The Case for More Activist Antitrust Policy

The University of Pennsylvania Law Review  (June 2020) has published a nine-paper symposium on antitrust law, with contributions by a number of the leading economists in the field who tend to favor more aggressive pro-competition policy in this area. Whatever your own leanings, it's a nice overview of many of the key issues. Here are snippets from three of the papers. Below, I'll list all the papers in the issue with links and abstracts. 

 C. Scott Hemphill and Tim Wu write about "Nascent Competitors," which is the concern that large firms may seek to maintain their dominant market position by buying up the kinds of small firms that might have developed into future competitors. The article is perhaps of particular interest because Wu has just accepted a position with the Biden administration to join the National Economic Council, where he will focus on competition and technology policy. Hemphill and Wu write (footnotes omitted): 

Nascent rivals play an important role in both the competitive process and the process of innovation. New firms with new technologies can challenge and even displace existing firms; sometimes, innovation by an unproven outsider is the only way to introduce new competition to an entrenched incumbent. That makes the treatment of nascent competitors core to the goals of the antitrust laws. As the D.C. Circuit has explained, “it would be inimical to the purpose of the Sherman Act to allow monopolists free rei[]n to squash nascent, albeit unproven, competitors at will . . . .” Government enforcers have expressed interest in protecting nascent competition, particularly in the context of acquisitions made by leading online platforms.

However, enforcers face a dilemma. While nascent competitors often pose a uniquely potent threat to an entrenched incumbent, the firm’s eventual significance is uncertain, given the environment of rapid technological change in which such threats tend to arise. That uncertainty, along with a lack of present, direct competition, may make enforcers and courts hesitant or unwilling to prevent an incumbent from acquiring or excluding a nascent threat. A hesitant enforcer might insist on strong proof that the competitor, if left alone, probably would have grown into a full-fledged rival, yet in so doing, neglect an important category of anticompetitive behavior.

One main concern with a general rule that would block entrenched incumbents from buying smaller companies is that, for entrepreneurs who start small companies, the chance of being bought out by a big firm is one of the primary incentives for starting a firm in the first place. Thus, there is a concern that more aggressive antitrust enforcement against buying smaller firms could reduce incentives to start such firms in the first place. Hemphill and Wu tackle the question head-on:

The acquisition of a nascent competitor raises several particularly challenging questions of policy and doctrine. First, acquisition can serve as an important exit for investors in a small company, and thereby attract capital necessary for innovation. Blocking or deterring too many acquisitions would be undesirable. However, the significance of this concern should not be exaggerated, for our proposed approach is very far from a general ban on the acquisition of unproven companies. We would discourage, at most, acquisition by the firm or firms most threatened by a nascent rival. Profitable acquisitions by others would be left alone, as would the acquisition of merely complementary or other nonthreatening firms. While wary of the potential for overenforcement, we believe that scrutiny of the most troubling acquisitions of unproven firms must be a key ingredient of a competition enforcement agenda that takes innovation seriously.

In another paper, William P. Rogerson and Howard Shelanski write about "Antitrust Enforcement, Regulation, and Digital Platforms." They raise the concern that the tools of antitrust may not be well-suited to some of the competition issues posed by big digital firms. For example, if Alphabet was forced to sell off Google, or some other subsidiaries, would competition really be improved? What would it even mean to, say, try to break Google's search engine into separate companies? When there are "network economies," where many agents want to be on a given website because so many other players are on the same website, perhaps a relatively small number of firms is the natural outcome. 

Thus, while certainly not ruling out traditional antitrust actions, Rogerson and Shelanski argue that the case for using regulations to achieve pro-competitive outcomes. They write: 

[W]e discuss why certain forms of what we call “light handed procompetitive” (LHPC) regulation could increase levels of competition in markets served by digital platforms while helping to clarify the platforms’ obligations with respect to interrelated policy objectives, notably privacy and data security. Key categories of LHPC regulation could include interconnection/interoperability requirements (such as access to application programming interfaces (APIs)), limits on discrimination, both user-side and third-party-side data portability rules, and perhaps additional restrictions on certain business practices subject to rule of reason analysis under general antitrust statutes. These types of regulations would limit the ability of dominant digital platforms to leverage their market power into related markets or insulate their installed base from competition. In so doing, they would preserve incentives for innovation by firms in related markets, increase the competitive impact of existing competitors, and reduce barriers to entry for nascent firms. 

The regulation we propose is “light handed” in that it largely avoids the burdens and difficulties of a regime—such as that found in public utility regulation—that regulates access terms and revenues based on firms’ costs, which the regulatory agency must in turn track and monitor. Although our proposed regulatory scheme would require a dominant digital platform to provide a baseline level of access (interconnection/interoperability) that the regulator determines is necessary to promote actual and potential competition, we believe that this could avoid most of the information and oversight costs of full-blown cost-based regulation ...  The primary regulation applied to price or non-price access terms would be a nondiscrimination condition, which would require a dominant digital platform to offer the same terms to all users. Such regulation would not, like traditional rate regulation, attempt to tie the level or terms of access to a platform’s underlying costs, to regulate the company’s terms of service to end users, or to limit the incumbent platform’s profits or lines of business. Instead of imposing monopoly controls, LHPC regulation aims to protect and promote competitive access to the marketplace as the means of governing firms’ behavior. In other words, its primary goal is to increase the viability and incentives of actual and potential competitors. As we will discuss, the Federal Communication Commission’s (FCC) successful use of similar sorts of requirements on various telecommunications providers provides one model for this type of regulation.

Nancy L. Rose and Jonathan Sallet tackle a more traditional antitrust question in "The Dichotomous Treatment of Efficiencies in Horizontal Mergers: Too Much? Too Little? Getting it Right."   A "horizontal" merger is one between two firms selling the same product. This is in contrast to a "vertical" merger, where one firm merges with a supplier, or a merger where the two firms sell different products. When two firms selling the same product propose a merger, they often argue that the two firms  will be more efficient together, and thus able to provide a lower-cost product to consumers. Rose and Sallett offer this example: 

Here is a stylized example of the role that efficiencies might play in an antitrust review. Imagine two paper manufacturers, each with a single factory that produces several kinds of paper, and suppose their marginal costs decline with longer production runs of a single type of paper. They wish to merge, which by definition eliminates a competitor. They justify the merger on the ground that after they combine their operations, they will increase the specialization in each plant, enabling longer runs and lower marginal costs, and thus incentivizing them to lower prices to their customers and expand output. If the cost reduction were sufficiently large, such efficiencies could offset the merger’s otherwise expected tendency to increase prices.

In this situation, the antitrust authorities need to evaluate whether these potential efficiencies exist and are likely to benefit consumers. Or alternatively, is the talk of "efficiencies" a way for top corporate managers to build their empires while eliminating some competition? Rose and Sallett argue, based on the empirical evidence of what has happened after past mergers, that antitrust enforcers have been too willing to believe in the possibility of efficiencies that don't seem to happen. They write: 

As empirically-trained economists focused further on what data revealed about the relationship between mergers and efficiencies, the results cast considerable doubt on post-merger benefits. As discussed at length by Professor Hovenkamp, “the empirical evidence is not unanimous, however, it strongly suggests that current merger policy tends to underestimate harm, overestimate efficiencies, or some combination of the two.” The business literature is even more skeptical. As management consultant McKinsey & Company reported in 2010: “Most mergers are doomed from the beginning. Anyone who has researched merger success rates knows that roughly 70 percent of mergers fail.”

For more on antitrust and the big tech companies, some of my previous posts include:

• "The Google Antitrust Case and Echoes of Microsoft" (October 21, 2020)
• "Antitrust in the Digital Economy" (July 19, 2019)
• "Three Questions for the Antitrust Moment" (July 9, 2018)
• "A Skeptical View in Favor of an Antitrust Push" (March 15, 2018)
• "Limits for Corporate Bigness on Acquisitions, Patents, and Politics" (August 13, 2019)

Here's the full set of papers from the June 2020 issue of the  University of Pennsylvania Law Review issue, with links and abstracts: 

"Framing the Chicago School of Antitrust Analysis," by Herbert  Fiona Scott Morton
The Chicago School of antitrust has benefitted from a great deal of law office history, written by admiring advocates rather than more dispassionate observers. This essay attempts a more neutral examination of the ideology, political impulses, and economics that produced the School and that account for its durability. The origins of the Chicago School lie in a strong commitment to libertarianism and nonintervention. Economic models of perfect competition best suited these goals. The early strength of the Chicago School was that it provided simple, convincing answers to everything that was wrong with antitrust policy in the 1960s, when antitrust was characterized by over-enforcement, poor quality economics or none at all, and many internal contradictions. The Chicago School’s greatest weakness is that it did not keep up. Its leading advocates either spurned or ignored important developments in economics that gave a better accounting of an economy that was increasingly characterized by significant product differentiation, rapid innovation, networking, and strategic behavior. The Chicago School’s protest that newer models of the economy lacked testability lost its credibility as industrial economics experienced an empirical renaissance, nearly all of it based on models of imperfect competition. What kept Chicago alive was the financial support of firms and others who stood to profit from less intervention. Properly designed antitrust enforcement is a public good. Its beneficiaries—consumers—are individually small, numerous, scattered, and diverse. Those who stand to profit from nonintervention were fewer in number, individually much more powerful, and much more united in their message. As a result, the Chicago School went from being a model of enlightened economic policy to an economically outdated but nevertheless powerful tool of regulatory capture.

