "China’s High Savings: Drivers, Prospects, and Policies," written as IMF Working Paper WP/18/277 (December 11, 2018).

Here's a comparison of national savings around the world in 2017. The US had national savings of 18.9% of GDP. The savings rate for the world as a whole was 26.4%. China was saving 45.8% of GDP, easily more than double the US level. And China's national savings rate is actually down a bit from when it peaked at 52% of GDP back in 2008.

To get a sense of what these high rates of saving imply for the mixture of consumption and investment in aneconomy, consider this figure. The horizontal axis shows a country's level of consumption; the vertical axis shows its level of fixed capital investment. China is way in the upper left, with low consumption and high investment,. The authors write: "With GDP per capita in PPP terms being similar to Brazil’s, consumption per capita in China is only comparable to Nigeria. If Chinese households consumed comparably to Brazilian households, their consumption levels would be more than double." One sometimes hears saying applied to China: "Country rich, people poor." The high savings rate is why it can feel that way. 

Government in China has not run especially large budget deficits or budget surpluses, so the mixture of household and corporate saving is what drives China's high savings rate. Corporate savings in China were quite high in the early 2000s, but as a percent of GDP are now pretty much in line with global averages. China's high savings rate thus traces to its household sector. The authors write:
"Household savings in China have been trending up since the early 1990s and peaked at 25 percent in 2010 and moderated slightly in recent years. Globally, household savings have been falling (from 14 percent of GDP in 1980 to about 7 percent today). The diverging trend has led to an increasing gap between China and the rest of the world. At 23 percent of GDP, today China’s household savings are 15 percentage points higher than the global average and constitute the main drivers of higher national savings in China."
Why do China's households save so much? Some of the likely factors include:

Low birthrates and the one-child policy meant less need to spend on children, but less ability to rely on children in retirement--and thus an incentive for more saving. This can explain perhaps half of the rise in China's household savings rate in recent decades. 
As China's economy shifted from state-owned to privately owned firms in the 1990s, the safety net got a lot thinner. The authors write: 
For example, the health care coverage of urban workers declined by 17 percentage points between 1990 and 2000. Furthermore, the average replacement rate for urban workers (pension benefits in percent of wages) dropped sharply from close to 80 percent to below 50 percent (He at al., 2017). Nationwide, individuals have been paying increasingly larger shares of healthcare expenditures out of pocket, rising from 20 percent in 1978 to a peak of 60 percent in 2000. In addition, households also began paying more for education out of their own pocket, rising from 2 percent in 1990 to 13 percent in 2001.
Up until just a few years ago, the options for making financial investments were fairly limited. Interest rates were controlled, and many people didn't have access to a wide range of other financial instruments. So if you wanted to accumulate a certain level of wealth by retirement, and your financial options paid only low interest rates, you had to save a lot. 

Where is China's high savings rate headed? Countries across east Asia have seen their household saving rate rise in a way similar to China, but then decline fairly rapidly. The authors write: 
East Asian economies experienced a rapid decline in household savings after the peak. Japan’s household savings rate peaked in 1974 at about 25 percent and has fallen to almost zero. In Korea, household savings peaked in the early 1990s at 27 percent, and are at about 15 percent today. Similarly, household savings in Taiwan POC also fell rapidly after peaking in 1993 at about 30 percent, although they stabilized a decade later at about 20 percent. Household savings in these countries or areas peaked at income levels similar to China’s, suggesting that the stage of development plays an important role in savings dynamics. In addition, microdata suggest that the decline in aggregate household savings in those countries or areas was driven by lower savings rates across all income deciles, although the drop was much more pronounced for low-income households, likely reflecting the improvement in social safety nets. With the aging population and strengthening of the social safety net, China is likely to follow the regional trend.
As China's population ages, household savings rates will decline and public pressures for more spending on pensions and health care will rise. Thus, the movement to lower savings rates could be reinforced if China's government shifted its pattern of spending from investment-heavy to more consumption-heavy. Here's a figure showing public investment as a share of GDP across a number of countries. 
And here's a figure showing government spending on consumption-related areas like health, education, social assistance, and pensions. The red diamond shows average levels of spending in these areas as a share of GDP for OECD countries. The yellow diamonds show the average for emerging markets around the world. The blue bars show China. .
In a low-saving, low-investment economy like the US, it's a little hard to conceive that its possible for savings and investment rates to be too high for a country's economic health. But that's where China has been, and shifting away from established patterns is rarely simple.

Wednesday, February 20, 2019


But those with medium-term memories will remember that a scandal erupted around LIBOR in 2010. But you may not know that as a result, LIBOR is probably going to disappear in the next few years to be replaced by SOFR. Since several hundred trillion dollars of financial contracts will be different as a result, it's useful to have at least some sense of what the change means

Jessie Romero tells the story in "Leaving LIBOR: The Fed has developed a new reference rate to replace the troubled LIBOR. Will banks make the switch?" which appears in Econ Focus from the Federal Reserve Bank of Richmond (Third Quarter 2018).

