China's Belt and Road Initiative Collides with Pandemic Realities

One of China's signature economic economic and foreign policy initiatives in the last few years has been the Belt and Road Initiative. The idea was that China would lend money to national or local governments in other countries transportation or infrastructure projects, especially in Africa and Asia but also in Australia and Latin America. Chinese firms would often be hired to do much of the design and construction work, and China might maintain some ownership share of the project. The borrowing jurisdictions would then receive both immediate economic benefits from the construction effort itself and then longer-run benefits from being connected to an improved transportation infrastructure. 

In theory, this plan could benefit all parties. In practice, there have been reasons for concern. I laid out some of the issues in "China's Belt and Road Initiative: Grand or Grandiose?" (September 10, 2018), "China's Belt and Road Initiative: The Perils of Being a Subprime Global Lender" (July 30, 2019), and "China's Belt and Road Initiative: Could It All Come Crashing Down?" (November 18, 2019). The basic concern was that a sizeable share of China's lending was for high-cost, low-benefit projects that had been turned down by other international lenders. While Chinese construction companies and elites in borrowing countries were benefiting in the short-term, a rising number of questions and concerns were being expressed in borrowing nations about the growing debt burden, environmental costs, and treatment of local workers. In addition, borrowing countries have noticed that China's infrastructure investment often seems to include a Chinese military or security component. 

And then the global pandemic recession hit in 2020. China had less to lend, and borrowers were finding it harder to repay. Many projects of the Belt and Road Initiative faced an acid test. The Financial Times recently published this chart, showing overseas lending by the China Development Bank and the Export-Import Bank of China (two major official overseas lenders) compared with the World Bank.  The data is based on estimates from the Global Development Policy Center at Boston University.

A group of researchers at the Overseas Development Institute, an international think-tank founded in 1960, focused on economic development issues, also offers a recent update in their report  "Pulse 1: Covid-19 and economic crisis – China’s recovery and international response," by Beatrice Tanjangco, Yue Cao, Rebecca Nadin, Linda Calabrese and Olena Borodyna (November 2020). They note that total Chinese investments abroad were already declining before the pandemic. They write: 

Chinese investments in Africa and Latin America, in contrast, had been slowing even before the pandemic, after peaking in 2015–2016, due to a mixture of international criticism and Beijing’s desire to improve the quality of its projects and lending. Data on lending from the China-Africa Research Initiative and The Dialogue show loans to African countries falling from a peak of $29.4 billion in 2016 to $8.9 billion in 2018, while loans to Latin American countries also slowed, from $21.5 billion in 2015 to $1.1 billion in 2019.

The ODI team notes that Belt and Road Initiative remains a priority for China: indeed, it argues the Belt and Road initiative in some specific areas have continued to rise, despite the overall decline in China's overseas investment. But there are clearly signs of stress. As the ODI report notes (EPC is an acronym standing for engineering, procurement, and construction): 

As low- and middle-income countries face mounting debt problems due to Covid-19, China’s attention in the short term will be on dealing with debt renegotiations ...  Surging debt, moreover, may also accelerate the shift in the type of overseas project we are seeing from China. The old ‘EPC + Chinese finance’ model,  whereby the interests of Chinese companies and local elites take precedence over the good  of the borrowing country, which bears a disproportionate amount of the project failure risk, will become even more unsustainable amid countries’ reduced capacity to take on debt and risk.

China has agreed to participate in the Debt Service Suspension Initiative (DSSI) overseen by the G20 group of countries. but exactly how it will work is not yet clear. Other countries and the IMF are of course not eager to bail out China's loans. There is also talk of refocusing the Belt and Road Initiative (BRI) away from infrastructure in general. The ODI report notes: 

The potential rebranding of China’s engagement with low- and middle-income countries around ‘high-quality’ BRI, with a focus on green energy, ICT [information and communications technology] and digital infrastructure. The renewed push on ICT and digital infrastructure comes as no surprise, as China started investing in these sectors in African countries as early as 2006. However, a recent increase in focus on science, innovation and technology as a driver of growth is expected to spur exponential growth, both domestically and along the BRI, in e-commerce, cloud computing, digital finance (fintech), communications infrastructure, smart cities, industrial internet, medical technology and digital supply chains. It will be important for developing countries to understand the long-term development, security and financial risks and opportunities involved. 

