Snapshots of Global Poverty and Inequality

The World Bank is apparently inaugurating what will be an annual report on the theme of "Poverty and Shared Prosperity." The first report in the series, with the subtitle  "Taking on Inequality," was released in early October. "The report series will inform a global audience comprising development practitioners, policy makers, researchers, advocates, and citizens in general with the latest and most accurate estimates on trends in global poverty and shared prosperity." Here are some themes from the report that caught my ehe.

Global poverty, measured by the number of people living on $1.90 or less per day, has fallen dramatically in the last couple of decades. The blue line (right axis) shows the decline in the total number of the world's poor. The red line (left axis) shows the percentage of the world's population below the poverty line. The fall from 35% just 25 years ago in 1990 to about 10% at present is a dramatic improvement.

There are basically two ways that broad swaths of a population can be lifted out of poverty: broad economic growth and redistribution. It's worth remembering that the overwhelming majority of poverty reduction is due to economic growth--especially in China and India, but in other low-income countries around the world as well. About half of the world's poor live in countries of sub-Saharan Africa, while the nations of South Asia have another third of the world's poor, and not coincidentally, those are countries that have not experienced sustained economic growth.

However, as a result of economic growth, it has now become much more possible for even relatively low-income countries to undertake policies aimed at assisting the poor. A working paper by Chris Hoy and Andy Sumner at the Center for Global Development made this point in "Gasoline, Guns, and Giveaways:Is there New Capacity forRedistribution to End Three Quarters of Global Poverty?" (CDG Working Paper 433, August 2016). Hoy and Summer focus on countries with high levels of poverty, but that also subsidize fuel use and have higher military spending than their neighbors. They find that reallocating funds from fuel subsidies and military spending could address three-quarters of existing global poverty (in what follows, citations omitted):

We also consider the reallocation of two illustrative public “bads.” Specifically, regressive fossil-fuel subsidies which are an aspect of fiscal policy that is unequivocally pro-rich and what we have termed “surplus” military spending which we define as more guns than your neighbours meaning military spending above the regional lowest per capita spent. We appreciate that reducing military spending to this level may seem radical to some as no doubt would the reallocation of fossil fuel subsidies away from cheap petrol. However, our estimates of the impact of such changes in fiscal policy show what is at stake — the end of three quarters of global poverty — and our estimates are deliberately conservative for a number of reasons we outline. Our intention is not to annoy those who enjoy cheap petrol for example but to illustrate the resources now available nationally to governments and the implied opportunity costs in terms of poverty.

The report devoted a couple of chapters to policies for reducing poverty and inequality: "[S]pecific interventions discussed are ECD [early childhood development], including breastfeeding; universal health care coverage; good-quality education; cash transfers, mostly conditional transfers; investments in rural infrastructure, specifically, rural roads and electrification; and income and consumption taxes. The selection means that other policy interventions with potential effects on inequality are not included in the assessment. This is not intended to deny the potential equalizing effects of these other interventions; the evidence of the equalizing effects is merely less compelling, is currently being collected, or a general consensus is absent on how to frame the policies to reduce inequality while reaching other objectives."

It's interesting to me that the highlighted policy choices mostly are about unconditional cash transfers, and little of the focus is on high marginal tax rates for those with high incomes. Instead, the policies here both offer near-term support to the poor and also can work as longer-term investments in productivity and economic growth.

The chapters of the report focused on inequality point out a theme that I've mentioned before on this blog: inequality across the world as whole is falling, perhaps for the first time since the start of the industrial revolution in the early 19th century. But inequality within specific countries is rising. For example, economic growth in urban areas of China will tend to increase inequality within China, but reduce inequality from a global perspective. Thus, here's a picture of global inequality using the Gini coefficient. The break in the line occurs because there was a change how to compare the size of incomes across countries

But even as global inequality is falling, inequality is rising not only in the US, but also in a number of developing economies like China, Indonesia, and to a lesser extent India. 

If you combine these sorts of estimates, you can divide up total global economic inequality into within-country inequality and between-country inequaltiy, and see that the first is rising while the second is falling. 

I think greater inequality in high-income countries like the US is a legitimate cause for concern. But I worry less about greater inequality in low-income countries. Tumultuous economic growth tends to affect some areas more than others. The challenge is for governments in countries that have experienced strong but region-specific or industry-specific growth to make the investments in health, education, and infrastructure that can help the poor who have not benefited from that growth.