 LIBOR stands for the London Interbank Offered Rate. It's a benchmark interest rate, which means that when LIBOR goes up or down, the payments owed in a few hundred trillion dollars of contracts go up or down, too. The problem is that LIBOR has been calculates as a survey response to hypothetical question. Romero explains:

LIBOR is based on how much banks pay to borrow from one another. Each day, a panel of 20 international banks responds to the question, "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?" The highest and lowest responses are excluded, and the remaining responses are averaged. Not every bank responds for every currency; 11 banks report for the franc, while 16 banks report for the dollar and the pound. For each of the five currencies, LIBOR is published for seven different maturities, ranging from overnight to 12 months. In total, 35 rates are published every applicable London business day.
About 95 percent of the outstanding contracts based on LIBOR are for derivatives. (See chart below.) It's also used as a reference for other securities and for variable rate loans, such as private student loans and adjustable-rate mortgages (ARMs). In 2012, the Cleveland Fed calculated that about 80 percent of subprime ARMs were indexed to LIBOR, as well as about 45 percent of prime ARMs. Prior to the financial crisis, essentially all subprime ARMs were linked to LIBOR.

What happened in the LIBOR scandal was that some too-smart traders at Barclay's, JP Morgan Chase, and Citigroup figured out that if just a few of the people answering the LIBOR survey would slant their responses just a bit, this benchmark interest rate could be manipulated a tiny bit higher or lower. And any trader who knows where the benchmark is headed--even if the movement is a tiny one--is well-positioned to consistently make a lot of money. Romero writes:
As regulators investigated ... [b]eginning at least in 2003, banks had been submitting LIBOR reports that would benefit their trading positions. Rate submitters and traders at different banks and brokerages also conspired with each other to manipulate LIBOR, promising each other steaks, Champagne, and Ferraris (among other perks). Internal emails and instant messages revealed the scheme. As one trader wrote, "Sorry to be a pain but just to remind you the importance of a low fixing for us today." Another wondered "if it suits you guys on hiking up 1bp on the 6mth Libor in JPY [one basis point on the six- month LIBOR in Japanese yen] ... it will help our position tremendously." At least 11 financial institutions faced fines and criminal charges from multiple international agencies, including the Commodity Futures Trading Commission (CFTC) and the Justice Department in the United States. Separately, in 2014 the FDIC sued 16 global banks for manipulating LIBOR, alleging that their actions had caused "substantial losses" for nearly 40 banks that went bankrupt during the financial crisis.
Although LIBOR has continued under stricter management, it seems clear that it was a bad idea to have a benchmark interest rate determined by answers to a survey. Instead, the challenge was to choose an interest rate for very safe borrowing--remember, LIBOR was banks borrowing from each other for very short terms, including overnight--but determined in a market that had lots of liquidity and volume.

Various groups of brainiacs tackles the problem. As one example from a few years ago in 2015, Darrell Duffie and Jeremy C. Stein surveyed the possible options in "Reforming LIBOR and Other Financial Market Benchmarks" published in the Journal of Economic Perspectives (29 (2): 191-212). Eventually an Alternative Reference Rates Committee was convened by the Federal Reserve, with representation from both government agencies and the private sector, and it published its recommendation in a March 2018 report

Bottom line: It recommends using the SOFR as the preferred benchmark interest rate, which stands for Secured Overnight Financing Rate. It refers to the cost of borrowing which is extremely safe, because the borrowing is only overnight, and there are Treasury securities used as collateral for rthe borrowing. The SOFR rate is based on a market with about $800 billion in daily transactions, and this kind of overnight borrowing doesn't just include banks, but covers a wider range of financial institutions. The New York Fed publishes the SOFR rate every morning at 8 eastern time.

But perhaps the best reason for using SOFR is that an agreed-upon benchmark interest rate is needed, and LIBOR is going away. As Romero reports, banks have been trying to duck out of answering the LIBOR survey for a few years now, and have continued to participate only because of threats from regulators. After all, with hundreds of trillions of financial contracts using LIBOR, it was important for the stability of global financial markets that the reference rate didn't become volatile or vanish altogether. But by around 2021, the financial regulators are ready to let LIBOR die. New financial contracts are often now being written with SOFR, instead. 

For most of us, the shift from LIBOR to SOFR doesn't affect our daily lives. But when you are discussing a risk-free interest rate, or a benchmark interest rate for a contract or mortgage with adjustable rates,  you are soon going to stop hearing about LIBOR. For practical purposes, just remember that SOFR serves the same benchmark interest rate function. 

Tuesday, February 19, 2019

Some Proposals for Improving Work, Wages, and Skills for Americans

The Aspen Institute Economic Study Group has published a collection of 12 papers on the theme Expanding Economic Opportunity for More Americans Bipartisan Policies to Increase Work, Wages, and Skills, edited by Melissa S. Kearney and Amy Ganz (February 2019). I'll list the complete Table of Contents for the volume below. Here, I'll just focus on four of the proposals that struck me as especially thought-provoking: caught

1) A Boost for Community Colleges

From "A Policy Agenda to Develop Human Capital for the Modern Economy," by  Austan Goolsbee, Glenn Hubbard, and Amy Ganz:
The United States should make a bold and dedicated commitment to increasing the skills and productivity of its workforce by leveraging the potential of the community college sector. We propose a federal grant program to provide new funding to community colleges, contingent on institutional outcomes in degree completion rates and labor market outcomes. We believe a program of a similar scale to the 19th century Morrill Land Grant Program, which dramatically expanded access to higher education for working-class Americans, is needed to ensure our workforce meets the demands of the modern economy. ...
In 1910, fewer than 10% of Americans had a high school degree. By 1935, nearly 40% of the population had earned their degrees. This inflection point came from substantial new investments in the nation’s education resources. We aim to achieve increases of a similar magnitude 2030:
  1. Close the completion gap between two-year college students aged 18 to 24 and their peers at four-year institutions by increasing the average completion/transfer rate among 18- to 24-year-olds at community colleges from 37.5% to 60% by 2030.3 This would result in 3.6 million additional 18- to 24-year-olds with college degrees in 2030.
  2. Increase the share of Americans aged 25 to 64 with a college degree or other high-quality credential from 46.9% to 65% by 2030, which reflects the expected share of jobs requiring advanced skills by that year. This goal would require 28 million additional workers to earn first-time degrees or high-quality credentials by 2030. ... 
We estimate an annual investment of $22 billion. 
2) A Boost for Apprenticeships

