Unemployment is Bottoming Out, So What's Next?

The unemployment rate, now hovering around 5%, has dropped a lot more quickly during the last three years than mainstream forecasters predicted. For example, back in February 2013, the Congressional Budget Office was forecasting that the unemployment rate would be 7.1% in 2015 and 6.3% in 2016. As another example, all participants in the meetings of the Federal Reserve Open Market Committee present their forecast of economic conditions looking ahead. In the "Summary of Economic Projections" prepared for its December 2012 meeting, the predicted range for the unemployment rate in 2015 was 5.7% to 6.8%. To put it another way, the unemployment rate in the last three years has fallen by more than even the most optimistic member of the Federal Reserve Open Market Committee believed was likely.

But now, the unemployment rate is close to bottoming out. The Congressional Budget Office forecast for January 2016 is that the unemployment rate will fall to 4.5% in 2016 and 2017, but will then rise back to 5.0% in the long run. In the Federal Reserve's "Summary of Economic Projections" for its meeting of December 16, 2015,  the median prediction is that unemployment will fall to 4.7% for the next three years from 2016 to 2018 but in the long run will rise back to 4.9%.

Other measures of the labor market also suggest that it is very close to returning to pre-recession levels. For example, here's a figure from the latest Job Openings and Labor Turnover Survey that came out in mid-January, which is a survey with a rotating sample of about 16,000 firms run by the US Bureau of Labor Statistics. The figure shows that the pace of hiring has returned almost to pre-recession levels, and that job openings have surged faster. The number of workers who quit typically drops during a recession, because it's harder to find an alternative job, so the rising number of "quits" is a signal of a healthier labor market.

In short, while the unemployment rate may dip a bit lower or bounce a bit higher, the long fall in the unemployment rate from its peak of 10% in October 2009 is mostly finished.  So what's the next step in looking for whether the labor market continues to improve? There are two broad metrics that come to mind. Are wages starting to rise more quickly, as one would expect in a tighter labor market? and what's the share of Americans who have jobs?

There are some early and very preliminary signs that wages might finally be starting to rise. For example, here's a figure from the "US Economy in a Snapshot" published earlier in January 2016 by the Federal Reserve Bank of New York.

Of course, what actually matters is not just wages, but whether wages are keeping ahead of inflation. Here's a figure in which the blue line shows the Employment Cost Index, a broad measure of how much costs of compensation (including benefits) are rising. The red line shows the rate of inflation based on the Personal Consumption Expenditures index. Notice that back around 2003-2004, compensation increases were running above inflation. The rate of inflation leaps up and down, in part driven by short-term shifts in prices of oil and food, but you can see that compensation wasn't running much ahead of inflation--if at all--from when the recession got underway up through about 2012. However, just in the last year or so, compensation has again been ahead of inflation

Another labor market measure that deserves a close look moving ahead is the relationship between the unemployment rate and some broader measures of labor market involvement. In this figure, again taken from the "US Economy in a Snapshot," the blue line shows the unemployment rate rising during the recession and falling again. The red line shows the labor force participation rate, which I've written on this blog a number of times.  The beige line shows the employment/population ratio

The downward trend in the labor force participation rate started well before the recession, and as I've discussed on this website before (for example, here and here), the long-term trend reflects factors like young adults being more likely to attend school, low-wage workers having fewer job opportunities, and the baby boom generation reaching retirement age.  This long-term fall in the labor force participation rate accelerates during the Great Recession, but more recently, it the rate of decline has slowed again.

A pattern I haven't written about much on this blog is the employment-to-population ratio, which has declined over time  for many of the same reasons as the labor force participation rate. The economic concept of the "labor force" includes both the employed and the unemployed--that is, everyone who has a job or is actively looking for one. However, the employment/population ratio includes only the employed,which is why it drops more sharply during recessions. It's interesting that the employment/population ratio actually stabilized back around 2010 and has even increased a little since then.

Maybe it goes without saying, but just because unemployment is bottoming out doesn't mean that everything is hunky-dory for everyone in the labor market. But the labor market problems of having the unemployment rate at 5% is at least a different and less terrible than the problems of having an unemployment rate at 10%.

Philanthropy, American Style

The Philanthropy Roundtable has published its most recent Almanac of American Philanthropy. The report offers lots of possibilities for browsing.  For example, there's a lengthy list of of "Great Philanthropy Quotations,"  "Timeline of American Philanthrophy: 1936-2015,"  a "Philanthropy Hall of Fame," and more. Alex Reid, a tax attorney who was a former counsel to the Joint Committee on Taxation of the U.S. Congress, offers a rock-ribbed historical and philosophical (if not especially economic) defense of why charitable contributions should be tax-deductible. But as is my wont, I'm inevitably drawn to the graphs and figures.

For example, here's a graph of giving over time, with the top line (measured on the left axis) showing total real charitable giving in the US, and the bottom line (measured on the right axis) showing per capita giving. As the report points out, another way of describing these figures is that Americans give about 2% of GDP: "But it’s interesting that even as we have become a much wealthier people in the post-WWII era, the fraction we give away hasn’t risen. There seems to be something stubborn about that 2 percent rate."