Interview with David Autor: Trade, Technology, Job Markets

Douglas Clement has an "Interview with David Autor" in The Region, published by the Federal Reserve Bank of Minneapolis (September 7, 2016). The subheading give a sense of the scope of the conversation: "MIT economist on tech, trade & job markets, how Chinese imports affect U.S. politics & family structure, and the Janus-faced gig economy." The interview is a lively and interesting read throughout, but here is a sampling of the comments that caught my eye.

On using Commuting Zones (CZs) to look at local employment effects of rising Chinese exports: 

"The U.S. Department of Agriculture developed the CZ [commuting zone] concept. Basically, they are contiguous counties where most of the people live and work within the same county cluster and where the centroid of the county is commutable from the edges of the CZs. It was [David] Dorn who discovered them in his doctoral thesis work, in the sense that they were out there, but no one outside the Department of Agriculture had used them for economic research. Following Dorn’s lead, we started using them because we thought they had a lot of attractive properties—they’re a sort of “revealed preference” measure of local labor markets. They cover the entire mainland United States, and their boundaries can be drawn consistently over time (unlike metropolitan statistical areas, which are regularly redefined as populations shift). Now a lot of scholars are using them, which is great. ...

The basic idea is simple: We see China’s share of U.S. manufacturing goods consumption rising rapidly in the 1990s and even more so in the 2000s. Is this due to changes in China’s competitive position—lower prices, higher quality—or is it due to shifts in U.S. consumer tastes or even due to declines in U.S. production capacity ...
To make progress, we studied China’s exports to eight other high-income countries simultaneously in each of 392 goods categories (covering all of manufacturing). Our idea was that if Chinese exports to the United States are driven in part by falling costs and rising quality, then Chinese import penetration in other rich countries in precisely these same goods categories should rise in parallel. And this hypothesis is strongly confirmed by the data. The bivariate correlation between the rise in China’s market penetration at the product level in the United States and these eight other countries ranges from 0.55 to 0.96.

For our analysis of the impact of the China shock on U.S. labor markets, we use only the component of rising China—U.S. import penetration that is shared with these other countries—that is, we use the component that we can confidently attribute to China’s improved competitive position.

We take these predicted changes in import penetration into the United States by goods category, and then we project that down to these commuting zones, looking at the geographic structure of U.S. manufacturing employment. Manufacturing is always very geographically concentrated. When you’re talking about furniture, for example, you’re talking about Tennessee or the Carolinas; you’re not talking about 50 states making furniture. The same is true if you’re talking about toys or leather goods or textiles—they’re very localized.

So that was the strategy; we thought it was a good idea, and we didn’t have a strong prior about what we would find. We thought we would find contraction of import-competing manufacturing employment, and we did. That was not surprising, but what happens after that was an unknown.

We were quite startled by how slow and incomplete the adjustment process was and the fact that you didn’t see offsetting gains in employment in other sectors. You see people entering unemployment or exiting the labor force, and wages falling modestly, but much adjustment was on the employment margin, not the earnings margin.

That is another thing that differentiated what we were doing. Historically, trade economists have relied upon full employment models, where people may lose jobs but they don’t lose work per se because they are quickly reallocated across sectors. According to such models, you should expect markets to clear by wages falling. But, in fact, what tends to happen is that people lose employment, and wages don’t really change for those who stay in employment.

Similarly, if we were in full general equilibrium all the time, the commuting zone would be irrelevant as an outcome measure because markets would clear nationally. The local shock is geographically dissipated because there’s effectively a law of one price of skill. And if that law did not hold in the very short run, workers would move to areas with higher wages until wages were again equalized. But it turns out that not only are the trade shocks locally concentrated—due to the concentrated geography of manufacturing—they also primarily play out locally. Much of the pain of adjustment is borne at the point of impact. ... At the level of commuting zones, looking at workers initially in the impacted industry, you just don’t see the kind of diffusion or reallocation that general equilibrium models suggest. It’s not that it doesn’t happen eventually, but it happens slowly and painfully.

How the polarization of Congress spread to polarization of the public

"What’s really fascinating—something we were not aware of—is that while the polarization of Congress has been going on for 30 years, basically since Ronald Reagan took office, the polarization of the U.S. electorate is much more recent. It’s really just been in the last 10 years.