The pushback against China's Belt and Road Initiative in many countries is very real. A Bloomberg report from a few days ago notes some news from Australia: "The laws passed by Parliament on Tuesday will give the foreign minister the ability to stop new and previously signed agreements between overseas governments and Australia’s eight states and territories, and with bodies such as local authorities and universities." In some ways, China is relearning a lesson that many lenders in high-income countries figured out a few decades ago: A lender's popularity is likely to be highest when a loan is announced and work has just started. But the lender's popularity will then steadily decline as issues on the ground become apparent and repayments on the loan become due. 

Recessions and Energy Efficiency

 At least to me, it's not immediately obvious how a recession might affect energy efficiency--which can be defined as the amount of energy needed to produce a given amount of output. A overall rise in energy efficiency is a consistent pattern over over time: for example, here's a figure showing US energy consumption divided by real GDP over the last 70 years or so. 

There are a variety of reasons for this long-run pattern. Developed economies over time tend to grow more slowly in energy-intensive industries like manufacturing and more quickly in service industries. As an environmental protection measure, governments often push for energy efficiency standards for everything from cars to buildings to appliances and electrical equipment. Companies that use a lot of energy have direct incentives to find ways to produce with less. In the US, the greater growth of population in warmer-weather states has also tended to reduce the growth of energy demand. 

But what happens in a recession? Both economic output and energy use are likely to drop, but which one is likely to drop more--and thus how will energy efficiency be affected?  The International Energy Agency has published its Energy Efficiency 2020 report (December 2020, free registration required). (The IEA is an autonomous Paris-based intergovernmental organization, somewhat similar to the OECD, which publishes a steady stream of energy-related reports.) The IEA has been warning for the last couple of years that from a global perspective, gains in energy efficiency have been declining, and the recession seems likely to worsen this situation. 

Overall, the IEA expects global primary energy demand in 2020 to decrease by 5.3% from 2019. With global GDP falling by 4.6%, primary energy intensity improvement is projected to increase by only 0.8%, the lowest rate since just after the last global economic crisis in 2010 ... roughly half the rates, corrected for weather, for 2019 (1.6%) and 2018 (1.5%). This is well below the level needed to achieve global climate and sustainability goals. ... It is especially worrying because energy efficiency delivers more than 40% of the reduction in energy-related greenhouse gas emissions over the next 20 years in the IEA’s Sustainable Development Scenario ... This is well below the average annual improvement of more than 3% which would be consistent with meeting international climate and sustainability goals.

Here's some global data from the last couple of decades. As you can see, gains in energy efficiency fell during previous global recession, and remained low for a year (in 2010) after the economic recovery had started. 

The IES report also has some interesting comments on how the pandemic recession is scrambling previous patterns of energy demand and shifts in energy efficiency. In the buildings sector, for example: 

The buildings sector is witnessing a partial shift in energy demand from commercial to residential buildings, as social distancing and teleworking reduce use of commercial buildings and increase activities that use energy in the home. In the first half of 2020, electricity use in residential buildings in some countries grew by 20% to 30% while falling by around 10% in commercial buildings. In commercial buildings, essential services are accounting for a larger share of energy use. These services are often more energy-intensive, so the energy intensity of commercial buildings is likely to increase. For example, food sales outlets, which have largely continued to operate during the pandemic, are more than twice as energy-intensive as the average office in the United States, where many offices have been largely unoccupied during the crisis.

As shops and offices re-open, commercial buildings could become more energy intensive if occupants expect higher ventilation rates to reduce the risk of Covid-19 transmission. Around 30% of a building’s energy is dissipated in ventilation and exfiltration. This would only increase with higher ventilation rates. ...

