Update on the Income Share of the 1%

Emmanuel Saez has just made available his latest update on the share of income received by those at the very top of the income distribution. It's in a short working paper called "Striking it Richer:The Evolution of Top Incomes in the United States (Updated with 2015 preliminary estimates)" June 30, 2016). Saez offers a brief overview of the findings and a link to the underlying paper at the blog of the Washington Center for Equitable Growth.

Just to be clear, what's being measured here is "cash market income"--that is, income received before taxes are paid and not counting government transfer payments. As Saez writes: "We define income as the sum of all income components reported on tax returns (wages and salaries, pensions received, profits from businesses, capital income such as dividends, interest, or rents, and realized capital gains) before individual income taxes. We exclude government transfers such as Social Security retirement benefits or unemployment compensation benefits from our income definition. Non-taxable fringe benefits such as employer provided health insurance is also excluded from our income definition. Therefore, our income measure is defined as cash market income before individual income taxes."

Here's a figure showing the share of cash market income going to the top 1% of the income distribution (that is above $443,000 of income in 2015), to the 95-99th percentile of the income distribution (income from $180,500 to $443,000 in income in 2015), and to the 90-95th percentile  of the income distribution (that is, $124,800 to $180,500 in 2015). The overall pattern is U-shaped for all three lines. But for the bottom two lines, the U is relatively flat; for the top 1%, the U is a steeper fall and a steeper rise during the last century or so.

Here's a figure showing the share of total cash market income top .01% of the income distribution (in 2015, the 16,500 families with more than $11.3 million in income).

I won't rehearse here all  of the arguments about the reasons behind this change. But I do think it's noteworthy that the share of cash market income received by the top 1% and the top 0.1% hit more-or-less the current level back in 1998, and since then has bobbed up and down around that level. This pattern suggests to me that at least some of the reason for the dramatic rise in incomes at the very top was associated with the combination of more stock options and the dot-com stock market boom of the 1990s, as I argue in "Stock Options: A Theory of Compensation and Income Inequality at the Top" (March 25, 2016).

World Drug Report 2016

The United Nations Office on Drugs and Crime has produced the World Drug Report 2016. The report is inevitably a bit of a disappointment to economists, because if focuses pretty heavily on quantities of drugs, with only occasional and peripheral mentions of prices. Of course, prices of illegal drugs would need to be estimated in many countries, but one suspects that law enforcement agencies could offer some insights here. Without specific prices, there can't be any effort, for example, to estimate the revenues generated by illegal drugs in various countries.

But with that shortcoming duly noted, the report does offer some useful perspectives. The focus of he report is on nonmedical use of "opiates, cocaine, cannabis, amphetamine-type stimulants (ATS) and new psychoactive substances (NPS)." About 5% of the world population between the ages of 15-64--roughly 250 million people--used drugs in this way in the last year, and roughly one-tenth of that number might be classified as having a "drug problem."

"Cannabis remains the most commonly used drug at the global level, with an estimated 183 million people having used the drug in 2014, while amphetamines remain the second most commonly used drug. With an estimated 33 million users, the use of opiates and prescription opioids is less common, but opioids remain major drugs of potential harm and health consequences."  The estimates show over 200,000 drug-related deaths in 2014. "Overdose deaths contribute to between roughly a third and a half of all drug-related deaths, which are attributable in most cases to opioids."

One of the major changes in US drug use in the last decade or so has been the rise in the death rate from precription opioids and heroin.

Given the move toward decriminalization and legalization of cannibis in some US states (and in other places around the world), the report points out that there has also been a global rise (almost entirely occurring outside the US) in the number of people seeking treatment for cannibis-related drug problems. The report has some specific discussion of the US experience to date with legalizing marijuana in a few states. Perhaps not surprisingly, in the states where cannabis use has been legalized, cannabis use is up in the age bracket from 18-25 , and so are auto accidents involving cannabis--although neither increase seems especially large so far.

The report describes the health issues of cannabis use in this way (footnotes omitted):

"The nature and extent of the potential health risks and harms associated with cannabis use are continually under debate. Cannabis use can be perceived to be relatively harmless when compared with the use of other controlled psychoactive substances and also in relation to the use of tobacco or alcohol. However, lower risk does not mean no risk: there are harmful health effects associated with a higher frequency of cannabis use and initiation at a very young age, especially among adolescents during the time of their cognitive and emotional development.  Adverse health effects of cannabis use associated with cognitive impairments or psychiatric symptoms are well documented
in the scientific literature. Hence, cannabis use disorders require clinically significant treatment interventions.

"The transition from drug use to drug dependence occurs for a much smaller proportion of cannabis users than for opioid, amphetamine or cocaine users. However, because so many people use cannabis, this translates into a large number who experience cannabis use disorders; for example, in the United States, of the 22.2 million current cannabis users in 2014, 4.2 million people aged 12 or older had a cannabis use disorder diagnosed in the previous year. Cannabis use disorders are estimated to occur in approximately 1 out of every 11 persons (9 per cent) who have ever used cannabis, and the proportion increases significantly to one out of every six persons (17 per cent) who started using cannabis in their teens and to 25-50 per cent of daily cannabis users. ...

