What Students Owe Teachers: Trust, Docility, Effort, Thinking

James V.  Schall, who has long been a Professor Political Philosophy at Georgetown University, has argued that students have obligations to teachers, not just the other way around. Specifically, these obligations are "trust, docility, effort, thinking." It's one of those claims that I'm not sure I agree with 100%, but I agree with it enough to pass it along as worthy of reflection. This is an excerpt from Chapter 3 of Schall's 1988 book, Another Sort of Learning.

Students have obligations to teachers. I know this sounds like strange doctrine ... [Let me state the obligations of students. The first obligation, particularly operative during the first weeks of a new semester, is a moderately good will toward the teacher, a trust, a confidence that is willing to admit to oneself that the teacher has probably been through the matter, and, unlike the student, knows where it all leads. I do not want here to neglect the dangers of the ideological professor, of course, the one who imposes his mind on what is. But to be a student requires a certain modicum of humility.

Yet to be a student also requires a certain amount of faith in oneself, a certain self-insight that makes a person realize that he can learn something that seems unlearnable in the beginning. This trust in the teacher also implies that the student, if he has trouble understanding, makes this known to the teacher. Teachers just assume that everything they say or illustrate is luminously clear. A student does a teacher a favor by saying, "I do not understand this". But the student should first really try to understand before speaking. ... 

The student ought to have the virtue of docility. He owes the teacher his capacity of being taught. We must allow ourselves to be taught. We can actually refuse this openness of our own free wills. This refusal is mostly a spiritual thing with roots of the profoundest sort in metaphysics and ethics. ... When a teacher, crusty as he may be, sees his students leave his classroom for the last time at the end of some fall or spring semester, he wants them to carry with them not so much the memories of his jokes – though he hopes they laughed – or his tests, but the internal possession of the subject matter itself. The student ought to become independent of the teacher to the point of even forgetting his name, but, not the truth he learned. ...

So the student owes to his teacher the effort of study. A good teacher ought to exercise a mild coercion on his students, a kind of pressure that takes into account their lethargy and fallenness and distractions, a pressure that indicates that the professor wants the students to learn, lets them know it is important, a pressure that has a purpose of guiding the students through the actual thought process, the actual exercise of the mind on the matter at hand. Few students, on being given The Republic of Plato or The Confessions of St. Augustine to read, will bounce right up to their room, shut off the stereo, cancel a date, and proceed to ponder the eternal verities in these books. The teacher who assigns such books – and a university in which they are not assigned has little claim to that noble name – always must wonder if the intrinsic fascination, the thinking through of such works will somehow reach into his students' minds. He hopes that the next time they read Plato or Augustine, they will do so because they want to, because they are challenged by them, and not because they might receive a C- grade if they do not.

Thus, the student owes the teacher trust, docility, effort, thinking.

How the Jargonauts Keep Normies in their Place

I spend most of my working life, and even a disturbingly high share of my private life, trying to move back and forth from academic jargon to a more widely-shared human vocabulary. Maximillian Alvarez offers some pungent thoughts on the temptation of academics to become entombed in their jaron in "The Accidental Elitist: Academia is too important to be left to academics," posted February 22, 2017 at The Baffler website. At this time this was written, Alvarez was a PhD candidate in History and Comparative Literature at the University of Michigan.

"There’s a huge difference, for instance, between defending academic jargon as such and defending academic jargon as the typical academic so often uses it. ... It’s not that things like specialized disciplinary jargon are inherently bad or unnecessary. They are bad, however, when they’ve traveled into that special category of identity markers, which so often allow people in contemporary academia to at least act like their primary purpose is to confirm their identity as academics. Like the tweed jacket, things like jargon help form a template of accepted behaviors and traits that qualify one’s identity as an academic, and such qualification becomes the primary justification for keeping them around. You’re not an academic unless you use a certain kind of jargon when you speak and write; you’re not an academic unless you publish in certain journals, etc.

"The scales tip a certain way and being an academic becomes less about what you do, how you do it, and whom you do it for, and more about where you do it and how you look and sound doing it. There are still other, more noble parts of the profession (advancing human knowledge, shaping the minds of tomorrow, etc.), but on a daily basis they can slip unnoticed into the background of secondary concerns. ... The sinister part of all this, then, occurs when, even if you don’t realize it, you end up being more willing to serve your public image and professional ego than you are inclined to put yourself out for the sake of other people. ...

"The perpetual conceit of academics in the humanities is that translating their work into a more accessible vernacular will “dumb down” what are necessarily complex subjects. Important stuff will be lost. Behind this conceit, though, is an implicit presumption from just about every academic that they could perform this kind of translation if pressed to. It has been one of the great sources of my disillusionment with academia to realize that a staggering majority of jargonauts, when pressed, actually can’t. ...

"[M]any academics will subconsciously fall back on the “complex” nature of our work as a way to put normies back in their place and get them to stop asking questions. Remember, we’re neurotic, anxious, self-conscious people. We have our own defense mechanisms and will do much to deflect the realization that very often, the problem is not that our work is so complex that it can only be understood through disciplinary jargon, but that we can’t or don’t want to do the work of “putting it in terms others would understand.” Or, even worse, we fear that making ourselves easier to understand will take away some of our social capital, our special aura as keepers of the densest secrets. We fear that, if we actually could explain our dissertation and book projects to others in simple, but still precise, ways, we might face that most troubling question—“So what?”—without being able to come up with a remotely plausible answer."

The Timidity and Buzzard Mentality of Professors

One of my favorite scathing essays about the dysfunctionalities of academic writing and academic life is the "Dancing with professors: the trouble with academic prose," by Patricia N. Limerick, a history professor at the University of Colorado, which appeared almost 25 years ago in the NY Times Book Review (October 31, 1993). It's available various places on the web (like here and here). It's not at all fair-minded, but it's funny--which is better--and it has enough truth to carry some sting. Here's Limerick:

In ordinary life, when a listener cannot understand what someone has said, this is the usual exchange: 

Listener: I cannot understand what you are saying. 

Speaker: Let me try to say it more clearly. 

But in scholarly writing in the late 20th century, other rules apply. This is the implicit exchange:

Reader. I cannot understand what you are saying. 

Academic Writer. Too bad. The problem is that you are an unsophisticated and untrained reader. If you were smarter, you would understand me. 

The exchange remains implicit, because no one wants to say: "This doesn't make any sense," for fear that the response, "It would, if you were smarter," might actually be true. 

While we waste our time fighting over ideological conformity in the scholarly world, horrible writing remains a far more important problem. For all their differences, most right-wing scholars and most left-wing scholars share a common allegiance to a cult of obscurity. Left, right and center all hide behind the idea that unintelligible prose indicates a sophisticated mind. The politically correct and the politically incorrect come together in the violence they commit against the English language.  ...

Ten years ago, I heard a classics professor say the single most important thing -- in my opinion--that anyone has said about professors: "We must remember," he declared, "that professors are the ones nobody wanted to dance with in high school."

This is an insight that lights up the universe--or at least the university. It is a proposition that every entering freshman should be told, and it is certainly a proposition that helps to explain the problem of academic writing. What one sees in professors, repeatedly, is exactly the manner that anyone would adopt after a couple of sad evenings sidelined under the crepe-paper streamers in the gym, sitting on a folding chair while everyone else danced. Dignity, for professors, perches precariously on how well they can convey this message: "I am immersed in some very important thoughts, which unsophisticated people could not even begin to understand. Thus, I would not want to dance, even if one of you unsophisticated people were to ask me." 

Think of this, then, the next time you look at an unintelligible academic text. "I would not want the attention of a wide reading audience, even if a wide audience were to ask for me." Isn't that exactly what the pompous and pedantic tone of the classically academic writer conveys? Professors are often shy, timid and even fearful people, and under those circumstances, dull, difficult prose can function as a kind of protective camouflage. When you write typical academic prose, it is nearly impossible to make a strong, clear statement The benefit here is that no one can attack your position, say you are wrong or even raise questions about the accuracy of what you have said, if they cannot tell what you have said. In those terms, awful, indecipherable prose is its own form of armor, protecting the fragile, sensitive thoughts of timid souls. ...

Fortunately, we have available the world's most important and illuminating story on the difficulty of persuading people to break out of habits of timidity, caution and unnecessary fear. I borrow this story from Larry McMurtry, one of my rivals in the interpreting of the American West, though I am putting this story to a use that Mr. McMurtry did not intend. 

In a collection of his essays, "In a Narrow Grave," Mr. McMurtry wrote about the weird process of watching his book "Horseman, Pass By" being turned into the movie ''Hud." He arrived in the Texas Panhandle a week or two after filming had started, and he was particularly anxious to learn how the buzzard scene had gone. In that scene, Paul Newman was supposed to ride up and discover a dead cow, look up at a tree branch lined with buzzards and, in his distress over the loss of the cow, fire his gun at one of the buzzards. At that moment, all of the other buzzards were supposed to fly away into the blue Panhandle sky. 