"Nascent Competitors," by C. Scott Hemphill & Tim Wu
A nascent competitor is a firm whose prospective innovation represents a serious threat to an incumbent. Protecting such competition is a critical mission for antitrust law, given the outsized role of unproven outsiders as innovators and the uniquely potent threat they often pose to powerful entrenched firms. In this Article, we identify nascent competition as a distinct analytical category and outline a program of antitrust enforcement to protect it. We make the case for enforcement even where the ultimate competitive significance of the target is uncertain, and explain why a contrary view is mistaken as a matter of policy and precedent. Depending on the facts, troubling conduct can be scrutinized under ordinary merger law or as unlawful maintenance of monopoly, an approach that has several advantages. In distinguishing harmful from harmless acquisitions, certain evidence takes on heightened importance. Evidence of an acquirer’s anticompetitive plan, as revealed through internal communications or subsequent conduct, is particularly probative. After-the-fact scrutiny is sometimes necessary as new evidence comes to light. Finally, our suggested approach poses little risk of dampening desirable investment in startups, as it is confined to acquisitions by those firms most threatened by nascent rivals.

"Antitrust Enforcement, Regulation, and Digital Platforms," by William P. Rogerson & Howard Shelanski
There is a growing concern over concentration and market power in a broad range of industrial sectors in the United States, particularly in markets served by digital platforms. At the same time, reports and studies around the world have called for increased competition enforcement against digital platforms, both by conventional antitrust authorities and through increased use of regulatory tools. This Article examines how, despite the challenges of implementing effective rules, regulatory approaches could help to address certain concerns about digital platforms by complementing traditional antitrust enforcement. We explain why introducing light- handed, industry-specific regulation could increase competition and reduce barriers to entry in markets served by digital platforms while better preserving the benefits they bring to consumers.

"The Dichotomous Treatment of Efficiencies in Horizontal Mergers: Too Much? Too Little? Getting it Right," Nancy L. Rose and Jonathan Sallet
The extent to which horizontal mergers deliver competitive benefits that offset any potential for competitive harm is a critical issue of antitrust enforcement. This Article evaluates economic analyses of merger efficiencies and concludes that a substantial body of work casts doubt on their presumptive existence and magnitude. That has two significant implications. First, the current methods used by the federal antitrust agencies to determine whether to investigate a horizontal merger likely rests on an overly-optimistic view of the existence of cognizable efficiencies, which we believe has the effect of justifying market-concentration thresholds that are likely too lax. Second, criticisms of the current treatment of efficiencies as too demanding—for example, that antitrust agencies and reviewing courts require too much of merging parties in demonstrating the existence of efficiencies—are misplaced, in part because they fail to recognize that full-blown merger investigations and subsequent litigation are focused on the mergers that are most likely to cause harm.

"Oligopoly Coordination, Economic Analysis, and the Prophylactic Role of Horizontal Merger Enforcement," by Jonathan B. Baker and Joseph Farrell
For decades, the major United States airlines have raised passenger fares through coordinated fare-setting when their route networks overlap, according to the United States Department of Justice. Through its review of company documents and testimony, the Justice Department found that when major airlines have overlapping route networks, they respond to rivals’ price changes across multiple routes and thereby discourage competition from their rivals. A recent empirical study reached a similar conclusion: It found that fares have increased for this reason on more than 1000 routes nationwide and even that American and Delta, two airlines with substantial route overlaps, have come close to cooperating perfectly on routes they both serve.

"The Role of Antitrust in Preventing Patent Holdup," by Carl Shapiro and Mark A. Lemley
Patent holdup has proven one of the most controversial topics in innovation policy, in part because companies with a vested interest in denying its existence have spent tens of millions of dollars trying to debunk it. Notwithstanding a barrage of political and academic attacks, both the general theory of holdup and its practical application in patent law remain valid and pose significant concerns for patent policy. Patent and antitrust law have made significant strides in the past fifteen years in limiting the problem of patent holdup. But those advances are currently under threat from the Antitrust Division of the Department of Justice, which has reversed prior policies and broken with the Federal Trade Commission to downplay the significance of patent holdup while undermining private efforts to prevent it. Ironically, the effect of the Antitrust Division’s actions is to create a greater role for antitrust law in stopping patent holdup. We offer some suggestions for moving in the right direction.

"Competition Law as Common Law: American Express and the Evolution of Antitrust," by Michael L. Katz & A. Douglas Melamed
We explore the implications of the widely accepted understanding that competition law is common—or “judge-made”—law. Specifically, we ask how the rule of reason in antitrust law should be shaped and implemented, not just to guide correct application of existing law to the facts of a case, but also to enable courts to participate constructively in the common law-like evolution of antitrust law in the light of changes in economic learning and business and judicial experience. We explore these issues in the context of a recently decided case, Ohio v. American Express, and conclude that the Supreme Court, not only made several substantive errors, but also did not apply the rule of reason in a way that enabled an effective common law-like evolution of antitrust law.


"Probability, Presumptions and Evidentiary Burdens in Antitrust Analysis: Revitalizing the Rule of Reason for Exclusionary Conduct," by Andrew I. Gavil & Steven C. Salop
The conservative critique of antitrust law has been highly influential. It has facilitated a transformation of antitrust standards of conduct since the 1970s and led to increasingly more permissive standards of conduct. While these changes have taken many forms, all were influenced by the view that competition law was over-deterrent. Critics relied heavily on the assumption that the durability and costs of false positive errors far exceeded the costs of false negatives. Many of the assumptions that guided this retrenchment of antitrust rules were mistaken and advances in law and economic analysis have rendered them anachronistic, particularly with respect to exclusionary conduct. Continued reliance on what are now exaggerated fears of “false positives,” and failure adequately to consider the harm from “false negatives,” has led courts to impose excessive burdens of proof on plaintiffs that belie both sound economic analysis and well-established procedural norms. The result is not better antitrust standards, but instead an unwarranted bias towards non-intervention that creates a tendency toward false negatives, particularly in modern markets characterized by economies of scale and network effects. In this article, we explain how these erroneous assumptions about markets, institutions, and conduct have distorted the antitrust decision-making process and produced an excessive risk of false negatives in exclusionary conduct cases involving firms attempting to achieve, maintain, or enhance dominance or substantial market power. To redress this imbalance, we integrate modern economic analysis and decision theory with the foundational conventions of antitrust law, which has long relied on probability, presumptions, and reasonable inferences to provide effective means for evaluating competitive effects and resolving antitrust claims.

"The Post-Chicago Antitrust Revolution: A Retrospective," by Christopher S. Yoo
A symposium examining the contributions of the post-Chicago School provides an appropriate opportunity to offer some thoughts on both the past and the future of antitrust. This afterword reviews the excellent papers presented with an eye toward appreciating the contributions and limitations of both the Chicago School, in terms of promoting the consumer welfare standard and embracing price theory as the preferred mode of economic analysis, and the post-Chicago School, with its emphasis on game theory and firm-level strategic conduct. It then explores two emerging trends, specifically neo-Brandeisian advocacy for abandoning consumer welfare as the sole goal of antitrust and the increasing emphasis on empirical analyses.

Origins of the Body Mass Index

Body Mass Index is commonly used as an indicator of obesity, and thus as a sign that a person might be a risk for various health problems (including worse health effects from contracting COVID-19).  But where did the measure come from? 

The definition is straightforward. As the Centers for Disease Control notes: "Body Mass Index (BMI) is a person’s weight in kilograms divided by the square of height in meters." For adults (of any age or gender), the usual guideline is that below 18.5 is "underweight" 18.5-24.9 is "normal or healthy weight," 25.0-29.9 is "overweight," and 30 or above is "obese." For an adult is who is 5' 9" (or 1.8 meters), the range for a normal or healthy weight would be 125-168 pounds (or 57 to 76 kilograms). 

