Thursday, May 31, 2018

Two Issues for an Aging Japan: Financial Gerontology and the Rise of Robots

Japan is aging fast. Here are some trends on total population and age distribution, according to projections from the National Institute of Population and Social Security Research in Japan,

The report notes that the 2015 Census gives a total Japanese population of 127 million in 2015, which in a middle-variant prediction will fall to 88 million--a fall of roughly one-third--in the next 50 years. 

Here's a breakdown for what share of the population will be over 65, under 15, and in-between. The working-age share of Japan's population was about 66% in the 1970s and 1980s, but is now down to 60%, and the long-term projections suggest that it will fall to about 50% in the next 30 years.
Aging and lower birthrates have been happening all over the world, but Japan is an extreme case. Two articles recently caught my eye about  a couple of the many adjustments that Japan's economy will need to make in the years to come. 

One adjustment is "financial gerontology," which is the study and policy related to how older folks will manage their money--especially in cases of Alzheimer's or other kinds of diminished capacity. 
Keiichiro Kobayashi, a professor of economics at Keio University and a Faculty Fellow at Japan's Research Institute of Economy, Trade and Industry (REITI), sketched this issue in a short essay on "Issues Concerning Japan’s Economic Policy," written as part of a collection of essays from REITI on Priorities for the Japanese Economy in 2018 (January 2018). Kobayashi writes (paragraph breaks inserted):
"[F]inancial gerontology ... refers to a policy area that seeks to address the question of how to ensure proper management of assets owned by elderly people with dementia or other problems in making decisions to support their livelihoods, while at the same time maintaining the vitality of the Japanese economy as a whole. Elderly people aged 65 and over, totaling some 30 million at present, own more than half of the 1.8 quadrillion yen worth financial assets held by Japanese households. Approximately five million of them are suffering dementia. The number is expected to rise to seven million in 2030, meaning that well more than 100 trillion yen worth of assets will be owned by those with senile dementia. 
"At present, most of those assets are held in cash. Reportedly, significant amounts of assets are left dormant—rather than invested in equity securities—because self-imposed industry regulations prohibit securities firms from recommending elderly customers to make new investments. The guardianship system for adults, which was established under the jurisdiction of the Ministry of Justice exclusively for the purpose of ensuring the proper management of property owned by elderly people with dementia, reportedly allows investments only in the form of principal-protected cash equivalent assets such as bank deposits because family courts tend to operate the system conservatively. 
"It might be too much to ask family courts, which have no economic expertise, to have a mindset to increase returns by taking appropriate risks. However, guardians would be doing no good for their wards as well as for Japan unless they take some risks in balance with returns. Performing the task of guardians, which is to manage property, needs sufficient economic knowledge and a way of thinking. It was probably wrong to have designed the system originally in a way to leave the entire task to the legal community. Also, it is often pointed out that guardians often lack coordination with caregivers and welfare specialists in undertaking their activities despite the fact that their task is to look after elderly people with dementia. It takes a broad spectrum of cooperation encompassing not only the legal, financial, and economic communities but also professionals specialized in elderly welfare to ensure the proper management of property owned by elderly people. However, a system for such cross-sectoral cooperation is hardly in place."
To me, this insight suggests that one reason why Japan can continue to run enormous budget deficits is that Japan's elderly own a large amount of wealth, which often ends up in very safe assets. Japan's economy would plausibly be better off if some of these funds ended up in well-diversified investments in private sector firms.

For example, Todd Schneider, Gee Hee Hong, and Anh Van Le discuss "Land of the Rising Robots: Japan’s combination of artificial intelligence and robotics may be the answer to its rapidly shrinking labor force," in the June 2018 issue of Finance & Development (pp. 28-31). They write:
"Japan’s estimated population fell by a record-breaking 264,000 people in 2017. Currently, deaths outnumber births by an average of 1,000 people a day. ... Japan’s domestic labor force (those ages 15–64) is projected to decline even faster than the overall population, dropping by some 24 million between now and 2050. ...  Japan is no stranger to coping with limited resources—including labor—and has historically been a leader in technological development. Automation and robotics, either to replace or enhance human labor, are familiar concepts in Japanese society. Japanese companies have traditionally been at the forefront in robotic technology. ...
"[T]he gap in productivity growth between the manufacturing and services sectors in Japan is extremely wide. While there are many causes, the largest gains in industrial productivity have been closely correlated with increased use of information and communication technology and automation. Perhaps it is no coincidence that the most productive manufacturing sectors in Japan—automotive and electronics—are the ones whose production processes are heavily reliant on automation. By contrast, the services sector, which accounts for 75 percent of GDP, has seen little annual productivity growth—only about half that of the United States. Labor productivity has roughly tripled since 1970 in manufacturing, but improved by only about 25 percent in the nonmanufacturing sector.
"The coming wave of automation technology and artificial intelligence promises new possibilities for replacing or augmenting labor in the nonmanufacturing sector (for example, in transportation, communications, retail services, storage, and others). According to several government reports (including the Bank of Japan’s Regional Economic Report and the annual survey on planned capital spending by the Development Bank of Japan), even small and medium-sized firms are embracing new technology to compensate for scarce labor and stay competitive. For example, Family Mart, a Japanese retail convenience store chain, is accelerating implementation of self-checkout registers, while the restaurant group Colowide and many other restaurant operators have installed touch-screen order terminals to streamline operations and reduce the need for staff. Other examples abound in health care, financial, transportation, and other services—including robot chefs and hotel staff. ....
"Surveys support the view that both the volume and quality of services in Japan are in decline. Recent work by the research arm of Japan’s Research Institute of Economy, Trade and Industry (Morikawa 2018) shows that the quality of services is eroding as a result of labor shortages. Most critically affected are parcel delivery services, hospitals, restaurants, elementary and high schools, convenience stores, and government services."
Japan's prospects for future economic growth seem likely to be intertwined with how the country can mobilize the enormous savings of its elderly to focus on the wave of robotic and AI technology that will be needed to complement its shrinking workforce.

Wednesday, May 30, 2018

Spending Per Student and Per Capita GDP: International Snapshots

Many of the public policy disputes over education, whether at the K-12 level or at the higher education level, quickly turn into disputes over how much to spent, or whether "enough" is being spent. For some international perspective on these issues, the Condition of Education 2018  has just been published by the National Center for Education Statistics (May 2018). It's chock-full of useful tables and figures, but here are a few from the "International Comparisons" part of the volume.

First, look at spending per student in OECD countries, as compared with per capita GDP. As the figure shows, the relationship is pretty much a straight line, in which countries with higher per capita GDP spend more on K-12 education. This makes some intuitive sense, given that  teachers are one of the main expenses in any K-12 system, and when a country has higher capita GDP, wages in general and pay for teachers in particular will be higher, too. The figure shows that while a few countries spend a little less than one might expect on K-12 education based on their per capita GDP (Mexico, Ireland) and some spend a little more (Korea, United Kingdom), most countries are quite close to the predicted line, like the United States.

Of course, this doesn't prove whether the US should dramatically change its level of K-12 education spending. But it suggests that US K-12 spending is not out-of-line with the rest of the world in this area.

What does a similar figure look like for higher education spending? Some interesting patterns emerge. For example, Mexico spent less on K-12 than one would predict from per capita GDP, but spends more on higher education. Conversely, Korea spent more on K-12 than one would predict based on per capita GDP, but spends less on higher ed. The United States spend way more than any other country on higher education on a per capita basis, and way more than would be predicted based on per capita GDP.

Of course, this doesn't prove whether the US should dramatically change its level of higher education spending, or how US higher education is delivered. But it suggests that the US higher education experience is different from most of the rest of the world.

Here's one more comparison, looking at the share of adults who have a postsecondary degree of some kind. In the figure, the light blue bars show the share in the 55-64 age bracket who have such a degree, while the dark blue bars show the share in the 25-34 age bracket with such a degree. One would generally expect that as higher education expands, a larger share of those in the younger group should have postsecondary degrees, compared with those in the older group, and this pattern holds for most countries.

But notice that for the US, the age 55-64 group was in general more educated than the rest of the world, with the exception of Canada. But for the 25-34 group, the US is still above the OECD average in share with a postsecondary degree, but a number of other countries are now substantially ahead, and the US is much more middle-of-the-pack. When combined with the previous figure, this makes some sense. Given that the US spends vastly more on a per person basis for higher education, it's more costly for the US to provide a big expansion of higher education for the young adults of today.