Where do the charitable donations go? As the report notes, donations to "religion" end up being spent in a variety of areas: "Much religious charity, however, ultimately goes into sub-causes like relief for the poor, medical care, education, or aid sent to low-income countries or victims of disaster."


And for all the talk of charitable giving by big foundations, the vast majority of charitable donations are by individuals. About two-thirds of Americans donate to charity, including over 90% of those with annual incomes above $125,000.


Here's a graph showing "Output of the Nonprofit Sector" as a share of GDP. A few points about this calculation are worth remembering: 1) With some industries, like steel mills or haircuts, it's relatively easy to measure output. With the nonprofit sector, what you're really measuring is money spent, rather than outcomes provided; 2) Volunteer time of over 8.1 billion hours per year isn't counted in the "output" statistics of nonprofits, for example, because although it would have a market value well above $100 billion (depending on how you value people's time), it's not paid for; 3) Also, it turns out that some charities registered with the IRS are counted as "businesses," rather than as nonprofits. That said, it's still interesting that, as the report notes: "For perspective, consider that annual U.S. defense spending totals 4.5 percent of GDP. The nonprofit sector surpassed the vaunted “military-industrial complex” in economic scope way back in 1993."



If one looks at private philanthropy as a share of GDP, Americans lead the high-income countries of the world, with Canada in second place.

Finally, there's a potentially interesting discussion topic for students--and for us all, really--on the subject of "Good Charity, Bad Charity?" The Almanac takes the following stance:

Some activists today are eager to define what is good or bad, acceptable or unacceptable, in other people’s giving. Princeton professor Peter Singer has lately made it almost a career to pronounce that only certain kinds of philanthropic contributions ought to be considered truly in the public interest. Only money given directly to “the poor” should be counted as charitable, he and some others argue.

Former NPR executive Ken Stern constructed a recent book on this same idea that charity must be “dedicated to serving the poor and needy.” Noting that many philanthropists go far beyond that limited population, he complains that it is “astonishingly easy to start a charity; the IRS approves over 99.5 percent of all charitable applications.” He disapprovingly lists nonprofits that have “little connection to common notions of doing good: the Sugar Bowl, the U.S. Golf Association, the Renegade Roller Derby team in Bend, Oregon, and the All Colorado Beer Festival, just to name a few.”

Is that a humane argument? Without question, the philanthropy for the downtrodden launched by people like Stephen Girard, Nicholas Longworth, Jean Louis, the Tappans, Milton Hershey, Albert Lexie, and Father Damien is deeply impressive. But the idea that only generosity aimed directly at the poor (or those who agitate in their name) should count as philanthropic is astoundingly narrow and shortsighted. Meddling premised on this view would horribly constrict the natural outpouring of human creativity.

Who is to say that Ned ­McIlhenny’s leaps to preserve the Negro spiritual, or rescue the snowy egret, were less worthy than income-boosting? Was the check that catalyzed Harper Lee’s classic novel bad philanthropy? Were there better uses for Alfred Loomis’s funds and volunteer management genius than beating the Nazis and Imperial Japanese military?

Even if you insist on the crude utilitarian view that only direct aid to the poor should count as charity, the reality is that many of the most important interventions that reduce poverty over time have nothing to do with alms. By building up MIT, George Eastman struck a mighty blow to increase prosperity and improve the health and safety of everyday life—benefiting individuals at all points on the economic spectrum. Givers who establish good charter schools today are doing more to break cycles of human failure than any welfare transfer has ever achieved. Donors who fund science, abstract knowledge, and new learning pour the deep concrete footings of economic success that have made us history’s most ­aberrant nation—where the poor improve their lot as much as other citizens, and often far more.

And what of the private donors who stoke the fires of imagination, moral understanding, personal character, and inspiration? Is artistic and religious philanthropy just the dabbling of bored and vain wealthholders? Aren’t people of all income levels lifted up when the human spirit is cultivated and celebrated in a wondrous story, or haunting piece of music, or awe-engendering cathedral?

When a donation is offered to unlock some secret of science, or feed an inspiring art, or attack some cruel disease, one can never count on any precise result. But it’s clear that any definition which denies humanitarian value to such giving, because it doesn’t go directly to income support, is crabbed and foolish. Much of the power and beauty of American philanthropy derives from its vast range, and the riot of causes we underwrite in our millions of donations.

In practice, my own answer to all those rhetorical questions is that my personal tax-deductible giving goes to a range of cause that include the arts, education, and conservation, as well as to activities supporting the poor. But one can make a case that it's too easy to use tax deductible contributions, and that the rules should be tightened.

Snapshots and Visualizations of the Global Economy

For me, figures based on data about the global economy are like reliable sources of indirect light in a room where I'm working. Even when they are out of view, or when I'm not thinking about them explicitly, they shed some light on whatever the topic of my work is that day. For example, I recently ran across this breakdown of world GDP by country on the cost information website "How Much" in the short article, "One Diagram That Will Change the Way You Look At the US Economy" (July 21, 2015).