The original formula dates back to a Belgian statistician named Adolphe Quetelet (1796–1874). Garabed Eknoyan provides an overview of his story in "Adolphe Quetelet (1796–1874)—the average man and indices of obesity" (Nephrology Dialysis Transplantation, January 2008, 23: 1,  pp. 47-51). 

Quetelet was quite a guy. Eknoyan reports that while still a teenager: "But it was his love of the humanities that dominated his early years. He published poetry, exhibited his paintings, studied sculpture, co-authored the libretto of an opera and translated Byron and Schiller into French." At age 23, he was the first recipient of a doctorate in science from the newly founded University of Gent. He became fascinated with probability theory after spending time in Paris with  Joseph Fourier (1768–1830), Simeon Poisson (1781–1840) and Pierre Laplace (1749– 1827). He became interested in seeking out probability distributions of the human form, including the creation of the first height-and-weight tables. Eknoyan continues: 

His subsequent conceptual evolution in the study of man evolved from the study of averages (physical characteristics), to rates (birth, marriage, growth) and ultimately distributions (around an average, over time, between regions and countries) [12]. The latter was the basis of one of his contributions to statistics; the demonstration that the normal Gaussian distribution, typical throughout nature, applied equally to physical attributes of humans, including body parts, derived from large-scale population studies. ... 

In developing his index, Quetelet had no interest in obesity. His concern was defining the characteristics of ‘normal man’ and fitting the distribution around the norm. Much like Dublin a century later, he encountered difficulty in fitting the weight to height relationship into a Gaussian curve and began his quest for a solution. In 1831–1832, he conducted what has been considered the first cross-sectional study of newborns and children based on height and weight, and extended it to the study of adults. ...

[I]n an 1835 book, A Treatise on Man and the development of his aptitudes, Quetelet wrote: ‘If man increased equally in all dimensions, his weight at different ages would be as the cube of his height. Now, this is not what we really observe. The increase of weight is slower, except during the first year after birth; then the proportion we have just pointed out is pretty regularly observed. But after this period, and until near the age of puberty, weight increases nearly as the square of the height. The development of weight again becomes very rapid at puberty, and almost stops after the twenty-fifth year.' 

Quetelet was famous in his own time, and a major influence on other pioneer statisticians like Francis Galton. A statue of him stands on one corner of the  Places des Palais in Brussels, at the entrance to the
Palais des Academies. A century after his death, Belgium put his picture on a postage stamp. But although Quetelet originated the formula, he did not discuss or draw conclusions about obesity. 

However, the Quetelet index was not re-baptized as the Body Mass Index until 1971, in research by a physiologist named Ancel Keys (1904-2004). Nicolas Rasmussen tells this story in "Downsizing obesity: On Ancel Keys, the origins of BMI, and the neglect of excess weight as a health hazard in the United States from the 1950s to 1970s" (Journal of the History of the Behavioral Sciences, Autumn 2019, pp. 299-318). Rasmussen also tells the story of efforts by life insurance companies in the early 20th century to pool their data and try to find out if causes of death like heart disease, cancer, and stroke could be predicted based on individual characteristics and behaviors.  Rasmussen writes: 

Big insurance companies began pooling data in quasiprospective collaborative studies around the turn of the century, in which length of life was correlated to a range of risk factors recorded on initial health examinations (Bouk, 2015; Czerniawski, 2007). These intercompany studies were massive, far larger than anything public sector epidemiologists could do at the time. In the landmark Medico‐Actuarial Mortality Investigation (MAMI) of the early teens, over 440,000 insured individuals were examined (representing equal numbers of men and women) for a span of 10–25 years up to 1909—millions of life‐years of observation (Association of Life Insurance Medical Directors & Actuarial Society of America, 1912). MAMI was followed by the similarly designed and executed Medical Impairment Study, which included data on 667,000 men issued policies since 1909, followed through 1928 (Actuarial Society of America & Association of Life Insurance Medical Directors, 1931). Both studies mainly looked at overall mortality rates associated with physical “impairments” and occupations, rarely attempting to identify predictors of particular causes of death (prudently, given the variability in how doctors completed death certificates). Insurance actuaries had tried a number of measures to gauge obesity such as girth for spine length, but the statisticians found that weight for height had the best predictive power for longevity (Czerniawski, 2007; Marks, 1956). And the association between weight and mortality was strong and consistent, changing very little between the generations represented by the two big studies (for people older than 25). In the Medical Impairment Study, for example, men categorized as 25% or more above average weight for their height suffered 30–40% higher mortality rates (depending on age). Similar findings were reported for women, although the mortality penalties of high weight were not quite as severe (Marks, 1956).

By 1900, insurance firms were already screening out applicants well above or below the average weight for their height and, unsurprisingly, after the big intercompany studies, the firms revised their rates and standard height‐weight tables to reflect greater mortality penalties for overweight (and smaller mortality penalties for underweight, as tuberculosis was in retreat). Tables of a normal or healthy weight for each height category were widely distributed by insurance companies and ubiquitous in doctors’ offices during the early 20th century (Weigley, 1984). Thus, the insurance industry informed the understanding of proper body weight among doctors and patients alike, during the period when it first became a matter of popular concern (evidenced, for instance, by rapid diffusion of weighing scales; Jutel, 2001). ...

Life insurance firms stiffened their price discrimination; that is, the overweight paid more for their “substandard” policies, if they could get them at all (Czerniawski, 2007; Weigley, 1984). Later, by 1930s, it was something like a universally accepted medical fact that obesity contributed to early death, especially from heart disease. ...

The National Heart Institute was created in 1948 to promote research in this area. But perhaps surprisingly, Ancel Keys--who would originate the label for Body Mass Index--was an opponent of the conventional wisdom about the linkage from weight to health. Instead, he argued that concerns about being overweight were often just moralistic lectures (what some today would call "body-shaming"). 

As Rasmussen explains it,  Keys agreed that obesity was unhealthy. However, he argued that measurements of excess weight-for-height were not a reliable measure of obesity. "Based on the observation that, because muscle is denser than fat, extraordinarily lean and  muscular men like varsity football players (and apparently, himself) registered as overweight on standard tables despite being unusually fit, he launched around 1950 into a campaign to replace relative weight measures of obesity with a measure of body fatness or adiposity." In addition, Keys argued that fat in one's diet was the key predictor of negative health consequences like coronary heart disease: "Thus, in the 1950s Keys took a strong position arguing that dietary fat intake, not caloric intake or its weight gain consequence, was the cause of high serum cholesterol and therefore a major driver of coronary disease. So he sought to discount weight as a heart disease predictor."

Keys thus explored other methods of measuring body fatness. For example, one approach was to submerge someone in water to calculate their volume, then divide by weight to get their density, and then infer body fat from this density. However, this approach was tricky. You had to take into account factors like residual air in the lungs. The extrapolation from density to fat content was at that time based on data from guinea pig dissection experiments. And it was hard to imagine a really large-scale study (or a life insurance policy) that involved dunking all the subjects. 

Another possible approach involves "skinfold measures," which basically  involved using certain calipers and pressures of pinching at specific places around the body. After experimenting with many pinching practices, the concensus seems to be that "the best sites for measuring skinfolds were the

back of the upper arm when extended 90° and just below the scapula, on the back."

Keys led a famous "Seven Countries" study that looked at how obesity might predict coronary heart disease, and when the study was published in 1972, it included three measure of obesity: skinfold measures, weight-for-height, and what Rasmussen calls "a heretofore obscure measure—BMI (weight in kilograms divided by height in meters squared, first proposed a century earlier by Quetelet)." The statistics suggested that the skinfold measures offered no difference in predictive power over the weight measures: "So at this point, after more than 20 years of conspicuous efforts to showcase skinfold and the body fatness it measured as a more rigorously scientific and predictively effective index of obesity than relative weight, Keys just dropped the topic of skinfold and adiposity and embraced BMI ..." However, in his study, BMI had only a very mixed record in predicting coronary heart disease. 

Simple measures, like the Body Mass Index, are going to be imperfect. There are longstanding concerns that dividing by height isn't quite right, and can lead to short people seeming thinner and tall people seeming fatter. There are other methods. Skinfold techniques are still used. There have been studies that suggest looking at waist-for-height measures, either alone or perhaps together with BMI. 

