Interview with Lawrence Katz: Inequality, Mobility, and More

Douglas Clement has a characteristically excellent "Interview with Lawrence Katz" in The Region, from the Federal Reserve Bank of Minneapolis, published September 25, 2017. The subheading reads: "Harvard economist on the gender pay gap, fissuring workplaces and the importance of moving to a good neighborhood early in a child’s life." The interview offers lots to chew on. Here, I'll just pass along some of Katz's thoughts on a couple of points. 

One issue is about the causes of rising inequality of wages. Katz (together with co-author Claudia Goldin) have argued that the most important reason behind rising wage inequality is that in the race between rising demand for skilled labor and rising supply of skilled labor, demand has surged ahead. The implication is that the appropriate long-run response to address inequality would be to aim at a dramatic increase in the share of Americans receiving higher education. However, others have emphasized other issues that might relate to the role of inequality, like effects from increased international competition, or have pointed out that the rising incomes of top corporate executives doesn't seem to have an obvious link to a shortage of skilled college-educated workers. In this interview, Katz argues that rising demand for skilled labor remains the primary cause of greater wage inequality, and that a substantial increase in the share of Americans receiving quality higher education from the public sector is the appropriate answer.  He says:

"In 2016, the college premium continued to grow. This other chart is sort of my favorite. This tries to put it all together for 200 years. ...

"There is no systematic survey or data prior to the 1940s census on wages. But there was one very important employer in the United States who kept good records going back to the 1820s: the U.S. military when they were hiring civilian employees at forts all around the country. They would hire a blacksmith or clerk or day laborer and write down the employee’s characteristics and the wage they were paid and look at the gap between, for example, a clerical worker and a production worker working at a fort.

"The chart starting with the 19th century skill premium data based on the military wage series put together by the economic historian Bob Margo shows that there was a rising skill premium (that fed into the high school movement) prior to the big decline in the early 20th century. Our best evidence suggests that with the shift from the artisanal shop to larger and more mechanized factories, there was a big demand—with the growth of scale of individual enterprises—for engineers, managers, accountants and clerks relative to craft workers and even relative to other production workers. ...
 

"If you look at the past 30 years, there’s been a big increase in inequality, which you can measure by the Gini coefficient. You can do this for individuals, for family households. A big part of that increase is at the very upper end—which I won’t claim is largely the education return. But even if we exclude the top 0.5 percent [of the income distribution], there are very large differences; we estimate that, as recently as 2013, about two-thirds of that [increase in inequality] is due to the growth of the educational wage premium. Almost all of that is post-secondary college and post-college. So, if you’d kept the college premium at the 1980 level, you would’ve seen only a third as much of the growth of U.S. earnings inequality. ...

"What the government has done—in the ’50s and ’60s, even into the ’70s—is invested heavily in high-quality colleges. Think of University of California campuses or Florida State. But since then, there’s been very little investment in expanding quality higher education. There’s increased crowding at community colleges and state universities, and states have greatly cut back on appropriations for higher education, particularly in the Great Recession.

"The federal government has continued to have an important role, but it’s done it with flexible support through Pell grants targeted to low-income students. The problem is that we’ve had a surge of really low-quality colleges, and the worst of that is the for-profit sector, which Claudia, David Deming and I have studied. Particularly from the late ’90s to 2011 with this very large wage premium and funneling more federal funding into loans and Pell grants, a big part of that marginal growth—particularly for disadvantaged individuals—was at for-profit institutions for both associate’s degrees and bachelor’s degrees.

"It’s been a bit of a disaster. Even though these for-profit institutions have tried to be up to date, very flexible, with high-quality online instruction, we have repeatedly found very little economic return to degree programs at for-profit institutions; instead, it’s become a massive debt trap. I think there is something to be said for the quality and capabilities, the faculty, the peer effects of a traditional public or private nonprofit university.

"So, rather than what would’ve been the equivalent of the high school movement—developing more University of California campuses or more Florida public universities, so we weren’t rationing access to quality public colleges—we allowed the for-profit private sector to come in both as a nimble creative but also as an agile predator."

A second subject involves a classic social science question: to what extent are people with low-incomes held back by living in a primarily low-income community? If instead low-income people were integrated into a middle-income or high-income community, with the schools and public services of that community, as well as the peer effects and social connections, how much difference would it make. The Moving to Opportunity study is based on a social experiment in which some low-income people had the incentive and possibility to relocate to a higher-income community. Katz is Katz is principal investigator for this experiment, and he describes it in this way:

"The demonstration program ran in five cities: Boston, Baltimore, Chicago, New York and Los Angeles. And the families eligible were living in public housing in the highest-poverty census tracts with an over 40 percent poverty rate.

"Through a lottery, MTO allowed people to jump the queue to get housing vouchers providing housing support to live in an area of their choice. There were three groups: an experimental group that had to move to a low-poverty area if they wanted to move and received mobility counseling assistance as well, a second treatment group that received vouchers but wasn’t required to live in a low-poverty area, and a third group, the control group, who stayed where they were and kept their regular housing support. And we’ve been tracking them for 20 years.

"The first question was whether we could actually get a significant number of families to move to low-poverty neighborhoods even with these vouchers. We thought that about a third of them would be able to make such moves. But, in fact, through the hard work of these families and the counselors, almost half of the experimental group families leased up in a low-poverty area. ...

"And what we find for Moving to Opportunity is in the short run it clearly made the adults in the families happier and healthier. Measures of well-being and safety improved. There were big reductions in exposure to violence. But, economically, nothing much changed for the parents.

"But it’s significant that at the time of the moves, at baseline, we asked people why they wanted to move, and very few said they were moving because they were looking for a better job. Almost always it was safety, wanting to get out of more violent areas, worried for their kids. Or it was trying to improve their housing conditions.

"We saw huge improvements one year out, five years out, 10 to 15 years out in adult health. Large reductions in obesity, in depression, in diabetes and in biomarker indicators for long-term stress. This is sort of the equivalent of your best antidepressant and your best exercise and diet program in terms of long-run improvements in adult health and mental health!

"So until we did the latest study on long-term effects on the kids, the message from MTO has been that there were huge benefits to a family’s well-being and health, but not much economically, and we weren’t finding much on test scores for kids. We had a little bit of evidence of positive things for girls and, if anything, the boys were looking a bit negative. ...

"When we looked at those same kids who didn’t look that different in their school performance but were less involved in violent crime as adolescents, they seemed to be assimilating types of social capital that may not show up on standardized tests, a sort of savvy of living in a different type of neighborhood. As Chetty, Hendren and I observe, the younger MTO children becoming adults, we see them more likely to go to and persist in college, and we see them much more likely to work, and an almost 40 percent impact in their mid-20s on earnings. It really looks like a powerful impact."

An intriguing and important lesson here is that getting the full story can often involve looking at a broad array of outcome measures. For example, the parents of the low-income families didn't achieve higher incomes, but their stress levels and health improved dramatically. The children from the low-income families didn't have gains on school test scores, but they were less likely to be  involved in crime, more likely to attend college, and more likely to work. For the typical young person, often it's not that their test scores and academic achievement need to be sky-high; after all, there's no escaping the arithmetical reality that the average student is going to have average scores! But young people who have social connectedness, a sense of possibility, and persistence to keep learning and growing can take their average academic performance and turn it into a successful adult life. 

Wealth Patterns in the United States

Wealth is not income. Income is what you receive in a certain period of time, perhaps a year. Wealth adds up all of your assets--bank account, value of equity in home, retirement savings, and so on. A substantial portion of retirees have high wealth, but low income. A substantial portion of young professionals in their 30s have high income, but (once their outstanding debts are taken into account), little wealth. The canonical source for looking at US wealth patterns is the Survey of Consumer Finances, carried out triennially by the Federal Reserve.

Results and highlights from the 2016  SCF appear in "Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances," in the Federal Reserve Bulletin (Summer 2017, in an article with a double-handful of co-authors: Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, Sarah Pack, John Sabelhaus, Jeffrey Thompson, and Richard A. Windle. The detailed survey results are here. The SCF and this article also look at patterns of income, but income data is readily available from other sources. Here, I'll focus on the discussion of wealth.

