Saturday, April 30, 2016

US Suicide Rates Rising

Overall US life expectancy is rising, but US suicide rates are also rising. The Centers for Disease Control and Prevention have recently published some short "Data Briefs" showing the patterns. In terms of age groups, suicide rates are up for all age groups except for those over 75 years of age. By ethnicity, the increases in suicide rates are largely explained by a rise in suicides in the white population. In terms of methods of suicide, the share of suicides by firearms is falling, while the share by suffocation is rising.

I won't offer any instant-insight analysis here about deeper meanings and policy implications. My heart just goes out to those who have committed suicide, and to everyone who has lost a dear one to suicide. But here are some figures to illustrate the patterns. Sally C. Curtin, Margaret Warner, and Holly Hedegaard wrote "Increase in Suicide in the United States, 1999–2014 ," as National Center for Health Statistics Data Brief #241 (April 2016). The overall trend of suicides (adjusted for shifts in the age of the population) looks like this;

The breakdown by age group shows that suicide rates have risen among all under-75 age groups, but the highest suicide rates are in the 45-64 age bracket, and that's also where the biggest increases in the suicide rates have occurred. The first figure shows the rates for females; the second for males.

The same three authors also wrote "Suicide Rates for Females and Males by Race and Ethnicity: United States, 1999 and 2014." The abbreviation API refers to Asian or Pacific Islanders, and the abbreviation AIAN refers to American Indian or Alaska Native. Of course, a much larger share of the US population is white than in the American Indian/Alaska Native category, so the rise in the suicide rate among whites is the primary driver of the rise in the overall suicide rate. The first figure shows suicide rates for females, and the second for males.

Finally, the share of suicides in which a firearm was used remains large, but has declined over time, while the share of suicides involving suffocation has risen. 

Friday, April 29, 2016

Crime and Incarceration: Correlation, Causation, and Policy

Social scientists go to sleep every night muttering "correlation is not causation." The correlation between rates of crime and rates of incarceration offers a useful example. The Council of Economic Advisers lays out many of the relevant issues in its April 2016 report, "Economic Perspectives on Incarceration and the Criminal Justice System."  The report discusses in some detail how levels of police and rates of arrest haven't changed all that much, but the likelihood of arrest leading to a conviction and the length of prison sentence given a conviction are on the rise. There's also some discussion of how the rest of a community is affected by high incarceration rates. Here, I'll focus on what the report has to say about reducing crime.

There's clearly a correlation in the US between a falling rate of crime and a rising rate of incarceration during the last few decades. Using figures from the CEA report, here are the basic patterns.

But of course, if you take any two patterns that show a long-term trend, they will be either positively or negatively correlated with each other. The question of whether one factor caused the other is more difficult to answer. As a starting point, it's easy enough to note that incarceration rates are not the only longer-term patterns that affect levels of crime. As the report notes:
Demographic changes also likely play a part; the youth proportion of the U.S. population (ages 15-30) declined by 12 percent between 1980 and 2013, reducing the general propensity for criminal behavior which is more prevalent among young people. Improvements in police tactics and technology used in policing may have also played a role. Other potential explanations include declines in alcohol consumption, decreases in “crack” cocaine use, and a reduction in exposure to lead ...
In addition, the effects of incarceration on crime are governed--like so many other things--by a law of diminishing returns. When the incarceration rate starts rising, you will be (on average) locking up more of those who committed the most severe crimes and who look the most like career criminals. As the incarceration rate gets ever-higher, you will be (on average) locking up a greater share of those who committed relatively less severe crimes and who are relatively less likely to be career criminals. The CEA report puts in this way (citations and footnotes omitted):
"Researchers who study crime and incarceration believe that the true impact of incarceration on crime reduction is small, with a 10 percent increase in incarceration decreasing crime by just 2 percent or less ...  Additional incarceration may be particularly ineffective in reducing crime when incarceration rates are already high. When incarceration rates are high, further incarceration entails incapacitating offenders who are on average lower risk, which means that their incarceration will yield fewer public safety benefits. Thus, given the size of the U.S. incarcerated population, the aggregate crime-reducing impact of increasing incarceration rates is likely to be minimal."
Economists tend to look at crime, like so many other issues, as a matter of balancing costs and benefits. For example, most jurisdictions in the US have decided that a rigid enforcement of speed limits wouldn't provide benefits that would be worth the costs to the criminal justice system. The United States may well have reached that point at which costs exceed benefits with incarceration. Here's an example from the CEA report:
"Cost-benefit analyses of incarceration weigh the direct costs of incarcerating an individual against the social value of crimes that may have been averted due to incarceration. Lofstrom and Raphael (2013) examine a 2011 policy change in California that resulted in the realignment of 27,000 State prisoners to county jails or parole. They find that realignment had no impact on violent crime, but that an additional year of incarceration is associated with a decrease of 1 to 2 property crimes, with effects strongest for motor vehicle theft. Applying estimates of the societal cost of crime, the authors calculate that while the cost of a year of incarceration is $51,889 per prisoner in California, the societal value of the corresponding reduction in motor vehicle thefts is only $11,783, yielding a loss of $40,106 per prisoner. Notably, this net loss per prisoner would be larger if the study considered the additional costs of collateral consequences, such as lost earnings or potential increases in re-offending due to incarceration. These estimates highlight the fact that there are more cost-effective ways of reducing crime than incarceration, such as investing in law enforcement, education, and policies that expand economic opportunity."
When the report refers to alternative law enforcement efforts, one approach is more police. Here's the CEA:
"In contrast to studies of incarceration and sentencing, research shows that investments in police have high returns. In a study of the impact of a mass layoff of highway troopers in Oregon, DeAngelo and Hansen (2014) found that traffic fatalities and non-fatal injuries significantly increased, due to a greater prevalence of dangerous driving and drunk driving. The estimates in this paper suggest that the state trooper salary cost required to save a life is $309,000, which is very low compared to estimates of the statistical value of life, which range from $1 million to $10 million ..."
Indeed, the report offers a striking figure showing some international comparisons on police, judges, corrections officials, and prisoners across countries. Relative to the size of its population, the US compared to the rest of the world is light on police, but heavy corrections officers and prisoners.

Putting these various factors together:
"CEA conducted “back-of-the-envelope” cost-benefit tests ...
  • We find that a $10 billion dollar increase in incarceration spending would reduce crime by 1 to 4 percent (or 55,000 to 340,000 crimes) and have a net societal benefit of -$8 billion to $1 billion dollars.
  • At the same time, a $10 billion dollar investment in police hiring would decrease crime by 5 to 16 percent (440,000 to 1.5 million crimes) have a net societal benefit of $4 to $38 billion dollars."
A final step to reduce crime is to find ways to improve high school graduation rates. The CEA report puts it this way:
"Lochner and Moretti (2004) conduct a cost-benefit analysis of the effect of increasing the high school graduation rate on crime and arrest rates. Comparing costs and benefits in 1990, they estimate that while the yearly per pupil cost of secondary school is $6,000, the societal benefit from reducing crime is $1,170-$2,100 per additional male graduate, including reductions in victim costs, property damages, and incarceration costs. When these benefits are considered alongside an $8,040 increase in annual income from a high school degree, the benefits of an additional high school graduate are tremendous ... In aggregate, the authors calculate that a 1 percent increase in the total high school graduation rate generates a $1.4 billion benefit due to reductions in crime rates."
Crime is falling for lots of reasons over the last three decades. Rising incarceration may well have been a moderate contributor to the fall in crime back in the 1980s, when the incarceration rate was relatively low. But by the 2000s, when the incarceration rate had more than doubled, it had become a costly and not-very-powerful way of reducing crime. From that perspective, it's not a coincidence that California and other states have been scaling back on their incarceration rate in the last few years. As various states are recognizing, there are more cost-effective alternatives to keep the crime rate on a downward trend.

Thursday, April 28, 2016

Hyperinflation and the Venezuela Example

Everyone needs a few scary stories for telling around the campfire, and for economists, stories about hyperinflation are an obvious choice. Four years ago, "Hyperinflation and the Zimbabwe Example" (March 5, 2012) was a vivid story. But Venezuela is now providing a more current example. 