But when Mr. McMurtry asked people how the buzzard scene had gone, all he got, he said, were "stricken looks."

The first problem, it turned out, had to do with the quality of the available local buzzards--who proved to be an excessively scruffy group. So more appealing, more photogenic buzzards had to be flown in from some distance and at considerable expense. 

But then came the second problem: how to keep the buzzards sitting on the tree branch until it was time for their cue to fly. That seemed easy. Wire their feet to the branch, and then, after Paul Newman fires his shot, pull the wire, releasing their feet, thus allowing them to take off. 

But, as Mr. McMurtry said in an important and memorable phrase, the film makers had not reckoned with the "mentality of buzzards." With their feet wired, the buzzards did not have enough mobility to fly. But they did have enough mobility to pitch forward.
So that's what they did: with their feet wired, they tried to fly, pitched forward and hung upside down from the dead branch, with their wings flapping.

I had the good fortune a couple of years ago to meet a woman who had been an extra for this movie, and she added a detail that Mr. McMurtry left out of his essay: namely, the buzzard circulatory system does not work upside down, and so, after a moment or two of napping, the buzzards passed out. 

Twelve buzzards hanging upside down from a tree branch: this was not what Hollywood wanted from the West, but that's what Hollywood had produced. 

And then we get to the second stage of buzzard psychology. After six or seven episodes of pitching forward, passing out, being revived, being replaced on the branch and pitching forward again, the buzzards gave up. Now, when you pulled the wire and released their feet, they sat there, saying in clear, nonverbal terms: "We tried that before. It did not work. We are not going to try it again." Now the film makers had to fly in a high-powered animal trainer to restore buzzard self-esteem. It was all a big mess; Larry McMurtry got a wonderful story out of it; and we, in turn, get the best possible parable of the workings of habit and timidity. 

How does the parable apply? In any and all disciplines, you go to graduate school to have your feet wired to the branch. There is nothing inherently wrong with that: scholars should have some common ground, share some background assumptions, hold some similar habits of mind. This gives you, quite literally, your footing. And yet, in the process of getting your feet wired, you have some awkward moments, and the intellectual equivalent of pitching forward and hanging upside down. That experience --  especially if you do it in a public place like a graduate seminar ­-- provides no pleasure. One or two rounds of that humiliation, and the world begins to seem like a very treacherous place. Under those circumstances, it does indeed seem to be the choice of wisdom to sit quietly on the branch, to sit without even the thought of flying, since even the thought might be enough to tilt the balance and set off another round of napping, fainting and embarrassment.

Yet when scholars get out of graduate school and get Ph.D.'s, and, even more important, when scholars get tenure, the wire is truly pulled. Their feet are free. They can fly wherever and whenever they like. Yet by then the second stage of buzzard psychology has taken hold -- and they refuse to fly. The wire is pulled, and yet the buzzards sit there, hunched and grumpy. If they teach in a university with a graduate program, they actively instruct young buzzards in the necessity of keeping their youthful feet on the branch.

What Structure Are Academic Researchers Building?

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I'm going to spend the week passing along some thoughts about academia and hyper-specialization.

Individual research papers can be elegant, in their own way. But do they add up to a cohesive structure of knowledge? Are academic researchers even trying to accomplish this broader goal? Gerald F. Davis finds an elegant way to pose this question in an "Editorial Essay: What is Organizational Research For?" which appeared two years ago in the Administrative Science Quarterly (2015: 60:2, pp. 179-188):

San Jose, California is home to one of the most peculiar structures ever built: the Winchester Mystery House, a 160-room Victorian mansion that includes 40 bedrooms, two ballrooms, 47 fireplaces, gold and silver chandeliers, parquet floors, and other high-end appointments. It features a number of architectural details that serve no purpose: doorways that open onto walls, labyrinthine hallways that lead nowhere, and stairways that rise only to a ceiling. 

According to legend, Sarah Winchester, the extremely wealthy widow of the founder of the Winchester rifle company, was told by a spiritual medium that she would be haunted by the ghosts of the people killed by her husband’s rifles unless she built a house to appease the spirits. Construction began in 1884 and by some accounts continued around the clock until her death in 1922. There was no blueprint or master plan and no consideration of what it would mean to reach completion. The point was simply to keep building, hence the sprawling and incoherent result. 

Is the Winchester Mystery House a good house? It’s certainly beautiful in its own way. Any given room might be well proportioned and full of appealing features. A stairway might be made of fine wood, nicely joined and varnished, and covered in a colorful carpet. Yet it ends in a ceiling and serves no useful purpose other than keeping its builders busy. In assessing whether a house is good, we have to ask, ‘‘Good for what? Good for whom?’’—the questions we would ask about other kinds of constructions. An airport is designed for a specific function, is built according to a blueprint, and is straightforward to evaluate, although evaluations might vary widely depending on people’s experience with the realized design. A cathedral has a plan that might take decades to realize, with adjustments along the way, guided by a shared vision for what its realization will be. But for the Winchester Mystery House, the act of building was an end in itself. It is a paradigmatic folly, according to one find on a Google search, ‘‘a costly ornamental building with no practical purpose.’’ 

The field of organization studies might be compared to a sprawling structure. There can be little doubt that a lot of activity goes into constructing the field: according to the Web of Knowledge, over 8,000 articles are published every year in the 170+ journals in the field of ‘‘Management,’’ adding more and more new rooms. The questions of good for what and good for whom are worth revisiting. There is reason to worry that the reward system in our field, particularly in the publication process, is misaligned with the goals of good science: we often reward novelty over truth. As a result, we may look more like a mystery house than a cathedral.

The general lesson here seems to me to apply to economics, and probably to a number of other fields as well, at least in the social sciences and humanities. As Davis goes on to note: "[S]cholars give different answers to the question ‘What is good for the advancement of our knowledge?’ versus ‘What is good for the advancement of a scholar’s career?' The misalignment between individual career incentives and the advancement of our science is the source of much mischief."

The Smile Curve: The Distribution of Benefits from Global Value Chains

Global value chains have been on the rise. Roughly one-third of international trade is "traditional" trade, in which all of production happens in one country and all of consumption happens in another. About two-thirds is either a "simple" global value chain, in which "value added crosses national borders only once during the production process, with no indirect exports via third countries or re-exports or re-imports" or a "complex" global value chain, in which the value-added crosses national borders at least twice. The Global Value Chain Development Report 2017, which has the theme of "Measuring and Analyzing the Impact of GVCs on Economic Development," explores these issues and others. The report is published a stew of groups, with participants from the World Bank Group, the Institute of Developing Economies, the Organisation for Economic Co-operation and Development, the Research Center of Global Value Chains headquartered at the University of International Business and Economics, and the World Trade Organization. It consists of an "Executive Summary" by David Dollar followed by eight chapters written by various contributors.

Here, I want to focus on some discussion from the report about how the benefits of global value chains are distributed, and the idea of the "smile curve." Consider a value-added chain which starts off with the production of new technology and high-tech components. These parts are then combined with other lower-tech inputs, like pieces of molded plastic and small flashing lights, during a manufacturing process. Finally, the finished product is marketed and sold to consumers, together with certain kinds of after-sales servicing. The "smile curve argument is that as most of the economic gain from this global supply curve is collected at the front end (new technology and high-tech components) and at the back end (marketing and sales), with less of the economic gain collected in the middle stages (lower-tech components and manufacturing).

Here's an explanation from David Dollar in the "Executive Summary." He is describing a specific example of exports from  China's electrical and optical equipment in 1995 and again in 2009. The points on the graph show where where the process is happening (country name) and the specific industry involved (the number after the country name). Dollar explains: 

"The vertical axis plots labor compensation per hour in the country-sector, indicating high- versus low-value-added activities. The horizontal axis plots the total forward linkage–based production length between global consumers of electrical and optical equipment and a specific participating industry in the corresponding GVC.

"The logic of the smile shape is as follows. Research and design activities for critical components of the electrical and optical equipment occur early in the production process (left side of the figure). These knowledge activities tend to be high-value-added activities in GVCs and tend to be carried out in more advanced economies. For example, in the 1995 curve Japan and the United States (JPN28 and USA28) are in the upper left corner, reflecting the high-value-added contributions from these two countries’ financial services sector. The Chinese industry that manufactures the good, Chinese electrical and optical (CHN14), is at the bottom point of the curve, reflecting assembly activity at low wages. The activities closest to the consumer are marketing, logistics, and after-product servicing.