Tuesday, May 29, 2018

Germany's Prosperity: How Stable are the Foundations?

Germany is the fourth-largest economy in the world (after the US, China, and Japan). And it's economy is doing extremely well. For example, consider the conclusion of the IMF staff in "Germany: Staff Concluding Statement of the 2018 Article IV Mission" (May 14, 2018):
"Germany’s economic performance is impressive, supported by prudent economic management and past structural reforms. Growth is robust. The unemployment rate has fallen to levels not seen in decades and employment is rising. Household and corporate balance sheets are strong and the public debt ratio is declining rapidly. Inflation remains low but wage growth is picking up, reflecting the strength of the labor market."
For a more detailed overview from the IMF, see "Germany : 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Germany (July 7, 2017).  Sure, the IMF expresses concerns about how Germany's economy will adapt to an aging population, how it can encourage greater business investment and reduce its gargantuan trade surpluses over time. But these problems, like most economic problems, are a lot easier to address in the context of an economy with solid growth, low unemployment, and declining debt levels.

So what are the roots of Germany's strong economic performance? Are there some lessons for other countries? Are there reasons for concern? Dalia Marin has edited a useful e-book, Explaining Germany’s Exceptional Recovery with a group of 10 readable essays looking at various aspects of German economic experience  (May 2018, published by the Centre for Economic Policy Research, available from the website with free registration). 

There's no one magic answer, of course. One set of arguments emphasize that Germany reformed it labor institutions in the late 1990s and intoe the early 2000s in a way that led to greater flexibility and a drop in labor costs (defined here not as an outright fall in wages, but as greater productivity for the cost of a unit of labor). This flexibility in Germany's labor market was combined with an willingness to reach across national boundaries and to build international production chains with nations of eastern Europe, so that German production could  focus on higher value-added tasks. Marin describes one of the essays along these line in the intro: 
Christian Dustmann, Bernd Fitzenberger, Uta Schoenberg, and Alexandra Spitz-Oener argue that the transformation of the German economy was due to an unprecedented process of decentralisation of wage bargaining to the firm level that led to a dramatic decline in unit labour costs, and ultimately to an increase in competitiveness of the German economy. Wage decentralisation was made possible, they claim, by the specific governance structure and autonomy of the German labour market, not rooted in legislation but laid out in contracts and mutual agreements between employer associations, work councils, and trade unions. This decentralisation of the wage-setting process was driven by a sharp decline in the share of workers covered by union agreements and an increase in opening clauses that strengthened the role of firm-based work councils in wage determination relative to trade unions. The decline in union coverage and the increase in opening clauses, in turn, were both triggered by a more competitive global environment. In particular, the new opportunities to move production to the emerging market economies of Eastern Europe changed the power equilibrium between trade unions and employer federations and forced unions and work councils to accept deviations from industry-wide agreements.
Here's a figure from their paper, showing how "unit" labor costs in Germany have fallen over time, compared to a number of competitors.

[The Dustman et al. paper in this volume is a condensed version of their paper in the Winter 2014 issue of the Journal of Economic Perspectives, available at  Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener. 2014. "From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy." Journal of Economic Perspectives, 28 (1): 167-88.]

Other essays explain how this shift in Germany's labor markets, together with the rise of economies in eastern Europe and a trend toward more decentralized German business management, helped the German economy to adapt more readily than many other countries when China entered world markets in force in the early 2000s.

Germany has its economic problems, of course. For example, one essay emphasizes that it has historically tended to lag behind in business entrepreneurship and research and development efforts. But when it comes to Germany's economic success, perhaps the single biggest question is how to interpret its very large trade surpluses -- at almost 8% of GDP in 2017, the largest in the world.

We live in a time when a large trade surplus is sometimes treated as a mark of shining success, but that's a misunderstanding of what it actually means. A trade surplus just means that a country has domestic saving higher than domestic investment. As a result, the domestic saving is flowing to othre countries. (If the domestic saving was instead being spent on imports, then the trade surplus would be eliminated.) A couple of essays in this volume focus on Germany's trade surplus. For example, here is Marin's summary of one of them
Guntram Wolff focuses in Chapter 6 on the import side of the current account. From a national accounts perspective, a country will face a current account surplus if its savings exceeds its investments. He looks at the difference between savings and investments for the different sectors of the German economy, and finds that the German current account surplus is mainly driven by the corporate sector, where savings have gone up (by around 3 percentage points of GDP), while corporate investment has been falling (by around 2 percentage points of GDP). He dismisses the argument that the ageing of the population has contributed to the current account surplus, as many observers have argued, as the savings of the household sector have not contributed significantly to savings in the economy. His data show that the corporate sector has been deleveraging for more than 15 years, resulting in lower corporate investment in manufacturing in Germany compared to Italy and France. He concludes by advising that the German government should pay attention to Germany’s current account surplus, and suggests that the government should increase public investment (to address the low intangible capital stock that he documents) and encourage private investment.
This volume has a lot of useful background, but it also seems to me to sidestep the question of the euro. One reason for Germany's enormous trade surplus is that other nations within the euro-zone have offsetting large trade deficits. In the old pre-euro days, a small or mid-sized European economy with a large and sustained trade deficit with the other European countries would watched or engineered a decline in the foreign exchange rate of its currency, which would have reduced the trade deficit by making the exports from that nation cheaper on world market and making imports more expensive for consumers from that country.

But the euro-zone is locked into a single currency, and so exchange rates can't adjust. When exchange rates can't move, there is instead a slow and painful process of "real depreciation" in which wages and prices within a country face downward pressure over time, often in a context of depressed growth. While Germany is booming with its outsized trade surpluses, Italy and Greece and others are staggering. In that sense, Germany's indubitable economic strengths are under an ongoing shadow of what will happen across the euro-zone as a whole. For example, here's Paul Krugman in the New York Times from a few days ago (May 21, 2018):

Many of Europe’s problems come from the disastrous decision, a generation ago, to adopt a single currency. The creation of the euro led to a temporary wave of euphoria, with vast amounts of money flowing into nations like Spain and Greece; then the bubble burst. And while countries like Iceland that retained their own money were able to quickly regain competitiveness by devaluing their currencies, eurozone nations were forced into a protracted depression, with extremely high unemployment, as they struggled to get their costs down. ... Some of the victims of the euro crisis, like Spain, have finally managed to claw their way back to competitiveness. Others, however, haven’t. Greece remains a disaster area — and Italy, one of the three big economies remaining in the European Union, has now suffered two lost decades: G.D.P. per capita is no higher now than it was in 2000.
For some other discussions of the euro, often with a skeptical twinge, see:

Monday, May 28, 2018

Sample Some Debates at the Soho Forum

The Soho Forum "features topics of special interest to libertarians, and the series aims to enhance social and professional ties within the NYC libertarian community." For the rest of us, lwhat's interesting is that they host regular and lively debates, a number of them on topics related to economics, and then post video and podcasts. Here are some of the recent tussles that caught my eye--more are available at the site. I've written down the debate resolution, the names of the participants, and the date, with a link to the video:

“All government support of higher education should be abolished."
Bryan Caplan vs. Edward Glaeser
May 14, 2018

“Fifteen million able-bodied adults on government welfare would have a better chance at economic betterment if they were taken off welfare."
Tarren Bragdon vs. Neera Tanden 
December 11, 2017

The U.S. government should unilaterally abolish all tariffs and duties on imports and all subsidies to exports, thereby making all reciprocal trade agreements with other countries unnecessary."
Don Boudreaux vs. Rick Manning

"The U.S. government should offer a Medicare-like plan that would be available to all Americans buying health insurance."
Paul Starr vs. David Goldhill
September 19, 2017

[My only complaint is that it would be nice if the Soho Forum would also post transcripts, for those of us who prefer to read rather than watch.]

Friday, May 25, 2018

If We Pay Football Players, Why Not Kidney Donors?

Here's a nice question to kick around the classroom or the lunch-table: "If we pay football players, why not kidney donors?" Philip J. Cook and Kimberly D. Krawiec argue that both should be paid in Regulation magazine (Spring 2018, pp. 12-17).