In the United States, the number of daily (or near-daily) cannabis users, measured by the number using cannabis on 20 or more days in the past month and the number using cannabis on 300 or more days in the past year, rose significantly after 2006, by 58 and 74 per cent, respectively. However, this increase in daily (or near-daily) cannabis use has not translated into an increased number of people seeking treatment, even when those in treatment referred by the criminal justice system are excluded. 

Finally, some interesting shifts in global drug markets appear to be underway. One is the shift from agriculture to manufacturing--that is, in the direction of amphetamines and psychoactive substances like Ecstasy. Another is a shift toward being able to purchase drugs on largely anonymous internet sites sometimes called the "dark" internet, using anonymous methods of payment like Bitcoin. For example, here's a figure showing how seizures of various drugs have changed in the lat 15 years: clearly, amphetamines are way up.

And here's some commentary from the report on buying drugs over the dark net.

"The purchasing of drugs via the Internet, particularly the “dark net”, may have increased in recent years. This trend raises concerns in terms of the potential of the “dark net” to attract new populations of users by facilitating access to drugs in a setting that, although illegal, allows users to avoid direct contact with criminals and law enforcement authorities. As the “dark net” cannot be accessed through traditional web searches, buyers and sellers access it through the “Onion Router” (TOR) to ensure that their identities remain concealed. Products are typically paid for in bitcoins or in other crypto-currencies and are most often delivered via postal services. A number of successful law enforcement operations worldwide have taken place in recent years to shut down trading platforms on the “dark net”, such as “Silk Road” in October 2013 or “Silk Road 2.0” in November 2014 ... However, as one marketplace closes, the next most credible marketplace tends to absorb the bulk of the displaced business. 

"A global survey of more than 100,000 Internet users (three quarters of whom had taken illegal drugs) in 50 countries in late 2014 suggested that the proportion of drug users purchasing drugs via the Internet had increased from 1.2 per cent in 2000 to 4.9 per cent in 2009, 16.4 per cent in 2013 and 25.3 per cent in 2014. The proportion of Internet users making use of the “dark net” for drug purchases had also increased, reaching 6.4 per cent (lifetime) in 2014, including 4.5 per cent (70 per cent of 6.4 per cent) who had purchased drugs over the “dark net” in the previous 12 months (ranging from less than 1 per cent to 18 per cent)."

For an earlier post on drug policy, see "Putting Drug Policy Tradeoffs on the Table" (April 14, 2016).

Trying to Envision the Original United States

Henry Adams's History of the United States, which for many decades was commonly acclaimed as one of the great works of history ever written, was published in nine volumes from 1889-1891. I've only read fractions of it, here and there, over the years. But the first chapter of volume I, called "Physical and Economical Conditions," has always struck me as one of the finest compact descriptions of the United States in those decades along those dimensions just after it had become a nation. In commemoration of July 4, here's are some snippets from how Henry Adams described the physical and economic condition of the United States circa 1800. 

"According to the census of 1800, the United States of America contained 5,308,483 persons. In the same year the British Islands contained upwards of fifteen millions; the French Republic, more than twenty-seven millions.  ... Even after two centuries of struggle the land was still untamed; forest covered every portion, except here and there a strip of cultivated soil; the minerals lay undisturbed in their rocky beds, and more than two thirds of the people clung to the seaboard within fifty miles of tide-water, where alone the wants of civilized life could be supplied. The centre of population rested within eighteen miles of Baltimore, north and east of Washington. ... 

With the exception that half a million people had crossed the Alleghanies and were struggling with difficulties all their own, in an isolation like that of Jutes and Angles in the fifth century, America, so far as concerned physical problems, had changed little in fifty years. The old landmarks remained nearly where they stood before. The same bad roads and difficult rivers, connecting the same small towns, stretched into the same forests in 1800 as when the armies of Braddock and Amherst pierced the western and northern wilderness, except that these roads extended a few miles farther from the seacoast. Nature was rather man's master than his servant, and the five million Americans struggling with the untamed continent seemed hardly more competent to their task than the beavers and buffalo which had for countless generations made bridges and roads of their own.

Even by water, along the seaboard, communication was as slow and almost as irregular as in colonial times ... No regular packet plied between New York and Albany. Passengers waited till a sloop was advertised to sail; they provided their own bedding and supplies; and within the nineteenth century Captain Elias Bunker won much fame by building the sloop "Experiment," of one hundred and ten tons, to start regularly on a fixed day for Albany, for the convenience of passengers only, supplying beds, wine, and provisions for the voyage of one hundred and fifty miles.  ...

