Thursday, February 14, 2019

Thinking about Pay-What-You-Can Restaurants

The idea of a pay-what-you-can restaurant raises obvious questions. Could it sustain itself? Or would those paying more than face value be swamped by those paying less? Are there ways of running such a venture that might be more sustainable than others?

The question arises because the Panera company starting in 2010 ran a group of up to five stores called Panera Cares that operated on a "pay-what-you-can" basis. The last one of these stores, based in Boston, is closing this week. Ben Johnson offers some background and reflections in "‘Pay what you can afford’ runs Panera out of bread," published at the Acton Institute blog (February 12, 2019).  He notes: “`Panera Cares' were indistinguishable from other Panera eateries in their branding, menu, or furnishings, except they announced that no one would be turned away if they did not pay one cent of the `suggested prices.' Those who could not afford to pay full price could volunteer for an hour at the store in exchange for the food."

Johnson emphasizes what went wrong, and it's more-or-less what you would expect. Some homeless people start eating there for every meal, but high school students dropped in for free food as well. The stores tried to explain their mission, telling the poor that they should be an irregular stop, rather than every day, and asking the high school principal to rein in the students. But trying to discourage misuse or overuse then led to accusations of profiling, followed up by requirements for sensitivity training.

Meanwhile, drug users were taking over the bathrooms, and the Panera Cares stores were typically covering only about 60-70% of their costs. Panera was sold in 2017 to a new set of investors in 2017, and probably not coincidentally, the Panera Cares experiment is now shutting down.

Clearly, those who are cynical about pay-what-you-can have some justification. But  just as clearly, cynicism isn't the whole story here. The Panera Cares experiment didn't last nine weeks or nine months, but more like nine years. Very large numbers of people got free or low-priced food. Others were willing to use Panera Cares as a charitable mechanism by paying more for food.

How widespread are pay-what-you-can restaurants? An organization called One World Everybody Eats serves as a clearinghouse for this model, offering expertise and network-building. The organization is now trying to find a replacement for Panera Cares to use a pay-what-you-can model in Boston. From the organization's website:
There are more than 60 community cafes around the world that have adopted the One World Everybody Eats model, including Panera Bread’s Panera Cares Cafes and the Jon Bon Jovi Soul Kitchens. Dozens of cafes are in development. New cafe development teams are joining our network of community cafes every month, proving that a cafe can thrive when guests are invited to pay what they can afford or offered the opportunity to volunteer for their meals.
Cafes in the OWEE network operate predominately with volunteers. Together, they serve nearly 4,000 meals a day, or more than 1.4 million meals a year.

OUR SEVEN CORE VALUES:

Pay-what-you-can pricing
Patrons choose their own portion size
Healthy, seasonal food is served whenever available
Patrons may volunteer in exchange for a meal
Volunteers are used to the maximum extent possible to staff the organization
Paid staff earn a living wage
I haven't looked over the full list of the 60 or so pay-what-you-can places, but I checked the one location in my state of Minnesota. It's in a smaller city about 25 miles from Minneapolis. It's run by a church, and it's only open on Tuesdays and Thursdays for a couple of hours in the morning. This operation seems to me a valuable and praiseworthy and useful method of involving the community in helping the hungry. But it's not what most people would call a "restaurant."

What determines the feasibility of a pay-what-you-can restaurant? The key seems to be whether it can attract a decent-sized clientele of those who are willing to pay full price, and more than full price. Otherwise, if this kind of operation runs almost entirely on volunteer labor and donated money, then it may be a worthwhile and worthy operation, but if hardly anyone is paying, it's probably not appropriate to refer to it as pay-what-you can.

Giana M. Eckhardt and Susan Dobscha look at these issues in "The Consumer Experience of Responsibilization: The Case of Panera Cares," published in the Journal of Business Ethics in January 2018. To have a sense of how Panera Cares was operating, consider this description:
Greeters called “Ambassadors” are situated at the front of the café to explain to the customers that when they get to the counter, they can pay what they want, and that the café is a nonprofit, as most people think they are in a Panera Bread rather than a Panera Cares. Greeters must be able to “diffuse potentially difficult situations,” which as we will see arise fairly frequently when the food insecure eat at the restaurant. The food secure are encouraged to pay above what their meal is worth. Because the cafés tend to be overwhelmed with homeless people, the food insecure can only eat one entrée for free per week, and must earn it via 1 h of volunteering. To discern between the two groups, the greeter relies on consumer profiling, done solely via physical appearance and dress. 
After studying the operation of Panera Cares, talking with managers and in particular looking at online reviews posted at Yelp.com, Eckhardt and Dobscha describe the social tensions that arise in this way:
We demonstrate that consumers feel discomfort with the conscious pricing policy. This discomfort takes three forms: physical, psychological, and philosophical. ...

Although most Panera Cares consumers profess to care broadly about the social problem of food insecurity, they are not comfortable with the very real experience of being proximal to those consumers. ... The food insecure are also not comfortable with eating
in close proximity to the food secure. An important principle that undergirds the notion of serving a temporarily food insecure population, and providing dignity, is that of anonymity. ... Yet the reality within the cafés differs from this, and because of the proximity to food secure customers, results in discomfort stemming from physical proximity. ...

In addition to physical discomfort, consumers were also uncomfortable with other non-physical dimensions of conscious pricing in Panera Cares, including the social comparison with other consumers that takes place and the consumer profiling that the café employees engage into determine who is food secure and food insecure, which we label psychological discomfort. First, in the café, consumers monitor the donation behavior of other consumers. ...  In this case, social comparison takes the form of noticing how much other customers are paying, and interpreting the amount, if
it is low, as free rider behavior. ...In particular, how he food insecure look plays an important role. On the one hand, if they look presentable, they fulfill the temporarily food insecure profile that Panera Cares wants to cater to, and are more likely to be treated with dignity. On the other hand, by virtue of looking presentable, they are also questioned as to why they cannot pay more. In sum, consumers feel uncomfortable with the social comparison and profiling which regularly occur in Panera Cares, and this results in psychological discomfort. ...

There was also discomfort with motives and tactics behind the conscious pricing model, which we label philosophical discomfort. That is, consumers were uncomfortable with the general philosophy behind what Panera Cares was doing and how they were doing it. This manifested itself in two ways: discomfort with how the conscious pricing policy is
explained and questioning the motives of the parent company, Panera Bread. . ... Overall, this questioning of the motives and tactics of Panera Cares (a nonprofit) may be intensified because of the close connection it has to its for-profit parent company Panera Bread. Lee et al. (2017) argue that the distinction between companies that have a social mission versus those who have a profit mission is salient for consumers, and in the case of Panera Cares and Bread, is not clear. A nonprofit orientation can paradoxically drive consumer perception of organizational greed. This is because communal norms rather than exchange norms are invoked by consumers, and any perceived breach of communal norms is seen as an indication of greed. As we saw with customers using terms like tax haven and marketing gimmick to describe Panera Cares, this effect seems to be at play here. 
The evidence suggests that a pay-what-you can restaurant model is more likely to last if it is clearly a nonprofit, if it have an outside source of funding, if it is located in areas with a supply of customers willing to participate both by paying and by sharing space with the homeless, and if it able to establish a set of customary behavioral expectations for all parties who enter the restaurant. In one way or another, a pay-what-you-can restaurant will have to find ways of addressing these issues of physical, psychological, and philosophical discomforts.

Wednesday, February 13, 2019

Interview with Deidre McCloskey on Economic Growth and Liberal Values:

Eric Wallach offers "An Interview with Deidre McCloskey, Distinguished Professor Emerita of Economics and of History, UIC" in The Politic, Yale's undergraduate journal of politics and culture (February 10, 2019).  McCloskey is characteristically thought-provoking and quotable. Here are a few comments of her many comments that caught my eye:

"Liberty is liberty, and is meaningless by parts."
The central misconception is to think that one can claim the honorable title of “liberal” if one approves of one form of liberty, such as mutual consent in sexual partners or the ability to drill for oil where you wish, but excludes the other form. Liberty is liberty, and is meaningless by parts. You are still a slave if only on odd days of the month.
In Latin America, for example, the word “liberal,” once meaningful there, has long been appropriated by conservatives who like to drill for oil where they wish, but hate gays. In the United States, it has been appropriated by sweet, or not so sweet, slow socialists, who celebrate diversity, but regard economic liberty as not worthy of much consideration. ...
I used to think freedom was freedom of speech, freedom of the press, freedom of conscience. Here is what it amounts to: you have to have the right to sow what you wish to, to make shoes or coats, to bake into bread the flour ground from the grain you have sown, and to sell it or not sell it as you wish; for the lathe-operator, the steelworker, and the artist it’s a matter of being able to live as you wish and work as you wish and not as they order you.
"Put me down for 10 percent slavery to government." 
It’s unwise to turn the issue of helping the poor into an on/off, none/perfect, exist/not question. We need to be seriously quantitative about such matters. On/off doesn’t answer the important question, which is always more/less. People think they are making a clever remark against liberalism by saying, “Well, we need some government.” Yes, certainly. But how much? (Will Rogers in the 1920s used to say, “Just be glad you don’t get the government you pay for.”) ...