In the context of football, players receive compensation for actions that benefit others--specifically, those who enjoy watching for entertainment--but also impose risks of both short-term and long-term negative health outcomes. In the context of kidney donations, potential living donors are forbidden from receiving compensation for actions that can be literally life-saving for others--specifically, donating a kidney--on the grounds that it may increase a risk of poor health outcomes. The authors write: 
"Although living kidney donation is a common medical procedure and donors usually enjoy a full recovery, the loss of a kidney poses long-term health risks, in particular that of renal failure if the donor’s remaining kidney fails. In the United States and most every other country (with the notable exception of Iran), kidney donation is permitted but financial compensation for donors is prohibited. Not only is there no legal market for kidneys, donors in the United States are often not even reimbursed for their full out-of-pocket cost in making the donation. 
"The ban on compensation may protect potential donors from the temptation of easing their financial situation by giving up a kidney, a choice they may regret in later years. But this regulation has dire consequences. 
"The need for transplantable kidneys is great, far exceeding current availability from deceased and living donations. The official waiting list of Americans with renal failure is now approximately 100,000, with a typical wait time of five years or more. Those on the waiting list are kept alive by dialysis, which is both costly to taxpayers (because Medicare pays for a large percentage of the costs) and debilitating to the patients. Even with dialysis, thousands of renal-failure patients die each year for want of a suitable kidney. This wait could be largely eliminated by easing the current ban on compensation for donors. An adequate supply of living donors would be especially valuable because living donors tend to provide higher quality kidneys with greater opportunity for developing a close tissue match, thus reducing the chance of rejection ... 
"While the recent evidence on the long-term medical damage from concussion has caused widespread concern, there is no prominent voice calling for a ban on professional football. Indeed, a ban is unthinkable in the foreseeable future. That observation helps illustrate the importance of history, custom, and established  interests in shaping the debate over regulating risky activity. But if we could start fresh, the current configuration of activities for which compensation is banned would seem very odd. 
"If ethical concerns persuade thoughtful people that the “right” answer is to ban compensation for kidney donation, then the same logic would suggest that compensation should also be banned for participation in violent sports. If the “right” answer is to permit compensation for participation in violent sports, then compensation for kidney donation should also be permitted. We see no logical basis for the current combination of banning compensation for kidney donors while allowing compensation for football players and boxers."
Like a lot of useful analogies, the value of this question isn't to parse details about whether football and kidney donations are literally identical, but to use the question to explore attitudes about bodily risk, benefits, and monetary payments.  Cook and Krawiec also point out that annual revenues for the National Football League are about $13 billion, while one cost-benefit study of paying for kidney donation suggests that such a policy could save taxpayers about $12 billion per year in expenses for people with kidney disease awaiting a donation, in addition to saving thousands of lives and improving the quality of life for tens of thousands of those with severe kidney disease.

For some previous posts on paying kidney donors and on programs to facilitate kidney exchanges, see: 

Thursday, May 24, 2018

Why is Inflation Stuck so Low?

I suspect that I am like many economists, in that when I am asked about causes of inflation, I can almost see the words from a 1970 speech by Milton Friedman scrolling across my mind's eye:  "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." (It's from Friedman's 1970 lecture, The Counterrevolution in Monetary Theory.")

But this seemingly crystal-clear linkage from is gets cloudier when you recognize that the current problem is not to explain a surge of inflation, but rather the relative immobility of inflation. Friedman did not say: "The lack of inflation is always and everywhere a monetary phenomenon ..."

I've mulled over this subject before in "Mysteries of Modern Inflation" (October 26, 2017) and "Janet Yellen Doesn't Know What Determines Inflation" (November 21, 2016). In the most recent issue of the Regional Economist, published by the Federal Reserve Bank of St. Louis, Juan M. Sánchez and Hee Sung Kim run through a list of the most commonly discussed reasons for "Why is Inflation So Low?" (First Quarter 2018, pp. 4-9). Some of the reasons seem more compelling than others, but here they are:

1) Technological Progress

It's easy to think of some ways that technological progress might help to hold down price increases: cheaper electronics and internet-related products; a rise of online shopping providing a higher level of price competition (the so-called "Amazon effect"); and the rise of the "sharing economy" firms like Airbnb and Uber holding down price increases in their industries. But it's also easy to think of industries like like health care and education where prices seem to be rising, rather than plummetting. Overall, one of the main concerns of the US economy is lack of sufficient productivity growth, not an excess of it. As the authors write about this explanation: "But why would inflation be low now if productivity has not grown faster than before?"

2) Demographic transitions

If you plot the countries of the world according to the share of elderly people, you find that countries with more older people tend to have lower inflation. Japan is a vivid example. For example, one study in Japan suggested that older workers suffer diminished skills, and thus end up competing with inexperienced workers for low-wage jobs in a way that holds down wage increases. Another possible explanation is that the elderly are often on tighter budgets, and thus are more value-oriented as consumers in a way that limits price increases. But how the broad validity of these kinds of explanations and how they apply to the US economy is not clear.

3) Globalization

A few countries have experienced high inflation rates in recent years, like Venezuela and Zimbabwe. But in most of the world, relatively low inflation is widespread. One possible explanation is that a surge in low-cost goods in global markets, especially as China entered global markets in force in the early 2000s, has helped to hold down price increases. But the authors point out that studies which have attempted to compare how global forces might affect inflation tend to find only small-sized effects.

4) Central bank actions

Maybe inflation is low because central banks all over the world have focused on keeping it low; indeed, perhaps central banks are even trying too hard to keep inflation low. As the authors write: "[T]he fact that inflation lower than the target is often considered better than inflation higher than the target may contribute to an inflation rate that, on average, is lower than the target."

5) Neo-Fisherism

Irving Fisher was a prominent American economist in the opening decades of the 20th century who pointed out that if you take the nominal interest rate and subtract the inflation rate, you get the real (that is, inflation-adjusted) interest rate. The most common use of this equation over time has been to point out that when inflation rises, the nominal interest rate also tends to go up. But the neo-Fisherian hypothesis is that if central banks are keeping the nominal interest rate low (to stimulate the economy), then the gap between the nominal and the real interest rate--which is the rate of inflation--must also be low. The implied policy suggestion is that raising nominal interest rates could also bring a rise in inflation. This hypothesis is counterintuitive for conventional macroeconomics, in which higher nominal interest rates should tend to slow down the economy and reduce inflation.

A final theory not emphasized here, but mentioned by Olivier Blanchard in a recent article, is that when inflation has been low for sustained period of time, people and businesses stop worrying about inflation in the same way. When the reality and risk of inflation isn't salient to economic decision-making, companies don't give semi-automatic pay raises to make up for inflation. Sellers don't semi-automatically raise prices to make up for inflation.

There doesn't have to be one right answer here. It can be a "Murder on the Orient Express" plotline where everyone contributes to the outcome. My own sense over the last couple of decades is that I no longer worry as much about rising inflation, or about inflation getting out of  hand. Instead, I worry about how buying power might manifest itself in asset price boom-and-bust cycles, like the dot-com boom of the late 1990s or the housing price boom before the Great Recession. Maybe inflation is so low in part because the economy has found other ways of blowing off steam.

Wednesday, May 23, 2018

Share of US Adults Without Health Insurance

One genuine accomplishment of the Patient Protection and Affordable Care Act of 2010 is that it reduced the share of Americans lacking health insurance. The National Center for Health Statistics has just published the most estimates for 2017 in "Health Insurance Coverage: Early Release of Estimates From the National Health Interview Survey, 2017," Robin A. Cohen, Emily P. Zammitti, and Michael E. Martinez (May 22, 2018). Here are a few snapshots:

Those over age 65 have health insurance through Medicare. Thus, it's conventional to focus on the health insurance status of those the age 64 and below  The percentage of adults age 18-64 without health insurance drops sharply right after the passage of the 2010 legislation, and has stayed lower since then.

For those under age 18, two patterns are readily apparent. The percentage of insured children has been falling steadily since 1997, tracing back to the passage of the State Children's Health Insurance Program (SCHIP) that year. At the same time, the share of children with private health insurance coverage has steadily declined, and the share with public coverage has risen. These long-term patterns are not much altered by the 2010 legislation.

