Wednesday, April 1, 2015

Better to be a Cynic or a Sentimentalist?

There's an old throw-away line about how economists that goes like this: "An economist is someone who knows the price of everything and the value of nothing." 

The comment is derived from the dialogue in one of Oscar Wilde's plays, called Lady Windermere's Fan, which was first produced on stage in 1892. Here's the relevant snippet of dialog:
Lord Darlington: What cynics you fellows are!
Cecil Graham: What is a cynic?
Lord Darlington: A man who knows the price of everything and the value of nothing.
Cecil Graham: And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.
Lord Darlington's comment about cynicism is fairly well-known, at least among economists. At least in my experience, the comeback from Cecil Graham is not known at all.

So which of Oscar Wilde's choices do we take? Cynic or sentimentalist? Economic analysis does suggest an intermediate path, which was nicely enunciated in the title of a 1987 book by Alan Blinder, Hard Heads, Soft Hearts.  Blinder writes:
There is an appealing philosophy of economic policy that combines hard-hearted respect for economic efficiency with soft-hearted concern for society's underdogs. ... We must start thinking with our minds and feeling with our hearts, rather than the other way around. ... The hard-headed but soft-hearted approach is based on two principles. The first, the hard head, is that more is better than less. The second, the soft heart, is that the poor are needier than the rich. Neither of these strikes me as particularly controversial nor ideological. And so there is hope. ... Of course, simply paying allegiance to the principles of equity and efficiency will not provide answers to all our economic policy questions. Many policies enhance efficiency but damage equity, or vice versa. ... In such cases, the principles of equity and efficiency are not enough. We must supplement them with more controversial ethical judgments about whether gains in efficiency compensate for losses in equity, or vice versa. Here the decisions are inherently political and reasonable people may disagree. But keeping the two principles firmly in mind does help.
Perhaps the old joke could be amended in this way: "An economist is someone who insists on both analyzing prices while also appreciating ultimate values--and struggling with the tradeoffs." Or briefer: "An economist is a cynical sentimentalist, teetering on the sharp edges of both views."

Tuesday, March 31, 2015

Human Rights are Eggs, and Economic Rights are Croquet Balls

I was talking with a student the other day about human rights and economic rights, and it reminded me of a passage written by E.B. White--yes, the author of Stuart Little, Charlotte's Web, Trumpet of the Swan, and of course, with William Strunk, co-author of The Elements of Style. White suggests the following analogy: economic rights are like croquet balls, and human rights are like eggs. If you jumble them together, the eggs are likely to get broken. The analogy seems to me to have enough truth in it to be worth pondering.

In the same letter, White makes some other statements worth consideration.
"There is, I believe, a very real and discernible danger, to a country like ours, in an international covenant that equates human rights with human desires, and that attempts to satisfy, in a single document, governments and philosophies that are essentially irreconcilable. I do not think it safe or wise to confuse, or combine, the principle of freedom of religion or the principle of freedom of the press with any economic goal whatsoever, because of the likelihood that in guaranteeing the goal, you abandon the principle. This has happened over and over again."
 "A right is a responsibility in reverse; therefore, a constitutional government of free people should not ward any “rights” that it is not in a position to accept full responsibility for."

The relevant passages come from a letter, which I'll include here, from White to Margaret Halsey on April 23, 1953. It appears in the Letters of E.B. White, collected and edited by Dorothy Lugano Guth (Harper and Row, 1976).

In turn, White's letter refers to an essay written by Halsey about taking her daughter to the public library, and I'll include a bit of that essay below (the full essay is available via JSTOR). Also to provide context, Halsey was writing in response to an editorial that White had written in the New Yorker on April 18, 1953. I'll include a slice of that below as well.

Here's the letter from White to Halsey:

__________________________

April 23 [1953]

Dear Miss Halsey,

I had just read your piece in the ALA Bulletin about taking your daughter to the public library, where she liked “the little chairs and the books about fierce things,” when your letter arrived protesting the editorial in the April 18th issue about human rights. Since I am the author of the offending remarks, it is up to me to answer your complaints.