Even the lightly equipped traveller found a short journey no slight effort. Between Boston and New York was a tolerable highway, along which, thrice a week, light stage-coaches carried passengers and the mail, in three days. From New York a stage-coach started every week-day for Philadelphia, consuming the greater part of two days in the journey; and the road between Paulus Hook, the modern Jersey City and Hackensack, was declared by the newspapers in 1802 to be as bad as any other part of the route between Maine and Georgia. South of Philadelphia the road was tolerable as far as Baltimore, but between Baltimore and the new city of Washington it meandered through forests; the driver chose the track which seemed least dangerous, and rejoiced if in wet seasons he reached Washington without miring or upsetting his wagon. In the Northern States, four mile an hour was the average speed for any coach between Bangor and Baltimore. Beyond the Potomac the roads became steadily worse ...  Except for a stage-coach which plied between Charleston and Savannah, no public conveyance of any kind was mentioned in the three southernmost States.

The stage-coach was itself a rude conveyance, of a kind still familiar to experienced travellers. Twelve persons, crowded into one wagon, were jolted over rough roads, their bags and parcels, thrust inside, cramping their legs, while they were protected from the heat and dust of mid-summer and the intense cold and driving snow of winter only by leather flaps buttoned to the roof and sides. In fine, dry weather this mode of travel was not unpleasant, when compared with the heavy vehicles of Europe and the hard English turnpikes; but when spring rains drew the frost from the ground the roads became nearly impassable, and in winter, when the rivers froze, a serious peril was added, for the Susquehanna or the North River at Paulus Hook must be crossed in an open boat,—an affair of hours at best, sometimes leading to fatal accidents. ...

In the Southern States the difficulties and perils of travel were so great as to form a barrier almost insuperable. Even Virginia was no exception to this rule. At each interval of a few miles the horseman found himself stopped by a river, liable to sudden freshets, and rarely bridged. Jefferson in his frequent journeys between Monticello and Washington was happy to reach the end of the hundred miles without some vexatious delay. "Of eight rivers between here and Washington," he wrote to his Attorney-General in 1801, "five have neither bridges nor boats." ...

Commerce between one State and another, or even between the seaboard and the interior of the same State, was scarcely possible on any large scale unless navigable water connected them. Except the great highway to Pittsburg, no road served as a channel of commerce between different regions of the country. In this respect New England east of the Connecticut was as independent of New York as both were independent of Virginia, and as Virginia in her turn was independent of Georgia and South Carolina. The chief value of inter-State communication by land rested in the postal system; but the post furnished another illustration of the difficulties which barred progress. In the year 1800 one general mail-route extended from Portland in Maine to Louisville in Georgia, the time required for the trip being twenty days. ... Thus more than twenty thousand miles of post-road, with nine hundred post-offices, proved the vastness of the country and the smallness of the result; for the gross receipts for postage in the year ending Oct. 1, 1801, were only $320,000.

Throughout the land the eighteenth century ruled supreme. ... The distance from New York to the Mississippi was about one thousand miles; from Washington to the extreme southwestern military post, below Natchez, was about twelve hundred. Scarcely a portion of western Europe was three hundred miles distant from some sea, but a width of three hundred miles was hardly more than an outskirt of the United States. No civilized country had yet been required to deal with physical difficulties so serious, nor did experience warrant conviction that such difficulties could be overcome.

If the physical task which lay before the American people had advanced but a short way toward completion, little more change could be seen in the economical conditions of American life. The man who in the year 1800 ventured to hope for a new era in the coming century, could lay his hand on no statistics that silenced doubt. The machinery of production showed no radical difference from that familiar to ages long past. The Saxon farmer of the eighth century enjoyed most of the comforts known to Saxon farmers in the eighteenth. The eorls and ceorls of Offa and Ecgbert could not read or write, and did not receive a weekly newspaper with such information as newspapers in that age could supply; yet neither their houses, their clothing, their food and drink, their agricultural tools and methods, their stock, nor their habits were so greatly altered or improved by time that they would have found much difficulty in accommodating their lives to that of their descendants in the eighteenth century. In this respect America was backward. 

Fifty or a hundred miles inland more than half the houses were log-cabins, which might or might not enjoy the luxury of a glass window. Throughout the South and West houses showed little attempt at luxury; but even in New England the ordinary farmhouse was hardly so well built, so spacious, or so warm as that of a well-to-do contemporary of Charlemagne. The cloth which the farmer's family wore was still homespun. The hats were manufactured by the village hatter; the clothes were cut and made at home; the shirts, socks, and nearly every other article of dress were also home-made. Hence came a marked air of rusticity which distinguished country from town,—awkward shapes of hat, coat, and trousers, which gave to the Yankee caricature those typical traits that soon disappeared almost as completely as coats of mail and steel head-pieces. The plough was rude and clumsy; the sickle as old as Tubal Cain, and even the cradle not in general use; the flail was unchanged since the Aryan exodus; in Virginia, grain was still commonly trodden out by horses. Enterprising gentlemen-farmers introduced threshing-machines and invented scientific ploughs; but these were novelties. Stock was as a rule not only unimproved, but ill cared for. The swine ran loose; the cattle were left to feed on what pasture they could find, and even in New England were not housed until the severest frosts, on the excuse that exposure hardened them. ...  