Here's a figure with some evidence on the shifting distribution of wealth. As the report explains: "The wealth share of the top 1 percent climbed from 36.3 percent in 2013 to 38.6 percent in 2016, slightly surpassing the wealth share of the next highest 9 percent of families combined (figure B). After rising over the second half of the 1990s and most of the 2000s, the wealth share of the next highest 9 percent of families has been falling since 2010, reaching 38.5 percent in 2016. Similar to the situation with income, the wealth share of the bottom 90 percent of families has been falling over most of the past 25 years, dropping from 33.2 percent in 1989 to 22.8 percent in 2016."

More from the report: "These patterns in net worth over the past several surveys were largely driven by the Great Recession and subsequent recovery in house and other asset prices. Declines in house prices in particular had a disproportionate effect on families in the middle of the net worth distribution, whose wealth portfolio is dominated by housing. Divergent trends in median and mean net worth over the past few surveys suggest substantial heterogeneity in wealth changes across families."

The report offers a detailed breakdown of financial and nonfinancial assets (like home equity) held by families, and also of different types of debts. However, some definitional issues should be noted. For example, are the Social Security payments you expect to receive after retirement an "asset" for you? In a broad economic sense, the answer is clearly "yes." But people do not have ownership of that asset in the way that they own their retirement account or their house, and putting a number on the current value of that asset requires making a bunch of assumptions about future patterns of work and marriage and possible political changes to Social Security. Thus, it isn't included in the SCF measure of wealth. As the report says: "Although the SCF measure of wealth is fairly comprehensive, some assets that may be widely held, such as defined-benefit pension and Social Security wealth, are not included in net worth definitions because of the many assumptions required to estimate their values."

Here's a table (a trimmed-down version of a larger table) from the report, showing some patterns of wealth.  One big difference that jumps out is the difference between "median" and "mean." Median net worth for all US families is $97,300, while mean net worth is $692,100.

Why such a huge gap?  For those who last encountered those definitions some years ago, "median" is technically the value where half of the values are above and half are below. Mean is the  average: that is, total sum divided by the number of people. When there are a small number of very high values, the mean will be much higher than the median. For an intuitive grip on the difference, imagine a three-person economy, where one person has $0 in wealth, one has $30,000 in wealth, and one has $3 million in wealth. The median here would be $30,000, with equal numbers of people above and below that value. The mean would be $3,030,000/3, which would be $1,010,000.

As the table shows, it's broadly true that those who are older or who have better education levels also tend to have higher net worth. However, mean net worth does tend to diminish just a bit for the older age groups, which makes some sense if that group is consuming wealth and passing it wealth to younger groups. The bottom half or so of the American population has relatively little in net worth, but it's not obvious from this table how big a problem that is. After all, one would expect most people in their 20s to have little net worth, and even people in their 30s who potentially have big home mortgages and high student debts might not have high net worth. The more troublesome groups, which are not the focus of this overview report, would be those in their 40s who are not yet taking real steps to accumulating wealth, or those in their 50s and 60s who are approaching retirement but have not yet accumulated much wealth. 

Demography Rebalances Asia

Demographic shifts are about more than economics. Think about an array of social institutions: schools, parks, libraries, building and housing codes, public transportation, health care, the size of the volunteer sector. All of these, and many others, take on differing importance and shape when an economy has a relatively high number of children, or working-age people, or retirees. Deloitte has published the third edition of Voice of Asia (September 2017), with a focus on "Demographics fuelling Asia’s shifting balance of power." Here are some thoughts from the report.

This figure shows the working-age share of the total population for Japan, China, and India. In Japan, this percentage rose and peaked during its period of rapid economic growth in the 1960s and 1970s. For China, the percentage rose in recent decades, and is now forecast to drop sharply. For India, the percentage is still rising.

The report notes: "India will account for more than half of the increase in Asia’s workforce in the coming decade. The consequences for businesses are vast: An Indian summer is coming, and it will last half a century. And while India’s rise might have the largest impact on the world, it isn’t the only economy set to surge, with Indonesia and the Philippines on track to enjoy similar trends. Both of these nations have a relatively young population, mainly because they still have birth rates in excess of the global average. This makes demographics a tailwind rather than a headwind for their growth across at least the next 20 years."

Or to put it another way, the median age in Japan is 47 years; in China, 37 years; in India, 27 years. These are dramatic differences. In the table, you can see where other Asian countries stand in terms of being older or younger.

The potential implications of these patterns are substantial. For example, "China will get old before it
fully succeeds in getting rich." The political implications of that fact, given that the Chinese Communist Party has essentially been using economic growth as a justification for maintaining its hold on power, could be severe. If China, which by some measures is now the largest economy in the world, follows Japan's pattern of aging and economic stagnation, it will have a powerful effect on the growth rate of the global economy. 

Of course, there is no guarantee that the growth of India's working-age population will power economic growth. But there's a powerful opportunity for it to do so, if India can continue with economic and social reforms (for some discussion, see here and here).

The global face of aging is going to shift dramatically in the next few decades. The report notes: "There are already more over-65s in Asia than there are people in the United States. The number of over-65s in Asia will exceed one billion just after the middle of this century. In fact, by 2042—in just a quarter of a century—there will be more over-65s in Asia than the populations of the Eurozone and North America combined. Yes, you read that right: More people aged over 65 in Asia than the total combined populations of North America and the Eurozone, and in just 25 years from now."

Here's a figure to emphasize the point. Europe and North America are aging. What's happening in Asia in the next few decades will be such a powerful demographic that it seems to require a stronger word than "aging." 

Two underlying patterns that will affect these workforce trends are migration and female labor-force participation. Countries like China or Japan, with low labor force growth, will face some economic pressures to allow greater in-migration. Japan, with relatively low female labor-force participation, will face pressures for that figure to rise. India has extremely low female labor-force participation, but if India wishes to take full advantage of its working-age demographic boom, this will need to change. Here are some female labor-force participation rates across Asia. 

It is of course not literally true that "demography is destiny," as an old saying has it, but it can matter a great deal for the growth rate and sectoral patterns of economies. With China's working-age share of its population topping out and India's on the rise, we are at the hinge of a demographic transition that will reshape relative economic (and probably also political) power across Asia. 

Child Labor in Decline

The phrase "child labor" conjures up such ugly images for me that it's hard to discuss it dispassionately. But the International Labour Organization has a recent report, "Global Estimates
of Child Labour: Results and Trends 2012-2016" that offers some useful facts and distinctions.

It would of course be peculiar to count every employed child as a human rights abuse. For example, in 2016 the ILO counts 216 million children as "in employment." However, 151 million of them are counted in the more concerning category of "child labor," which is largely determined by the number of hours worked. For example, any child in the 5-11 age category who is "in employment" is also counted as "child labor." But children in the 15-17 age bracket need to work 43 hours per week or more to be counted is "child labor." Another subcategory is "hazardous work," which includes the physically or emotionally hazardous, along with the illegal.

The figure shows the categories of "child labor" and "hazardous work" from 2000-2016. The steady decline over time is apparent. Of course, the numbers should not be taken as precise.  "The 2016 estimates use data from a total of 105 national household surveys covering more than 70 per cent of the world population of children aged 5 to 17 years." It's easy to hypothesize about reasons why some countries might understate (to make themselves look better) or overstate (to attract international aid) or just not know (because of weak statistical apparatus) the level of child labor. But the overall downward trend is highly unlikely to be a result of some trend in survey bias.

Here are a few ways of slicing up the underlying data:

By region: "The Africa region and the Asia and the Pacific region together host nine out of every ten children in child labour. Africa ranks highest both in the percentage of children in child labour – one-fifth – and the absolute number of children in child labour – 72 million. Asia and the Pacific ranks second highest in both these measures – 7 per cent of all children, 62 million in absolute terms, are in child labour in this region."

Effect of armed conflict on child labor: "The Africa region has also been among those most affected by situations of conflict and disaster, which in turn heighten the risk of child labour. The incidence of child labour in countries affected by armed conflict is 77 per cent higher than the global average, while the incidence of hazardous work is 50 per cent higher in countries affected by armed conflict than in the world as a whole."