There are also methods that seek to measure body fat more directly. The approach of submerging someone in water, calculating density, and inferring body fat now rejoices in the name of "air displacement plethysmography." There are also approaches which involve shining infrared light ("near-infrared interactance") or different levels of photons ("dual energy X-ray absorptiometry") through the body, and then calculating body fat based on the idea that fatty tissues absorb more infrared light or attenuate photons differently than lean muscle.

For studies of large populations, Body Mass Index is a useful measure in part because height and weight are relatively easy to collect. There are also historical records of height-and-weight, which were often kept for large population groups like soldiers being drafted into a nation's armed forces. Also, the research since Keys has established strong linkages that groups with higher rates of obesity as measured by BMI do on average have a higher rate of adverse health outcomes. But individuals can and do vary considerably, the specific numbers and labels that the Centers for Disease Control place on BMI should be viewed as useful guidelines for groups, not as a firm judgement applying to every person. 

Japan: The Challenges of Aging, Slow Growth, and Government Debt

Japan is the third-largest economy in the world, behind the US and China. It'e experience seems to foretell some of the key issues facing other high-income economies, like slow productivity growth, rapid aging, and rising government deficits. But in the last few years, it also seems to have recovered to at least a moderate rate of economic growth. What are some of the main patterns and lessons in Japan?  For background, I'll draw on the work of theOECD, which just published one of its "Economic Surveys" of Japan in April 2019.

Back in the 1980s, a number of popular books and reports published in the US anointed Japan as the future leader of the global economy. A standard claim was that the disorganized competitive market forces of the US economy were unable to keep up with the government-directed cooperative ventures of Japan's economy. Then in the early 1990s, Japan's economy experienced a meltdown in stock and housing prices, and its economy entered a period of near-zero growth. Here's figure comparing Japan's in per capita terms to the rest of the OECD countries.  The left-hand set of bars show that when it comes to per capita output, Japan's growth was lagging well behind and is now catching up. The right-hand set of bars show how this pattern is linked to an aging population. If one looks only at Japan's output relative to its working-age population, it wasn't all that far behind from 1997-2012, and has actually been ahead of average OECD growth since 2012.

Japan's is facing a situation of a declining population and workforce, and the share of the population that is elderly is on the rise. This rising share of elderly has been driving up government spending on pensions and health care, and together with attempts to stimulate its economy through government spending (much of it on infrastructure), Japan has run up an enormous government debt. In the last few years, it has been aggressively using the Bank of Japan to buy and hold its government debt. Meanwhile, productivity growth has been stagnant. Let's say just a bit more about these patterns.

 Here's a figure showing Japan's total population, broken down by age group. The OECD writes: "With Japan’s population projected to fall by one-fifth to around 100 million by 2050, many parts of the country are facing depopulation. Efficiency would be increased by expanding the joint provision of local public services, including health and long-term care and infrastructure, across jurisdictions and developing compact cities."

Here's the change in total population and working-age population from 2000-2018. The working-age population is dropping fast in Japan, near-zero in Germany and Italy. Although it's rising in the other countries, the aging of population in these other countries is coming, too.

The combination of slow growth and a declining population has meant ongoing declines in the price of real estate in Japan for most of the last three decades, before stabilizing in the last few years.

Here's a figure showing Japan's population age 65 and older as a share of the working-age population aged 20-64. The bar shows the level in 2017; the arrow shows where it's headed by 2050. Many high-income countries are getting older, but Japan is an extreme case. The OECD writes: "Half of the children born in Japan in 2007 are expected to live to the age of 107, which has major implications for the labour market. The number of elderly is projected to rise from 50% of the working-age population in 2015 to 79% by 2050 ..."

Supporting the elderly and attempting to stimulate the economy has led to very high levels of government debt in Japan. The OECD writes: "Twenty-seven consecutive years of budget deficits have driven gross government debt to 226% of GDP in 2018, the highest ever recorded in the OECD area. The government projects that population ageing will boost spending on health and long-term care by 4.7% of GDP by 2060. Measures to ensure the sustainability of Japan’s social insurance programmes, as spending rises and the number of working-age persons falls from 2.0 per elderly to 1.3 by 2050, is a priority."

Japan has traditionally had a high savings rate, and in the past, the common pattern was that Japan's government debt was mostly funded by the high savings levels of its citizens. However, in the last few years the Bank of Japan has become much more aggressive that other countries in its "quantitative easing," where the central bank essentially prints money to buy government debt. 

All of this is happening against a backdrop of relatively low labor productivity in Japan. This figure compares Japan to countries in the upper half of the OECD nations--that is, those countries that have higher income levels. A common pattern in Japan is that the labor input in Japan is higher than the comparison group, because labor force participation and hours worked in Japan are high. However, the productivity of labor in Japan has been well below the comparison group.  A shrinking labor force and lagging productivity are not a recipe for success. 

So what needs to be done in Japan? Clearly, a main approach has been to try jump-start the economy with large fiscal deficits and aggressively loose monetary policy. While this seems likely to continue, the OECD warns that it's not a strategy that can be pursued forever. Ultimately, an economy needs to have the output of its workforce expand--and for this to happen in a situation where the number of people in the workforce is falling. 

One set of approaches is to get more work from the existing workforce. The OECD notes that as life expectancies head toward 100 years and higher, the traditional patterns of retirement need to change. The report says: 

More than 80% of [Japan's] firms continue to set mandatory retirement at age 60, even though life expectancy at that age is 26 years, up from 17 in 1970. While workers can continue until age 65, most are re-hired as non-regular workers at significantly lower wages and in jobs that make less use of their skills. The right of firms to set a mandatory retirement age should be abolished to allow more workers to continue their careers, while fully utilising their skills. An end to mandatory retirement requires shifting away from seniority-based wage systems by giving more weight to job category and performance. In addition, the pension eligibility age should be raised above 65, as healthy life expectancy has reached 75. Lengthening careers in the era of 100-year life spans also requires lifelong learning and job-related training to avoid the decline in skill levels among older workers. An end to mandatory retirement would increase firms’ incentives to increase such investment in older workers, which is currently low in Japan. Finally, longer working lives would also be facilitated by better work-life balance for all workers by strictly enforcing the new 360-hour annual limit on overtime hours, imposing adequate penalties on firms that exceed it and introducing a mandatory minimum period of rest between periods of work.

The share of Japanese women in the labor force has risen in recent years, with a push from expanded child care programs. But Japan has long had a "dual-track" economy, with one set of workers who have regular work, good pay and benefits, and a career path, and a second track of irregular work, low pay, and little chance for advancement. Women in Japan have often ended up in this second track. The OECD writes:

The employment rate for women has risen sharply over the past five years, from 60.7% in 2012 to 69.6% in 2018, well above the 60.1% OECD average (Table 9). However, half of the new workers are non-regular workers. The working lives of women are interrupted and shortened by the burden of providing care for family members, leaving them under-represented in managerial positions and on boards of directors . ... Removing barriers to women requires policies to: i) improve work-life balance by strictly enforcing the new 360-hour annual limit on overtime; ii) further reduce waiting lists for childcare; and iii) attack discrimination, which tends to exclude women from fast-track career
paths. Breaking down labour market dualism is also essential, as women account for two-thirds of non-regular workers, who are paid substantially less.

Of course, pushing back retirement ages and expanding the existing workforce would also help to improve Japan's long-run budget picture. But the OECD report emphasizes that other efforts like cost-sharing in health care, means-testing of benefits for the elderly, and various kinds of cost-cutting will also be needed. 

How to get more productivity from Japan's workers? This issue has been the heart of Japan's long-run problems for decades. Of course, Japan's economy has a number of well-known world-class companies at highest level of global competitiveness. But it also lots of small and medium enterprises with much lower productivity. The OECD writes: "Despite a high level of public support for SMEs [small and medium enterprises], productivity in large firms was 2.5 times higher than in SMEs in FY 2017 in manufacturing, a large gap by international standards ..." Japan's service industries lag well behind their international peers in productivity, as well.

Subsidizing small and medium enterprises, as long as they remain small, is not a long-run path to higher productivity. Instead, the dropping Japanese workforce offers a chance for these inefficient firms to be combined, reorganize, managed better, and exposed to greater competition. Many of these companies seem to be in a quirky situation where they complain that they don't have enough capacity to produce--but they aren't taking the steps and making the investments to push for higher productivity of their existing workforce. The OECD report talks a lot about reforms to corporate governance, so that Japan's companies would do less sitting on their piles of cash and more looking for growth and efficiency opportunities. But spreading a more productivity-based mindset across all the companies of Japan, not just the world leaders, isn't an easy task. 