From "Scaling Apprenticeship to Increase Human Capital," by Robert I. Lerman
[T]he United States has lagged far behind other developed countries—countries like Germany and Switzerland, but also Australia, Canada, and England—in creating apprenticeships. In these countries, apprentices constitute about 2.5-3.0% of the labor force, or about 10 times the U.S. rate. Increasing the availability of apprenticeships would increase youth employment and wages, improve workers’ transitions from school to careers, upgrade those skills that employers most value, broaden access to rewarding careers, increase economic productivity, and contribute to positive returns for employers and workers. ...
The experiences of Australia, Canada, and England demonstrate that scaling apprenticeship is quite possible, even outside countries with a strong tradition of apprenticeship. While none of these countries have the strong apprenticeship tradition seen in countries like Austria, Germany, or Switzerland, they have nonetheless grown significant programs. In fact, if apprenticeships as a share of the U.S. labor force reached the levels already achieved in Australia, Canada, and England (on average), the United States would attain over 4 million apprenticeships, about 9 times the current number of registered apprenticeships in the civilian sector. ...

Overall, the federal government has devoted less than $30 million (per year) to the Office of Apprenticeship (OA) to supervise, market, regulate, and publicize the system. Many states have only one employee working under their OA. Were the United States to spend what Britain spends annually on apprenticeship, adjusting for differences in the size and composition of the labor force, it would provide at least $9 billion per year for apprenticeship. In fact, the British government spends as much on advertising its apprenticeship programs as the entire U.S. budget for apprenticeship. ...
Today, funding for the “academic only” approach to skill development in the United States dwarfs the very limited amounts available to market and support apprenticeship. Yet apprenticeship programs yield far higher and more immediate gains in earnings than do community or career college programs and cost students and the government far less.
3) Sharing the Costs of Higher Minimum Wages with a Tax Credit

From "The Higher Wages Tax Credit," by David Neumark
In recent years, there has been a torrent of state and local minimum wage increases. For example, as of the end of 2017, 30 states (including the District of Columbia) had minimum wages above the $7.25 federal minimum wage, with an average difference of 26%. At the state and local level, California, New York, Seattle, and the District of Columbia have or will soon have a $15 minimum wage; other localities may follow. Finally, a change in the national political alignment could result in a $15 national minimum. ...
While the effects of minimum wage increases are contested, it is impossible to dismiss the sizeable body of evidence that suggests minimum wage hikes reduce employment among the least skilled (including recent research that addresses criticisms of earlier evidence). In addition, it is uncontested that higher minimum wages do not target low-income families very well, in part because of the large number of teenagers earning the minimum wage, and in part because poverty is more strongly related to whether or not one works and how many hours one works, rather than low wages ....
I propose a Higher Wages Tax Credit (HWTC) to partially offset the costs imposed by minimum wage increases on firms that employ low-skilled labor. Following a minimum wage increase, the HWTC would provide a tax credit of 50% of the difference between the prior minimum wage and the new minimum wage, for each hour of labor employed; the credit would phase out at wages higher than the minimum wage, and as wage inflation erodes the real cost of higher nominal minimum wages. The HWTC would reduce the incentive for employers to substitute away from low-skilled workers in the face of minimum wage increases, thus mitigating the potential adverse effects of minimum wage increases while simultaneously preserving and possibly enhancing some of the benefits of minimum wage hikes.
4) Minimum Zoning to Ease Movement to Higher-Cost, Higher-Wage Locations

From "How Minimum Zoning Mandates Can Improve Housing Markets and Expand Opportunity," by Joshua D. Gottlieb
Dramatic differences in income, productivity, and housing costs within the United States make geographic mobility important for spreading prosperity. But Americans’ ability to move to places like San Francisco, Boston, and New York in search of economic opportunities is limited by severe restrictions on new housing supply in these productive places.State-level Minimum Zoning Mandates (MZMs) allowing landowners to build at a state-guaranteed minimum density, even in municipalities resistant to development, would be an effective means of encouraging denser housing development. These MZMs would improve housing affordability, spread economic opportunity more broadly, and limit the environmental impact of new development. ...