The transportation sector is seeing a shift across modes: 

Long-distance transport is witnessing dramatic falls in activity across all modes, with commercial aviation likely to be 60% lower in 2020 and rail demand 30% lower. The difference between these drops suggests that, at least domestically, some switching from planes to trains and cars is taking place. Shifts from aviation to rail would reduce energy intensity whereas a shift to road vehicles may increase energy intensity. In cities, people are moving away from public transport, which is down 50% in some countries, to private cars and active modes of transport such as walking, cycling or using other non-motorised vehicles.

A bright spot for energy efficiency is that many households are updating their appliances during the pandemic, and newer appliances tend to be more energy-efficient than those they replace: 

A bright spot for technical efficiency gains is the appliances sub-sector. Data through the end of the third quarter of 2020 indicate that the Covid-19 crisis has increased households’ interest in new appliance purchases, with at least some appliances replacing older, inefficient models. Since the pandemic began, online shopping search indices were up by 20% to 40% for many appliance types worldwide, indicating that sales of appliances could be higher than usual. If these trends are confirmed, they would increase the technical efficiency of the global appliances stock.

But overall, the financial stresses of a pandemic recession are not a good time for investments in greater energy-efficiency--which may also be a reason why slower gains energy efficiency may persist even after a recession. 

Investments in new energy-efficient buildings, equipment and vehicles are expected to decline in 2020, as economic growth falls by an estimated 4.6% and income uncertainty affects consumer and business decision making. Sales of new cars are expected to fall by more than 10% from 2019, keeping the overall vehicle stock older and less efficient, although the share of electric vehicles in new car sales is anticipated to grow to 3.2%, up from 2.5% in 2019.

Bottom line: If you are assuming that ongoing steady growth in energy efficiency will play a big role in meeting future environmental goals related to using fossil fuels, both standard air pollution goals and issue of carbon emissions, you should have already been worried by the trend to smaller annual gains in energy efficiency before the pandemic recession--and even more concerned now. 

Lessons about Copyright from the History of Italian Operas

When studying the effects of copyright, one would ideally like to compare settings with and without it. In a modern context, one can look for effects of various changes or extensions in copyright, but it's harder to make comparisons with what creative markets would be like if there was no copyright at all. However, Michela Giorcelli and Petra Moser offer a thought-provoking historical example in "Copyrights and Creativity: Evidence from Italian Opera in the Napoleonic Age" (Journal of Political Economy, November 2020,  128:11, pp. 4163-4210).  

Here's a quick overview of the historical context: 

In 1796, Napoléon began his Italian campaign by invading the Kingdom of Sardinia at Ceva. Although he was unable to subdue Sardinia at the time, two other states, Lombardy and Venetia, were annexed and formed the Cisalpine Republic, which adopted French laws. In 1801, the Republic adopted France’s copyright laws of 1793, granting composers exclusive rights for the duration of their lives, plus 10 years for their heirs (Legge 19 Fiorile anno IX repubblicano, Art. 1–2; Repubblica Cisalpina 1801). In 1804, France replaced its system of feudal laws and aristocratic privilege with the code civil, a codified system of civic laws. The code left copyrights intact where they already existed but did not introduce them in states without copyright laws. As a result, only Lombardy and Venetia offered copyrights until the 1820s (Foà 2001b, 64), while all other Italian states that came under French rule after 1804 had no copyrights, even though they shared the same exposure to French rule, as well as the same language and culture. The empirical analysis examines rich new data on 2,598 operas that composers created across eight Italian states between 1770 and 1900.

In other words, this is a setting where a certain type of performing art is extremely popular, where we have good historical records on performances at the time and since then, and where there was a clear-cut break between nearby regions where some had copyright and some did not. What do they observe? 

Giorcelli and Moser find that in the years before the copyright law takes effect in Lombardy and Venetia, the Italian states look pretty similar both in terms of supply of new operas and also in demand for operas (as measured by factors like theater seats taking population and income into account). Before copyright, the average number of new operas in Lombardy and Venetia rose from 1.4 per year to 3.6 per year--a rise of 157%. 

One effect of copyright that was quickly noticed by composers is that instead of just being paid once for creating the opera, they could receive a stream of payments over time if the opera was popular enough to be performed more widely and repeatedly. When the authors look at measures of the quality of operas, like what was being performed at the Metropolitan Opera in New York in the 20th and 21st century or what recordings of operas are being sold on Amazon even today, they find that the increased quantity of operas was accompanied by higher quality, as well. 