Japan has other issues beyond aging, budgets, and productivity. For example, Japan seems likely to bear costs of rising trade disputes involving China and around the world, even if if often isn't directly involved in the complaints. But the success which Japan has in addressing its challenges, for better or for worse, will shape how other high-income countries like the US view similar policy choices in the decades ahead. 

For some additional perspective on Japan's economy, Tanweer Akram has written "The Japanese Economy: Stagnation, Recovery, and Challenges," in the Journal of Economic Issues (June 2019, pp. 403-410).

Work is What Funds Retirement

The US population and workforce is aging. The median age of Americans--that is, half are above this age and half are below--was 28.1 years back in 1970, 32.9 years in 1990, and now is up to about 38 years. If one looks only at the US workforce, the median age rose from  38.3 years in 1996 to 42.0 years by 2016.  By 2035, the Census Bureau projects that the number of over-65 Americans will exceed the number of under-18 Americans for the first time in US history.

As as society ages, it needs to redraw the common expectations of when work will end and retirement will begin. Of course, from an individual perspective, retirement age isn't a one-size-fits-all choice. But from an overall social perspective,  Robert L. Clark and John B. Shoven write:

The retirement crisis is in no small measure caused by trying to do the impossible. What we mean by this is that it is nearly impossible to finance 30-year retirements with 40-year careers. Yet with today’s average retirement ages (62 for women and 64 for men), we are trying to do just that. If a 64-/62-year-old couple retired today, the survivor of the couple would have about a 40 percent chance of living an additional 30 years. This division of adult life between work and retirement is at the heart of the financial problems of Social Security and state and local pension plans, and it threatens the adequacy of retirement resources for millions of Americans. 

The Brookings Institution and the Kellogg School of Business hosted a conference on these issues in late January. Here, I'll draw on three discussion papers written for that conference:

• "Working longer policies: Framing the issues," by Martin Neil Baily and Benjamin H. Harris (January 31, 2019)
• "Enhancing work incentives for older workers: Social Security and Medicare proposals to reduce work disincentives," by Robert L. Clark and John B. Shoven (January 31, 2019)
• "Proposals to keep older people in the labor force," by Alicia H. Munnell and Abigail N. Walters (January 31, 2019)

Some of the adjustment in which longer life expectancies are accompanied by rising labor force participation is already underway. For example, the graph shows the share of those 55 and older who remain in the workforce. Back in the 1950s, about 42-43% of over-55s were in the labor force. By the early 1990s, the proportion had dipped below 30%. It then started rising again--although the upward momentum stalled, at least for now, around the Great Recession.



From the Baily and Harris paper, here's a figure showing labor force participation for older age groups: 55-59, 60-64, 65-69, 70-74, and 75+. Overall labor force participation is rising for each of these groups.

Indeed, many people continue to work after starting to claim Social Security. Here's a figure from the Baily-Harris paper:

Again, a later retirement age isn't for everyone, of course. But it's worth reconsidering the economic incentives that affect people's decision to keep working, and whether a few more years of accumulating assets and postponing Social Security payments, might be a good choice. After all, as Baily and Harris note: "In July 2018, the Social Security Administration reported that the average monthly benefit paid to retired workers was $1,415 per recipient, a rate of $16,980 a year. This is often insufficient to allow a worker to maintain in retirement the same standard of standard of living enjoyed during their working years. Even if there are two people in a household collecting benefits at this rate, $2,830 a month amounts to a still-modest $33,960 a year. Payments for Medicare coverage and out-of-pocket health costs must be paid for out of this total."

The three papers between them have several suggestions that would tend to have the effect of encouraging those who are on the margin to push back retirement a little, while still leaving open the option of earlier retirement. 

1) Reframe the message from Social Security. Baily and Harris suggest that one basic step might be just to reframe the message that people receive from Social Security. They write:

When a worker first signs on at the Social Security Administration and discusses their choices for collecting benefits, the framing they are given is about their “full retirement” age. This is 66, rising to 67. Many people take away from this conversation the fact that they should start collecting benefits at the full retirement age, even though they may be much better off to wait until age 70. Waiting increases the level of benefits by about 8 percent for each year until age 70. The message given to older people should be that their maximum benefit comes at age 70 and, though they can collect earlier, this comes at a price in lower benefits for life, and perhaps lower benefits for their spouse.

Munnell and Walters push this theme a little harder by arguing that from a practical and  historical perspective: "A strong case can be made that age 70 is the nation’s real retirement age.18 It is the age that maintains the same ratio of retirement to working years as in 1940, the age at which Social Security provides solid replacement rates, and the age at which most people are assured of retirement security ..."

Consider their table below. Start back in 1940, when the retirement age was 65. Think about the average years remaining of life expectancy at that time. Because of expanding life expectancies, by the year 2000 a retirement age of 70 years would imply the same expected number of retirement years; by 2020 it would be a retirement age of 71 years, and rising. Thus, a retirement age of 70 now actually means slightly more years of expected retirement than a retirement age of 65 did back in 1940. Similarly, if one looks at the ratio of years of expected retirement to working years, that ratio will also rise over time with life expectancy. The second column shows that if one retires at 69 in 2020, the ratio of retirement years to working years is the same as for a person retiring at age 65 back in 1940.



Notice that this particular proposal is all about making public announcements and managing expectations. It's just letting people know, in a clear way, that the current retirement system is set up for them to retire at 70, and that retiring earlier comes with costs in terms of Social Security benefits and long-term financial security.

2) Restructure Social Security and Medicare to reduce work disincentives. The current structure of Social Security and Medicare has some features that look like disincentives to work. The overall idea is that when you hit a certain age like 65 or 70, but you decide to keep working, you should be be able to stop paying into Social Security and Medicare. At that point, you can be considered "paid-up." In addition, you should be able to enroll in Medicare even if you are still working, so your employer don't have to buy health insurance for older individuals. And if you start getting Social Security payments, those payments should not be scaled back or penalized in any way if you continue working. Clark and Shoven offer a set of three policies along those lines:

With this in mind, we advocate three policies that could be adopted to make working longer more financially attractive. They are (1) eliminating the Social Security earnings test, (2) establishing a paid-up category for the Social Security payroll tax, and (3) also establishing a paid-up category for the Medicare payroll tax and simultaneously switching Medicare from secondary to primary payer status. We think the most obvious of our policy proposals is eliminating the earnings test. It is widely misunderstood and produces no long-run revenue for Social Security. It discourages work, not because of what it actually is but because it appears to be a major tax on work for those between the ERA [Early Retirement Age] and the FRA [Full Retirement Age]. Both the paid-up idea and the MPP [Medicare as a primary payer] idea have major appeal. 

We estimate if both our second and third proposals were adopted, the net wage would go up by about 40 percent for workers over age 65. This is exactly the age group that is most responsive to wages. In fact, with the higher wages and the resulting additional labor supply, IRS revenues would increase to substantially offset the cost of these programs to Social Security and Medicare. We think the reasonable range for the IRS offset is between 44 and 116 percent of the cost of these new policies. This means, at a minimum, that the offset is significant. With two reasonable assumptions—a labor supply elasticity of 3.0, and a tax rate of 22 percent—the IRS would collect more than enough revenue to completely offset the cost of the initiatives to Social Security and Medicare. Some of these policies, such as the earnings test, were initially implemented during the Great Depression with the explicit goal of encouraging people to retire. We think it is time to turn this thinking on its head and come up with policies to encourage people to work longer.

3) Training older workers to update their digital skills. The symposium authors disagree on whether this kind training is likely to pay off. Baily and Harris describe the mildly optimistic view for at least trying some pilot programs in this way:

Munnell and Walters are skeptical of the potential value of training for older workers, and they are not alone in their skepticism. They point out that the United States spends almost nothing on worker training and that evaluations of worker training programs are often negative. In what may be a triumph of hope over experience, we respectfully disagree, and we think it is worth trying to provide greater training opportunities for older workers using new teaching technologies. One of the reasons companies give for choosing younger workers is that older workers lack proficiency with digital technologies. This is an area where online instruction can make a difference. With guidance from instructors, older workers can improve their capabilities with the programs necessary for both white- and blue-collar jobs. Given what is at stake, it would be worthwhile to establish pilot programs to test whether older workers are willing to take courses and to see whether their employment outcomes are improved as a result.

