Cancelling Plans for a Robo-Apocalyse?

We know from historical experience that it's common to hear prophesies about how new automation technologies will wipe out jobs (for examples, see here,  here, here, here, and here) We also know that that the past can be an imperfect guide to the future. Leslie Willcocks offers a number of reasons to believe that claims of future job loss may be overstated in "Robo-Apocalypse cancelled? Reframing the automation and future of work debate" (Journal of Information Technology, 35:4, pp. 286-302, freely available online at present). Specifically, Willcocks offers eight "qualifiers" as to why claims of job loss from robotics, automation, and artificial intelligence are not likely to be as large as often feared. Here are is qualifiers, with a few words of explanation:  

Qualifier 1 – job numbers versus tasks and activities. 

When you look more closely at estimates that one-third or one-half of jobs will be "automated," the evidence actually tends to show that one-third to one-half of jobs will be changed in the future by use of  technology. Maybe some of those jobs will disappear, but in many other cases, the job itself will evolve, as jobs tends to do over time. Of course, it's a lot less exciting to have a headline which says: "The information technology you use at your job is going to keep changing change in ways that affect what you do at work."

Qualifier 2 – job creation from automation

An overall view of the effects of automation on jobs also needs to take into account how, over time and in the present, automation has also led to the creation of many new jobs. Lest we forget, the US unemployment rate before the pandemic hit was under 4%, which certainly doesn't look like evidence that total jobs are being reduced. 

Qualifier 3 – is technology (ever) a fire-and-forget missile?

Technology tends to phase in slowly, often more slowly than enthusiasts may predict. Willcocks writes: "Our own research suggests that implementation challenges are very real in the context of automation, especially for large organizations with a legacy of information technology (IT) investments, infrastructure and outsourcing contracts. There are also cultural, structural and political legacies that will shape the speed of implementation, exploitation and reinvention. In particular, we found in the
2017–2019 period organizations running up against ‘silo challenges’ – in respect of technologies, data, processes, skill bases, culture, managerial mindsets and organizational structures – that slow adoption considerably."

Qualifier 4 – technology: born perfect? perfectible?

"Informed sources also point to the fact that the kind of AI we have today is narrow or weak AI, able to perform a specific kind of problem or task. Nearly all refer to the reality of the Moravec Paradox, that is, the easy things for a 5-year-old human are the hard things for a machine, and vice versa ..." 

Qualifier 5 – distinctive human strengths at work

"Manyika et al. (2017) developed a highly useful (though not exhaustive) framework of 18 human capabilities needed at work, and likely to be needed in the future. These divide into sensory perception, cognitive capabilities, natural language processing, social and emotional capabilities and physical capabilities. They found that automation could perform 7 capabilities at medium to high performance, but their modelling suggests that automation tools are nowhere near able to perform the other 11 capabilities (e.g. creativity, socio-emotional capabilities) to an above human level, and that it would be anything between 15 and 50 years before many tools could. Furthermore, humans tend to use a number of capabilities in specific workplace contexts, and machines are not, and will not be good any time soon, at combining capabilities, let alone being integrated to deal with complex real-life problems ... ... In sum, too little consideration is given to distinctive human qualities that are not easily codifiable or replaceable, especially in combination, and are likely to remain vital at work. Perhaps the direction of travel should be not for replicating human strengths but for automation to be focused on what humans cannot do, or do not want to do."

Qualifier 6 – ageing populations, demographics and automation

Birth-rates have been falling around the world, populations have been aging, and the size of the workforce in many countries is either not rising much or actually declining: "Declining birth
rates and ageing populations across the G20 may well see workforce growth decline to 0.3% a year, leaving a workforce too small to maintain current economic growth, let alone meet espoused aspirational targets." The global economic future in many countries, based on demography, looks more likely to involve labor shortages than labor surpluses. 

Qualifier 7 – automation, skills and productivity shortfalls

It may be that fears over the robo-apocalyse are not so much about the rising abilities of robots as about the shortages of skills from humans. Willcocks writes: "There is an irony here in that, while many studies are predicting large job losses as a result of automation, we are also seeing skills shortages reported across many sectors of the G20 countries. These shortages are not necessarily just in areas relating to designing, developing, supporting or working with emerging digital, robotic and automation
technologies. Demographic changes, plus skills mismatches and shortages, feed into productivity issues at macro and organizational levels. Therefore, it is increasingly likely that despite the lack of attention given to the issue by most studies, major economies over the next 20 years are going to experience large productivity shortfalls even to maintain their present economic growth rates, let alone achieve their espoused growth targets. Automation and its productivity contribution may turn out to be a coping,
rather than a massively displacing phenomenon."

Qualifier 8 – exponential increases in work to be done

Information technology isn't just about automating existing work. Among other changes, it brings with it an explosion of available data, which needs to be managed, examined, stored, protected against cybersecurity threats, integrated with regulatory and legal requirements, and more. Willcocks writes: 

Consider how many organizations are self-reportedly at breaking point despite work intensification, working smarter and the application of digital technologies to date. Then reflect on how the exponential data explosion, the rise in audit, regulation and  bureaucracy and the complex, unanticipated impacts of new technologies are already interacting, and increasing the amount of work to be done, and the time it takes to get around to doing productive work. I would propose a new Willcocks Law to capture some of what is happening,  namely ‘work expands to fill the digital capacity available’. Far from the headlines, a huge if under-analysed work creation scheme may well be underway, to which automation will only be a part solution.

Taking these factors together, it is not at all obvious that artificial intelligence, information technology, and robots are going to reduce the number of jobs. Instead, it seems more plausible that they will reshape jobs, potentially both for better and for worse. 

This issue of the Journal of Information Technology includes a set of short comments on the Willcocks paper. I was especially struck by the comments by Kai Riemer and Sandra Peter  in "The robo-apocalypse plays out in the quality, not in the quantity of work" (pp. 310–315). They point out some possible negative consequences of information technology in the workplace. For example,  if the "easier" tasks are automated, then the remaining human work tasks may be more difficult and less rewarding, and it may be harder for new workers to leap up the learning curve and gain experience. Jobs may have more pressure from automated oversight, with a corresponding pressures for more intense work and reductions in personal autonomy and human interaction. Information technology may also make alternative labor market arrangements like "gig" work more common, in a way that creates a group of less-secure jobs.  

On the other side, Marleen Huysman comments in "Information systems research on artificial intelligence and work: A commentary on “Robo-Apocalypse cancelled? Reframing the automation and future of work debate” (pp. 307-309): "By developing hybrid AI, tools will become our new assistants, coaches and colleagues and thus will augment rather than automate work."

The connecting thread here is that there is little doubt that technology will affect the nature of future jobs. But instead of focusing on a robo-apocalypse of losses in the number of jobs, we would probably be better served by focusing on changes in the qualities of jobs, and in particular on improving skill levels in ways that will help more workers to treat these technologies as complements for their existing work, rather than as substitutes. 