I propose that state governments adopt Minimum Zoning Mandates (MZMs). These MZMs would be explicit zoning codes that provide a baseline minimum density that land owners, such as developers, can invoke when municipal zoning and permitting processes prevent useful development.
The MZMs should provide all land owners with a meaningful right to build housing up to a certain density significantly beyond single-family houses. Medium-density rowhouses and small apartment buildings should be allowed in every location where any sort of development is allowed. This is the type of density that is associated with some of America’s most-loved neighborhoods: Greenwich Village and other parts of Lower Manhattan, Boston’s North End and South End, the Mission in San Francisco, Lincoln Park in Chicago, and much of historic Philadelphia. It meshes well with existing single-family homes, as we see in places like Cambridge, Massachusetts. MZMs need not enable high-rise condo towers that would change the character of leafy, low-density neighborhoods. Even medium-density zoning rules could generate interesting new neighborhoods and resolve the housing shortages in productive cities.
Full Table of Contents

Part I: Developing Human Capital for the Modern, Global Economy

"A Policy Agenda to Develop Human Capital for the Modern Economy," by Glenn Hubbard, Austan Goolsbee, and Amy Ganz
"What Works in Career and Technical Education (CTE)? A Review of Evidence and Suggested Policy Directions,"  by Ann Huff Stevens
"Scaling Apprenticeship to Increase Human Capital,"  by Robert I. Lerman
"The Challenges of Leveraging Online Education for Economically Vulnerable Mid-Career Americans," by Joshua Goodman

Part II: Increasing Prime-Age Labor Force Participation 

"A Policymaker’s Guide to Labor Force Participation," Keith Hennessey and Bruce Reed
"Restoring Economic Opportunity for `The People Left Behind': Employment Strategies for Rural America." by James P. Ziliak
"Policies to Reintegrate Former Inmates Into the Labor Force," by Manudeep Bhuller, Gordon B. Dahl, and Katrine V. Løken

Part III: Promoting Private Sector Wage Growth and Job Creation 

"Economic Strategy for Higher Wages and Expanded Labor Participation," Jason Furman and Phillip Swagel
"The Link Between Wages and Productivity Is Strong," by Michael R. Strain
"Creating Economic Opportunity for More Americans Through Productivity Growth," by Chad Syverson
"The Higher Wages Tax Credit," by David Neumark
"How Minimum Zoning Mandates Can Improve Housing Markets and Expand Opportunity." bny Joshua D. Gottlieb

Monday, February 18, 2019

Capitalism with Scandinavian Characteristics

Here's an op-ed piece by me that was published on the editorial page of the local Star Tribune newspaper yesterday, February 17.

Capitalism with Scandinavian characteristics
What it is, why it's not socialism, and what we in the U.S. might be surprised to learn about it.

Outside an H&M store in Stockholm, the Swedish capital. The country is capitalist, but Scandinavian capitalism is different from that in the United States.

It is a truth universally acknowledged that arguing about the definitions of terms like “capitalism” and “socialism” is a waste of time. So I will simply assert that the world has many flavors of capitalism — U.S./British, Japanese, Scandinavian, German, French/Italian/Southern European and others.

I’ve known some genuine socialists who favor outright government ownership and control of the means of production, which necessarily means government making all the decisions about what is produced, where it is produced, how it is priced, who gets hired and how much workers get paid.

But most people who talk a socialist game, when asked for real-world examples, tend to sidestep the more extreme (and less attractive) possibilities and point to European countries — in particular, to Northern European countries like Sweden, Denmark, Norway and sometimes Finland.

The genuine socialists I know view these countries as sellouts to capitalism. The Scandinavians themselves are quick to deny that they are socialists, too. For example, the prime minister of Denmark gave a talk at Harvard in 2015 and said:

“I know that some people in the U.S. associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy. … The Nordic model is an expanded welfare state which provides a high level of security for its citizens, but it is also a successful market economy with much freedom to pursue your dreams and live your life as you wish.”

If we want to avoid quibbling over the s-word and instead just refer to a Scandinavian style of capitalism, what are some of its key elements?

The question is tricky, because the Scandinavian style of capitalism has gone through several stages in the last 50 years or so. In a 1997 article, the prominent Swedish economist Assar Lindbeck described how in the decades after World War II Sweden had a growing economy, generous public services, full employment and a fairly equal distribution of income. But this was followed by slower growth in the 1970s and a collapse of full employment and rise of inequality by the early 1990s.

In Lindbeck’s words, the Swedish model looked “less idyllic” by the early 1990s. Problems include “disincentive effects, problems of moral hazard and cheating with taxes and benefits, deficiencies in competition … as well as inflexible relative wages … [and] the ever higher ambitions of politicians to expand various government programs, and the gradually rising ambitions of union officials to compress the distribution of wages as well as to expand the powers of unions.”

In short, the Swedes themselves didn’t think the Scandinavian model of capitalism was working all that well in the 1980s and early 1990s, and they carried out a hardheaded redesign.

For example, there was a broad recognition that as a small, market-oriented economy open to international trade, Sweden needed healthy companies and skilled workers, so top tax rates were rolled back. Many government benefit programs were redesigned and rolled back. A ceiling was put on public spending. Sweden’s ratio of national debt to GDP fell from 80 percent in 1995 to 41 percent in 2017.

The U.S. system of capitalism relies on financial incentives to encourage work. In the Scandinavian model of capitalism, high taxes reduce the financial incentive to work but pay for social services that encourage work.

Henrik Jacobsen Kleven described this trade-off in a 2014 article. He calculated that “in the Scandinavian countries … an average worker entering employment will be able to increase consumption by only 20 percent of earned income due to the combined effect of higher taxes and lower transfers. By contrast, the average worker in the United States gets to keep 63 percent of earnings when accounting for the full effect of the tax and welfare system.”