4) Re-create a Mandatory Retirement Age at 70.  The argument against a mandatory retirement age is that it is a form of age discrimination, and was outlawed (although with a number of exceptions) by amendments passed in 1986 to the Age Discrimination in Employment Act of 1967. But there are also arguments for a mandatory retirement age at age 70: mainly, if employers thinking about hiring someone who is 60 or 65 need to worry that it will be very hard to fire this person without a lawsuite, and in addition that they may be responsible for high health care costs, employers will lean against hiring such workers. Munnell and Walters write:

One tool could be the restoration of some form of mandatory retirement at age 70 (which is substantially higher than mandatory retirement ages in the past), indexed to the age at which Social Security provides the maximum benefit. While employers can dismiss older workers who can no longer do their job, the process is unpleasant and employers worry about age discrimination lawsuits. But employers cannot legally dismiss older workers whose health insurance premiums have risen too high or who have come down with very expensive medical problems. Mandatory retirement would limit the employer’s exposure to the problem of compensation outpacing productivity that typically emerges as workers age. This limit could be key as, given the decline in career employment, hiring decisions have become more important. Putting a lid on tenure could make hiring workers in their 50s and early 60s more attractive, especially for low- and averagewage workers with employers that offer health insurance. ...

A default retirement age would have benefits for both retirement planning and workforce management. On the employee side, it would provide a more formal process to enable workers to plan to work longer, begin partial retirement, or enter into full retirement at age 70. On the employer side, a default retirement age would give employers a way to separate from an employee whose compensation outpaces his or her productivity, increasing the attractiveness of hiring older workers.

5) Provide information to employers and the public about the benefits of older workers.  Munnell and Walters write:

Older workers today are healthier, better educated, and more computer savvy than in the past and, in terms of these basic characteristics, look very much like younger workers. In addition, they bring more to the job in terms of skills, experience, and professional contacts. Finally, they are more likely to remain with their employer longer, and longer tenure enhances productivity and increases profitability for the employer. All of these benefits more than offset any remaining cost differentials between older and younger workers.

They offer a number of interesting details and figures along these lines. This figure offers some comparisons between those in the 30-35 and 55-60 age group. If you are an employer hoping to hire someone who will contribute immediately and reliably, and then stay with your company for the long run, the differences between these groups in health, college degree, and use of a computer at home are not large. Of course, job experience is likely to be much greater for the older group. 

As another example, here's a study of the number of severe errors  (measured by the cost) made on a Mercedes-Benz assembly line. At least in this study, older workers were much less likely to have severe screw-ups.

Some economic choices can be made frequently, for small stakes, like where to order a pizza. There are plenty of chances for consumers to learn from experience and for producers to have incentives for for efficiency and experimentation. But other economic choices get made only once in a lifetime. The chance to learn from personal experience is close-to-nonexistent. The transition from work to retirement is that kind of choice. It will be heavily shaped by the design of retirement programs, as well as by the norms and common beliefs of employers and workers. But in a time period when life expectancies are rising, then the design of those retirement programs, as well as the common beliefs of employers and the public about retirement, can become out of synch with reality. Time to consider how some adjustments might happen.

The Emergence and Erosion of the Retail Sales Tax

About 160 countries around the world, including all the other high-income countries of the world, use a value-added tax. The US has no value added tax, but 45 states and several thousand cities, use a sales tax as an alternative method of taxing consumption.  John L. Mikesell and Sharon N. Kioko provide a useful overview of the issues in "The Retail Sales Tax in a New Economy," written for the 7th Annual Municipal Finance Conference, which was held on July 16-17, 2018, at the Brookings Institution.  Video of the conference presentation of the paper, with comments and discussion, is available here.

Here's a short summary of the emergence and erosion of the retail sales tax (footnotes omitted):

"The American retail sales tax emerged from a desperation experiment in Mississippi in the midst of the Great Depression. Revenue from the property tax, the largest single source of state tax revenue at the time, collapsed, falling by 11.4 percent from 1927 to 1932 and by another 16.8 percent from 1932 to 1934. State revenue could not cover their service obligations or provide expected assistance to local governments. Mississippi (followed by West Virginia) showed that retail sales taxes could produce immediate cash collections, even in low-income jurisdictions. Other states paid attention. In 1933, eleven other states adopted the tax (two let the tax expire almost immediately). By 1938, twenty-two states (plus Hawaii, not yet a state) were collecting the tax; six others had also imposed the tax for a short time but had let them expire. ...

"The national total retail sales tax collections exceeded the collections from every other state tax from 1947 through 2001. It was also the largest tax producer in 2003 and 2004 also (years in which individual income tax revenue was still impacted by the 2001 recession), but it was surpassed by state individual income tax revenues in other years since 2001. ,,, By fiscal 2016, total state individual income tax collections exceeded $345 billion, compared to over $288 billion for state retail sales taxes. However, those national totals conceal the continuing dominance of the retail sales taxes in a number of states ...

A major and ongoing US sales taxes is that, from the start, they mostly did not cover services. Thus, as the US has shifted to a service-based economy, the amount of consumer spending doing to goods covered by the sales tax has diminished. As the base of the sales tax diminished, then states have gradually raised the rate of the sale tax so that it would bring in a similar proportion of overall state revenue. This dynamic of higher sales tax rates imposed on a shrinking base is not sensible.
looking only at the 45 states with sales taxes.

"[Here is] the history of mean retail sales tax breadth (implicit tax base / state personal income) across the states from 1970 to 2016. The record is one of almost constant decline, from 49.0 percent in 1970 to 37.3 percent in 2016. ... The typical state retail sales tax base has narrowed as a share of the economy of the state over the years and this has meant that, in order for states to maintain the place of their sales tax in their revenue systems, they have been required to gradually increase the statutory tax rate they apply to that base. ... [L]ittle good can be said about a narrow base / high statutory rate revenue policy. ...

"Unfortunately, many states got off to a bad start when they initially adopted their sales taxes and excluded all or almost all household service purchases from the tax base and it has proven to be difficult to correct that initial error. Extending the retail sales tax to include at least some services is a perennial topic whenever states are seeking additional revenue or considering reforms in their tax systems. ... While the current typical sales tax base is around 20 percent narrower in 2016 compared with 1970, the base with all services added is actually about 11 percent broader, and the base without health care and education services is only 8 percent below its 1970 level. ..."

Another perennial sales tax issue is that legislatures like to list items that will be exempt from the sales tax, or tax "holidays" where sales tax doesn't need to be paid during certain time periods on items or like back-to-school items, energy-saving appliances, emergency preparedness supplies, and other items. These policies are often justified as helping those with low incomes, but any policy which cuts taxes for 100% of the population in the name of helping the 15-20% of the population that is poor has a mismatch between its stated intentions and its reality. Several states have taken a much more sensible course: if the goal is to help poor people, then give poor people a tax credit, based on their income, so that sales taxes they pay can be rebated to them. Mikesell and Kioko write:

"The problems with [a sales tax] exemption are well-known – absence of targeting, high revenue loss, additional cost of compliance and administration, distortion of consumer behavior, reward for political support, etc. – and it is particularly distressing in light of the fact that the credit/rebate system normally operated through the state income tax provides an alternative relief approach that eliminates virtually all these difficulties. Currently five states (Maine, Kansas, Oklahoma, Idaho, and Hawaii – operate some form of sales tax credit that returns to families some or all of sales tax paid on purchases, giving greatest relative relief to lowest income families and lesser (or no) relief to more affluent families. ... The credit / rebate system promises efficiency, equity, and less revenue loss. Its apparent unpopularity is somewhat surprising, particularly in light of the spread of the earned income tax credit program, a program with some similar characteristics."

Yet another perennial sales tax issue is that the logic of the tax is that it should apply to goods and services purchased by households, not to business purchases. If a sales tax is applied to business purchases, it raises a risk of "pyramiding," where one business pays sales tax on equipment and supplies from another business, and the consumers also pay sales tax on the finished product. If there are layers of businesses buying from each other along the supply chain, the sales tax can be imposed on a given product multiple times. Again, Mikesell and Kioko write:

"American retail sales taxes have not entirely gotten over the confusion that the tax is not on finished goods but rather should be on goods (and services) purchased for household consumption. The reality of sales taxation is that a considerable share of the overall sales tax base, roughly 40 percent on average, consists of input purchases by businesses. The tax on those purchases embeds in prices charged by those businesses, meaning that this share of the tax is effectively hidden from households, allowing legislatures to claim a statutory rate that is considerably less than the true rate borne by individuals. ... The pattern does show a considerable movement toward removal of these business input purchases from the tax base, thus reducing the prospects for pyramiding, hidden tax burdens, distortions, and discrimination. However, states continue to tax purchases made by other business activities. Lawmakers are inclined to try to pick favorites for tax relief and appear to like glitz. Targeted preferences for motion pictures, certain sorts of research and development, or bids for the Super Bowl are attractive to politicians because they provide identifiable credit and possibly ribbon cutting not available with general exemption. Super Bowl bids are particularly egregious."