The New Yorker isn’t against freedom from want and didn’t attack it or minimize it as a goal. But we’re against associating freedom from want (which is an economic goal) with freedom of speech (which is an exact political principle). There is, I believe, a very real and discernible danger, to a country like ours, in an international covenant that equates human rights with human desires, and that attempts to satisfy, in a single document, governments and philosophies that are essentially irreconcilable. I do not think it safe or wise to confuse, or combine, the principle of freedom of religion or the principle of freedom of the press with any economic goal whatsoever, because of the likelihood that in guaranteeing the goal, you abandon the principle. This has happened over and over again. Eva Peron was a great freedom-from-want girl (specially at Christmas time), but it also happened that La Prensa died and the Argentinians were left with nothing to read but government handouts.

If you were to pack croquet balls and eggs in a single container, and take them travelling, you would probably end your journey with some broken eggs. I believe that if you put a free press into the same bill with a full belly, you will likely end the journey with a controlled press.

In your letter you doubt whether the man who wrote the editorial had given much thought to the matter. Well, I’ve been thinking about human rights for about twenty years, and I was even asked, one time during the war, to rewrite the government pamphlet on the Four Freedoms — which is when I began to realize what strange bedfellows they were. A right is a responsibility in reverse; therefore, a constitutional government of free people should not ward any “rights” that it is not in a position to accept full responsibility for. The social conscience and the economic technique of the United States are gaining strength, and each year sees us getting closer to freedom from want. But I’m awfully glad that the “right to work” is not stated in our bill of rights, and I hope the government never signs a covenant in which it appears.

My regards to your daughter, who (human rights or no human rights) is my favorite commentator on the subject of public libraries.

Sincerely,

E.B. White

______________________

The essay by Halsey to which White is referring is called "The Outdoor Reading Room," and it appears in the ALA Bulletin, Vol. 47, No. 4 (April 1953), pp. 150, 166. Halsey begins:

Every Saturday morning my husband and I take our little girl, aged four and a half, down to the Children's Room of the local public library to change her books. This is a fixed routine in our household, and if anything hap pens to interfere with it, my daughter reacts in a way which gives grim promise of future juvenile delinquency. 
Speaking rather idly, I asked my daughter one day what it is she likes about the public library. "The little chairs," she answered promptly, "and the books about fierce things."
After a moment's pause, she added, "And the librarian with the long brown hair." 
As a matter of fact, one of her first gestures toward freeing herself of the maternal apron strings--this was way back a year and a half ago, when she was three--was her insistence that she should take her books into the Children's Room by herself. Furtive lurking by the parents outside the door was not encouraged. She made us wait in the street. We did not, of course, know what transpired in the Children's Room; but as she never emerged with VASC to WEB of the Encyclopedia Britannica, we concluded she had found out how to cope. 
In these days of radio and television, I suppose the public library is not the enormously important source of entertainment that it was to my husband and me when we were growing up ...
___________________

I do not know if Halsey's letter to White is available somewhere. But here is the short editorial in the April 18, 1953 issue of The New Yorker, from the "Talk of the Town" section, to which Halsey was responding:





Monday, March 30, 2015

Should Individual Tax Returns Be Public Information?

My guess is that if you asked Americans if their income taxes should be public information, the answers would mostly run the spectrum from "absolutely not" to "hell, no." But the idea that tax returns should be confidential and not subject to disclosure was not a specific part of US law until 1976. At earlier periods of US history, tax returns were sometimes published in newspapers or posted in public places. Today, Sweden, Finland, Iceland and Norway have at least some disclosure of tax returns--and since 2001 in Norway, you can obtain information on income and taxes paid through public records available online.

Here are some moments in US history involving the disclosure of income tax information, followed by a few thoughts of my own. I'll draw here the Disclosure and Privacy Law Reference Guide published by the IRS in 2012.

