Monday, December 10, 2018

US Health and Healthcare Spending in the Last 25 Years: Gains and Costs

As an overall pattern over the decades, spending in the US health care has been rising, both on a per person basis and as a share of GDP, and a number of health outcomes have improved. Are the benefits worth the costs?

Jeffrey Selberg, Bradley Sawyer, Cynthia Cox, Marco Ramirez, Gary Claxton and Larry Levitt tackle the question "A generation of healthcare in the United States: Has value improved in the last 25 years?" in a short essay published by the Peterson Center on Healthcare and the Kaiser Family Foundation (December 6, 2018).

In terms of health care costs: "In 1991, the GDP attributable to healthcare was 12.8% or $788 billion. In 2016, healthcare consumed 17.9% of GDP or $3.3 Trillion."

In terms of health care status: " Between 1991 and 2016, life expectancy increased by 3.1 years to 78.6, representing a 4% improvement. In the same time, disease burden (as measured by the total number of disability adjusted life years, or DALYs) improved by 12%.

Disease burden is comprised of two factors: years of life lost to premature death, which improved by 22%, and years living with disability, which worsened by 2%. The improvement in overall years of life lost was driven by a remarkable 36% reduction in years lost due to premature death from diseases of the circulatory system. At the same time, the worsening of years living in disability was led largely by an increase in substance use disorders. Moreover, substance use is one of the primary contributors to the slight decline in life expectancy in 2015 and 2016, the first time life expectancy has dropped two years in a row in several decades. Another critical outlier where outcomes have worsened in the U.S. (and not other comparable countries) is maternal mortality, which has gone up significantly from 14 deaths per 100,000 live births in 1991 to nearly 31 in 2016."

Again, are the benefits worth the costs of health care spending? There are at least three ways to tackle this question, none of them fully satisfactory.

1) One approach is to put a monetary value on the extending life expectancy by a healthy year (mid-range estimate run about $100,000) and on the value of a human life (about $9 million, for reasons given here). These authors decide not to take this approach. They write: "Much more analysis and discussion, beyond the scope of this paper, would be necessary to make such a judgement."  In a way, that's fair enough. As if the problems of putting monetary values on health outcomes were not enough, a deeper issue with this approach is that many factors affect health outcomes other than health care spending, so a basic comparison of changes in health spending with changes in overall health outcomes wouldn't make sense. The economist in me would like to see the results of such an analysis, even just a back-of-the-envelope calculation. But I readily confess that, for example, thinking about how to measure the benefits of US has health care spending against a changing health issues like the opioid epidemic or the rise in maternal mortality mentioned above raises some difficult issues.

2) An alternative approach is to do an international comparison. How do the changes in US health care spending and US health outcomes compare with other high-income countries? The overall pattern is that in the last 25 years, other countries have seen about the same rise in per capita  health care spending as in the US (although at a lower overall levels), while achieving higher gains in health. The authors write: " Over the past 25 years, similarly sizable and wealthy nations generated an average increase in life expectancy of 5.2 years, or 7%, compared to the U.S.’s 3.1 years, or 4% improvement. In these countries, disease burden improved by 22%, compared to the U.S.’s 12%.  ... On average, comparable countries spend under two thirds (60%) of what the U.S. spends on healthcare relative to GDP, while the per capita spending growth has been similar over the last three decades."

3) However, international comparisons also raise raise the question: Are health care problems in the US in some ways worse than in other countries, so that US health care spending is higher in part because it is facing bigger challenges? In the comparison with other high-income countries, the authors write: "The disease burden in the U.S. is appreciably higher at 24,235 versus 18,605 disability adjusted life years per 100,000 population—a difference of 30%. ... The 2016 U.S. rate of obesity is over twice that of other high-income countries (40% versus 17%).":

4) There are two possible goals for society to consider: improving health, and making sure that people have health insurance so that they are not overly exposed to high health care costs. These goals overlap, but they aren't the same. If the goal is to improve health outcomes, it might make sense for the US to spend less on health care, and instead to spend more on the social determinants of health like better housing. In their international comparisons, the authors note:
"According to the OECD’s 2016 measure of poverty (which can be applied across countries more easily than the U.S. federal poverty level), 18% of people in the US are living below poverty, versus 10% in comparable OECD countries. When combined, public and private spending on social services and healthcare is fairly similar across these countries (30.5%) and the U.S. (32.6%), but the distribution is very different in the U.S., where we spent much more than average on health (16.3% vs 10.5% of GDP) and less than average on public social services (16.3% vs 20.0% of GDP) in 2013, the most recent year of available data on social services spending internationally."
In general, I'm a supporter of programs that expand health insurance coverage, like Medicaid and the changes in the 2010 Patient Protection and Affordable Care Act. But it's worth remembering that when we commit substantial resources to making health insurance available, the main effect may be to reduce financial stress rather than to improve physical health outcomes. Medicaid costs thousands of dollars per person. The 2010 Patient Protection and Affordable Care Act expanded health insurance coverage to about 22 million more people at an annual cost to the federal government of about $110 billion--so about $5,000 per person. If the goal is to improve people's physical health, then alternative ways of spending that money might well have a larger effect: say, steps focused on reducing the opioid epidemic, or reducing maternal mortality, or broader improvements in the living conditions of the poor and near-poor.

Tuesday, December 4, 2018

US Not the Source of China's Growth, China Not the Source of America's Problems

A sizeable portion of the US discussions about economic policy toward China seem to me based on two conceptual mistakes. One mistake is that China's rapid economic growth fundamentally depends on trade with the US. The other mistake is that the bulk of US economic problems depend in some fundamental way on trade with China.  

The inexhaustibly interesting Larry Summers puts the point this way in his Financial Times column yesterday ("Washington may bluster but cannot stifle the Chinese economy,' December 3, 2018, soon to be available at his website). Summers writes: 
At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.
Equally, while some U.S. companies might earn more profits operating in China, and some job displacement in American manufacturing because of Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected U.S. growth by even 0.1 percent a year.
This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world’s largest economy.
It's worth spelling out the underlying logic here a bit. The formula for economic growth is to invest in human capital, physical capital, and technology, in an economic environment that provides incentives for hard work, efficiency, and innovation. China has made dramatic changes in all of these areas, and they are the main drivers behind China's extraordinary economic growth in the last four decades, and its expectation of above-global-average growth heading into the future.