By “polarization,” I mean the clustering of beliefs along party lines. So, for example, it’s increasingly the case that your view on global warming is highly predictive of your view on Mexicans, is highly predictive of your view on how high or low taxes should be and whether people should have a right to open-carry weapons.

Those beliefs didn’t used to be as correlated. So people have more strongly held, more divergent views. They have much more negative views of the other party as well. There is rising disapproval of cross-party marriage: The idea that you would be upset if your kid married someone of the other party has risen. Pew has documented this phenomenon. This has coincided with the rise of the Tea Party, and it’s most pronounced after 2006.

We’re seeing this same phenomenon in the data that we’re using to look at the trade exposure. We don’t want to say that all political polarization is due to trade exposure; I’m sure it’s not. But the localized adverse economic impact of the China shock in the 2000s does appear to be a kind of unnoticed contributor. In fact, you can see the antecedents of the current divisive presidential race playing out in the House in the 2000s—and specifically, in the locations where manufacturing was most hard hit.

On the longer-term relationship between technology and jobs

"It’s a very natural thing to think that if computers do more work, people do less work. But I think the answer is much more nuanced—and, of course, economists have recognized these nuances for centuries.

Computerization changes what type of work people do—that’s very clear; we see the occupational change going on. But the part that people miss is that displacement of a set of tasks or even entire job categories does not augur the end of work. In the last 200 years, technology has totally changed the work that we do. Most of the jobs we have didn’t really exist in any significant number 200 years ago. As a result, work is much better. It’s more interesting, it’s more productive, it’s safer and more rewarding.

My optimism on this topic comes in part from the fact that we’ve already gone through incredibly dramatic adjustments and have been largely made enormously better off for it. It’s not just because we’ve increased aggregate wealth, but more of us work in paid jobs now than 100 years ago. At the turn of the 20th century, most women worked in grueling unpaid employment in the household. Now the majority work in better jobs, for pay, in the formal labor market.

We’ve adjusted to the displacement of human labor by automation along at least three margins. One is that we’ve just created many new and interesting things to do. Think about software development or tourism or all kinds of travel and food and restaurants. We do all kinds of creative and interesting things we didn’t do before.

Two, more of us work, but we work fewer hours. People don’t work until the day they die. They work 40- and 50-hour weeks instead of 80-hour weeks. They work five days a week instead of seven. They take vacations. So they’ve spread the work in a way that’s constructive and leads to a better quality of life.

And the other thing, of course, is that as we get wealthier, our consumption demands rise, so we create a lot of work because we choose to consume rather than just taking it all in leisure. If a worker in 2015 wanted to have a 1915 level of income, he or she could work about 17 weeks a year. But most of us choose not to. We’d rather have a bigger house and a couple of cars and whatever else.

Full disclosure: Autor was the Editor of the Journal of Economic Perspectives from 2009-2014, and thus was my boss for six years.

Oliver Hart and Bengt Holmström: The 2016 Nobel Prize in Economics

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2016 has been awarded to Oliver Hart and Bengt Holmström "for their contributions to contract theory." So what is contract theory, why does it matter, and what did Hart and Holmstrom do? The Nobel committee each year posts some background information about its choice, both a "Popular Science Background: Contract Theory," and a more technical "Scientific Background" paper called "Oliver Hart and Bengt Holmström: Contract Theory."

In the most basic model of supply and demand, the buying and selling takes place at a moment in time. But in the real world, what is bought and sold often takes place in the context of an ongoing relationship. A company signs a long-term contract with a supplier. A bank makes a loan that will be repaid over some years. Workers at some firms and executives at many firms do their jobs expecting that if the firm makes higher profits, they will receive a bonus. Sales people at many firms expect to be paid according to how much revenue they generate. Some organizations operate on an up-or-out principle, where a time comes when you are either promoted or asked to leave. When a market exchange takes place over an extended period of time, a contractual relationship is at work. Sometimes the contract is mostly explicit, and sometimes large parts of it are implicit (or are part of a broader legal framework). But understanding contracts--both what goals they seek to achieve and how they can go wrong--is fundamental to understanding markets.