When Hamilton and Jefferson Agreed! On Fisheries

As all of us who learn our US history from Broadway musicals know, Thomas Jefferson and Alexander Hamilton disagreed on everything. But in the aftermath the US Revolutionary War, when George Washington had become the first US president, he asked Jefferson and Hamilton to work together in creating a plan to rescue the fisheries off the New England coast, which had suffered greatly during the Revolutionary War. Jefferson and Hamilton agreed on an incentive-based plan--although for distinctively different reasons. The result of their collaboration was February 1791 "Report on the American Fisheries by the Secretary of State," produced by Jefferson but with the assistance of staff loaned to the project by Hamilton. 

Although I've seen this episode mentioned in passing in several place, the best telling of the story I've run across is by   Joseph R. Blasi in  "George Washington, Thomas Jefferson, and Alexander Hamilton and an Early Case of Shared Capitalism in American History: The Cod Fishery" (Rutgers University School of Management and Labor Relations, Working paper, April 15, 2012).

As the "Report on the American Fisheries" points out, literally dozens of European ships were catching cod of the coast of what would be come New England and Canada in the early 1500s. But during the Revolutionary War, the US fishing industry was largely destroyed. As Blasi says: The American Revolutionary War lasted from 1775-1783 during which time the British went out of their way to paralyze and destroy the important cod fishery because of its economic and its national security importance." Or as Jefferson wrote: 

The fisheries of the United States annihilated during the war, their vessels, utensils, and fishermen destroyed, their markets in the Mediterranean and British America lost, and their produce dutied in those of France, their competitors enabled by bounties to meet and undersell them at the few markets remaining open, without any public aid, and indeed paying aids to the public: Such were the hopeless auspices under which this important business was to be resumed.

George Washington first took office in February 1789. In April 1790 the state of Massachusetts requested a plan for restoring the cod industry, and Washington assigned the job to Jefferson. However, Blasi notes:

[I]t is clear from the historical record that Tench Coxe, the Assistant Secretary of the Treasury under Alexander Hamilton, was sending materials to Jefferson and serving as his lead reasearcher. It is interesting and notable that, despite his growing rivalry with Secretary of the Treasury Alexander Hamilton at this time and their deep policy conflict over Hamilton’s proposal for the first Bank of the United States and many other issues, that Hamilton’s right hand man, Tench Coxe was essentially staffing Jefferson on the fishery issue and serving as his researcher, and that essentially, both departments were cooperating on the fishery issue.

Jefferson pointed out that along with the physical destruction of fishing ships during the war, the fishing industry labored under other disadvantages. The British and French were subsidizing their fishing fleets, while imposing duties on American-caught fish. In addition, taxes imposed by the US government were hurting the fishing industry. As Blasi describes Jefferson's argument:  

Finally, the report lays out a significant disadvantage actually imposed by the young U.S. government, namely, and ironically, barriers to the industry’s development actually imposed by the young Government itself in the form of taxes and duties such as tonnage and Naval duties on the vessels and impost duties on the supplies used in the fishery production (salt, hooks, lines, leads, duck, cordage, cables, iron, hemp, and twine) and in the “nourishment” of the seamen (tea, rum, sugar, and molasses). There was also a tax levied on the coarse woolens of the fishermen and a poll tax on each of them levied by the State of Massachusetts. Jefferson adds up the taxes from duties and concludes “When a business is so nearly in equilibriuo, that one can hardly discern whether the profit be sufficient to continue it, or not, smaller sums than these suffice to turn the scale against it.” (p. 210-211) Ironically, after a war partly motivated by anti-tax fervor, America’s leading industry was being smothered in taxes and government bureaucracy.

Jefferson and Hamilton of course had quite different perspectives on the fishing industry. Jefferson saw the industry as an opportunity for small family-sized businesses. Thus, when listing in his report the advantages of the US-based fishing industry, Jefferson mentioned factors like: 

The neighbourhood of the great Fisheries, which permits our fishermen to bring home their fish to be salted by their wives and children. ... The smallness of the vessels, which the shortness of the voyage enables us to employ and which consequently require but a small capital. .... The cheapness of our vessels, which do not cost above the half of the Baltic fir vessels, computing price and duration. ... Their excellence as Sea-Boats which decreases the risk and quickens the returns.

There was also a widely held belief that the fisheries were a training ground for sailors who then might end up either in the navy or in other jobs in the shipping industry. 

Hamilton, on the other hand, viewed fisheries as part of what he hoped would be a US economic future as a manufacturing power. In his Report on the Subject of Manufactures, finalized in late 1791, he makes a brief comment on fisheries along these lines:

As far as the prosperity of the Fisheries of the United states is impeded by the want of an adequate market, there arises another special reason for desiring the extension of manufactures. Besides the fish, which in many places, would be likely to make a part of the subsistence of the persons employed; it is known that the oils, bones and skins of marine animals, are of extensive use in various manufactures. Hence the prospect of an additional demand for the produce of the Fisheries.

Jefferson's report on fisheries did not make explicit policy recommendations, but the implicit recommendation that Congress should stop burdening the industry with taxes on the inputs it used and instead consider mechanisms to support it was pretty clear. Of course, a number of shipowners of fishing vessels strongly believed that the US should also adopt a system of government bounties, paid directly to them. But the laws that emerged from the first Congress came out a little differently, including both specific legislation about the rights of workers and about profit-sharing. 

As Blasi tells the story, one motivation for the worker's rights legislation was that British fishing vessels were often offering a better deal to American fishermen. Thus, even before Jefferson's report on fisheries was released, Congress passed a law to assure better treatment of US fishermen. Blasi writes:

Ships were one of the largest collections of workers in an employee-employer relationship in the young nation so it is no surprise that First Congress passed a law on July 20, 1790 that laid out work conditions for seamen. From December 1, 1790 every master or commander of a ship had to have a written agreement before a voyage declaring the length of the voyage while every seaman had to agree to be available for the time period or there was a wage penalty. Workers had the right to one third of their wages before the voyage ended and the balance upon the completion of the voyage. The law provided a procedure by which members of the crew other than the captain could move for the repair of leaky or faulty ships, the requirement of a chest of medicines on board, and minimum per person requirements of water, salted meat, and “wholesome ship-bread. If seamen received a lower allowance then the commander had to pay them an extra day’s wages for each day of ‘short allowance.’ ” Other laws provided strict rules for keeping track of seamen as voyages ensued, for making records of seamen seized by foreign powers, and for hospital care and relief for sick and disabled seaman.

Given that many people tend to view the US version of capitalism as red in tooth and claw up basically up to the New Deal of the 1930s, or even up to the present, it's interesting to read the list of contractual rules and occupational health and safety provisions that Congress was passing in 1790. Soon after, Congress reacted to the Jefferson bill with provisions to roll back taxes that would otherwise have been owed. This was carefully not called a "bounty," but was rather an "allowance."  The law specified that an owner of a ship could not receive the allowance unless there was a written profit-sharing agreement with the crew. Blasi writes:

But, clearly, the most significant and the most interesting detail about the “bounties” and incentives is that the Federal government required in the same 1792 law that no allowances could be paid to the owner of the ship unless the ship owner had a written profit sharing agreement with all the fishermen affirming that the traditional and customary shared capitalist practice of broad profit-sharing on the entire catch itself would be honored. ... [T]he owners had to produce this written agreement when they requested payment of the their share of the allowance. So, in the end, the law insured profit sharing in two ways: both the allowance in order to encourage the industry’s revival was shared between the crew and the owners and the custom of broad-based profit sharing on the entire catch had to be honored. The owners of large cod ships were required to have these signed profit sharing agreements with the sailors before the ship left the port. The penalty to the owner was the same as the penalty for desertion of a ship. This probably the first documented case in American history where shared capitalism became the law of the land.