So here’s what a Liberalism 2.0 favors. It favors a social safety net, which is to say a clean transfer of money from you and me to the very poor in distress, a hand up so they can take care of their families. It favors financing pre- and post-natal care and nursery schools for poor kids, which would do more to raise health and educational standards than almost anything we can do later. It favors compulsory measles vaccination, to prevent the big spillover of contagion that is happening now in Clark County, Washington. It favors compulsory school attendance, financed by you and me, though not the socialized provision of public schools. The Swedes have since the 1990s had a national voucher system, liberal-style. It favors a small army/coast-guard to protect as against the imminent threat of invasion by Canada and Mexico, and a pile of nuclear weapons and delivery systems to prevent the Russians or Chinese or North Koreans from extorting us. All this is good, and would result in the government at all levels taking and regulating perhaps 10 percent of the nation’s production. Put me down for 10 percent slavery to government. Not the 30 to 55 percent at present that rich countries enslave.
"The Nordics ... are not thoroughly socialist, and in fact they are reasonably close to the U.S., and in some ways more anti-socialist."


Americans of good will have long been persuaded, on the basis of breathless articles in the Sunday New York Times Magazine, that the Nordics are thoroughly “socialist” ...  No, they are not thoroughly socialist, and in fact they are reasonably close to the U.S., and in some ways more anti-socialist. They are in fact highly liberal in their economies (and their fastest rates of growth since 1850 were in fact when they were even more liberal). Almost all prices in Sweden and the rest, for example, are determined by supply and demand, and are nothing like the disastrous socialist interventions by way of price controls in, say, Venezuela. Setting up a business is not hard. Inherited wealth in Scandinavia and Finland is not honored. Innovation is (for example Svenska Kullagerfabriken, SKF, a pioneer in ball bearings, out of which in the 1920s rolled Volvo [Latin for “I roll”]).

And government ownership of the means of production is trivial in all the Nordic countries. When Saab Motors went bankrupt, it came to the Swedish government hat in hand, and the government said, “Get lost.” When Volvo recently became a Chinese company, the government said, “So what?” You don’t have to exercise much imagination about what the American government would do if General Motors was so threatened: “Here are billions of tax dollars, and so the Federal Government owns part of you.” The American government in 2008 of course did precisely that.
"Give this gentleman sixteen cents. That’s his share of the wealth." 
[Andrew] Carnegie himself is said to have made the same point in another way. A socialist came to his office and argued to him that the wealthy should redistribute their wealth to the poor of the earth. Carnegie asked an assistant to go get him a rough estimate of his current wealth and of the population of the earth. The assistant returned shortly with the figures, and according to the anecdote Carnegie performed a calculation, then turned to the assistant and said, “Give this gentleman sixteen cents. That’s his share of the wealth.” And then he gave every dime of his wealth away, in accord with his Gospel of Wealth. Another businesslike Scot, Adam Smith, by the way, also gave away his considerable fortune, though, unlike Carnegie, he did not sound a trumpet before him when he did his alms.

Tuesday, February 12, 2019

Economics of Medieval Guilds

Guilds played an important role in the economies of Europe from about the 11th century up through the 16th century, and a continuing if less important role up into the 19th century. Sheilagh Ogilvie, the go-to economic historian on this subject, has a new book out called The European Guilds: An Economic Analysis (published by Princeton University Press and of course available on Amazon, too). For a flavor, here are some comments from the opening chapter: 
"Guild membership was therefore reserved for the privileged few. Guilds were small relative to the consumer markets they monopolized. They were also small relative to the wider labour market, whose members they largely excluded. Guilds were not all-encompassing workers' associations analogous to twentieth-century labor unions, but exclusive organizations for relatively well-off, middle-class men. ... 
The effects of guilds on economy and society have always generated controversy. Contemporaries held strong view about them, with guild members and their political allies extolling their virtues, while customers, employees, and competitors lamented their misdeeds. Many early economic thinkers praised guilds, as, for example, the French government minister Jean-Baptiste Colbert, who ordered all French crafts to form guilds, "so as to compose by this means a group and organization of capable persons, and close the doors to the ignorant," and the Austrian imperial councilor Johann Joachim Becher, who argued that the authorities in past eras had wisely invented the guilds because "competition weakens the livelihood of the community". Others censured guilds, as did Adam Smith when he called them "a conspiracy against the public", and Ann-Robert-Jacques Turgot, when he told the King of France: "I do not believe that one can seriously and in good faith hold that these guilds, their exclusive privileges, the barriers they impose to work, emulation, and progress in the arts, are of any utility. ... The total removal of the obstacles that this system imposes on industry and on the poor and laborious sections of your subjects [is] one of the greatest steps to be taken towards the betterment, or rather the regeneration, of the realm". ...
Modern scholars are also deeply divided on guilds. Some claim that guilds were so widespread and long-lived that they must have generated economic benefits. They might, for example, have solved information asymmetries between producers and consumers, overcome imperfections in markets for human capital, created incentive favoring innovation, put pressure on governments to be business-friendly, or generated social harmony by reducing competition, conflict, and inequality. Other scholars take a darker view. Guilds, they hold, were in a position to extract benefits for their own members by acting as cartels, exploiting consumers, rationing access to human capital investment, stifling innovation, bribing governments for favours, harming outsiders such as women, Jews, or the poor, and redistributing resources to their members at the expense of the wider community. 
As this book will show, my own reading of the evidence is that a common theme underlies guilds' activities: guilds tended to do what was best for guild members. In some cases, what guilds did brought certain benefits to the broader public. But overall, the actions guilds took mainly had the effect of protecting and enriching their members at the expense of consumers and non-members; reducing threats from innovators, competitors, and audacious upstarts; and generating sufficient rents to pay off the political elites that enforced the guilds' privileges and might otherwise have interfered with them. 
For an incomplete and appetizer-sized portion of the arguments presented in the book, potentially interested readers might start with Ogilvie's article, "The Economics of Guilds," published in the Fall 2014 issue of the Journal of Economic Perspectives (28:4, pp. 169-92) and freely available online, like all JEP articles, from the American Economic Association. From the abstract of the JEP article: 
Occupational guilds in medieval and early modern Europe offered an effective institutional mechanism whereby two powerful groups, guild members and political elites, could collaborate in capturing a larger slice of the economic pie and redistributing it to themselves at the expense of the rest of the economy. Guilds provided an organizational mechanism for groups of businessmen to negotiate with political elites for exclusive legal privileges that allowed them to reap monopoly rents. Guild members then used their guilds to redirect a share of these rents to political elites in return for support and enforcement. In short, guilds enabled their members and political elites to negotiate a way of extracting rents in the manufacturing and commercial sectors, rents that neither party could have extracted on its own. First, I provide an overview of where and when European guilds arose, what occupations they encompassed, how large they were, and how they varied across time and space. I then examine how guild activities affected market competition, commercial security, contract enforcement, product quality, human capital, and technological innovation. The historical findings on guilds provide strong support for the view that institutions arise and survive for centuries not because they are efficient but because they serve the distributional interests of powerful groups.
Of course, the issues raised by the medieval guilds have continuing economic relevance. There are continuing efforts to reduce competition, through method ranging from occupational licensing to trade tariffs, always based on the claim that setting the stage for a certain group of producers to receive higher profits is actually in the interest of society as a whole. This broad argument is probably true in a few cases: for example, patents restrain competition for a period of time, but by allowing innovators to earn higher profits they also provide incentives for innovation.

But in many cases, including guilds, a cycle forms in which government helps certain producers receive higher profits, and then a share of those profits goes to  helping government officials reach the conclusion that favoring one set of producers over consumers and other producers is a socially important goal.

Monday, February 11, 2019

Why US Financial Regulators Are Unprepared for the Next Financial Crisis

The Great Recession from 2007-2009 represented a toxic mixture of failures by market participants and financial regulators. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 patched some of the holes. but not nearly all of them. At least, that's the conclusion I reach from a three-paper "Symposium on Financial Stability Regulation" in the Winter 2019 issue of the Journal of Economic Perspectives. (Full disclosure: I have worked as Managing Editor of JEP since the first issue back in 1987, so I am perhaps predisposed to find its articles persuasive.) The papers are:
To understand the underlying perspective here, you need to think about recessions in two parts. All grown-ups know that bad things are going to happen to economies from time to time: oil price shocks, trade shocks, price bubbles in stock markets or housing markets, and so on.  If an economy is reasonably resilient, any resulting recessions can be fairly mild and brief. On the other side, if an economy and its financial sector is fragile, with high levels of debt that often need to be rolled-over and refinanced on a short-term basis, then a recession that could otherwise have been fairly mild turns into a Great Recession.