Those who were poor and near-poor were most likely to see expanded health insurance coverage as a result of the 2010 legislation.

The first figure above shows that the share of those on public health insurance rises, like expanded Medicaid programs. The share of those having private insurance rises, too. However, those who purchase health insurance through the "exchanges" are counted in these statistics as having having private health insurance. This accounts for about 4 percentage points of the overall rise in health insurance coverage.

The benefits that the Affordable Care Act was likely to achieve in terms of expanding health insurance coverage were often oversold. If you read the fine print, even well before passage of the law, it was never projected to provide universal health insurance. It's also fair to note that the costs were often undersold. Unless you browse through Congressional Budget Office documents, you may not know that the expansion of health insurance coverage is costing about $110 billion annually.

As I've written before, there's no magic here. It was never any secret that if the federal government was willing to spend an additional $110 billion, it could expand health insurance coverage to an additional 20 million people. The  cost for the expanded health insurance coverage works out to about $5500 per person per year. Personally, I'm fine with spending the money for this expansion of  health insurance coverage, although I would have preferred to see the money raised by taxing some portion of employer-provided health insurance benefits as income.

Monday, May 21, 2018

China Now Has a Trade Deficit

A large share of the concern over China's effect on the world economy starts with large Chinese trade surpluses. But in the first few months of 2018, China's trade balance was negative(using the standard broad measure of the current account balance). That is, China had a trade deficit, not a trade surplus. For example, the Economist magazine reports: "China’s vanished current-account surplus will change the world economy" (May 17, 2018).  The South China Morning Post reports: "China’s first current account deficit for 17 years ‘could signal fundamental shift" (May 4, 2018).

Here's a figure showing China's pattern of trade imbalances since the late 1990s. Notice that although China's economic reforms and very rapid growth started in the late 1970s, its trade balance was fairly close to zero during late 1990s and early 2000s. Then China's trade surplus exploded in size before the Great Recession, fluctuated for a few years while gradually trending down, and then turns negative in early 2018.

China Current Account

There's a seasonal pattern in China's economy that exports tend to be lower in the early months of the year. Assuming the usual rise in China's exports later in the year, China may well end the year with a trade surplus, but it will be quite modest in size.

I have argued before that thinking of the trade balance as a measure of the unfairness of trade is economically illiterate. But if you are someone who holds that belief, then consider what it implies. You must believe that China was a fair trader in the late 1990s and into the early 2000s (near-zero trade deficit), then it exploded into large trade unfairness, and less but fluctuating trade unfairness, before now returning to trade fairness. Such an interpretation taxes credulity. But if China's trade surpluses are the rationale for imposing trade barriers on Chinese imports, that rationale does not presently exist.

It is vastly more plausible to explain China's trade balance patterns by looking at the entry of China to the World Trade Organization in 2001; the way a booming US economy sucked in Chinese imports before the Great Recession, but less so afterwards; how China's economy is shifting to higher imports of services; and a variety of other factors.

Friday, May 18, 2018

The Rising Number of US Teachers Leaving for Other Fields

The rate of US teachers leaving for other jobs is on the rise. Adam Grundy of the US Census Bureau reports in a short note (May 2018)
"Teachers are leaving their jobs for other careers at a rate that has grown steadily every year in the past three years. ... The majority of educators leaving Educational Services (NAICS Sector 61) are starting careers in the Healthcare and Social Assistance sector. ... For starters, some jobs in Healthcare and Social Assistance, which includes nurses, child care and family assistance services, often require some of the same skills. “Administrative Services,” which includes office workers, is another category that attracts many educators leaving the workforce. Moves to these industries are not surprising since they are two of the largest sectors of the economy. ... Educators aged 25-34 are the largest cohort of job-to-job movers."
For more details, a useful starting point is "Teacher Turnover:Why It Matters and What We Can Do About It," by  Desiree Carver-Thomas and Linda Darling-Hammond, published by the Learning Policy Institute (August 2017). They write: 
"The percentage of teachers leaving the profession—known as “leavers”—has increased substantially over the past two decades: 5.1% of public school teachers left the workforce in 1992, while 8.4% left in 2005. Attrition rates have continued to hover around 8% since then (see Figure 1).The 3% increase in attrition rates is not trivial: It amounts to about 90,000 additional teachers needing to be hired across the U.S. each year. In high-achieving school systems such as those in Finland, Singapore, and Ontario, Canada, annual teacher attrition rates typically average as low as 3% to 4%. If attrition rates in the U.S. could be reduced by half to be more comparable with these systems, the national teacher shortage could be virtually eliminated."

Here's some additional summary of the report by Carver-Thomas and Darling-Hammond:
About 90% of the nationwide annual demand for teachers is created when teachers leave the profession, with two-thirds of teachers leaving for reasons other than retirement. If school systems can address the factors that create high turnover, they can reduce the demand for teachers who are in short supply. 
Not only does turnover contribute to shortages, teacher movement out of schools and out of teaching creates costs for the schools they leave behind. Estimates exceed $20,000 to replace each teacher who leaves an urban school district.  Most importantly, high turnover rates reduce achievement for students whose classrooms are directly affected, as well as for other students in the school. Our analysis of nationally representative survey data from the 2012 Schools and Staffing Survey and the 2013 Teacher Follow-up Survey reveals that the severity of turnover varies markedly across the country: 
  • Total turnover rates are highest in the South (16.7%) and lowest in the Northeast (10.3%), where states tend to offer higher pay, support smaller class sizes, and make greater investments in education.
  • Teachers of mathematics, science, special education, English language development, and foreign languages are more likely to leave their school or the profession than those in other fields. These are teaching fields that experience shortages in most states across the country. 
  • Turnover rates are 50% higher for teachers in Title I schools, which serve more low-income students. Mathematics and science teacher turnover rates are nearly 70% greater in Title I schools than in non-Title I schools, and turnover rates for alternatively certified teachers are more than 80% higher. 
  • Turnover rates are 70% higher for teachers in schools serving the largest concentrations of students of color. These schools are staffed by teachers who have fewer years of experience and, often, significantly less training to teach. Teacher turnover rates are 90% higher in the top quartile of schools serving students of color than in the bottom quartile for mathematics and science teachers, 80% higher for special education teachers, and 150% higher for alternatively certified teachers. 
  • Teachers of color—who disproportionately teach in high-minority, low-income schools and who are also significantly more likely to enter teaching without having completed their training—have higher turnover rates than White teachers overall (about 19% versus about 15%). While they leave at higher rates than White teachers generally, their turnover rates are about the same as those of all other teachers in high-poverty and high-minority schools. 
Teachers cite a number of reasons for leaving their school or the profession. The most frequently cited reasons in 2012–13 were dissatisfactions with testing and accountability pressures (listed by 25% of those who left the profession); lack of administrative support; dissatisfactions with the teaching career, including lack of opportunities for advancement; and dissatisfaction with working conditions. These kinds of dissatisfactions were noted by 55% of those who left the profession and 66% of those who left their school to go to another school.
The authors offer a number of sensible suggestions for retaining teachers along the lines of higher pay, better administrative support and working conditions, and so on. I don't disagree. But it also seem to me that those low-performing schools which also serve high share of low-income students may in some cases need a bigger and perhaps even jolting set of changes, perhaps drawing on lessons about approaches to curriculum and teaching, along with intensive tutoring, used at successful charter schools. 

Wednesday, May 16, 2018

Both Sides of the Vaping Controversy

Could vaping and e-cigarettes reduce the toll of death and illness due to smoking conventional cigarettes? The most recent issue of the Annual Review of Public Health (April 2018) has a nice pro-and-con. On one side, David B. Abrams, Allison M. Glasser, Jennifer L. Pearson, Andrea C. Villanti, Lauren K. Collins, and Raymond S. Niaura have written "A Harm Minimization and Tobacco Control: Reframing Societal Views of Nicotine Use to Rapidly Save Lives" (pp. 193-213). They argue that e-cigarettes can be a useful part of a harm minimization strategy. On the other side, Stanton A. Glantz and David W. Bareham offer a more skeptical view about whether e-cigs will reduce the overall harms from tobacco use in "E-Cigarettes: Use, Effects on Smoking, Risks, and Policy Implications (pp. 215-235).