Looking specifically at trade, China's exports of goods and services were 19.7% of GDP in 2017, and its imports of goods and services were 18% of GDP. China's economy has been growing at 6-7% per year, so the overwhelming majority of that growth has been economic production in China for domestic consumption. No matter your views of China's trade surplus, there's no sensible economic theory which suggests that China's trade surplus, which as a share of GDP is relatively small, is a major driver of China's growth.

Yes, there was a "China shock" after China entered the World Trade Organization in 2001, when China's exports suddenly soared from 20.3% of GDP in 2000 to 36% of GDP in 2006. The size of this shock was not predicted by China or others, and it's fair to argue that neither the US nor others in the world economy did a good job of reacting to that shock at the time. But again, China's exports are now down to 19.7% of GDP in 2017--a lower proportion of China's economy than in 2000. To put it differently, China's exports have been growing more slowly than the rest of its economy since 2006.

Conversely, the US economy has not done a great job of investing in the fundamentals of economic growth. The US once led the world in share of workers with higher education, but now it's middle-of-the-pack. The US is a low-saving economy, with low rates of investment in both private and public capital. US spending on research and development has been stagnant for years, while other countries have been expanding. Rates of business start-ups have been declining.  Mobility of US workers is downEconomic mobility between generations in the US is not high. Further, the US has made little progress--and little effort--to address ongoing issues like the projections of large and growing budget deficits, or rising health care costs, or a much higher level of income inequality than a few decades ago.

These US economic issues and others are in any substantial part not the result of trade with China, or the result of international trade at all. Lasting solutions will not be found in trade squabbles, either. 

The world economy is indeed shifting in a dramatic way. As I've noted in the past, it used to be true that the national economies of the largest size were also the national economies with quite high levels of per capita GDP. However, we are headed toward a world economy where the largest national economies are countries with large populations and only medium levels of per capita GDP. 

This isn't just an issue about China. Some common projections (like these) suggest that by 205, the seven largest economies in the world, in order, will be China, India, the US, Indonesia, Brazil, Russia, and Mexico--then followed in size by Japan, Germany, and the UK.

I lack the geopolitical imagination to see how this shift will play out. But at a small scale, you can see it at the movies, when you see a rising number of roles for Chinese actors and settings in China. It tells you that the international market for movies is becoming ever-more important. At a larger scale, The rest of the world used to complain that it was always having to hear about US products like Coca Cola, Levi's. big American cars, and the like. But US domestic car production is now about 7% of the global totalUS companies are producing around the world: for example, General Motors makes more cars in China than in the US, and US producers make and sell twice as much inside China as they export to China. 

But in 21st century, when it comes a wide array of decisions--international trade talks, decisions of the the International Monetary Fund and the World Bank, who leads the way during global financial crises, who dominates the flows of international investment capital and foreign aid, who has the power to impose trade or financial sanctions, and what kind of military threats are most credible--the shifts in the global economy suggest that the high-income countries of the world will not dominate as they did during most of the 20th century. Instead, countries with the world's largest economies, but much lower standard of living for their populations, will play a central role in setting the rules. 

Monday, December 3, 2018

Excavating Layers of the Tax Cuts and Jobs Act of 2017

"The 2017 Tax Act, sometimes called the Tax Cuts & Jobs Act, has been heralded by some as historic reform and by others as Armageddon. This Collection analyzes the Act, exploring the process by which it was passed, the values that undergird its policies, and how specific provisions will affect the structure of the U.S. and global economy moving forward." Thus begins a five-paper "Forum: Reflections on the 2017 Tax Act" from the Yale Law Journal (dated October 25, 2018)

Michael J. Graetz writes the "Foreword—The 2017 Tax Cuts: How Polarized Politics Produced Precarious Policy." He touches on a number of the themes mentioned in the two papers by Joel Slemrod and Alan Auerbach in the"Symposium on the Tax Cuts and Jobs Act" that appeared in the Fall 2018 issue of the Journal of Economic Perspectives: yes, the US corporate taxation needed both lower rates and more sensible treatment of multinational companies, but in many ways the new tax bill created a muddle--and a muddle that will lead to substantially higher budget deficits. Here's a flavor of Graetz (footnotes omitted throughout): 

"The Democrats’ complaints about the law’s reduction in the corporate tax rate from 35% to 21% ring hollow. Democrats themselves had long realized that the U.S.’s exceptionally high corporate tax rate in today’s global economy—with highly mobile capital and intellectual property income—invited both U.S. and foreign multinational companies to locate their deductions, especially for interest and royalties, in the United States, and to locate their income in low- or zero-tax countries. This is obviously not a recipe for economic success. Both before and after the legislation, Democrats urged a corporate tax rate of 25% to 28%; meanwhile, Donald Trump asked for a 15% rate.So, even if Democrats had been involved in the legislative process, the 21% rate that we ended up with would be in the realm of a reasonable compromise. ... [A] significantly lower corporate rate has been long overdue, and raising it would be a mistake. If Democrats are unhappy with the distributional consequence that a corporate tax cut will benefit high-income shareholders, the appropriate remedy––given the mobility of business capital, businesses’ ability to shift mobile intellectual property and financial income to low-tax jurisdictions, and the challenges of intercompany transfer pricing––is to increase taxes at the shareholder level, not to increase corporate tax rates. ...
Congress’s greatest challenge in crafting this tax legislation was figuring out what to do about the international tax rules. ... Congress confronted daunting challenges when deciding what rules would replace our failed foreign-tax-credit-with-deferral regime. There were essentially two options: (1) strengthen the source-base taxation of U.S. business activities and allow foreign business earnings of U.S. multinationals to go untaxed; or (2) tax the worldwide business income of U.S. multinationals on a current basis when earned with a credit for all or part of the foreign income taxes imposed on that income. Faced with the choice between these two very different regimes for taxing the foreign income of the U.S. multinationals, Congress chose both. ...
No doubt analysts can find provisions to praise and others to lament in this expansive legislation, but we should not overlook its most important shortcoming: its effect on federal deficits and debt.  ...
Under the 2017 tax law, the federal debt held by the public is estimated to rise to more than 96% of GDP by 2028, and this does not count the omnibus spending bill signed in 2018 by President Trump. ... If the current policy levels of taxes and spending are maintained, total deficits over the next decade will approach $16 trillion, with deficits greater than 5% of GDP beginning in 2020. By 2028, current fiscal policy will produce deficits of more than 7% of GDP annually. This is unsustainable. ... The budget legislation of the 1990s, along with the economic growth unleashed by the information technology revolution of the late 1990s, completely eliminated the projected deficits by the year 2000 and produced a federal surplus for the first time since 1969. Indeed, the budget surpluses projected by the Congressional Budget Office at the beginning of this century were so large that, in March 2001, Chairman of the Federal Reserve Alan Greenspan told Congress that the federal government would soon pay off all of the national debt and would have to begin investing its surplus revenues in corporate stocks, a prospect he abhorred. The good news is that this problem has been solved. 