Moreover, the rise in composition of operas was not primarily due to opera composers moving to the areas with copyright, although some of this did occur: instead, the same composers were producing more and better operas.  As other Italian states adopted copyright from 1826 to 1840, they also experienced a rise in quantity and quality of operas produced. 

One last finding is that "there were no benefits from copyright extensions beyond the life of the
original creator." It's important to remember that the broad social purpose of copyright and patent law is not to create "intellectual property" for the creator. Instead, the broad social goal as stated in the so-called "Patents and Copyrights Clause" of the US Constitution is "[t]o promote the Progress of Science and useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." In other words, giving rights to the author for a limited time is the tool, but the actual social goal is progress in science and art. The issue that arises here in both science and art is that new creations are often built on older ones. If an earlier creator is given too much power, or for too long a time, later progress of science and useful arts can be hindered rather than helped. In our modern economy, corporate ownership of intellectual property means that there will always be political pressure to extend and strengthen copyright and patent law to cover creations that are still bringing in royalties. It's important to remember that while such expansions of intellectual property undoubtedly benefit those who hold the copyrights and patents, they may hinder the creation of new innovations.

For some previous posts on copyright, see: 

• "Absurdities of Copyright Protection" (May 13, 2014)
• "The Economics of Copyright" (March 22, 2012)\
• "Should Museums Own Copyright on Photographs of their Paintings?" (November 2, 2016)
• "Is Intellectual Property a Misnomer?" (March 29, 2013)

Why Some of the Shift to Telecommuting Will Stick

It seems to me that the tone of the discussion surrounding the pandemic-induced shift telecommuting has been changing. Last spring and early summer, a lot of the discussion was about about how well it was working, how much time it was saving, how much employees preferred it, and so on. But then the discussions tend to express more concerns. In the words of a recent Wall Street Journal article, "Companies Start to Think Remote Work Isn’t So Great After All Projects take longer. Collaboration is harder. And training new workers is a struggle. ‘This is not going to be sustainable.’" Bloomberg reported on the results from a study done on teleworkers by researchers at the Harvard Business School:  "The Pandemic Workday Is 48 Minutes Longer and Has More Meetings. A study of 3.1 million workers around the world found an uptick in emailing, too."

What factors will determine whether the shift to telecommuting sticks? Jose Maria Barrero, Nicholas Bloom, and Steven J. Davis present some results from a series of nationally representative surveys of US workers done from May to October 2020, in "Why Working From Home Will Stick" (December 2020, University of Chicago Becker Friedman Institute Working Paper 2020-174). The authors argue that teleworking will remain substantially higher after the pandemic: they estimate a rise from about 5% of work-days were supplied from home before the pandemic, and it will be something like 22% even after the pandemic is done. Based on the survey data, they suggest five reasons why some of the shift to working from home will persist:

First, reduced stigma. A large majority of respondents report perceptions about working from home have improved since the start of the pandemic among people they know. With fewer people viewing working from home as “shirking from home,” workers and their employers will be more willing to engage in it.

Second, ... COVID-19 compelled firms to experiment with a new production mode – working from home – and led them to acquire information that leads some of them to stick with the new mode after the forcing event ends.

Third, our survey reveals that the average worker has invested over 13 hours and about $660 dollars in equipment and infrastructure at home to facilitate working from home. We estimate these investments amount to 1.2 percent of GDP. In addition, firms have made sizable investments in back-end information technologies and equipment to support working from home. Thus, after the pandemic, workers and firms will be positioned to work from home at lower marginal costs due to recent investments in tangible and intangible capital.

Fourth, about 70 percent of our survey respondents express a reluctance to return to some pre-pandemic activities even when a vaccine for COVID-19 becomes widely available, for example riding subways and crowded elevators, or dining indoors at restaurants. ...

Fifth, ... the massive expansion in working from home has boosted the market for working from equipment, software and technologies, spurring a burst of research that supports working from home, in particular, and remote interactivity, more broadly.