But Kleven also points out that the higher Scandinavian taxes finance government policies that make it easier for many people to work — in particular “provision of child care, preschool, and elderly care.” He writes: “Even though these programs are typically universal (and therefore available to both working and nonworking families), they effectively subsidize labor supply by lowering the prices of goods that are complementary to working. … [T]he Scandinavian countries … spend more on such [labor] participation subsidies … than any other country. …”

The resulting higher tax burden is substantial. The total tax burden in the Scandinavian countries is almost half of GDP, while the combined spending of all U.S. levels of government is about 38 percent of GDP.

Some in the U.S. claim a Scandinavian level of social protection could be financed by taxing corporations and the rich. The Scandinavians recognized the unreality of that hope back in the 1990s. An October 2018 report from the Council of Economic Advisers (CEA) noted:

“The Nordic countries themselves recognized the economic harm of high tax rates in terms of creating and retaining businesses and motivating work effort, which is why their marginal tax rates on personal and corporate income have fallen 20 or 30 points, or more, from their peaks in the 1970s and 1980s.”

In addition, the Scandinavian countries impose a value-added tax of 24 or 25 percent on purchases. (A VAT functions like a sales tax, although it is collected from producers rather than at the point of sale.) The CEA report notes that, as a result, taxation of households in the Scandinavian economies is overall less progressive than in the U.S.

The Scandinavian model of capitalism has more equal economic outcomes. But for advocates for a higher U.S. minimum wage, it’s perhaps worth noting that the Scandinavian countries do not have minimum wage laws. However, rates of unionization are typically 70-90 percent of the workforce in Norway, Denmark and Sweden, as opposed to about 11 percent of the U.S. workforce. Negotiating pressure from these unions is a powerful reason for the greater equality of wages and benefits for labor.

Last fall, New York Times columnist Paul Krugman illustrated the greater economic equality in Scandinavian countries by citing estimates of income levels for people at different points in the income distribution. This comparison looks at income after taxes are paid and transfer payments are received.

Below about the 30th percentile of the income distribution, income levels are higher in Nordic countries. This shows both the greater equality of wages and greater government support for economic equality in those countries. (For perspective, the 30th percentile of the U.S. income distribution is roughly $32,000 per year.)

A low-income person at the 10-20th income percentile in Denmark or Finland has an income about 20 percent higher than an American’s at that place in the U.S. income distribution. But among middle-income people in the 55th-60th percentile of the income distribution, incomes in Denmark and Finland are 20 percent below those of the similar person in the U.S. income distribution. Overall, average income levels are about 20 percent higher in the United States.

(Health care benefits provided through government programs are not included in the estimates cited by Krugman. The omission is interesting to consider. U.S. health care spending per person is much higher than in other countries. Thus, including it would make U.S. income levels look much higher — and would probably close much of the income gap at lower levels of income.)

In my experience, a number of the features of the Scandinavian system of capitalism come as a surprise to Americans. Here are some additional examples:

• In the early 1990s, Sweden set up its equivalent of the K-12 school system so that parents have vouchers that can be used at public, private and for-profit schools.

• College tuition in the Nordic countries is free to the student. However, college graduates in these countries don’t earn substantially higher wages. As a result, Americans are more likely to attend college, even needing to pay for it.

• The Scandinavian countries have national programs of health insurance coverage, but with substantial co-payments. For example, data from the Organization for Economic Cooperation and Development (OECD) suggest that out-of-pocket health care spending is only a little lower in Norway than in the United States.

• Although the Scandinavian countries have greater government regulation of labor markets than the U.S., they tend to have lower levels of regulation for product markets and companies.

• Sweden’s social security system is based on mandatory contributions to individual accounts, with people having a wide range of several hundred possible investment options for their accounts, or a default fund mostly invested in stocks.

Whether these various aspects of the Scandinavian model appeal, or not, it’s worth remembering what works in one country may not transplant easily.

After all, the combined population of Sweden (10 million) Denmark (5.8 million) and Norway (5.3 million) is roughly comparable to that of the greater New York City metropolitan area, and rather less diverse. The Nordic countries have intimate economic and regulatory ties with the much larger European Union. However, Sweden, Norway and Denmark have kept their own currencies and don’t use the euro.

It seems inaccurate to me to label the Scandinavian model of capitalism as “socialism,” but arguing over definitions of imprecise and emotionally charged terms is a waste of breath. What does bother me is when the “socialist” label becomes a substitute for actually studying the details of how different varieties of capitalism have functioned and malfunctioned, with an eye to what concrete lessons can be learned.

Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College. He blogs at

Note: Regular readers of this blog may recognize this op-ed as a tightened-up version of the blog post from last year, "The Scandinavian Style of Capitalism" (November 5, 2018). There are additional links, quotations, and detail in that post. 

Thursday, February 14, 2019

Thinking about Pay-What-You-Can Restaurants

The idea of a pay-what-you-can restaurant raises obvious questions. Could it sustain itself? Or would those paying more than face value be swamped by those paying less? Are there ways of running such a venture that might be more sustainable than others?

The question arises because the Panera company starting in 2010 ran a group of up to five stores called Panera Cares that operated on a "pay-what-you-can" basis. The last one of these stores, based in Boston, is closing this week. Ben Johnson offers some background and reflections in "‘Pay what you can afford’ runs Panera out of bread," published at the Acton Institute blog (February 12, 2019).  He notes: “`Panera Cares' were indistinguishable from other Panera eateries in their branding, menu, or furnishings, except they announced that no one would be turned away if they did not pay one cent of the `suggested prices.' Those who could not afford to pay full price could volunteer for an hour at the store in exchange for the food."