Just to be clear, the economic analysis of contracts are not an arithmetic problem with a clear cut answer. Amidst the complexities of the real world, there is no all-purpose perfect contract. But researchers like Hart and Holmström can still make considerable progress by spelling out the issues and identifying the key tradeoffs. For example, here is the Nobel committee on some of Holmström's insights about pay-for-performance contracts. As you read it, you may wish to consider  how it differs from that is actually observed in contracts for top executives at many firms.

"A central result, published separately and independently by Bengt Holmström and Steven Shavell in 1979, is that an optimal contract should link payment to all outcomes that can potentially provide information about actions that have been taken. This informativeness principle does not merely say that payments should depend on outcomes that can be affected by agents. For example, suppose the agent is a manager whose actions influence her own firm’s share price, but not share prices of other firms. Does that mean that the manager’s pay should depend only on her firm’s share price? The answer is no. Since share prices reflect other factors in the economy – outside the manager’s control – simply linking compensation to the firm’s share price will reward the manager for good luck and punish her for bad luck. It is better to link the manager’s pay to her firm’s share price relative to those of other, similar firms (such as those in the same industry).

"A related result is that the harder it is to observe the manager’s effort – perhaps due to many distorting factors blurring the relationship between her effort and the company’s performance – the less the manager’s pay should be based on performance. In industries with high risk, payment should thus be relatively more biased towards a fixed salary, while in more stable environments it should be more biased towards a performance measure." 

Related problems arise in jobs that involve a high degree of multi-tasking. With many interlocking tasks, trying to create an explicit pay-for-performance is very difficult, and it may be better to have an overall performance evaluation which leads to promotions or raises over time. Another issue arises with jobs that involve a high degree of teamwork. As the Nobel committee writes: "Team work also modifies the original pay-for-performance framework. If performance reflects the joint efforts of a group of individuals, some members may be tempted to shirk, free-riding on the efforts of their workmates. Holmström addressed this issue in an article from 1982, showing that when the firm’s entire income is divided among team members (as in a worker-owned firm), effort will generally be too low."

The award to Hart focused on a different set of contracting issues, in the area of what are called "imcomplete contracts." The issue here is that in a number of settings, it is impossible to anticipate all of the possible issues that might arise. For example, imagine a city that hires a contractor to build a bridge. The contractor submits a bid. But what if there are dramatic changes in the price of materials, or bad weather, or a quality problem with a subcontractor, or a flu epidemic that knocks out half the workforce, or an unexpected environmental review that leads to delays, or any number of other issues? When it is essentially impossible to write a contract covering all eventualities, the other option is to write a contract that specifies who will get to make the decisions when an unseen eventuality arises. Here is discussion from the Nobel committee with a sampling of some  implications:

"The main idea is that a contract that cannot explicitly specify what the parties should do in future eventualities, must instead specify who has the right to decide what to do when the parties cannot agree. The party with this decision right will have more bargaining power, and will be able to get a better deal once output has materialised. In turn, this will strengthen incentives for the party with more decision rights to take certain decisions, such as investing, while weakening incentives for the party with fewer decision rights. In complex contracting situations, allocating decision rights therefore becomes an alternative to paying for performance. 

"In several studies, Hart – along with different co-authors, such as Sanford Grossman and John Moore – analysed how to allocate the ownership of physical assets, for example whether they should be owned by a single firm, or separately by different firms. Suppose a new invention requires the use of a particular machine and a distribution channel. Who should own the machine and who should own the distribution channel – the inventor, the machine operator, or the distributor? If innovation is the activity for which it is most difficult to design a contract, which seems realistic, the answer could be that the innovator should own all the assets in one company, even though she may lack production and distribution expertise. As the innovator is the party that has to make greater non-contractible investments, she also has greater need of the future bargaining chip that property rights bring to the assets. ...

"Another application of Hart’s theory of incomplete contracts concerns the division between the private and public sectors. Should providers of public services, such as schools, hospitals, and prisons, be privately-owned or not? According to the theory, this depends on the nature of non-contractible investments. Suppose a manager who runs a welfare-service facility can make two types of investment: some improve quality, while others reduce cost at the expense of quality. Additionally, suppose that such investments are difficult to specify in a contract. If the government owns the facility and employs a manager to run it, the manager will have little incentive to provide either type of investment, since the government cannot credibly promise to reward these efforts. If a private contractor provides the service, incentives for investing in both quality and cost reduction are stronger. A 1997 article by Hart, together with Andrei Shleifer and Robert Vishny, showed that incentives for cost reduction are typically too strong. The desirability of privatisation therefore depends on the trade-off between cost reduction and quality. In their article, Hart and his co-authors were particularly concerned about private prisons. Federal authorities in the United States are in fact ending the use of private prisons, partly because – according to a recently released U.S. Department of Justice report – conditions in privately-run prisons are worse than those in publicly-run prisons."