A more recent issue is how jurisdictions with a sales tax can react to the rise of online sales from other jurisdictions. There seem to be several models developing. First, there is a "South Dakota" model of collecting sales tax from companies physically located in other states if they have total sales above a certain minimum level to South Dakota residents. The US Supreme Court upheld this law as constitutional this summer.  Other states that have adopted this model include Indiana, Iowa, North Dakota, Massachusetts, Maine, Mississippi, Wyoming, and Alabama.

An alternative "Colorado" model require sellers in a different state to notify both Colorado buyers and the Colorado tax authorities that state sales tax was due--but did not seek to collect the sales tax from those out-of-state sellers.  Other states that have enacted this approach are Louisiana, Pennsylvania, Vermont, and Washington.

Yet another approach addresses the question of when the producer is in one state, the buyer is in another state, and the "market facilitator" through which an online transaction is carried out is in still another state. This approach seeks to make the market facilitator based in one state responsible for collecting sales taxes on behalf of other states. Alabama, Arizona, Oklahoma, Pennsylvania, Rhode Island, Washington, and Minnesota have taken this approach.

The lurking difficulty with the lower base and higher rates for the retail sales tax is that, at some point, the tax rate gets  high enough that it becomes lucrative to find ways to avoid paying it.

"The problem is that there has been a consensus, heavily based on pre-value-added tax experience in Scandinavian countries with high-rate retail sales taxes, that retail sales tax rates much above 10 percent are likely to produce compliance issues so difficult that the tax becomes almost impossible to administer. American retail sales tax rates are drifting ever closer to that danger level, particularly when local governments add their own rates to the rate levied by the state. ... [S]tate statutory rates have drifted upward since 1970. Rates of 6 and 7 percent are no longer rare and a narrowing base will require more rate increases if the position of the sales tax is to be preserved (or expanded) in state revenue systems. Rates are moving toward the danger zone in which significant non-compliance begins to become more attractive and, unless states can manage the narrowing base problem, a compliance gap may become a significant challenge for state tax administrators in the first part of the 21st century."

Outside the US, where value-added taxes are high, there has been a spread of what is called "sales suppression software," under names like "phantomware" and "zappers." Basically, this software cooks the accounting books to make sales look lower, either by substituting lower prices for the higher price that was actually charged, or by reducing the number of transactions. This software takes care of other issues too, by producing fake inventory records if needed, or by running certain transactions through international cloud-based services that will be more difficult to track. Tax administration has become increasingly based on electronic records, so sales suppression software may turn into a real problem.

Notes on "Eternal Vigilance is the Price of Liberty"

Who said: "Eternal vigilance is the price of liberty?" Well, it wasn't Thomas Jefferson, at least not according to the official Jefferson Library. However, a few years ago a blogger named Anna Berkes at the Jefferson library website took a deep dive to search out the source of the quotation. Berkes found that "eternal vigilance" and "price of liberty" were used more than 700 times in close proximity in various newspapers and books during the first half of the 19th century.

For this post-Fourth-of-July ramble, I'll follow in Berkes's footsteps, but add a different kind of detail. Specifically, I'll take a look at five notable earlier appearances of this phrase. My focus will is on what specifically were the early users of the quotation suggesting that we liberty-loving people need to be eternally vigilant about?

1.  The first time that we know the terms "eternal vigilance" and "price of liberty" were used in close proximity was by an Irishman named John Philpott Curran in 1790, discussing the rules for electing the Lord-Mayor of London.
2. The first time we know that the the entire phrase was used together was during in an 1809 discussion of how James Jackson helped fight off the "Yazoo land grab" in western Georgia. 
3. The first use by a US president, in Andrew Jackson's Farewell Address in 1837, was about the need to fight off the Bank of the United States.
4. The first use by someone who would later be a  US president was when James Buchanan applied the phrase to discussing the merits of the presidential veto.
5. The use of the term in its more modern meaning, as pushing back against encroachments on personal liberty, in the speeches and writings of Frederick Douglass starting in 1848 and continuing to the years after the Civil War. 

Example #1: John Philpott Curran and the rules for electing the Lord-Mayor of Dublin

John Philpott Curran (1750-1817) was a lawyer who is probably best-remembered today as an advocate for freedom in Ireland. At the time of the election of the Lord-Mayor of Dublin in 1790, Philpott gave a speech pointing that while the Lord Mayor had traditionally been elected, a situation had evolved in which Alderman of the city had both become the only ones eligible for the position of Lord Mayor, but also decided among themselves who would hold that position. Thiw quotation is from The speeches of the Right Honourable John Philpot Curran, published in 1865 (July 10, 1790, p. 105, italics added). 

"The Lord Mayor of this city hath, from time immemorial, been a magistrate, not appointed by the crown, but elected by his fellow citizens; from the history of the early periods of this corporation, and view of its charters and bye-laws, it appears that the Commons had from the earliest periods, participated in the important right of election to that high trust; and it was natural and just that the whole body of citizens, by themselves or their representatives, should have a share in electing those magistrates who were to govern them, as it was their birthright to be ruled only by laws which they had a share in enacting. The Aldermen, however, soon became jealous of this participation, encroached by degrees upon the Commons, and at length succeeded in engrossing to themselves the double privilege of eligibility and of election of being the only body out of which, and by which the Lord Mayor could be chosen. 

Nor is it strange that, in those times, a board consisting of so small a number as twenty-four members, with the advantages of a more united interest, and a longer continuance in office, should have prevailed, even contrary to so evident principles of natural justice and constitutional right, against the unsteady resistance of competitors so much less vigilant, so much more numerous, and, therefore, so much less united. It  is the common fate of the indolent to see their rights become a prey to the active. The condition upon which God hath given liberty to man is eternal vigilance, which condition if he break, servitude is at once the consequence of his crime, and the punishment of his guilt. 

In this state of abasement the Commons remained for a number of years; sometimes supinely acquiescing under their degradation; sometimes, what was worse, exasperating the fury, and alarming the caution of their oppressors, by ineffectual resistance. The slave that struggles, without breaking his chain, provokes the tyrant to double it; and gives him the plea of self-defence for extinguishing what, at first, he only intended to subdue.

Example #2: Thomas Charlton, James Jackson, and the Yazoo Land Fraud

The earliest use of the exact phrase, "eternal vigilance is the price of liberty," dates to an 1809 book called The Life of Major General James Jackson, by Thomas U.P. Charlton. James Jackson was a member of first Continental Congress and was in the US Senate in early 1790s. He became Governor of Georgia, and then later returned to the US Senate. The specific issue here is the "Yazoo land fraud," in which the Georgia legislature--some of whom had been bribed--sold large quantities of land in the western part of the state.  Jackson made a political issue of sale, was elected Governor, and overturned it, also using the opportunity to disgrace a number of his political opponents. Here is the sympathetic and florid passage from Charlton's book (pp. 84-87), which is only a portion of the surrounding paragraph (!). Notice that Charlton puts the phrase of interest in quotation marks (and I've put it in italics), which might either mean that the phrase was already well-known to his readers, or else that he is just setting off a phrase of his own invention for ease of reading.