Johnson emphasizes what went wrong, and it's more-or-less what you would expect. Some homeless people start eating there for every meal, but high school students dropped in for free food as well. The stores tried to explain their mission, telling the poor that they should be an irregular stop, rather than every day, and asking the high school principal to rein in the students. But trying to discourage misuse or overuse then led to accusations of profiling, followed up by requirements for sensitivity training.

Meanwhile, drug users were taking over the bathrooms, and the Panera Cares stores were typically covering only about 60-70% of their costs. Panera was sold in 2017 to a new set of investors in 2017, and probably not coincidentally, the Panera Cares experiment is now shutting down.

Clearly, those who are cynical about pay-what-you-can have some justification. But  just as clearly, cynicism isn't the whole story here. The Panera Cares experiment didn't last nine weeks or nine months, but more like nine years. Very large numbers of people got free or low-priced food. Others were willing to use Panera Cares as a charitable mechanism by paying more for food.

How widespread are pay-what-you-can restaurants? An organization called One World Everybody Eats serves as a clearinghouse for this model, offering expertise and network-building. The organization is now trying to find a replacement for Panera Cares to use a pay-what-you-can model in Boston. From the organization's website:
There are more than 60 community cafes around the world that have adopted the One World Everybody Eats model, including Panera Bread’s Panera Cares Cafes and the Jon Bon Jovi Soul Kitchens. Dozens of cafes are in development. New cafe development teams are joining our network of community cafes every month, proving that a cafe can thrive when guests are invited to pay what they can afford or offered the opportunity to volunteer for their meals.
Cafes in the OWEE network operate predominately with volunteers. Together, they serve nearly 4,000 meals a day, or more than 1.4 million meals a year.


Pay-what-you-can pricing
Patrons choose their own portion size
Healthy, seasonal food is served whenever available
Patrons may volunteer in exchange for a meal
Volunteers are used to the maximum extent possible to staff the organization
Paid staff earn a living wage
I haven't looked over the full list of the 60 or so pay-what-you-can places, but I checked the one location in my state of Minnesota. It's in a smaller city about 25 miles from Minneapolis. It's run by a church, and it's only open on Tuesdays and Thursdays for a couple of hours in the morning. This operation seems to me a valuable and praiseworthy and useful method of involving the community in helping the hungry. But it's not what most people would call a "restaurant."

What determines the feasibility of a pay-what-you-can restaurant? The key seems to be whether it can attract a decent-sized clientele of those who are willing to pay full price, and more than full price. Otherwise, if this kind of operation runs almost entirely on volunteer labor and donated money, then it may be a worthwhile and worthy operation, but if hardly anyone is paying, it's probably not appropriate to refer to it as pay-what-you can.

Giana M. Eckhardt and Susan Dobscha look at these issues in "The Consumer Experience of Responsibilization: The Case of Panera Cares," published in the Journal of Business Ethics in January 2018. To have a sense of how Panera Cares was operating, consider this description:
Greeters called “Ambassadors” are situated at the front of the café to explain to the customers that when they get to the counter, they can pay what they want, and that the café is a nonprofit, as most people think they are in a Panera Bread rather than a Panera Cares. Greeters must be able to “diffuse potentially difficult situations,” which as we will see arise fairly frequently when the food insecure eat at the restaurant. The food secure are encouraged to pay above what their meal is worth. Because the cafés tend to be overwhelmed with homeless people, the food insecure can only eat one entrée for free per week, and must earn it via 1 h of volunteering. To discern between the two groups, the greeter relies on consumer profiling, done solely via physical appearance and dress. 
After studying the operation of Panera Cares, talking with managers and in particular looking at online reviews posted at, Eckhardt and Dobscha describe the social tensions that arise in this way:
We demonstrate that consumers feel discomfort with the conscious pricing policy. This discomfort takes three forms: physical, psychological, and philosophical. ...

Although most Panera Cares consumers profess to care broadly about the social problem of food insecurity, they are not comfortable with the very real experience of being proximal to those consumers. ... The food insecure are also not comfortable with eating
in close proximity to the food secure. An important principle that undergirds the notion of serving a temporarily food insecure population, and providing dignity, is that of anonymity. ... Yet the reality within the cafés differs from this, and because of the proximity to food secure customers, results in discomfort stemming from physical proximity. ...

In addition to physical discomfort, consumers were also uncomfortable with other non-physical dimensions of conscious pricing in Panera Cares, including the social comparison with other consumers that takes place and the consumer profiling that the café employees engage into determine who is food secure and food insecure, which we label psychological discomfort. First, in the café, consumers monitor the donation behavior of other consumers. ...  In this case, social comparison takes the form of noticing how much other customers are paying, and interpreting the amount, if
it is low, as free rider behavior. ...In particular, how he food insecure look plays an important role. On the one hand, if they look presentable, they fulfill the temporarily food insecure profile that Panera Cares wants to cater to, and are more likely to be treated with dignity. On the other hand, by virtue of looking presentable, they are also questioned as to why they cannot pay more. In sum, consumers feel uncomfortable with the social comparison and profiling which regularly occur in Panera Cares, and this results in psychological discomfort. ...