The Civil War Income Tax and 19th Century History

"The history of tax information confidentiality may be traced to the Civil War Income Tax Act of 1862, when tax information was posted on courthouse doors and sometimes published in newspapers to promote taxpayer surveillance of neighbors. ... In 1870, the Commissioner prohibited newspaper publication of the annual list of assessments, but the list itself remained available for public inspection. The Revenue Act of 1870 confirmed this directive. Two years later, in part because of problems stemming from publicity of tax returns, the income tax law was allowed to expire. When the income tax was reinstated by the Revenue Act of 1894, Congress affirmatively prohibited both the printing and the publishing in any manner of any income tax return unless otherwise provided by law, and provided criminal sanctions for unlawful disclosure. In 1895, the Supreme Court declared the income tax unconstitutional ..."
The 1924 disclosure

"The proponents of full [income tax return] disclosure had a limited victory in 1924. The Revenue Act of 1924 provided that the Commissioner would:
as soon as practicable in each year cause to be prepared and made available to public inspection . . . lists containing the name and . . . address of each person making an income tax return . . . together with the amount of income tax paid by such person.
As a result of the 1924 Act, newspapers devoted pages to publishing the taxes paid by taxpayers, and the right of newspapers to publish these lists was upheld by the Supreme Court.The Revenue Act of 1926, however, removed the provision requiring that the amount of tax be made public while leaving the requirement that a list be published containing the name and address of each person making an income tax return."
The 1934 disclosure
"In 1934, after a widely publicized income tax evasion scandal, Congress
enacted another form of limited disclosure. The Revenue Act of 1934
contained a provision for the mandatory filing of a so-called "pink slip" with
the taxpayer's return. The pink slip was to set forth the taxpayer's gross
income, total deductions, net income and tax payable. The pink slip was
to be open to public inspection. Fueled by images of kidnappers sifting
through pink slips looking for worthwhile victims, the provision was
repealed even before it took effect."
The 1976 confidentiality rules

The Senate Select Committee on Presidential Campaign Activities (Watergate Committee) hearings revealed that former White House counsel John Dean had sought from the IRS political information on so-called "enemies." Furthermore, it was disclosed that the White House actually was supplied with information about IRS investigations of Howard Hughes and Charles Rebozo. The Committee noted that tax information and income tax audits were commonly requested by White House staff and supplied by IRS personnel.
The House Judiciary Committee investigating the possible impeachment of President Nixon learned of the apparently unauthorized use of IRS tax data by the President. One of the Articles of Impeachment proposed by the Judiciary Committee alleged that President Nixon had:
endeavored to obtain from the Internal Revenue Service, in violation of theconstitutional rights of citizens, confidential information contained inincome tax returns for purposes not authorized by law ...
[A]s part of the Tax Reform Act of 1976 ...  Congress recognized that the IRS had more information about citizens than any other federal agency and that other agencies routinely sought access to that information. Congress also understood that citizens reasonably expected the IRS would protect the privacy of the tax information they were required to supply. If the IRS abused that reasonable expectation of privacy, the resulting loss of public confidence could seriously impair the tax system. ...  Ultimately, Congress amended section 6103 to provide that tax returns and return information are confidential and are not subject to disclosure, except in the limited situations delineated by the Internal Revenue Code.

Some thoughts

The arguments for and against disclosure of individual income tax information haven't changed much over time. The 2012 IRS report illustrates this point with a matched set of quotations. Here is former President Benjamin Harrison (his term ended in 1893), making the case for disclosure in an 1898 speech:

"Each citizen has a personal interest, a pecuniary interest in the tax return of his neighbor. We are members of a great partnership, and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it."