Here are a few reactions: 

1) More work-days happening from home would be bad news for dense urban areas. The authors write: "We estimate that 4 the post-pandemic shift to working from home (relative to the pre-pandemic situation) will lower post-COVID worker expenditures on meals, entertainment, and shopping in central business districts by 5 to 10 percent of taxable sales." 

2) The workers who are well-positioned to benefit from working form home often tend to have higher incomes and workplace status. Workers in retail or manufacturing or many other other jobs don't have a work-from-home option. For new workers getting hired, on-the-job learning and professional connections are almost certainly harder to create when you're one more face in a checkerboard of continual online meetings. In that sense, the additional perk of sometimes working from home is likely to create a separation between a more favored class of  workers that has access to this option and other workers who do not. 

3) There's a conflict in what workers and employers saying about productivity during the pandemic. In this survey data, workers typically report being more productive from home. But employers often report that productivity is lower when people are working at home (for example, see "What Jobs are Being Done at Home During the Covid-19 Crisis? Evidence from Firm-Level Surveys," by Alexander W. Bartik, Zoe B. Cullen, Edward L. Glaeser, Michael Luca & Christopher T. Stanton, NBER Working paper #27422 , June 2020). One possible reason for this gap is that many of those working from home are happy to be doing it, and they are overestimating their productivity. Another possible reason is that workerks tend to focus on their productivity in doing specific day-to-day tasks, but employers are also looking at activities like the benefits of training or brainstorming that may be facilitated by more informal face-to-face interactions. 

4) Finally, there's a lot of research on the "economics of density," which tends to find that workers who are grouped together have higher productivity. After all, there's a reason why cities and downtown areas with concentrated employment came into existence in the first place, and why they have been the engines of economic growth over time. The after-effects of the pandemic will test this connection. If those who work closely in a physical sense continue to have higher pay and productivity, then those who work from home are likely to gain flexibility but suffer some career slowdowns, because they aren't where the action is. Perhaps employers and firms have now learned how to gain the benefits of physical closeness via web-based conference calls. Or maybe not. 

For an overview of these arguments about the economics of density, the Summer 2020 issue of the Journal of Economic Perspectives has a useful Symposium on the Productivity Advantages of Cities: 

• "The Economics of Urban Density," by Gilles Duranton and Diego Puga (pp. 3-26)
• "How Close Is Close? The Spatial Reach of Agglomeration Economies," by Stuart S. Rosenthal and William C. Strange (pp. 27-49)
• "Tech Clusters," by William R. Kerr and Frederic Robert-Nicoud (pp. 50-76)
• "Internal Mobility: The Greater Responsiveness of Foreign-Born to Economic Conditions," by Gaetano Basso and Giovanni Peri (pp. 77-98)

For a previous post on this topic from last spring, see "Will Telecommuting Stick?" (May 26, 2020).

COVID Comparisons Across Countries and US States: A Graphing Tool from the FT

 The Financial Times has a useful graphing tool that allows you to compare rates of COVID-19 new cases or deaths, either across countries or across US states. Here are a couple of charts with international comparisons that I made yesterday. Feel free to make your own, and to contemplate them.

This graph show rates of COVID-19 deaths per 100,000 population, based on a seven-day rolling average to smooth the line. On the far right of the diagram, the blue line at the top is the European Union. The purple line just below that is the United Kingdom. The green line below that is Sweden. The pink line is the United States.

As with most statistics, one can view the glass as half-full or half-empty. The pink line showing US COVID-19 death rates has not so far spike as high as the EU rate. But if one looks back over the summer, the US death rate line was substantially above the EU line. 

Perhaps the higher US death rate over the summer will mean a lower death rate this fall? Maybe. But the numbers of new COVID-19 cases gives reason for concern. This graph shows rates of new COVID-19 cases per 100,000 population, again using a seven-day rolling average to smooth the line. The blue EU line for new cases started rising in August and September, and then spiked to well above the US level in September and October, before peaking in early November. The pink US line for new cases started spiking in October, and at least for the moment it seems to have peaked a little later and higher than the EU level--which may presage a  higher US death rate in the weeks to come. The green line showing Sweden's COVID-19 cases was at EU levels last summer, but is now peaking. The United Kingdom seems to be doing a little better than the EU as a whole. The blue line at the bottom showing Canada has done the best of the countries show, but has also seen a substantial recent rise. 