"Contract theory" is one of those terms that may sound irredeemably theoretical and academic. But when thinking about the benefits and tradeoffs of contracts in a wide array of different situations--workers, innovation, production, finance, even government constitutional arrangements--you soon notice that this is a branch of economic theory which is applying analytical precision and rigor to gain insights into the messy real-world issues of day-to-day economic and political life.

Hayek: For Humility and Against a Nobel Prize in Economics

As the pedants among us never tire of pointing out, the so-called "Nobel Prize in economics" is not literally a "Nobel prize." It was not established by the original bequest from Alfred Nobel, but instead was first given in 1969, with the prize money provided by a grant from Sweden's central bank as part of the 300th anniversary of the founding of the bank. Thus, the award is officially "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel." (Justin Fox gives a nice brief overview of the history here.) Although I am pedantic in many matters, this doesn't happen to be one of them, so I will continue following the conventional usage in calling it the "Nobel prize in economics."

More interesting is that Friedrich Hayek the co-winner of the sixth Nobel prize in economics (with Gunnar Myrdal), spoke at the prize banquet in 1974 as to why the establishment of the prize was mistaken. Here's is Hayek's call to humility for economists from his speech at the Nobel banquet on December 10, 1974.

Your Majesty, Your Royal Highnesses, Ladies and Gentlemen,

Now that the Nobel Memorial Prize for economic science has been created, one can only be profoundly grateful for having been selected as one of its joint recipients, and the economists certainly have every reason for being grateful to the Swedish Riksbank for regarding their subject as worthy of this high honour.

Yet I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it.

One reason was that I feared that such a prize, as I believe is true of the activities of some of the great scientific foundations, would tend to accentuate the swings of scientific fashion. This apprehension the selection committee has brilliantly refuted by awarding the prize to one whose views are as unfashionable as mine are.

I do not yet feel equally reassured concerning my second cause of apprehension. It is that the Nobel Prize confers on an individual an authority which in economics no man ought to possess.

This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.

But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally. There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society - as the press tends to treat him till in the end he may himself be persuaded to believe. One is even made to feel it a public duty to pronounce on problems to which one may not have devoted special attention.

I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past.

I am therefore almost inclined to suggest that you require from your laureates an oath of humility, a sort of hippocratic oath, never to exceed in public pronouncements the limits of their competence.

Or you ought at least, on confering the prize, remind the recipient of the sage counsel of one of the great men in our subject, Alfred Marshall, who wrote: "Students of social science, must fear popular approval: Evil is with them when all men speak well of them".

Hayek is quoting from an comment from Marshall which appears in "In Memoriam: Alfred Marshall," a speech given by A.C. Pigou  in 1924 and published as part of a Memorials of Alfred Marshall volume in 1925 (pp. 81-90). The fuller quotation attributed to Marshall (on p. 89) is:

Students of social science, must fear popular approval: Evil is with them when all men speak well of them. If there is any set of opinions by the advocacy of which a newspaper can increase its sales, then the student who wishes to leave the world in general and his country in particular better than it would have been if he had not been born, is bound to dwell on the limitations and defects and errors, if any, in that set of opinions: and never to advocate them unconditionally even in ad hoc discussion. It is almost impossible for a student to be a true patriot and to have the reputation of being one in his own time.

Sorting Out the Patent Trolls

The fundamental power granted by holding patent is to block others from making use of the invention, unless they pay you a licensing fee. Inevitably, this power looks pretty good when you are the patent-holder, and not so good when you are being sued for infringing on someone else's patent. Just to complicate matters, some companies that bring suit for patent infringement didn't actually do the inventing themselves, nor do these companies actually make a product. The neutral name for these firms are "patent assertion entities." A less-neutral name, when some of these firms act in a way that seems to misuse patent law as a genteel method of extorting payments from other firms, is to call them "patent trolls."