The New England fishing industry had had various forms of profit-sharing with the crew for some time. The idea that such agreements provided greater incentives for the crew was well-known, and such agreement were broadly accepted. But the idea that such agreements would be encouraged by the provision of government incentives to owners was one more innovation for the early United States. 

Jefferson

We have seen that the advantages of our position place our fisheries on a ground somewhat higher such as to relieve our Treasury from the necessity of giving them support, but not to permit it to draw support from them, nor to dispense the Government from the obligation of effectuating free markets for them:

 

An Economist Chews Over Thanksgiving

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

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

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

Turkey companies are what economists call "vertically integrated," which means that they either carry out all the steps of production directly, or control these steps with contractual agreements. Over time, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys. Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:

"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg capacity per hatchery in 2007.

Some decades ago, turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised while supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.

Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.

Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."

The 2014 report points out that the capacity of eggs per hatchery has continued to rise (again, references to charts omitted):

"For several decades, the number of turkey hatcheries has declined steadily. During the last six years, however, this decrease began to slow down. As of 2013, there are 54 turkey hatcheries in the United States, down from 58 in 2008, but up from the historical low of 49 reached in 2012. The total capacity of these facilities remained steady during this period at approximately 39.4 million eggs. The average capacity per hatchery reached a record high in 2012. During 2013, average capacity per hatchery was 730 thousand (data records are available from 1965 to present)."

U.S. agriculture is full of examples of remarkable increases in yields over periods of a few decades, but such examples always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time from the 2007 report.




The production of turkey is not a very concentrated industry with three relatively large producers (Butterball, Jennie-O, and Cargill Turkey & Cooked Meats) and then more than a dozen mid-sized producers. 

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

In the past, the US turkey industry has at some times suffers from outbreaks of HPAI
(Highly Pathogenic Avian Influenza): for discussion of the 2015 outbreak, see the November 17, 2015 issue of the "Livestock, Dairy, and Poultry Outlook" from the US Department of Agriculture, where Kenneth Mathews and Mildred Haley offer some details. However, this Thanksgiving a main issue for the industry is an expectation "that people will gather in smaller groups for the holidays this year is resulting in increased demand for smaller turkeys for Thanksgiving tables," which in turn is leading to lower-than-usual average slaughter weights. Apparently not everyone is a big fan of cold turkey sandwiches or of Thanksgiving, Part II, which in the Taylor household is a second meal to clear up the leftovers, usually staged Saturday or Sunday of the following weekend. 

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

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

The cost of buying the Classic Thanksgiving Dinner dropped 2% from from 2019 to 2020, The top line of the graph that follows shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The lower line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been an OK measure of the overall inflation rate.

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

Thanksgiving Origins

Thanksgiving is a day for a traditional menu, and part of my holiday is to reprint this annual column on the origins of the day.

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

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

Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as an example of unwanted and inappropriate federal government interventionism. As reported by the Papers of George Washington website at the University of Virginia.

The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”

Here's the transcript of George Washington's Thanksgiving proclamation from the National Archives.

Thanksgiving Proclamation

By the President of the United States of America. a Proclamation.

Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”

Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.

and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.

Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.

Go: Washington

Sarah Josepha Hale was editor of a magazine first called Ladies' Magazine and later called Ladies' Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here's a PDF file of the Hale's actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale's letter to Lincoln:

"You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. ... For the last fifteen years I have set forth this idea in the "Lady's Book", and placed the papers before the Governors of all the States and Territories -- also I have sent these to our Ministers abroad, and our Missionaries to the heathen -- and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. ... But I find there are obstacles not possible to be overcome without legislative aid -- that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; -- or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject ..."

William Seward was Lincoln's Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale's September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here's the text of Lincoln's Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:

Washington, D.C.
October 3, 1863
By the President of the United States of America.
A Proclamation.

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.

In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.

By the President: Abraham Lincoln
William H. Seward,
Secretary of State

The Dominance of Peoria in the Processed Pumpkin Market

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

[In honor of pumpkin pie, I'm repeating this blog published in 2017.]

The facts are clear enough. As the US Department of Agriculture points out (citations omitted):

In 2016, farmers in the top 16 pumpkin-producing States harvested 1.1 billion pounds of pumpkins, implying about 1.4 billion pounds harvested altogether in the United States. Production increased 45 percent from 2015 largely due to a rebound in Illinois production. Illinois production, though highly variable, is six times the average of the other top eight pumpkin-producing States (Figure 2).

Not only does Illinois produce more pumpkins, but a much larger share of pumpkins from this state end up being processed, rather than used fresh. The USDA reports:


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

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

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



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

What If All Jobs Were Potentially Part-time?

Some jobs in business and law seem to require exceptionally long hours and being perpetually on-call. Indeed, one main reason for the remaining wage gap between college-educated it's mostly men who end up in these jobs, while professional women are more likely to end up in careers where the work is full-time or part-time, but not extreme overtime (for discussion, see here and here). This pattern raises an obvious question: is it really so impossible to divide up these extreme overtime jobs into more than one job, like two part-time or even two full-time (but only full-time) jobs?  

Zurich Insurance UK gave it a try: specifically, the company shifted to a policy in which all jobs in the firm, right up to the top of the C-suite, were advertised within the firm as potentially part-time. The UK government has something called the Government Equalities Office which contains within it a  Behavioural Insights Team. Thus, the results of the study "Changing the default: a field trial with Zurich Insurance to advertise all jobs as part-time" was carried out by Rony Hacohen, Shoshana Davidson, Vivek Roy-Chowdhury, Daniel Bogiatzis Gibbons, Hannah Burd and Tiina Likki - the Behavioural Insights Team (September 2020). Here's a description: 

A comprehensive review of Zurich’s internal HR data on recruitment, progression and promotions revealed differences in outcomes between staff who worked full-time and those who worked part-time. The vast majority of part-time workers were women. Findings showed that, relative to full-time employees, part-time employees were 35% less likely to apply for promotions, received raises that were 1.1% lower, and received lower scores on performance and potential to progress metrics. ...

Our interviews also suggested that there was some stigma around working part-time, related to perceptions of commitment of part-time employees, and employees feared being judged for seeking to reduce their working hours. In addition, managers and employees saw part-time work as a privilege, rather than a right.

To address these concerns, we developed an intervention to normalise part-time work at Zurich, by opening all new positions to part-time work by default. The intervention was live for 12 months. ... The intervention aimed to normalise part-time work across all levels of the organisation. To achieve this, new positions at Zurich were advertised as open to part-time patterns or job-shares by default, unless the hiring manager provided a business case for why that was not possible. The intervention went live in March 2019 on Zurich’s hiring platform.