 

There's a tendency to read these graphs as if they are a judgement on public health authorities, or on the willingness of the public to follow public health advice. This view isn't wrong, but it's also incomplete.  The specifics of the virus and how it interacts with the season and with local human environments gets a say of its own, too. 

Time to Worry Less About Federal Budget Deficits?

 Jason Furman and Lawrence Summers are prominent Democratic-leaning academic economists, but not among those whose names have been put forward for prominent economic policy positions in a Biden administration--which leaves them free to be a little iconoclastic. Yesterday, they presented a "Discussion Draft" of "A Reconsideration of Fiscal Policy in the Era of Low Interest Rates" in an online event hosted by the Hutchins Center on Fiscal & Monetary Policy and the Peterson Institute for International Economics. Video and slides from of their presentation together with discussants are available here.  Furman and Summers have been ruminating along these lines for some time: for another example, see their essay "Who’s Afraid of Budget Deficits? How Washington Should End Its Debt Obsession" in the March/April 2019 issue of Foreign Affairs.  

Furman and Summers begin by noting that not only have interests rates been very low for more than a decade, but that according to the forecasts embedded in financial market actions (like the willingness to investors to put their money in long-term bonds that pay a low interest rates for decades into the future), interest rates seem likely to remain low for years or decades into the future. Here's, I'll list three main implications they draw for fiscal policy, and offer some thoughts about each one. 

Implication 1: Active Use of Fiscal Policy is Essential in Order to Maximize Employment and Maintain Financial Stability in the Current Low Interest Rate World

The basic idea here is that with interest rates already very low, the Federal Reserve is not going to be able to respond to recessions by cutting interest rates by, say, 5-6 percentage points to stimulate demand. Even if the Fed was to move its benchmark policy interest rate slightly into the negative range by a few tenths of a percent, as some other central banks around the world have done, making those rates negative by several percentage points seems like a policy with risks of its own for financial stability.

Perhaps the main policy challenge here is that fiscal policy has traditionally been somewhat slow to adjust: that is, the economy slows down, Congress starts holding hearings, the economy is still slow, Congress passes a bill, the economy is still slow, the bill begins to take effect, the economy is (maybe) still slow, and the full effects of the stimulus bill percolate through the economy. Is there a way to speed the process? 

History has taught that it's hard for the government to have a bunch of "shovel-ready" projects on hand, just ready and waiting to ramp up if the economy tips into recession. Thus, a lot of the more recent thinking involves considering spending bills that would be triggered--perhaps only in specific areas or regions--by an indicator like an ongoing rise for several months in the unemployment rate. 

Implication 2: Lower Interest Rates Necessitate New Measures of a Country’s Fiscal Situation

When it comes to debt, a key practical issue is not the size of the debt itself, but the size of the payments you need to make. When buying a house, for example, you worry about the size of the monthly payments  in comparison to your income, not the total debt. Similar logic suggests that in a global economy with low interest rates, a government can take on a higher level of debt. Summers and Furman suggest that rather than focusing on the size of the government debt, the appropriate goal should be to look at federal debt service payments (specifically,  they recommend "limiting real interest payments to comfortably below about 2 percent of GDP ideally measured in the economically meaningful sense of net interest less remittances from the Federal Reserve and interest on Federal financial assets").

The general direction of this argument seems clearly correct: that is, one should worry less about a given level of debt when interest rates are lower. As the authors emphasize, long-term economic forecasts come with a heavy dose of uncertainty. They emphasize that if debt payments start rising, policy steps can be taken then. 