The country share of GDP (using market exchange rates to convert national currency values) is shown by the dark like. The lighter subdivisions within each country show the share of the economy that is services (darker area), manufacturing (medium area), and agriculture (lighter area). The color scheme differentiates continents, as the key to the figure shows.



Here's a quick collection of some other global economy figures that have appeared on this blog during the last year or two. If you want more detailed commentary about the figures and their sources, you can check at the original blog post.

Here's a different representation of world GDP, this one from the World Bank's International Comparison project. The horizontal axis shows population for various countries. The vertical axis shows per capita GDP. Thus, the area for each country (per capita GDP multiplied by population) gives the size of the country's economy.  The original post was "GDP Snapshots from the International Comparison Project" (May 9, 2014),




This is a similar figure with population and per capita GDP from a McKinsey Global Institute report at "Global Economic Growth: All Productivity, All the Time"  (January 20, 2015). However, this figure shows the distribution for 1964 and also the distribution 50 years later in 2014, thus illustrating the rise in population, standard of living, and the size of the world economy over those 50 years.

Some areas of the world obviously have more economic activity than others. What's the geographic center of the world economy? It's a little tricky to carry out this calculation on the sphere of the world, but here's the result of one such calculation in "The Shifting Geographic Center of the World Economy" (June 3, 2015). The center of the world economy was over near China 2000 years ago. During the industrial revolution period of the 19th century and on into the 20th century, the geographic center moves to Europe and then over toward the United States. But now the geographic center is shifting back toward China.



One way of illustrating income inequality is with a graphs that has the range of incomes on the horizontal axis, and the share of people receiving any given level of income on the vertical axis. This kind of graph shows the most common level of income and the distribution of income. In this figure on "Global Income Inequality in Decline" (May 5, 2015), the global distribution of income for 2003 (brown line) is compared with the distribution in 2013 (blue line) and a projected distribution for 2035 (red line). You can see the rise in mean and median incomes over time. Moreover, economic growth around the globe, but especially in previously low-income places like China and India, means that not as much of the world population is bunched down at the bottom of the income distribution, and for that reason the world distribution of income is becoming more equal.



Over the last couple of centuries, a common pattern has been that the high-income economies were also the faster-growing and largest economies. But over the last few decades, that pattern has been changing. The consulting firm PricewaterhouseCoopers estimates that by 2050, the six largest economies in the world will be, in order, China, India, United States, Indonesia, Brazil, Mexico. Thus, we are entering a world "When High GDP No Longer Means High Per Capita GDP" (October 20, 2015). Here's a figure showing GDP in per capita terms for some large high-income countries the also a group of lower-income emerging market countries. By 2050, economic growth will make many of the countries on the right-hand side of this figure among the largest in the world. But even after several more decades of faster-than-global-average growth, their per capita GDP will not have yet caught up to the levels n the US and other high-income countries.




Finally, here's a depiction of the distribution of global wealth from Credit Suisse in "Snapshots of Global Wealth" (October 15, 2014). If you have more than $100,000 in wealth (and yes, your housing equity and your retirement account are included here), then you are sitting above the 90th percentile of the world wealth distribution. If you have more than $1,000,000 in wealth (or if you plan to end up at that level of wealth by the time you reach retirement age), you are in the 99th percentile of world wealth.

Digital Dividends and Development

"Digital technologies have spread rapidly in much of the world. Digital dividends—the broader development benefits from using these technologies—have lagged behind. In many instances digital technologies have boosted growth, expanded opportunities, and improved service delivery. Yet their aggregate impact has fallen short and is unevenly distributed." Those are the opening words of the 2016 World Development Report from the World Bank, which focuses on the theme of "Digital Dividends." The report does a nice job of wrapping its arms around this big unruly topic, with lots of concrete facts and examples. Here's a quick overview of some points that caught my eye.

The evidence on the spread of digital technologies around the world in the last decade or so is quite remarkable. The dark solid line rising sharply in this figure shows the spread of mobile phone technology to more than 80% of the population. Internet and mobile broadband are growing too, as the lines at the bottom of the figure show, but access to mobile phones has actually outstripped access to improved water, electricity, improved sanitation, and secondary schools.

But one can view digital access as half-full or half-empty. As the report notes: "First, nearly 60 percent of the world’s people are still offline and can’t participate in the digital economy in any meaningful way. ... The internet, in a broad sense, has grown quickly, but it is by no means universal. For every person connected to high-speed broadband, five are not. Worldwide, some 4 billion people do not have any internet access, nearly 2 billion do not use a mobile phone, and almost half a billion live outside areas with a mobile signal."

In what ways can the spread of digital technologies benefit the process of economic development, or economic growth more broadly? Digital technologies are what economists sometimes call "general purpose" technologies; they can be broadly applied in a very wide variety of contexts.