For up-to-date figures, a useful place to turn is the Troubled Currencies Project run by Steven Hanke.
The official exchange rate is 10 Venezuelan bolivars for $1 US. As inflation has hit and the value of the bolivar has plummeted, the black market exchange rate looks like this:

One can then infer an annual rate of inflation from these changes, which is shown by the blue line, with Venezuela's official inflation rate appearing in red: :

The facts emerging from Venezuela's hyperinflation are unsurprisingly grim. Annual inflation has run above 700% during some periods. According to summaries of the available data (like here and here), the IMF estimates that Venezuela's economy shrunk by 10% in 2015, and per capita GDP will be the same size in 2018 as it was back in 2000. Poverty rates, which fell from 60% to 30% with the rise of oil prices in the early 2000s, are now above 70% and rising. One estimate is that the cost of buying a basic basket of food for a month is eight times what would be earned at the minimum wage--always assuming a worker can find that minimum wage job in the first place.

On some dimensions, the bad news shades into black comedy, like the unavailability of basic consumer goods like aspirin or diapers or toilet paper. Venezuela, like many countries, does not print its own currency, but instead relies on outside firms like De La Rue. Of course, hyperinflation means a dramatically increased need for currency if the economy is to function at all. However, Andrew Rosatti at Bloomberg is reporting that the outside firms are worried about being paid for providing currency. He writes: "Venezuela, in other words, is now so broke that it may not have enough money to pay for its money." If memory serves, the hyperinflation in Bolivia back in the 1980s led to a similar problem, in which it was reported that for Bolivia, the cost of importing its own currency became for a time the country's third-largest import.

But the short-term problems of inflation are only part of its effect; indeed, one might argue that the curse of high inflation rates is that they encourage an extreme short-term focus throughout the economy. One of the most succinct explanations of inflation and short-termism that I know appeared in an essay written back in 1992 by V.S. Naipaul, called "Argentina and the Ghost of Eva Peron," in which Naipaul quoted "Jorge" on the situation of hyperinflation in Argentina. Here, I'm quoting from the essay as reprinted in the 2003 collection of Naipaul's travel writing, The Writer and the World.
"Another aspect of inflation is that you cease to worry about productivity and even technology. Now, that is the secret of all progress: productivity. But you really can get no more than 3 or 4 percent per annum improvement in productivity anywhere in the world. With inflation like ours you can get 10 per cent in one day, if you know when and where to invest. ... It is much more important to protect your working capital than to think about long-term things like technology and productivity--although you try to do both.  So capital investment in Argentina is not even covering wear and tear. In short, when the current plant reaches the end of its working life there won't be a provision built up to purchase new capital equipment. This is the inevitable result of inflation, which is the monetary disease. Your money is disintegrating. It's like cancer. You live day to day. That's all you can do when you have inflation of more than 1 per cent per day. You cease to plan, You're just happy to make it to the weekend."

Tuesday, April 26, 2016

Who's the Threat? Big Business, Big Labor, Big Government?

Here's a question that the Gallup Poll has been asking Americans every few years since the 1960s, most recently in December 2015 In your opinion, which of the following will be the biggest threat to the country -- big business, big labor, or big government? Not to keep you in suspense: Big government is winning, or perhaps it's more accurate to say losing, this contest.

Here are the answers going back to 1965. It makes sense that the share of those listing "big labor" has dropped over time, given the decline in the share of US workers belonging to a union. It's interesting that the share naming big business as the biggest threat is about the same now as in the Carter era of the late 1970s. Sure, there have been some spikes in viewing big business as the biggest threat, like a spike probably related to Enron and other corporate governance scandals in the early 2000s and a spike around 2009 in the aftermath of the corporate and financial bailouts. But there doesn't seem to be an overall trend upward. For big government, on the other hand, there does seem to be a long-term upward trend: that is, given the way the question is phrased, the shift away from seeing "big labor" as the leading issue has been counterbalanced by a swing toward naming "big government" instead.

Views of Biggest Threat to Future in U.S.

What's the political breakdown here? Here's the share naming big government as the biggest threat, broken down by party. It's no surprise that Republicans are most likely to name big government as the problem and Democrats are least likely, with Independents falling between. It's also perhaps expected that when Barack Obama was elected president in 2008, the share of Democrats naming "big government" as the biggest threat showed a big drop. But historically, it looks as if a little more than half of Democrats see "big government" as the biggest threat through the 1980s and 1990s, and in the December 2015 data as well.

Views of Big Government as Biggest Threat

Of course, it's worth noting (especially in an election year) that opposition to "big government" might not be a broad philosophical opposition to all big government, but  just be disappointment or opposition to the existing government--perhaps along with the evergreen belief that an alternative big government would perform better.

Monday, April 25, 2016

What Do We Know about Subsidized Employment Programs?

A subsidized employment program is when the government offers a subsidy to an employer (could be private sector or public sector) to hire those from a certain eligible group. The eligible group can be defined in many ways: for example, those who live in a certain set of neighborhoods, or those who have been unemployed for a certain time, or single mothers, or the disabled, or older workers, or those just emerging from jail or prison, or those who are already in some income-support program and trying to make a transition to work, or other groups. The basic idea of subsidized employment is that it's better to pay people to work than it is to support them while they aren't working--and further, there is a hope that subsidized work experience can be a transition to being hired by an employer who doesn't need a subsidy.

 Indivar Dutta-Gupta, Kali Grant, Matthew Eckel, and Peter Edelman provide a useful overview of the existing research in "Lessons Learned from 40 Years of Subsidized Employment Programs," published by the Georgetown Center on Poverty and Inequality in Spring 2016. The report calls subsidized employment a "promising strategy," which seems a fair judgement if one mentally adds "but not yet proven." There are two major federal government studies now underway involving subsidized employment. The "Subsidized and Transitional Employment Demonstration (STED), 2010-2017" being run by the US Department of Health and Human Services in seven cities and the Enhanced Transitional Jobs Demonstration study is being run in seven cities by the US Department of Labor. Results from these studies should become available over the next couple of years. 

It's easy to hypothesize about why subsidized employment programs might work, or not, but as we wait for these big new studies to be completed, what does the preexisting evidence say? As one might suspect, the reason that the government is doing the additional studies is that the existing evidence isn't as clear as one might like. 

For example, one of the biggest subsidized employment programs tried in the US was the Comprehensive Employment Training Act which ran from 1973-1982. It offered a combination of public service jobs, classroom training, subsidized on the job training and work experience. As of 1980, for example, there were more than 700,000 people participating in CETA. But as the report writes, CETA "was not rigorously evaluated." Modern studies are often set up with a big group of eligible participants who are then randomly assigned either to get the subsidized employment or not. Based on this study design, it's relatively straightforward to look at the difference in outcomes between two very similar groups--some of who are randomly in the program and some who are not. 

But CETA wasn't based on randomization. People decided whether to enroll, and presumably those who had more initiative or responsibility or better skills or fewer life problems were more likely to enroll. Economists tried to use statistical tools to sort out these factors, but while some factors are measureable (say, years of schooling or prior work experience), lots of factors like initiative or sense of responsibility aren't collected in data. So figuring out how much difference CETA made, as opposed to these other characteristics, was very hard. As the report says: "Little can be said with certainty about CETA ...  but non-experimental studies suggest sometimes contradictory findings, with one analysis suggesting positive effects only for women in classroom training, OJT [on-the-job training], and public service employment (not work experience), and another analysis of the impacts of training on men found large positive effects from classroom training and smaller, positive effects from OJT." It's also fair to point out that the labor market for lower-skilled labor has evolved considerably during the four decades or since CETA, so even if the evidence was a lot more clear-cut than it is, it seems hazardous to draw lessons for getting people jobs in 2016 based on evidence from the 1970s and early 1980s. 

Here's a table from the report summarizing results from "rigorously evaluated models," by which they mean models that involved in some way a randomized element in who was assigned to receive the subsidized employment. (You can click on the table to enlarge it.  In the final column, the results that appear in bold type are statistically significant.)