Most child labor is within families: "Most child labour takes place within the family unit. More than two-thirds of all children in child labour work as contributing family labourers, while paid employment and own-account workers make up 27 per cent and 4 per cent, respectively, of those in child labour. These numbers underscore an important broader point concerning the nature of child labour in the world today. Most children in child labour are not in an employment relationship with a third-party employer, but rather work on family farms and in family enterprises; understanding and addressing family reliance on children’s labour will therefore be critical to broader progress towards ending child labour."

Child labor and forced labor: "According to the 2016 Global Estimates of Modern Slavery, there were about 4.3 million children aged below 18 years in forced labour, representing 18 per cent of the 24.8 million total forced labour victims worldwide. This estimate includes 1.0 million children in forced labour for sexual exploitation, 3.0 million children in forced labour for other forms of labour exploitation, and 300,000 children in forced labour imposed by state authorities."

Child labor in agriculture: "The agricultural sector accounts for by far the largest share of child labour. The sector accounts for 71 per cent of all those in child labour and for 108 million children in absolute terms. Child labour in agriculture relates primarily to subsistence and commercial farming and livestock herding. It is often hazardous in its nature and in the circumstances in which it is carried out."

By gender: "Boys appear to face a greater risk of child labour than girls. There are 23 million more boys than girls in child labour and 17 million more boys than girls in hazardous work. The gender gap increases with age. The difference in child labour incidence is less than one percentage point for 5–11 year-olds, rising to three percentage points for 12–14 year-olds and to five percentage points for 15–17 year-olds. But it is possible that these figures understate girls’ work relative to that of boys.  ... Girls are much more likely than boys to shoulder responsibility for household chores, a form of work not considered in the child labour estimates. Estimates of children’s involvement in household chores, produced for the first time for the 2016 Global Estimates, indicates girls are much more likely than boys to perform household chores in every weekly hour bracket. Girls account for two-thirds of the 54 million children aged 5–14 years who perform household chores for at least 21 hours per week, the threshold beyond which initial research suggests household chores begin to negatively impact on the ability of children to attend and benefit from school. ... Girls are also more likely than boys to perform “double work duty”, meaning both work in employment and in household chores."

The recommended policies to reduce child labor don't include any surprises. Make public schools available, and don't charge fees for them. Provide enough income support for families so it's not an economic necessity for children to work: some countries have moved toward "conditional cash transfer" programs that essentially pay families for the school attendance of their children. Challenge some existing social norms. In the extreme cases of hazardous child labor and forces labor, expose the practices and prosecute. But the bulk of child labor is family work in the agricultural sector, so that's where most of the progress needs to be made.

Imperfect Information: Is It For or Against Free Markets?

In the real world, no one has full and complete information about economic interactions. But is that an argument for or against free markets? For or against government regulation? The answer seems to be "all of the above."

Friedrich von Hayek (Nobel 1974) is among the most prominent of those who have made the case that imperfect information strengthens the case for free markets. Samuel Bowles, Alan Kirman, and Rajiv Sethi offer an overview of Hayek's beliefs about information and free markets in "Retrospectives: Friedrich Hayek and the Market Algorithm," in the Summer 2017 issue of the Journal of Economic Perspectives (31:3, pp. 215-230).

In one much-quoted example, Hayek offers a discussion of what  happens in the market for some raw material, like tin, when "somewhere in the world a new opportunity for the use" arises, or "one of the sources of supply of tin has been eliminated." Either of these changes (rise in demand, or a fall in supply) will lead to a higher market price. But as Hayek points out, no company that uses tin, nor any consumer who uses products made with tin as an ingredient, needs to know any details about what happened. No commission of government officials needs to meet to discuss how every firm and consumer should be required to react to this change in the price of tin. No government quota system for allocation of tin supplies needs to be established. No special government program for research and development into cheaper substitutes for tin, and no government-subsidized producers for potential-but-still-costly substitutes needs to be created. Instead, the shifts in demand or supply, and the corresponding changes in price, work themselves out with a larger number of small-scale shifts in the market.

A government agency might collect information on who currently produces and uses tin. But that government lacks the granular information about all the different alternatives that might possibly be used for tin, and any sense of when a user of tin would be willing to pay twice as much, or when a user of tin would shift to a substitute if the price rose even a little. Indeed, this granular information about the tin market is not even theoretically available to a government planner or regulator! Many users of tin, or potential suppliers of additional tin, or potential suppliers of substitutes, don't actually know just how they would react to the higher price until after it happens. Their reactions emerge through a process of trial and error.

Hayek's point becomes even more acute if one considers not just existing basic products, like tin, but the potential for innovative new products or services. One can make a guess about whether a certain type of new smartphone, headache remedy, spicy sauce, alternative energy source, or water-in-a-bottle will be popular and desired. But government planners--especially given that they are operating under political constraints--won't have the knowledge to make these decisions. Hayek's point is not only that government economic planners not only that government planners lack perfect information, but that is is not even theoretically possible for them to have perfect information--because much of the information about production, consumption, and prices does not exist. thus, Hayek wrote:

"[The market is] a system of the utilization of knowledge which nobody can possess as a whole, which … leads people to aim at the needs of people whom they do not know, make use of facilities about which they have no direct information; all this condensed in abstract signals … [T]hat our whole modern wealth and production could arise only thanks to this mechanism is, I believe, the basis not only of my economics but also much of my political views ..."

As Bowles, Kirman and Sethi point out in the title of their article, Hayek's view of market system can be viewed as an "algorithm" for calling information into existence and then coordinating among the agents in the market.

On the other side, there's also a powerful case that imperfect information can cause markets not to function well. For example, the financial meltdown leading up to the Great Recession can be described as a situation where the available information was highly imperfect about the expected path of housing prices, and more specifically about complex financial securities based on home mortgages (that is, collateralized debt obligations). The information about what could happen to the macroeconomy as a result was imperfect, too. Bowles, Kirman and Sethi point out that there are a variety of economic settings where imperfect information can lead a market, or even an entire economy, into dysfunction and recession.

Joseph Stiglitz (Nobel, 2001) is among the best-known of those who have explained how imperfect information can hinder the functioning of a market, and thus offer a justification for government intervention or regulation.  Stiglitz offers a readable overview of his perspective in "The Revolution of Information Economics: The Past and the Future" (September 2017, National Bureau of Economic Research Working Paper 23780). The paper isn't freely available online, although readers may have access through a library subscription, but a set of slides from when he presented a talk on this topic at the World Bank in 2016 are available here.  Stiglitz emphasizes two particular aspects of imperfect information: it leads to a lack of competition and especially to problems in the financial sector. He writes:

"The imperfections of competition and the absence of risk markets with which they are marked matter a great deal. ... And in those sectors where information and its imperfections play a particularly important role, there is an even greater presumption of the need for public policy. The financial sector is, above all else, about gathering and processing information, on the basis of which capital resources can be efficiently allocated. Information is central. And that is at least part of the reason that financial sector regulation is so important. Markets where information is imperfect are also typically far from perfectly competitive ... In markets with some, but imperfect competition, firms strive to increase their market power and to increase the extraction of rents from existing market power, giving rise to widespread distortions. In such circumstances, institutions and the rules of the game matter. Public policy is critical in setting the rules of the game."

Stiglitz also argues that in a modern economy, concerns over information are likely to become more acute.

"Looking forward, changes in structure of demand (that is, as a country gets richer, the mix of goods purchased changes) and in technology may lead to an increased role of information and increased consequences of information imperfections, decreased competition, and increasing inequality. Many key battles will be about information and knowledge (implicitly or explicitly)—and the governance of information. Already, there are big debates going on about privacy (the rights of individuals to keep their own information) and transparency (requirements that government and corporations, for instance, reveal critical information about what they are doing). In many sectors, most especially, the financial sector, there are ongoing debates about disclosure—obligations on the part of individuals or firms to reveal certain things about their products." 

Both Hayek and Stiglitz use a similar "straw man" argumentative tactic: that is, set up a weak position as the opposing view, and then set it on fire. Hayek's preferred straw man is government economic planners who seek to dictate every economic decision. He was writing in part with economic systems like the Communist Soviet Union in mind. But arguing that a market is better than wildly intrusive and weirdly over-precise old-time Soviet-style economic planning doesn't make a case against more restrained and better-aimed forms of economic regulation. Indeed, Hayek occasionally expressed support for a universal basic income and for certain kinds of bank regulation.