"These market knowledge industries are also high value added, as shown by the upward-sloping part of the smile curve on the right. And they tend to be carried out in advanced economies, where the mass consumption products are eventually purchased by households. The comparison of the same country-sector export in 1995  and 2009 reveals that the smile curve for this product has deepened. Compensation in the USA28 industry rose from about $25 an hour to $60 an hour, whereas Chinese wages remained very low on the smile curve. But the bubble that shows the total value added produced by CHN14 expanded about 10-fold. China may have held a low position in the value chain throughout this period, but it brought a huge number of workers from its impoverished countryside to work in the related factories. 

"Figure 3 captures anxieties felt by both rich and poor countries in contemplating contemporary trade. Rich-country electorates worry that manufacturing is being hollowed out—that is, that semiskilled production jobs have moved to developing countries or, to the extent that such jobs still remain in advanced economies, have suffered downward pressure on wages. Poor countries worry that they are trapped in low-value-added activities and are locked out of the higher value-added activities in
design, key technological inputs, and marketing."

Dollar draws some implications for  who benefits within a given economy from participation in global value chains. He writes:

"These findings do not permit drawing strong causal conclusions, but the analysis is consistent with a story in which the benefits from GVC-related trade have been distributed highly unevenly. For the United States the big winners appear to be high-skilled workers and multinational corporations. GVCs have enabled them to benefit from enormous productivity gains in developing countries such as China. Ordinary workers in the United States have not seen much (if any) benefit. In China ordinary workers have benefited. Even at the beginning of the period factory wages in China were far ahead of rural incomes. And those wages doubled over 15 years. The wage gains are a driving factor behind the impressive decline of absolute poverty in China. Relatively speaking, however, the big benefits in China accrued to the small number of high-skilled workers and to the owners of capital, including foreign investors. ...

"[I]n developing countries deeply involved in GVCs, virtually the entire population benefits from the expanded trade and faster growth, though not all to the same extent. In developed countries, by contrast, the benefits of expanded international trade and investment are highly concentrated among the very skilled in the workforce and the owners of capital. Both groups are already high up in the income distribution, and globalization increases their share of the pie."

For developing countries and emerging markets, global value chains offer an enormous opportunity. Such countries can now just become involved in a piece of the production chain, without needing to produce all of a finished product domestically, before being able to participate in world trade. Dollar cites evidence that the emerging market economies that participate in  global value chains tend to have faster growth.

But again, cause and effect are not simple to disentangle here. Countries that participate in global value chains have the physical, legal, and regulatory infrastructure that enables not just imports an exports, but also flows of financial capital and enforceable contracts--which are factors that should tend to boost prosperity, too. As Dollar notes: For the involvement of developing countries in GVCs, geography clearly matters. The world seems to have three interconnected production hubs for the extensive trade in parts and components: one centered on the United States, one on Asia (China, Japan, Republic of Korea), and one on Europe (especially Germany)."

For advanced economies, given that the gains from global value chains accrue mainly to high-income workers and investors of capital, they may seem of less importance. However, if US firms did not have access to global value chains, they will find it harder to compete in global markets with firms from other countries that do. In addition, I am not someone who opposes to higher income for skilled workers or capital investors (which after all, includes my retirement account as well as pension funds and life insurance companies). I would just prefer to see some additional steps taken toward redistribution of some of that income toward policies that would benefit others across the rest of society.

Will the China Shock Operate in Reverse?

Everyone knows that China's economy has had explosive economic growth in recent decades, with tidal effects through the rest of the global economy. In fact, China's economy has come so far and so fast that some of the main shocks it has caused in recent decades may be about to move into reverse. At least, that is the provocative thesis of Charles Goodhart and Manoj Pradhan in "Demographics will reverse three multi-decade global trends," written as Bank of International Settlements Working Paper No 656 (August 2017). They write:

"The global economy over the last 35 years has experienced three significant trends; a decline in real interest rates (supporting asset prices), a drop in real labour earnings in advanced economies (AEs), and, perhaps most startling of them all, a meteoric rise in inequality within countries alongside a drop in inequality between them. All three trends have been researched extensively, but individually, locally and independently from one another. We argue that such an analysis is the wrong approach. Instead, we believe all three trends need to be examined together in a global context. Specifically, we argue that demographic developments over the last 35 years have driven falling real interest rates, inflation and wages, and rising inequality within countries as well as some of the falling inequality between AEs and emerging market economies (EMEs). Can demographics really explain all three trends? If we include the integration of the gigantic labour forces of China and eastern Europe into the global economy, then global demographic dynamics do help to explain all three trends. But if that is correct, then the demographic reversal that the global economy will witness over the coming decades will also reverse the fall in real interest rates and inflation, while inequality will fall."

It's useful to spell out these connections in more detail. As just noted, they include both China and eastern Europe as central parts of their explanation, although China plays a bigger role. The argument rests on two sets of interrelated changes in global labor and capital markets.

In global labor markets, when China and eastern Europe entered global trade in force in the late 1990s and early 2000s, it affected labor market prospects across the high-income countries. However, that process of labor market entry has now run its course, and in the future, the growth of workers in China, eastern Europe, and other emerging markets will actually decline a bit. Here's a figure showing the labor shock from China and eastern Europe:

In addition, China in particular has had extraordinarily high rates of saving in the last few decades, and the greater supply has helped to drive real interest rates lower. But China's population is now aging, and countries that are on average older tend to save less, while spending more on consumption among the elderly. Thus, the shock to global financial markets from China's high saving rate is about to run in reverse, too. Here's a figure on how the working-age share of the population is already in decline in high-income economies, and is soon to level off and decline a bit in emerging markets.

Goodhard and Pradhan explain the dynamics in this way:

"China has played a well known role in lowering global real interest rates. Its share of world trade (an average of exports plus imports) increased from slightly less than 2% in 1990 to almost 12% by end-2014. The asymmetric integration of China into the world economy is what really affected these dynamics. China’s economic markets joined the global economy, but its financial markets did not. China’s labour force joined the global economy with a capital/labour ratio that was well below global standards, but its financial border was closed, thus allowing its domestic real interest rate to remain very low in order to drive capital accumulation at home. Imposing strict capital controls and pegging the currency allowed monetary policy to remain extraordinarily easy for a long time in order to maximise internal growth. As a result, there was a shift of overall investment out of the rest of the world and into China. Furthermore, the savings ratio was boosted in China through corporate/state-owned enterprises (SOEs) and household savings, especially owing to the lack of a social safety net and the collapse of the family safety net as the “one child” policy took hold. Thus, despite an already high investment ratio, the savings ratio climbed even higher, creating a savings glut that channelled back into the US Treasury bond market. On both counts, real interest rates outside China fell as ex ante investment fell relative to ex ante savings.

"And then there was eastern Europe. Over a similar time span, communism collapsed in the USSR and eastern Europe. As in China’s economy, prior to the fall of communism and their subsequent participation in the global economy, these countries had been more or less isolated. In these countries, labour was abundant and quite well educated, but capital and management were limited. A fruitful combination ensued: the West supplied much of the management, while the East supplied the labour. The numbers associated with this integration are staggering. Counting just the potential workforce, the working population in China and eastern Europe (aged 20–64) was 820 million in 1990 and 1,120 million in 2014, whereas the available working population in the industrialised countries was 685 million in 1990 and 763 million in 2014 (Graph 4). That represents a one-time increase of 120% in the workforce available for global production."

The authors readily admit that their proposition, especially the part about how real interest rates are likely to rise in the future, is controversial. Basically, they argue that both savings and investment will fall in China as the population ages, but that the decline in savings will be substantially bigger than the decline in investment--which is where the controversy arises. They argue:

"Everything about China is enormous; its demographic dynamics have been and remain remarkable, and the consequential movements in its savings and investment ratios have been extraordinary. As China’s labour force dynamics change direction, the savings-investment balance within and even outside China will change as a result. Demographics will ensure that China’s extraordinary savings will fall. Prior to modern times, the (relatively few) old in China were cared for in the extended family. But the one-child policy, extended for too long, has meant that support has gotten more and more scarce for the aged. With an insufficient social safety net, personal savings rose to plan for retirement. Add to this the incentive on the managers of state-owned enterprises to retain, rather than pay out, profits, and the explanation of these extraordinary savings ratios becomes clearer. ...

"The economic impact of China on the world economy has been great. One dimension of this has been to impart upward pressure on the price of raw materials including, notably, oil. Much oil has been produced in relatively sparsely populated countries (Saudi Arabia and the Gulf and Norway). With China’s growth declining, and with the need to shift from fossil fuels to renewables, the net savings and current account surpluses of the petro-currency countries are likely to erode...."