There's a readable short summary/overview of these two articles in the Knowable magazine (which summarizes results of articles that appear in the Annual Review journals). Viviane Callier has written "E-cigarettes: A win or loss for public health?," subtitled, "They’re less toxic than traditional cigarettes but still addictive and not without their own health risks. Researchers disagree on whether vaping can help or harm efforts to reduce tobacco use" (May 11, 2018). As she notes: "In 2006, e-cigarettes were introduced in Europe and the US. Uptake has been rapid among adults and youth alike. According to the Centers for Disease Control and Prevention, in 2016, more than 2 million US middle and high school students had used e-cigarettes in a 30-day period, and 3.2 percent of US adults (approximately 10.4 million) were current users."

What's the substance of the controversy? The Abrams et al. group frames the issue as an opportunity to reduce the harms of cigarette smoking. They write:
"Inhalation of the toxic smoke produced by combusting tobacco products, primarily cigarettes, is the overwhelming cause of tobacco-related disease and death in the United States and globally. A diverse class of alternative nicotine delivery systems (ANDS) has recently been developed that do not combust tobacco and are substantially less harmful than cigarettes. ANDS have the potential to disrupt the 120-year dominance of the cigarette and challenge the field on how the tobacco pandemic could be reversed if nicotine is decoupled from lethal inhaled smoke. ANDS may provide a means to compete with, and even replace, combusted cigarette use, saving more lives more rapidly than previously possible. ... A reframing of societal nicotine use through the lens of harm minimization is an extraordinary opportunity to enhance the impact of tobacco control efforts."
Here's a figure from their paper showing how they perceive the harms from e-cigarettes: that is, similar to other aids to quitting smoking like nicotine patches or nasal sprays, clearly lower than smokeless tobacco, and dramatically lower than combusted tobacco.

As Glantz and Bareham see it, most e-cig user are already smokers. The health gains from e-cigs over conventional smoking are probably real, but not all that large. So if e-cigs lead to increasing use of tobacco products (that is, conventional smoking and vaping combined), the overall result could be negative for public health. 

Here's a figure from their paper showing patterns of teens and e-cigarettes. Notice that conventional smoking has dropped faster than expected since the arrival of vaping, but the overall downward trend--combining smoking and vaping--maybe altering.

Callier sums up these patterns in the overview essay for Knowable:
In a meta-analysis of 20 studies, Glantz and his UCSF colleague Sara Kalkhoran found that the odds of quitting cigarettes were 28 percent lower for smokers who used e-cigarettes than for those who did not. In the real world, many e-cigarette users take them up with an intention to quit tobacco. But others use them without such an aim, perhaps to get a nicotine fix in areas with smoking restrictions. “Importantly, most adults who use e-cigarettes continue to smoke conventional cigarettes (referred to as dual users),” Glantz and David Bareham of Lincolnshire Community Health Services in the UK wrote in the 2018 Annual Review of Public Health. “In 2014 in the United States, 93 percent of e-cigarette users continued to smoke cigarettes, 83 percent in France, and 60 percent in the United Kingdom.”
In terms of health issued, Glantz and Kalkhoran cite studies that raise concerns over whether vaping reduced the health consequences for hearts and lungs: in particular, they raise questions over whether ultrafine particles created by vaping may pose health risks.

For yet another perspective, the British Medical Association published "E-cigarettes: Balancing risks and opportunities"  (August 2017). This study writes: 
"Survey data from the charity ASH (Action on Smoking and Health) indicates that the vast majority of e-cigarette users in the UK are either ex-smokers or current smokers,5 and regular use among ‘never smokers’ remains very low, at less than one per cent.3,5 The level of e-cigarette use by children also remains low ..."
On the health issue, the BMA writes that also the evidence on vaping is still accumulating (especially evidence on long-term effects), the weight of the evidence at present is that nicotine alone is substantially better than nicotine-and-smoke. Moreover, vaping has become the most popular method of trying to quit smoking. The report argues (footnotes omitted):
"For example, though long-term inhalation of nicotine vapour is associated with some level of risk, and there continues to be debate over the precise level of this risk, several reviews have concluded that it is substantially lower than inhaling tobacco smoke.While NICE guidance states that smokers should always be advised that stopping smoking in one step is the best approach, it also recommends advising those who do not want, are not ready or are unable to stop smoking in one step, to consider a harm-reduction approach.It is the tar and other toxins in tobacco smoke, rather than nicotine, that are responsible for most of the harm associated with smoking. ... 
"In a 2016 consensus statement coordinated by PHE (Public Health England) a range of health organisations together stated that “the evidence suggests that the health risks posed by e-cigarettes are relatively small by comparison” [to smoking]. Similarly, a 2017 consensus statement from NHS Health Scotland – endorsed by a range of health organisations – stated that e-cigarettes are “definitely less harmful than smoking tobacco”.Although there is consensus that e-cigarettes are less harmful than smoking, and that any risks associated with their use are likely to be significantly lower than tobacco, quantifying the precise level of this risk is complex. The most widely cited estimate of relative risk is from PHE’s 2015 e-cigarette evidence review – which concluded that it would be reasonable to estimate that e-cigarette use is likely to be around 95% safer than smoking. This figure was endorsed by the RCP (Royal College of Physicians) in their 2016 report Nicotine without smoke: Tobacco harm reduction, which concluded that “…the hazard to health arising from long-term vapour inhalation is unlikely to exceed 5% of the harm from smoking tobacco smoke” ...
"Significant numbers of smokers are now using e-cigarettes in attempts to stop smoking. The most recent data from the smoking toolkit study indicates that 34% of people trying to stop smoking use an e-cigarette, and e-cigarettes are the most popular device used in attempts to quit smoking. ... Overall – while there is a lack of high-quality research into their effectiveness as a cessation aid – most reported studies demonstrate a positive relationship between e-cigarette use and smoking cessation."
It's hard for an outsider like me, without training in medicine and epidemiology, to evaluate these controversies. On one side, there is a danger that vaping could lead to an increase in tobacco use, and to  health harms that are not yet understood. On the other hand, there is a danger that sharp restrictions on vaping would lead more people to continue with conventional cigarettes, with health harms that are very well understood.

For what it's worth, my reading of the evidence comes down somewhat in favor of a belief that vaping will disrupt the cigarette industry, and that the probabilities are in favor of believing that this change will benefit public health. To put it another way, efforts to treat vaping as if it is fully equivalent to conventional cigarettes run a real risk of costing lives.

For some previous posts on smoking and vaping, see: 

Monday, May 14, 2018

Interview Bonanza: Dow, Harcourt, Goodhart, Lawson, Nelson, Chang

Some people, like me, like reading and listening to interviews with economists. It's energizing, invigorating, exhilarating. On the suspicion that readers of this blog might have a higher-than-average propensity to share this preference, I commend to your attention an interview project ongoing at Goldsmiths, University of London, run by Ivano Cardinale and Constantinos Repapis. They have posted interviews with six prominent economists who, in different ways, would classify themselves as being out of the mainstream of the profession: Sheila Dow, Geoff Harcourt, Charles Goodhart, Tony Lawson, Julie Nelson, and Ha-Joon Chang. The interviews include nice video and full transcripts. The first three interviews were done in 2016; the last three in 2017. Here are some samples:

Sheila Dow discusses pluralism in economics.
"Economics took a different turn in the last few decades of the 20th Century so that there’s a much greater focus on models as providing the full argument. People were lulled into a sense of security by what’s called the great moderation, which was a long period of stability, steady growth. Various people were making statements “We’ve got it cracked. No more issues to be addressed,” so the crisis was a huge, huge shock. Even though people were starting to say that risk pricing was going awry in financial markets, nevertheless, there was this confidence… I mean, because that framework is based on a notion of equilibrium and markets being able always to bring situations back to equilibrium, there seemed to be this blind confidence that the same would happen again. Okay, there’s a bit of mispricing, we have to deal with that, but equilibrium will be restored. ... 
"The crisis itself was regarded as a problem of mispricing due to impediments to market forces. So all the solutions now coming from mainstream economics are couched in these terms – how to reconfigure incentives, how to reconfigure constraints on destabilising activity, how to make information more transparent so markets can make decisions better. A lot of the thinking that’s gone into bank regulation has been very constructive but the underlying thought processes are still in line with what went before and the expectation is we can sort this so that it won’t happen again. ...
"What’s required is what I would call a pluralist approach to teaching, which is recognising that there are other ways of addressing economics. This could start at a very simple level of just making it clear that there is an other. ... [W]hat I’m talking about is economics but doing economics differently. This is even prior to questions of which is better, which is worse, whether it’s possible to say one is wrong. That’s something else. I’m just talking at the level of the fact that there are different approaches to economics and it seems to me it’s crucial for educating future economists, whether practitioners or academics, that they be aware of the possibilities and be given the equipment to make their own choices about how to approach the subject....
"One example would be that New Keynesians focus on market imperfections and that provides the justification for intervention. But the implication is that without those imperfections we would be in the perfect general equilibrium world and intervention wouldn’t be required. So, it’s great that they are focusing on limitations of markets and therefore proposing policies which often would be supported by Post-Keynesians. But Post-Keynesians would approach the question very differently; the rationale for intervention, and the starting point in other words would not be an ideal general equilibrium world. This is difficult to talk about because the differences are so profound. A Post-Keynesian would start with a historical understanding of a particular context, not seek a universal solution; understand ways in which the market economy does not ensure full employment (the principle of effective demand is a core principle within the Post-Keynesian approach); look at the role of money; look at the way in which financial markets create instability and through financial instability create economic and monetary instability."
Geoffrey Harcourt discusses his views on Keynesian and Post-Keynesian economics.
"A Keynesian economist means a number of things. Keynes, in particular, put aggregate demand alongside aggregate supply in producing a new theory of the determination of level of employment and activity. And he claimed that Thomas Robert Malthus, whom he called the first of the Cambridge economists, had this idea, but was defeated in his debates with Ricardo, and so the whole concept of aggregate demand vanished for 100 years, and Keynes brought it back when he was thinking about: "How do I explain these prolonged and terrible levels of unemployment?" Both in the 20s, and even more so in the 30s. And he developed his new theory around the interplay of aggregate demand and aggregate supply, and resurrected the term that Malthus, amongst others, used, effective demand, where effective demand was the point where aggregate demand and aggregate supply were equalised, in the short period. ...
"[L]ying behind proper Keynesian analysis is the assumption that all important decision makers are doing it in an environment of fundamental uncertainty, so that expectations - both short-term expectations and long-term expectations - have a central role to play. It's in the light of people's expectations, and then the total outcome of what they do, we see whether expectations are realised or not. If they're not, then in Keynes's analysis there are a variety of different stories of how the decision makers react to the signals that are given out by the initial non-realisation of expectations. ...
"But as far as positive attributes [of Post-Keynesian economics] are concerned, the way of defining particular functions, like the consumption function, the investment function, putting in how you model exports, how you model the demand for imports, how you model the government's behaviour, they are all peculiarly post-Keynesian because they are based on observations rather than on axiomatic assumptions."
Charles Goodhart discusses his practice of bringing different ompare different traditions or theories in economic thought as a way to identify and discuss key issues in monetary theory and policy
"Very rarely is there any single, clear answer in economics, which is actually why I found it so enjoyable to do economics, because at school we were always taught that there was one right answer. Even in subjects such as history, there was the correct answer and then everything else was incorrect. When one came up to university to do economics, one soon discovered that actually there wasn't a single answer, and I found that was enormously relieving and it was like being freed from shackles, so that one could think for oneself rather than try and memorise what one was told was the correct answer. ...
"When I specialised at school, I specialised in history. Again, I think that economics is a splendid subject. Not only because there isn’t one correct answer to most of the questions that we get asked, but also because I think it’s a very good mixture of history, of knowing what has happened in the past and how we got where we are at the moment and much more rigorous mathematical analysis. I think that the combination of history and mathematics is a very good, very valid one, and in a sense puts us apart from some of the other social sciences. Now, having said that, I think that the subject from time to time varies too much in one direction. ... I think that in recent years it’s been very upsetting for me that history has been downgraded, and indeed that economic history is no longer required as part of the undergraduate economics syllabus, but also that the whole thrust of the subject has gone far too mathematical, with far too little reference and under-appreciation of historical evolution. ....
"If there had been greater reliance on history, I think there would have been a greater appreciation that a combination of a housing boom and credit expansion was highly dangerous. What happened, to a degree, was that in the US there were wonderful data on housing – all aspects of the housing market – which went back to the early 1950s. For 50 years you had monthly data on housing prices and all that. During these 50 years, if you held a diversified portfolio of houses across all the States in the US, there was only I think one or two quarters where housing prices overall on average fell. There were crises in New England at one stage and then the oil-producing states at another, but if you diversified you seemed to be safe.
"If you took these 50 years, and ignored history elsewhere, and you ran your econometric analysis and assumed that the future was going to be like the past of those 50 years, it actually came about that you reckoned that a decline in housing prices over the whole of the United States of more than about four or five percent was an almost unimaginable event. It was basically on that premise that people went into, for example, all the sub-prime stuff, because it didn't matter if you were lending to poor people or people who are likely to get ill, who were on the fringes of the labour market and so on, because if they couldn’t repay you, for one reason or another, if housing prices didn't go down you could foreclose and you would still be safe, because you wouldn't lose any money, whereas you could sell.
"The whole of the sub-prime exercise and the rest of it, which initially was done for the best of intentions, and it was to try and get the disadvantaged of America into the housing market. If you could rely on ever rising housing prices, it would have worked, but you couldn’t and history would have shown you that. So certainly I would want to start by reinstating history to a far greater extent into the syllabus; history not only of one country, because again any country has a sort of particularity. You want to have a history of two or three countries.  ...
Tony Lawson argues against the mainstream use of mathematical methods in economics, and instead advocates an ontological approach.
"The mainstream is defined in principle by an emphasis on applying a narrow set of methods, those of mathematical modelling, whatever the context. In accepting this principle its advocates are forced into working with a particular ontology, whether they recognise it or not: to presupposing worlds of isolated atoms. Thereafter they are reduced to focusing on theories, or formulations of theories, that can be transformed into the world of isolated atoms. In essence, human beings have to be turned into atoms. The obvious assumption to use in order to effect this is that we humans are all super-rational; we don't make mistakes. Situations are devised wherein, relative to the notion of rationality specified, there is a unique optimum, and the presumption is that any model agents, being rational, would ‘end up’ there.
"Heterodoxy is something else. Its participants put much more emphasis on at least seeking to be realistic. I do think underpinning most of the different schools within heterodoxy are more realistic ontological presuppositions; these, if not always explicitly made clear are usually close to the surface. Another difference is that even when heterodox economists use mathematical modelling, they’re far more pluralistic about it. They are willing to engage with people who don't. They’re willing to say it’s one method amongst others. So, pluralism of method is essential to heterodoxy. ...

"My assessment is that most heterodox groups are each best identified or distinguished through a tradition-specific focus on issues that fairly clearly reflect ontological presuppositions and concerns, and indeed a shared set. Institutionalists, following Veblen, are very interested in both evolutionary change, and things like institutions that bring stability within change. So, in evolutionary economics a focus on process and stability is fundamental. Post-Keynesians are very interested in uncertainty. Uncertainty basically derives from the openness of social reality. So, it’s an ontological presupposition of openness that conditions their focus. Feminists are especially interested, I believe, in relationships. Relations of care, oppression, exploitation, etc. It is an ontological orientation of relationality that is fundamental here. Marxian economists focus on the relational totality in motion that is capitalism. So, ontological categories like relationality, openness, process, totalities are key to identifying the various heterodox traditions.

"I believe the just noted ontological categories are everywhere relevant, each being fundamental features of all social phenomena. So, I see the separate heterodox traditions each as a division of labour looking at the same basic social reality from a particular perspective. Implicitly at least, they agree more or less on the nature of social reality, and are divisions of labour within the study of it."
Julie Nelson is interviewed on the subject of feminist economics, which she once defined as "work having to do with the economic roles of men of women that has a liberatory bent ... and work on the definition and methodology of economics that shows the gender biases there."
"My research during the last couple of years looked at phrases like ‘women are more risk-averse than men’. Philosophy and linguistics tell us that they’re considered to be generic statements about categorical differences, like ‘ducks lay eggs.’ Actually, only a minority of ducks lay eggs--only the mature females! Most ducks don’t lay eggs. So when people hear ‘Women are more risk-averse’, people tend to think of that as categorical--women over here, men over there. In my meta-analysis, I looked back at the statistical data on which this claim was based and the two distributions are almost entirely overlapping. There is at least 80%, sometimes 90 or 96% overlap between the men’s and women’s distributions. There may also be tiny, perhaps statistically significant differences in the means of the distributions, but men and women are really a lot more similar than different. Yet, if you read the titles of certain books or articles, you would be getting a big misperception. ...