From this perspective, the role of financial regulators goes beyond the traditional tasks of looking at individual financial institutions to make sure they are reasonably solvent and are providing timely and accurate information to investors. For some years now, financial regulators have been talking about "macroprudential" regulation (for example, here and here), which goes beyond looking at individual financial institutions to see whether the financial system as a whole is robust. The idea is to avoid the mistake of looking at individual trees, while missing risks that involve the entire forest. This view recognizes that recessions will continue to happen, but hopes that with robust financial system, they will not mushroom into another Great Recession.

In the context of the Great Recession, the team of Aikman, Bridges, Kashyap, and Siegert argue that if US financial regulators had the legal authority and the foresight to take steps to protect the overall robustness of the US financial system in the years before 2008, the Great Recession would have been only one-third or one-fourth as large. They write: "Our diagnosis centers on two overlapping but distinct vulnerabilities: the increase in leverage and short-term funding at financial intermediaries, and the build-up in indebtedness in the household sector. These factors, we argue, can account for around two-thirds to three-quarters of the fall in US GDP that followed the financial crisis."

They describe what macroprudential policy tools would have been needed to address these issues. For example, at least in theory a government regulator could have required that mortgage lenders impose certain loan-to-income rules, to hold down on the rise in household debt. Or at least in theory, a  government regulator could have imposed rules to prevent investment banks from relying so heavily on extremely short-term borrowing that needed to be rolled over every day--which made them highly vulnerable when that borrowing was not rolled over. However, they point out that these changes were not part of the power given to regulatory authorities by the Dodd-Frank legislation They write:
We argue that the US Financial Stability Oversight Council would likely make little difference were we to experience a rerun of the factors that caused the last crisis. It has no macroprudential levers under its direct control, and not all of its members have mandates to protect financial stability. ... And given the role played by loosely regulated nonbank financial institutions prior to the last crisis—and the continuing evolution of the financial system—a successful macroprudential intervention would likely require political backing to be nimble in widening the perimeter of regulation to capture such institutions. More generally, such a regulator would have to be fairly aggressive in using its powers. Given the novelty of these powers, there is no clear evidence on whether such forceful interventions would be realistic were risks to escalate again. ...
As one example of the powers that US regulators do not have:
After the crisis, the Dodd–Frank Act did ban certain types of mortgages, such as interest-only mortgages or those with negative amortization. But it left the question of minimum down-payment restrictions to a group of six regulators involved in housing, which ultimately opted against introducing such a requirement. While risks in the housing market have significantly declined since the crisis, average loan-to-value ratios on mortgages are not lower than they were in the early 2000s. Furthermore, no US regulator has the ability to impose loan-to-income requirements, even if the Financial Stability Oversight Council wished to recommend this action. ... Moreover, the Fed lacks authority over many parts of the financial system and has no tools that can be used to tackle household debt vulnerabilities. A June 2015 “war game” exercise conducted by four Reserve Bank presidents concluded that the Fed had insufficient macroprudential powers to address a build-up in risks that resembled the earlier financial crisis. Also, Fed officials have cast doubt on whether its mandate permits it to use monetary policy to act against a build-up in financial stability risks.
Thus, Aikman, Bridges, Kashyap, and Siegert are pointing out that financial regulators are unprepared for a literal rerun of the financial crisis that already occurred. The regulators also remain unprepared for financial crises that arise form other sources or in other forms.

For example, Daniel Tarullo points out in his essay that most of the regulatory attention has focused on banks. but potential dangers remain in the rest of the financial system. Tarullo writes:
Within the perimeter of prudentially regulated banking organizations, post-crisis financial regulation has made considerable strides, though liquidity regulation needs more work and capital requirements for the biggest banks should probably be somewhat higher.  ... While there is at least a chance for maintaining the progress toward more resiliency for the largest banks, it is considerably harder to conjure up a benign outcome with respect to financial activity that occurs outside the perimeter of banking organizations. Recycled or new forms of shadow banking will almost surely increase over time, whether from existing nonbank financial firms or from new fintech (financial technology) entrants. Some of these will present risks to financial stability. 
For an example of one set of shadow banking issues, Amit Seru argues that 'Regulation of the Mortgage Market Must Consider Shadow Banks" in a Policy Brief written for the Stanford Instituted for Economic Policy Research (December 2018). As he notes: " Mortgage lending in this country is highly segmented and traditional banks represent only an increasingly small part of the story. For many decades, banks have competed with independent mortgage companies that don’t take deposits and typically don’t have brick-and-mortar branches, a group that can be called `shadow banks.'” This figure shows that the share of mortgage lending that doesn't come from banks is over half and rising.


The mortgages from these independent companies are then bundled together into financial securities, which are in turn sliced and diced into pieces and resold to investors (including banks, pension funds, insurance companies, hedge funds, money market funds, and others). Because the financial reforms have focused so heavily on banks, they do not delve into the potential system risks from the nonbanks.

For other examples, Darrell Duffie discusses in his JEP essay "the run-prone designs and weak regulation of the markets for securities financing and over-the-counter derivatives." For example, one rule change is that there is now strong encouragement for financial derivatives to be bought and sold through central clearinghouses--but there has been little attention to the risks that might be accumulated in these clearinghouses. If a clearinghouse seemed close to failing, and as a result it appeared that many derivatives contracts could fail or go into limbo for a time, the effects on fhe financial system could be nasty. Duffie writes:
A key change is the increased use of central clearing, which was directly mandated in post-crisis regulation and further encouraged by new regulatory capital requirements that, in effect, expressed a preference for central clearing. A central counterparty (CCP), also known as a clearinghouse, enters a derivatives trade as the buyer to the original seller, and as the seller to the original buyer. In this way, original counterparties become insulated from each other’s default risk—provided of course that the clearinghouse meets its own obligations. Central clearing also improves the transparency of derivatives positions and enforces uniform collateral practices that are more easily supervised by regulators. ...
There do remain, however, important concerns over the ability to resolve the failure of central counterparties, which have become enormous concentrations of risk under post-crisis regulations. If a clearinghouse has insufficient resources to manage the default of the derivatives obligations of a clearing member, the consequences could be catastrophic, now that hundreds of trillions of derivatives have been cleared by a small number of systemically important central counterparties. The default management resources of the central counterparty consist primarily of the margins provided by clearing members against their positions, and by a default fund to which all clearing members contribute. If the initial margin of a failed clearing member is not enough to cover the losses, the default fund is then applied. If the clearinghouse burns through both of these paid-in default management resources, and a small layer of its own capital, it then has the contractual right to stop paying clearing members the amounts otherwise due on their derivatives, even to the point of “tearing up” their derivatives positions. In the worst scenarios, the cessation of payments to clearing members and tear-ups would be catastrophic, and contagious. The largest clearing members are generally also large members of other central counterparties. This tail contagion risk is subject to regulatory stress tests and ultimately to regulations that could trigger a failure resolution process for central counterparties. However, actual implementable plans for the failure resolution of clearinghouses have still not been designed, at least in the United States...
In November 2018, the Federal Reserve started publishing a Financial Stability Report, with lots of information about various possible sources of financial risk in the economy,  as well as a Supervision and Regulation Report about trends and patterns in these areas. My general sense is that there aren't any major systematic financial risks threatening the US economy right now. But one hopes that financial regulators can be proactive, rather than reactive, to risks that could easily emerge in the future.


Friday, February 8, 2019

Building Connections with Active Labor Market Policies

"Passive" labor market policies involve paying money to the unemployed, like with unemployment insurance. "Active" labor market policies involve a range of programs to assist the unemployed with finding jobs. In both categories, the US has long lagged well behind other high-income countries. Chad P. Bown and Caroline Freund review the evidence in "Active Labor Market Policies: Lessonsfrom Other Countries for the United States" (Peterson Institute for International Economics, January 2019. 19-2).