There was also discomfort with motives and tactics behind the conscious pricing model, which we label philosophical discomfort. That is, consumers were uncomfortable with the general philosophy behind what Panera Cares was doing and how they were doing it. This manifested itself in two ways: discomfort with how the conscious pricing policy is
explained and questioning the motives of the parent company, Panera Bread. . ... Overall, this questioning of the motives and tactics of Panera Cares (a nonprofit) may be intensified because of the close connection it has to its for-profit parent company Panera Bread. Lee et al. (2017) argue that the distinction between companies that have a social mission versus those who have a profit mission is salient for consumers, and in the case of Panera Cares and Bread, is not clear. A nonprofit orientation can paradoxically drive consumer perception of organizational greed. This is because communal norms rather than exchange norms are invoked by consumers, and any perceived breach of communal norms is seen as an indication of greed. As we saw with customers using terms like tax haven and marketing gimmick to describe Panera Cares, this effect seems to be at play here. 
The evidence suggests that a pay-what-you can restaurant model is more likely to last if it is clearly a nonprofit, if it have an outside source of funding, if it is located in areas with a supply of customers willing to participate both by paying and by sharing space with the homeless, and if it able to establish a set of customary behavioral expectations for all parties who enter the restaurant. In one way or another, a pay-what-you-can restaurant will have to find ways of addressing these issues of physical, psychological, and philosophical discomforts.

Wednesday, February 13, 2019

Interview with Deidre McCloskey on Economic Growth and Liberal Values:

Eric Wallach offers "An Interview with Deidre McCloskey, Distinguished Professor Emerita of Economics and of History, UIC" in The Politic, Yale's undergraduate journal of politics and culture (February 10, 2019).  McCloskey is characteristically thought-provoking and quotable. Here are a few comments of her many comments that caught my eye:

"Liberty is liberty, and is meaningless by parts."
The central misconception is to think that one can claim the honorable title of “liberal” if one approves of one form of liberty, such as mutual consent in sexual partners or the ability to drill for oil where you wish, but excludes the other form. Liberty is liberty, and is meaningless by parts. You are still a slave if only on odd days of the month.
In Latin America, for example, the word “liberal,” once meaningful there, has long been appropriated by conservatives who like to drill for oil where they wish, but hate gays. In the United States, it has been appropriated by sweet, or not so sweet, slow socialists, who celebrate diversity, but regard economic liberty as not worthy of much consideration. ...
I used to think freedom was freedom of speech, freedom of the press, freedom of conscience. Here is what it amounts to: you have to have the right to sow what you wish to, to make shoes or coats, to bake into bread the flour ground from the grain you have sown, and to sell it or not sell it as you wish; for the lathe-operator, the steelworker, and the artist it’s a matter of being able to live as you wish and work as you wish and not as they order you.
"Put me down for 10 percent slavery to government." 
It’s unwise to turn the issue of helping the poor into an on/off, none/perfect, exist/not question. We need to be seriously quantitative about such matters. On/off doesn’t answer the important question, which is always more/less. People think they are making a clever remark against liberalism by saying, “Well, we need some government.” Yes, certainly. But how much? (Will Rogers in the 1920s used to say, “Just be glad you don’t get the government you pay for.”) ...

So here’s what a Liberalism 2.0 favors. It favors a social safety net, which is to say a clean transfer of money from you and me to the very poor in distress, a hand up so they can take care of their families. It favors financing pre- and post-natal care and nursery schools for poor kids, which would do more to raise health and educational standards than almost anything we can do later. It favors compulsory measles vaccination, to prevent the big spillover of contagion that is happening now in Clark County, Washington. It favors compulsory school attendance, financed by you and me, though not the socialized provision of public schools. The Swedes have since the 1990s had a national voucher system, liberal-style. It favors a small army/coast-guard to protect as against the imminent threat of invasion by Canada and Mexico, and a pile of nuclear weapons and delivery systems to prevent the Russians or Chinese or North Koreans from extorting us. All this is good, and would result in the government at all levels taking and regulating perhaps 10 percent of the nation’s production. Put me down for 10 percent slavery to government. Not the 30 to 55 percent at present that rich countries enslave.
"The Nordics ... are not thoroughly socialist, and in fact they are reasonably close to the U.S., and in some ways more anti-socialist."

Americans of good will have long been persuaded, on the basis of breathless articles in the Sunday New York Times Magazine, that the Nordics are thoroughly “socialist” ...  No, they are not thoroughly socialist, and in fact they are reasonably close to the U.S., and in some ways more anti-socialist. They are in fact highly liberal in their economies (and their fastest rates of growth since 1850 were in fact when they were even more liberal). Almost all prices in Sweden and the rest, for example, are determined by supply and demand, and are nothing like the disastrous socialist interventions by way of price controls in, say, Venezuela. Setting up a business is not hard. Inherited wealth in Scandinavia and Finland is not honored. Innovation is (for example Svenska Kullagerfabriken, SKF, a pioneer in ball bearings, out of which in the 1920s rolled Volvo [Latin for “I roll”]).