Except among the best farmers, drainage, manures, and rotation of crops were ncommon. The ordinary cultivator planted his corn as his father had planted it, sowing as much rye to the acre, using the same number of oxen to plough, and getting in his crops on the same day. He was even known to remove his barn on account of the manure accumulated round it, although the New England soil was never so rich as to warrant neglect to enrich it. The money for which he sold his wheat and chickens was of the Old World; he reckoned in shillings or pistareens, and rarely handled an American coin more valuable than a large copper cent. ...

Of the whole United States New England claimed to be the most civilized province, yet New England was a region in which life had yet gained few charms of sense and few advantages over its rivals. ... The houses were thin wooden buildings, not well suited to the climate; the churches were unwarmed; the clothing was poor; sanitary laws were few, and a bathroom or a soil-pipe was unknown. Consumption, typhoid, scarlet fever, diphtheria, and rheumatic fevers were common; habits of drinking were still a scourge in every family, and dyspepsia destroyed more victims than were consumed by drink. Population increased slowly, as though the conditions of life were more than usually hard. ...   In appearance, Boston resembled an English market-town, of a kind even then old-fashioned. The footways or sidewalks were paved, like the crooked and narrow streets, with round cobblestones, and were divided from the carriage way only by posts and a gutter. The streets were almost unlighted at night, a few oil-lamps rendering the darkness more visible and the rough pavement rougher. Police hardly existed. The system of taxation was defective. The town was managed by selectmen, the elected instruments of town-meetings whose jealousy of granting power was even greater than their objection to spending money, and whose hostility to city government was not to be overcome. Although on all sides increase of ease and comfort was evident, and roads, canals, and new buildings, public and private, were already in course of construction on a scale before unknown, yet in spite of more than a century and a half of incessant industry, intelligent labor, and pinching economy Boston and New England were still poor. ...

 The State of New York was little in advance of Massachusetts and Maine. ...  New York was still a frontier State, and although the city was European in its age and habits, travellers needed to go few miles from the Hudson in order to find a wilderness like that of Ohio and Tennessee. In most material respects the State was behind New England; outside the city was to be seen less wealth and less appearance of comfort.  ... [I]f Boston resembled an old-fashioned English market-town, New York was like a foreign seaport, badly paved, undrained, and as foul as a town surrounded by the tides could be. Although the Manhattan Company was laying wooden pipes for a water supply, no sanitary regulations were enforced, and every few years—as in 1798 and 1803—yellow fever swept away crowds of victims, and drove the rest of the population, panic stricken, into the highlands. No day-police existed; constables were still officers of the courts; the night-police consisted of two captains, two deputies, and seventy-two men. The estimate for the city's expenses in 1800 amounted to $130,000. One marked advantage New York enjoyed over Boston, in the possession of a city government able to introduce reforms. Thus, although still mediæval in regard to drainage and cleanliness, the town had taken advantage of recurring fires to rebuild some of the streets with brick sidewalks and curbstones. Travellers dwelt much on this improvement, which only New York and Philadelphia had yet adopted, and Europeans agreed that both had the air of true cities: that while Boston was the Bristol of America, New York was the Liverpool, and Philadelphia the London. ... 

As a rule American capital was absorbed in shipping or agriculture, whence it could not be suddenly withdrawn. No stock-exchange existed, and no broker exclusively engaged in stock-jobbing, for there were few stocks. The national debt, of about eighty millions, was held abroad, or as a permanent investment at home. States and municipalities had not learned to borrow. Except for a few banks and insurance offices, turnpikes, bridges, canals, and land-companies, neither bonds nor stocks were known. ...

As a national capital New York made no claim to consideration. If Bostonians for a moment forgot their town-meetings, or if Virginians overcame their dislike for cities and pavements, they visited and admired, not New York, but Philadelphia. "Philadelphia," wrote the Duc de Liancourt, "is not only the finest city in the United States, but may be deemed one of the most beautiful cities in the world." In truth, it surpassed any of its size on either side of the Atlantic for most of the comforts and some of the elegancies of life. While Boston contained twenty-five thousand inhabitants and New York sixty thousand, the census of 1800 showed that Philadelphia was about the size of Liverpool—a city of seventy thousand people. The repeated ravages of yellow fever roused there a regard for sanitary precautions and cleanliness; the city, well paved and partly drained, was supplied with water in wooden pipes, and was the best-lighted town in America; its market was a model, and its jail was intended also for a model—although the first experiment proved unsuccessful, because the prisoners went mad or idiotic in solitary confinement. In and about the city flourished industries considerable for the time. The iron-works were already important; paper and gunpowder, pleasure carriages and many other manufactures, were produced on a larger scale than elsewhere in the Union. Philadelphia held the seat of government until July, 1800, and continued to hold the Bank of the United States ... Public spirit was more active in Pennsylvania than in New York. More roads and canals were building; a new turnpike ran from Philadelphia to Lancaster, and the great highway to Pittsburg was a more important artery of national life than was controlled by any other State. ... 