"Perhaps the greatest contribution to growth comes from the internet’s lowering of costs and thus from raising efficiency and labor productivity in practically all economic sectors. Better information helps companies make better use of existing capacity, optimizes inventory and supply chain management, cuts downtime of capital equipment, and reduces risk. In the airline industry, sophisticated reservation and pricing algorithms increased load factors by about one-third for U.S. domestic flights between 1993 and  2007. The parcel delivery company UPS famously uses intelligent routing algorithms to avoid left turns, saving time and about 4.5 million liters of petrol per year. Many retailers now integrate their suppliers in real-time supply chain management to keep inventory costs low. Vietnamese firms using e-commerce had on average 3.6 percentage point higher TFP [total factor productivity] growth than firms that did not use it. Chinese car companies that are more sophisticated users of the internet turn over their inventory stocks five times faster than their less savvy competitors. And Botswana and Uruguay maintain unique ID and trace-back systems for livestock that fulfill requirements for beef exports to the EU, while making the production process more efficient."

What about specifically helping the poor in developing countries?

"The biggest gains from digital technologies for the poor are likely to come from lower information and search costs. Technology can inform workers about prices, inputs, or new technologies more quickly and  cheaply, reducing friction and uncertainty. That can eliminate costly journeys, allowing more time for  work and reducing risks of crime or traffic accidents. Using technology for information on prices, soil  quality, weather, new technologies, and coordination with traders has been extensively documented in agriculture ... In Honduras, farmers who got market price information via short message service (SMS) reported an increase of 12.5 percent in prices received. In Pakistan, mobile phones allow farmers to shift to more perishable but higher return cash crops, reducing postharvest losses from the most perishable crops by 21–35 percent. The impacts of reduced information asymmetries tend to be larger when learning about information in distant markets or among disadvantaged farmers who face more information constraints. ..."

"In 12 countries surveyed in Africa, 65 percent of people believe that their family is better off because they have mobile  phones, whereas only 20 percent disagree (14.5 percent not sure). And 73 percent say mobile phones help save on travel time and costs, with only 10 percent saying otherwise. Two-thirds believe that having a mobile phone makes them feel more safe and secure."

To me, one intriguing application of digital technologies is to offer people a proof of identification. One of the most remarkable efforts along these lines is India’s Aadhaar system, in which about 900 million people have a 12-digit number which is linked to biometric information.

"Identity should be a public good. Its importance is now recognized in the post-2015 development agenda, specifically as a Sustainable Development Goal (SDG) target to “promote peaceful and inclusive societies for sustainable development, provide access to justice for all, and build effective, accountable, and inclusive institutions at all levels.” One of the indicators is to “provide legal identity for all, including birth registration, by 2030.” The best way to achieve this goal is through digital identity (digital ID) systems, central registries storing personal data in digital form and credentials that rely on digital, rather than physical, mechanisms to authenticate the identity of their holder. ...

"India’s Aadhaar program dispenses with the card altogether, providing remote authentication based on the holder’s fingerprints or iris scan. Online and mobile environments require enhanced authentication features—such as electronic trust services, which include e-signatures, e-seals, and time stamps—to add confidence in electronic transactions. Mobile devices offer a compelling proposition for governments seeking to provide identity credentials and widespread access to digital services. In Sub-Saharan Africa, for example, more than half of the population in some countries is without official ID, but more than two-thirds of the residents in the region have a mobile phone subscription. The developing world is home to more than 6 billion of the world’s 7 billion mobile subscriptions, making this a technology with considerable potential for registration, storage, and management of digital identity.  ...  Nigeria’s e-ID revealed 62,000 public sector “ghost workers,” saving US$1 billion annually. But the most important benefit may be in better integrating marginalized or disadvantaged groups into society. Digital technologies also enable the poor to vote by providing them with robust identification and by curtailing fraud and intimidation through better monitoring."

The report also discusses potential dangers of the spread of digital technology, including risks of greater concentration of large firms, a possible rise in economic inequality, and potential for government control of information. For example, there is some evidence of a "hollowing out" of jobs in a number of developing economies. The countries in the figure below are ranked from left to right by the annual change in the share of medium-skill jobs, shown by the medium-green bar. The darkest bars show the change in high-skilled jobs, while the lightest bars show the change in low-skilled jobs. A number of economies (although not China, shown on the far right) are seeing a drop in the share of jobs that involve medium skills.

A couple of final thoughts:

First, the upside thing about digital technologies is that they are general purpose, and have such broad application. The corresponding downside is that such technologies need to be applied, and wisely applied, in a broad variety of contexts to have their most powerful effect. As the World Bank report notes:

Access to the internet is critical, but not sufficient. The digital economy also requires a strong analog foundation, consisting of regulations that create a vibrant business climate and let firms leverage digital technologies to compete and innovate; skills that allow workers, entrepreneurs, and public servants to seize opportunities in the digital world; and accountable institutions that use the internet to empower citizens.

I confess that part of this explanation just made me laugh. Only international bureaucrats at a place like the World Bank could un-selfconsciously write that what's first needed is "regulations," because apparently we all know that regulations are what "create a vibrant business climate."  Well, at least we can agree that a favorable business climate is what's important! Along with human capital and good governance, or course.

The other point is that although the report is understandably focused on how digital technologies affect productivity and output, it also raises in a number of places the insight that many of the benefits of digital technology may not be captured very well by the economic values alone. For example, the report notes:

The digital revolution has brought immediate private benefits—easier communication and information, greater convenience, free digital products, and new forms of leisure. It has also created a profound sense of social connectedness and global community.