Here's the difference in spending on passive and active labor market policies across countries. Notice that the US is second from the left, above only Mexico in this comparison group of OECD countries.
Not all active labor market policies are created equal. As different policies have been used and then studied in different countries, a body of evidence has built up that is overviewed by Bown and Freund. They write:
"The evidence documented in this paper shows that many other countries deploy “active” labor market policies (ALMPs) that have been more effective than those in the United States. Programs in other countries under review have improved the possibilities of workers and firms matching up with each other’s needs, and when these efforts have fallen short, governments have sometimes created jobs in the face of intractable local conditions. The research demonstrates that job placement services, training and education, wage subsidies, and other adjustment policies have been proven effective in helping workers find employment and stay in the job pool. Although public works programs and direct job creation have also been tried to address the problem, these programs tend to be ineffective in helping workers over the long run. ...
The most common ALMPs are placement services (public employment services [PES] and administration), training, employment incentives, and direct job creation. ...  There is significant variation across the major economies, with the United Kingdom and Germany relying largely on job placement services; Austria, Finland, and Denmark targeting training; Luxembourg and Sweden offering employment incentives; and Hungary, France, and Korea using direct job creation as their main form of assistance.
Here's a table from the authors summarizing the state of knowledge about active labor market policies.
There's a lot of talk in the US about problems faced by workers who have a hard time finding jobs, or who are displaced from their jobs. The menu of policy responses at this point seems to involve either: blame it all on the Chinese and impose tariffs, or have the government guarantee everyone a job. I view both of these options as posturing. Active labor market policies certainly aren't the only step toward building connections between US workers and potential employers, but they could be a useful step. While I don't think such programs would pay for themselves, a substantial part of the cost could be covered by the lower need for other government payments like unemployment insurance, disability, Medicaid, and other programs. Bown and Freund write: 
The United States currently spends about 0.1 percent of GDP on active labor market policies, compared with an average of 0.5 percent of GDP in 31 other OECD countries. Bringing the United States to the average could help stem the decline in labor force participation, return millions of working-age Americans to employment, supporting their well-being and US economic growth.
I try to beat the drum for active labor market policies every now and then. Some previous posts include:

Thursday, February 7, 2019

How to Reduce Health Care Costs?

The US spends about 18% of GDP on health care. Other high-income countries spend an average of about 11%, Thus, the Society of Actuaries and Henry J. Kaiser Family Foundation have created Initiative 18/11 to consider ways of holding down US heath care spending. A first report from the initiative, "What Can We Do About the Cost of Health Care?" (January 2019), doesn't yet offer proposals for action. But it offers a useful sense of what many of the main targets are likely to be of any serious effort to reduce healthy care costs. Here are some of my own reactions and takeaways from the report.

Although the report doesn't emphasize this point, it's worth noting that 18-11=7, and with a US GDP of about $20 trillion, 7% is $1.4 trillion. If you find yourself wondering why other countries can apparently afford improvements in physical infrastructure or higher support for education or higher social benefits of certain kinds,  part of the reason is that a much lower level of their social resources is going to health care spending. If you wonder why your paycheck seems to go up so slowly, part of the reason is that your employer keeps paying more for you health insurance. My point here isn't that a substantial share of US health care spending is wasteful or even harmful, although that does seem to be true. It's just that output going to health care has a tradeoff of less output available for other uses--even when some of those other uses might do more to improve health.

When thinking about cutting health care spending, and obvious approach is to look at how the money is being spent, and the bulk of health care spending is on those with multiple chronic conditions. The Kaiser report notes:
"Remarkably, 86 percent of health care spending is for patients with one or more chronic conditions—conditions expected to last three months ... Among the chronic population, people with more than one condition account for 71 percent of total spending. The cost of chronic diseases goes far beyond the direct amounts spent on these diseases. In the United States, seven out of every 10 deaths are caused by chronic diseases each year. There are indirect costs through lost productivity and an unmeasurable loss in the quality of life and the loss of ability to perform activities of daily living, such as bathing and eating. For adults, the most prevalent conditions are uncontrolled hypertension (uncontrolled blood pressure) and hyperlipidemia (high cholesterol and high triglycerides). For children, the most common conditions are allergies and asthma."
One way of thinking about chronic conditions is that if they are managed properly (medicine, diet, exercise. whatever is needed),  then health care costs are usually low. But if such conditions are not not managed properly, very expensive episodes of hospitalization become likely.

For example, just looking at noncompliance with taking prescriptions drugs, the report notes:
In a 2011 Consumer Reports survey, one of the leading complaints among primary physicians is that patients do not take the doctor’s advice or follow treatment. For example, although 3.8 billion prescriptions are written every year, more than 50 percent of them are not taken or are taken incorrectly. The cost of noncompliance has been estimated at $290 billion. Also, 125,000 deaths each year are attributed to poor medication compliance.
Interestingly, the report doesn't make an argument that Americans overall live less healthy lifestyles than those in other high-income countries. Yes, obesity is bigger problem in the US. But compared to other high-income countries, the US has a smaller share of smokers and a lower share of elderly. Thus, taken as a whole, it's not clear that US lifestyles and demographic factors are less favorable than other high-income countries.



The report is also bracingly honest about what can be accomplished by going after "indirect" costs. The report notes:
"In its simplest form, the total cost of health care has two components: the direct cost of care and the indirect expenses needed to develop systems and administer the program. According to national health expenditures reports, indirect expenses have been around 15 percent of total spending for more than 25 years. Currently, 8 percent of the total is associated with costs related to administering a program, such as billing and claims payments. The remaining costs are associated with other indirect services, such as research, public health and infrastructure."
Let's say for the sake of argument that we could agree on steps that would have the effect of cutting these indirect expenses from the 15% level of the last 25 years by half, with no effect on the quality of care actually received. Sounds good to me! If we can do it, it certainly seems worth doing. But with health care spending rising at about 4% per year, these cost reduction savings would be cancelled out in about two years--at which point we would face exactly the same health care cost problem that we do now. This is of course not an argument against finding ways to cut health care administrative costs. But it suggests that such changes are only a short-term palliative for the long-term of health care costs. It's certainly not going to get the US from spending 18% of GDP on healthc are to 11%.

The US pays more for health care compared with other countries not because the US is sicker, but because the US pays higher prices for health care services. The report notes: "For example, a 2018 Journal of the American Medical Association (JAMA) study concluded that the major drivers of the increase in health care costs were due to the `prices of labor and goods, including pharmaceuticals, and administrative costs.' They also noted that utilization rates in the United States were similar to those in other countries."

The specific study is "Health Care Spending in the United States and Other High-Income Countries," by Irene Papanicolas, Liana R. Woskie, and Ashish K. Jha (JAMA, March 13, 2018). From the "findings of that study:
The US did not differ substantially from the other countries in physician workforce (2.6 physicians per 1000; 43% primary care physicians), or nursing workforce (11.1 nurses per 1000). The US had comparable numbers of hospital beds (2.8 per 1000) but higher utilization of magnetic resonance imaging (118 per 1000) and computed tomography (245 per 1000) vs other countries. The US had similar rates of utilization (US discharges per 100 000 were 192 for acute myocardial infarction, 365 for pneumonia, 230 for chronic obstructive pulmonary disease; procedures per 100 000 were 204 for hip replacement, 226 for knee replacement, and 79 for coronary artery bypass graft surgery). Administrative costs of care (activities relating to planning, regulating, and managing health systems and services) accounted for 8% in the US vs a range of 1% to 3% in the other countries. For pharmaceutical costs, spending per capita was $1443 in the US vs a range of $466 to $939 in other countries. Salaries of physicians and nurses were higher in the US; for example, generalist physicians salaries were $218 173 in the US compared with a range of $86 607 to $154 126 in the other countries.
This report from Kaiser Society of Actuaries and Kaiser Foundation the is about setting the stage for further discussion, not about concrete recommendations. While such discussions are certainly needed, I confess that the hints about possible solutions don't fill me with great hope. There's talk about how future health care technologies might be cheaper and money-saving, rather than expensive and expenditure-increasing. Maybe! There's talk about how certain kinds of budgeting and incentives might focus more on improving health outcomes, and thus reduce the need for care. Sounds good!

But I feel as if I've been hearing similar arguments for several decades, about how managed care would alter incentives of health care providers, and new technologies might help drive down costs. Across the high-income countries, there does seem to have been slower growth in the rate of health care spending starting back around 2005.  But with all of that said, the fact remains that the US is spending 18% of GDP on health care.

As health care economists like to note, every dollar of US health care spending is income to someone. Any steps that reduce the income received by someone will lead to protests. In a broad social sense, reducing health care spending from 18% to 11% of GDP would involve a very large shift of (mostly) well-paid workers to other jobs, with industries that provide supplies for health care receiving less revenue, and facilities devoted to health care being shifted to other uses. The build-up of US health care spending to 18% of GDP has taken decades, and a substantial reduction from that level will involve disruptive and controversial changes. 

Wednesday, February 6, 2019

Some Puzzles About Asset Returns in the Long Run

It can be hard to draw broad lessons about macroeconomics from the experience of one country alone, or from the experience of one or two recessions. Thus, a group of researchers including Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor have been working to compile macroeconomic and financial data for 16 high-income countries going back to 1870.  Alan Taylor provides a readable overview of several puzzles that emerge from the long-run financial data in "The Rate of Return on Everything" (NBER Digest, December 2018, pp. 20-23).