I was also struck by the essay by Linda Sugin, "The Social Meaning of the Tax Cuts and Jobs Act." Sugin describes the social values that seem to underlie the provisions of the TCJA. She writes:
This Essay discusses five American priorities and values revealed by the TCJA:

1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich; and
5. Physical things are important.
The TCJA’s distributional effects dovetail with these values. ... First, traditional families with a single working spouse and a stay-at-home spouse are disproportionately prosperous, so subsidizing that family model reduces progressivity. Second, access to capital increases with affluence, so a greater entitlement to investment income favors taxpayers who enjoy that affluence. Third, valuing individual autonomy is consistent with robust individual property rights, and less consistent with high levels of taxation for shared community purposes. Fourth, favoring the charitable giving of the rich allows them tax reductions not available to others, and sends the message that philanthropy substitutes for tax paid. Fifth, prioritizing physical assets favors individuals are able to invest in such assets and underrates the important value that workers contribute to prosperity. Critics of the legislation concerned about the law’s reallocation of tax burdens down the income scale and its projected budgetary deficits must focus more on these embedded priorities.

Of the other three papers, two papers dig into details of the changes in the international corporate tax regime, while the other argues that the Tax Cuts and Jobs Act will push firms away from the use of debt financing--and thus toward alternative types of financing--with implications that are not yet clear.

Rebecca M. Kysar discusses "Critiquing (and Repairing) the New International Tax Regime."
"In this Essay, I address three serious problems created—or left unaddressed—by the new U.S. international tax regime. First, the new international rules aimed at intangible income incentivize offshoring and do not sufficiently deter profit shifting. Second, the new patent box regime is unlikely to increase innovation, can be easily gamed, and will create difficulties for the United States at the World Trade Organization. Third, the new inbound regime has too generous of thresholds and can be readily circumvented. There are ways, however, to improve upon many of these shortcomings through modest and achievable legislative changes, eventually paving the way for more ambitious reform. These recommendations, which I explore in detail below, include moving to a per-country minimum tax, eliminating the patent box, and strengthening the new inbound regime. Even if Congress were to enact these possible legislative fixes, however, it would be a grave mistake for the United States to become complacent in the international tax area. In addition to the issues mentioned above, the challenges of the modern global economy will continue to demand dramatic revisions to the tax system."
Susan C. Morse raises implications about International Cooperation and the 2017 Tax Act.
"Some have criticized the 2017 Tax Act for lowering the corporate tax rate. This Essay argues instead that Congress deserves credit for bringing the U.S. rate in line with other OECD countries, potentially saving the corporate tax by establishing a minimum global rate. ... There is a silver lining for the corporate income tax in the Tax Cuts and Jobs Act of 2017. This is because the Act’s international provisions contain not only competitive but also cooperative elements. The Act adopts a lower, dual-rate structure that pursues a competitiveness strategy and taxes regular corporate income at 21% and foreign-derived intangible income at 13.125%. But the Act also supports the continued existence of the corporate income tax globally, thus favoring cooperation among members of the Organisation for Economic Cooperation and Development (OECD). Its cooperative provisions feature the minimum tax on global intangible low-taxed income, or GILTI, earned by non-U.S. subsidiaries. Another cooperative provision is the base erosion and anti-abuse tax, or BEAT. The impact of the Act on global corporate income tax policy will depend on how the U.S. implements the law and on how other nations respond to it."
Robert E. Holo, Jasmine N. Hay and William J. Smolinski discuss issues of corporate leverage in "Not So Fast: 163(j), 245A, and Leverage in the Post-TCJA World."
"The Tax Cuts and Jobs Act will require large multinational corporations to reevaluate the use of debt in their acquisition and corporate structures. Changes to the Tax Code brought about by the Act have reduced incentives to use debt in these contexts. These changes may require practitioners to identify new approaches to financing acquisitions and will necessitate reevaluation of current capital structures used by large multinational entities. ...
"In other words, is it a good idea to dampen the worldwide preference for debt in capital structures? Is there a problematic preference for debt that needs fixing in the first place? It is likely too early to make that call given the potential number of unintended consequences that my result under the new law. ... By changing the rules of the game, the IRS has effectively changed the inputs to that modeling exercise. It remains a complicated question whether, holistically, business entities carry excess debt relative to equity; but it is certainly the case that a new set of rules which, on their face, appear to favor equity over debt, may very well cause those modeling exercises to produce an output that suggests a shift in debt-equity preferences is in order."

Friday, November 30, 2018

Unauthorized Immigrants to US Continues to Decline

The total number of unauthorized immigrants in the US climbed very rapidly in the 1990s and early 2000, but peaked around 2007, and has declined since then. Jeffrey S. Passel and D’Vera Cohn report details in "U.S. Unauthorized Immigrant Total Dips to Lowest Level in a Decade," just published by the Pew Research Center (November 28, 2018).

Here's an illustrative figure. The number of unauthorized immigrants more than doubled in the 1990s from 3.5 million in 1990 to 8.6 million, and then kept rising up to 12.2 million in 2007, but has declined since then.

I've noted this decline and discussed some of the reasons for this drop in the number of unauthorized immigrants in earlier posts (see here and here): for example, the Great Recession in the US from 2007-2009, improved growth prospects for Mexico's economy in the last couple of decades, fewer children per women and an overall aging of Mexico's workforce, and stepped-up border enforcement.

The report from Passel and Cohn breaks down the estimates of unauthorized immigrants in a variety of ways: by location, age, occupation, parental status, and so on. Here, I'd like to emphasize two points.

First, back in the 1990s it was generally true that the number of unauthorized migrants who had been in the US for less than five years and the number who had been here for more than 10 years was about the same. But with the passage of time since the 1990s, and the dropoff in recent unauthorized immigration, we have moved to a situation where about two-thirds of the unauthorized immigrants have now been here for more than 10 years, and only 18% have been here for less than five years. "By 2016, an unauthorized immigrant adult had typically lived in the U.S. for 14.8 years, compared with a median 8.6 years in 2007."
To put differently, one can argue that a main policy problem of the 1990s and early 2000s was to limit additional unauthorized immigration, and that both the Clinton and Bush administrations failed to do so. But the main immigration enforcement problem at present is not to block growing numbers of unauthorized migrants: it is how we address the issue of about 7 million unauthorized immigrants who have been here more than a decade, and who have put down roots in their communities. For example, about 43% of the unauthorized immigrants live in households that include a total of about 5 million US-born, American-citizen children.