Stiglitz's straw man is a free market that operates essentially without government intervention or regulation. He likes to emphasize that in the real world of imperfect information, there is no conceptual reason to presume that markets are efficient. But arguing that imperfect information can offer a potential justification for government regulation doesn't make a case that all or most government regulation is justified. especially given that the real-world government regulators labor with their own problems of political constraints and limited information. And indeed, while Stiglitz tends to favor an increase in US economic regulations in a number of specific areas, his vision of the economy always leaves a substantial role for private sector ownership, decision-making, and innovation.

So what's the bottom line here? In my introductory economic textbook (if you are teaching the course, I encourage you to check it out), I seek some resolution between these competing views by quoting the well-known line from F. Scott Fitzgerald: “The true test of a first-rate mind is the ability to hold two contradictory ideas at the same time.” In this case, the contradictory ideas are that markets can often be a substantial improvement on government regulators, and government regulators can often be a substantial improvement on unconstrained market outcomes. One can't presume that unconstrained markets are efficient, one can't presume that government interventions are efficient, either. I finish Chapter 20 of the textbook with this comment:

As the famous British economist, Joan Robinson (1903–1983), wrote some decades ago: “[E]conomic theory, in itself, preaches no doctrines and cannot establish any universally valid laws. It is a method of ordering ideas and formulating questions.” The study of economics is neither politically conservative, nor moderate, nor liberal. There are economists who are Democrats, Republicans, libertarians, socialists, and every other political group you can name. Of course, conservatives may tend to emphasize the virtues of markets and the limitations of government, while liberals may tend to emphasize the shortcomings of markets and the need for government programs. But such differences only illustrate that the language and terminology of economics is not limited to one set of political beliefs, but can be used by all.

Antitrust in the 1520s: Diet of Nuremberg, Martin Luther, and the City of Augsberg

Monopolies can come into existence for reasons that are beneficial to consumers: for example, perhaps a monopoly has patent protection for an innovative new product, or perhaps economies of scale allow a big company to sell at a cheaper price. However, once the monopoly is in place, it then has incentives to increase its profits by raising prices for consumers. Thus, the ongoing challenge of antitrust law is to encourage behaviors that are beneficial to consumers. like innovation and economies of scale, while offering consumers some protection from the price-fixing power of monopolies. This story has of course played itself out numerous times in US economic history, from the trusts and "robber barons" of the late 19th century to more recent arguments about IBM, Microsoft, and the most recent batch of high-tech giants.

But these issues of the benefits and costs of monopoly behavior have a much longer historical pedigree. One prominent example is the situation that had arisen in Germany in the 1520s. It's described in some detail in "Social Reform and the Reformation," by Jacob Salwyn Schapiro, which was published in 1909 in a series of volumes edited by the Columbia University Political Science Department alled  Studies in History Economics and Public Law (Volume XXXIV, number 2). Here I'll focus on the story that Schapiro tells in "Chapter 1: The Growth of Monopolies." 

To set the stage, the end of the 15th century and into the 16th century is a very prosperous time for Germany. Schapiro writes:

The end of the fifteenth century witnessed Germany's high noon of prosperity. Old and insignificant towns like Augsburg Nuremberg and Ulm blossomed forth into wealthy and populous cities. The great merchants vied with princes and kings in magnificence and luxury. Their gardens palaces and entertainments were the envy of the poorer nobility. Aeneas Sylvius writing in 1458 says: "We proclaim it aloud Germany has never been richer or more prosperous than to-day. She takes the lead of all other nations in wealth and power One can say truly that God has favored this land above all others On all sides are seen cultivated farms cornfields and vineyards and gardens Everywhere are great buildings, walled cities and well-to-do farmers." Jacob Wimpheling, the famous humanist, declared fifty years later that Germany was never more prosperous than to day and she owes it chiefly to the untiring industry and energy of her people artisans as well as merchants. The peasants too are rich and prosperous."  The desire for wealth became the all absorbing passion and we find the popular preacher Martin Butzer denouncing the materialistic spirit of the time. "All the world," he says, "is running after those trades and occupations that will bring the most gain. The study of the arts and sciences is set aside for the basest kind of manual work. All the clever heads, which have been endowed by God with capacity for the nobler studies are engrossed by commerce, which nowadays is so saturated with dishonesty that it is the last sort of business an honorable man ought to engage in." The headquarters of German capitalism was the city of Augsburg which because of its situation acted as a distributing center for all Eastern goods received from both Lisbon and Venice. 

But the importance of ports and trade routes shifting. Venice, which was relatively close to German merchants, was declining while farther-away Lisbon was rising. Doing business at this greater distance tended to favor the larger German merchants, who could afford to have dedicated representatives in Lisbon to manage their transactions, warehouses, and shipping. As Schapiro explains, this shift provided a launching pad for Germany's wealthier merchants to act as price-fixing monopolists. He wrote:

The wealthier merchants quickly took advantage of this condition and organized themselves into associations or "companies." At first they united for the purpose of buying and transporting in common in order to reduce expenses; but very soon they united for the purpose of selling as well. These associations quickly developed into monopolistic combines that controlled the entire Asiatic trade in and arbitrarily fixed the prices of all Eastern articles. The small merchant found himself crowded to the wall. All methods familiar to monopoly everywhere and at all times were used to drive him out of business. 

Schapiro cites a number of contemporary complaints about the situation. Here are three, one from from Martin Luther, and the other two from religious and civil assemblies of that time:

Luther complains in his pamphlet On Trade and Usury, printed in 1524: "The monopolists succeed in driving out the small merchants by buying up large quantities of goods, and then suddenly raise the prices when they are left masters of the field. So, these monopolists, have everything in their hands and do whatever they wish raise and lower prices at will and oppress and ruin small dealers, just as a great pike swallows up a lot of little fishes. They have become lords over God's creatures and free from all bonds of religion and humanity ..... If monopolies are permitted to exist, then justice and righteousness must vanish." ...

The Diet of Nuremberg complained in 1522: "The companies take special care to monopolize those spices that are most needed. If one company is not rich enough it associates itself with another and so gets the article in its hands. If a poor merchant desires to deal in these wares, the companies are immediately at his throat. They are able to ruin him, because having more money and more goods, they are able to sell cheaper and give longer credit .... The companies are responsible for lessened business. To-day, there is one great concern with many branches where formerly there were twenty independent merchants ..."   

The Landtag of the Austrian hereditary dominions at Innsbruck in 1518 declared: "The great companies have monopolized all things and are not to be borne any longer. All sorts of merchandise-- silver, copper, steel, iron, linen, sugar, spices, corn, cattle, wine, meat, tallow. and leather--have fallen into their hands Through their money power, they have become so strong, that no merchant having less than 10,000 florins is able to compete with them. They raise prices arbitrarily when it is to their advantage and as a result their incomes are as great as those of princes. They are a great harm to our land."

The tensions created by these monopoly powers were then heightened by an enormous rise in the overall price level. Schapiro writes: "During the first quarter of the sixteenth century there occurred a most remarkable revolution in prices. Every article foreign and domestic rose enormously in some cases one hundred per cent and over Naturally the monopolies were blamed by all classes for this extraordinary advance in the prices of the necessities of life." As he is also quick to note, monopoly is not the only cause here, and may not have been the primary cause. For example, there were wartime shortages resulting from the conflict between Venice and the League of Cambray. There was also an enormous increase in the volume of currency in circulation, with large increases in silver and copper production in Germany and Hungary, as well as imported silver from the new world by Spain.

Ultimately, these issues arose again in the Diets of Nuremberg from 1522-24. The main agenda of these gathering was to coordinate a response to Soliman the Turk, who had just invaded Hungary, and to Martin Luther, who was posing a danger to the established Catholic Church. But the issue of monopoly came up as well, and as Schapiro explains, a committee was appointed which "sent a questionnaire to the councils of the towns that represented the trading interests." The reply of the city of Augsburg has been much-quoted over the years, because it offers a defense of the large monopoly firms. Here are some snippets of the response from the city Augsburg, as quoted (and translated) by Schapiro:

Where there is no business, the country is of little account. Hence it follows that commerce is useful to kings and princes and good for the common weal. The more business a country does, the more prosperous are its people. There are lands where business interests are better protected than in Germany and where they do everything to encourage and attract the merchants .... Commerce adds to the coffers of princes and is besides absolutely essential to the common welfare where there are many merchants there is plenty of work. Only the great merchants are able to do business on a large scale, because the small traders have not enough capital.  ...