(The detailed research behind this short article is available as National Bureau of Economic Research Working Paper #24112: Ò. Jordà, K. Knoll, D. Kuvshinov, M. Schularick, and A. Taylor, "The Rate of Return on Everything, 1870–2015," December 2017. It's also available as a Centre for Economic Policy Research Discussion Paper #12509: Jordà, O, K Knoll, D Kuvshinov, M Schularick, and A M Taylor (2017), “The Rate of Return on Everything, 1870–2015.” A short readable overview of the work that is very similar to the version I'm referring to here, with the same title but listing  Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan Taylor as the authors appeared at the VOX website on January 2, 2018).

#1 The Housing Puzzle

In general, economists would expect that assets with more risk--that is, more likely to rise or fall over time--will tend to have higher returns on average. From the standpoint of investors, the higher returns are needed to make up for the higher risk. This logic suggests that over the long run, a risky asset with volatile prices like corporate stock should have a higher average rate of return than a less risky asset with less volatile prices like housing. But that doesn't seem to be true. The blue line shows returns to housing, while the black line shows returns to corporate stock across the 16 countries in this sample.. Corporate stock is more volatile, but the average rates of return are quite similar.

Figure1

Why might this pattern hold true? One possibility is that the risks for housing are higher than they at first appear, because it's harder to diversify the risks of owning housing, and perhaps also because it's harder to buy and sell housing quickly or in incremental chunks when prices change. But these factors don't seem nearly enough to explain the housing puzzle.

#2 The "Safe Rate" Puzzle

A lot of theories in finance and macroeconomics start with idea of a "safe" investment that pays a low rate of return but also has low risk. A common example would be investing in US Treasury debt, where the risk of default is near-zero. The theory then discusses how the safe assets might be combined with riskier assets. The puzzle is that "safe" assets like government debt actually can have quite volatile rates of return, once factors like inflation are taken into account. Here's a figure showing international returns on government debt.
Figure2
For a concrete example, think about US experience since the 1970s. When inflation went way up in the 1970s, it mean that those who were holding government debt paying a low fixed rate were experiencing negative real returns for a time. The nominal rates paid on government debt rose by the early 1980s, but then when inflation declined substantially, those holding the "safe" asset for a time had substantially positive real returns for a time. Since then, a combination of declining nominal interest rates and low inflation have meant a steady decline in the real rate of return on "safe" assets. In real terms, the "safe" rate doesn't look all that safe.

Indeed, if you look at the "risky" assets like housing and corporate stock, but focus on moving averages over any given ten-year period rather than annual returns, the returns on the "risky" assets actually look rather stable.

#3 The r > g Question

If wealthy people can invest and receive a rate of return r, while the economic grows at a slower rate g, then wealth might grow faster than the economy over time (at least if wealthy people don't spend all of the returns on wealth), leading to greater inequality of wealth. This was a common interpretation of the work of Thomas Piketty in Capital in the Twenty-First Century on causes of income and wealth inequality a few years back. The findings here are that returns on risky assets like stocks and housing are often twice as large as rates of economic growth, or more.

But interestingly, Piketty himself doesn't view this r>g dynamic as central to the processes that generate wealth inequality. In an article her wrote for the Winter 2015 issue of the Journal of Economic Perspectives, "Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century," Piketty commented:
"[T]he way in which I perceive the relationship between r > g and wealth inequality i soften not well-captured in the discussion that has surrounded my book—even in discussions by research economists. ... I do not view r > g as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century. ... I certainly do not believe that r > g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, for example, the supply and demand of skills and education.  ...  The gap between r and g is certainly not the only relevant mechanism for analyzing the dynamics of wealth inequality. As I explained in the previous sections, a wide array of institutional factors are central to understanding the evolution of wealth. Moreover, the insight that the rate of return to capital r is permanently higher than the economy’s growth rate g does not in itself imply anything about wealth inequality. Indeed the inequality r > g holds true in the steady-state equilibrium of most standard economic models ..."
What are some of the main factors that affect the rise or fall of wealth inequality over time? Examples would include taxes on wealth, the extent to which wealth is saved or consumed, and even the birth and death rates of the population, which affects how long concentrations of wealth will stay together and how many slices they will be divided into when passed to a new generation. There are questions about the extent to which whether the new fortunes being created in businesses around the globe will displace earlier fortunes, and whether the new fortunes will be long- or short-lived. There are also events of history like World Wars, and events of politics like surges of populist sentiment. For more on these topics, see "Piketty and Wealth Inequality" (February 23, 2015), or the four-paper symposium on these issues in the Winter 2015 issue of the Journal of Economic Perspectives.

Tuesday, February 5, 2019

Why Did Simon Kuznets Want to Leave Military Spending out of GDP?

Simon Kuznets (Nobel 1971) usually gets the credit for doing as much as anyone to organize our modern thinking about what should be included in GDP, or left out. But I had not known that Kuznets apparently argued for leaving military spending out of GDP, on the grounds that it wasn't actually "consumed" by anyone, but should instead be treated as an intermediate input that supported production and consumption. Here's how Hugh Rockoff tells the story in his essay, "On the Controversies behind the Origins of the Federal Economic Statistics," in the Winter 2019 issue of the Journal of Economic Perspectives. [Full disclosure: I work at JEP as Managing Editor.]  Rockoff writes:
Military spending presented another problem. In one of his last discussions of national income and product before US entry in World War II, Kuznets (1941, pp. 19–20) explained that his estimates included “dreadnoughts, bombing planes, poison gas, and patent medicines because they are rated economic goods in our country today,” even though they “might well be considered worthless and even harmful” in a society organized differently. In a footnote, Kuznets (p. 31, fn. 5) used an analogy with private spending to buttress his case for including military expenditures: “If the activities of the private police used by many large corporations are productive, why not those of the municipal police? And if of the domestic police, why not of the international police, i.e., the armed forces of the nation?” During World War II, however, Kuznets (1945) modified his thinking. He argued that military spending should be counted in national product during a time of total war, but it should be excluded during peacetime because military spending was then an intermediary good for producing a flow of consumption to consumers. Other economists, including decisively those at the Department of Commerce, thought otherwise (Gilbert, Staehle, Woytinsky, and Kuznets 1944).
A number of economists, however, have found Kuznets’s concept of a Peacetime National Income to be attractive. Higgs (1992), for example, argued that the then-current interpretation of the impact of World War II on the American economy, that it created unprecedented prosperity, was reversed when one used Kuznets’s peacetime concept rather than the conventional measure. Higgs even took exception to Kuznets’s decision to include some military durables such as aircraft in investment because Kuznets thought that they could later be turned to peacetime purposes. 
In retrospect, a number of concerns weighed against adopting Kuznets’s concept of peacetime national product. One reason, as Coyle (2014, p. 20) suggests, was the rise of Keynesian economics. In principle, one could use Kuznets’s peacetime version of national product to analyze the macroeconomy, but the conventional measure fit more smoothly into the simple Keynesian model taught to a generation of economics students in Samuelson and other textbooks. Perhaps the most important reason for rejecting Kuznets’s concept, however, was the Cold War. In his famous study of productivity, Kendrick (1961, p. 25) chose to include all defense spending in his estimates of national product partly on the grounds that “national security is at all times [Kendrick’s italics] a prime objective of economic organization.” In political terms, excluding national defense from national product would create the appearance that the government’s statistical agency was siding with the critics of America’s defense budget. Of course, no one was required, as Kuznets had pointed out, to use only one measure of aggregate product. To the contrary, Kuznets thought that it would be best to produce a series of measures, some specialized for one purpose and some for another. But as we have learned, public attention does tend to focus on a single measure of national product, so the decision to ignore Kuznets’s peacetime concept may have had important consequences.
I find myself in agreement with the views of Kuznets expressed back in 1941, that if private security guards and municipal police are in GDP, the military should be, too.

But more broadly, the dispute serves as a useful reminder that GDP includes some categories of expenditures that society would have preferred not to make. For example, GDP includes all measures for home security and corporate security--not just guards but also locks, bars, and electronic measures. In addition, GDP includes cleaning up after pollution spills and natural disasters, although it would certainly have been preferable if such events had not happened in the first place. It would also be socially beneficial if people got more exercise and at healthier diets, and as a result a substantial proportion of health care spending didn't need to happen.

For other comments on the relationship between GDP and social welfare, readers might be interested in the well-known comments from "Robert Kennedy on the Shortcomings of GDP in 1968" (January 30, 2012). My own sense is that economists are well-aware of the shortcomings of GDP--indeed, probably better aware of the shortcomings than many critics. But economists also point out that on a wide array of dimensions, people who live in societies with higher GDP tend to live better lives. For samples of these arguments, see "Why GDP Growth is Good" (October 11, 2012)  and "GDP and Social Welfare in the Long Run" (April 6, 2015).