How you evaluate this kind of table may depend on what sort of mood you're in. Some of the studies are relatively old, like the 1970s and 1980s. Some show no effect, or no statistically significant effect. But some data is more recent, and some results are more positive. As the report summarizes: 
  • Subsidized employment programs have successfully raised earnings and employment. This effect is not universal across programs or target populations, but numerous rigorously evaluated interventions offer clear evidence that subsidized employment programs can achieve positivelabor market outcomes. Some of these effects derive from the compensation and employment provided by the subsidized job itself, but there also is evidence that well-designed programs can improve outcomes in the competitive labor market after a subsidized job has ended.
  • Subsidized employment programs have benefits beyond the labor market. Fundamentally, subsidized jobs and paid work experience programs provide a source of both income and work experience. A number of experimentally-evaluated subsidized employment programs have in turn reduced family public benefit receipt, raised school outcomes among the children of workers, boosted workers’ school completion, lowered criminal justice system involvement among both workers and their children, improved psychological well-being, and reduced longer-term poverty; there may be additional effects for some populations, such as increases in child support payment and improved health, which are being explored through ongoing experiments.
  • Subsidized employment programs can be socially cost-effective. Of the 15 rigorously evaluated (through experimental or quasi-experimental methods) models described in this report, seven have been subject to published cost-benefit analyses. Keeping in mind that more promising and effective models are more likely to lead to such analyses, all seven showed net benefits to society for some intervention sites (for models implemented at multiple sites) and some target populations. Four of these seven models were definitively or likely socially cost-effective overall.
Academic researchers are congenitally fond of ending their studies by saying "more research is needed." Isn't it always? But in this case, it seems a fair conclusion--and the good news is that the additional research has been underway for some years already and is fairly close to completion. Until then, this overview by Dutta-Gupta, Grant, Eckel, and Edelman is a solid summary and overview of the existing evidence.

Friday, April 22, 2016

The Spartan Doctrine of Laissez Faire vs. the Roman Doctrine of External Remedy

The Council of Economic Advisers, an office made up of rotating advisory group of economists and their staff within the White House administrative structure, was created 70 years ago by the Employment Act of 1946.  In its First Annual Report to the President,  published in December 1946, the CEA tried to lay out its overall vision of public policy and the US economy. (For those who pay close attention to their prepositions, this First Annual Report to the President is not the same document as the first Economic Report of the President, which was published in January 1947. That document is a nuts-and-bolts overview of the status of the US economy circa 1946.)

Remember that back in 1946, the US economy had just gone through an extraordinary array of stresses and dislocations, including the brutality of the Great Depression from 1929-1933, the steep and severe recession of 1937-38, the disruptions of wartime production, and a post-World War II recession from February to October 1945. Thus, it's interesting to me that the CEA overview of economic policy sought to strike a balance between two extremes that have remained recognizable in policy discussions ever since, which they named "The Spartan Doctrine of Laissez Faire," which had a somewhat fatalistic review that sometimes bad stuff just happens in the economy, and "The Roman Doctrine of an External Remedy," which held that well-conceived government action could pretty much always prevent bad economic outcomes. Here's how the 1946 report described the two views.

"THE SPARTAN DOCTRINE OF LAISSEZ FAIRE Early thinking about the general upswings and downswings of business were of a highly individualistic and essentially fatalistic character. Those who follow this line of thought—and some still do—accept the cycle as a result produced by causes deeply rooted in physical nature or in fundamental human behavior and following an intricate pattern of short-, medium-, and long-time swings. They do not claim that this pattern is precise as to timing or invariable as to magnitude, like the movement of the stars. But they do think in terms of essentially mechanical relationships rather than human institutions that can be modified by intelligent action in a republic, and human behavior that can be changed by wise leadership. ...
THE ROMAN DOCTRINE OF AN EXTERNAL REMEDY Unlike those whose belief in the external character of the cycle causes them to conclude that nothing can be done about it but to adapt one's business operations or exploit it for individual profit, a second group would master the cycle by a remedy equally external to the processes of private business—the power of government to spend and create a purchasing medium. There has arisen in recent years a widespread belief that, whatever the "cyclical" forces beating upon business in general or whatever adaptations to such forces may be spontaneously made by the dictates of private managerial understanding or prudence, the economy as a whole may be kept on a reasonably even keel merely through the intervention of central government in the monetary and fiscal area. According to this philosophy of external remedy, the essential phenomenon of a business depression is a too restricted volume of purchasing power being turned into the system, and this particularly in the form of capital expenditures. The obvious remedy, therefore, is for central government to measure the amount of this aggregate deficiency and restore the Nation's business to a satisfactory state of activity by injecting an appropriate amount of the purchasing medium.  ...
In discussing these polar extremes, the CEA report tried to stake out a middle ground, saying that "it is with the 100-percenters or the 90-percenters that we disagree."

"In contrast to the Spartan business theory and practice that carried a cult of individual self-reliance to the point of brutality and needless waste, we believe it is not fanciful to liken this doctrine of an overall offset to managerial maladjustment to the Roman system that swung to an extreme opposite to that of Sparta. Roman citizens were—for a time— relieved of the compulsion of relying on their own efforts to keep their economy as a desirable level. "Bread and circuses" were provided for all through the power of the state. Similarly, this theory relieves businessmen of the necessity of themselves making the business adjustments by which they would keep the system going at a satisfactory level. As we found in the Spartan school of thought, it is with the 100-percenters or perhaps the 90-percenters that we disagree. Extremists of the Roman doctrine says that we need not worry about any maladjustments in our enterprise system. Monopolistic price policies may curtail markets and cause unemployment. Excessive wage demands may drive costs up and paralyze profits, investments, and employment. We do not need to worry because we can always create full employment by pumping enough purchasing power into the system. If there is too much demand for labor and materials—that is inflation—we turn the faucet off and cause a contraction. Thus by manipulation of Government expenditures and taxation, continuing full employment is assured, and we do not need to worry about anything else in the economy.
"Although American thought has largely been of the Spartan pattern of self-reliance, not without some of the brutally wasteful accompaniments of laissez faire, and although the softer Roman philosophy of external salvation has been aggressively sponsored in recent years, we believe the great body of American thinking on economic matters runs toward a more balanced middle view. This view stresses the importance of having the specific wage-profit-investment-disbursement relationships soundly adjusted at the points where business is actually done, markets found, and jobs created. ...
"For the actual operation of the major forms of business, we need the intimately informed and flexible decision making of private individuals in their business relations and of executives of business organizations. But we must recognize also that the practically sound and individually efficient management of private farming, manufacturing, transportation, distribution, and banking in the practical situations in which the active managers must make their decisions will not, year in and year out, add up to a sustained and satisfactorily stabilized total utilization of the Nation's resources in producing the national well-being of which we are in fact capable. Hence experience and experimentation teach us that there is an important area of Government action in stimulating, facilitating, and complementing the enterprise of private business even if individually well managed.  This functional differentiation and cooperation between private enterprise and public enterprise is in our view something quite different from and much better suited to our situation and temperament than the nationalization of industries to which our English cousins have now resorted. Nor does it involve that regulation of actual business operation which would constitute bureaucratic "regimentation." 
Along with the more modern view of government macroeconomic policy that the report summarized as when government is either "pumping enough purchasing power into the system" or "we turn the faucet off," the CEA report also emphasized the importance of consultation and communication that between "the most thoughtful and responsible leaders" representing business, labor, consumers, and various levels of government. Such consultation sounds a little strange to my modern American ear: perhaps naive, or old-fashioned, or European, or all of those. But that doesn't mean we couldn't do with more of it. Here's the 1946 report:
We believe, therefore, that when the Congress instructed the Council of Economic Advisers to set up consultative relations "with such representatives of industry, agriculture, labor, and consumers, State and local governments, and other groups as it deems advisable," this outlines one of the major features of our work and one of the most important ways in which we may prove of aid in creating and maintaining conditions of maximum employment and the high standards of living that go with it. By consulting with the most thoughtful and responsible leaders of these groups with reference to conditions which would promote the welfare of the country as a whole, we believe that our counsel and advice on the national economic program will reflect a realistic grasp of the needs and difficulties of the several factors in the total economic process. We trust also that in the course of these consultations we may reflect back to the leaders of these groups something of the demands that successful operation of a total system make upon each of its component parts. In particular, we trust that we may translate objectively to the representatives of the various business, labor, and agricultural groups the purposes and methodology of the Government programs so that, instead of blind opposition which might arise through misunderstanding, there may always be constructive criticism, which will lead to useful adaptation.

Thursday, April 21, 2016

Foreigners Buy US Debt, US Investors Buy Foreign Equity

When it comes to international flows of debt and equity, the US economy as a whole has developed an interesting pattern: those from other countries are net buyers of US debt, while US investors and firms are net buyers of foreign companies--in the form of stock market equity investments and foreign direct investment. Pierre-Olivier Gourinchas discusses this pattern in "The Structure of the International Monetary System," an overview of recent research in this area appearing in the NBER Reporter (2016, Number 2, pp. 13-17).  He explains the pattern this way:
As financial globalization proceeded, U.S. investors concentrated their foreign holdings in risky and/or illiquid securities such as portfolio equity or direct investment, while foreign investors concentrated their U.S. asset purchases in portfolio debt, especially Treasuries and bonds issued by government-affiliated agencies in areas such as housing finance, and cross-border loans.
Here's a figure illustrating the pattern, with net debts owed from the US economy to the rest of the world at the bottom, and net portfolio equity and foreign direct investment by US investors in the rest of the world on top.