It is impossible to limit the size of the companies for that would limit business and hurt the common welfare; the bigger and more numerous they are the better for everybody. If a merchant is not perfectly free to do business in Germany he will go elsewhere to Germany's loss. Any one can see what harm and evil such an action would mean to us. If a merchant cannot do business, above a certain amount, what is he to do with his surplus money? It is impossible to set a limit to business and it would be well to let the merchant alone and put no restrictions on his ability or capital. ... Some people talk of limiting the earning capacity of investments. This would be unbearable and would work great injustice and harm by taking away the livelihood of widows, orphans and other sufferers, noble and non-noble, who derive their income from investments in these companies. Many merchants out of love and friendship invest the money of their friends--men, women and children--who know nothing of business in order to provide them with an assured income. Hence any one can see that the idea that the merchant companies undermine the public welfare ought not to be seriously considered. ... 

Of course, discussions making similar points have continued up to the present. Countries with lots of business activity are better off, and create jobs. If the companies are overregulated at  home, they will move elsewhere. Limiting what investment can earn would be unbearable. Out of love and friendship, the giant monopolists will look out for the widows and orphans. The committee for the Diet of Nuremburg didn't buy these arguments! But its report is an interesting mix of opposition to the big companies and admitting that their defenders are not altogether wrong. Here's Schapiro quoting from the committee report:

"The companies have done more injury to the common man than all the highwaymen and thieves put together yet the monopolists and their associates strut about in all the magnificence and luxury that wealth can buy. ...  We have already given reasons why the great companies should be destroyed but that does not mean that all business associations should be done away with. Such a course would be foolish and harmful to the whole German people, for the following reasons: In the first place, it would give the foreigners an opportunity to take over our business and then the companies could exploit Germany at will. Secondly, if we permitted only single individuals to trade, failure would be sure to result, which would be avoided by permitting associations of moderate size only. This, too, would give an opportunity to an individual who possesses great capital to do exactly what a company does and yet be within the law. Finally, a single individual cannot go to many places for goods and he cannot afford to hire agents as this costs money Therefore the foreign companies will have a great advantage over the German merchant."

Ultimately, the Diet of Nuremberg passed a set of anti-monopoly laws. Schapiro writes:

After a great deal of debate, the Diet passed a series of laws designed to mitigate the evils of monopoly. These provide that:
I. Companies are not to be capitalized for more than fifty thousand gulden and are to have only three branches. A statement of its membership and business must be filed with the government.
II. The profits must be divided every two years and the authorities notified of the fact.
III. No money may be loaned at usurious rates of interest.
IV. No commodity shall be entirely under one control.
V. No merchant shall buy during a single quarter of a year more than 100 cwt. of pepper, 100 cwt. of ginger, and 50 cwt. of other spices.
VI. The companies shall not impose a minimum selling price.
VII. The government shall regulate the prices of wares because the companies secretly agree to raise prices.
VIII. Each article imported shall be taxed by the imperial government a fixed sum on the hundredweight.
IX. Voyaging to Portugal is to be forbidden because of too much speculation there and the king of that country is to be asked to send the spices into Germany.
X. The penalty for violating these laws is to be confiscation of the property of the company one half to go to the imperial and the other half to the local government 

Whatever the merits and demerits of these rules, they made little difference. This early round of the anti-monopoly battles was won by the monopolists. As Schapiro explains: "In spite of the denunciations, petitions, laws, and decrees, the monopolies were not seriously disturbed. The vast wealth of the great companies, the political importance of the cities which they controlled, the weakness of the central government and the intimate relations of the merchants with the governing powers, were proof against all laws aimed at them." 

Should the Federal Reserve Buy Corporate Bonds?

When (not "if") the next recession arrives, the Federal Reserve will want to take action to stimulate the economy. In recent decades, this action has often involved cutting a certain targeted interest rate--the "federal funds interest" rate--by 3-4 percentage points. However, the federal funds interest rate is now in the range of 1-1.25%, and for a variety of underlying reasons, it seems unlikely that these rates will climb to the 4-5% range any time soon.  Thus, central banks around the world are experimenting with nontraditional tools of monetary policy. For example, a number of central banks have pushed their own targeted policy interest rates into mildly negative territory, with what seems to be mild success so far. The US Federal Reserve, along with a number of other central banks, has engaged in "quantitative easing" policies in which the central bank buys financial assets directly. So far, the Fed has focused on Treasury debt and on mortgage-backed securities. But when the next recession  hits, should the Fed think about buying government bonds?

Thomas Belsham and Alex Rattan provide an overview of the issues that arise in making this choice, along with a review of what has happened since the Bank of England made a decision in August 2016 purchase up to £10 billion in corporate bonds, in their article "Corporate Bond Purchase Scheme:design, operation and impact," which appears in the Quarterly Bulletin of the Bank of England (2017 Q3, pp. 170-181).

Why might a central bank decided to purchase corporate bonds at all, as opposed to other assets?

If more parties in the market are willing to buy bonds--whether government bonds, corporate bond, or mortgage-backed securities-- it should be easier for borrowers to issue such securities. But Belsham and Rattan offer a few arguments as to why buying corporate bonds might have a bigger effect on the real economy than buying government bonds.

For example, they argue that when a central bank buys investment-grade bonds, which are typically issued by larger companies, those large companies become more likely to obtain capital by issuing bonds and less likely to do so through borrowing from banks. In turn, this could cause banks to become more willing to lend money to medium-sized and smaller-sized firms. Another reason is that part of the risk in bond markets is that such markets are often not very liquid, meaning that it isn't always easy to buy or sell bonds right away--at least not without taking a hit on your desired price. But if the central bank is steadily involved as a buyer of bonds, liquidity in the bond market improves, and the risk of holding bonds diminishes accordingly. Finally, when a central bank buys corporate bonds, those who had previously been holding the bonds (or would have been holding the bonds) clearly have some appetite for the risks and returns associated with corporate activities, so they are likely to try to seek out some other ways to invest their funds into active corporate activities (rather than into lower-risk and safer investments).

If a central bank decides to purchase corporate bonds, how can it keep the risk of doing so relatively low and avoid favoritism to certain industrial sectors or specific corporations? 

The Bank of England was willing to buy up to £10 billion in "investment-grade" corporate bonds (that is, relatively safe bonds, not high-yield, high-risk "junk bonds"). For comparison, the total amount of such bonds was about £500 billion. The goal of the BoE was to purchase these bonds without unbalancing the market.

In a regular auction, buyers compete to purchase an item. However, the Bank of England purchased bonds with a "reverse auction," in which sellers compete to sell an item--in this case a bond--to the central bank. Thus, the Bank of England was agreeing to pay the lowest possible interest rates (and there was also a "maximum price" that the Bank would not exceed when purchasing any given bond). In addition, the Bank of England looked at how much of the  £500 billion in bonds came from each sector of the economy, and took care to purchase bonds (tweaking the prices it was willing to pay just a bit as needed) so the Bank ended up owning bonds from each sector in the same proportion as these sectors were represented in the overall bond market.


What were some effects of the Bank of England Corporate Bond Purchase Scheme?
One quick-and-dirty way to evaluate the effects of this policy is to compare interest rates on corporate bonds of similar risk levels that are denominated in US dollars, euros, and pounds. If one sees a drop in the interest rate for these corporate bonds around the time the policy starts, a drop which isn't mirrored in the other markets, it suggests the policy had some effect.

The authors carry out some more sophisticated calculations, which tend to confirm this general result. They write: "Sterling-denominated investment-grade private non-financial corporate (PNFC) bond spreads fell 10 basis points on the day of the announcement of the CBPS, and around a further
10 basis points in the days that followed. Issuance in sterling by UK PNFCs picked up sharply after the announcement, with the highest recorded monthly issuance of sterling-denominated investment-grade bonds in September of that year. Market intelligence also suggests that there was an improvement in liquidity in the sterling corporate bond market ... While the direct impact on the corporate bond market is encouraging, it is still too early to assess fully the transmission of the Corporate Bond Purchase Scheme to the real economy."