At least for me, the Goodhart-Pradhan argument falls into the category of plausible speculation. For some qualifications and alternative speculations, I commend the accompanying comments on the paper by Masaaki Shirakawa and Alan Auerbach. But in the bigger picture, if you are concerned some of the consequences of how China's pattern of economic growth has affected the US and the global economy, it's useful to be aware that China's growth has moved so quickly that its economic patterns in the next 20 years are likely to be quite a bit different than in the previous 20 years, and the consequences in China and elsewhere will differ, too.

Final note: The Goodhart-Pradhan paper was presented as part of the 15th BIS Annual Conference, held in Lucerne, Switzerland, on June 24, 2016. For those who are interested, here's the full list of papers and comments, with links:

BIS Papers no 92 contains the opening address by Jaime Caruana (General Manager, BIS) and remarks by Kevin Warsh (Hoover Institution and Stanford Graduate School of Business).

Dollar pricing redux, BIS Working Papers No 653
by Camila Casas, Federico Díez, Gita Gopinath, Pierre-Olivier Gourinchas
Comments by Philip Lane and Richard Baldwin

World changes in inequality: an overview of facts, causes, consequences and policies, BIS Working Papers No 654
by François Bourguignon
Comments by Barry Eichengreen and Raquel Fernández

The FinTech Opportunity, BIS Working Papers No 655
by Thomas Philippon
Comments by Ross Levine

Demographics will reverse three multi-decade global trends, BIS Working Papers No 656
by Charles Goodhart
Comments by Masaaki Shirakawa and Alan Auerbach

Foreign Aid to Haiti: Benefit/Cost Options

Haiti has the lowest per-capita GDP of any country in the western hemisphere. The World Bank notes that "more than 6 million out of 10.4 million (59%) Haitians live under the national poverty line of US$ 2.42 per day and over 2.5 million (24%) live under the national extreme poverty line of US$1.23 per day. It is also one of the most unequal countries, with a Gini coefficient of 0.61 as of 2012."

Back in 2010, after the terrible earthquake that hit Port-au-Prince killed 200,000 people, Haiti was for a time a substantial recipient of foriegn aid. But it's now seven years later. Other disasters have happened. Canada has at times been the single most important foreign aid donor to Haiti, and Haiti was the top recipient of Canadian foreign aid in 2010. But Haiti now by ranks 16th among countries receiving aid from Canada.  Thus, the Canadian government decided to fund a study to set priorities for its foreign aid. It provided funding to the Copenhagen Consensus group for the Haiti Priorise project, which carried out benefit-cost studies on a number of possible aid priorities. 

It's worth noting that the specific numbers in benefit-cost calculations are always a little shaky: if you are comparing two policies with benefit-cost ratios of, say, 4.2 and 3.5, it's probably fair to conclude that for practical purposes they are about the same. But a lack of perfect precision doesn't mean a lack of any insight. If the benefit-cost calculations find that fortifying wheat flour with micronutrients has a benefit-cost ratio of 24, while building pit latrines in urban areas has a benefit-cost ratio of 0.9, then it's sensible to decide (at least provisionally, barring some dramatic change in the available information) that one option is strongly preferable to the other.

If you want to look over the research  behind Haiti Priorise recommendations, this page offer the links to each of the presentations of evidence; in turn, each page has a link to an underlying background paper.

Here's a list of the policy options where the benefit-to-cost ratio is 11 or higher, with the benefit-to-cost ratio listed first and the policy option afterward. Thus, wheat flour micronutrient fortification has a benefit-to-cost ratio of 24. If you want more information, the presentation is here and the underlying paper, written by four professors at UC-Davis, is here.

• 24 Wheat flour micronutrient fortification
• 22 Reform electricity utility
• 18 Access to contraception
• 17 Early childhood stimulation
• 16 Train first responders
• 14 Shelters for women and children
• 13 Immunization for children 0-1
• 12 Expand mobile broadband
• 12 Domestic violence hotline
• 11 Electronic registration of birth certificate
• 11 Maternal and newborn health

On the other end of the scale, here are the policy options with a benefit-to-cost ratio of 1 or less, again with the benefit-to-cost ratio first, and the policy option next.

• 1.0 Solar photovoltaic power
• 1.0 Increase domestic worker wage
• 1.0 Increase public service pay 10%
• 1.0 Urban container-based sanitation
• 0.9 Pit latrines in urban areas
• 0.8 20% rice tariff for 10 years
• 0.8 Improved and intensified rice production
• 0.8 Prevent teen dating violence
• 0.8 Vaccinate girls against cervical cancer
• 0.5 Solar reflective power

The value of this approach comes in several forms. In some cases, results are non-intuitive (at least for me). For example, I probably wouldn't have guessed both that a domestic violence hotline and shelters for women and children would be near the top of the list, while also guessing that seeking to prevent teen dating violence would be near the bottom of the list. I'm not surprised that vaccinations for newborns and maternal-child health is high on the list, but I am surprised that the gains from vaccinating girls against cervical cancer ranks so low.

The more broad-based advantage is the potential for reallocating resources. Shifting aid funds from programs with the lowest benefit-to-cost ratios to those with the highest benefit-to-cost ratios will not change expenditures, but would increases benefits tenfold and more.

Finally, if you disagree with a benefit-cost analysis and wish to dispute it, the reasons for the number out in the open. Have at it. 

The Next Inflection Point for Aging and Social Security

It was apparent back in the 1970s that something needed to be done about Social Security. A presidential commission under Alan Greenspan proposed a combination of phased-in tax increases and benefit cuts that were enacted into law in 1983. The changes were sufficient so that the date at which the Social Security trust fund would run out of money was moved back from 1983 (!) into the 2030s.  My purpose here is neither to praise nor to critique that report and legislation from more than three decades ago. It is to point out that the 2030s are a lot more visible in the headlights now than they were back in 1983, and we need one more round of legislation to assure that Social Security will remain solvent.

A few figures from the  the 2017 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds  (released July 13, 2017), tell much of the underlying story. The figure shows expenditures and costs. One result of the legislation following the Greenspan commission report was that for several decades Social Security was collecting more in taxes than it paid out in benefits, with the surpluses being invested in US Treasury debt and deposited in a trust fund. But back in 2009, the trust fund started to diminish, instead of to increase. Up through 2034, on the current projections, annual benefits paid out can be larger than the annual income of the system, because of the trust fund. But in 2034, the trust fund runs out, and the annual income of the system would be 77% benefits that have been promised.

Underlying this fiscal shift are the demographic patterns that affect the number of working-age people and retirees in the US economy. This figure shows the ratio of the number of workers paying into Social Security divided by the number of beneficiaries. Back in the 1980s, 1990s, and early 2000s, the ratio was more than 3:1. But one of the most predictable (and commonly predicted!) demographic shifts in US history started happening around 2010. The front end of the baby boomer generation, those born from 1946 through the early 1960s, turned 65 years of age in 2010. The ratio of workers paying in divided by beneficiaries falls from well above 3 as late as 2007 to nearly 2 by 2030. In the timelines that commonly apply to demographic shifts, this is a very shift in a relativley short time.

But along with the obvious bad news for the finances of the Social Security system, there's an aspect of good news here as well. The big demographic shift of the retiring boomers will be pretty much over by the mid-2030s. As the first figure shows, costs are 77% of projected income in 2030, and 73% of projected income in 2091--much the same. As the second figure shows, the ratio of contributing workers to beneficiaries falls to roughly 2:1, but then stays sags only a bit more by the end of the 21st century. Given that the overall fiscal and demographic balance of the system doesn't change much after about 2035, it is technically possible to put into place one big fix of changes that would bring the system into fiscal balance (minor future tweaks excepted) for the rest of the 21st century.

What would it take to close the gap? Conveniently, the Social Security Administration publishes a "Summary of Provisions that Would Change the Social Security System" (most recent version, February 28, 2017). It lists dozens of proposals, many of them just variations on the timing and size of the change, and for each proposal, it lists what percentage of the long-range short-fall (that is, over the next 75 years) would be eliminated by this specific change. It's not really kosher just to add together the estimates about individual proposals to get an estimate of the combining several of the proposals, because the changes would overlap or interact in certain ways that could diminish or increase their effects. But for back-of-the-envelope estimates--and just getting a sense of what changes would matter a lot and what changes wouldn't matter so much--no great harm is done by listing some specific estimates. Without pre-judging the merits, here's a selection of some possible changes.

Under current law, Social Security benefits are adjusted upward each year according to the rise in the Consumer Price Index. For example, if instead the cost-of-living adjustment was 0.5 percentage points lower each year (starting in December 2017), this step would eliminates 34% of the long-run actuarial imbalance.