Why does this matter? Here are a few of the consequences as Gourichas lays them out.

1) Essentially, the US economy has been able to borrow cheaply from the rest of the world, and then invest those funds in companies around the world. The average return on equity over sustained periods of time is higher than the return on debt. Gourinchas cites estimates that the gap has been between 2.0 and 3.8% per year since 1973.

2) "These large and growing U.S. excess returns have first-order implications for the sustainability of U.S. trade deficits and the interpretation of current account deficits. As an illustration of the orders of magnitude involved, suppose that the U.S. has a balanced net international investment position with gross assets and liabilities of 100 percent of GDP. An excess return of 2 percent per annum implies that, on average, the U.S. can run an annual trade deficit of 2 percent of GDP while leaving its net international investment position unchanged. More generally, since a large part of realized returns take the form of valuation gains due to changes in asset prices and exchange rates, the current account, which excludes non-produced income such as capital gains, will provide an increasingly distorted picture of the change in a country's external position."

3) "[A] deterioration of the U.S. trade balance or of its net international investment position is often followed by a predictable depreciation of the U.S. dollar against other currencies. This depreciation may subsequently improve the U.S. trade balance along the usual channels, but it also improves the return on U.S. financial assets held abroad, thereby making the U.S. relatively richer.Most other countries don't seem to enjoy a similar advantage."

4) Why has this pattern of "foreigners buy US debt, US investors buy foreign equity" emerged? Gourinchas argues that a main reason is that "it reflects a superior capacity of the U.S. to supply `safe' assets—assets that will deliver stable returns even in global downturns." As a result, the US economy can depend on an inflow of debt financing at low interest rates. On the other side, "[w]illingly or not, global suppliers of safe-haven assets must bear more exposure to global risks." When a global recession occurs as in 2008, US-based investors will tend to bear heavier losses because they are more exposed to equity risks everywhere in the world. "Lower funding costs come with a commensurate increase in the global exposure of their external balance sheet."

5) Finally, the US economy probably can't keep playing the role of providing such a disproportionately large share of safe assets for the entire global economy. Gourinchas argues: As the world economy grows faster than that of the U.S., so does the global demand for safe assets relative to their supply. This depresses global interest rates and could push the global economy into a persistent ZLB [zero lower bound] environment, a form of secular stagnation. ... Finally, a body of empirical evidence suggests that environments with low interest rates may fuel leverage boom and bust cycles. The vulnerability of emerging and advanced economies alike to these crises has been amply demonstrated in the past."

For a few decades now, "foreigners buy US debt, US investors buy foreign equity" has been a reasonable equilibrium in the global financial system and a benefit to the US economy But in years ahead, it may well become a cause of stress.

Wednesday, April 20, 2016

Mexico to the US: Border Apprehensions and Immigration Fall

The number of Mexicans apprehended at the US border is approaching a 50-year low, dropping back to levels last seen  in the 1960s. Most of the reason seems to be that immigration from Mexico dropped off several years ago, and has stayed low since then. Ana Gonzales-Barrera gives a quick overview of the evidence in "Apprehensions of Mexican migrants at U.S. borders reach near-historic low," published on April 14 by the Pew Research Center.

Here's the annual data from the US Border Patrol on apprehensions at the US-Mexico border over time.

Apprehensions of Mexicans at U.S. borders fall to near historic lows in 2015

The number of border apprehensions is often taken as a rough-and-ready measure of the number of people seeking to enter the US illegally. The decline strongly suggests that fewer Mexicans are trying to do so. Here's data from the Mexican government on the emigration rate from Mexico per 100,000 in the last decade. Notice that the big decline happens some years ago, even before the start of the Great Recession.
Mexican emigration rates stable for past five years

Data from the US side of the border on the Mexican immigrant population in the US actually shows a downturn in recent years.

 Gonzalez-Barrera provided a useful figure in a longer report she wrote last fall at the Pew website about "More Mexicans Leaving than Coming to the U.S." (November 19, 2015). 

Mexican Immigrant Population in the U.S. in Decline

These trends and the economic and demographic patterns behind them aren't new. I was blogging four years ago on the topic: "Net Immigration from Mexico Stops--or Turns Negative" (April 24, 2012). I wrote last year about "The Declining Number of Illegal Immigrants" (July 13, 2015) and about how "China and India Overtake Mexico for Inflow of US Foreign-Born Residents" (May 13, 2015).

How to limit or regulate the enormous inflow of immigrants from Mexico was a legitimate policy concern from the 1970s into the early 2000s. As Gonzalez-Barrera puts it, that migration was "one of the largest mass migrations in modern history." But now that flow has fallen substantially, and even reversed itself. The main issue now is be how we deal with the after-effects of that enormous mass migration and the immigrants who are already here--many of whom have been here for quite some time.

Tuesday, April 19, 2016

The Economics of Noncompete Contracts

In a "noncompete contract," an employee signs a contract with an employer not to work for a competing firm for some period of time. The usual justification for such agreements is that it would be unfair an employee who has detailed knowledge of trade secrets or customer contracts to take that information to a competitor.

But about 18% of all US workers are covered by noncompete contracts, and it seems unlikely that they are all in possession of sensitive corporate data. As a Forbes magazine article reported in 2014, the Jimmy John's sandwich chain was requiring sandwich makers and drivers to sign a noncompete contract in which they agreed that when they stopped working for Jimmy John's they would not work for “any business which derives more than 10% of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches,” if that new employer was located within three
miles of any of the 2,000 Jimmy John's restaurants anywhere in the country.

The Office of Economic Policy at the U.S. Department of the Treasury has published a useful overview of these issues in its March 2016 report: "Non-compete Contracts: Economic Effects and Policy Implications."

Non-compete agreements are contracts between workers and firms that delay employees’ ability to work for competing firms. Employers use these agreements for a variety of reasons: they can protect trade secrets, reduce labor turnover, impose costs on competing firms, and improve employer leverage in future negotiations with workers. However, many of these benefits come at the expense of workers and the broader economy. Recent research suggests that a considerable number of American workers (18 percent of all workers, or nearly 30 million people) are covered by non-compete agreements. The prevalence of such agreements raises important questions about how they affect worker welfare, job mobility, business dynamics, and economic growth more generally. This report presents insights from economic theory and evidence on the economic effects of non-compete agreements. It goes on to discuss policy implications, starting a discussion about how such agreements could be used in a way that balances the interests of firms with those of workers and society as a whole.
It's obvious why employers like noncompetes. What's less clear is whether noncompete contracts serve a broader social interest. As the US Treasury report explains, the standard argument for noncompetes sounds like this:
fThe conventional picture of a workplace characterized by non-compete agreements is one that features trade secrets, including sophisticated technical information and business practices that firms have a strong interest in protecting. By preventing a worker from taking such secrets to a firm’s competitors, the non-compete essentially solves a “hold-up” problem: ex ante, both worker and firm have an interest in sharing vital information, as this raises the worker’s productivity. But ex post, the worker has an incentive to threaten the firm with divulgence of the information, raising his or her compensation by some amount equal to or less than the firm’s valuation of the information. Predicting this state of affairs, the firm is unwilling to share the information in the first place unless it has some legal recourse like a non-compete contract.
Moreover, a noncompete can be a way for firms to seek out employees who intend to remain with the firm for a time. When the firm that knows its workers will not be decamping for the competitor down the street, it finds it easier to share trade secrets and company methods across all workers in the firm, and to provide training in these methods as needed.

Of course, it's hard to see how these justifications apply to those working as drivers for Jimmy John's. Indeed, the report offers an array of suggestive evidence that noncompete agreements often don't have a lot to do with trade secrets and training. The study cites a variety of evidence along these lines.  For example:
• Non-competes are common among workers who report lower rates of trade secret possession: 15 percent of workers without a four-year college degree are subject to non-competes, and 14 percent of workers earning less than $40,000 have non-competes. This is true even though workers without four-year degrees are half as likely to possess trade secrets as those with four-year degrees, and workers earning less than $40,000 possess trade secrets at less than half the rate of their higher-earning counterparts.
• Available evidence suggests that workers with a low initial desire to switch jobs are not more likely to match with employers who require non-competes.
• In some cases, non-competes prevent workers from finding new employment even after being fired without cause; in such cases, it is difficult to believe that non-competes yield social benefits.
Noncompete contracts often include provisions that are not enforceable under state law: for example, state law in California makes noncompete contracts (with a few limited exceptions) essentially unenforceable, but 19% of California workers sign such agreements. Noncompete contracts are often presented to workers as part of the paperwork that they need to sign when showing up for their first day on the job, which doesn't suggest that they are part of a negotiation between employer and prospective employee about access to trade secrets and future training. There's even some evidence (which at this stage I would characterize as "real, but weak") that signing a noncompete causes less future job mobility and even lower future wages on average.