Monday, February 4, 2019

Why Have Other Countries Been Dropping Their Wealth Taxes?

A wealth tax is what it sounds like: a tax imposed not on income, but on wealth. The standard economic definition of wealth includes both nonfinancial assets like real estate and financial assets like stocks and bonds. Thus, a wealth tax doesn't care if the value of someone's wealth went up or down in the last year/ It is not a tax on the transfer of wealth to others, like an inheritance tax or a gift tax. It is just imposed on the amount of wealth.

In the US, property taxes are a cousin of a part of a broader wealth tax, in the sense that they are imposed annually on the value of a property, whether the value rises or falls. But they are not at true wealth tax in the sense that they don't differentiate between someone who own their home debt-free--and thus all the value of the home is wealth--and someone who is still paying off the mortgage, where only the equity you have in your home is wealth. The inheritance tax is also a form of a wealth tax.

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: "Overall ... from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes."

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth. Here's a table showing how much wealth is exempt from the wealth tax in European countries. Clearly, most countries with such taxes were applying them to wealth well below $50 million.

It's interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: "In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland ... Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries ..." However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren't worth the bother. In addition, it suggests that a US wealth tax which doesn't kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

Why do wealth taxes imposed on what seem to be quite low levels of wealth collect so little revenue in various European countries, especially during the last few decades when high-wealth individuals as a group have done pretty well? The answer seems to be that when countries impose a wealth tax, they often typically create a lot of exemptions for certain kind of wealth that aren't covered by the tax. Each of these exemptions has a reasonable-sounding basis.  But every exception also creates a potential loophole.

For example, a number of common exemptions are based on "liquidity" problems, which in this context refers to the idea that we don't want people to have to sell their homes to pay the wealth tax, and we don't want family businesses or farms that are maybe hitting a tough patch to have to be sold off because of the wealth tax. Thus, many European countries exempt a primary residence from the wealth tax (and instead apply a property tax).

Countries also often exempt the value of a business in which you are actively working, which of course means a potentially voluminous set of rules for what "actually working" means. As the OECD notes: "For the business asset exemption to apply, rules typically require that real economic activities are being performed (possibly excluding activities such as the management of movable or fixed assets, e.g. Spain), that the taxpayer performs a managing role, that income derived from the activity is the main source of the taxpayer’s revenue and/or that the taxpayer owns a minimum percentage of shares in the company (e.g. 25% in France and Sweden; 5% in Spain)."

Another common exemption is that wealth tax is usually not applied to the value of pensions and retirement savings. One can sympathize with this, but also recognize that it leads to potential issues. As the OECD notes: "Pension assets typically get full relief under net wealth taxes. ... However, this creates inequities between different taxpayers, raises fairness concerns, and creates tax planning opportunities. .... "

What other incentives does a wealth tax create? Here are some examples that often are not included int he discussion:

1) While we often think of a wealth tax as being applied to those who have already "made it" and accumulated a fortune, it's worth remembering that when a small- or medium-sized business is trying to get established, or going through hard times, it may lead to a situation where the overall value of the asset is substantial, but profits may be near-zero or even negative for a time. But at least in theory, a wealth tax would still be owed. As the OECD report notes:  
"Under a net wealth tax, however, if income is zero or negative, the tax liability will still be positive if the capital value of the assets remains positive. In practice, new entrepreneurs which tend to generate low, or even negative, profits in their first few years of operation would still face a wealth tax liability. Thus, a heavy net wealth tax which is unlinked to income might discourage entrepreneurship relative to an income tax with (perfect) loss offset."
2) A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial. The OECD writes: "[D]ebt deductibility provides incentives to borrow and can encourage tax avoidance. If the wealth tax base is narrow, taxpayers will have an incentive to avoid the tax by borrowing and investing in exempt assets or – if debt is only deductible when incurred to acquire taxable assets – taxpayers will have an incentive to invest part of their savings in tax-exempt assets and finance their savings in taxable assets through debt." 

3) To get a fair picture of a wealth tax, one needs to look at it in the context of all the other taxes that exist, along with different situations that arise. It's quite possible for there to be situations where when the wealth tax is added, someone who saves more will actually reduce their wealth. The OECD notes: "In France and Spain, METRs [marginal effective tax rates] reached values above 100%, which means that the entire real return is taxed away and that by saving people actually reduce the real value of their wealth." Indeed, France recently decided to apply its wealth tax just to certain kinds of property wealth, not financial wealth, for this reason.  Indeed, many wealth taxes have provisions that if the combined tax burden gets too high, then the wealth tax gets scaled back. Again from the OECD : 
"Ceiling provisions or tax caps are common features of net wealth taxes. These often consist in setting a limit to the combined total of net wealth tax and personal income tax liability as a maximum share of income. They are used to prevent unreasonably high tax burdens and liquidity constraints requiring assets to be sold to pay the net wealth tax. In France, the wealth tax ceiling (often referred to as the “bouclier fiscal”) limits total French and foreign taxes to 75% of taxpayers’ total income. If the percentage is exceeded, the surplus is deducted from the wealth tax. In Spain, the aggregate burden of income tax and net wealth tax due by a resident taxpayer may not exceed 60% of their total taxable income."
4) A wealth tax is typically at a fairly low rate, like 1-2%, in recognition of the fact that it will be imposed every year. But if a wealthy person is investing in a way that has low risk and low returns, this wealth tax could completely swallow up low return,  while having no effect on higher returns. In general, setting up a situation where people receive no gain from saving is not usually regarded as a good set of incentives. The OECD writes:
"[A] tax on the stock of wealth is equivalent to taxing a presumptive return but exempting returns above that presumptive return. Where the presumptive return is set at the level of or at a level close to the normal - or risk-free – return to savings, a wealth tax is economically equivalent to a tax on the normal return to savings, which is considered to be inefficient. Indeed, the taxation of normal returns is likely to distort the timing of consumption and ultimately the decision to save, as the normal return is what compensates for delays in consumption. As discussed below, it is also unfair that the wealth tax liability does not vary with returns, which implies that the effective wealth tax burden decreases when returns increase."
On the other side, it is sometimes argued that a wealth tax will encourage the wealthy to make more productive use of their wealth:
"For instance, if a household owns land which is not being used and therefore does not generate income, no income tax will  be payable on it. However, if a wealth tax is levied, the household will have an incentive to make a more productive use of their land or to sell it to someone who will ... The argument here is that wealth taxes do not discourage investment per se but discourage investments in low-yielding assets and reinforce the incentives to invest in higher-yielding assets because there is an additional cost to holding assets, which is not linked to the return they generate."
5) A wealth tax will encourage the spawning of ownership structures where people control assets, but do not technically "own" them. A common example is when assets are owned in a trust, or some kind of nonprofit. The possibilities for controlling and benefiting from wealth without technically "owning" it are even great for assets that can be held in other countries across the international economy. If there is a heaven for tax lawyers, it's a place where they get to sit around and invent legal arrangements for shielding wealth. 

6) The OECD notes: "Human capital is always exempt under net wealth taxes. This results from a number of considerations, including the fact that human capital is very difficult to value, that it is not
directly transferrable or convertible into cash, and that there is uncertainty about the
durability of its value. Therefore, a wealth tax lowers the net return on real and financial assets relative to the returns on investments in human capital. Thus, wealth taxes encourage investment in human capital, which may in turn have positive effects on growth. Human capital is a critical driver of long-run economic growth. This implies that a wealth tax may be less harmful to economic growth than commonly believed as it can encourage a substitution from physical to human capital formation ... "

7) A wealth tax may not seem especially fair if applied across people who started in similar circumstances. As one example, imagine two adults who split a large inheritance. One heir spends the money. The other heir tries to invest, with some success, in creating new technology and businesses and jobs. The spender depletes the inheritance and thus avoids the wealth tax. More broadly, consider wealth from a variety of sources: inherited financial wealth, inheriting a family business, inheriting a family-owned piece of property, starting and running a business, investing in businesses run by others, investing in property that increases in value over time, wealth from having a patent on an invention, wealth from producing a book or music or movie with high sales. A wealth tax treats all of these the same. 


8) The practicalities of imposing a wealth tax can be nontrivial. It means updating the value of assets and debts every year. If the assets are something that is bought and sold in financial markets, like shares of stock, then updating the value is easy. But updating the value of an expensive house or piece of property on an annual basis isn't easy. Updating the value of art or jewelry owned by a wealthy person isn't easy. Updating the value of a privately owned business isn't easy. Updating the current value of assets held in other countries can be hard, too In general, it's a lot easier to track flows of income than it is to measure changes in asset values.  