Under current law, Social Security benefits are calculates by looking at average earnings over the highest 35 years of earnings, which are expressed as a statistic called AIME, or "average indexed monthly earnings." Then a formula is applied to AIME to calculate the PIA, or "primary insurance amount," which is the basis for benefits paid.  A higher AIME generally leads to a higher PIA, but the relationship isn't a simple proportion; instead, there's an element of redistribution in which those with lower AIME get a higher share of their income replaced by Social Security benefits. One could adjust how AIME is calculated, or adjust the PIA formula in many ways.

For example, one proposal is to "increase the number of years used to calculate benefits for retirees and survivors (but not for disabled workers) from 35 to 40, phased in over the years 2017-2025," which would address 17% of the long-range actuarial imbalance. However, there are lots of ways of tweaking the PIA formula. For example, one can tweak the formula so there is a benefit cut only for those with higher AIME, and so that the change doesn't start right away. For example, one such proposal would "create a new bend point at the 30th percentile of the AIME distribution of newly retired workers. Maintain current-law benefits for earners at the 30th percentile and below. Reduce the 32 and 15 percent factors above the 30th percentile such that the initial benefit for a worker with AIME equal to the taxable maximum is reduced by 1.21 percent per year as compared to current law (for the years that progressive indexing applies)." This step would eliminate 53% of the the long-run actuarial imbalance.

Under current law, there is a "normal retirement age" for Social Security, although retirees have an option to retire earlier and receive lower benefits, or to retire later and receive higher benefits. The Greenspan commission recommendations, have already been phasing in a later "normal retirement age," and as life expectancies continue to rise, this change could be extended. For example, one proposal would be that "after the normal retirement age (NRA) reaches 67 for those age 62 in 2022, increase the NRA 2 months per year until it reaches 69 for individuals attaining age 62 in 2034. Thereafter, increase the NRA 1 month every 2 years." This change would eliminate 40% of the actuarial imbalance.

Social Security is funded by a payroll tax of 12.4% on earnings up to $127,200. Thus, it would be possible either to raise the tax rate, or to raise the income ceiling, or both.  If one was to increase the payroll tax "by 0.1 percentage point each year from 2022-2041, until the rate reaches 14.4 percent in 2041 and later," that step eliminates 55% of the long-run actuarial imbalance. Alternatively, say that we "eliminate the taxable maximum in years 2027 and later. Phase in elimination by taxing all earnings above the current-law taxable maximum at: 1.24 percent in 2018, 2.48 percent in 2019, and so on, up to 12.40 percent in 2027. Provide benefit credit for earnings above the current-law taxable maximum, adding a bend point at the current-law taxable maximum and applying a formula factor of 5 percent for AIME [average indexed monthly earnings] above this new bend point." This step alone would address 72% of the long-run actuarial imbalance.

An alternative proposal in this category would be to apply Social Security taxes to the value of employer-provided health insurance,which is currently an untaxed fringe benefit for some workers --but not others. A sample proposal sounds like this: "Expand covered earnings to include employer and employee premiums for employer-sponsored group health insurance (ESI). Starting in 2020, phase out the OASDI payroll tax exclusion for ESI premiums. Set an exclusion level at the 75th percentile of premium distribution in 2020, with amounts above that subject to the payroll tax. Reduce the exclusion level each year by 10 percent of the 2020 exclusion level until fully eliminated in 2030. Eliminate the excise tax on ESI premiums scheduled to begin in 2020." This step would eliminate 33% of the long-run actuarial imbalance.

As long as we are tinkering with tax and benefit rates, some steps might be taken to help those with the lowest incomes who depend most heavily on Social Security. For example, there are a variety of proposals for raising the minimum benefit, which would tend to worsen the long-run actuarial imbalance by about 5%. A related idea is to offer an increase in minimum benefits for the very old, who have been receiving Social Security for at least 20 years, on the ground that this group is especially likely to be in need. Another option would "increase the earliest eligibility age (EEA) by two months per year for those age 62 starting in 2018 and ending in 2035 (EEA reaches 65 for those age 62 in 2035)," so that people who have economic or health-related reasons to claim benefits earlier could do so--although the level of benefits would be reduced for those who took this option. One could also tinker with the formulas to provide a boost for elderly workers who remain active in the workforce. For example, one proposal would eliminate Social Security taxes for those who have worked more than 180 quarters (that is, 45 years).

Thus, if thinking of an overall big deal on Social Security, it makes sense to take steps that would address, say, 120% of the long-run actuarial imbalance, and then "spend" 20% of that amount on targeted increases in Social Security benefits for the most needy.

At least for geeks like me, innocent as a rose of real-world political machinations, it appears that a political opportunity lurks here! What if the remaining practical politicians in one party or the other could hammer out a plausible bill to fix Social Security for the 21st century, which would offer some  mixture of all these policies.

Of course,  whatever party wants to take this on would need to keep its own extremists in check. In my experience, Republican extremists on this issue sometimes insist on trying to address the entire problem with benefit cuts, or on turning this into a fight over whether to privatize Social Security. Meanwhile, Democratic extremists on this issue sometimes want to disregard the projections of the Social Security actuaries, argue that the problem isn't real, and then offer large and broad increases in benefits. I'm not saying it's an easy problem--although compared to North Korea or rising health care costs, I don't think Social Security is an especially hard problem. And think of the potential political gains from being the party that got its act together and saved Social Security for the 21st century!

Blockchain: New Frontiers

Blockchain is a technology that offers reliable by decentralized record-keeping. The best-known applications of "blockchain" technology are still the alternative currencies, of which Bitcoin remains most prominent. But it looks more and more as if the main near-term expansions of blockchain technology are not going to be about currencies, but instead relate to other kinds of ownership, transactions, and record-keeping.  A couple of recent studies emphasizing this theme are "How blockchain technology could change our lives," written by Philip Boucher, Susana Nascimento, and Mihalis Kritikos for the European Parliamentary Research Service (February 2017), and "Blockchain and Economic Development: Hype vs. Reality," written by Michael Pisa and Matt Juden for the Center for Global Development (CGD Policy Paper #107, July 2017).

Both papers offer a verbal and intuitive sketch of how the blockchain technology works. Here's a taste of the explanation from Boucher, Nascimento and Kritikos:

"Blockchain offers the same record-keeping functionality but without a centralised architecture. The question is how it can be certain that a transaction is legitimate when there is no central authority to check it. Blockchains solve this problem by decentralising the ledger, so that each user holds a copy of it. Anyone can request that any transaction be added to the blockchain, but transactions are only accepted if all the users agree that it is legitimate, e.g. that the request comes from the authorised person, that the house seller has not already sold the house, and the buyer has not already spent the money. This checking is done reliably and automatically on behalf of each user, creating a very fast and secure ledger system that is remarkably tamper-proof. Each new transaction to be recorded is bundled together with other new transactions into a 'block', which is added as the latest link on a long 'chain' of historic transactions. This chain forms the blockchain ledger that is held by all users. ..."

Thus, anyone can download the blockchain of all transactions. But who has an incentive to update and check the blockchain? Blockchain technology relies on "miners" to do this job. Miners need to spend computing resources to solve a complicated algorithm before they can add a block of transactions to the blockchain, and they are paid either by users of blockchain services or by the system itself. Again, Boucher, Nascimento and Kritikos explain:

"This work is called 'mining'. Anybody can become a miner and compete to be the first to solve the complex mathematical problem of creating a valid encrypted block of transactions to add to the blockchain. There are various means of incentivising people to do this work. Most often, the first miner to create a valid block and add it to the chain is rewarded with the sum of fees for its transactions. Fees are currently around €0.10 per transaction, but blocks are added regularly and contain thousands of transactions. Miners may also receive new currency that is created and put into circulation as an inflation mechanism.

"Adding a new block to the chain means updating the ledger that is held by all users. Users only accept a new block when it has been verified that all of its transactions are valid. If a discrepancy is found, the block is rejected. Otherwise, the block is added and will remain there as a permanent public record. No user can remove it. While destroying or corrupting a traditional ledger requires an attack on the middleman, doing so with a blockchain requires an attack on every copy of the ledger simultaneously. There can be no 'fake ledger' because all users have their own genuine version to check against. Trust and control in blockchain-based transactions is not centralised and black-boxed, but decentralised and transparent. These blockchains are described as 'permissionless', because there is no special authority that can deny permission to participate in the checking and adding of transactions." 

When blockchain is used for Bitcoin, the blockchain records the ownership of each bitcoin, and when each bitcoin is transferred to another user. But the users themselves remain (although sufficiently motivated law enforcement can sometimes find a way in). Bitcoin has been in the news lately because it has been experiencing a price spike. Here's the price of bitcoin in US dollars from Google Finance website. As you can see, the price of a bitcoin first soared above $1,000 back in 2013, sagged, slowly moved back to about $1,000, but then in the last few months has soared to above $4,000.