There's also an interesting big-picture story looming here. Histories of the development of Silicon Valley in its early years have often talked about the extremely fluid employment culture. The legends say that an engineer could have a tiff with the boss one morning, walk out the front door of the company and across the street to a competing firm, be hired, and be working for the other firm that same day after lunch. The point is that while California companies might have preferred to have noncompete contracts, these were not enforceable in California. As a result, engineers to come work in California, and the flow of workers between companies encouraged the flow of ideas and innovation, while also encouraging companies to offer high compensation and an attractive work environment.

However, the US Treasury report is quite mild-mannered in drawing policy conclusions, my own reading of the evidence is that noncompete contracts are often overused. The law of labor contracts is largely determined at a state level (whether by legislation or by case law), so if I was in state government, I would be thinking seriously about writing laws that place limits on noncompete contracts.  Some states, following the example of California, might prefer the clean sweep approach and come close to outlawing contracts with only a few exceptions. (Of course, rules about stealing trade secrets would still apply.) Other states might prefer more incremental reforms.

For example, the report notes that some states require that workers receive a "consideration"--that is, something of value in addition to their regular job pay--in exchange for signing the noncompete. Certain kinds of training that involves trade secrets might be one kind of answer. Another would be to require that severance pay be linked to the noncompete. As the report notes:
Some firms already provide severance payments to workers with non-competes. For instance, a worker who quits may receive 50 percent of her previous salary in exchange for abiding by the terms of the non-compete. This limits the harm to workers while ensuring that firms retain the ability to protect their interests with non-competes. Importantly, by requiring that firms incur a cost when requesting a non-compete, this policy preserves the most socially valuable non-compete agreements and discourages the least valuable, for which firms would not be willing to pay.
As another example, states could require that noncompete contracts cannot delay someone taking a job with a competitor for more than a certain period: for example, Oregon recently passed a law limiting noncompetes to 18 months. Or states could pass laws that noncompete contracts won't apply to anyone in a job paying less than $15-$20 per hour, or that they won't apply to workers in certain industries. Or states could pass a law that firms can only put language in a contract which is enforceable under the law of the state, to avoid the California-style scenario where 19% of workers are signing contracts that they often do not know are unenforceable.

The presumption in a market-oriented economy should be that workers are free to switch between jobs when they wish to do so. Employers who want to keep employees have many tools to do so, including paying bonuses related to length of time on the job. Noncompete contracts may occasionally make sense, but they should be a great deal more rare than they currently are.

Hat tips: For some other commentary on the US Treasury noncompete report, see the post by Nick Bunker at the Washington Center for Equitable Growth website, and the article by Justin Fox at the Bloomberg View website.

Monday, April 18, 2016

Some Economics for Tax Filing Day

U.S. tax returns and taxes owed for 2015 are due today, April 18. To commemorate, I offer some connections to five posts about taxes from the last few years. Click on the links if you'd like additional discussion and sources for of any of these topics.

1) Should Individual Income Tax Returns be Public Information? (March 30, 2015)
"My guess is that if you asked Americans if their income taxes should be public information, the answers would mostly run the spectrum from "absolutely not" to "hell, no." But the idea that tax returns should be confidential and not subject to disclosure was not a specific part of US law until 1976. At earlier periods of US history, tax returns were sometimes published in newspapers or posted in public places. Today, Sweden, Finland, Iceland and Norway have at least some disclosure of tax returns--and since 2001 in Norway, you can obtain information on income and taxes paid through public records available online."
2) Could government just fill out preliminary and placeholder tax returns for everyone?

For most people, the US government already has access to your income earned at work, through records from your employer, and it has access to the pathetic little slice of interest you are earning on your bank account. Your age, and the ages of your family members, advance predictably from year to year. For those who don't itemize deductions on their tax returns, which is about 70% of all tax returns, this is all the information needed to fill out your taxes. So why doesn't the US government fill in this information, calculate taxes owed or refund to be received, and send it to you? You could just accept what they sent, or you could file as usual and make any needed corrections. I discuss how this is done in Denmark, where about 80% of taxpayers accept the accuracy of the form the government sends them, and I also discuss the hurdles faced by proposals to do this in the United States, in "When Government Pre-Fills Income Tax Returns" (April 15, 2014).

3) What is the average share of income paid in federal taxes by people from different income groups? 

However much and in whatever direction your knee-jerk reflexes twitch when the subject of income distribution arises, it's useful to start with a grounding of "Facts on the US Income Distribution, Before and After Taxes" (November 14, 2014). The Congressional Budget Office lays out many of the key facts in a November 2014 report: "The Distribution of Household Income and Federal Taxes, 2011."  As one example among several discussed at the post and in the report, here's the path of average taxes paid as a share of income over time that includes all federal taxes: that is, federal income taxes, payroll taxes, corporate income taxes (attributed back to individuals). and excise taxes. The division here is top 1%, 81st-99th percentile, middle three quintiles (that is, middle three-fifths), and bottom quintile. Again, these are average tax rates. Thus, a person at the very top of the income distribution might well be paying a tax rate on the marginal dollar of market income received of 40% or more, but the average tax rate for that same person over all income received could well by the 29% shown for 2011 in the figure.

4) The top marginal income tax rates used to be a lot higher, but what share of taxpayers actually faced those high rates,, and much revenue did those higher rates actually collect?

Compare "Top Marginal Tax Rates: 1958 vs. 2009" (March 16, 2012), which is based on a short report by Daniel Baneman and Jim Nunns,"Income Tax Paid at Each Tax Rate, 1958-2009," published by the Tax Policy Center. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. What share of taxpayer returns paid these high rates? Across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates.

How much revenue was raised by the highest marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It's interesting to note that the share of income tax revenue collected by those in the top brackets for 2009--that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.

5) Did you know "How Milton Friedman Helped to Invent Tax Withholding" (April 12, 2014)?

The great economist Milton Friedman--known for his pro-market, limited government views--helped to invent government withholding of income tax. It happened early in his career, when he was working for the U.S. government during World War II, and the top priority was to raise government revenues to support the war effort. Of course, the IRS opposed the idea at the time as impractical.

Thursday, April 14, 2016

Putting Drug Policy Tradeoffs on the Table

It feels as if the tradeoffs involved in anti-drug policies are now up for discussion, in a way that they weren't 20 or 30 years ago. One signal is that the United Nations convened a special session about drugs back in 1998, with an underling theme of  of prohibitionism. Next week, the UN will convene another special session about drugs, and the tone may sound rather different. For a sense of how the argument is evolving, a useful starting point is "Public health and international drug policy"  from the Johns Hopkins-Lance Commission on Drug Policy and Health,  published at the website of the Lancet on March 24, 2016. "The Johns Hopkins–Lancet Commission, cochaired by Professor Adeeba Kamarulzaman of the University of Malaya and Professor Michel Kazatchkine, the UN Special Envoy for HIV/AIDS in Eastern Europe and Central Asia, is composed of 22 experts from a wide range of disciplines and professions in low-income, middle-income, and high-income countries."

Their report harks back to the tone of the UN discussions about drug policy in 1998 (with footnotes and references to figures omitted here and throughout):
The previous UN General Assembly Special Session (UNGASS) on drugs in 1998—convened under the theme, “A drug-free world—we can do it!”—endorsed drug-control policies with the goal of prohibiting all use, possession, production, and trafficking of illicit drugs. This goal is enshrined in national laws in many countries. In pronouncing drugs a “grave threat to the health and wellbeing of all mankind”, the 1998 UNGASS echoed the foundational 1961 convention of the international drug-control regime, which justified eliminating the “evil” of drugs in the name of “the health and welfare of mankind”. But neither of these international agreements refers to the ways in which pursuing drug prohibition might affect public health. The war on drugs and zero-tolerance policies that grew out of the prohibitionist consensus are now being challenged on multiple fronts, including their health, human rights, and development impact. ... The disconnect between drug-control policy and health outcomes is no longer tenable or credible.
The basic message here is simple enough: the goal of anti-drug policy is to improve public health. Thus, when evaluating anti-drug policy, it is reasonable to take into effect both how effective it is in reducing drug us and improving health, but also how the enforcement effort itself may be adversely affecting health health. Murders by drug cartels as one of the more obvious examples, but the Commission quotes a provocative comment from "former UN Secretary-General Kofi Annan, `Drugs have destroyed many people, but wrong policies have destroyed many more'."