The connectedness and information flows of digital technology provide a very wide range of benefits. In economic terms, we measure those benefits by what users pay for the service. But like many innovations, what is provided was literally not possible to receive--or only possible at an extremely high price--before the innovation occurred. On a personal level, I receive very large benefits from access to the internet, by which I include use of computer, phone, and television. Thanks to the magic of somewhat competitive markets and their ongoing drive for innovation, what I actually pay for those services seems considerably less to me than the value of the benefits I receive.

Some Economics for Martin Luther King Jr. Day

On November 2, 1983, President Ronald Reagan signed the legislation establishing a federal holiday for the birthday of Martin Luther King Jr., to be celebrated each year on the third Monday in January. As the legislation that passed Congress said: "such holiday should serve as a time for Americans to reflect on the principles of racial equality and nonviolent social change espoused by Martin Luther King, Jr.." Of course, the case for racial equality stands fundamentally upon principles of justice, not economics. But here are four economics-related thoughts for the day drawn from past posts. (This is a revised and altered version of a post that first ran on this holiday in 2015.)


1) Inequalities of race and gender impose large economic costs on society as a whole, because one consequence of discrimination is that it hinders people in developing and using their talents. In "Equal Opportunity and Economic Growth" (August 20, 2012), I wrote:

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A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in "The Allocation of Talent and U.S. Economic Growth," a Policy Brief for the Stanford Institute for Economic Policy Research.

Here's a table that illustrates some of the movement to greater equality of opportunity in the U.S. economy. White men are no longer 85% and more of the managers, doctors, and lawyers, as they were back in 1960. High skill occupation is defined in the table as "lawyers, doctors, engineers, scientists, architects, mathematicians and executives/managers." The share of white men working in these fields is up by about one-fourth. But the share of white women working in these occupations has more than tripled; of black men, more than quadrupled; of black women, more than octupled.


Moreover, wage gaps for those working in the same occupations have diminished as well. "Over the same time frame, wage gaps within occupations narrowed. Whereas working white women earned 58% less on average than white men in the same occupations in 1960, by 2008 they earned 26% less. Black men earned 38% less than white men in the typical occupation in 1960, but had closed the gap to 15% by 2008. For black women the gap fell from 88% in 1960 to 31% in 2008."

Much can be said about the causes behind these changes, but here, I want to focus on the effect on economic growth. For the purposes of developing a back-of-the-envelope estimate, Klenow builds up a model with some of these assumptions: "Each person possesses general ability (common to
all occupations) and ability specific to each occupation (and independent across occupations). All groups (men, women, blacks, whites) have the same distribution of abilities. Each young person knows how much discrimination they would face in any occupation, and the resulting wage they would get in each occupation. When young, people choose an occupation and decide how
much to augment their natural ability by investing in human capital specific to their chosen
occupation."

With this framework, Klenow can then estimate how much of U.S. growth over the last 50 years or so can be traced to greater equality of opportunity, which encouraged many in women and minority groups who had the underlying ability to view it as worthwhile to make a greater investment in human capital.

"How much of overall growth in income per worker between 1960 and 2008 in the U.S. can be explained by women and African Americans investing more in human capital and working more in high-skill occupations? Our answer is 15% to 20% ... White men arguably lost around 5% of their earnings, as a result, because they moved into lower skilled occupations than they otherwise would have. But their losses were swamped by the income gains reaped by women and blacks."

At least to me, it is remarkable to consider that 1/6 or 1/5 of total U.S. growth in income per worker may be due to greater economic opportunity. In short, reducing discriminatory barriers isn't just about justice and fairness to individuals; it's also about a stronger U.S. economy that makes better use of the underlying talents of all its members.

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2) Roland Fryer delivered the Henry and Bryna David Lecture at the National Academy of Sciences on the subject of "21st Century Inequality: The Declining Significance of Discrimination." I discussed this lecture in "The Journey to Becoming a School Reformer" (February 13, 2015). As Fryer tells the story, he was "asked in 2003 to explore the reasons for the social inequality in the United States." Fryer said:

"In two weeks I reported back that achievement gaps that were evident at an early age correlated with many of the social disparities that appeared later in life. I thought I was done. But the logical follow-up question was how to explain the achievement gap that was apparent in 8th grade. I’ve been working on that question for the past 10 years. I am certainly not going to tell you that discrimination has been purged from U.S. culture, but I do believe that these data suggest that differences in student achievement are a critical factor in explaining many of the black-white disparities in our society. It is no longer news that the United States is a lackluster performer on international comparisons of student achievement, ranking about 20th in the world. But the position of U.S. black students is truly alarming. If they were to be considered a country, they would rank just below Mexico in last place among all Organization of Economic Cooperation and Development countries. ... 

"When do U.S. black students start falling behind? It turns out that development psychologists can begin assessing cognitive capacity of children when they are only nine months old with the Bayley Scale of Infant Development. We examined data that had been collected on a representative sample of 11,000 children and could find no difference in performance of racial groups. But by age two, one can detect a gap opening, which becomes larger with each passing year. By age five, black children trail their white peers by 8 months in cognitive performance, and by eighth grade the gap has widened to twelve months."