For an alternative view, here's Secretary of the Treasury Andrew Mellon, commenting in the aftermath of the 1924 income tax disclosures:
"While the government does not know every source of income of a taxpayer and must rely upon the good faith of those reporting income, still in the great majority of cases this reliance is entirely justifiable, principally because the taxpayer knows that in making a truthful disclosure of the sources of his income, information stops with the government. It is like confiding in one's lawyer. ... There is no excuse for the publicity provisions except the gratification of idle curiosity and filling of newspaper space at the time the information is released."
Both comments raise interesting questions. For example, the last few words of Harrison's comment in 1898 suggest that if we are going to have a conversation about revealing tax returns publicly, perhaps we should also have a discussion about revealing publicly all amounts and kinds of government assistance received. When Mellon writes in 1924 that the government does not know sources of income, he is of course writing at a time before income taxes are automatically withheld from wages, and at a time before employers and financial institutions send detailed records of income paid to the government which can be checked against income tax returns.

Some evidence from Norway

Norway is the world leader in disclosure of income tax information. Erlend E. Bø, Joel Slemrod, and Thor O. Thoresen investigate the effects of Norway making individual tax returns publicly available online in "Taxes on the Internet: Deterrence Effects of Public Disclosure," which appeared in a recent issue of  American Economic Journal: Economic Policy (2015, 7:1, pp. 36–62).  (Full disclosure: The AEJ: Economic Policy is published by the American Economic Association, which also publishes the Journal of Economic Perspectives, where I have worked as Managing Editor since 1986.The journal is not freely available on-line, but many readers will have access through library subscriptions or AEA memberships.)  Here's how they set the stage (citations omitted):

Norway has a long history of public disclosure of information from income tax returns, going back at least to the middle of the nineteenth century. Citizens could visit the local tax office or the city hall and look through a book that contained information about each taxpayer in the local area. Persons were listed by name and address, along with key measures from the income tax return: income, tax payment, and wealth. The information was generally available for three weeks after the tax statement was made public. As the media had access to the same type of information, local newspapers would often communicate highlights from the lists, such as rankings of the citizens with highest wealth and income, or incomes of sports and entertainment celebrities.
However, the advent of the Internet changed the form of the public disclosure of tax information rather dramatically. In the fall of 2001, a national newspaper offered online access to tax information for the whole population through the web version of the newspaper, and soon all of the major national newspapers followed. Now, one could simply sit at home by the computer and obtain information about relatives, friends, neighbors, or celebrities. Whereas not many people took the trouble to visit the local tax office for manual searches, obtaining the same information by computerized searches from home substantially reduced the information access hurdle. The web pages offering search engines for tax information have been among the most popular websites in
Norway, especially shortly after the release of new annual information.
Would we expect tax returns on the Internet to alter tax payments? For example, one possibility is that people might be less likely to hide income, for fear that if they reported a low income but had a visibly high level of spending (new car, big vacation, home remodelling), the neighbors might turn them in to the tax authorities.

Bø, Slemrod, and Thoresen tackle the question this way. They reason that most wage-earners have little ability to understate their income, because their employer reports income to the tax authorities in the first place. However, the self-employed and other business owners have more freedom to understate their income. Thus, they carry out a detailed comparison of income reported to tax authorities by wage-earners and by the self-employed and business owners both before and after 2001, when the income tax returns became publicly available on the Internet. They conclude:

We attribute an approximately 3 percent increase in reported income to Internet public disclosure. The main hypothesis of a shaming effect from public disclosure on tax evasion is also supported by finding somewhat larger effects in smaller, less densely populated areas, and for business categories which are believed to be “reputation sensitive.”
Of course, this 3% figure cannot easily be applied to other proposals that would make income taxes public. After all, the shift in Norway was from publicly available, but not on the Internet, to publicly available, and also on the Internet. Moreover, one suspects that the very fact that Norway makes tax information public suggests that attitudes about taxes and tax enforcement may differ there from many other countries. For example, did you notice in the earlier quotation that Norwegians are required not only to disclose their income and tax payments each year, but also their wealth?





Friday, March 27, 2015

Invest in Vice or Virtue?