It was not possible to run the intervention as a randomised controlled trial (RCT). Therefore, we conducted a before-after analysis comparing the data from the pre-intervention period (before March 2019) with the intervention period (March 2019 - February 2020).

What happened next? 

• A significant increase of 16.4% in the overall proportion of female applicants (+6 percentage points from the baseline of 36.4% to 42.4%), as well as the proportion of applicants who did not say they were male (+3 percentage points).
• A significant increase of 19.3% in the proportion of female applicants to senior roles (+6 percentage points from the baseline of 31.1% to 37.1%).
• A significant increase of 8% in the number of part-time employees reporting that they feel they ‘belong’ at Zurich (+0.38 percentage points). ...
• There was a non-significant increase in the proportion of promotions that went to women - from 50.2% in the pre-period to 56.1% in the post-period (+5.9 percentage points).

The researchers are careful to surround this finding with appropriate caveats, but the main thrust is clear enough. Many employers expect their top employees to work extreme overtime for extreme pay. But in doing so, they end up with a large number of high-skill workers doing jobs that are below their capabilities, because those workers--often women--prefer a different work-life balance. There are some obvious benefits to an employer who replaces a worker putting in 150% of a normal work-week with two workers each doing 75% a normal week or three workers each doing 50% of a normal week. The firm can make better use of some high-skilled talent. It would have better "bench strength," so it wouldn't run the risk of one key employee getting sick or leaving the firm. If there was a short-term need for either more or less work, it could be somewhat easier to accommodate. Given the extremely high pay for the 150% workers, the combined pay for a team of part-timers could probably be less. 

One side-effect of the COVIS pandemic has been a huge rise in telecommuting, and thus in a different approach to coordinating the efforts of teams and of the workplace as a whole. In such settings, the idea that the leaders of an organization need to be the ones who physically arrive the earliest and depart the latest no longer holds true. Among the professional women I know--those with many years of business and consulting experience, often with high levels of education and MBA degrees--it's fairly common to hear of a wish for employers that would promote into jobs and roles that could be more explicitly shared by workers who don't need to commit to extreme overtime, or even to regular full-time, at least not all the time.  Thus, I find myself wondering if the Zurich Insurance experiment, even though it took place before the pandemic hit, may be a harbinger of workplace changes to come. 

Where Does Increased Revenue from Men's College Football and Basketball Go?

College sports can be readily divided into two groups: in one group, sports are an extracurricular activity mainly subsidized by the institution; in the other group, the big-revenue sports of football and men's basketball generate large and revenues far beyond the existing costs of those programs--which is money that can be spent in other ways. Craig Garthwaite, Jordan Keener, Matthew J. Notowidigdo and Nicole F. Ozminkowski examine these issues in "Who Profits From Amateurism? Rent-Sharing in Modern College Sports" (NBER Working Paper #27734, October 2020, subscription required, but a readable summary is here). 

Here's a way of dividing up the college sports landscape. Each point represents one of the 229 colleges and universities categorized as "Division I" for athletics purposes.  The horizontal axis shows the revenue received by the sports program at various universities. The vertical axis shows the share of athletic department costs that that are covered by the university from student fees, state funding, or other general funding from the university (that is, "institutional support"). The institutions fall into two groups, the red triangles and the blue circles. The red triangles have relatively low athletic department revenue, and the institution typically covers 60-80 percent of the costs of the athletic department. The blue circles have relatively high athletic department revenue, averaging $125 million per institution in 2018, and have much lower shares of "institutional support" for athletics from the rest of the university. 

The blue circles are the so-called "Power 5" schools--that is, schools in the Atlantic Coast Conference, Big Ten Conference, Big-12 Conference, Pac-12 Conference, and Southeastern Conference. It's worth noticing that even for the blue circle schools, most of their athletic departments receive institutional support--that is, the overall flow of funds is from the unversity to the athletic department, not from the athletic department to the rest of the university.  

Here are some patterns for the average "Power 5" school from 2005 to 2018.  The figure shows "net revenues" for each sport--that is, revenues minus costs.  Net revenues football have more than doubled, and net revenues from men's basketball--although much lower--have risen as well. Meanwhile, net revenue from other men's sports and from women's sports is negative and falling. To put it another way, some but not all of the gains in revenues from football and men's basketball are paying for the reduction in net revenues in the other sports. 

Garthwaite, Keener, Notowidigdo and Ozminkowski carry out various calculations. One shows that of the total revenue received by football and men's basketball, the players receive about 7 percent. For comparison, pro athletes in several sports negotiate for about 50% of total revenue. 

The authors also estimate what happens to an extra $1 of revenue raised by men's football and basketball: for example, about 31 cents of every additional $1 of revenue is reinvested in the football and basketball programs--not directly given to the players, but instead going to facilities, along with salaries of coaches and administrators. About 11 cents of every additional $1 from the big-revenue sports goes to the other sports. Although in theory it would be possible that some of the additional funds from big-revenue sports could be funneled back to the rest of the university, in practice this doesn't seem to happen. 

The authors also do some illustrative calculations about paying college athletes in the big-money sports, but of course, such calculations depend on what kinds of contracts would be allowed or disallowed, and whether public support would be the same for college sports if the teams were the result of a bidding war over high school athletes. I won't try to dig into those issues here. But I will note that if college football and men's basketball players were to receive, say, half of all the revenues they generate rather than the current 7 percent, something else in this ecosystem of college athletics will have to give way. 

Futures and Options for Farmers, But Why Not for Homeowners?

One of the difficulties in explaining about futures and options is that they can seem detached from reality--just games that rich people play with money. However, the farm sector offers some extremely practical examples of how these tools are used. Daniel Prager, Christopher Burns, Sarah Tulman, and James MacDonald explain in "Farm Use of Futures, Options, and Marketing Contracts" (US Department of Agriculture, Economic Information Bulletin Number 219, October 2020). 

I'll walk through a few of their examples, but of course most of us aren't farmers. Thus, I'll raise a question of greater relevance to many of us: Why can't homeowners (and banks and mortgage-lenders) use futures and options to hedge against the risk of large shifts in housing prices, like what occurred in the lead-up to the Great Recession of 2008? Frank J. Fabozzi, Robert J. Shiller, and Radu S. Tunaru tackle this question of why such financial instruments barely exist in . "A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?" (Journal of Economic Perspectives, Fall 2020, 34: 4, pp. 121-45).

As the USDA economists point out, farmers face a problem that they can't know in advance what prices they will receive for their crop after it is harvested. What options to farmers have to protect themselves against a fall in crop prices? 

Farmers may use on-farm strategies, such as commodity diversification, to manage such risks, and they may also draw on Federal risk management support programs, including commodity support programs, Federal crop and livestock insurance, and disaster assistance. Market mechanisms are also available to farmers who can use agricultural derivatives—such as futures and options contracts—and marketing contracts to protect against price fluctuations. These tools can help guarantee producers an established price before harvest.

The USDA report goes into some detail on  how farmers use these different approaches. For those who are a little rusty on just what the financial terms mean: 

• A futures contract is an agreement to buy or sell a commodity or an asset at a predetermined price at a specific date in the future. Futures contracts are traded on organized exchanges and are standardized by quantity, delivery date, and location. Organized futures trading is often used for major agricultural commodities, where traders can opt for futures trading as a way of hedging against price risks for a commodity. ...