Fryer goes on to describe his remarkable work that seeks to learn from the experience of high-performing charter schools that do very well in bringing many African-American children from low-income families up to expected grade-level academic performance--and better--and then applying those lessons in the context of actual big-city public schools. As I wrote in that blog post: 

It is remarkable to me that most of the cognitive performance gap for eighth-graders is already apparent for five year-olds. As I've commented on before in "The Parenting Gap for Pre-Preschool" (September 17, 2013), one possible reaction here is to think more seriously about home visitation programs for at-risk children in the first few years of life. 

3) For those who would like to know more about the economics of thinking about cause-and-effect in discrimination issues, a starting point might begin with this interview with Glenn Loury (July 2, 2014). Here's a slice of the discussion from that post:

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A standard approach to studying discrimination in labor markets is to collect data on what people earn and their race/ethnicity or gender, along with a number of other variables like years of education, family structure, region where they live, occupation, years of job experience, and so on. This data lets you answer the question: can we account for differences in income across groups by looking at these kinds of observable traits other than race/ethnicity and gender? If so, a common implication is that the problem in our society may be that certain groups aren't getting enough education, or that children from single-parent families need more support--but that a pay gap which can be explained by observable factors other than race/ethnicity and gender isn't properly described as "discrimination." Loury challenges this approach, arguing that many of the observable factors are themselves the outcome of a history of discriminatory practices. He says:

"By that I mean, suppose I have a regression equation with wages on the left-hand side and a number of explanatory variables—like schooling, work experience, mental ability, family structure, region, occupation and so forth—on the right-hand side. These variables might account for variation among individuals in wages, and thus one should control for them if the earnings of different racial or ethnic groups are to be compared. One could put many different variables on the right-hand side of such a wage regression.
Well, many of those right-hand-side variables are determined within the very system of social interactions that one wants to understand if one is to effectively explain large and persistent earnings differences between groups. That is, on the average, schooling, work experience, family structure or ability (as measured by paper and pencil tests) may differ between racial groups, and those differences may help to explain a group disparity in earnings. But those differences may to some extent be a consequence of the same structure of social relations that led to employers having the discriminatory attitudes they may have in the work place toward the members of different groups.

So, the question arises: Should an analyst who is trying to measure the extent of “economic discrimination” hold the group accountable for the fact that they have bad family structure? Is a failure to complete high school, or a history of involvement in a drug-selling gang that led to a criminal record, part of what the analyst should control for when explaining the racial wage gap—so that the uncontrolled gap is no longer taken as an indication of the extent of unfair treatment of the group?

Well, one answer for this question is, “Yes, that was their decision.” They could have invested in human capital and they didn’t. Employer tastes don’t explain that individual decision. So as far as that analyst is concerned, the observed racial disparity would not be a reflection of social exclusion and mistreatment based on race. ... But another way to look at it is that the racially segregated social networks in which they were located reflected a history of deprivation of opportunity and access for people belonging to their racial group. And that history fostered a pattern of behavior, attitudes, values and practices, extending across generations, which are now being reflected in what we see on the supply side of the present day labor market, but which should still be thought of as a legacy of historical racial discrimination, if properly understood.

Or at least in terms of policy, it should be a part of what society understands to be the consequences of unfair treatment, not what society understands to be the result of the fact that these people don’t know how to get themselves ready for the labor market.

 4) Extensions in the period of copyright over time have meant that the speeches and writings of Martin Luther King Jr. and others in the U.S. civil rights movement are not easily available to, say, students in schools or the general public. This was one example I discussed in a post on "Absurdities of Copyright Protection" (May 13, 2014). The post discusses a paper by Derek Khanna called  "Guarding Against Abuse: Restoring Constitutional Copyright," published as R Street Policy Study No. 20 (April 2014). Here, I'll just quote a couple of paragraphs from Khanna.

Excessively long copyright terms help explain why Martin Luther King’s “I Have a Dream” speech is rarely shown on television, and specifically why it is almost never shown in its entirety in any other form. In 1999, CBS was sued for using portions of the speech in a documentary. It lost on appeal before the 11th Circuit. If copyright terms were shorter than 50 years, then those clips would be available for anyone to show on television, in a documentary or to students. When historical clips are in the public domain, learning flourishes. Martin Luther King did not need the promise of copyright protection for “life+70” to motivate him to write the “I Have a Dream” speech. (Among other reasons, because the term length was much shorter at the time.) ...

Eyes on the Prize is one of the most important documentaries on the civil rights movement. But many potential younger viewers have never seen it, in part because license requirements for photographs and archival music make it incredibly difficult to rebroadcast. The director, Jon Else, has said that “it’s not clear that anyone could even make ‘Eyes on the Prize’ today because of rights clearances.” The problems facing Eyes on the Prize are a result of muddied and unclear case law on fair use, but also copyright terms that have been greatly expanded. If copyright terms were 14 years, or even 50 years, then the rights to short video clips for many of these historical events would be in the public domain.

Franchise the National Parks?