My stock market investments are in no-load broad-based index fund, just like Warren Buffett recommends. But it seems as if more and more people are looking for a "socially responsible" fund which either rules out certain investments or tries to put pressure on companies to sell off or alter certain lines of business, often those related to tobacco, alcohol, gambling, "adult entertainment." In a chapter in the Credit Suisse Global Investment Returns Yearbook 2015 (published February 2015), Elroy Dimson, Paul Marsh and Mike Staunton write on the question: "Responsible investing: Does it pay to be bad?" They point out that at least at a rhetorical level, claims of responsible investing have become widespread (citations omitted).
 The world’s largest asset owners now devote extensive resources to social and environmental issues and corporate governance, and to engaging with investee companies on these issues. The extent of engagement is reported to be at an all-time high. The UN-supported Principles for Responsible Investment lists 1,349 signatories with assets of over USD 45 trillion, around half the assets of the global institutional investor market. The Global Sustainable Investment Alliance estimates that worldwide some USD 14 trillion of professionally managed portfolios incorporate environmental, social and governance concerns into their decisions. ... Under the UN Global Compact, more than 12,000 business organizations in 145 countries have committed to responsible and sustainable corporate practices.
Typically, the motivations for socially responsible investing are that when you gain from investing in a firm, you are to some some degree complicit in what that firm sells or how the firm behaves. Also, stock ownership offers a platform for calling attention and perhaps even exercising influence over the firm, either through a shareholder resolution, threat of divestment, or actual divestment. However, Dimson, Marsh and Staunton also point out an angle I had not considered, which is why the investors with a fairly universal portfolio, like pension funds, endowments, and my no-load equity mutual funds, might not be averse to pressuring firms about social issues:

[T]he very largest asset owners are increasingly “universal owners” ...  They are now so large that they essentially own every company in the market. Furthermore, many of them have investment horizons that extend into the distant future. Universal owners cannot escape costly, company-specific factors: if one investee company benefits at the expense of creating additional costs for another, there may be no net gain to an asset owner with shares in both. Logically, universal owners should focus on increasing the size of the cake – the aggregate value of all corporations – rather than being too concerned about how the cake is sliced up between companies. An example of this broader focus is labor practices. Some investee companies may lower production costs by employing children, or by sourcing from companies that employ children, but they are unlikely to pay the costs of poor child health or under-education. The universal owner may recognize that child labor in one firm reduces the profitability of other firms who do not employ children, and that impaired education may impede broader economic progress. From a long-term perspective, the owner can therefore benefit financially by engaging with companies and regulatory authorities.

Of course, pursuing socially responsible investment--however defined--raises a possibility of missing out on high returns. As the authors point out, vice can be profitable: "The rationale for "vice investing" is that these companies have a steady demand for their goods and services regardless of economic conditions, they operate globally ("vice" is a worldwide phenomenon), they tend to be high-margin businesses, and they are in industries with high entry barriers."

Dimson, Marsh and Staunton offer some evidence that returns to vice may well be higher than market averages. As one example, here's a comparison of two mutual funds. "The Vice Fund invests in businesses that are considered by many to be socially irresponsible. Recently renamed the Barrier Fund, it has assets of USD 290 million invested in “industries with significant barriers to entry, including tobacco, alcoholic beverage, gaming and defense/ aerospace industries.” The Social Index
Fund tracks an index screened by social, human rights, and environmental criteria. Constituents have superior environmental policies, strong hiring/promotion records for minorities and women,
and a safe workplace. There are no companies involved in tobacco, alcohol, adult entertainment,
firearms, gambling, nuclear power, and unfair labor practices. It has assets under management
of USD 1.5 billion ..."



Or as another example, here's a different study comparing "sin stocks" to market returns for a variety of countries from 1970 to 2007. In most countries, sin stocks comfortably beat the market. The "sin" industries in this study included  alcohol, tobacco, "adult services," weapons, and gambling.



As a final example, the enormous pension fund run by the California Public Employees' Retirement System announced with some fanfare in 2002 that it would not invest in countries that fell short in various categories, which among others ruled out China and Russia, which cost the fund enough that the policy soon changed.