The other main point is that the situations of the United States and the European Union are quite different when it comes to migration. Indeed, one can make a case that the unauthorized immigration situation currently faced by the European Union is similar, or perhaps more extreme, than the situation the US faced in the 1980s and 1990s. Fundamental drivers of unauthorized immigration are large differences in birthrates and in economic prospects. In the 1980s and 1990s, these factors drove unauthorized immigration from Mexico to the United States. Now, those factors are driving unauthorized immigration from Africa to the European Union.

A couple of years ago, I wrote about an article by Gordon Hanson and Craig McIntosh called "Is the Mediterranean the New Rio Grande? US and EU Immigration Pressures in the Long Run," which appeared in the Fall 2016 issue of the Journal of Economic Perspectives. They wrote:
The European immigration context today looks much like the United States did three decades ago. In Europe, which long ago made its demographic transition to low birth rates, declines in fertility in the 1970s and 1980s set the stage for a situation in which the number of working-age residents is in absolute decline. Countries in the North Africa and Middle East region, in contrast, have had continued high fertility, creating bulging populations of young people looking for gainful employment in labor markets plagued by low wages and the scarcity of steady work. Further to the south, population growth rates in sub-Saharan Africa, a region with still lower relative earnings, remain among the highest in the world. ...
As an example, we predict the number of African-born first-generation migrants aged 15 to 64 outside of sub-Saharan Africa to grow from 4.6 million to 13.4 million between 2010 and 2050. During this same period, the number of working-age adults born in the region will expand from under half a billion to more than 1.3 billion, meaning that international migration would only absorb 1 percent of the overall population growth. ... The coming half century will see absolute population growth in sub-Saharan Africa five times as large as Latin America’s growth over the past half century. 
If Americans want to imagine the political tensions over immigration in the European Union, imagine try to imagine the current US political climate if instead of having the total number of unauthorized immigrants falling during the last 10 years, the total had instead been increasing strongly over the last 10 years--and was predicted to keep doing so into the future.

P.S. A recent alternative study of the size of the unauthorized immigrant population estimates a substantially higher total. Mohammad M. Fazel-Zarandi, Jonathan S. Feinstein, Edward H. Kaplan published "The number of undocumented immigrants in the United States: Estimates based on demographic modeling with data from 1990 to 2016," in PLoS ONE (published September 21, 2018). Two quick comments here:

1) Although this study finds a higher total number of unauthorized immigrants at any given time, the pattern over time is the same: that is, a sharp rise in the 1990s and the early 2000s, and then a leveling off after about 2007. 

2) The assumptions behind these alternative estimates have been questioned. In a follow-up "Commentary" published simultaneously online on PLoS One, Randy Capps, Julia Gelatt, Jennifer Van Hook, and Michael Fix point out that the model is not benchmarked against other available demographic data, and in fact is inconsistent with such data. In particular, their estimates are highly sensitive to what assumptions are made about how many unauthorized immigrants return to Mexico and other places on their own: if you assume that very few return (an assumption not backed up by the available survey evidence), then the total remaining the US will obviously look much higher. 

Thursday, November 29, 2018

Snapshots of Falling US Mobility

Americans are moving less, although the reasons aren't clear. The US Census Bureau has just released an updated set of tables and graphs showing the trend.

For example, here's the overall pattern. The blue bars show the total number of movers (measured on the left axis) while the black line shows the mover rate relative to population (measured on the right axis).
Figure A-1. Number of Movers and Mover Rate: 1948-2018
Although moves of all types have declined, the number of short-distance moves within a given county has fallen somewhat more.

number of relatively short moves, under 50 miles, hasn't fallen much. It's the longer-distance moves that have fallen.


I also thought the regional pattern of net domestic migration was interesting. The Northeast has consistently been losing population to moves; the South has been consistently gaining; and the West and Midwest as a whole have been roughly breaking even.

The reasons for this decline in mobility are not clear. A good explanation needs to explain a long-term trend--that is, pointing to something like people who didn't want to move after the drop in housing prices in 2008 can't explain a pattern that has been going on for decades. Moreover, most common explanations are easily tested. For example, if the reason for declining mobility is the US population getting older, then younger  households should be continuing to move at the same rate, which isn't actually true.

For an overview of the research on this topic from a few years back, Raven Molloy, Christopher L. Smith, and Abigail Wozniak wrote "Internal Migration in the United States." in the Summer 2011 issue of the Journal of Economic Perspectives. For example, they write: "Migration rates have fallen for most distances, demographic and socioeconomic groups, and geographic areas. The widespread nature of the decrease suggests that the drop in mobility is not related to demographics, income, employment, labor force participation, or homeownership."

About a year ago, David Schleicher discusses the issue in "Stuck! The Law and Economics of Residential Stagnation," appearing in the Yale Law Journal (October 2017, 127:1, pp. 78-154). (I discussed the article here.) He argues that a wide variety of local and state rules and regulations have combined to make movement more difficult: like limits on residential building that drive up the price of housing and rules requiring state-level occupational licenses for certain jobs.

The question of why US mobility is falling can be rephased in this way: Why don't we see more movement from areas with lower wages and fewer jobs to areas with better economic prospects? It used to be that US regions with lower income levels had faster growth, and thus tended to converge with the rest of the country. But regional convergence has now slowed down dramatically, or even stopped.

I'm not sure what might best be done about the decline in mobility, but it seems to me a legitimate public concern. It's bad for an economy when labor resources are not being reallocated to areas where they would be more productive. In addition, less mobility means that people have less shared life experience with others across a range of neighborhoods, communities and regions.

Wednesday, November 28, 2018

Some Alternative Baskets of Goods for Measuring Inflation

When explaining or teaching about measures of inflation, a usual starting point is to talk about a "basket" of goods--for example, a combination of goods that reasonably represents a typical pattern of consumption for urban households underlies the Consumer Price Index. Basic measures of inflation look at what it would cost to purchase this same basket of goods at two points in time.