What's the Bank of England plan going forward? 

The current plan is that as bonds make payments and mature, these amounts will be reinvested into other bonds. Thus, the Bank of England portfolio of corporate bonds is planned to remain at about £10 billion -- at least for now.

This experiment is worth watching. If the US Federal Reserve feels a need during a future recession to carry out large-scale quantitative easing, the Bank of England process is likely to serve as a model. It would be interesting, and perhaps not in a good way, to watch the political pressure that would surely be exerted if the US Federal Reserve attempting to purchase corporate bonds in a way that doesn't intervene to favor certain parts of the bond market.

Federal Subsidies for Health Insurance

When I posted a couple of days ago on the most recent Census Bureau report about "Health Insurance Coverage in the United States," I didn't know that the Congressional Budget Office was about to come out with an updated set of estimates for "Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2017 to 2027" (September 2017). Obviously, it's useful to consider the number of people with health insurance and the government subsidies at the same time!

The CBO calculation is that federal subsidies for those under age 65 (that is, not counting Medicare spending on those over 65, and not counting the portion of Medicaid funded by US states) are $705 billion in 2017. Here's the graph from the cover of the report summarizing these subsidies:

A few thoughts:

1) Total US health care spending is about $3.5 trillion in 2017. For the present calculation, subtract out Medicare, which is about $700 billion. Thus, the total federal subsidies of $705 billion represent about one-fourth of non-Medicare health care spending.

2) The Patient Protection and Affordable Care Act of 2010 increased these federal subsidies in 2017 by $117 billion: that is $72 billion for expansions of Medicaid coverage and $45 billion for subsidies involving the state-based insurance exchanges that are called the "Basic Health Plan."

3) The federal government subsidizes employer-provided health insurance to the tune of $279 billion in 2017 by treating it as an untaxed fringe benefit. The single largest method through which Americans get their health insurance continues to be employer-based coverage.

4) The Patient Protection and Affordable Care Act of 2010 expanded Medicaid enrollment by about 13 million people, and another 8 million have received subsidies for purchasing insurance on the state-level exchanges.

5) It's a little tricky to calculate how much the Affordable Care Act of 2010 expanded coverage. For example, if some employers decided to stop providing health insurance with the idea that their employees could turn to the state-based health  insurance exchanges, one would need to take those effects into account. But as a back-of-the-envelope estimate, one could reasonably say that the Affordable Care Act provide health insurance for about 21 million people, with a corresponding increase in federal health care subsidies of $117 billion. Thus, the average cost of person of expanded health insurance coverage has been about $5,500. As I've written before, there was never any mystery in how the 2010 legislation expanded insurance coverage: if the federal government was willing to spend an extra $117 billion, it could provide insurance coverage for another 21 million people.

6) A substantial number of US residents continue to lack health insurance. The CBO breaks it down this way: "Over the next decade, roughly 1 out of every 10 residents under age 65 is projected
to be uninsured each year, and the number of people who are uninsured is projected to be 31 million in 2027 ...  In that year, according to CBO and JCT’s estimates, about 30 percent of those uninsured
people would be unauthorized immigrants and thus ineligible for subsidies through a marketplace or for most Medicaid benefits; about 10 percent would be ineligible for Medicaid because they lived in a state that had not expanded coverage; about 20 percent would be eligible for Medicaid but would not enroll; and the remaining 40 percent would not purchase insurance to which they had access through an employer, through the marketplaces, or directly from insurers."

7) For ll the controversy surrounding the 2010 health care legislation, both at the time and since, it was essentially incremental. For most Americans with health insurance--most of those with employer-provided plans, Medicare, or already eligible for Medicaid--the 2010 act did not disrupt their health insurance in any substantial way.

Health Insurance Coverage in the US

Since a number of major provisions of the Patient Protection and Affordable Care Act of 2010 took effect in January 2014, the share of Americans without health insurance has dropped substantially. But that success story remains incomplete, and the the progress that has been made has come at substantial financial cost.

Jessica C. Barnett and Edward R. Berchick of the US Census Bureau have authored this year's version of the authoritative report: Health Insurance Coverage in the United States: 2016 (Current Population Reports, September 2017, P60-660). Here's the share of Americans without health insurance from 2008-2016.  The big drop starting in 2014 is quickly apparent.

What forms of health insurance expanded in a way that can help to explain this decline? In private plans, employer-based health insurance didn't budge, but direct-purchase plans expanded--surely due to the expansion that occurred through the subsidized state-based insurance exchanges. On the government side, both Medicare and Medicare have seen expansions, with the rise in Medicaid in particular being traceable to the 2010 Affordable Care Act.

The report offers lots of detail about what groups are more or less likely to have health insurance. Many of the correlations are unsurprising. Those with less work experience in the previous year, or lower levels of education,  are less likely to be covered by health insurance. Even with the existence of Medicaid and Medicare, those with lower incomes remain less likely to have health insurance (including both public and private health insurance).

But I was intrigued by this figure showing the likelihood of not having health insurance by age. The different shading shows different years, and the drop in the rate of uninsured over time. The big drop-off around age 65 shows the effect of Medicare. The uninsurance rate for children is also relatively low, because low-income families with children are typically eligible for insurance through Medicaid and the Children's Health Insurance Program (CHIP). The age group least likely to have health insurance are in their 20s and 30s.

This report from the Census Bureau is about documenting patterns, not drawing policy conclusions.  But I'll add that the gains that have been made in expanding health insurance coverage are costing the US government about $110 billion per year, according to the Congressional Budget Office.  As I've written in the past, I support expanded spending for this reason, given the very limited array of policy options actually available. But I do have a number of qualms.

For example, a number of recipients of public health insurance or insurance subsidies might prefer a lower level of health insurance and more income in their pocket for other purposes--but that choice isn't available to them. Employer-provided health insurance in the United States is an untaxed fringe benefit that cost the US Treasury $266 billion in 2016, which encourages employers and employees to provide compensation in the form of health insurance and helps propel the ongoing rise in health care costs. Finally, the rate of uninsurance has fallen by less than one-half since the provisions of the Affordable Care Act went into effect. Thus, the problem that millions of Americans lack health insurance is far from resolved.

"Rationality is an Assumption I Make About Other People"

Self-aware people recognize that they sometimes act irrationally. So how can self-aware economists assume that other people act rationally? Here's how David D. Friedman answered that question in his 1996 book Hidden Order: The Economics of Everyday Life (pp. 4-5).

"Suppose someone is rational only half the time. Since there is generally one right way of doing things and many wrong ways, the rational behavior can be predicted but the irrational cannot. If we assume he is rational, we predict his behavior accurately about half the time--far from perfect, but a lot better than nothing. If I could do that well at the racetrack I would be a very rich man. 

“One summer, a colleague asked me why I had not bought a parking permit. I replied that not having a convenient place to park made me more likely to ride my bike. He accused me of inconsistency. As a believer in rationality, I should be able to make the correct choice between sloth and exercise without first rigging the game. My response was that rationality is an assumption I make about other people. I know myself well enough to allow for the consequences of my own irrationality. But for the vast mass of my fellow humans, about whom I know very little, rationality is the best predictive assumption available.

"One reason to assume rationality is that it predicts behavior better than any alternative assumption. Another is that, when predicting a market or a mob, what matters is not the behavior of individuals but the summed behavior of many. If irrational behavior is random, its effects may cancel out. 

"A third reason is that we are often dealing not with a random set of people but with people selected for the particular role they are playing. If firms picked CEOs at random, Bill Gates would still be a programmer and Microsoft would have done a much worse job than it did of maximizing its profits. But people who do not want to maximize profits or do not know how are unlikely to get the job. If they do get it, perhaps through an accident of inheritance, they are unlikely to keep it. If they do keep it, their companies are likely to go on a downhill slide. So the people who run companies can be safely assumed to know what they are doing--generally and on average. And since businesses that lose money eventually shut down, the assumption of rational profit maximization turns out to be a pretty good way of explaining and predicting the behavior of firms."