This recent spike,while it certainly gladdens the heart of those who already hold bitcoins, is actually part of the reason why bitcoin is not an especially good currency. Useful currencies are relatively stable in value! In most modern economies, traditional currencies typically allow transactions that are already relatively fast, secure,and cheap. For most people, it's not clear how they would benefit from using bitcoin for transaction purposes. Pisa and Juden explain (footnotes and citations omitted):

To usurp the role of national currencies, bitcoin would first need to fulfill some (though perhaps not all) of the core functions that money provides, including serving as a medium of exchange, a unit of account, and a store of value. Currently, bitcoin does none of these things very well: its extreme volatility prevents it from being a good store of value and unit of account, and retailers and consumers—who appear satisfied with the cost/benefit tradeoffs associated with using credit cards—have not accepted the currency widely enough to consider it a reliable medium of exchange. National governments also present an obstacle:  currently, no government allows taxes to be paid with bitcoin, which reduces the incentives for individuals and companies to use it.

"Even if national governments choose not to resist broader usage of bitcoin, there are questions about the technology’s ability to scale due to the speed of the network. Currently, the Bitcoin blockchain can process a maximum of seven transactions per second. To put this in context, Visa processes an average of 2,000 transactions per second and has a peak capacity of 56,000 transactions per second. Increasing the speed of the Bitcoin network could be accomplished through increasing block size. This is technically feasible, but some network participants have resisted it, since it would increase the cost of mining bitcoin and give more control to larger entities, leading to greater centralization of the network. Finally, there are concerns about the energy intensity of mining. Although estimates vary widely, some indicate that bitcoin mining could consume 14,000 megawatts of electricity by 2020, which is comparable to Denmark’s total energy consumption."

But although bitcoin and virtual currencies may not be likely to take over the money supply anytime soon, the blockchain technology can be adapted for a considerable array of other purposes. Here are some suggestions about these other purposes.

Ownership of Digital Media (as explained by Boucher, Nascimento, and Kritikos)

"When consumers purchase books and discs, they come to own physical artefacts that they can later sell, give away or leave as part of their inheritance. There are limitations to their rights, for example they should not distribute copies, and should pay royalties if they broadcast the content. In buying the digital equivalent of this same media, consumers know they will not gain ownership of a physical artefact, but many do not realise that they do not gain ownership of any content either. Rather, they enter into a licensing agreement which is valid for either a period of time or a fixed number of plays. These licences cannot be sold, given away or even left as part of an inheritance. Building a collection of legitimately-owned digital music, literature, games and films often comes at a cost similar to that of a collection of various discs and books with the same content. It is a substantial lifelong investment but one that cannot be transferred and that expires on death. While older generations might take pleasure in reliving the tastes and experiences of loved ones via the boxes of vinyl, books and games they left behind, today's children may not enjoy the same access to their parent's digital content. Could blockchain technology help resolve these and other problems with digital media? ... 

"The blockchain could be used to register all sales, loans, donations and other such transfers of individual digital artefacts. All transactions are witnessed and agreed by all users. Just like transactions in a bank account or land registry, artefacts cannot be transferred unless they are legitimately owned. Buyers can verify that they are purchasing legitimate copies of MP3s and video files. Indeed, the transaction history allows anyone to verify that the various transfers of ownership lead all the way back to the original owner, that is, the creator of the work. The concept could be combined with smart contracts so that access to content can be lent to others for fixed periods before being automatically returned, or so that inheritance wishes could be implemented automatically upon registration of a death certificate. ... Using blockchain technology in this way could for the first time enable consumers to buy and sell digital copies second hand, give them away or donate them to charity shops, lend them to friends temporarily or leave them as part of an inheritance – just as they used to with vinyl and books – while ensuring that they are not propagating multiple unlicensed copies."

Management of Global Supply Chains (as explained by Boucher, Nascimento, and Kritikos)

"Blockchain-based applications have the potential to improve supply chains by providing infrastructure for registering, certifying and tracking at a low cost goods being transferred between often distant parties, who are connected via a supply chain but do not necessarily trust each other. All goods are uniquely identified via 'tokens' and can then be transferred via the blockchain, with each transaction verified and time-stamped in an encrypted but transparent process. This gives the relevant parties access whether they are suppliers, vendors, transporters or buyers. The terms of every transaction remain irrevocable and immutable, open to inspection to everyone or to authorised auditors. Smart contracts could also be deployed to automatically execute payments and other procedures.

"Several companies, innovators and incumbents are already testing blockchain for record-keeping in their supply chains. Everledger enables companies and buyers to track the provenance of diamonds from mines to jewellery stores and to combat insurance or documentation fraud. For each diamond, Everledger measures 40 attributes such as cut and clarity, the number of degrees in pavilion angles and place of origin. They generate a serial number for each diamond, inscribed microscopically, and then they add this digital ID to Everledger's blockchain (currently numbering 280 000 diamonds). This makes it possible to establish and maintain complete ownership histories, which can help counteract fraud and support police and insurance investigators tracking stolen gems. It also allows consumers to make more informed purchasing decisions, e.g. to limit their search to diamonds with a 'clean' history that is free from fraud, theft, forced labour and the intervention of dubious vendors who are linked to violence, drugs or arms trafficking. ...

Wal-Mart, the world's largest retailer, is trialling Blockchain for food safety. It is expected that a Blockchain-based accurate and updated record can help to identify the product, shipment and vendor, for instance when an outbreak happens, and in this way get the details on how and where food was grown and who inspected it. An accurate record could also make their supply chain more efficient when it comes to delivering food to stores faster and reducing spoilage and waste.

International Financial Transactions (as explained by Pisa and Juden)

"The cost and inefficiency associated with making international payments across certain corridors present a barrier to economic development. Whether it is a business making an investment in a developing country, an emigrant sending money back home, or an aid organization funding a project abroad, moving resources from rich to poorer countries ultimately requires money to be sent across borders. ... [C]onducting  these transactions through the formal financial system can involve considerable cost and delay. Cross-border payments are inefficient because there is no single global payment infrastructure through which they can travel. Instead, international payments must pass
through a series of bilateral correspondent bank relationships, in which banks hold accounts at other banks in other countries. The number of such relationships that a bank is willing to maintain is limited by the cost of funding these accounts as well as the risk of conducting financial transactions with banks who lack strong controls to prevent illicit transactions ... 

"One consequence of the fragmented global payments system is the high cost of remittances, which are an enormously important source of development financing. Roughly $430 billion of remittances were sent to developing countries in 2016, nearly three times as much as  official aid. The global average cost of sending remittances worth $200 is 7.4 percent but varies greatly  across corridors: for example, the average cost of sending $200 from a developed country to South Asia is 5.4 percent, while the cost of sending the same value to sub-Saharan Africa is 9.8 percent (World Bank 2017).  ...
Small and medium-sized businesses face similar costs when conducting cross-border payments. Industry surveys suggest that approximately two-thirds of cross-border businesses are unhappy with the delays and fees associated with using traditional bank transfers for sending international payments ...

"Using a bitcoin-based company to send remittances to countries that have deep bitcoin exchange markets can be cheaper than using traditional MTOs. For example, sending a $200 remittance from the United States to the Philippines with Rebit.ph currently costs 3 percent, while World Remit, an established MTO that relies on the traditional system of bank wires, charges 3.5 percent. However, in most corridors, bitcoin-based remittance companies have  not been able to offer fees that are substantially lower than traditional players. As a result, many have closed, while others have shifted to emphasizing business-to-business payments ..."  

Public record-keeping and land registries (from both sets of authors)

Boucher, Nascimento, and Kritikos write:

"The most immediate applications of blockchain technology in public administrations are in record keeping. The combination of time-stamping with digital signatures on an accessible ledger is expected to deliver benefits for all users, enabling them to conduct transactions and create records (e.g. for land registries, birth certificates and business licences) with less dependence upon lawyers, notaries, government officials and other third parties. ...

"The Estonian government has experimented with blockchain implementations enabling citizens to use their ID cards to order medical prescriptions, vote, bank, apply for benefits, register their businesses, pay taxes and access approximately 3 000 other digital services. The approach also enables civil servants to encrypt documents, review and approve permits, contracts and applications and submit information requests to other services. This is an example of a permissioned blockchain, where some access is restricted in order to secure data and protect users' privacy. ... 

"Several countries including Ghana, Kenya and Nigeria have begun to use blockchains to manage land registries. Their aim is to create a clear and trustworthy record of ownership, in response to problems with registration, corruption and poor levels of public access to records. Sweden is also conducting tests to put real estate transactions on blockchain, in this case to allow all parties (banks, government, brokers, buyers and sellers) to track the progress of the transaction deal in all its stages and to guarantee the authenticity and transparency of the process while making considerable time and cost savings.