This approach raises an obvious question: What about if someone is not a member of an average household? Averages can mislead: as we say in my part of the world, based on yearly averages, the Great Lakes never freeze. What about inflation for households that are poor or rich, older or younger, or face a specific situation? The straightforward and practical approach is to define a separate basket of goods that does represent your group of interest more accurately.

As one example, along with the Consumer Price Index for All Urban Consumers (CPI-U), which represents the spending habits for roughly 90 percent of the population of the United States, and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which represents a smaller subset of about 30 percent of the U.S. population, the Bureau of Labor Statistics also produces an experimental Consumer Price Index-Elderly (CPI-E). The basket of goods in this index gives greater weight to health care, for example, because that category represents a larger share of spending for the elderly. There are occasional proposals that the CPI-E should be used for the annual cost-of-living adjustment applied to Social Security benefits, instead of the CPI-W used at present. Over the period from 1982-2014, annual Social Security adjustments would have been a modest 0.2% per year higher with this change.

The Federal Reserve Bank of Atlanta has set up an interesting website, myCPI, which lets you plug in some specific information about number of people in a household, income, homeowner vs. renter, and some other factors. The choices are fairly course: for example, there are only three categories for age and income, and two categories for education level. But it does show that measures of inflation will differ when taking different baskets of goods into account.

Some non-government groups have used the idea of a basket of goods as the basis for an annual article or report. For example, Forbes magazine publishes an annual Cost-of-Living-Extremely-Well Index (CLEWI). The index is based on 40 luxury items: for example, an ebonized Model D concert-grand Steinway piano in  New York; a pair of 12-gauge side-by-side sporting shotguns from James Purdey & Sons in New Jersey; 12 cotton bespoke shirts from Turnbull & Asser in the UK; a Jules Audemars self-winding, 18-karat pink gold, alligator strap, Audemars Piguet Swiss watch; a case of Dom Perignon champagne; installing a Har-Tru crushed stone tennis court in Connecticut; and others. The CLEWI has been rising faster than the Consumer Price Index over time, but luckily for the very rich, the net worth of the Forbes 400 has risen faster still.



Another example is the annual American Farm Bureau estimate of the cost of Thanksgiving dinner. This year, they sent out 166 volunteer shoppers to grocery stores in 37 states, with the task of calculating what it would cost to purchase the ingredients for a representative dinner. The items include: 

For an overview of some historical examples of price indexes, a useful starting point is the short article by Joseph Persky, "Retrospectives: Price Indexes and General Exchange Values," in the Winter 1998 issue of the Journal of Economic Perspectives. Perhaps my favorite  historical example is the basket of goods used by the state of Massachusetts in 1780. As Persky describes it (citations omitted):
In 1780, Massachusetts enacted what may be the first documented case of formal price indexation. ... [F]acing a crisis in maintaining Revolutionary War enlistments at a time when the value of the currency was unstable and falling, they hit upon a scheme to use indexed interest-bearing notes as payment. Both principal and interest on these ‘‘depreciation notes’’ were to be paid not at their nominal values but ‘‘in the then current Money of the State, in a greater or less Sum, according as Five Bushels of Corn, Sixty-eight Pounds and four-seventh Parts of a Pound of Beef, Ten Pounds of Sheeps Wool, and Sixteen Pounds of Sole Leather shall then cost, more or less than One Hundred and Thirty Pounds of Current Money.’’ Pursuant to the Massachusetts act, county agents were named and charged with collecting average price data every month.
There is apparently some historical question as to whether this price index was calculated accurately and honestly, but I love the example nonetheless. The idea of price indexes was apparently in the air around this time. Persky writes: "An Italian named G. R. Carli is often credited with having developed the first price index number. In work published about a decade before The Wealth of Nations, Carli made a serious empirical investigation of prices over time, including a simple average of the percentage changes in three commodities—grain, wine and oil—over the period 1500 to 1750."

Of course, the idea of buying a fixed basket of goods at two different points in time opens up a number of other obvious questions, too, which I haven't discussed here. What if consumers shift their pattern of consumption over time, perhaps by substituting goods that have become cheaper for goods that have become more expensive? What if the qualities of specific products change and evolve over time? What if new goods enter the market and replace older goods?

A body of economics research and several prominent commissions have looked at these issues of bias from substitution, quality change, and new goods over time.  For a recent discussion of these issues, a useful starting point is the report by Brent R. Moulton, "The Measurement of Output, Prices, and Productivity: What’s Changed Since the Boskin Commission?" written for the Hutchins Center on Fiscal and Monetary Policy at Brookings (July 2018). For discussion of the Boskin Commission, see the six-paper symposium on "Measuring the CPI" in the Winter 1998 issue of the Journal of Economic Perspectives. For discussion of the Schultze commission report a few years later, see the three-paper symposium on the "Consumer Price Index" in the Winter 2003 issue of the JEP

Tuesday, November 27, 2018

Gender Wage Gaps Around the World

On average, women around the world are paid 15.6% per hour less than men. The Global Wage Report 2018-2019, just published by the International Labour Organization, devotes two main chapters to the theme "What lies behind gender pay gaps." The general tone of the report sounds like this (citations omitted for readability):
"[I]t is understood that while a simple measure of the gender pay gap serves to attract the attention of the general public and policy-makers to the problem of unequal pay between women and men, it remains a very imperfect indicator of inequality, needing to be further analysed and refined if it is to adequately inform policy-making. A gender pay gap measured simply – the so-called “raw” or unadjusted gender pay gap – can arise for a multitude of different reasons, including, among others: differences between female and male educational attainments; lower wages in the sectors and occupations in which women are concentrated; differences between female and male participation rates in part-time and full-time work, which are in turn influenced by women’s role as mothers and their care responsibilities; and discrimination in pay between women and men performing equal work or work of equal value. The most appropriate mix of policy responses will differ across countries, depending on which factors have the largest impact on the gender pay gap in each national context."
As one example of the issues, here are two figures on the raw gender wage gap across countries. The first looks at wages per hour; the second looks at earnings per month. Thus, the second figure reflects both lower wages and lower average hours for women.

The report walks through a number of possible explanations for gender wage gaps--although because the ILO is focused on a cross-country analysis, it is somewhat limited by what kinds of cross-country data are available. But for example, while lower education levels might have played a role in lower human capital for women some decades in the past, those education gaps have now been dramatically reduced, and do not seem like a likely mechanism for explaining the curent gender gap.

However, there are at least four patterns behind the gender wage gap that show up strongly in the cross country data.