Interview with Jesse Shapiro: Media and Political Bias

Renee Haltom interviews Jesse Shapiro on the topic of media bias and political bias in Econ Focus,  published by the Federal Reserve Bank of Richmond (2nd Quarter 2017, pp. 24-29).  The entire interview is worth reading, but here are a few points that caught my eye. The headings are my words, and the explanations are Shapiro.

Newspaper political bias is more likely to reflect readership, rather than bias of owners.

"What we were trying to figure out is which newspapers are right-leaning and which newspapers are left-leaning and by how much. In the context of the news media in the United States, there isn't really a training set. So we took an idea that was developed by Tim Groseclose and Jeffrey Milyo to use the Congressional Record as the training set. We have a lot of text by speakers who have a known political affiliation — what party they belong to and how they vote on issues. Then we find the phrases that are diagnostic of the speaker's party. We came up with things like "death tax" for Republicans and "estate tax" for Democrats, or "personal retirement accounts" for Republicans and "private retirement accounts" for Democrats, or "the war in Iraq" for Democrats and "the war on terror" for Republicans. We could then look for those keywords or key phrases in newspapers and answer the question: If this newspaper were a speaker in Congress, would it be more likely to be affiliated with the Republican Party or the Democratic Party? That's our quantitative answer to how right-leaning or left-leaning a newspaper is. ...

"What we found is that newspapers with a more Republican customer base are much more Republican than newspapers in more Democratic markets. And once you control for geography, there's very little evidence of an influence of owner ideology — whether you measure that by the positions of the other newspapers owned by that owner or by the owner's donations to different political parties. There really isn't much evidence that the owner plays a big role in how a newspaper slants the news.

There is less ideological segregation in online media than you might have thought. 

"Think of an online news outlet, like a blog, as a neighborhood, and let's measure who's in that neighborhood: What fraction of those people would self-identify as conservative? What fraction would self-identify as liberal? And let's calculate how segregated is this universe, how segregated is the Internet. To what extent are people visiting news sites that are only populated by other people like them ideologically?

"We found that the extent of segregation on the Internet is surprisingly low. It's certainly true that people gravitate to like-minded sources. So for example, foxnews.com has a more conservative audience than nytimes.com. 

"But the Internet is not radically different from traditional media. Take the fraction of the audience on a given news site that is conservative and call that the conservativeness of the site. Then take the website visited by the average conservative on the average day — that website is about as conservative as usatoday.com. Now do that same thing for the average liberal, that's about as liberal as cnn.com. If you were to read those two outlets, you wouldn't find that they're radically different.

"In fact, we find that isolation is very rare in the data. We have individual-level data on users on the Internet. People who get all of their news from outlets to the left of, say, the New York Times are very unusual. Likewise, people who get all of their news from sites to the right of Fox News are extremely rare. Folks that go to a fringe conservative site like rushlimbaugh.com are more likely to go to nytimes.com than readers of Yahoo News. The people who are consuming niche media are probably pretty politically engaged people, and therefore they want to read a lot of things. So in the end, the picture is a lot more muted than what people have feared."

Use of online news and social media is not correlated with political polarization. 

"We just compare trends in polarization for groups of people that have high or low propensities to use the Internet and social media. Our favorite and most important comparison is with respect to age. People who are 75 years and over rarely use social media and don't report getting a lot of political information online. People who are 18 to 25 frequently use social media and report getting a lot of political information online. So if you thought that social media was contributing to the rise in polarization, what you would expect to see in the data is that polarization is rising especially fast for younger Americans — and if anything, the story is the opposite. The rise in polarization is similar between the relatively old and the relatively young, and if anything, maybe polarization is rising faster among the relatively old. So in that sense the data don't line up with the hypothesis that social media is driving the rise in polarization.

"I think the effect of the Internet on polarization remains an open question. We're arguing that it doesn't appear that social media is accounting for the increase in polarization, but we haven't offered a constructive account of what is driving it. Until we have a better understanding of that, it's hard to rule anything out."

Political phrases have become more specialized and identifiable by party affiliation over time. 

"So what we did is try to figure out, for every session of Congress and every point in time, how easily a neutral observer could tell whether someone is a Republican or Democrat based on how they talk. We took the entire Congressional Record and used computer scripts to turn it into quantitative data about the use of phrases. Then we took the counts of phrases by every speaker and every session of Congress back to the 1870s and fed that through a model of speech. The model can tell us, at every point in time, how informative your speech is about your party.

"What we find is that in the 1870s, if I give you a minute of random speech from somebody in Congress, you're going to guess his party correctly about 54 percent of the time, only modestly higher than chance. In the late 1980s, you'd be doing a little bit better, but barely. By the 2000s, the number is closer to 75 percent. Something enormous changes between the late 1980s and the 2000s to cause the parties to diverge tremendously in how they're talking — many more phrases like "death tax" and "estate tax."

"The timing of the change coincides with the "Contract with America" and the Republican takeover in the 104th Congress in 1994. That was a watershed moment in political marketing. It showed the power of language to frame a set of issues and craft a narrative that could be very powerful in winning elections and changing policy views. In the wake of that, strategies on both sides crystallized around trying to have a very consistent message and use very consistent language to try and influence how voters saw the issues. I think that's what's reflected in the data.

"In terms of implications, one speculative possibility is that the fact that Republicans and Democrats are speaking differently to each other might contribute to hostility. It might make it harder for them to find common ground or recognize positions on which they do agree. That's not something that we show in the study, but that's one not-so-optimistic possibility suggested by it."

Netherlands: The #2 Food Exporter in the World

Densely populated Netherlands, with 17 million people and a GDP similar to the state of Illinois, is the second-largest exporter of food products in the world as measured by volume of sales. Frank Viviano explains in "This Tiny Country Feeds the World: The Netherlands has become an agricultural giant by showing what the future of farming could look like," which appears in the September 2017 issue of National Geographic magazine.

Essentially, Netherlands does it with high-tech farming and greenhouses, which enable very high yields. The online version of the essay has a number of remarkable photographs. Here's one showing a farmer's home surrounded by greenhouses:

The essay has lots of details and is worth reading in full, but the main points that jump out at me are that yields of many crops are vastly higher while environmental effects are lower. And while the high-tech agricultural model cannot be directly applied to every crop in every country (of course!), it does offer lessons that can be much more broadly applied.

For example, the Dutch are the world's top exporters of tomatoes, potatoes, and onions, and second-largest overall in vegetables (by value of sales). "More than a third of all global trade in vegetable seeds originates in the Netherlands. Some of the example read like science fiction: 15 varieties of tomato plants that are 20 feet tall, growing not in soil but in fibers spun from basalt and chalk.

Meanwhile, the plentiful use of sensors and enviromental controls means that many "have reduced dependence on water for key crops by as much as 90 percent. They’ve almost completely eliminated the use of chemical pesticides on plants in greenhouses, and since 2009 Dutch poultry and livestock producers have cut their use of antibiotics by as much as 60 percent."

Of course, the Dutch expertise cannot simply be tranplanted to other places. Part of the technology is a use of geothermal energy--plentiful in Netherlands--to keep greenhouses at a reasonably consistent temperature. Another issue is that the Dutch are (understandably) focused on vegetable crops with relatively high values, more than on the field crops that are food staples around the world.

But there are lessons be learned, and probably the main one is the importance of research and development, even in an industry like agriculture that may seem fairly mature already. Apparently in the Netherlands, developments in high-tech agriculture and are facilitated by Wageningen University & Research. Instead of a US-style Silicon Valley, they aspire to a Food Valley. Moreover, there are now "a thousand WUR projects in more than 140 countries." However, "Less than 5 percent of the world’s estimated 570 million farms have access to a soil lab."

In the big picture, a crucial issue for the world economy is how to feed a world population that is projected to exceed 9 billion by 2050 or so. For some earlier posts on aspects of this topic, see:

• "How the World Can Feed 9 Billion People" (October 20, 2011)
• "Is the World Already Growing Sufficient Food?" (June 5, 2014)
• "Meat Substitutes: Soy, Mealworms, and Crickets" (May 23, 2017)

Middle East Economic Challenges (as the Role of Fossil Fuels Declines)

The Middle East and North Africa region contains about half of the world's proven reserves of oil and natural gas. This has already proven to be a mixed blessing for economic growth in the region, and in a world economy where many countries are making efforts to reduce carbon-emitting sources of energy, a dependence on production of fossil fuels will be even more problematic. Abdelhak, Bassou, Mario Filadoro, Larabi Jaidi, Marion Jansen, Yassine Msadfa, and Simone Tagliapietra consider these isues in "Towards EU-MENA Shared Prosperity," a report recently co-published by the European think tank Breugel and the Moroccan think tank OCP Policy Center (which receives funding through Office Chérifien des Phosphates, a Morocco-based mining company).