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals. Many of those who favor a wealth tax tend to favor a more European-style capitalism (and no, I don't think of any country in western Europe as "socialist") that places a higher value on economic equality. But when those who favor your goal of greater economic equality have been steadily deciding that the wealth tax isn't worth the trouble, and that other policy tools are more effective in reaching the goal, it's probably useful to pay attention. 

Saturday, February 2, 2019

58 Episodes of Hyperinflation (Venezuela is #23)

Steve Hanke has devoted considerable effort to building up data on hyperinflations during the last century or so. He offers a quick overview of this work in Forbes (January 20, 2019). Below is his list of hyperinflations. When it comes to Venezuela, he writes:
Now, let’s turn to the world’s only current hyperinflation: Venezuela. It ranks as the 23rd most severe. Today, the annual rate of inflation is 120,810%/yr. While this rate is modest by hyperinflation standards, the duration of Venezuela’s hyperinflation episode, as of today, is long: 27 months. Only four episodes of hyperinflation have been more long-lived.
Here's the table of all 58 hyperinflations:
For those who want more, here's an earlier discussion of "Hyperinflation and the Venezuela Example" (April 28, 2016). Here's a discussion of "Hyperinflation and the Zimbabwe Example" (March 5, 2012). And I offered an earlier discussion of the list from Hanke and Krus in "A Systematic List of Hyperinflations" (August 21, 2012).

Friday, February 1, 2019

The Puzzle of the US Productivity Slowdown

In the long-run, the average standard of living in an economy is determined by the average productivity of its workers. For example, Paul Krugman started Chapter 1 of his 1990 book, The Age of Diminished Expectations, by stating: "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

Thus, it matters a lot that US productivity growth slowed down back around 2005, even before the start of the Great Recession, and that we don't really understand why. The Congressional Budget Office laid out the issues in its recent report The Budget and Economic Outlook: 2019 to 2029 (January 28, 2019). CBO pointed out that productivity growth--which it refers to by its more formal moniker of TFP for "total factor productivity"--seems to be higher or lower for periods of some years, with abrupt transitions between these periods.
"Over longer periods, however, years of comparatively steady TFP growth tend to be followed by rather abrupt transitions to years with steady but substantially different growth. For example, estimated trend growth in TFP remained  relatively strong in the 1950s and 1960s, slowed considerably from the early 1970s to the mid-1990s, and resurged in the late 1990s and early 2000s. Around 2005, a few years before\ the recession and financial crisis that began in 2007, TFP growth again slowed in many industries and throughout the international economy. In CBO’s estimate, TFP growth in the domestic nonfarm business sector was only about one-third as rapid during the 2006–2017 period as it had been from 1996 to 2005."
In the aftermath of the Great Recession, CBO has been scaling back its productivity forecasts. The top line show the CBO productivity forecasts in 2012. The other lines show how the forecasts were reduced in 2014, 2016, 2018, and now in 2019.


Why is US productivity growth slowing down? CBO is forthright in admitting: "[E]xtensive research has failed to uncover a strong, compelling explanation either for the slowdown or for its persistence ..." The report runs through a number of potential explanations, before knocking each one on the head.

Is the productivity slowdown a matter of measurement issues?
"Even though mismeasurement of economic phenomena is widespread and persistent, measurement issues do not appear to have been substantially worse since 2005 than they were in the past and probably account for at most a small portion of the slowdown."
Is the productivity slowdown a result of slower growth feeding back to reduced productivity growth?
"The slower growth of the labor force and of aggregate demand in the aftermath of the recession resulted in relatively modest demand for capital investment, slow turnover of capital stock, and slow introduction of new technologies in new plants and equipment. Nevertheless, there is little evidence of a backlog of technology that exists but is not raising output and productivity through its effect on capital stock, which suggests that slower economic growth did not feed back strongly into TFP ...
Is it a result of less human capital for US workers, either as a result of less experience on the job or reduced growth in education?
"Highly skilled and well-educated baby boomers are retiring, and the educational attainment of younger cohorts only modestly exceeds that of their predecessors—two demographic effects that could be restraining TFP growth. Higher-skilled workers tend to continue working longer than their predecessors, however, and younger cohorts made especially strong gains in educational attainment during the recession and the ensuing slow recovery. Both developments have tended to improve the average skill level of the aggregate labor force. As a consequence, growth of the estimated quality of the aggregate labor force since 2005 has been only moderately slower than growth over the preceding 25 years, and that slowdown has played at most a minor role in the overall slowdown in TFP growth."
Is the problem one of overregulation?
"Declining dynamism in many industries, possibly exacerbated by increasing regulatory constraints, could be contributing to slower growth in TFP. Regulatory restrictions on homebuilding in denser, high-productivity urban regions could also be slowing TFP growth. Such problems have been developing slowly over time, however, and are difficult to associate with an abrupt slowdown in TFP growth around 2005."
Is the scientific potential for long-term innovation declining?
"Some researchers believe that long-term innovation may be slowing as well and that the economy is `running out of ideas.' The costs of research and innovation are increasing, they argue, and the resulting new ideas are not as economically significant as past innovations. Again, no evidence exists of an abrupt change around 2005 connected to such developments. Moreover, other, more optimistic researchers conclude that the pools of potential innovators and the potential market for innovative products are now global, that research tools have greatly improved and communication of innovations has become much more rapid, and that major advances in technology can continue to be expected in the future, though they may diffuse through industry rather slowly."
When it comes to productivity growth, the great irony in our public discourse is that it's common to hear concerns that there is likely to be both too little of it and too much of it. The concern over too little productivity growth is that without productivity growth we won't have the economic strength both to offer job opportunities and rising wages to American workers--along with having the economic strength to devote resources to environmental protection, health and education, assisting the poor, and other issues. The concern over too much productivity growth is that a combination of robots and artificial intelligence will be so ultra-productive that they will greatly diminish the number of jobs for humans.

Of course, the scenarios of no-productivity-growth and the ultra-productivity-growth are not both going to happen. Personally, I'm considerably more worried about the the problems of slow growth.

Thursday, January 31, 2019

Winter 2019 Journal of Economic Perspectives Available Online

I was hired back in 1986 to be the Managing Editor for a new academic economics journal, at the time unnamed, but which soon launched as the Journal of Economic Perspectives. The JEP is published by the American Economic Association, which back in 2011 decided--to my delight--that it would be freely available on-line, from the current issue back to the first issue. Here, I'll start with the Table of Contents for the just-released Winter 2019 issue, which in the Taylor household is known as issue #127. Below that are abstracts and direct links for all of the papers. I may blog more specifically about some of the papers in the next week or two, as well.

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Symposium on Women in Economics
"Women in Economics: Stalled Progress," by Shelly Lundberg and Jenna Stearns
Women are still a minority in the economics profession. By the mid-2000s, just under 35 percent of PhD students and 30 percent of assistant professors were female, and these numbers have remained roughly constant ever since. Over the past two decades, women's progress in academic economics has slowed, with virtually no improvement in the female share of junior faculty or graduate students in decades. Little consensus has emerged as to why, though there has been a renewal of widespread interest in the status and future of women in economics and of the barriers they face to professional success. In this paper, we first document trends in the gender composition of academic economists over the past 25 years, the extent to which these trends encompass the most elite departments, and how women's representation across fields of study within economics has changed. We then review the recent literature on other dimensions of women's relative position in the discipline, including research productivity and income, and assess evidence on the barriers that female economists face in publishing, promotion, and tenure. While differences in preferences and constraints may directly affect the relative productivity of men and women, productivity gaps do not fully explain the gender disparity in promotion rates in economics. Furthermore, the progress of women has stalled relative to that in other disciplines in the past two decades. We propose that differential assessment of men and women is one important factor in explaining this stalled progress, reflected in gendered institutional policies and apparent implicit bias in promotion and tenure processes.
Full-Text Access | Supplementary Materials


"Variation in Women's Success across PhD Programs in Economics," by Leah Boustan and Andrew Langan
We document wide and persistent variation in women's representation and success across graduate programs in economics. Using new data on early career outcomes for recent graduates, including first job placement, publications, and promotion, we rank (anonymized) departments on outcomes for women relative to men graduating from the same program. We then conduct interviews with faculty and former students from five programs with better and worse relative outcomes. We find that departments with better outcomes for women also hire more women faculty, facilitate advisor-student contact, provide collegial research seminars, and are notable for senior faculty with awareness of gender issues. We offer our qualitative evidence as the first step in learning about "what works" in expanding women's representation in economics.
Full-Text Access | Supplementary Materials

"Fixing the Leaky Pipeline: Strategies for Making Economics Work for Women at Every Stage," by
Kasey Buckles