The city of Washington, rising in a solitude on the banks of the Potomac, was a symbol of American nationality in the Southern States. The contrast between the immensity of the task and the paucity of means seemed to challenge suspicion that the nation itself was a magnificent scheme like the federal city, which could show only a few log-cabins and negro quarters where the plan provided for the traffic of London and the elegance of Versailles. When in the summer of 1800 the government was transferred to what was regarded by most persons as a fever-stricken morass, the half-finished White House stood in a naked field overlooking the Potomac, with two awkward Department buildings near it, a single row of brick houses and a few isolated dwellings within sight, and nothing more; until across a swamp, a mile and a half away, the shapeless, unfinished Capitol was seen, two wings without a body, ambitious enough in design to make more grotesque the nature of its surroundings. The conception proved that the United States understood the vastness of their task, and were willing to stake something on their faith in it. Never did hermit or saint condemn himself to solitude more consciously than Congress and the Executive in removing the government from Philadelphia to Washington: the discontented men clustered together in eight or ten boarding-houses as near as possible to the Capitol, and there lived, like a convent of monks, with no other amusement or occupation than that of going from their lodgings to the Chambers and back again. Even private wealth could do little to improve their situation, for there was nothing which wealth could buy; there were in Washington no shops or markets, skilled labor, commerce, or people. Public efforts and lavish use of public money could alone make the place tolerable; but Congress doled out funds for this national and personal object with so sparing a hand, that their Capitol threatened to crumble in pieces and crush Senate and House under the ruins, long before the building was complete.

A government capable of sketching a magnificent plan, and willing to give only a half-hearted pledge for its fulfilment; a people eager to advertise a vast undertaking beyond their present powers, which when completed would become an object of jealousy and fear--this was the impression made upon the traveller who visited Washington in 1800, and mused among the unraised columns of the Capitol upon the destiny of the United States. ...

A probable valuation of the whole United States in 1800 was eighteen hundred million dollars, equal to $328 for each human being, including slaves; or $418 to each free white. ...  In New York and Philadelphia a private fortune of one hundred thousand dollars was considered handsome, and three hundred thousand was great wealth. Inequalities were frequent; but they were chiefly those of a landed aristocracy. Equality was so far the rule that every white family of five persons might be supposed to own land, stock, or utensils, a house and furniture, worth about two thousand dollars; and as the only considerable industry was agriculture, their scale of life was easy to calculate,—taxes amounting to little or nothing, and wages averaging about a dollar a day.

The Transition to Transfer Payment Government

Government in the United States, especially at the federal level, has become more about transfer payments and less about provision of goods and services.

Here a figure showing government transfer payments to individuals--everything from Social Security and Medicare/Medicaid to welfare payments of various kinds--as a share of GDP. The pattern is bumpy, but the overall upward rise in the last half-century from 5% of GDP back in the 1960s to about 15% of GDP in the last few years is clear. The lower blue line shows transfer payments to individuals from just the federal government. (The figure is created using the ever-helpful FRED website from the Federal Reserve Bank of St. Louis.)

Conversely, the category of "government consumption expenditures and gross investment" has been a generally falling share of GDP over time. The top red line shows this pattern for government overall, including federal, state and local government. The blue line shows just federal spending on "government consumption expenditures and gross investment."



Back in the 1960s, the federal government was spending about 12-13% of GDP "government consumption expenditures and gross investment," which was more than the state and local government spending of about 10% of GDP in these categories (as shown by the gap between the red and blue lines in the second figure). Now the federal government is spending about 7-8% of GDP on "government consumption expenditures and gross investment," which is now less than state and local government spending of about 10% of GDP in this category. State and local government has continued to be about provision of goods and services, from education to roads/transportation to law enforcement. But over time, the federal government in particular has become less focused on "government consumption expenditures and gross investment," and more focused on transfer payments.

The political economy of such a shift is simple enough: programs that send money to lots of people tend to be popular. But I would hypothesize that this ongoing shift not only reflects voter preferences, but also affect how Americans tend to perceive the main purposes of the federal government. Many Americans have become more inclined to think of federal budget policy not in terms of goods or services or investments that it might perform, but in terms of programs that send out checks.

For those who are interested, one way of measuring gross domestic product is to add up the sources of demand in the economy: consumption plus investment plus government plus exports minus imports. In this formula for GDP, the "government" category includes only "government consumption expenditures and gross investment," as explained here by the US Bureau of Economic Analysis.  In contrast, transfer payments become income to those who receive them, and thus are counted in GDP when the recipients spend the money to consume a good or service.

Corporate Boards: Stop Expecting the Impossible?