Here are some of the tradeoffs of anti-drug policy as laid out by the Johns Hopkins-Lancet Commission. As a starting point, the gains from existing prohibitionist policies typically need to be phrased in terms of "well, maybe they discouraged drug use from getting a lot bigger," because it's hard to demonstrate that drug use has been falling in more than a modest way.
In 1998, when the UN members states declared their commitment to a drug-free world, the UN estimated that 8 million people had used heroin in the previous year worldwide, about 13 million had used cocaine, about 30 million had used amphetamine-type substances (ATS), and more than 135 million were “abusers”—that is, users—of cannabis. When countries came together after 10 years to review progress towards a drug-free world in 2008, the UN estimated that 12 million people used heroin, 16 million used cocaine, almost 34 million used ATS, and over 165 million used cannabis in the previous year. The worldwide area used for opium poppy cultivation was estimated at about 238 000 hectares in 1998 and 235 700 hectares in 2008—a small decline. Prohibition as a policy had clearly failed. ... North America continues to have by far the highest rates of drug consumption and drug-related death and morbidity of any region in the world, and drug policy in this region tends to influence global debates heavily. Between 2002 and 2013, heroin-related overdose deaths quadrupled in the USA, and deaths associated with prescription opioid overdose quadrupled from 1999 to 2010.
One of the most obvious tradeoffs of anti-drug policy has been gang violence. It's hard to measure this in any precise way, but the report cites evidence that in the Americas, about 30% of all homicides involve criminal groups and gangs, compared with about 1% in Europe or Asia. In Mexico,  the rise in homicide rates after 2006 has been so extreme--from a national rate of 11 per 100,000 to a rate of over 80 per 100,000 in the most heavily affected locations--that it actually reduced average life expectancies for the entire country. Of course, just looking at murders leave out other violence, including sexual assault. About 2% of Mexico's population is displaced from their homes by violence and risk of more violence. Colombia, Guatemala, and others have experienced a sharp rise in violence as well. Much of this is drug-related.

The illegality of drug use means that those who inject illegal drugs are likely to share needles, which in turn raises the rates of infection for HIV, hepatitis, tuberculosis, and other illnesses. One estimate is that outside Africa, 30% of cases of HIV infection are caused by unsafe drug injections. "A landmark US study showed that over half of people who inject drugs were infected with HCV during their first year of injecting."

Illegality means that drugs are more likely to be taken by unsafe methods and in unsafe dosages --and when overdoses occur, the ability to get medical help may be quite limited. The Commission notes:
Drug overdose should be an urgent priority in drug policy and harm-reduction efforts. Overdose can be immediately lethal and can also leave people with debilitating morbidity and injury, including from cerebral hypoxia. ...  In 2014, WHO estimated that about 69 000 people worldwide died annually from opioid overdose, but that estimate might ot have captured the substantial increase in opioid overdose deaths especially in North America since 2010. In the EU, drug overdoses account for 3·4% of deaths among people aged 15–39 years.
The illegality of drug use boosts prison populations around the world. "[P]eople convicted of
drug crimes make up about 21% of incarcerated people worldwide. Possession of drugs for individual use was the most frequently reported crime globally. ... [D]rug-possession offences constituted 83% of drug offences reported worldwide." The evidence that incarceration for possession or use of drugs deters use in any substantial way is weak. But incarceration does tend to reinforce other social inequalities: in the US, for example, African-Americans are disproportionately affects by drug-related incarceration. In many cases, young people and women who are low-level carriers of drugs end up with significant sentences. Prison is of course a place where additional drug use and violence are common. Those who aren't in any way involved personally in the drug business, but who live in communities where the rates of incarceration are high, find themselves bearing high costs, too.

When it comes to drugs, most of us are not pure prohibitionists at heart. We regularly consume caffeine through the workday, and occasionally alcohol after the workday. Maybe we don't use nicotine ourselves, but we don't see a compelling reason why our friends who like a nicotine hit now and again should be locked up. A growing number of Americans live in states--Washington, Colorado, Oregon, and Alaska--where recreational use of marijuana is legal. Some countries like Uruguay are experimenting with legalization of marijuana, as well.

On the other side, most of us are not pure libertarians when it comes to drugs, either. Rules about age limits, time and place of use, and intoxication while driving or just walking down the street can make some sense. A country which gives serious considering to limiting the size and availability of sugared soft drinks is unlikely to take a hands-off attitude to drug use.

When it comes to policy proposals, the Commission is essentially arguing that reducing the costs of anti-drug policies should matter, too. Without endorsing all of these steps myself, here are some of the recommendations:

  • Decriminalise minor, non-violent drug offences— use, possession, and petty sale—and strengthen health and social-sector alternatives to criminal sanctions.
  • Reduce the violence and other harms of drug policing, including phasing out the use of military forces in drug policing, better targeting of policing on the most violent armed criminals, allowing possession of syringes, not targeting harm-reduction services to boost arrest totals, and eliminating racial and ethnic discrimination in policing.
  • Ensure easy access to harm-reduction services for all who need them as a part of responding to drugs, in doing so recognising the effectiveness and cost-effectiveness of scaling up and sustaining these services. OST [opioid substitution therapy], NSP [needle and syringe programmes], supervised injection sites, and access to naloxone—brought to a scale adequate to meet demand—should all figure in health services ... 
  • Efforts to address drug-crop production need to take health into account. Aerial spraying of toxic herbicides should be stopped, and alternative development programmes should be part of integrated development strategies ...
  • Although regulated legal drug markets are not politically possible in the short term in some places, the harms of criminal markets and other consequences of prohibition catalogued in this Commission will probably lead more countries (and more US states) to move gradually in that direction—a direction we endorse. 

Hat tip: I ran across a mention of the Johns Hopkins-Lancet Commission on Drug Policy and Health in a post by Emily Skarbek at the Econlog website.

Wednesday, April 13, 2016

The Relationship Between Household Worth and Personal Saving

Household net worth can move substantially within a few years--say, when the stock market or real estate prices have a substantial rise or fall. When household worth rises, people tend to save less; conversely, when household worth falls, people tend to save more. The Federal Reserve Bank of New York offers a nice illustration of this relationship in the April 2016 edition of its monthly publication, "U.S. Economy in a Snapshot."

The horizontal axis of this figures shows household net worth for the US economy as a whole, expresses as a share of total disposable income in the US economy at the time. Thus, total household net worth in the last few decades has ranged from about 450-650% of disposable income at any given time. The vertical axis measures the personal saving rate. The blue diamonds show quarterly data on these two variables from 1983 to 2005, and the blue line shows a best-fit curve for the relationship between these variables over this time.

What has happened since 2006 is shown by the red points, and the line connecting them. In the first quarter of 2006, a combination of high stock prices and soaring real estate values had driven the ratio of household worth/disposable income up to 643%, while the personal saving rate had fallen to 3.8%. However, the combination of the strop in the stock market and the fall in housing prices dropped the household worth/disposable income ratio down to about 500%. The corresponding change in the personal saving rate pretty much matched what would have been expected from the earlier data.

As the stock market and housing prices recovered, so did household net worth. As the points defining the red line moved out to the right, personal saving rates at first seemed on their way to falling again. But in the last couple of years, the personal saving rate has stayed moderately but noticeably higher than would have been predicted from the earlier data based on household worth.

Obviously, lots of factors affect the personal saving rate other than just household net worth. For example, the New York Fed writes: "Restrained access to credit, continued high demand for precautionary saving, and increased concentration of wealth at the top of the income distribution may be potential explanations for this recent pattern." These potential causes will be researched and debated. But in the meantime, the tendency of people to save more than expected as their net worth rises is one factor that has contributed to the sluggishness of the economic upswing in the last few years.

Tuesday, April 12, 2016

Saving Global Fisheries With Property Rights

Economists often use over-fishing as an example of the "tragedy of the commons," a situation in which each individual who exploits a common resource benefits individually, but no one has an individual incentive to trim back on exploiting the resource in the name of preserving its long-run health. An alternative is to use tradeable property rights for catching fish, which leads to a situation in which those who are doing the fishing have some incentive both to restrain themselves and to monitor others.