The idea of franchising the national parks raises images of Mickey Mouse ears on top of Half-Dome at Yosemite, or the McDonald's "golden arches" as a scenic backdrop to the Old Faithful geyser in Yellowstone. But that's not what Holly Fretwell has in mind in her essay, "The NPS Franchise:
A Better Way to Protect Our Heritage," which appears in the George Wright Forum (2015, vol. 32, number 2, pp. 114-122). Instead, she is suggesting that a number of national parks might be better run as independent nongovernment conservation-minded operations with greater control over their own revenues and spending. In such an arrangement, the role of the National Park Service would be to evaluate the financial and environmental plans of possible franchisees, provide brand-name and a degree of logistical support, and then to make sure the franchisees announced plans were then followed up in the future.

To understand the impetus behind Fretwell's proposal, you need to first face the hard truth that the national parks have severe financial problems, which are manifesting themselves both in decaying infrastructure for human visitors and also in a diminished ability to protect the parks themselves (for example, sewer systems in parks affect both human visitors and environmental protection). Politicians are often happy to set aside more parkland, but spending the money to manage the land is a harder sell. If you accept as a basic constraint that federal spending on park maintenance isn't going to rise, or at least not rise sufficiently, then you are driven to consider other possibilities. Here's Fretwell on the current problems of the National Park Service (footnotes omitted):

As it enters its second century, NPS faces a host of challenges. In 2014, the budget of the National Park Service was $2.6 billion. The maintenance backlog is four times that, at $11.5 billion and growing. According to the National Parks Conservation Association (NCPA), about one-third of the shortfall is for “critical systems” that are essential for park function. Without upgrades, many park water and sewer systems are at risk. A water pipe failure in Grand Canyon National Park during the spring of 2014 cost $25,000 for a quick fix to keep water flowing, but is estimated to cost about $200 million to replace. Yellowstone also has antiquated water and wastewater facilities where past failures have caused environmental degradation. Sewer system upgrades in Yosemite and Grand Teton are necessary to prevent raw sewage from spilling into nearby rivers. Deteriorating electrical cables have caused failures in Gateway National Recreation Area and in Glacier’s historic hotels. Roads are crumbling in many parks. They are patched rather than restored for longevity. Only 10% of park roads are considered to be in better than “fair” condition. At least 28 bridges in the system are “structurally deficient,” and more than one-third of park trails are in “poor” or “seriously deficient” condition.

Cultural heritage resources that the parks are set aside to protect are also at risk. Only 40% of park historic structures are considered to be in “good” or better condition and they need continual maintenance to remain that way. Exterior walls are weakening on historic structures such as Perry’s Victory and International Peace Memorial in Ohio, the Vanderbilt Mansion in New York, and the cellhouse in Golden Gate National Recreation Area in California. Weather, unmonitored visitation, and leaky roofs are degrading cultural artifacts. Many of the artifacts and museum collections have never been catalogued. ... 

Even though the NPS maintenance backlog is four times the annual discretionary budget, rather than focus funding on maintaining what NPS already has, the system continues to grow. ... The continual expansion of park units and acreage without corresponding funding is what former NPS Director James Ridenour called “thinning the blood.” ...  The national park system has grown from 25.7 million acres and about 200 units in 1960 to 84.5 million acres and 407 units in 2015. Seven new parks were added under the 2014 National Defense Authorization Act and nine parks were expanded. The growth came with no additional funding for operations or maintenance—more “thinning the blood.”

I've had great family vacations in a number of national parks since I was a child. They were inexpensive to visit then, and they remain cheap. Indeed, there's sometimes an odd moment, when visiting a national park, when you realize that what you just spent at the gift shop, or for a family meal, considerably exceeds what you spent to enter the park. Fretwell writes:

Numerous parks have increased user and entrance fees for the 2015 summer season after
seeking public input and Washington approval. Even with the higher fees, a visit to destination parks like Grand Canyon and Yellowstone costs $30 for a seven-day vehicle permit, or just over $1 per person per day for a family of four. ... The current low fees to enter units of the national park system typically make up a small portion of the total park visit expense. It has been estimated that the entry fee is less than 2% of park visit costs for visitors to Yellowstone and Yosemite. The bulk of the expenditures when visiting destination parks go to lodging, travel, and food. Higher fees have little effect on visitation to most parks. ... Even modest fees (though sometimes large fee increases) could cover the operating costs of some destination parks. About $5 per person per day could cover operations in Grand Canyon National Park, as would just over $10 in Yellowstone.

An obvious question here is why the parks can't just raise fees on their own, but of course, that choice runs into political constraints as well. It is at least arguable that franchisees could spell out the facilities that need renovating and building, along with other services that could be offered, and then also be able to charge the fees that would cover the costs.

Fretwell recognizes that not all national parks will have enough visitors to work well with a franchise model (for example, some of the huge national parks in Alaska), and a need for direct government spending on such parks will remain. But it's worth remembering that national park visitors tend to have above-average income levels. A franchise proposal can be understood as a way of circumventing the political constraints that first prevent national parks from collecting money, and then don't allocate sufficient financial resources from other government revenues. A group of franchise proposals would also give national parks a way to move away from "thinning the blood"--that is, focusing heavily on how to persevere with tight and inflexible financial constraints--and instead offer an infusion of new ideas and how they might be financed.