There is nothing illegal about buying patents, or enforcing patent rights by requiring a license fee. Indeed, it can be a useful service for a firm to collect a group of closely-related patents and then license all of those patents as a group, so that firms wishing to use those patents can negotiate with a single entity. Is it possible to divide up the "patent assertion entities" in some defensible way, to distinguish the trolls from the rest?

The Federal Trade Commission has the authority to collect confidential business information. "[T]he FTC analyzed information from 22 Responding PAEs and over 2,500 of both their Affiliates and other related entities." The FTC describes it findings in an October 2016 study: Patent Assertion Entity Activity. The report runs well over 200 pages, including a review of existing research literature and the relevant court cases, together with past FTC thinking on this subject over the last decade or so. It you want to get up to speed on this topic, this report is the place to start.The FTC defines the subject of its study this way:

The term “patent assertion entity,” or PAE, as used by the Commission in this report and elsewhere, refers to a firm that primarily acquires patents and seeks to generate revenue by asserting them against accused infringers. As the term underscores, PAE business models focus on asserting patents that the firm has acquired from third parties, rather than obtained from the U.S. Patent and Trademark Office (USPTO) through prosecution. Patents are a PAE’s principal asset; a PAE does not manufacture, distribute, or sell products. Merely holding a patent, however, does not generate revenue for a PAE. Instead, the firm generates revenue by licensing that patent or, more rarely, by obtaining court-ordered damages in successful patent infringement litigation. Furthermore, a PAE generally initiates negotiations that may lead to a license by communicating a demand for payment to, or filing an infringement suit against, an accused infringer.

The report cites some evidence from other studies that a greater share of patent infringement lawsuits are being brought by "non-practicing entities," which is to say firms that own the patents but don't make anything. "[T]he share of infringement cases brought by NPEs has grown over time, from below 30% of all cases in 2009 to over 60% in 2014, and that about 89% of NPE cases appear to have been filed by PAEs."

Basically, the FTC argues that the "patent assertion entities" can be divided fairly neatly into two "two distinct PAE business models: Portfolio PAEs and Litigation PAEs." The FTC steers away from using the term "patent trolls," which in this report mainly comes up in quotations from other articles buried in the footnotes. But "litigation PAEs" is the category that most people are thinking of when they refer to "patent trolls." Here is how "portfolio PAEs" functioned:

"Portfolio PAEs most closely resembled the licensing arms of manufacturing firms; they were highly capitalized and often raised money from investors that included both investment funds and manufacturing firms. Typically, these investors received a share of the Portfolio PAE’s future revenue and a license to the Portfolio PAE’s patents. ...

"Portfolio PAEs typically conducted business in the following manner. First, they acquired portfolios of patents. Portfolio PAEs frequently acquired patents from manufacturing firms by making large up-front payments to the owner. Some Portfolio PAEs acquired hundreds or thousands of patents in individual transactions, often purchasing these patents from manufacturing firms. Other Portfolio PAEs acquired smaller numbers of patents per transaction and aggregated them into larger portfolios. Regardless of acquisition model, Portfolio PAEs then organized acquired patents into one or more portfolios, each containing hundreds if not thousands of patents and offered these portfolios for licensing. ...

"Portfolio PAEs negotiated licenses covering large portfolios, often containing hundreds or thousands of patents, frequently without first suing the alleged infringer. The value of these licenses was typically in the millions of dollars. Although Portfolio PAEs accounted for only 9% of the reported licenses in the study, they generated 80% of the reported revenue, or approximately $3.2 billion.  ...

In particular, notice that the investors in these "portfolio PAEs" are often companies, which the get access to the patents in the portfolio. Thus, these institutions can be viewed as ameliorating the "patent thicket" problem, where there are so many closely related and interlocking patents in some areas that it becomes difficult for innovators to function.

Litigation PAEs look different.

"The Litigation PAE business model frequently employed one or more affiliate entities, usually set up as limited liability companies (LLCs), each created to acquire and assert a small portfolio of patents, without bundling or aggregating acquired patents into larger portfolios. ... Regardless of whether they sent demand letters, Litigation PAEs almost always sued potential licensees in district court before beginning license negotiations.  ... Litigation PAEs tended to be thinly capitalized. Many had between one and three individual owners, often with no other employees and no offices outside of their owners’ homes. In fact, several Litigation PAEs were simply individual entrepreneurs who relied entirely on outside attorneys and professionals to maintain records regarding their assertion activity. ...