And government ownership of the means of production is trivial in all the Nordic countries. When Saab Motors went bankrupt, it came to the Swedish government hat in hand, and the government said, “Get lost.” When Volvo recently became a Chinese company, the government said, “So what?” You don’t have to exercise much imagination about what the American government would do if General Motors was so threatened: “Here are billions of tax dollars, and so the Federal Government owns part of you.” The American government in 2008 of course did precisely that.
"Give this gentleman sixteen cents. That’s his share of the wealth." 
[Andrew] Carnegie himself is said to have made the same point in another way. A socialist came to his office and argued to him that the wealthy should redistribute their wealth to the poor of the earth. Carnegie asked an assistant to go get him a rough estimate of his current wealth and of the population of the earth. The assistant returned shortly with the figures, and according to the anecdote Carnegie performed a calculation, then turned to the assistant and said, “Give this gentleman sixteen cents. That’s his share of the wealth.” And then he gave every dime of his wealth away, in accord with his Gospel of Wealth. Another businesslike Scot, Adam Smith, by the way, also gave away his considerable fortune, though, unlike Carnegie, he did not sound a trumpet before him when he did his alms.

Tuesday, February 12, 2019

Economics of Medieval Guilds

Guilds played an important role in the economies of Europe from about the 11th century up through the 16th century, and a continuing if less important role up into the 19th century. Sheilagh Ogilvie, the go-to economic historian on this subject, has a new book out called The European Guilds: An Economic Analysis (published by Princeton University Press and of course available on Amazon, too). For a flavor, here are some comments from the opening chapter: 
"Guild membership was therefore reserved for the privileged few. Guilds were small relative to the consumer markets they monopolized. They were also small relative to the wider labour market, whose members they largely excluded. Guilds were not all-encompassing workers' associations analogous to twentieth-century labor unions, but exclusive organizations for relatively well-off, middle-class men. ... 
The effects of guilds on economy and society have always generated controversy. Contemporaries held strong view about them, with guild members and their political allies extolling their virtues, while customers, employees, and competitors lamented their misdeeds. Many early economic thinkers praised guilds, as, for example, the French government minister Jean-Baptiste Colbert, who ordered all French crafts to form guilds, "so as to compose by this means a group and organization of capable persons, and close the doors to the ignorant," and the Austrian imperial councilor Johann Joachim Becher, who argued that the authorities in past eras had wisely invented the guilds because "competition weakens the livelihood of the community". Others censured guilds, as did Adam Smith when he called them "a conspiracy against the public", and Ann-Robert-Jacques Turgot, when he told the King of France: "I do not believe that one can seriously and in good faith hold that these guilds, their exclusive privileges, the barriers they impose to work, emulation, and progress in the arts, are of any utility. ... The total removal of the obstacles that this system imposes on industry and on the poor and laborious sections of your subjects [is] one of the greatest steps to be taken towards the betterment, or rather the regeneration, of the realm". ...
Modern scholars are also deeply divided on guilds. Some claim that guilds were so widespread and long-lived that they must have generated economic benefits. They might, for example, have solved information asymmetries between producers and consumers, overcome imperfections in markets for human capital, created incentive favoring innovation, put pressure on governments to be business-friendly, or generated social harmony by reducing competition, conflict, and inequality. Other scholars take a darker view. Guilds, they hold, were in a position to extract benefits for their own members by acting as cartels, exploiting consumers, rationing access to human capital investment, stifling innovation, bribing governments for favours, harming outsiders such as women, Jews, or the poor, and redistributing resources to their members at the expense of the wider community. 
As this book will show, my own reading of the evidence is that a common theme underlies guilds' activities: guilds tended to do what was best for guild members. In some cases, what guilds did brought certain benefits to the broader public. But overall, the actions guilds took mainly had the effect of protecting and enriching their members at the expense of consumers and non-members; reducing threats from innovators, competitors, and audacious upstarts; and generating sufficient rents to pay off the political elites that enforced the guilds' privileges and might otherwise have interfered with them. 
For an incomplete and appetizer-sized portion of the arguments presented in the book, potentially interested readers might start with Ogilvie's article, "The Economics of Guilds," published in the Fall 2014 issue of the Journal of Economic Perspectives (28:4, pp. 169-92) and freely available online, like all JEP articles, from the American Economic Association. From the abstract of the JEP article: 
Occupational guilds in medieval and early modern Europe offered an effective institutional mechanism whereby two powerful groups, guild members and political elites, could collaborate in capturing a larger slice of the economic pie and redistributing it to themselves at the expense of the rest of the economy. Guilds provided an organizational mechanism for groups of businessmen to negotiate with political elites for exclusive legal privileges that allowed them to reap monopoly rents. Guild members then used their guilds to redirect a share of these rents to political elites in return for support and enforcement. In short, guilds enabled their members and political elites to negotiate a way of extracting rents in the manufacturing and commercial sectors, rents that neither party could have extracted on its own. First, I provide an overview of where and when European guilds arose, what occupations they encompassed, how large they were, and how they varied across time and space. I then examine how guild activities affected market competition, commercial security, contract enforcement, product quality, human capital, and technological innovation. The historical findings on guilds provide strong support for the view that institutions arise and survive for centuries not because they are efficient but because they serve the distributional interests of powerful groups.
Of course, the issues raised by the medieval guilds have continuing economic relevance. There are continuing efforts to reduce competition, through method ranging from occupational licensing to trade tariffs, always based on the claim that setting the stage for a certain group of producers to receive higher profits is actually in the interest of society as a whole. This broad argument is probably true in a few cases: for example, patents restrain competition for a period of time, but by allowing innovators to earn higher profits they also provide incentives for innovation.

But in many cases, including guilds, a cycle forms in which government helps certain producers receive higher profits, and then a share of those profits goes to  helping government officials reach the conclusion that favoring one set of producers over consumers and other producers is a socially important goal.