"The Department for Work and Pensions in the UK have also trialled the use of blockchain technology for welfare payments. Here, citizens use their phones to receive and spend their benefit payments and, with their consent, their transactions are recorded on a distributed ledger. The aim of the initiative is to help people manage their finances and create a more secure and efficient welfare system, preventing fraud and enhancing trust between claimants and the government. The UK government is also considering how blockchain technology could enable citizens to track the allocation and spending of funds from the government, donors or aid organisations to the actual recipients, in the form of grants, loans and scholarships."

Pisa and Juden write:

"The idea of storing land titles on a blockchain has obvious appeal. Most importantly, sharing a land registry across a distributed network greatly enhances its security by eliminating “single point of failure” risk and making it more difficult to tamper with records. It could also increase transparency by allowing certified actors (including, potentially, auditors or mon-profit organizations) to monitor changes made to the registry on a near real-time basis, and enhance efficiency by reducing the time and money associated with registering property. ...

"A blockchain cannot, however, address problems related to the reliability of records. This is an obvious point but one that is often overlooked. As noted earlier, the blockchain is a “garbage in, garbage out” system: if a government uploads a false deed to a blockchain (either out of carelessness or deceit), it will remain false. This suggests that using the technology to store land records works best in places where the existing system for recording land titles is already strong. This was certainly the case in Georgia, which initiated a project with The Bitfury Group and the Blockchain Trust Accelerator in 2016 to register land titles on a blockchain. ... Bitfury’s pilot project in Georgia has reportedly been a success. By February 2017, NAPR had registered more than 100,000 documents and the Georgian government announced a new agreement with Bitfury to expand the use of blockchain technology to other government departments. The question now is whether this success can be replicated in less favorable environments. Bitfury will face this challenge in Ukraine where it recently reached agreement with the Ukrainian government to put all its electronic records (not just land titles) onto a blockchain."

Private and Validated Proof of Identity (as explained by Pisa and Juden, citations and footnotes omitted)

A number of countries have recently enacted digital identification systems for their citizens, including most notably India, but also Estonia, Pakistan, Peru, and Thailand. However, these are not blockchain systems, but rather a combination of ID numbers, biometric markers (like fingerprints or iris scans), and cryptography (where a person needs to know a private code). Governments are not likely to outsource the identification of their citizens to blockchain technology. The question is whether it might be useful to use blockchain to provide a private proof of identification that people might use for other purposes, alongside their government ID, while having greater control over their private information. The authors explain:

"Because of the weaknesses of centralized and federated ID solutions, and the belief that people should have greater control over their own personal data and the value derived from it, some ID experts have turned their focus to developing “user-centric” or “self-sovereign” systems. These systems aim to shift control to individuals by allowing them to “store their own identity data on their own devices, and provide it efficiently to those who need to validate it, without relying on a central repository of identity data.” Until recently such a solution seemed technically infeasible, but blockchain technology appears to make it possible.

"Several benefits arise from storing certified attributes on a blockchain. The first is privacy: Alice can control both who she shares her personal information with and how much information she shares. The second is security, as the absence of a centralized database eliminates single point of failure risk. The system is also more convenient, since it allows users to provide verified information with the touch of a button rather than having to access and submit a wide variety of documents. Finally, a blockchain provides an easy and accurate way to trace the evolution of ID attributes since each change is time-stamped and appended to the record preceding it.

"The idea of a self-sovereign ID system based on blockchain is close to becoming a reality. For example, SecureKey and IBM are now piloting a digital ID system in Canada using the Linux Foundation’s open-source Hyperledger Fabric blockchain. The project connects the Canadian government (including national and provincial government agencies) with the country’s largest banks and telecoms on a permissioned blockchain network. These participating companies and agencies play a dual role of certifying users’ attributes and providing digital services. The project is expected to go live in late 2017, at  which time Canadian consumers will be able to opt into the network to access a variety of egovernment and financial services by sharing verified attributes stored on a mobile phone."

Transparency and Coordination of Financial Aid (as described by Pisa and Juden)

"An example of the first model is an application called Stoneblock developed by the company Neocapita. Still in an early stage of development, the platform will allow actors along the development supply chain (including donors, recipients, implementing partners, and auditors) to simultaneously track information about how a project is progressing and the flow of funding. The company is also exploring the use of smart contracts that would trigger disbursement of funds tied to performance metrics. In most cases, human observers would report metrics onto a blockchain (e.g., reporting the number of children attending a school) but in others, electronic meters could play the same role (e.g., measuring the amount of water produced by a well). By allowing all participants on the network to view the same information at the same time, using a blockchain to share project data could dramatically reduce administrative overhead. Storing records on a blockchain would also make them essentially tamper-proof, thereby reducing the potential for misappropriation."

These papers include other possible applications: blockchain-enabled records of when a patent application occurred; blockchain-enabled voting; "smart contracts," which might involve provisions for payments related to in loans, insurance payments, or wills that can be automatically carried out when prespecified dates or conditions occur; and even talk of setting up "decentralized autonomous organizations" on blockchain that would own assets and could carry out a set of contractual commitments with humans, firms, and other autonomous organizations. The alternative currencies like bitcoin get the headlines, but my guess is that these alternative frontiers for the application of blockchain technology are going to be considerably more important very soon -- if they aren't more important already.

For a couple of earlier posts on blockchain and Bitcoin, see:

• "How Does Bitcoin Work" (September 25, 2014)
• "Bitcoin: A Remarkable Innovation and Its Limitations" (May 18, 2015)

Autonomous Cars: Altering One in Nine Jobs

It seems clear that driverless vehicles are coming, although the timeline for their arrival remains unclear. David Beede, Regina Powers and Cassandra Ingram of the Economics and Statistics Administration at the US Department of Commerce look at one aspect, "The Employment Impact of Autonomous Vehicles," in ESA Issue Brief #05-17 (August 11, 2017). They set the stage this way: 

"In September 2016, the U.S. Department of Transportation and the National Highway Traffic Safety Administration (NHTSA) published policy guidelines for AVs [autonomous vehicles], recognizing their potential as “the greatest personal transportation revolution since the popularization of the personal automobile nearly a century ago” (NHTSA 2016). ... The worldwide number of advanced driver-assistance systems (ADAS), such as backup cameras and adaptive cruise control, increased from 90 million to 140 million units between 2014 and 2016. Consumers have indicated a willingness to pay $500-$2,500 per vehicle for ADAS. Sensor technologies are rapidly advancing to provide sophisticated information to vehicle operating systems about the surrounding environment, such as road conditions and the location of other nearby vehicles. However, slower progress has been made in developing software that can mimic human driver decision-making, so that fully autonomous vehicles may not be introduced for another ten or more years ..."  

Autonomous vehicles could lead to sweeping changes in personal mobility, car ownership, parking arrangements, traffic congestion, road safety, and more. I ran through some of the main effects in an earlier post on "Driverless Cars" (October 31, 2012).

The focus of Beede, Powers, and Ingram is on jobs that involve a substantial amount of driving. They write:

"In 2015, 15.5 million U.S. workers were employed in occupations that could be affected (to varying degrees) by the introduction of automated vehicles. This represents about one in nine workers. We divide these occupations into “motor vehicle operators” and “other on-the-job drivers.” Motor vehicle operators are occupations for which driving vehicles to transport persons and goods is a primary activity, are more likely to be displaced by AVs [autonomous vehicles] than other driving-related occupations. In 2015, there were 3.8 million workers in these occupations. These workers were predominately male, older, less educated, and compensated less than the typical worker. Motor vehicle operator jobs are most concentrated in the transportation and warehousing sector. Other on-the-job drivers use roadway motor vehicles to deliver services or to travel to work sites, such as first responders, construction trades, repair and installation, and personal home care aides. In 2015, there were 11.7 million workers in these occupations and they are mostly concentrated in construction, administrative and waste management, health care, and government. Other-on-the-job drivers may be more likely to benefit from greater productivity and better working conditions offered by AVs than motor vehicle operator occupations." 

When they break down these jobs by industry, I was interested to note that "government" is the area where the greatest number of jobs will potentially be affected by driverless cars. This suggests that certain might play a leading role in offering examples of how driverless vehicles could work. Or not!

Many of those whose jobs would be affected by autonomous vehicles are likely to push back. When tallying up the costs and benefits, it's worth noting that those who spend a lot of time driving are actually in relatively hazardous jobs, because of the risk of motor vehicle accidents. "[T]he fatality rate (per 100,000 full-time equivalent workers) for motor vehicle operators from on-the-job roadway incidents involving motor vehicles is ten times the rate for all workers, and the numbers of roadway motor vehicle occupational injuries resulting in lost work time per 100,000 full-time equivalent workers is 8.7 times as large as that of all workers."