"Litigation PAEs typically sued potential licensees and settled shortly afterward by entering into license agreements with defendants covering small portfolios, often containing fewer than ten patents.  The licenses typically yielded total royalties of less than $300,000.  ... The American Intellectual Property Law Association (AIPLA), which periodically surveys the costs of patent litigation, recently reported that defending an NPE patent lawsuit through the end of discovery costs between $300,000 and $2.5 million, depending on the amount in controversy. By this estimate, 77% of Litigation PAEs’ settlements fell below a de facto benchmark for the nuisance cost of litigation. This suggests that discovery costs, and not the technological value of the patent, may set the benchmark for settlement value in Litigation PAE cases. ... Given the relatively low dollar amounts of the licenses, the behavior of Litigation PAEs is consistent with nuisance litigation.

"For each separate patent portfolio that they acquired, Litigation PAEs characteristically
created a new affiliate entity, which often held ten patents or less. They generally operated with little or no working capital and relied on agreements to share future revenue with patent sellers to fund their businesses. Litigation PAEs filed 96% of the cases in the study and accounted for 91% of the reported licenses, but only 20% of the reported revenue, or approximately $800 million."

The report also notes that this problem is really centered in the electronics and software industries. "Of all the patents held by PAEs in the FTC’s study, 88% fell under the Computers & Communications or Other Electrical & Electronic technology categories, and more than 75% of the Study PAEs’ overall holdings were software-related patents."

The policy question of how to draw legal distinctions put the brakes on the patent trolls without unduly hindering legitimate protection of patent rights raises some tricky questions, but the report offers some general guidance:

The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws. Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior. With this balance in mind, the FTC proposes reforms to: 1) address discovery burden and cost asymmetries in PAE litigation; 2) provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits; 3) streamline multiple cases brought against defendants on the same theories of infringement; and 4) provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

For a previous discussion of these issues, I recommend "The New Patent Intermediaries: Platforms, Defensive Aggregators, and Super-Aggregators," by Andrei Hagiu and David B. Yoffie, which appeared in the Winter 2013 issue of the Journal of Economic Perspectives.

What Do We Know About Angel Investors?

The venture capital industry is fairly well-known: they raise funds from investors, often pension funds or university endowments, to invest in start-up companies at an early stage, knowing that a most of those companies won't do very well, but hoping to make a good return when about one in ten of those companies hits it big. The National Venture Capital Association estimates that VC funds raised $28 billion in 2015, and have about $168 billion under management. This isn't a large amount in the context of an $18 trillion US economy, but the effects of VC firms in choosing and nurturing start-ups are much larger than the dollar value would suggest.

But behind or perhaps along-side of the VC firms are a more shadowy group known as "angel investors." which may well be investing more money than their better-known VC cousins. Angel investors are not raising a fund from others; instead, they are investing their own money in small start-ups.  Not much is known about them. But Josh Lerner and Antoinette Schoar present some evidence in their report "Rise of the Angel Investor: A Challenge to Public Policy," written for the Third Way think tank (September 23, 2016). They describe the subject this way:

Angel investors are high-net-worth individuals, often (but not exclusively) former entrepreneurs and corporate executives, who make private investments in start-up companies with their own money. While individual angel investors have a long history—for instance, Naomi Lamoreaux and co-authors highlight how Cleveland’s angel investors played a critical role in financing the early electricity and automotive industries—organized angel groups are a quite recent phenomenon. Beginning in the mid-1990s, angels began forming groups to collectively evaluate and invest in entrepreneurial ventures. ...  

Angels typically invest at the seed funding stage, making them among the first equity investors in a company beyond its founders. ... Angels invested a total of $24.6 billion in 2015 with an average deal size of $345,390, according to the Center for Venture Research. ...  The Angel Capital Association (ACA) lists more than 300 U.S. groups in its database. The average ACA angel group in 2015 had 68 member angels and invested a total of nearly $2.5 million in 10.3 deals in 2007. At least between 10,000 and 15,000 angels are believed to belong to angel groups in the U.S. ... 