But debt problems often don't evolve in a linear way, offering space to politicians for timely interventions before they go bad. As Rudiger Dornbusch used to say, in what I have dubbed the Hemingway Law of Motion: ""The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought." The current system for marketing federal debt, for example, is showing cracks.  Another concern the authors do not discuss in any detail is that US government borrowing relies on inflows of foreign capital, because of of the low US savings rates. By contrast, government borrowing in Japan, say, can draw on Japan's high domestic savings rate. Thus, a recommendation for higher US borrowing is also a recommendation for higher US reliance on inflows of foreign capital from higher-saving countries, which will also imply generally rising debt from the US economy to foreign investors and generally higher US trade deficits (as the US consumes more domestically, financed by inflows of foreign capital). There would be an emerging pattern of global imbalances with risks of its own. 

Implication 3: The Scope and Need for Public Investment Has Greatly Expanded

Furman and Summers offer an intuitively useful example of potholes in roads. If the potholes remain unfixed, they will get worse in the future and thus impose steadily rising social costs on drivers of vehicles. They write: "Put another way, it is better to fill potholes today than to wait and fill them at a cost that grows faster than the interest rate, which is currently around zero in real terms." What are some other "potholes" that it might be better to fix sooner rather than later? 

The political economy danger here, of course, lies in offering politicians a blank check. With just a bit of rhetorical ingenuity, pretty much every government spending program can be re-conceptualized as an "investment." The authors write: 

The above points depend heavily on what the additional debt is used for. If it is used to fund effective public programs with high rates of return, like research, infrastructure, education and investments and support for children, it is very likely to have benefits far greater than the costs of any additional debt accumulation. Wasteful and poorly designed spending programs or tax cuts, however, are not justified by this logic.

Even in some of these categories, Furman and Summers offer some cautions. For example, when it comes to infrastructure improves, an ongoing political challenge is to make sure the money is spent where it have the biggest payoff, not just spread around among Congressional districts in a way that ends up with beautiful and drastically underused rural highways or "bridges to nowhere" projects. Thus, it's important that users of roads and local governments spending local taxes have some skin in the game when it comes to local infrastructure improvements, and they aren't just spending what feels like free federal money. 

As a bottom line, Furman and Summers suggest that their arguments would justify "[a]dditional investments of about 1 percent of GDP," which would be roughly  $200 billion per year. This of course seems like an invitation to think about how you would spend this money. While I've got nothing against fixing physical potholes, my own preferences here would instead focus on human capital and technology. 

For example, I'm not a big fan of universal pre-K programs: they cost a lot, and the recent evidence on such programs often shows short-term effects that fade over time (for example, here and here), although it still seems worth thinking about how to fund such programs for children from disadvantaged families. However, there does seem to me promising evidence on even earlier interventions for children: for example, the value of pre-natal care and nutrition, interventions aimed at families with children under the age of 2. Indeed, some economists have gone so far as to argue that redistributing spending from pre-K to policies aimed at younger children could be a net gain. 

I would also spend a chunk of the money on a substantial rise in support for community colleges and  apprenticeships. We seem to me to be in a time when employers have a strong demand for workers with particular skills, but those same employers have become more hesitant to do the training themselves--perhaps because they fear that most promising of these trained employees will leave for other jobs, or perhaps because they fear they they have become less able to fire those who do not complete the training successfully. In either case, the ladders of opportunity for getting into good career-oriented jobs have become frayed for many young and young-ish adults, and programs that match employers with public-sector training in the actual skills those employers need seem one way to reduce this problem. 

Finally, it's a long-standing lament for me that the US economy underinvests in research and development, by which I would include not just basic research, but also the ability of communities to create self-sustaining centers where research and new companies and jobs combine in a virtuous circle. There's a strong case to be made that the US should phase in an increase in research and development spending of 50% or more, which can be done with a variety of tools including direct government support, tax incentives for industry, and encouragement for corporate labs. In addition, it would then be useful to have a process for spreading the effects of this technology across the US, rather than having it concentrated in a few cities. There are several fairly detailed proposals in which the federal government might set up a process in which medium-sized cities across the country that have university ties and a reasonable tech base in place could bid to become both reseach and economic centers for these new investments in technology.  

I'm probably more worried about the current trajectory of US borrowing than Furman and Summers (for example, here and here).  But it also seems true to me that, without any conscious decision, the role of federal spending has shifted quite dramatically: back in 1960 for example, 26% of federal spending was payments to individuals, in 2020, 70% of federal spending was payments to individuals. I like the idea of some federal programs focused on longer-term social gains, and this period of low interest rates seems like an opportunity to let this agenda have some air. 