"When I teach my students I always ask them to start with a definition of ‘feminist’ and ask them whether a man can be a feminist, etc. So, to me, feminism is not treating women as second-class citizens, as there to help and entertain men. And then more my methodological work has been about the biases that have been built into economics by choosing only the masculine-associated parts of life and techniques and banishing the feminine-associated ones. In my own life, I’m quite comfortable in both economics and feminist camps. I find when I give talks I get interesting labels. When I talk to a group of relatively mainstream economists I’m a wild-eyed radical leftist feminist nutcase. But because I’m an economist, when I talk to a lot of gender and women’s studies groups, and I don’t talk about the evils of global corporate capitalism and I don’t have a certain line that I take on the economy, I’m considered a right-wing apologist for capitalism. And I’m quite comfortable balancing those two. ...

"I think of the feminist analysis as a particular way in ... The gender aspect, along with explanations coming from economic power and class, I think, together explain a lot of the power of the mainstream in economics. That is, the mainstream is supported in part because it kind of throws a smokescreen over inequalities which we would rather not look at. For example, in the US, these ridiculous CEO salaries, some people spout a free market sort of thing to justify that. But then also I think there is a psychological dimension to the power of the mainstream. It seems to be more macho, more rigorous, somehow more scientific, and builds this big barrier of math: ‘Well, you don’t understand the policy because you can’t read this journal article’. I think this is rather silly and that the more we reveal that the emperor has no clothes, maybe, the easier it will be to knock down."
Ha-Joon Chang discusses the development economics, contrasting the neoclassical view with a productivist view.
"People have debated about the definition [of development economics] for ages. Now, broadly, there are, I think, two-and-a-half definitions, if I may say so. The first definition is basically conflating economic development with economic growth. So as output per capita grows, there is economic development. This view is adopted by most neoclassical economists, who form the vast majority of the economic profession today. But then there is another definition, which has roots from the classical school and the Marxist school and also what I call the developmentalist tradition, people like Alexander Hamilton, Friedrich List, and the development economists of the 1950s and ‘60s, people like Simon Kuznets, Albert Hirschman and so on. In these alternative traditions, economic development is defined not purely in terms of quantitative growth but qualitative change.
"This definition is based on the understanding of the economy mainly as something based in the sphere of production. So, for these people, economic development happens only when there is fundamental structural transformation in the productive structure of the economy and also the underlying capabilities that make that productive transformation possible. It’s a much more nuanced and qualitative definition of economic development. For example, Equatorial Guinea, which is actually, at the moment, the richest country in Africa, because of oil, grew from an economy with $350 per capita income in the early ‘90s to a country with something like $22,000 per capita income. The standard neoclassical definition will classify this as economic development but there are people like Albert Hirschman or Friedrich List who would say, ‘No. That’s not development. That’s just quantitative growth.’

"Then I said two-and-a-half definitions because there has been more recently a variant of the neoclassical definition, which is apparently more progressive, but in the end even less forward-looking than the standard neoclassical definition. This is a definition that more or less equates economic development with poverty reduction. ... So it has a progressive element, but, on the other hand, this is a vision of the economy as something that is almost static. You don't need structural transformation. You don't need growth in productive capabilities. All you need is to generate more income and, more importantly, redistribute it more fairly so that we eliminate abject poverty, which is usually defined as $2 a day. So that is a very narrow defensive kind of definition. ...
"It is not just academic theoretical differences because they give very different policy implications. So if you take what I call the productivist view, the view that economic development is in the transformation of the productive sphere, yes, then you will necessarily recommend economic policies that will encourage the accumulation of new technologies, acquisition of new skills by workers, transformation of the social arrangements to back those. So the most famous policy recommendation in this tradition is the so-called infant industry argument. The argument that governments of economically-backward nations need to provide trade protectionism, subsidies and other supports to young industries so that they can have the space to develop their productive capabilities and eventually catch up with the more advanced producers from abroad.
Now, for this to happen, you would need to provide tariff protection. You might even need to ban the imports of certain foreign products. You might put restrictions on foreign direct investment. You might set up state-owned enterprises in the large capital-intensive sectors with high risk because, typically, in developing countries, there are no large capitalists that can take such risks in the beginning. So you recommend these kinds of policies. 
"If you took the neoclassical view, then, basically, economic growth happens ultimately as a consequence of people trading. So as people want to buy better things then they are ready to offer higher prices and entrepreneurs will spot the opportunity, produce new things. In that world, you also assume that technologies are freely available, and therefore everyone has equal productive capability. ...At most, you would provide some public goods like infrastructure and basic education, but, beyond that, you don't really have to do anything other than keeping competition alive by opening your borders, by deregulating businesses. ... If you keep the markets open and free, economic development naturally follows.
"From these two different visions of how the economy works and develops in the long run especially, you’d come up with completely different sets of economic policies. ...
I studied economics in the early 1980s in South Korea. Most of our professors were neoclassical economists, although, compared to today’s neoclassical economists, they were much milder. But the reason why I started looking at other approaches was because I just couldn't reconcile what I was taught in the classroom with what was happening around me. At the time, South Korea was going through its miracle growth period. The economy was growing at 8, 10, 12% every year, massive social transformation, positive and negative, and huge conflicts. Workers going on strike, students going on demonstration, riot police coming in to bash people. Huge conflict, and then in the classroom, the professors were saying, ‘All changes are marginal. Everything is in equilibrium.’ I couldn't take it seriously."

Friday, May 11, 2018

More From Your Horseshoe Crab Blood Economics Leader

About a year ago I reported on "The Economics of Horseshoe Crab Blood, referring to an article by Caren Chesler, "The Blood of the Horseshoe Crab" in Popular Mechanics (April 13, 2017). The subtitle of the story reads: "Horseshoe crab blood is an irreplaceable medical marvel—and so biomedical companies are bleeding 500,000 every year. Can this creature that's been around since the dinosaurs be saved?"

Turns out that the blood of horseshoe crabs has some components that are superb at detecting infection. The blue-colored blood of horseshoe crabs was selling for $14,000 per quart, and the crabs were in danger of being wiped out in certain of their long-time habitats.

Now Sarah Zhang offers an update in "The Last Days of the Blue-Blood Harvest," appearing in The Atlantic (May 9, 2018). The subtitle reads: "Every year, more than 400,000 crabs are bled for the miraculous medical substance that flows through their bodies—now pharmaceutical companies are finally committing to an alternative that doesn't harm animals. Zhang writes:
"Contemporary humans do not deliberately kill the horseshoe crabs—as did previous centuries of farmers catching them for fertilizer or fishermen using them as bait. Instead, they scrub the crabs clean of barnacles, fold their hinged carapaces, and stick stainless steel needles into a soft, weak spot, in order to draw blood. Horseshoe crab blood runs blue and opaque, like antifreeze mixed with milk. ... Horseshoe-crab blood is exquisitely sensitive to toxins from bacteria. It is used to test for contamination during the manufacture of anything that might go inside the human body: every shot, every IV drip, and every implanted medical device. So reliant is the modern biomedical industry on this blood that the disappearance of horseshoe crabs would instantly cripple it."
Jeak Ling Ding and her husband and research partner Bow Ho from the National University of Singapore started a quest to find an alternative. After a number of false starts over a couple of decades, they had identified the gene for "factor C," which is the key to detecting infection, and spliced it into "insect gut cells, turning them into little factories for the molecule. Insects and horseshoes have a shared evolutionary lineage: They’re both arthropods. And these cells worked marvelously."

The scientific discovery was in the late 1990s, but the wheels of medical innovation can grind slowly. It took until 2003 for the first test kit to come out. But for a decade, there was only one supplier. Regulators like the Food and Drug administration seemed ambivalent about whether the new technology would be acceptable. Existing companies using horseshoe crab blood had no reason to switch. Pharmaceutical companies were risk-averse, too. It's not until the last few years that more suppliers have entered the market, and regulators and drug companies are opening up to the switch.