Economists have been worried about what is  often called the "separation of ownership and control" in large corporations since at least 1932, when Adolf A. Berle, Jr., and Gardiner C. Means wrote a book called The Modern Corporation and Private Property. The shareholders who legally own the company are technically represented by a board of directors, who then oversees the top executives who control the company on a daily basis. But when an Enron-style corporate scandal occurs, or when top executives receive very high levels of compensation, concerns arise that boards of directors have failed in their task of monitoring the firm.

But what if the entire vision of expecting corporate boards to monitor daily operations of large companies is simply implausible? Steven Bovie, Michael K. Bednar, Ruth V. Aguilera, and Joel L. Andrus argue that this is the case in "Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring," which appears in a 2016 issue of the Academy of Management Annals (10:1, pp. 319-407). They offer an extensive review of the literature on how well corporate boards perform the function of monitoring companies, and conclude that such monitoring often doesn't work very well. They write:

"In fact, most academic research, popular press accounts, and even U.S. legislation all echo the sentiment and deeply held belief that boards should be able to actively monitor and control management. ...  Our review focuses on literature that directly or indirectly explores one of the core assumptions of governance research-that a correctly designed and staffed board will be  able to properly fulfill its primary function of effectively monitoring managerial action. The fundamental question that we hope to shed light on is the following: Is it reasonable to expect that boards can offer effective ongoing monitoring of firms, even if we assume that directors are sufficiently qualified and motivated? ... Specifically, we outline a number of barriers stemming from information-processing challenges that   ultimately inhibit directors from pro­viding effective oversight on an ongoing basis. ... Our review and assessment of the literature suggests that effective, ongoing monitoring of managerial  action is unlikely in most large corporations due in large part to these varied barriers."

What sort of barriers do they have in mind? For starters, effective board members should have what they call "board capital," meaning that they have personally invested the time and energy to have a fairly deep level of knowledge about the specific company, and also that board members should be compensated in a way that provides the right incentives to act in the interests of shareholders, not corporate insiders. The issues involved here are substantial! But drawing on their review of the literature on why board monitoring has often been ineffective, they argue that even when these conditions are reasonably well-met, directors typically face substantial problems in monitoring, which can stem from basic issues like firm size, firm complexity, outside job demands, complexity of those job demands, dissimilarity of those job demands, size of the board, frequency of board meetings, diversity of the board, norms of deference of the board, and power of the existing CEO.

Given the research reviewed in this article, we are pessimistic about the possibility of boards being able to effectively monitor managers on an  ongoing basis in many circumstances. ... Given the size and complexity of many modem firms, we believe some firms may effectively be "too  big to monitor", and that successful monitoring by boards may be highly unlikely in many large public firms. It might be time to concede that our conception of boards as all-encompassing monitors is doubtful ... After many of the  corporate scandals over the past several years, the initial reaction has often seemed to be  "where was the board?" Our review calls into question whether boards are really equipped to  catch or stop misbehavior. Governance failures are likely to often be the result of the many   barriers that we have outlined in this review, rather than directors who are shirking their duty as is often assumed.

What are some implications of this line of argument for corporate monitoring and the purposes of corporate boards of directors?


First, it's possible to improve the ability of boards to do monitoring on all of these dimensions, and such efforts can be worthwhile. Somewhat improved monitoring by corporate boards is likely better than no monitoring by boards.

Second, given that even improved board monitoring is likely to be highly imperfect, it's important to think about how to strengthen, emphasize, and rely on the other social mechanisms beyond corporate boards for monitoring the ongoing operations of firms. For example, there is analysis from investors and sources of finance like banks. There are reports of auditors, and government rules about how such audits should be done. There are articles in the financial press. Most industries have oversight in some dimensions (say, workplace safety, product safety, or environmental laws) by government regulators. There can be groups representing workers, including unions, and groups representing various community stakeholders.

Third, when evaluating whether a corporate board is performing well, it may be useful to knock expectations about the extent of monitoring down to more reasonable levels. Instead, in many cases the most important aspects of a corporate board may involve tasks like "providing resource," meaning as a source of expert advice and connections to corporate management, ans well as dealing with "punctuated events" like replacing the CEO or a big decision about a merger. Bovie, Bednar, Aguilera, and Andrus write: "Consequently, we believe that future research and theorizing needs to focus on boards as advice-giving bodies, or bodies that get involved in punctuated events, and look to  other corporate governance mechanisms to secure monitoring."

For a quite different vision of overhauling corporate boards, a couple of years ago I discussed a proposal to "Outsource Corporate Boards?" (August 28, 2014).

Alfred Marshall: Not Competition, But Deliberateness and Freedom

A common complaint against economics and economists is that their theories and outlook place an emphasis on competition, when instead they should encourage cooperation and altruism. I've offered some of my own thoughts that the supposed opposition between competition and cooperation is a false dichotomy here,  and posted on the topic here and here.