While women comprise over half of all undergraduate students in the United States, they account for less than one-third of economics majors. From there, the proportion of women at each stage of the academic tenure track continues to decrease, creating a "leaky pipeline." In this paper, I provide a toolkit of interventions that could be implemented by individuals, organizations, or academic units who are working to attract and retain women students and faculty at each stage of this pipeline. I focus on smaller-scale, targeted interventions that have been evaluated in a way that allows for the credible estimation of causal effects.
Full-Text Access | Supplementary Materials

Symposium on Financial Stability Regulation
"Financial Regulation: Still Unsettled a Decade after the Crisis," by Daniel K. Tarullo
A decade after the darkest moments of the financial crisis, both the US financial system and the legal framework for its regulation are still in flux. The post-crisis regulatory framework has made systemically important banks much more resilient. They are substantially better capitalized and less dependent on runnable short-term funding. But the current regulatory framework does not deal effectively with threats to financial stability outside the perimeter of regulated banking organizations, notably from forms of shadow banking. Moreover, with the political tide having for the moment turned decisively toward deregulation, there is some question whether the resiliency improvements of the largest banks will be preserved. This article assesses the accomplishments, unfinished business, and outstanding issues in the post-crisis approach to prudential regulation.
Full-Text Access | Supplementary Materials


"Prone to Fail: The Pre-crisis Financial System," by Darrell Duffie
The financial crisis that began in 2007 was triggered by over-leveraged homeowners and a severe downturn in US housing markets. However, a reasonably well-supervised financial system would have been much more resilient to this and other types of severe shocks. Instead, the core of the financial system became a key channel of propagation and magnification of losses suffered in the housing market. Critical financial intermediaries failed, or were bailed out, or dramatically reduced their provision of liquidity and credit to the economy. In short, the core financial system ceased to perform its intended functions for the real economy at a reasonable level of effectiveness. As a result, the impact of the housing-market shock on the rest of the economy was much larger than necessary. In this essay, I will review the key sources of fragility in the core financial system. I discuss the weakly supervised balance sheets of the largest banks and investment banks; the run-prone designs and weak regulation of the markets for securities financing and over-the-counter derivatives; the undue reliance of regulators on market discipline; and the interplay of too-big-to-fail and the failure of market discipline. Finally, I point to some significant positive strides that have been made since the crisis: improvements in the capitalization of the largest financial institutions, a reduction of unsafe practices and infrastructure in the markets for securities financing and derivatives, and a significantly reduced presumption that the largest financial firms will be bailed out by taxpayer money in the future. But I will also mention some remaining challenges to financial stability that could be addressed with better regulation and market infrastructure.
Full-Text Access | Supplementary Materials

"Would Macroprudential Regulation Have Prevented the Last Crisis?" by David Aikman, Jonathan Bridges, Anil Kashyap and Caspar Siegert
How well equipped are today's macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a macroprudential regulator would need to implement policies to tackle vulnerabilities from financial system leverage, fragile funding structures, and the build-up in household indebtedness. We specify and calibrate a package of policy interventions to address these vulnerabilities-policies that include implementing the countercyclical capital buffer, requiring that banks extend the maturity of their funding, and restricting mortgage lending at high loan-to-income multiples. We then assess how well placed are two prominent macroprudential regulators, set up since the crisis, to implement such a package. The US Financial Stability Oversight Council has not been designed to implement such measures and would therefore make little difference were we to experience a rerun of the factors that preceded the last crisis. A macroprudential regulator modeled on the UK's Financial Policy Committee stands a better chance because it has many of the necessary powers. But it too would face challenges associated with spotting build-ups in risk with sufficient prescience, acting sufficiently aggressively, and maintaining political backing for its actions.
Full-Text Access | Supplementary Materials

Symposium on Public Provision of Economic Data
"The Value of US Government Data to US Business Decisions," by Ellen Hughes-Cromwick and Julia Coronado
The US government is a major producer of economic and financial data, statistics, analysis, and forecasts that are gathered, compiled, and published as public goods for use by citizens, government agencies, researchers, nonprofits, and the business community. There is no market transaction in the publication and dissemination of these government data and therefore no market-determined value. The purpose of this paper is to outline and augment our understanding of the value of government data for business decision-making. We provide an overview of the topic, including results from government reports and a private sector survey. We then provide concrete examples of how these government data are used to make business decisions focusing on three sectors: automotive, energy, and financial services. Examples of new initiatives by the federal government to open access to more data, exploiting technology advances associated with the internet, cloud storage, and software applications, are discussed. With the significant growth in the digital economy, we also include discussion and insights around how digital platform companies utilize government data in conjunction with their privately generated data (or "big data") to foster more informed business decisions.
Full-Text Access | Supplementary Materials

"On the Controversies behind the Origins of the Federal Economic Statistics," by Hugh Rockoff
Our federal economic statistics originated in the economic and political divisions in the United States and the bitter debates over economic policy they engendered at the end of the 19th century and during the world wars and Great Depression. Workers were angry because they believed that they were being exploited by robber barons who were capturing all of the benefits of economic growth, while employers were just as sure that the second industrial revolution had brought workers an unparalleled increase in real wages. Other debates centered on the effects of unrestricted immigration on wages and employment opportunities of native-born Americans, on the effects of tariffs on prices paid by consumers, on the effects of frequent financial panics on employment, and, during the world wars, on the effects of wage and price controls on the living standards of workers. Participants on all sides of these debates believed that nonpolitical and accurate statistics constructed by experts would help to win support for the policies they favored. In most cases, the development of these statistics was led by individuals, private organizations, and state governments, although the federal government eventually took over the role of producing these statistics on a regular basis. Here I provide brief histories of the origins of US statistics on prices, national income and product, and unemployment to illustrate this story.
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"Evolving Measurement for an Evolving Economy: Thoughts on 21st Century US Economic Statistics," by Ron S. Jarmin
The system of federal economic statistics developed in the 20th century has served the country well, but the current methods for collecting and disseminating these data products are unsustainable. These statistics are heavily reliant on sample surveys. Recently, however, response rates for both household and business surveys have declined, increasing costs and threatening quality. Existing statistical measures, many developed decades ago, may also miss important aspects of our rapidly evolving economy; moreover, they may not be sufficiently accurate, timely, or granular to meet the increasingly complex needs of data users. Meanwhile, the rapid proliferation of online data and more powerful computation make privacy and confidentiality protections more challenging. There is broad agreement on the need to transform government statistical agencies from the 20th century survey-centric model to a 21st century model that blends structured survey data with administrative and unstructured alternative digital data sources. In this essay, I describe some work underway that hints at what 21st century official economic measurement will look like and offer some preliminary comments on what is needed to get there.
Full-Text Access | Supplementary Materials

Articles

"Environmental Justice: The Economics of Race, Place, and Pollution," by Spencer Banzhaf, Lala Ma and Christopher Timmins
The grassroots movement that placed environmental justice issues on the national stage around 1980 was soon followed up by research documenting the correlation between pollution and race and poverty. This work has established inequitable exposure to nuisances as a stylized fact of social science. In this paper, we review the environmental justice literature, especially where it intersects with work by economists. First we consider the literature documenting evidence of disproportionate exposure. We particularly consider the implications of modeling choices about spatial relationships between polluters and residents, and about conditioning variables. Next, we evaluate the theory and evidence for four possible mechanisms that may lie behind the patterns seen: disproportionate siting on the firm side, "coming to the nuisance" on the household side, market-like coordination of the two, and discriminatory politics and/or enforcement. We argue that further research is needed to understand how much weight to give each mechanism. Finally, we discuss some policy options.
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"Economists (and Economics) in Tech Companies." by Susan Athey and Michael Luca
As technology platforms have created new markets and new ways of acquiring information, economists have come to play an increasingly central role in tech companies-tackling problems such as platform design, strategy, pricing, and policy. Over the past five years, hundreds of PhD economists have accepted positions in the technology sector. In this paper, we explore the skills that PhD economists apply in tech companies, the companies that hire them, the types of problems that economists are currently working on, and the areas of academic research that have emerged in relation to these problems.
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"Parag Pathak: Winner of the 2018 Clark Medal." by Ariel Pakes and Joel Sobel
The American Economic Association awarded Parag Pathak the 2018 John Bates Clark Medal for his research on the impacts of educational policies. Both the theory and the empirical research take the constraints facing administrators seriously. As a result, Parag's research led directly to educational reforms in many large US cities and abroad. The leading example is Parag (and co-authors') research on school assignment mechanisms that led many school districts to institute fairer and more efficient procedures for allocating students to schools. The institutional detail Parag learned in working on the assignment problem led to innovative empirical work on the impacts of different types of schools, most notably of charters, which was suggestive of the characteristics of both successful schools and of the types of students who gained from being enrolled in them. Using the data generated by the new assignment rules, his recent work provides complete frameworks for the quantitative analysis of the benefits of different assignment mechanisms and has measured those benefits in New York high schools.
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"Recommendations for Further Reading," by Timothy Taylor
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