• Options. Options offer the right (but do not carry the obligation) to purchase or sell an instrument at a set price, regardless of the market price at the time of sale. ...

• Marketing contracts. Marketing contracts are agreements to exchange a specified asset for a certain price on a future date. They are neither standardized nor tradeable, as futures and options are, but are customized to the needs of specific buyers and sellers. They often include features such as price adjustments for quality, and they sometimes include commodity-specific features. Marketing contracts also reduce market risk by securing a buyer and a delivery window for the farmer’s output.

• Production contracts. Production contracts are agreements under which a farmer agrees to raise livestock or crops for a contractor, which may or may not be another farm. The farmer is paid a fee for growing services, while the contractor provides key inputs and markets the product. Most input and output price risks are transferred to the contractor.

It turns out that "[s]ince the mid-1990s, between 33 and 40 percent of U.S. agricultural production has been produced under contract ..." Meanwhile, larger farms tended to be the ones who use futures and options contracts: "Among corn and soybean producers, 17 percent of midsize farms and 27 percent of large farms used futures contracts. ... Those corn and soybean farms that used futures or options hedged a substantial share of their production through such instruments. For example, while only 10 percent of all corn producers hedged using futures contracts, those that did hedged 41 percent of their corn production in 2016."

It's also important to note that that there are a number of parties who want protection against farm prices unexpectedly rising higher than expected: for example, companies that buy crops for animal feed, or to produce human food, or to produce other products using agricultural inputs, all have reason to use futures and options to protect themselves against large rises in the price of such products. 

So why can those worried about fluctuations in farm prices use financial tools to protect themselves, but those worried about fluctuations in home prices cannot easily do so? Fabozzi, Shiller, and Tunaru point out that there is a 30-year history of trying to create financial contracts based on housing prices. What are some of the issues that come up?

One is that any contract based on what the price will be in the future must specify that price very clearly. With farm products, for example, contracts are quite specific about exactly what type of corn or soybeans are involved, and there are active markets setting prices at all times. But what would an index of housing prices, adjusted for quality, look like? The answer that has emerged is to use a "repeat-sales" approach, which relies on price data from houses that have been sold more than once--and in that way offers some adjustment for the quality of the houses being sold. But creating such indexes in a way that can serve as a basis for futures and options contracts isn't a simple task: "The first lasting house price futures contract finally arrived on May 22, 2006, when the Chicago Mercantile Exchange (CME) started trading house futures contracts and options based on the family of S&P/Case-Shiller® Home Price Indices, which covered both a national composite index and 10 major cities."

Another problem that has bedeviled these markets is that lots of parties (homeowners and financial institutions) would like protection against a fall in the price of housing, but for the market to work, it needs another side--that is, it needs parties who will agreed to contracts where they will lose money if the price of housing falls. The hope here is that a broader group of economic actors who want to be fully diversified against risk, and who could look at participation in a housing prices market as part of their overall portfolio. Such players might include "mutual funds, insurance companies, pension funds and other managers of large pools of funds who desire to be fully diversified who take the other side of the real estate risk on derivatives." 

A related problem is that if these big players are going to invest in financial derivatives based on housing prices, they need a somewhat reliable way of characterizing the likely returns and risks of such an investment and how that translates into current prices of the financial instruments. To understand part of this problem, consider options or futures contracts that are based on the stock market. The value of those options and futures contracts are governed by the fact that someone can easily and quickly buy a fund that represents the actual stock market--which then governs the prices in the derivatives market. But an investor who owns financial derivatives based on housing prices cannot easily and quickly buy or sell a representative portfolio of real estate holdings, and so the rules for valuing options and futures in the context of the stock market cannot be applied directly to financial derivatives based on housing prices. 

In short, creating a market for futures and options based on housing prices has been a stop-and-start process with only limited success. There are lots of challenges here both for real-world market participants and academics. But the average homeowner has reason to root for these challenges to be resolved. There are a lot of people who might be willing to buy "down-payment insurance," which would guarantee that no matter how housing prices change in the next few years, you won't lose the amount of your down-payment. Financial arrangements like "reverse mortgages" would be much  more widespread if it was possible to hedge against falls in housing prices. Many financial crises around the world in the last few decades--including the Great Recession in the US--are linked to fluctuations in housing prices. A well-functioning futures and options market based on home prices could help both to address personal financial risk and to limit a cause of macroeconomic instability. 

Are Editors Just Failed Writers?

Robert Giroux was the editor for T.S. Eliot for many years. In "A Personal Memoir" (Sewanee Review, Winter 1966, 74:1, pp. 331-338, available via JSTOR),  Giroux tells anecdotes about knowing Eliot; indeed, for Eliot buffs, the entire issue is devoted to people talking about their interactions with Eliot. But as someone who has worked as editor of the Journal of Economic Perspectives for many years, the story that caught my eye was Eliot's response to the question of whether editors are just failed writers. Here's Giroux: 

I first met T. S. Eliot in 1946, when I was an editor at Harcourt, Brace under Frank Morley. I was just past thirty, and Eliot was in his late fifties. As I remember it he had come into the office to have lunch with Morley, who had been his close editorial colleague at Faber & Faber, and Morley discovered that he had forgotten a previous luncheon appointment for that day. Since I did not know this when Morley introduced us, I was dumbfounded when Eliot said, "Mr. Giroux, may I take you to lunch?" It was like being invited to eat with a public monument, and almost as frightening as shaking hands with the statue in Don Giovanni. I wondered what I could find to say to him.

We went across the street to the old Ritz-Carlton. It was a lovely spring day and the courtyard restaurant--I think it was called the Japanese Garden--had just been opened for the season. For some reason I was astonished at the sight of newly hatched ducklings swimming in the center pond, perhaps because they seemed to embody the odd and improbable quality the occasion had for me.

Eliot could not have found a kinder, or more effective, way of putting me at ease. As we sat down, he said, "Tell me, as one editor to another, do you have much author trouble?" I could not help laughing, he laughed in return--he had a booming laugh--and that was the beginning of our friendship. His most memorable remark of the day occurred when I asked him if he agreed with the definition that most editors are failed writers, and he replied: "Perhaps, but so are most writers."

Perhaps this comments appeals to me only as a defense of my amour propre, but I think there's also a deeper issue. Explaining is hard. It's hard in nonfiction as well as fiction. It's hard for both writers and editors. Surely, some writers fail because they are poor editors of their own early drafts.  

For some other posts on the challenges and rewards of editing, see: 

• "Stephen King: `The Editor is Always Right ... To Edit is Divine" (August 21, 2019)
• "Editor Hell," November 30, 2013
• "Albert Jay Nock on the Three Rules of Editorial Policy" (August 3, 2018)
• "I Surpass Keynes: 33 Years Plus One" (August 4, 2020)

Jane Haldimand Marcet and the "Conversations on Political Economy"

Jane Haldimand Marcet (1769-1858) was one of the most prominent and successful popularizers of science writing of her time, with books on chemistry, natural philosophy, botany, and other topics that often went through many editions.  Her 1806 book on chemistry is commonly credited with being the first chemistry textbook, and was famously praised by Michael Faraday for introducing him to the topic. Marcet also wrote the 1816 book "Conversations on Political Economy; in which the elements of that science are familiarly explained." The work was a substantial commercial success, but rather than have a woman's name listed as the author, it was published as being written "By the author of Conversations on Chemistry." 