Any innovation which directly affects the jobs of about one-ninth of all US workers has the potential to be a dislocating shock of some force. Some  types of workers who spend a good portion of every day in a vehicle will have a harder time adjusting to the change; for others, autonomous vehicles may come as a relief, by freeing them up to focus on other parts of their job. The authors note: 

"Workers in motor vehicle operator jobs are older, less educated, and for the most part have fewer transferable skills than other workers, especially the kinds of skills required for non-routine cognitive tasks. ... [I]n contrast to the workers in the occupations we classify as motor vehicle operators, other on-the-job drivers, of which there are about triple the number of motor vehicle operators, have a more diversified set of work activities, knowledge, and skills. For this group, although driving is an important work activity, it is only one of many important work activities, many of which already require the kinds of non-routine cognitive skills that are becoming increasingly in demand in our economy. Such workers are likely to be able to adapt to the widespread adoption of AVs."

Adam Smith: The Plight of the Impartial Spectator in Times of Faction

Adam Smith's first great book, the Theory of Moral Sentiments, relies heavily in places on the idea of an "impartial spectator." Smith's notion is that our beliefs about morality are closely related to our notion of how a hypothetical "impartial spectator" would react to a given situation. (Here's a quick overview of Smith's argument.) But what happens to a person trying to think like an impartial spectator--that is, a person trying to preserve the integrity of their own personal judgment--in a time of faction?  Smith argues that anyone trying to act in this way is likely to be marginalized by all competing factions.

Here is Smith's comment from the 1759  Theory of Moral Sentiments (Book III, Ch. 1, paragraph 85). As is my wont, I quote here from the online version of the book at the Library of Economics and Liberty website. Smith wrote: 

"The animosity of hostile factions, whether civil or ecclesiastical, is often still more furious than that of hostile nations; and their conduct towards one another is often still more atrocious. ...  In a nation distracted by faction, there are, no doubt, always a few, though commonly but a very few, who preserve their judgment untainted by the general contagion. They seldom amount to more than, here and there, a solitary individual, without any influence, excluded, by his own candour, from the confidence of either party, and who, though he may be one of the wisest, is necessarily, upon that very account, one of the most insignificant men in the society. All such people are held in contempt and derision, frequently in detestation, by the furious zealots of both parties. A true party-man hates and despises candour; and, in reality, there is no vice which could so effectually disqualify him for the trade of a party-man as that single virtue. The real, revered, and impartial spectator, therefore, is, upon no occasion, at a greater distance than amidst the violence and rage of contending parties. To them, it may be said, that such a spectator scarce exists any where in the universe. Even to the great Judge of the universe, they impute all their own prejudices, and often view that Divine Being as animated by all their own vindictive and implacable passions. Of all the corrupters of moral sentiments, therefore, faction and fanaticism have always been by far the greatest."

Misallocation and Productivity: International Perspective

In pretty much every industry in pretty much every country, the firms exhibit a range of productivity: that is, some well-run and efficient firms produce more output given their levels of labor and capital, while others produce less. What ought to happen in a well-functioning economy is that the lagging-productivity firms should either be catching up with the leading-productivity firms over time, or the laggard firms should shrink in size while the leading firms grow in size. This process has been demonstrably important to economic growth in the past.

However, a wide range of taxes, rules, and institutions may act to inhibit reallocation of resources, and thus to slow down productivity growth. For example, if smaller farms are less efficient that larger farms, but the land use rules in a developing economy keep farm sizes small, then agricultural resources will not be reallocated. Economists refer to this as an issue of "misallocation."

Diego Restuccia and Richard Rogerson discuss "The Causes and Costs of Misallocation" in the Summer 2017 issue of the Journal of Economic Perspectives (31:3: pp. 151-174). The IMF discusses the role of tax policy in creating and sustaining misallocation  in the April 2017 IMF Fiscal Monitor, with an overall theme of "Achieving More with Less." The discussion of reallocation is in "Chapter 2: Upgrading the Tax System to Boost Productivity." The IMF researchers write:

"Resource misallocation manifests itself in a wide dispersion in productivity levels across firms, even within narrowly defined industries. High dispersion in firm productivities reveals that some businesses in each country have managed to achieve high levels of efficiency, possibly close to those of the world frontier in that industry. This implies that existing conditions within a country are compatible with higher levels of productivity. Therefore, countries can reap substantial TFP [total factor productivity] gains from reducing resource misallocation, allowing firms to catch up with the high-productivity firms in their own economies. In some cases, however, the least productive businesses will need to exit the market, releasing resources for the more productive ones. For example, Baily, Hulten, and Campbell (1992) find that 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to the reallocation of factors across plants and to firm entry and exit. Similarly, Barnett and others (2014) find that labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007.

Resource misallocation is often the result of a large number of poorly designed economic policies and market failures that prevent the expansion of efficient firms and promote the survival of inefficient ones. Reducing misallocation is therefore a complex and multidimensional task that requires the use of all policy levers. Structural reforms play a crucial role, in particular because the opportunity cost of poorly designed economic policies is much greater now in the context of anemic productivity growth. Financial, labor, and product market reforms have been identified as important contributors (see Banerjee and Duflo 2005; Andrews and Cingano 2014; Gamberoni, Giordano, and Lopez-Garcia 2016; and Lashitew 2016). This chapter makes the case that upgrading the tax system is also key to boosting productivity by reducing distortions that prevent resources from going to where they are most productive. ... 

Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. Payoffs are higher for emerging market and low-income developing countries than for advanced economies, with considerable variation across countries. ...

Many emerging market economies have a relatively small number of leading firms, and a large number of laggards. If the distribution of leaders and laggards in these markets became more equal, similar to the distribution between leaders and laggard firms in US industries, the productivity gains could be large. By the IMF calculations, total factor productivity "would increase by 30 to 50 percent in China and by 40 to 60 percent in India."

In their JEP essay, Restuccia and Rogerson  provide a useful overview of what can cause misallocation, and how economists have sought to measure the potential gains from reducing misallocation. For a flavor of the issues and analysis, here are a few of the studies mentioned in the paper:

"Government regulation can also hinder the reallocation of individuals across space. Hsieh and Moretti (2015) study misallocation of individuals across 220 US metropolitan areas from 1964 to 2009. They document a doubling in the dispersion of wages across US cities during the sample period. Using a model of spatial reallocation, they show that the increase in wage dispersion across US cities represents a misallocation that contributed to a loss in aggregate GDP per capita of 13.5 percent. They argue that across-city labor misallocation is directly related to housing regulations and the associated constraints on housing supply. ..."

"Tombe and Zhu (2015) provide direct evidence on the frictions of labor (and goods) mobility across space and sectors in China and quantify the role of these internal frictions and their changes over time on aggregate productivity. The reduction of internal migration frictions is key and together with internal trade restrictions account for about half of the growth in China between 2000 and 2005. ..."

"Restuccia and Santaeulalia-Llopis (2017) study misallocation across household farms in Malawi. They have data on the physical quantity of outputs and inputs as well as measures of transitory shocks and so are able to measure farm-level total factor productivity. They find that the allocation of inputs is relatively constant across farms despite large differences in measured total factor productivity, suggesting a large amount of misallocation. In fact, they found that aggregate agricultural output would increase by a remarkable factor of 3.6 if inputs were allocated efficiently. Their analysis also suggests that institutional factors that affect land allocation are likely playing a key role. Specifically, they compare misallocation within groups of farmers that are differentially influenced by restrictive land markets. Whereas most farmers in Malawi operate a given allocation of land, other farmers have access to marketed land (in most cases through informal rentals). Using this source of variation, Restuccia and Santaeulalia-Llopis find that misallocation is much larger for the group of farmers without access to marketed land: specifically, the potential output gains from removing misallocation are 2.6 times larger in this group relative to the gains for the group of farms with marketed land." 

There will always be leading and lagging firms, and various hindrances to reallocation of resources across places and firms. In that sense, misallocation is never going away. But studying misallocation offers a useful reminder that productivity growth and economic growth are driven (or not!) by the dynamic forces of competition in a reasonably flexible economic setting.

Moreover, a better understanding of the gaps between leading and lagging companies--why suchh gaps persist, what might help to close them-- may even help to explain one of the really big questions in the global economy, which is the overall slowdown in productivity growth. A 2015 study done by the OECD found that productivity growth among leading companies in various industries has not been slowing down; instead, the gap between leading and lagging companies has expanded, as if lagging companies are having a harder time keeping pace.