Alfred Marshall, a towering figure in the history of economics, offers some pointed comments on how to think about the interaction of competition and economics in the opening chapter of his Principles of Economics, which was originally published in 1890 and became the dominant economics textbook for several decades. Here, I quote from the eighth edition, published in 1920, which is freely available online from the ever-useful collection of writings of past economists available at the Library of Economics and Liberty. Marshall argues that while "poets and dreamers" may describe a world in which purely altruistic people work only for the common good, such a world has never existed, and that when thinking about potential evils of competition, it is also necessary to remember its benefits. Marshall writes:

"The term "competition" has gathered about it evil savour, and has come to imply a certain selfishness and indifference to the wellbeing of others. Now it is true that there is less deliberate selfishness in early than in modern forms of industry; but there is also less deliberate unselfishness. It is deliberateness, and not selfishness, that is the characteristic of the modern age."

To put that short comment in context, with more of how Marshall sees the interaction of deliberateness, freedom, and competition, here is an extended quotation:

"It is often said that the modern forms of industrial life are distinguished from the earlier by being more competitive. But this account is not quite satisfactory. The strict meaning of competition seems to be the racing of one person against another, with special reference to bidding for the sale or purchase of anything. This kind of racing is no doubt both more intense and more widely extended than it used to be: but it is only a secondary, and one might almost say, an accidental consequence from the fundamental characteristics of modern industrial life.

"There is no one term that will express these characteristics adequately. They are, as we shall presently see, a certain independence and habit of choosing one's own course for oneself, a self-reliance; a deliberation and yet a promptness of choice and judgment, and a habit of forecasting the future and of shaping one's course with reference to distant aims. They may and often do cause people to compete with one another; but on the other hand they may tend, and just now indeed they are tending, in the direction of co-operation and combination of all kinds good and evil. But these tendencies towards collective ownership and collective action are quite different from those of earlier times, because they are the result not of custom, not of any passive drifting into association with one's neighbours, but of free choice by each individual of that line of conduct which after careful deliberation seems to him the best suited for attaining his ends, whether they are selfish or unselfish.

"The term "competition" has gathered about it evil savour, and has come to imply a certain selfishness and indifference to the wellbeing of others. Now it is true that there is less deliberate selfishness in early than in modern forms of industry; but there is also less deliberate unselfishness. It is deliberateness, and not selfishness, that is the characteristic of the modern age.

"For instance, while custom in a primitive society extends the limits of the family, and prescribes certain duties to one's neighbours which fall into disuse in a later civilization, it also prescribes an attitude of hostility to strangers. In a modern society the obligations of family kindness become more intense, though they are concentrated on a narrower area; and neighbours are put more nearly on the same footing with strangers. In ordinary dealings with both of them the standard of fairness and honesty is lower than in some of the dealings of a primitive people with their neighbours: but it is much higher than in their dealings with strangers. Thus it is the ties of neighbourhood alone that have been relaxed: the ties of family are in many ways stronger than before, family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. ...

"Again, the modern era has undoubtedly given new openings for dishonesty in trade. The advance of knowledge has discovered new ways of making things appear other than they are, and has rendered possible many new forms of adulteration. The producer is now far removed from the ultimate consumer; and his wrong-doings are not visited with the prompt and sharp punishment which falls on the head of a person who, being bound to live and die in his native village, plays a dishonest trick on one of his neighbours. The opportunities for knavery are certainly more numerous than they were; but there is no reason for thinking that people avail themselves of a larger proportion of such opportunities than they used to do. On the contrary, modern methods of trade imply habits of trustfulness on the one side and a power of resisting temptation to dishonesty on the other, which do not exist among a backward people. Instances of simple truth and personal fidelity are met with under all social conditions: but those who have tried to establish a business of modern type in a backward country find that they can scarcely ever depend on the native population for filling posts of trust. It is even more difficult to dispense with imported assistance for work, which calls for a strong moral character, than for that which requires great skill and mental ability. Adulteration and fraud in trade were rampant in the middle ages to an extent that is very astonishing, when we consider the difficulties of wrong-doing without detection at that time.

"In every stage of civilization, in which the power of money has been prominent, poets in verse and prose have delighted to depict a past truly "Golden Age," before the pressure of mere material gold had been felt. Their idyllic pictures have been beautiful, and have stimulated noble imaginations and resolves; but they have had very little historical truth. Small communities with simple wants for which the bounty of nature has made abundant provision, have indeed sometimes been nearly free from care about their material needs, and have not been tempted to sordid ambitions. But whenever we can penetrate to the inner life of a crowded population under primitive conditions in our own time, we find more want, more narrowness, and more hardness than was manifest at a distance: and we never find a more widely diffused comfort alloyed by less suffering than exists in the western world to-day. We ought therefore not to brand the forces, which have made modern civilization, by a name which suggests evil.