For those who would like to know more about Marcet's life and work, Evelyn L. Forget offers a useful overview in "Jane Marcet as Knowledge Broker" (History of Economics Review, 2016, vol. 65, pp. 15-26).  Forget writes: 

Jane Marcet was a popularizer of political economy whose textbook entitled Conversations on Political Economy was first published in 1816, went through at least 14 legal editions and was translated into French, Dutch, German, Spanish and Japanese. It was received with great acclaim not only by the public but also by economists such as Jean-Baptiste Say, David Ricardo and Thomas Robert Malthus. ... Marcet was engaged in the work of the knowledge broker--creating and maintaining networks between and among economists, scientists and the larger public. Knowledge sharing was based upon the personal and social connections she facilitated by bringing together bankers, scientists, and professional economists such as Malthus, Ricardo, James Mill, and others at her home.

Forget quotes a letter from Jean-Baptiste Say to Marcet: 

"You have worked much more efficiently than I to popularize and to spread extremely useful ideas; and you will succeed Madame, since you have built on the strength of science... It is not possible to stay closer to the truth with more charm; to clothe such indisputable principles with a more elegant style. I am an old soldier who asks only to die in your light. 

Indeed, Say requested permission from Marcet to translate "sizeable passages from your excellent book," which often consisted of sections where Marcet was explaining Say's own work. Forget also quotes a comment from a letter from Thomas Malthus to Marcet: 

"I own I had felt some anxiety about the success of your undertaking, both on account of its difficulty, and its utility; and I am very happy to be able to say that I think you have overcome the first and consequently insured completely the second.... I am much obliged to you for your explanations on rents, and think you have managed some other difficult subjects remarkably well, particularly the subject of exchanges and bill merchants ..."

Marcet's books were typically in the form of conversations between Mrs. B and Caroline, and sometimes also with Caroline's sister Emily. The dialogue rarely sparkles, but as a work of pedagogy, the format allows Marcet to express doubts, uncertainties and mistakes--and then to address them. 

To offer a taste of the style, here is an excerpt from "Conversation I" between Mrs. B. and Caroline at the start of her book on political economy, which is subtitled "Errors arising from total ignorance of political economy.—advantages resulting from the knowledge of its principles. — difficulties to be surmounted in this study." The passage does contains a couple of my favorite comments: the opening speech by Caroline on how political economy is "the most uninteresting of all subjects" and the later admonition from Mrs. B. that "when you plead in favour of ignorance, there is a strong presumption that you are in the wrong." I quote here from the edition of the book available via the Online Library of Liberty. 

CAROLINE: I confess that I have a sort of antipathy to political economy.

MRS. B.: Are you sure that you understand what is meant by political economy?

CAROLINE:  I believe so, as it is very often the subject of conversation at home; but it appears to me the most uninteresting of all subjects. It is about custom-houses, and trade, and taxes, and bounties, and smuggling, and paper-money, and the bullion-committee, &c. which I cannot hear named without yawning. Then there is a perpetual reference to the works of Adam Smith, whose name is never uttered without such veneration, that I was induced one day to look into his work on Political Economy to gain some information on the subject of corn, but what with forestalling, regrating, duties, draw-backs, and limiting prices, I was so overwhelmed by a jargon of unintelligible terms, that after running over a few pages I threw the book away in despair, and resolved to eat my bread in humble ignorance. So if our argument respecting town and country relates to political economy, I believe that I must be contented to yield the point in dispute without understanding it.

MRS. B.: Well, then, if you can remain satisfied with your ignorance of political economy you should at least make up your mind to forbear from talking on the subject, since you cannot do it to any purpose.

CAROLINE: I assure you that requires very little effort; I only wish that I was as certain of never hearing the subject mentioned as I am of never talking upon it myself.

MRS. B.:  Do you recollect how heartily you laughed at poor Mr. Jourdain in the Bourgeois Gentilhomme, when he discovered that he had been speaking in prose all his life without knowing it? — Well, my dear, you frequently talk of political economy without knowing it. But a few days since I heard you deciding on the very question of the scarcity of corn; and it must be confessed that your verdict was in perfect unison with your present profession of ignorance.

CAROLINE: Indeed I only repeated what I had heard from very sensible people, that the farmers had a great deal of corn; that if they were compelled to bring it to market there would be no scarcity, and that they kept it back with a view to their own interest, in order to raise the price. Surely it does not require a knowledge of political economy to speak on so common, so interesting a subject as this first necessary of life.

MRS. B.: The very circumstance of its general interest renders it one of the most important branches of political economy. Unfortunately for your resolution, this science spreads into so many ramifications that you will seldom hear a conversation amongst liberal-minded people without some reference to it. It was but yesterday that you accused the Birmingham manufacturers of cruelty and injustice towards their workmen, and asserted that the rate of wages should be proportioned by law to that of provisions; in order that the poor might not be sufferers by a rise in the price of bread. I dare say you thought that you had made a very rational speech when you so decided?

CAROLINE:  And was I mistaken? You begin to excite my curiosity, Mrs. B.; do you think I shall ever be tempted to study this science?

MRS. B: I do not know; but I have no doubt that I shall convince you of your incapacity to enter on most subjects of general conversation, whilst you remain in total ignorance of it; and that however guarded you may be, that ignorance will be betrayed, and may frequently expose you to ridicule. During the riots of Nottingham I recollect hearing you condemn the invention of machines, which, by abridging labour, throw a number of workmen out of employment. Your opinion was founded upon mistaken principles of benevolence. In short, my dear, so many things are more or less connected with the science of political economy, that if you persevere in your resolution, you might almost as well condemn yourself to perpetual silence.

CAROLINE: I should at least be privileged to talk about dress, amusements, and such lady-like topics.

MRS. B.: I have heard no trifling degree of ignorance of political economy betrayed in a conversation on dress. “What a pity,” said one lady, “that French lace should be so dear; for my part I make no scruple of smuggling it; there is really a great satisfaction in cheating the custom-house.” Another wondered she could so easily reconcile smuggling to her conscience; that she thought French laces and silks, and all French goods, should be totally prohibited; that she was determined never to wear any thing from foreign countries, let it be ever so beautiful; and that it was shameful to encourage foreign manufactures whilst our own poor were starving.

CAROLINE: What fault can you find with the latter opinion? It appears to me to be replete with humanity and patriotism.

MRS. B.: The benevolence of the lady I do not question; but without knowledge to guide and sense to regulate the feelings, the best intentions will be frustrated. The science of political economy is  intimately connected with the daily occurrences of life, and in this respect differs materially from that of chemistry, astronomy, or any of the natural sciences; the mistakes we may fall into in the latter sciences can have little sensible effect upon our conduct, whilst our ignorance of the former may lead us into serious practical errors. ...