One is "vertical occupational segregation," which refers to a common pattern that although education levels are similar, women are more likely to be found in lower-skilled occupational categories.
"[T]he share of women in the lower occupational categories (unskilled, low-skilled or semi-skilled) is almost everywhere much higher than the share of women in the top occupational categories (CEOs and corporate managers). For example, in Finland, only 20 per cent of CEOs are women, whereas about 70 per cent of semi-skilled jobs are occupied by women. This illustrates “vertical occupational segregation” – that is, the clustering of men at the top of occupational hierarchies and of women at the bottom."
A second pattern is that firms that employ a larger share of women tend to pay lower wages.

A third pattern relates to parental status. Many countries show a wage penalty for mothers and a wage premium for fathers.

Finally, labor force participation is lower for women.
"[T]the low labour market participation of women vis-à-vis men is a global phenomenon. Irrespective of income level, in all countries and at any age group, women’s participation rates are always below those of men. ... [F]or most countries, the trend in participation rates for women starts to separate further from that of men at about the age of 25–35 years old, coinciding with the beginning of the period of motherhood. Finally, in only a few of the countries shown here (Armenia, Australia, Mongolia, Philippines, Russian Federation, Ukraine) is there any “bounce back” into the labour market for women. In most other countries, it seems that motherhood has a long-term effect: once the participation of women declines at around the age of 25–30 years, the proportion of women who stay in (or out) of the labour market across all other age groups thereafter remains constant until approximately retirement age. ... Globally, women are still substantially less likely than men to participate in the labour market. The global gap in labour force participation has been estimated at 27 percentage points, and participation gaps remain particularly wide in the Arab States, northern Africa and southern Asia, in each case exceeding 50 percentage points.
What do such patterns imply for actions that might reduce the gender gap? The ILO report discusses a wide variety of possibilities, including collective bargaining, minimum wages, and others. Here, I'll focus on my thoughts about some policies with a more direct relationship to the gender gap.

1) Laws about "equal pay for equal work" can have only limited effect on the gender wage gap if much of the gap traces back to different jobs, different employers, and effects of motherhood on labor force participation. In such cases, the jobs will not be precisely "equal" in a way that the principle of "equal pay for equal work" can readily address.

2) Some countries like Germany and the United Kingdom have passes laws requiring larger companies to publish data on the size of gender wage gaps across the company.

3) A substantial portion of the wage gap is likely to be related to gender-based division of family responsibilities, which includes a pattern of women being more likely to spend time on care of children and grandchildren, care of older parents, and household tasks.

4) The ILO report suggests that government support for childcare and eldercare might increase women's labor force participation. My own reading is that the cross-country evidence on this conclusion is mixed. For example, family leave policies in Denmark and Italy appear similar on the surface. But the effect of such policies in Denmark is to support higher labor force participation of women, while the effect in Italy is to support a substantial amount of exit from the labor force for women. In other words, family leave policies can have quite different effects depending on the social context of the country that enacts them.

Obviously, the gender wage gap is not purely a labor market phenomenon, but arises in the context of social expectations and choices within households about time allocation. Interested readers wanting more might start with a three-paper symposium on "Women in the Labor Market in the Winter 2017 issue of the Journal of Economic Perspectives:

Or here are some earlier posts addressing various aspects of the topic:

Friday, November 23, 2018

Opening Some Windows Into Recent Economic Research

Readers who find this blog a useful stimulus for reflection might also be interested in checking the "Research Highlights" webpage run by the American Economic Association. I'm the Managing Editor of the Journal of Economic Perspectives, which is one of the seven journals currently published by the AEA (with an eighth journal scheduled to start publishing next year). Once or twice a week, the Research Highlights page picks a recent article from these journals and offers a short readable overview or an interview with the author. For those interested getting a sense of a wide array of recent economic research, it's a good starting point. For a flavor, here's a list of the nine most recent entries:

Building trust with buyers (November 21, 2018)
How much do offers of "satisfaction guaranteed" improve efficiency in the marketplace?

Making economics transparent and reproducible (November 16, 2018)
The AEA interviews Ted Miguel about the credibility of economics.

Shadow business (November 12, 2018)
How many cartels exist and how important is competition policy to reining them in?

The heroin balloon (November 7, 2018)
A push to make prescription opioids more difficult to abuse touched off a surge of heroin deaths.

Fragile innovation (November 2, 2018) 
This video explains how financial innovation helped cause the 2008 financial crisis.

How Democrats lost the South (October 29, 2018)
The AEA interviews Ilyana Kuziemko and Ebonya Washington about why Southern states turned Republican in the 1960s.

Modern family (October 24, 2018)
How do parental leave policies affect relationship stability at home?

Boosting mobile savings (October 19, 2018)
Can automatic enrollments encourage saving in developing countries?

Cutting taxes, creating jobs (October 15, 2018)
How would lowering the corporate tax rate affect entrepreneurial decisions and employment?

Thursday, November 22, 2018

Thanksgiving History: George Washington, Sarah Josepha Hale, Abraham Lincoln

Thanksgiving is a day for a traditional menu, and I take a holiday by reprinting this annual column on the origins of the day:

The first presidential proclamation of Thanksgiving as a national holiday was issued by George Washington on October 3, 1789. But it was a one-time event. Individual states (especially those in New England) continued to issue Thanksgiving proclamations on various days in the decades to come. But it wasn't until 1863 when a magazine editor named Sarah Josepha Hale, after 15 years of letter-writing, prompted Abraham Lincoln in 1863 to designate the last Thursday in November as a national holiday--a pattern which then continued into the future.

An original and thus hard-to-read version of George Washington's Thanksgiving proclamation can be viewed through the Library of Congress website. The economist in me was intrigued to notice that some of the causes for giving of thanks included "the means we have of acquiring and diffusing useful knowledge ... the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best."

Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as an example of unwanted and inappropriate federal government interventionism. As reported by the Papers of George Washington website at the University of Virginia.
The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”
Here's the transcript of George Washington's Thanksgiving proclamation from the National Archives.
Thanksgiving Proclamation
By the President of the United States of America. a Proclamation.
Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”
Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.
and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.
Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.
Go: Washington
Sarah Josepha Hale was editor of a magazine first called Ladies' Magazine and later called Ladies' Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here's a PDF file of the Hale's actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale's letter to Lincoln:
"You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. ... For the last fifteen years I have set forth this idea in the "Lady's Book", and placed the papers before the Governors of all the States and Territories -- also I have sent these to our Ministers abroad, and our Missionaries to the heathen -- and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. ... But I find there are obstacles not possible to be overcome without legislative aid -- that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; -- or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject ..."
William Seward was Lincoln's Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale's September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here's the text of Lincoln's Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:
Washington, D.C.
October 3, 1863
By the President of the United States of America.
A Proclamation.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.
By the President: Abraham Lincoln
William H. Seward,
Secretary of State

The Dominance of Peoria in the Processed Pumpkin Market

As I prepare for a season of pumpkin pie, pumpkin bread (made with cornmeal and pecans), pumpkin soup (especially nice wish a decent champagne) and perhaps a pumpkin ice cream pie (graham cracker crust, of course),  I have been mulling over why the area around Peoria, Illinois, so dominates the production of processed pumpkin.