The report offers a reminder that while oil and gas money is intertwined with the economy of the Middle East and North Africa region, the energy resources are not evenly distributed across countries.  Countries like Libya, Iraq, and Saudi Arabia are highly dependent on oil, while others like Egypt and Jordan are actually oil importers.

For the oil-rich countries of this region, oil tends to be a very large share of government revenues and of exports. In Saudi Arabia and Kuwait, more than 60% of the citizen workforce (that is, not counting immigrant workers from other countries) work in the government sector.

But countries that are heavily dependent on natural resources, and especially oil reserves, have often found themselves without much economic growth. Around the world, Nigeria, Angola, Venezuela, and Saudi Arabia have examples of some extraordinary wealth for the few, but it's hard to make the case that This pattern is so common that it is sometimes called the "natural resources curse" or the "Dutch disease," after Netherlands experienced a slowdown in economic growth after tapping into North Sea natural gas resources. For an overall discussion, I recommend the article by Anthony J. Venables,"Using Natural Resources for Development: Why Has It Proven So Difficult?" in the Winter 2016 issue of the Journal of Economic Perspectives. Or you can check an earlier blog post on the subject, "The Natural Resources Curse" (October 27, 2011), discussing an article by Jeffrey Frankel.

The present report looks at both economic and political causes of the resource curse. On the economic side, it cites "Resource Curse Theory":

"Richard M. Auty (1993) formulated the Resource Curse Theory to describe the reasons why natural resource-abundant countries often perform poorly in economic and political terms. He claimed this can happen for several reasons, such as the presence of weak institutions, commodity price volatility, conflicts and the so-called ‘Dutch disease’ – a perverse mechanism by which the increased revenues from natural resource discoveries lead to appreciation of the local currency, thus negatively affecting the exports of all other sectors in the economy."

They supplement this argument with "rentier state theory":

The RST [rentier state theory] was first postulated by Hussein Mahdavy in 1970, in the context of a discussion on the evolution of economic development in the Middle East in general, and in Iran in particular. Mahdavy (1970) defined as rentier states those countries that receive on a regular basis substantial amounts of external rents, which have little to do with the production processes in their domestic economies. Building on Mahdavy’s seminal study, Hussein Beblawi and Giacomo Luciani in 1987 systematised the RST, and developed it into a widely-accepted tool to interpret theMENA political economy and – more broadly– the political economies of all the world’s oil-producing countries ... As Hvidt (2013) outlines, MENA rentier states easily give up their well-argued and planned policies when under pressure and fall back on established ways of doing business, namely through patronage and the predominant role of the public sector."

The combination of these factors creates some unpleasant economic patterns behind. In the long run, productivity growth is what improves the standard of living in an economy. But as the figure shows, countries in the Middle East and North Africa region that export a lot of oil have typically seen a decline in productivity growth since 1980, while those with little in the way of energy resources have tended to see a rise in productivity. Energy resources are not inevitably a curse--as Venables and Frankel explain in the articles mentioned above--but with a rentier state and an otherwise weak economy, they can be.

The pressures to find substitutes for fossil fuels are on the risk. Production of fossil fuels outside the Middle East using unconventional methods like hydraulic fracturing are on the rise, too. Energy exports from the Middle East don't seem likely to vanish, but they also don't seem likely to grow, and oil and gas prices seem likely to remain low. The economic foundation of the Middle Eastern oil exporters is being shaken. Of course, these countries have been trumpeting plans for diversifying their economies for a long time, but without a lot of real effect. As the report notes: "However, it should be outlined that these kinds of economic diversification plans have been part of MENA oil exporters’ rhetoric for a long time. For instance, Kuwait’s government was already discussing the need for economic diversification during the 1950s. After 60 years, oil continues to represent more than 60 percent of Kuwait’s GDP, and more than 70 percent of its fiscal revenues."

The report focuses on the possibility of generating an alternative source of economic growth for this region through participation in global supply chains. Why this approach? The countries that have experience growth "miracles" in recent decades (Japan, South Korea, China, and others) have typically done so with expanded exports. The typical pattern was that countries started in low-tech manufacturing (like textiles), moved up to intermediate level assembly lines, and then moved to higher-tech products like information technology. But this economic ladder of success may not function very well in the future. The difficulty is what Dani Rodrik has called "premature deindustrialization," referring to the fact that the low-tech manufacturing jobs that used to be a point of entry into the global economy are now being taken over by automation and robots.

A possible alternative for developing countries in search of their own growth miracle is to integrate into global supply chains, and the Middle East and North Africa region does have some success stories along these line: for example, the report offers some detailed discussion of ties from Morocco and Tunisia to the global automotive and aeronautics sectors. But more broadly, the report has some tough language about why this global supply chain approach will be difficult for the countries of this region:

"A closer look at import and export flows of MENA countries suggests that MENA trade has at least two characteristics that do not put it in pole position for trade in the 21st century. First, the MENA region is characterized by an apparent lack of regional integration, which is important to attract foreign investment (ITC,2017). ... [E]xports and imports within the MENA region represent only 10% and 13% respectively of total flows.

"Second, the region is characterized by a relative lack of integration with “factory China” and “factory Germany”. The relationship with China and Germany is important given the role these countries play within regional value chains. ... [G]lobal trade in parts and components is mostly centred around three important hubs: Germany, China and the US. This distribution suggests that international value chains tend to be regionally diversified, spinning around Factory Europe, Factory Asia and Factory US (Baldwin and Lopez-Gonzalez, 2015). ...

"One of the weaknesses characterizing the MENA region is the relatively weak capacity of firms to meet internationally recognized standards and regulations. ITC (2016) pointed out that the MENA region is the weakest performing region measured by the percentage of firms meeting internationally recognized certificates. This performance is notably driven by the very weak performance of small firms in this criterion. When their products do not meet international quality standards, firms find it very difficult, if not impossible, to find international buyers. ...

"The lack of integration within the MENA region is a well-known phenomenon and – if unaddressed – may continue to be a drag on the region’s integration into global markets. Non-tariff measures have been found to present an important explanation for this lack of integration. Non-tariff measures (NTMs) create heavy burdens for regional trade. Many of these barriers occur “before the border”, applied by the home country prior to goods being exported. A sizeable share of NTMs affects domestic and regional trade. In the case of the European Union, 36% of exporters report that they face restrictive regulations or related procedural obstacles to trade while exporting or importing goods. In the Arab States region, 44% of all trading companies report that they face burdensome NTMs – both within and outside the region. ... 

"An example of a sector with significant unexploited growth potential for the MENA region is fresh and processed food (ITC, 2016). Much of this is for trade within the region itself. Yet, the MENA region imposes, on average, the largest number of technical regulations on fresh and processed food imports – nearly four times more than other regions. Reforming those regulations could be very beneficial for the region."

To put it bluntly, when countries can't find a way to trade food products with their nearest neighbors, their prospects for being a reliable part of farther-flung global supply chains seem limited.  I have no magic answer for development priorities in this region. But as I've written before, population growth in this region means that there is a need for about 60 million new jobs in the next decade or so. The oil industry isn't going to provide those jobs, both because it won't be growing and because it's highly capital-intensive. Governments aren't going to be able to provide those jobs, because both oil-exporters and oil-importers of the region lack the resources to do so. There is a dire need for the development of private sector firms not focused on oil and gas. A basic and preliminary step for job creation would be to reduce trade barriers for trade within the region itself. 

For some other posts on economic development issues in the Middle East and North Africa region, see: 

• "Youth and the Economic Future of Arab States" (December 1, 2016)
• "Next Steps for Economies of the Middle East" (March 11, 2013)
• "Economic Underpinnings of Arab Spring" (January 27, 2012)
• "The Middle East: Slow Growth and Stagnant Job Creation" (June 8, 2011)