CAROLINE: Well, after all, Mrs. B., ignorance of political economy is a very excusable deficiency in women. It is the business of Government to reform the prejudices and errors which prevail respecting it; and as we are never likely to become legislators, is it not just as well that we should remain in happy ignorance of evils which we have no power to remedy?

MRS. B.: When you plead in favour of ignorance, there is a strong presumption that you are in the wrong.

The Super-rich and How to Tax Them

How might one define the super-rich and how might the government tax them? Florian Scheuer tackles these questions in "Taxing the superrich: Challenges of a fair tax system" (UBS Center Public Paper #9, November 2020). Also available at the the website is a one-hour video webinar by Scheuer on the subject. Those who want a more detailed technical overview  might turn to the article by Scheuer and Joel Slemrod, Taxation and the Superrich," in the 2020 Annual Review of Economics (vol. 12, pp. 189-211, subscription required).

When discussing the superrich in a US context, there are two common starting points. One is to focus on the Forbes 400, an annual list of the 400 wealthiest Americans.  Another is to focus on the very top of the income distribution--that is, not just the top 1%. but the top 0.1% or even the top 0.01%. 

On the subject of the Forbes 400, Scheuer writes: "The cutoff to make it into the Forbes 400 in 2018 was a net worth of $2.1 billion, and the average wealth in this group was $7.2 billion. The share of aggregate U.S. wealth owned by the Forbes 400 has increased from less than 1% in 1982 to more than 3% in 2018." It's worth pausing over that number for a moment: the share of total US wealth held by the top 400 has tripled since 1982. Scheuer also points out that one can distinguish whether those in top 400 inherited their wealth or accumulated it themselves. Back in 1982, 44% of the top 400 had accumulate it themselves, while in 2018, 69% had done so. 

Of course, wealth is not the same as income. For example, when the value of your home rises, you have greater wealth, even if your annual income hasn't changed. Similarly, when the price of stock in Amazon or Microsoft changes, so does the wealth of Jeff Bezos and Bill Gates (#1 and #2 on the Forbes wealth list), even if their annual income is unchanged. 

The IRS used to (up to 2014) release data on the "Fortunate 400" top income-earners in a given year; in 2014, the cutoff for making this list was $124 million in income for that year. Another approach is to looking at the top of income distribution. the top 0.01% represents the 12,000 or so households with the highest income in the previous year. 

There are basically four ways to tax the super-rich: income tax, capital gains taxes, the estate tax, or a wealth tax. 

In the 2020 tax code, the top income tax bracket is 37%: for example, if you are married filing jointly, you pay a tax rate of 37% on income above $622,500. (This is oversimplified, because there are phase-outs of various tax provisions and surtaxes on investment income that can lead to a marginal tax rate that is a few percentage points higher.) But one obvious possibility for taxing the superrich would be to add additional higher tax brackets that kicks in a higher income levels, like $1 million or $10 million in annual income. 

The difficulty with this straightforward approach is what Scheuer refers to as the "plasticity" of income, that is, "the ease with which higher-taxed income can be converted into lower-taxed income." Scheuer writes: 

Plasticity is an issue when different kinds of income are subject to different effective tax rates. By far the most important aspect of plasticity, with implications both for understanding the effective tax burden on the superrich and for measuring the extent of their income and therefore income inequality, concerns capital gains.

To put this in concrete terms, if you look at the wealthiest Americans like Jeff Bezos or Bill Gates, their wealth doesn't rise over time because they save a lot out of the high wages they are paid each year; instead, it's because the stock price of Amazon or Microsoft rises. They only pay tax on that gain if they sell stock, and receive a capital gain at that time. Thus, if you want to tax the super-rich,  taxing their annual income will miss the point. You need to think about how to tax the accumulation of their wealth 

In the US, taxes on capital gains have several advantages over regular income. The tax rate on capital gains is 20%, instead of the 37% (plus add-ons) top income tax rate. In addition, you can let a capital gain build up for years or decades before you realize the gain and owe the tax; thus, along with the lower tax rate there is a benefit from being able to defer the tax. Finally, if someone who has experienced a capital gain over time dies, and then leaves that asset to their heirs, the capital gain for that asset during their lifetime is not taxed at all. Instead, the heir who receives the asset can "step up": the basis, meaning that the value for purposes of calculating a capital gain for the heir starts from the value at the time the asset was received by the heir. Taken together, the "plasticity" of being able to gain wealth by a capital gain, rather than by annual income, is a core problem of taxing the superrich. Scheuer explains: 

Most countries’ tax systems treat capital gains favorably relative to ordinary labor income (Switzerland being an extreme case where most capital gains are untaxed). Realized capital gains represent a very high fraction of the reported income of the superrich. For example, realized capital gains represented 60% of total gross income for the 400 highest-income Americans in tax year 2014. ... For tax year 2016, those earning more than $10 million report net capital gains corresponding to 46% of their total income, whereas capital gains are a negligible fraction of income for those earning less than $200 k.

There are other ways to tax capital gains. For example, one of Joe Biden's campaign promised was to tax capital gains income at the same rate as personal income for anyone receiving more than $1 million in income in that year. Before getting into some of the reasons, it's worth noting that every high-income country taxes capital gains at a lower rate. Scheuer writes: 

Five OECD countries levy no tax on shareholders based on capital gains (Switzerland being a prominent example). Of those that do, all tax is on realization rather than on accrual. Five more countries apply no tax after the end of a holding period test, while four others apply a more favorable rate afterwards. The tax rate varies widely with the highest as of 2016 being Finland, at 34%. With a few exceptions, the accrued gains on assets in a decedent’s estate escape income taxation entirely, because the heir can treat the basis for tax purposes as the value upon inheritance.

Why is capital gains taxed at a lower rate, all around the world? Why is it taxed only when those gains are realized, perhaps after years or decades, rather than taxed as the gains happen? One reason is that there is an annual corporate tax, so income earned by the corporation is already being taxed. Or if the capital gain is being realized on a gain in property values, there were also property taxes paid over time. In general, many countries want to have a substantial share of patient investors, who are willing to  hold assets for a sustained time. Trying to tax capital gains as they happen, rather than when they are realized, would also raise practical questions--for example it might require people to sell some of their assets to pay their annual taxes. 

Scheuer runs through a variety of  different ways of ways of taxing capital gains, and you can consider the alternatives. But again, there are reasons why no country has pursued taxing capital gains as they accrue, rather than as they are realized, and why no country taxes such gains as ordinary income--and in fact why some countries don't tax them at all. 

Another alternative is to tax wealth directly. I've written about a wealth tax before, and don't have a lot to add here. Scheuer offers the reminder that Donald Trump was an advocate of a large but one-time wealth tax on high net-worth individuals back in 1999, when he ran for president on the Reform Party ticket, as a way to pay off the national debt. Here, I'll just offer a reminder that a wealth tax is based on total wealth, not on gains. Thus, if there is a an annual wealth tax of, say, 3%, then if your wealth was earning a return of 3% per year, the wealth tax means you are now earning a return of zero. If there is a year where the stock market drops, and the returns for that year are negative, you still owe the wealth tax. 