In one of those ironic turns, medical technology first imperiled the horseshoe crab, but gene-splicing technology may end up saving it. Sometimes the answer to problems created by one technology is an alternative technology.

Thursday, May 10, 2018

Some Economic Effects of US Import Restraints

With all the controversies over the US imposing tariffs on steel and aluminum (discussed here and here, for example), it's perhaps useful to consider an overview of what import restraints the US economy already has in place, and what effects they have had. Every three or four years, the US International Trade Commission publishes a report called: "The Economic Effects of Significant U.S. Import Restraints." The  Ninth Update came out in September 2017.  The report notes: 
"[T]he United States is one of the world's most open economies. The average U.S. tariff on all goods was 1.5 percent (based on trade-weighted import values) in 2015. As tariffs fall and trade expands, households of all income levels benefit from lower-priced imports. A major part of the growth in global trade is due to the increased use of global supply chains, in which parts of the production process are completed in different countries. ...
"The U.S. International Trade Commission (USITC or Commission) estimates that the net change to total U.S. economic welfare from removing significant U.S. import restraints would be a positive one—an average annual increase of about $3.3 billion during 2015–20.  ... Among agricultural products, the restraints that currently restrict trade the most are those applied to sugar. Among manufactured goods, the most restrictive restraints are in the textile and apparel industries and in leather and allied product manufacturing, which includes footwear ... The largest effects from the removal of significant import restraints are in the textiles and apparel sector, where consumers would benefit from lower-priced imports and where net U.S. welfare would increase by $2.4 billion. ...
"The report divides all U.S. households into 10 groups, based on their income level, and
estimates the effects of removing significant U.S. import restraints on each group. A typical annual household consumption basket would cost from $54 to $288 less each year if significant import restraints were removed, depending on the household group. Higher income groups benefit more than lower ones in dollar terms because they spend more; as a share of income, all income groups benefit by about the same percentage.
"When an import restraint is removed, the U.S. price of that import declines. Producers making similar products reduce their prices to compete better, and some may shut down, thus decreasing domestically produced supply and displacing workers. Over the long run, displaced workers will likely move to jobs in other sectors, and business owners will likely invest in other, more profitable sectors. The costs to displaced workers include temporary job loss, possible lower wages in new jobs, and the costs of transitioning from one job to another. The most efficient firms will continue to produce, improving the overall efficiency of the industry, and those firms will likely increase exports. Consumers, including producers who use imports as inputs, gain from the lower prices
on imports and competing U.S.-produced goods. In total, the gains typically outweigh the costs, although some households, sectors, and regions may be harmed."
All of this is standard wisdom among economists, and thus refreshing to see it in a government report. But the mission of the report is defined in a way that numerical estimates for the gains from trade may appear lower than they actually are. Here are five reasons why:

1) By law, the mission of this report is that it can only look at restrictions on trade that are not the result of an case involving anti-dumping or a countervailing duty. The report notes: "As requested in the original letter by the USTR [US Trade Representative], this report considers all U.S. import restraints except those originating from antidumping or countervailing duty investigations, section 337 or 406 investigations, or section 301 actions." Thus, the report is required to leave out the recent steel and aluminum tariffs, and many other cases along similar lines.

2) The report is focused on the benefits of removing existing import restraints, and thus doesn't really look back on earlier gains. Import barriers around the world have dropped substantially in the last 25 years or so: "For example, the World Bank calculates that the applied weighted-mean tariff on all products for all countries with data fell from 34.0 percent in 1996 to 2.7 percent in 2010." Thus, the US economy has already been experiencing much larger gains from the reduction in trade barriers around the world.

3) The report doesn't include a quantitative estimate of benefits from reducing import barriers in service industries, which are increasingly important in the overall picture of US trade.  
"Although this report does not quantitatively estimate the effects of liberalizing U.S. restraints on services imports, it does summarize key impediments to services trade in the United States for a range of services sectors, including architecture and engineering services, legal services, telecommunications, commercial banking, insurance, retail distribution, and air and maritime transport. ... [T]he United States maintains fewer or less-intense restrictions for trade in these services than other countries in the database. However, U.S. scores for air transport, maritime transport, and insurance services exceed their respective sector average scores for all countries, suggesting that the United States maintains additional or more-intense restrictions for trade in these
4) In a world economy where global supply chains are increasingly prominent, products will often cross international borders a number of times. As a result, costs of customs and border procedures that don't seem especially large can add up. Reducing these costs is sometimes called the "trade facilitation" agenda. This ITC report devotes a chapter to Special Topic: Effects of Tariffs and of
Customs and Border Procedures on Global Supply Chains." 

For an illustration, here's a sample of a supply chain for a microprocessor, which includes five border crossings and input from multiple countries. If one included the product in which the microprocessor is implanted, the supply chain would be even more complex. 

As the ITC report notes: "[S]since the 1970s, the use of foreign inputs in production has increased from about 15 percent of gross export value to between 25 and 30 percent. In recent years, more than half of global manufacturing imports, and 70 percent of services imports, are used as intermediate inputs in the production of other goods. Given this increased use of GSCs [global supply chains], the inefficiencies experienced between each stage of the supply chain have become increasingly important."

Here's a list of some hurdles a shipment faces when entering or exiting a
  • Preparing and submitting documents;
  • Customs and pre-shipment inspections;
  • Transit clearance, transportation delays, and congestion at the border;
  • Payment of fees, such as duties and other taxes;
  • Certification, which verifies the trader has fulfilled requirements such as technical, sanitary, and phytosanitary standards or import and export licenses;
  • Customs classification procedures;
  • Customs valuation procedures, which occur when administering countries use nonstandard methods of assessing the value of the shipment; and
  • Theft, bribes, and other forms of corruption.
Again, none of these may be especially large in themselves, but taken together, when multiplied over a number of border crossings, the accumulate to something larger. Many of the recently proposed trade agreements are less about reducing tariffs, and more about addressing these processes and issues.

5) US industries are disrupted all the time by factors that don't much involve trade. For example, consider the textile and apparel industry, where the $2.4 billion in welfare gains is the single biggest source of gains discussed in this report. If one could sign a deal which said that the US consumers would pay more for clothing to assure that textile workers all keep their jobs, it wouldn't sound like the worst deal in the world. Except that even without trade, the textile industry wouldn't be standing still. The report discusses two big changes that affect textile and apparel, as well as lot of other industries: automation and innovation. Thus, here is the estimate of what would happen to the US textile industry with no change at all in the import restraints. 
"Significant investment in automation in the U.S. textile and apparel industry, particularly in yarn, thread, and fabric production, has depressed U.S. employment despite increases in domestic shipments. In coming years, increased capital investment in automation should contribute to a further expected decline of 3.7 percent, on average, in employment in the textile and apparel industry during 2015–20. The most significant decline is projected in the textile products (5.9 percent) and textile mills sectors (5.7 percent). At the same time, U.S. textile and apparel exports are expected to increase 2.8 percent, with U.S. apparel exports increasing by 10 percent as a result of growing demand for higher-quality, specialized, or “Made in the USA” apparel. ... 
"The U.S. textile mill producers are increasingly focused on the production of technical fabrics (also known as “performance textiles”) and smart fabrics used in the automotive, construction, healthcare, sportswear, and agriculture industries, as well as in protective applications. According to the U.S. Department of Commerce, the value of U.S. technical fabric production is expected to increase by 4 percent annually on average during 2015–17 due to strong global demand. The technical and smart
fabric sectors are less price sensitive than imports of lower-cost commodity fabrics because technical and smart fabrics are produced through advanced manufacturing processes, after significant research and development, and therefore are not materially affected by the removal of import restraints. Further, one of the largest consumers of U.S.-produced technical textiles is the U.S. military, which by law must purchase its textiles from U.S. producers."
US producers and their workers face all sorts of challenges, including domestic competitors, shifts in consumer preferences, new technologies, investment of the right size and type, evolving skills and training needed by worker, government taxes and regulations, and whether management can handle these challenges. Foreign trade matters, too, of course. But if we competed hard in tackling the rest of these issues, my suspicion is that foreign trade would look a lot less threatening.