[In honor of pumpkin pie, I'm repeating this blog from a year ago.]

The facts are clear enough. As the US Department of Agriculture points out (citations omitted):
In 2016, farmers in the top 16 pumpkin-producing States harvested 1.1 billion pounds of pumpkins, implying about 1.4 billion pounds harvested altogether in the United States. Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States (Figure 2).
Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States.

Not only does Illinois produce more pumpkins, but a much larger share of pumpkins from this state end up being processed, rather than used fresh. The USDA reports:
Illinois harvests the largest share of processing pumpkin acres among all States—almost 80 percent. Michigan is next with a little over 10 percent. Other States harvest less than 5 percent processing pumpkins.

It's not really the entire state of Illinois, either, but mainly an area right around Peoria. The University of Illinois extension service writes: "Eighty percent of all the pumpkins produced commercially in the
U.S. are produced within a 90-mile radius of Peoria, Illinois. Most of those pumpkins are grown for processing into canned pumpkins. Ninety-five percent of the pumpkins processed in the United States are grown in Illinois. Morton, Illinois just 10 miles southeast of Peoria calls itself the `Pumpkin Capital of the World.'"

Why does this area have such dominance? Weather and soil are part of the advantage, but it seems unlikely that the area around Peoria is dramatically distinctive for those reasons alone. This also seems to be a case where an area got a head-start in a certain industry, established economies of scale and expertise, and has thus continued to keep a lead. The Illinois Farm Bureau writes: "Illinois earns the top rank for several reasons. Pumpkins grow well in its climate and in certain soil types. And in the 1920s, a pumpkin processing industry was established in Illinois, Babadoost [a professor at the University of Illinois] says. Decades of experience and dedicated research help Illinois maintain its edge in pumpkin production." According to one report, Libby’s Pumpkin is "the supplier of more than 85 percent of the world’s canned pumpkin."

The farm price of pumpkins varies considerably across states, which suggests that it is costly to ship substantial quantities of pumpkin across moderate distances. For example, the price of pumpkins is lowest in Illinois, where supply is highest, and the Illinois price is consistently below the price for other nearby Midwestern states. This pattern suggests that the processing plants for pumpkins are most cost-effective when located near the actual production.

While all States see year-to-year changes in price, New York stands out because prices have declined every year since 2011. Illinois growers consistently receive the lowest price because the majority of their pumpkins are sold for processing.

Finally, although my knowledge of recipes for pumpkin is considerably more extensive than my knowledge of supply chain for processed pumpkin, it seems plausible that demand for pumpkin is neither the most lucrative of farm products, nor is it growing quickly, so it hasn't been worthwhile for potential competitors in the processed pumpkin market to try to establish an alternative pumpkin-producing hub somewhere else.

An Economist Chews over Thanksgiving

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change in turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there's anything wrong with that. [Note: This is an updated and amended version of a post that was first published on Thanksgiving Day 2011.]

The last time the U.S. Department of Agriculture did a detailed "Overview of the U.S. Turkey Industry" appears to be back in 2007, although an update was published in April 2014 . Some themes about the turkey market waddle out from those reports on both the demand and supply sides.

On the demand side, the quantity of turkey per person consumed rose dramatically from the mid-1970s up to about 1990, but then declined somewhat, but appears to have made a modest recovery in the last few years The figure below is from the Eatturkey.com website run by the National Turkey Federation.



On the production side, the National Turkey Federation explains: "Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing - from breeding through delivery to retail." However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys. Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:
"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.
Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.
Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.
Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."
The 2014 report points out that the capacity of eggs per hatchery has continued to rise (again, references to charts omitted):
"For several decades, the number of turkey hatcheries has declined steadily. During the last six years, however, this decrease began to slow down. As of 2013, there are 54 turkey hatcheries in the United States, down from 58 in 2008, but up from the historical low of 49 reached in 2012. The total capacity of these facilities remained steady during this period at approximately 39.4 million eggs. The average capacity per hatchery reached a record high in 2012. During 2013, average capacity per hatchery was 730 thousand (data records are available from 1965 to present)."
U.S. agriculture is full of examples of remarkable increases in yields over perionds of a few decades, but they always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time from the 2007 report.




The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here's a list of top turkey producers in 2015 from the National Turkey Federation:

Given this reasonably competitive environment, it's interesting to note that the price markups for turkey--that is, the margin between the wholesale and the retail price--have in the past tended to decline around Thanksgiving, which obviously helps to keep the price lower for consumers. However, this pattern may be weakening over time, as margins have been higher in the last couple of Thanksgivings  Kim Ha of the US Department of Agriculture spells this out in the "Livestock, Dairy, and Poultry Outlook" report of November 2018.. The vertical lines in the figure show Thanksgiving. She writes: "In the past, Thanksgiving holiday season retail turkey prices were commonly near annual low points, while wholesale prices rose. ... The data indicate that the past Thanksgiving season relationship between retail and wholesale turkey prices may be lessening."

In the past, the US turkey industry has at some times suffers from outbreaks of HPAI
(Highly Pathogenic Avian Influenza): for discussion of the 2015 outbreak, see the November 17, 2015 issue of the "Livestock, Dairy, and Poultry Outlook" from the US Department of Agriculture, Kenneth Mathews and Mildred Haley offer some details. But for Thanksgiving 2018, supply seems to have remained strong and wholesale turkey prices have stayed low.

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing?

Anyway, the starting point for measuring inflation is to define a relevant "basket" or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and since 1986, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:



The cost of buying the Classic Thanksgiving Dinner actually declined by a bit in 2018, fallingfrom to $49.12 in 2018 to $48.90 in 2018. The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The lower line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate.



Thanksgiving is a distinctively American holiday, and it's my favorite. Good food, good company, no presents--and all these good topics for conversation. What's not to like?