A group of 12 authors shows what is at stake in their essay"Global fishery prospects under contrasting management regimes," which was published on-line in the Proceedings of the National Academy of Sciences on February 26, 2016.  The authors are Christopher Costello, Daniel Ovando, Tyler Clavelle, Kent Strauss, Ray Hilborn, Michael C. Melnychuk, Trevor A. Branch, Steven D. Gaines, Cody S. Szuwalski, Reniel B. Cabral, Douglas N. Rader, and Amanda Leland.
"What would extensive fishery reform look like? In addition, what would be the benefits and trade-offs of implementing alternative approaches to fisheries management on a worldwide scale? To find out, we assembled the largest-of-its-kind database and coupled it to state-of-the-art bioeconomic models for more than 4,500 fisheries around the world. We find that, in nearly every country of the world, fishery recovery would simultaneously drive increases in food provision, fishery profits, and fish biomass in the sea. Our results suggest that a suite of approaches providing individual or communal access rights to fishery resources can align incentives across profit, food, and conservation so that few tradeoffs will have to be made across these objectives in selecting effective policy interventions. ...

"Current status is highly heterogeneous—the median fishery is in poor health (overfished,with further overfishing occurring), although 32% of fisheries are in good biological, although not necessarily economic, condition. Our business-as-usual scenario projects further divergence and continued collapse for many of the world’s fisheries. Applying sound management reforms to global fisheries in our dataset could generate annual increases exceeding 16 million metric tons (MMT) in catch, $53 billion in profit, and 619 MMT in biomass relative to business as usual. We also find that, with appropriate reforms, recovery can happen quickly, with the median fishery taking under 10 y to reach recovery targets. Our results show that commonsense reforms to fishery management would dramatically improve overall fish abundance while increasing food security and profits. ...
"We examined three approaches to future fishery management: (1) business-as-usual management (BAU) (for which status quo management is used for projections), (2) fishing to maximize long-term catch (FMSY), and (3) rights-based fishery management (RBFM), where economic value is optimized. The latter approach, in which catches are specifically chosen to maximize the long-term sustainable economic value of the fishery, has been shown to increase product prices (primarily due to increased quality and market timing) and reduce fishing costs (primarily due to a reduced race to fish); these are reflected in the model. In all scenarios, we account for the fact that fish prices will change in response to levels of harvest."
Here's a flavor of their results in an interestingly multidimensional graph. The vertical axis is based on a measure the biomass of the catch divided by the maximum sustainable yield. If this  ratio is 80% or higher, then the fishery is taken to be sustainably managed; if it's less than 80%, then overfishing is occurring. Thus, these estimates show that in a business-as-usual system, the share of fisheries that are being sustainably managed will continue to decline, and to experience financial losses. In contrast, the rights-based fishing management techniques at the top do the most to keep fisheries sustainable, and also have the biggest harvests (shown by the diameter of the circles) and the highest profits (shown by the blue color).

Monday, April 11, 2016

All the Job Growth is in "Alternative" Jobs

There's a widespread sense that fewer American jobs involve an ongoing connection to a employer, and a larger share are in some sense temporary or on-call. "Gig economy" jobs with companies like Uber are the most prominent recent example of this concern, but while the issue seems potentially much broader, hard data is lacking. The US Bureau of Labor Statistics has sometimes conducted a Contingent Worker Survey, but for budgetary reasons, that survey hasn't been conducted since 2005.
The Secretary of the US Department of Labor, Thomas Perez, announced a few ago that the the survey would be done again in May 2017.  But in the meantime, efforts to spell out "How Many in the Gig Economy?" (February 16, 2016) have typically used a wide variety of definitions and partial data sources, making it hard to reach clear conclusions.

Lawrence F. Katz and Alan B. Krueger took on this challenge head-on. The RAND Corp. conducts research using an American Life Panel, "a nationally representative, probability-based panel of over 6000 members ages 18 and older."  Katz and Krueger contracted with RAND to include a set of questions about contingent workers in the October-November 2015 American Life Panel Survey. The questions were based on those used in 1995 and 2005 by the US Bureau of Labor Statistics. The first round of results from this research apppear in a working paper, "The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015," which was published online on March 29, 2016.

The headline finding is that the share of US workers in "alternative" arrangements didn't rise much from 1995 to 2005, but did indeed rise substantially from 2005 to 2015. However, at least so far, only a small share of that increase is due to on-line gig economy jobs like Uber. Katz and Krueger write (citations omitted):
A comparison of our survey results from the 2015 RPCWS [RAND-Princeton Contingent Worker Survey] to the 2005 BLS CWS [Bureau of Labor Statistics Contingent Worker Survey] indicates that the percentage of workers engaged in alternative work arrangements – defined as temporary help agency workers, on-call workers, contract company workers, and independent contractors or freelancers – rose from 10.1 percent in February 2005 to 15.8 percent in late 2015. This increase
is particularly noteworthy given that the BLS CWS showed hardly any change in the percent of workers engaged in alternative work arrangements from 1995 to 2005. We further find that about 0.5 percent of workers indicate that they are working through an online intermediary, such as Uber or Task Rabbit ... Thus, the online gig workforce is relatively small compared to other forms of alternative work arrangements, although it is growing very rapidly. ...  The General Accounting Office (2015) analyzes data from the General Social Survey and CWS and finds that an expansive definition of alternative work arrangements, which includes part-time employees, increased from 35.3 to 40.4 percent of employment from 2006 to 2010."
Future work on this data will dig into details about wages, total earnings, and work hours for these alternative workers. But some striking patterns emerge even from this first cut at the data. For starters, as Katz and Krueger write: "A striking implication of these estimates is that all of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements."

This change toward alternative work arrangements is widespread across industries. It also seems to be occurring in roughly equal force across the income distribution, although the "alternative" workers at the low end of the income distribution are more likely to be categorized as temporary help agency jobs and on-call jobs, while the alternative workers at the  high end of the income distribution are more likely to be categorized as independent consultants and freelancers.

But more broadly, it appears that those who have been looking for jobs in the last decade or so, or who are looking now, are much more likely to find that the jobs on offer involve a fundamentally different set of employment relationships compared to the common jobs of the 20th century--much less likely to involve an ongoing relationship with an employer.

Friday, April 8, 2016

Global Capital Flows: Why No Crisis (So Far) This Time?

Here's the puzzle. Outflows of international capital from emerging markets around the world played a key role in causing financial shocks and steep recessions all over the globe in the late 1990s, including the east Asian financial crisis affecting countries like Korea, Thailand, and Indonesia in 1997-98; Latin American countries like Brazil (1999) and Argentina (2001); along with an assortment of other places like Ukraine (1998) and Turkey (2000). But even larger outflows of  international capital from emerging markets have been occurring in the last few years, with much less dire economic consequences. What changed? The World Economic Outlook published by the IMF in April 2016 devotes a chapter to this subject: "Chapter 2: Understanding the Slowdown in Capital Flows to Emerging Markets."

Here's a figure that sets the stage by showing net capital inflows to emerging market economies since 1980. You can see the drop in capital inflows in the late 1990s, surrounded by various crises. The more recent drop was accompanied by some crises during the worse of the global recession of 2008 and its immediate aftermath, but not much since then. (The recent external financial crises in this data are Ukraine in 2014 and Albania in 2015.)

What changed? In the late 1990s, the destructive economic dynamic sometimes evolved like this. Banks and large companies in a country like Thailand would borrow in US dollars. They would convert those US dollars to the local currency--say, Thai baht--and then lend and spend that currency in Thailand. This process of borrowing in US dollars and lending in Thai baht seemed fairly safek because government policy had been to  keep exchange rates fixed (or close to it) over time. But when international capital inflows went into reverse, exchange rates declined. As a result, the big banks and companies that had borrowed in US dollars and loaned in Thai baht could not repay those US dollar loans. The government had often in some way guaranteed the stability of the banking system, but didn't hold much in the way of US dollar reserves, so the government finances ended up in trouble, too.

In the last five years, many elements of this interaction have changed, at least in part because all the players learned from the experiences of the late 1990s. Here are some examples from the IMF report:

A rising share of the original international capital inflows aren't in the form of borrowed money and debt, but instead are in the form of stock market investments or foreign direct investment. These other kinds of investments are more flexible: an inability to repay debt causes legal consequences and even bankruptcy, but a drop in the price of stock market investments means only a loss in asset values.