"In 1793, 1794, and 1795, he [Jackson] was a senator in congress. Recalled by his fellow citizens, who (inflamed almost to madness, and discerning around them, in every quarter, their rights trampled upon by men of highest character) passed resolutions in their primary county meetings demanding his aid at home, he resigned his honorable station, and immediately embarked all the faculties of his mind, all the firmness of his nature, and all the reputation he had acquired, in indefatigable exertions to effect a repeal of the act by which Georgia had sold to companies of speculators millions of acres of her western territory. To recall the memory of her degradation, to assist in extending remembrance of her shame, can give no satisfaction to her sons. The biographer approaches the subject with loathing, impelled to it by the obligations he has assumed. His painful duty will be comparatively light, if he can convince himself that his succinct presentation of the speculation shall have the least effect in fastening upon the minds of the American people the belief, that "the price of liberty is eternal vigilance"; and in convincing them that, whilst a just confidence is given to their public servants, they should be watched with eyes that never sleep. A majority of the Georgia legislature had been bribed by promises of shares— some by certificates of shares, for which they were never to pay—others by expectations of slave property. The foulest treason had been perpetrated, under the guise of legislation. Citizens of the most exalted standing from several States, some of them high public functionaries: one a senator from Georgia, whose duty required him to have been at his post in Congress; others judges, generals, revolutionary characters, whose popularity and past services made them more dangerous, and served ultimately to heap degradation upon their heads, had attended at Augusta, in January, 1795, and executed their unhallowed purpose. Georgia had been robbed of her domain—her own law givers corrupted and consenting and an indelible stigma fixed upon her fame, her own children blackening her escutcheon. The full iniquity of this nefarious legislation—if usurpation can be denominated legislation—was exposed by General Jackson in a series of letters addressed to the people under the signature of "Sicilius." At the following session he was a member. The all-absorbing subject, with the petitions, remonstrances, memorials, and other proceedings of the people, was referred to a committee of which he was chairman. Testimony was taken upon oath, which established deep and incontrovertible guilt. The rescinding law was passed. It was drawn and reported by General Jackson, and adopted as it came from his pen. The merits of this latter act— its constitutionality—its consistency with republican principles—its necessity—its justice—have all been freely and ably discussed in our country, in private circles, in pamphlets, in the public gazettes, in the Congress of the Union, in the Supreme Court. The decision of the country, perhaps, has been against the power of the rescinding legislature, so far as innocent purchasers under the fraudulent grants were interested; but, whether constitutional or not, nothing is more certain than that the honest of every section of the United States; all who detest corruption, admire virtue, and regard an honest representation as the bulwark of the public liberties, have considered its action upon the Yazoo speculation as pure, and its motives patriotic. The citizens of Georgia, especially, have held in horror and detestation the authors and abettors of her humiliation; and have consecrated with their best affections the memories of those who were faithful to the State. The Yazoo act repealed, every vestige and memorial of its passage expunged from the public records, and burnt with all the ceremony and circumstance which popular indignation demanded, the popularity of General Jackson became unrivalled.  

Example #3: Andrew Jackson and Opposition to the Bank of the United States

In President Jackson's Farewell address on March 4, 1837, he took a few whacks at his old adversaries who favored the founding of a Bank of the United States. He said (italics added):

"The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States, and the evil consequences which followed may warn us of the danger of departing from the true rule of construction and of permitting temporary circumstances or the hope of better promoting the public welfare to influence in any degree our decisions upon the extent of the authority of the General Government. Let us abide by the Constitution as it is written, or amend it in the constitutional mode if it is found to be defective.

"The severe lessons of experience will, I doubt not, be sufficient to prevent Congress from again chartering such a monopoly, even if the Constitution did not present an insuperable objection to it. But you must remember, my fellow-citizens, that eternal vigilance by the people is the price of liberty, and that you must pay the price if you wish to secure the blessing. It behooves you, therefore, to be watchful in your States as well as in the Federal Government. The power which the moneyed interest can exercise, when concentrated under a single head and with our present system of currency, was sufficiently demonstrated in the struggle made by the Bank of the United States."

Example #4: James Buchanan and the Presidential Veto

In 1842, the US Senate was considering a bill that would alter the US Constitution to eliminate the presidential veto: that is, what Congress passes by majority vote becomes law. James Buchanan, who would later become president from 1857-1861, just before the Civil War, gave a speech "On the Veto Power" on February 2, 1842. This is from volume 5 of The Works of James Buchanan published from 1908-1911 (p. 130).  Buchanan said (italics added):

"This veto power was conferred upon the President to arrest unconstitutional, improvident, and hasty legislation. Its intention (if I may use a word not much according to my taste) was purely conservative. To adopt the language of the Federalist, " it establishes a salutary check upon the legislative body, calculated to guard the community against the effects of faction, precipitancy, or of any impulse unfriendly to the public good, which may happen to influence a majority of that body," [Congress.] Throughout the whole book, whenever the occasion offers, a feeling of dread is expressed, lest the legislative power might transcend the limits prescribed to it by the Constitution, and ultimately absorb the other powers of the Government. From first to last, this fear is manifested. We ought never to forget that the representatives of the people are not the people themselves. The practical neglect of this distinction has often led to the overthrow of Republican institutions. Eternal vigilance is the price of liberty; and the people should regard with a jealous eye, not only their Executive, but their legislative servants. The representative body, proceeding from the people, and clothed with their confidence, naturally lulls suspicion to sleep; and, when disposed to betray its trust, can execute its purpose almost before their constituents take the alarm." 

Example #5: Frederick Douglass and the Fight against Slavery and Racial Discrimination

Our proverb of interest was something of a favorite for Frederick Douglass. In Wolfgang Mieder's 2001 book, No Struggle, No Progress: Frederick Douglass and His Proverbial Struggle for Civil Rights, Mieder lists seven times when Douglass used the term spanning the years from 1848 to 1889, The first time was in an essay in Douglass's journal The North Star, on March 17, 1848 (the Library of Congress has a manuscript of the essay here). Douglass wrote (italics added):

"It is in strict accordance with all philosophical, as well as experimental knowledge, that those who unite with tyrants to oppress the weak and helpless, will sooner or later find the groundwork of their own liberties giving way. "The price of liberty is eternal vigilance." It can only be maintained by a sacred regard for the rights of all men. The people of the North have sought to attain and secure their rights, by a most flagrant infringement of the rights, liberty and happiness of others. They have consented to stand side by side with the tyrant; with their heels on the hearts of fettered millions, leaving them to perish under the weight of what they call "our glorious Union", and in doing so, have given the Southern slaveholder the most effective power to control and govern the North." 

Douglass's usage made the eternal vigilance a matter of universal civil rights and human rights, not just about rules for electing the Lord Mayor or being opposed to arguably ill-considered legislation. On the 26th anniversary of emancipation on April 16, 1888,  Douglass gave a speech in Washington, DC, now often titled, "I Denounce the So-Called Emancipation as a Stupendous Fraud." He focused on the dire situation of blacks in the South (where he had just returned from a visit),

"It is well said that "a people may lose its liberty in a day and not miss it in half a century," and that "the price of liberty is eternal vigilance." In my judgment, with my knowledge of what has already taken place in the South, these wise and wide-awake sentiments were never more apt and timely than now. ... 

"I have no taste for the role of an alarmist. If my wishes could be allowed to dictate my speech I would tell you something quite the reverse of what I now intend. I would tell you that everything is lovely with the Negro in the South; I would tell you that the rights of the Negro are respected, and that be has no wrongs to redress; I would tell you that he is honestly paid for his labor; that he is secure in his liberty; that he is tried by a jury of his peers when accused of crime; that he is no longer subject to lynch law; that he has freedom of speech; that the gates of knowledge are open to him; that he goes to the ballot box unmolested; that his vote is duly counted and given its proper weight in determining result; I would tell you that he is making splendid progress in the acquisition of knowledge, wealth and influence; I would tell you that his bitterest enemies have become his warmest friends; that the desire to make him a slave no longer exists anywhere in the South; that the Democratic party is a better friend to him than the Republican party, and that each party is competing with the other to see which can do the most to make his liberty a blessing to himself and to the country and the world. But in telling you all this I should be telling you what is absolutely false, and what you know to be false, and the only thing which would save such a story from being a lie would be its utter inability to deceive.

The first quotation from Douglass in this passage, about how "a people may lose its liberty in a day," is commonly attributed to Montesquieu, but I don't know the original source. (And I wouldn't dream of putting any faithful reader who has stuck with me this far through another search!)

Some Thoughts

1) I suppose that the economist in me likes the phrase "eternal vigilance is the price of liberty" because it is a prominent example of a nonmonetary price. But maybe that reason  doesn't resonate with everyone!

2) The word "vigilance" is powerful and interesting. Vigilance is about a heightened level of perception and responsibility, about being present not just physically, but also emotionally. For example, a sentry who is responsible for the safety of others may keep vigil, or there are vigils before certain religious events, or people might sit vigil near a with someone who is dying or already dead.

3) "Vigilance" leaves open the question of what political tactics are appropriate at a given point in time. Vigilance doesn't mean that you react on a hair-trigger, or that you react in a dramatic way--although sometimes those responses may be advisable. Vigilance is about awareness and sensitivity and noticing.

4) The idea that vigilance must be "eternal" is pleasing to me, because it suggests a hard-headed view both of political actors and of ordinary people. It suggests both that political actors and social groups will always and inevitably be trying to encroach upon liberty.

5) In a broad sense, this sentiment is not just political in its meaning. Back in 1956, in the previous to a CBS Radio adaptation of his novel Brave New World, Aldous Huxley said (January 27, 1956): 
"The price of liberty--and even of common humanity--is eternal vigilance." I suspect that Frederick Douglass would have agreed, although some of the earlier users of the term might have felt that Huxley was missing the point.