Wednesday, November 21, 2018

Four Follow-Ups: Scandinavia, Equal Opportunity, Brexit, Leveraged Lending

I sometimes run across articles that offer additional follow-up on topics about which I've previously posted, or stories in the news that remind me of earlier posts. Here, I'll just offer short follow-ups on an eclectic set of four topics:

  • The Scandinavian style of capitalism, 
  • Economic gains from in equal opportunity
  • The news about Brexit
  • Possible systemic risks of the risks of leveraged lending

1)  "The Scandinavian Style of Capitalism" (November 5, 2018)

I wrote a few weeks ago about the actual specific attributes of the style of capitalism practiced in countries of northern Europe. (Hint: It isn't "socialism," and it has a number of traits of which many American supporters of a Scandinavian approach seem largely unaware.) A reader forwarded to me this report Sweden's Ministry of Finance  called "The Swedish Model" (June 20, 2017).

Some of the report is the kind of stuff that any government says when it is not-too-subtly praising itself. It's not incorrect, but it does tend to sidestep concerns and problem. From the perspective of an an American who often hears casual references to the Swedish model or Scandinavian model, it's interesting to consider the emphasis that the report puts on a shared social responsibility. Here's a representative paragraph:
"The distinguishing characteristics of the Swedish labour market are coordinated wage formation, an active labour market policy and effective unemployment insurance. The fundamental premise is that individuals should contribute through work and be willing to adjust to new tasks. Provided that individuals perform this part of the social contract, they qualify for rights in the form of income-related social security, and, after needs assessment by the Public Employment Service, active initiatives to facilitate the return to work after having become unemployed. In addition, there is a certain level of financial security for people who do not qualify for income-related social security benefits. The social partners also provide a large portion of support in connection with unemployment through various career readjustment agreements."
Some of those who favor what they think of as a Scandinavian approach to labor markets tend to emphasize the government benefits, but not to put an equal and counterbalancing emphasis on the responsibility of individuals to adjust to new tasks and careers. The report also emphasizes the importance in the Swedish model of a fiscal policy that "is sustainable over the long term ... with surplus targets, expenditure ceilings, a municipal balanced budget requirement and rigorous budget process," as well as the central importance of promoting competitiveness in open international trade
2) "Equal Opportunity and Economic Growth" (August 1, 2012)

Back in 2012, I noted a study of how improvements in equal opportunity benefit economic growth, because an economy that makes fuller use of its human resources will be larger. For an illustration of shifts toward more equal opportunity, Pete Klenow offered this table. Based on joint research with others, he argued that about 15-20% of total US growth from 1960 to 2008 can be explained by women and African-Americans investing more in human capital and working in high-skill occupations.

For those who would like to see the underlying research behind this result, the most recent (April 6, 2018) version of the research paper is available at Klenow's website. Their current estimate is that "[a]bout one-quarter of growth in aggregate output per person over this period [from 1960 to 2010] can be explained by the improved allocation of talent." There's a cautionary insight her about how how academic research really works. The preview of these findings from six years ago, back in 2012, has mostly the same bottom line result as the current paper. But the authors have spent years writing and revising to sharpen the analysis and to address detailed questions that have been raised. And the paper isn't published yet.

3) The United Kingdom and the European Union have agreed on the text of a draft agreement for how the UK might leave the EU. The news stories caused me to reflect on two earlier posts. In
"Seven reflections on Brexit" (June 27, 2016), I offered some thoughts in the immediate aftermath of the Brexit vote. For example, here was my first point:
1) The Brexit vote seemed to me a strangely American moment. Some of the lasting slogans handed down from the American revolution against England are "no taxation without representation" and "don't tread on me." Thus, for an American there was some historical irony in hearing many of the British argue, in effect, that there should be "no regulation without representation," or perhaps "no legislation without representation." There was similar irony in hearing some of the British turn loose their "don't tread on me" spirit while railing against annoying but in some sense small-scale regulatory impositions from the central power, like rules that sought to standardize shapes and sizes for fruit and vegetable produce, or the rules with force of law that sales of loose and packaged good use only metric measurements. I found myself half-expecting some "Leave" advocates to start quoting the US Declaration of Independence: "When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them ..."
For a discussion of the economic studies about Brexit options and their effects, see "Brexit: Getting Concrete about Next Steps" (August 2, 2016) and "Brexit: Still a Process, Not Yet a Destination" (November 17, 2017).

4) "Corporate Debt and Leveraged Loans: Financial Snags Ahead?" (September 21, 2018)

Stop me if you've heard this story before. Certain loans look too risky for any bank to make on its own. So groups of lenders combine to make such loans, and then repackage groups of these loans as complex financial securities, and then resell the in pieces to investors all over the economy.  Just which financial institutions are are exposed to the downside risks is unclear. But we do know that the volume of these loans is growing fast, while the credit standards applied to granting such loans has been declining. Although this general description seems as if it could apply to the wave of lending in US housing markets in the lead-up the Great Recession, it also applies to the current wave of what is called "leveraged lending."  For an earlier post on the subject, see "Leveraged Loans: A Danger Spot?" (October 4, 2014).

Three economists from the IMF, Tobias Adrian, Fabio Natalucci, and Thomas Piontek, have wrtten a recent blog post ""Sounding the Alarm on Leveraged Lending" (November 15, 2018). Among other concerns, they offer this figure:


Similarly, the Office of Financial Research has just published its Annual Report to Congress 2018, "which presents its assessment of the state of the U.S. financial system, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010." Its overall assessment is that "risks to U.S. financial stability are still in a medium range overall." But it highlights leveraged lending as an area of concern. The report notes:
"Rapid growth in leveraged lending is a concern. These commercial loans, often used by borrowers with credit ratings below investment grade for buyouts, acquisitions, or capital distributions, can leave borrowers highly indebted. Strong investor demand for these higher-yielding loans is behind the rapid growth. Less creditworthy corporations took advantage of that demand by seeking more funding in leveraged loan markets. As a result, more than $1 trillion of leveraged loans are outstanding. That is more than 11 percent of all U.S. nonfinancial debt — a record high. With the growth in leveraged lending has come a deterioration in the credit quality of newly issued loans. One sign of this decline is the high share of covenant-lite loans ... Covenants are restrictions placed on debt-issuing firms meant to increase the likelihood of payment. Another sign of deterioration in underwriting quality is that more than half of all leveraged loans issued are rated B+ or lower (that is, highly speculative). "
Investors in such bonds, and financial regulators, should be paying attention here.