Many of the big players emerging markets no longer need to borrow almost exclusively in US dollars; instead, they can now do a lot of borrowing in their own currency. As a result, they aren't exposed to the risk of exchange rate shifts. Here's a figure showing the rising ability of government and nongovernment borrowers in emerging markets to borrow in their own currency.

Many of the key emerging market no longer fix their exchange rate. What used to happen back in the 1980s and 1990s was that governments would claim to have a fixed exchange rate, which actually was a situation where the exchange rate was fixed for a time and then took a huge jump. Ongoing exchange rate adjustments mean that the players in the global economy are more likely to take the risks of exchange rate shifts into account, and the adjustments can be more gradual.

Many of the key emerging markets have built up substantial US dollar foreign reserves. Thus, if there is a sharp decline in capital inflows or an actual outflow, they can soften the effect of this change--at least for a time--by drawing down these foreign reserves.

The IMF report mentions some other factors, as well. But the central point is a bit of good news for the global economy: As emerging market economies are playing a larger role in global economic output, they are also becoming more integrated into the global financial system in more flexible ways. As a result, the cycles of inflows and outflows of international capital that caused severe disruptions and financial crises back in the 1980s and 1990s have had less power to do so in the last five years.

Thursday, April 7, 2016

The EU Carbon Trading Market: A Decade of Experience

It's common to hear proposals that the US should adopt a "cap-and-trade" system for reducing climate emissions. Indeed, back in 2009 the House of Representatives passed the American Clean Energy and Security Act, the so-called "Waxman-Markey" act, which would have implemented such a law, but the legislation died in the US Senate without ever being brought to a vote. In the meantime, the European Union has now had a cap-and-trade policy in place for 10 years. How well is it working?

The Winter 2016 issue of the Review of Environmental Economics and Policy has a three-paper symposium on the subject of "The EU Emissions Trading System: Research Findings and Needs."
(REEP is not freely available on-line, but many readers will have access through library subscriptions.) The three papers are:
  • A. Denny Ellerman,  Claudio Marcantonini,  and Aleksandar Zaklan, "The European Union Emissions Trading System: Ten Years and Counting (pp. 89-107), 
  • Beat Hintermann,  Sonja Peterson,  and Wilfried Rickels, "Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature (pp. 108-128)
  • Ralf Martin, Mirabelle Muûls, and Ulrich J. Wagner, "The Impact of the European Union Emissions Trading Scheme on Regulated Firms: What Is the Evidence after Ten Years"' (pp. 129-148) 
The paper by Ellerman,  Marcantonini,  and Zaklan offers an overview of the EU carbon trading market, while the other papers drill down into more specific issues. Ellerman et al. describe the EU Emissions Trading System (ETS) in this way (footnotes and citations omitted):
The EU ETS is a classic cap-and-trade system. As of 2014, the EU ETS covered approximately 13,500 stationary installations in the electric utility andmajor industrial sectors and all domestic airline emissions in the EU’s twenty-eight member states, plus three members of the closely associated European Economic Area: Norway, Iceland, and Liechtenstein. Approximately two billion tons of carbon dioxide (CO2) and some other greenhouse gases (GHGs) are included in the system, together accounting for about 4 percent of global GHG emissions in 2014. Aside from its sheer size in terms of geographic scope, number of included sources, and value of allowances, another distinguishing feature of the EU ETS is its implementation through a multinational framework, namely the EU, rather than through the action of a single state or national government, as assumed in most theory and as has been the case for most other cap-and-trade systems.
They discuss a variety of the nuts-and-bolts details of the system. For example, should the permits to emit carbon be given to existing firms, or auctioned? Economic theory tends to favor auctioning, but the horse-trading of politics tends to favor giving the permits away, which is mainly what happened. How will the total carbon emissions over time be set? Will EU emitters be allowed to pay for steps that would reduce carbon emissions elsewhere in the world, and then use reductions to offset part of any required reduction in their own direct carbon emissions?

I won't try to describe the ins-and-outs of the EU system in this blog post. It's gone through three "phases" and a bunch of other rule changes during its single decade of existence. But two graphs give a sense of its main themes--and the difficulties in evaluating it performance. The first graph shows carbon emissions in the EU while the carbon trading system has been in effect.

Emissions are clearly down. However, it's not easy to separate out the effects of the emissions trading system from other policies that would have an effect of reduce carbon emissions, including other environmental regulations and taxes, efforts at energy conservation, subsidies for non-carbon forms of energy, and the like. In fact, a look at the price of carbon in the ETS suggests that it might not be having much of a role.
Notice that the price of allowances during "phase I" of the system fell all the way to zero: in other words, the allowed emissions of carbon were considerably above what was actually being emitted, so there was no additional cost for emitting. During phases II and III, the cost of emitting carbon has been at around €5 per ton of emissions, which is a lot lower than the price of about €30 per ton that is often recommended for making a realistic and useful dent in carbon emissions over time. To be blunt about it, the price data suggests that perhaps the EU ETS hasn't had much effect in reducing emissions, and may not have much effect looking forward.

Should the low price for carbon emissions be interpreted as a success story for an emissions trading system? After all, emissions are indeed down. Or should it be interpreted as a failure for an emissions trading system, and perhaps a sign that political pressures have led to a system where it has little effect? After all, emissions may be falling for other reasons and the current price of €5 just isn't very high.  Ellerman,  Marcantonini, and Zaklan describe the resulting debates in this way:
The great surprise of the second phase of the EU ETS was that, as phase III started in 2013, the price paid to emit carbon was less than €5, not the €30 or more that had been indicated by 2013 futures prices in 2008 and that was generally expected at that time. This development has created a lively debate about the future of the EU ETS and its role in climate policy. This debate can be summarized as being between those who view the current, much-lower-than-expected price as indicating serious flaws in the EU ETS and those who argue that the low price shows that the system is working exactly as it should given all that has happened since 2008 (i.e., reduced expectations for economic growth in the Eurozone, increased electricity generation from renewable sources, the significant use of offsets), including the possibility that abatement may be cheaper than initially expected. Fundamentally, this debate reflects differing views of the objectives of climate policy itself: whether the objective is solely to reduce GHG emissions or also (and perhaps principally) to transform the European energy system. Although no one is
suggesting that emissions have exceeded the cap, or that they will do so, current prices do not seem likely to lead to the kind of technological transformation that would greatly reduce Europe’s reliance on fossil fuels.
The other papers in the symposium make a case that the EU ETS policy should be regarded more as a partial success than as a partial failure. For example, Hintermann,  Peterson,  and Rickels write:

Although the EU ETS has been criticized from an environmental perspective because of its rather low carbon price signal, we believe that the policy has actually performed quite well from an economic point of view. It introduced a single price for emissions, which were previously a free public “bad,” and it correctly reflected the substantial oversupply of allowances in both phase I and phase II through a significant price drop. Moreover, the nonzero price toward the end of phase II, despite a nonbinding cap for the phase, reflected expectations of a cap on overall emissions that is binding in the long term, given the opportunity to bank allowances. ... 
As is currently being discussed in the EU, the low allowance price could be counteracted through the use of new mechanisms such as price floors or strategic allowance reserves. However, a more direct (and environmentally beneficial) approach would be to tighten the cap, for example, by adjusting the rate at which it is decreased after 2020; because of banking, this should affect the price even today.  We would argue that the fact that allowance prices turned out to be lower than anticipated (and thus EU climate policy was cheaper than expected) should actually be interpreted as good news rather than a problem. After all, the main economic argument in favor of an emission allowance market is that it delivers a particular emissions goal at least cost.

Martin, Muûls, and Wagner focus on the specific sectors--energy and industry--that were directly regulated by the cap-and-trade arrangements under the ETS. They argue that there is little evidence the emissions trading system hurt these industries, and some evidence that it did accelerate their reduction in emissions and stimulate their innovation in cleaner-energy alternatives.

It seems to me that the best case one can make for the EU ETS after its first decade is along the lines of "it's a start." Sure, the prices are very low, but they aren't zero. Ellerman et al. emphasize that the ETS is set up in a way that over the long-run, it will become a binding constraint forcing carbon emissions to decline. They write:
Absent a decision by the EU to abandon the program, which would require a super-majority, the EU ETS will march on with a continually declining cap, which, under all likely scenarios, will create continuing scarcity, thus virtually guaranteeing that a carbon price will be a permanent feature of the European economic landscape.
Right now, the political pressures to change the rules in such a way as to allow a lower carbon price are quite muted. It will be interesting to see how the political pressures play out a few years down the road when the carbon constraint in the ETS start to push the price of the allowances higher, up to €30 per ton or perhaps considerably more.