The precise measurement of the total size of the angel investment market is difficult to ascertain due to the fact that most angel investments are made on an individual basis and thus typically are not subject to regulatory disclosure requirements. But estimates suggest that the total size of angel investment has long surpassed venture capital investment in the U.S. and increasingly in some other countries as well. For instance, survey estimates suggest the projected size of the total angel market in the U.S. grew from $17.6 billion in 2009 to $24.1 billion in 2014. The estimated capital
deployed by angel groups in Europe has almost doubled over the past five years, and in Canada, it almost tripled. Some estimates suggest that these investors are as important for high-potential start-up investments as venture capital firms. But despite their
rapid growth, we know very little about the role that angels play internationally and the type of firms in which they invest.

 As Lerner and Schoar describe them, angel investors are "a growing form of start-up investing that is less formal than the VC market but more professional than receiving funding from friends and family."  Venture capitalists often have a few seats on a company's board of directors, but angel investors are more likely to be personal mentors to entrepreneurs who are starting a company and to play a fairly direct role in using their connections and experience to help the company grow. Their average investment in a company is fairly small, measured in  hundreds of thousands of dollars, not millions. Here's a description of the process for a typical angel group:

Angel groups follow mostly similar templates. Entrepreneurs typically begin the process by submitting to the group an application that may also include a copy of their business plan or executive summary. The firms, after an initial screening by the staff, are then invited to give a short presentation to a small group of members, followed by a question-and-answer session. Promising companies are then invited to present at a monthly meeting (often a breakfast or dinner). The presenting companies that generate the greatest interest then enter a due diligence review process by a smaller group of angel members, although the extent to which due diligence and screening leads or follows the formal presentation varies across groups. If all goes well, this process results in an investment one to three months after the presentation.

The authors describe some of their recent research on angel investors. For one study, they got detailed data on two groups of angel investors, so they could compare companies that just barely made the cut to receive funding with companies that just barely missed the cut--and thus firms whose prospects  looked quite similar--the firms that got funding were measurably (although not extremely) more successful over the next few years. For another study, they looked at "the records of 13 angel investment groups based in 12 nations and with applicants for financing transactions from 21 nations," and again find that firms which just made the cut for funding do better over time. 

A lot of angel investors have historically preferred to do private deals behind the scenes. But as their importance increases, and as at least some angel investors start working with web-based "crowd-funding" techniques for start-ups, a number of of them are going to emerge from the shadows. As the subtitle of the Lerner-Schoar paper implies, politicians and regulators are likely to grab for a more role in regulating angel investors, too.

Rising Out-of-Pocket Health Care Costs

The health care costs that Americans pay out-of-pocket are rising--both in total amount, which is perhaps not a surprise, but also as a share of incomes, which is perhaps more disturbing. Ann Foster discusses the pattern in "Household healthcare spending in 2014,"  written as a "Beyond the Numbers" short essay for the US Bureau of Labor Statistics (August 2016, vol. 5, no. 13). She has lots of details of spending in particular areas, but here's an overall figure showing out-of-pocket spending by households as a total amount (left axis) and as share of total expenditures (right-hand axis).

Part of the reason for this rise is that more Americans have health care insurance with high deductibles: that is, the amount you pay out of pocket before the insurance kicks in. Here's some information from the most recent Kaiser Family Foundation 2016 Employer Health Benefits Survey.  The report notes:

"[T]he share of covered workers in plans with a general annual deductible has increased significantly over time: from 55% in 2006, to 74% in 2011, to 83% in 2016, as have the average deductible amounts for covered workers in plans with deductibles: from $584 in 2006, to $991 in 2011, to $1,478 in 2016." 

Another simpler way to describe this information is just to look at what share of workers now have a deductible above a certain amount, like $1,000.  This share has been rising for firrms of all sizes, but especially for smaller firms.

I'll add that I'm not automatically opposed to  higher out-of-pocket spending for certain kinds of health costs. One way of holding down the rise in  health care costs is for patients and health care providers to be more sensitive to the cost implications of their choices. Most kinds of insurance against certain costs or damages--auto insurance, homeowner's insurance, and so on--have some form of out-of-pocket cost sharing for this reason. In the big picture, being protected against the risk of health care costs in the tens of thousands of dollars, or more, is quite important, even if it means you aren't protected against annual health care costs in the range of a few hundred or even several thousand dollars.

But it's also wise to remember that the relatively modest rise in out-of-pocket health care costs above is a mixture of households with relatively little in such costs in most years, and other families that are consistently paying the full deductible--an amount which is rising fast--every year. High and rising deductibles will make a lot of people feel as if their health care doesn't offer them much benefit in a typical year.