War on Cancer: Redux

In his 1971 State of the Union Address, President Richard Nixon launched what came to be known as the War on Cancer:

“I will also ask for an appropriation of an extra $100 million to launch an intensive campaign to find a cure for cancer, and I will ask later for whatever additional funds can effectively be used. The time has come in America when the same kind of concentrated effort that split the atom and took man to the moon should be turned toward conquering this dread disease. Let us make a total national commitment to achieve this goal.”

And now, 45 year later in the 2016 State of the Union address, President Barack Obama is relaunching the War on Cancer:

"Last year, Vice President Biden said that with a new moonshot, America can cure cancer. Last month, he worked with this Congress to give scientists at the National Institutes of Health the strongest resources that they’ve had in over a decade. So tonight, I’m announcing a new national effort to get it done. And because he’s gone to the mat for all of us on so many issues over the past 40 years, I’m putting Joe in charge of Mission Control. For the loved ones we’ve all lost, for the families that we can still save, let’s make America the country that cures cancer once and for all."

So how did that first War on Cancer turn out? At the tail end of 2008, just before President Obama took office, David Cutler took a stab at answering that question in "Are We Finally Winning the War on Cancer?" which appeared in the Fall 2008 issue of the Journal of Economic Perspectives (22:4, pp. 3-26). Here's a figure showing the mortality rate from cancer over time.

As Cutler reports, spending on cancer research and treatment did rise steadily after Nixon's speech at about 4-5% per year. But as the figure shows, cancer death rates kept rising for a time as well, at about 8% per year during the 1970s and 1980s. By 1997, the New England Journal of Medicine ran an article noting these trends called "Cancer Undefeated."  Perhaps inevitably, that article was soon followed by a sharp decline in cancer mortality. Apparently, Obama is re-enlisting in a war on cancer that has been going pretty well for a couple of decades. 

But the War on Cancer has been fought with several different tools--and biomedical research on a "cure for cancer" isn't the biggest one. Cutler focuses on four main types of cancer: lung, colorectal, female breast, and prostate. After reviewing the evidence on each, he wrote:  

"[B]ehaviors, screening, and treatment advances for the four cancers I consider were each important in improved cancer survival. Together, they explain 78 percent of the reduction in cancer mortality between 1990 and 2004. Thirty-five percent of reduced cancer mortality is attributable to greater screening—partly through earlier detection of disease, and partly through removal of precancerous adenomas in the colon and rectum. Behavioral factors are next in importance, at 23 percent; the impact of smoking reductions on lung cancer is the single most important factor in this category. Finally, treatment innovation is third in importance, accounting for 20 percent of reduced mortality.

"The relative importance of these different strategies seems surprising, but it is easily understandable. Despite the vast array of medical technologies, metastatic cancer remains incurable and fatal. The armamentarium of medicine can delay death, but cannot prevent it. Thus, technologies in metastatic settings have only limited effectiveness. Far more important is making sure that people do not get cancer in the first place (prevention) and that cancer is caught early (screening), when it can be successfully treated."

From this perspective, emphatic calls for a "cure for cancer" highlight a bias in US medicine, in favor of later-stage interventions which are often at high-cost, rather than early stage interventions of prevention and early screening that may often happen pretty much outside the health care system, but have the potential save many more lives at much lower cost.

David H. Howard, Peter B. Bach, Ernst R. Berndt, and Rena M. Conti looked at "Pricing in the Market for Anticancer Drugs" in the Winter 2015 issue of the Journal of Economic Perspectives (29:1, pp. 139-62). As I've discussed on this blog, before a new anti-cancer drug is approved, various clinical trials and studies are done, and these studies provide an estimate of the median expected extension of life as a result of using the drugs. Then based on the market price of the drug when it is announced, it's straightforward to calculate the price of the drug per year of life gained. Their calculations show that back in 1995, new anti-cancer drugs reaching the market were costing about $54,000 to save a year of life. By 2014, the new drugs were costing about $170,000 to save a year of life. This is an increase in cost per year of life saved of roughly 10% per year.

As both Nixon and Obama can attest, calling for a "cure for cancer" with an analogy to putting a person on the moon has been political magic for 45 years now. But if the "cure for cancer" rhetoric creates the expectation of a magic pill that lets everyone go back to smoking cigarettes again, I fear that it is both missing the point and even raising false hopes for cancer patients and their families. I'm pretty much always a supporter of additional research and development, and like everyone else, I hear anecdotes (which I cannot evaluate) about how some great new anti-cancer drugs are already in the research pipeline. But a focus on developing more extremely expensive anti-cancer drugs that often provide only very limited gains in average life expectancy (in a number of cases, only a few months) shouldn't be the primary approach here. At least for the near-term and probably the medium-term, too,  primary tools that can keep cancer mortality on a downward trends are more likely to be prevention and early detection, along with ongoing improvements in the health-effectiveness and cost-effectiveness of treatment, not a "moonshot" for a cure. 

Full disclosure: I've been Managing Editor of the Journal of Economic Perspectives since 1987, and so part of my paycheck came from working to publish the two articles mentioned here.