"It is perhaps not reasonable that such a suggestion should attach to the term "competition"; but in fact it does. In fact, when competition is arraigned, its anti-social forms are made prominent; and care is seldom taken to inquire whether there are not other forms of it, which are so essential to the maintenance of energy and spontaneity, that their cessation might probably be injurious on the balance to social wellbeing. The traders or producers, who find that a rival is offering goods at a lower price than will yield them a good profit, are angered at his intrusion, and complain of being wronged; even though it may be true that those who buy the cheaper goods are in greater need than themselves, and that the energy and resourcefulness of their rival is a social gain. In many cases the "regulation of competition" is a misleading term, that veils the formation of a privileged class of producers, who often use their combined force to frustrate the attempts of an able man to rise from a lower class than their own. Under the pretext of repressing anti-social competition, they deprive him of the liberty of carving out for himself a new career, where the services rendered by him to the consumers of the commodity would be greater than the injuries, that he inflicts on the relatively small group which objects to his competition.

"If competition is contrasted with energetic co-operation in unselfish work for the public good, then even the best forms of competition are relatively evil; while its harsher and meaner forms are hateful. And in a world in which all men were perfectly virtuous, competition would be out of place; but so also would be private property and every form of private right. Men would think only of their duties; and no one would desire to have a larger share of the comforts and luxuries of life than his neighbours. Strong producers could easily bear a touch of hardship; so they would wish that their weaker neighbours, while producing less should consume more. Happy in this thought, they would work for the general good with all the energy, the inventiveness, and the eager initiative that belonged to them; and mankind would be victorious in contests with nature at every turn. Such is the Golden Age to which poets and dreamers may look forward. But in the responsible conduct of affairs, it is worse than folly to ignore the imperfections which still cling to human nature.

"History in general, and especially the history of socialistic ventures, shows that ordinary men are seldom capable of pure ideal altruism for any considerable time together; and that the exceptions are to be found only when the masterful fervour of a small band of religious enthusiasts makes material concerns to count for nothing in comparison with the higher faith. ... 

"We may conclude then that the term "competition" is not well suited to describe the special characteristics of industrial life in the modern age. We need a term that does not imply any moral qualities, whether good or evil, but which indicates the undisputed fact that modern business and industry are characterized by more self-reliant habits, more forethought, more deliberate and free choice. There is not any one term adequate for this purpose: but Freedom of Industry and Enterprise, or more shortly, Economic Freedom, points in the right direction; and it may be used in the absence of a better." 

Can the US Continue to be an Outlier in Long Term Care?

As population ages, it seems plausible that more people will rely on long-term care. Such care could be delivered in a variety of ways: for example, within their own home, or a specialty adapted house where care is available 24/7, or or in an institutionalized setting, and by some mixture of paid providers, volunteers, and family members. Compared with other high-income nations of the world, the US is something of an outlier when it comes to long-term care: spending less, fewer recipients of long-term care, as a result a healthier over-65 population. The figures below come from the OECD databook published last November, Health at a Glance 2015.

Here's a figure showing public spending on long-term care as a share of GDP. The OECD average is 1.7% of GDP. The US spends 0.5% of GDP. The other countries that spend this little tend to have lower GDP per capita than the rest of this comparison group.

The main reason for this lower level of spending on long-term care seem to be that a much smaller share of the sUS poulation is receiving long-term care. For the OECD countries with data available, an average of 2.3% of the population is receiving long-term care; for the US, it's just 0.4%.

In turn, a main reason why the share of over-65 Americans receiving long-term care is so low is because, compared with other countries, the American cohort feels it's in pretty good physical shape.  In the US and Canada, about 80% of the over-65 population reports being in good or very good health. For comparison, less than half of the over-65 population in for the other OECD countries is reports being in good or very good health.

It's wise to take these kinds of international comparisons with a bit of skepticism. For example, the figure above shows public spending on long-term care. The Congressional Budget Office estimated in 2013 that the value of informal care provided in the US without compensation by family and friends was  slightly larger than the amount of paid-for care. But other countries presumably have some long-term care that is informally provided, too. One might also wonder if Americans (and Canadians) over-65 are actually in better health than their counterparts in other countries, or just more likely to say that they are in better health. 

However, the US is falling so far below the average in its spending on long-term care and number of recipient of long-term care, and so far above the average in self-reported health status for the over-65 population, that it seems unlikely that either a greater prevalence of informal care or a greater degree of optimism about health status explains the difference. 

As I argued back in 2011, in the context of a previous OECD report, provision of long-term care is just one of many adjustments that countries will need to make in response to aging populations. The easy, costly, and unsatisfactory answer is to make it quite easy for elderly people to qualify for receiving long-term care in an institutional setting. The less costly, harder-to-implement, and more satisfactory answer is to encourage ways for people to receive only the degree of assistance they really need, so that they can live in their homes or their communities as long as possible while being supported by family and friends, but still have a backstop of public support for institutional care when needed. 

The "baby boom generation" refers to those born from roughly 1945-1960. Thus, members of that group will be turning 65 over the 15 years from 2010 to 2025, and will be reaching 80 over the 15 years from 2025 to 2040.  As that generation ages, designing and implementing long-term care policies will be a continual work in progress.