About 30 years ago, 12 high-income counties had wealth taxes, but the total is now down to three. The general consensus was that the troubles of trying to value wealth each year for tax purposes (and just consider for a moment how the superrich might shuffle their assets into other forms to avoid such a tax), just wasn't worth the relatively modest total amounts being collected.  The one country that continues to collect a substantial amount through its wealth tax is Switzerland--but remember, Switzerland doesn't have any tax at all on capital gains.  Scheuer writes: 

So far, the Swiss case is the only modern example for a wealth tax in an OECD country that has been able to generate sizeable and stable revenues in the long run. It enjoys broad support, as evidenced by the fact that it keeps being reaffirmed by citizens in Switzerland’s direct democracy, where most tax decisions must be put directly to voters. However, its design and the role it plays in the overall tax system are quite different from current proposals in the United States. In particular, it is not geared towards a major redistribution of wealth, and indeed wealth concentration in Switzerland remains high in international comparison.

A final option, which is not a focus of Scheuer's discussion, would be to resuscitate the estate tax: that is, instead of taxing the superrich during their lives, tax the accumulated value of their assets at death. For an example of a proposal along these lines, William G. Gale, Christopher Pulliam, John Sabelhaus, and Isabel V. Sawhill offer a short report of "Taxing wealth transfers through an expanded estate tax" (Brookings Institution, August 4, 2020). They point out, for example, that back in 2001 estates of more than $675,000 were subject to the estate tax; now, it applies only to estates above $11.5 million. Maybe $675,000 was on the low side, but an exemption of $11.5 million is pretty high--only about 0,2% of estates are subject to the estate tax at all. They calculate that rolling back the estate tax rules to 2004--which was hardly a time of confiscatory taxation--could raise about $100 billion per year in revenue. 

Taking all this together, it seems to me that a middle-of-the-road answer on how to raise taxes on the  superrich would focus in part on the estate tax, and in part on the capital gains tax--and perhaps in particular on limiting the ability to pass wealth between generations in a way that avoids capital gains taxes. 

Public-Private Partnerships: The Importance of Contract Design

Most transportation infrastructure in most countries is funded by government. But in a public-private partnership, a private company puts up at least some the money to build the project in exchange for being able to earn a return from that project in the future--typically through some combination of tolls or other charges to those using the infrastructure. 

For cash-strapped governments, a public-private partnership can sound enticing.  Reduced need for public spending up front! Those who pay in the future will be users of the system after it is built! But unsurprisingly, whether a PPP is a good deal for the public turns out to depend on the details of the contractual arrangement. Eduardo Engel, Ronald Fischer, and Alexander Galetovic provide a readable overview of what we know in in "Public–Private Partnerships: Some Lessons After 30 Years" (Regulation, Fall 2020, pp. 30-35). The subheading on the article reads: "The savings policymakers usually claim for these projects are illusory, but well-designed contracts can deliver public benefits." 

As the authors note: "[I]nvestment in PPPs over the last 30 years has been substantial, adding €203 billion of infrastructure spending in Europe and $535 billion of spending in developing countries. Most investments are in roads, seaports, and airports, but in some countries investment via PPPs has been significant in other types of infrastructure, such as hospitals and schools. In comparison, PPP investments in the United States have been small."

To understand the economic perspective here, consider the following question: If a PPP is such a good deal that businesses are bidding against each other for the contract, then maybe it would make sense for the government to spend the money up front, via deficit spending if needed, and then have the government collect the tolls or other revenues in the future. As the authors point out, the real economic gains from a PPP (if any) don't come from the private partner being willing to invest some cash up front. Instead, the gains come from incentives in the contract that would cause a private firm to to build or maintain or run the infrastructure in a more efficient or higher-quality way than if the government just took it over. 

For example, an accumulation of evidence suggests that the private firm in a long-term PPP may do a better job of ongoing maintenance than a government agency running the same project.  As the authors write: 

Many governments do not perform regular, continuous maintenance because building new infrastructure or repairing severely deteriorated projects is politically more attractive. ... Moreover, the annual logic of public budgets makes it difficult to set aside funds for future maintenance at the time the project is built. Indeed, a study suggests that one-third of expenditures on new infrastructure should be allocated to maintaining existing projects. The cost of poor maintenance under traditional provision can be high. Not only is the quality of service poor, but the cost of intermittent maintenance, which often involves costly rehabilitation, has been estimated to lie between 1.5 and 3 times the cost of continuous maintenance. We estimate that maintenance savings are somewhere between 10% and 16% of initial investment.

To put it another way, if a PPP has a contract where government inspectors will be checking to make sure that regular maintenance is done--and paid for--by the private firm, that maintenance is more likely to happen than via direct government spending, where other items will always seem to have a higher priority than regular maintenance. 

On the other side, lots can go wrong when negotiating a PPP contract. One of the major issues is that a firm may win the contract under the bright lights of transparency with a lowball bid, and then almost immediately initiate backroom discussions of why the contract now needs to be renegotiated for higher payments. The authors write: "When Mexico privatized highways in the late 1980s, Mexican taxpayers
incurred costs of more than $13 billion following renegotiation of the initial contracts. In Chile, 47 out of 50 PPP concessions awarded by the Ministry of Public Works between 1992 and 2005 had been renegotiated by 2006, and one of every four dollars invested had been obtained through renegotiation." However, contractual terms can be redrawn to reduce this risk. As the authors write:  

To do so, the contract should limit the present value of a concessionaire’s compensation during the life of the contract to the amount determined by the original bid (the so-called “sanctity of the bid” principle). Moreover, any works added to the original project should be auctioned off to the lowest bidder and the concessionaire should be excluded from bidding. To ensure the sanctity of the bid, renegotiations should be reviewed by an independent panel and all contract modifications should be easily accessible to the public via the internet so that an informed public can question the reasons for renegotiations and the amounts involved.

Another issue arises when a private company is going to be allowed to impose tolls or user charges in the future. It has been a common practice that the right to charge is granted for fixed time period (and if the firm doesn't collect as much as expected, it then tries to renegotiate). This can lock in large payments to the private firm over a long period. The authors note: 

Portugal received €20 billion in PPP investments in roads, hospitals,and other projects between 1995 and 2014. Of this amount, 94% was spent in highways that used “shadow tolls” that the government paid to the concessionaire per user. Government-guaranteed minimum revenue from the tolls amounted to 1% of the country’s gross domestic product annually over the period 2014–2020, though it will fall to an estimated 0.5% of GDP by 2030.

An alternative is for the contract to specify how much the private firm will collect over time, and when that amount has been collected, ownership of the project revert to the government. Indeed, the government can even decide, if it wished to do so, to pay the private firm the amount it was to receive in advance, and then let the government take over the project sooner. 

In short, with any PPP, it's worth remembering that the private partner isn't making investments to help the government "save money," but rather because the firm expects to earn a profit from doing so. If the contract is poorly designed, the firm will quite likely take every opportunity to renegotiate it upward.  The best reason for a PPP is that, if the contract is well-designed, it provides a way to reduce the government tendency to skimp on routine maintenance. In many settings, it can often work out better for society if government takes the role of active monitoring and oversight of the private provision of certain services, rather than having government try to monitor its own actions in providing those services.