Remember the Opioid Crisis?

The COVID-19 pandemic is deservedly the main public health story of our time. But spare a thought for the opioid crisis, which hasn't gone away, and has led to the deaths of about 500,000 Americans in the last two decades. Johanna Catherine Maclean, Justine Mallatt, Christopher J. Ruhm, and Kosali Simon provide an update and overview in "Economic Studies of the Opioid Crisis" (November 2020, National Bureau of Economic Research Working Paper 28067). 

As they point out, the number of deaths from the opioid epidemic is just the starting point for looking at social costs: "Data from the National Survey of Drug Use and Health (NSDUH)--the official government source for substance use statistics in the U.S.--indicate that in 2018, 1.7 million Americans met diagnostic criteria for prescription opioid use disorder (OUD) and over 500,000 for heroin-related OUD (McCance-Katz, 2018). These numbers represent a lower bound on the true prevalence of OUD as individuals are likely to under-report this condition in survey settings and since the NSDUH excludes groups likely to have disproportionately high rates of OUD (e.g., institutionalized and homeless individuals)." Indeed, the combination of deaths and diseases is the main factor causing average life expectancy among non-Hispanic whites to reverse its pattern of increases over time, and instead to start declining around the year 2000.

The authors re-tell the basic story of the opioid crisis, as I have told it here before. It's a commonly viewed as a three-stage event. The first stage from the late 1990s up to about 2010 was an explosive rise in prescription opioids: for example, sales of prescription opioids quadrupled from 1999-2014, but the share of Americans reporting that they were in pain was not rising during this time. It's common to say that this rise was driven by aggressive marketing from the pharmaceutical industry, and marketing did indeed rise. But it seems to me that health care providers also bear a substantial share of the blame for their susceptibility to that marketing. In the second stage, restrictions were imposed on prescription opioids, which then led to a rise in heroin usage. In the third stage, there has been a shift from heroin to fentanyl, which provide a much cheaper high in much less volume--and thus are easily smuggled across national borders in ordinary-looking mailed packages.  

Now that the opioid crisis has been unleashed, and has morphed from a prescription drug crisis into the heroin/fentanyl crises, what's to be done? 

There's still room for identifying physicians who are dramatically more likely to prescribe opioids, and pushing back against that behavior. One study looked at county-level data on what counties have a higher or lower share of doctors who are high-prescribers of opioids. The study also looked at people moving between counties--and whose average health status should be about the same before and after the move. It found that about 30% of the variation in opioid deaths across countries is explained by physician prescribing behavior. There's some evidence that if a state has a "prescription drug monitoring program," which is a centralized database recording all individual prescriptions, and if physicians enter the information into the database and check it before prescribing, it can make a difference in opioid-related mortality, crime, the health of newborns, and the number of children who end up in foster care. Other states have had success with pain management clinics laws," which seek to regulate "pill mills" that are prescribing especially high volumes of these drugs. 

But as noted above, the opioid crisis stopped being primarily a prescription drug issue a few years ago. In addition, steps to reduce prescriptions of opioids always run some risk of nudging users into the illegal opioid markets. Given that the past wars on other illegal drugs have not been notably successful in raising the price or reducing the quantity of illegal drugs, the main policy proposals  here involve trying other methods to protect public health from opioid abuse. 

For example, trying to assure easy access to naloxone, especially among first-line responders including police, seems to have some benefits. Another option is to make treatment cheaper and more available. The authors write (citations omitted):  

Recent estimates suggest that only one in ten individuals with OUD [opioid use disorder] receive medication for treating it in a given year, although there have been recent expansions in availability of DEA-waivered providers of buprenorphine. While there are many reasons why individuals do not receive treatment--including strong psychological barriers to treatment and stigma--commonly stated causes include inability to pay and lack of insurance coverage ...

Overuse of opioids is of course not physically contagious. But there is a sense in which it is socially contagious and also socially destructive in ways that go beyond the harms to individuals.