An application of country exclusion was adopted in 2002 by CalPERS, whose Permissible Emerging Market Policy blacklisted entire countries that fell short of a minimal threshold on factors such as political stability, democratic institutions, transparency, labor practices, corporate responsibility and disclosure. The resulting restriction on investing in Russia, China and other (then) high-performing emerging markets was costly: “by late 2006, CalPERS’ emerging market portfolio had been subject to 2.6% in annual opportunity cost of foregone return, totaling over USD 400 million in losses from the time of the policy’s inception” (Huppé and Hebb, 2011). In 2007, CalPERS dropped its emerging-market country withdrawal strategy, and switched to a principles-based approach to selecting companies in the developing world. They chose to use voice rather than exit within emerging markets, and embraced dialogue, engagement and shareholder activism.
Of course, this change by CalPERS raises the possibility that talking about principles is a cheap way of satisfying those who care without giving up on the higher returns, and perhaps without accomplishing much change either. Dimson, Marsh and Staunton argue that the higher returns received by vice may be in part due to those who prefer not to invest in these firms.
The paradox, then, is that depressed share prices for what some regard as noxious and nasty businesses may demonstrate that responsible and ethical investors are having an impact on the value of a company whose activities conflict with social norms. If so, the shares will ultimately sell at a lower price relative to fundamentals. For example, they may trade at a lower price/earnings or lower price/dividend ratio. Buying them would then offer a superior expected financial return which, for some investors, compensates for the emotional “cost” of exposure to offensive companies. ... [I]f companies have a lower stock price, they offer a buying opportunity to investors who are relatively
untroubled by ethical considerations.
This pattern may explain why it's hard to find evidence that divesting from a stock causes the company to alter its behavior: after all, if those with strong objections to a company's behavior divest, the remaining shareholders who don't care that much receive higher returns. Win-win! Sort of.

The question of how pressuring a company to respond to certain social responsibilities affects returns from that company is not fully clear. Dimson, Marsh and Staunton offer some preliminary evidence that when socially activist shareholders pressure a company for change, the company's stock price often rises in the short-run--but then perhaps does not rise so quickly after that. This suggests what they call the "washing machine" socially conscious investment strategy:
To maximize the probability of success as an activist, asset owners might consider the “washing machine” strategy advocated by Gollier and Pouget (2014). They argue that a large investor can generate continuing outperformance by buying non-responsible companies and turning them into more responsible businesses. After they have been cleaned up, the shares may then be sold at a price that reflects the accomplishments of the activist.

Back in the day, I headed a college committee that recommended that the college divest its endowment holdings of South African mining companies. The standard list of "sin stocks" often includes alcohol, tobacco, gambling, "adult entertainment," and weapons. Other lists would focus on how firms treat their workers, or on what firms require on how their suppliers (or the suppliers of their suppliers) treat labor. More recently, there are sometimes proposals to pressure or divests from companies that are involved with fossil fuels or companies that are involved in biotechnology that can lead to products based on gene modifications. Another recent category is to pressure companies that are deemed to have pushed too hard to reduce their taxes. "Despite its credentials as a purveyor of Fair Trade coffee, Starbucks has become a boycott target because of its UK tax avoidance practices. Despite its inclusion in the Dow Jones Sustainability World Index and FTSE4Good Index, Medtronic has been excoriated in the USA for its tax-inversion scheme. Amazon, a company praised for environmental initiatives, is accused in Europe and the USA of anticompetitive tax arrangements."

If an investor is considering an strategy of buying either the entire market in an index fund, or just ruling out a few companies from that entire market index, the difference in terms of return on investment or diversification will be small. But if you start ruling a large number of companies, the effects on returns and diversification can increase accordingly. For those concerned about corporate social responsibility, it seems potentially counterproductive to engage in these issues by disengaging from owning any of the relevant companies, while the alternative of participating in shareholder activism may be a more productive path.


Thursday, March 26, 2015

Development Targets: 169 or 19?

Back in 2002, the United Nations established a set of "Millennium Development Goals," which were phrased as a combination of overall "goals" and more specific "targets." For example, the first "goal" was "Eradicate Extreme Poverty and Hunger," but the first specific target under that goal was "Halve, between 1990 and 2015, the proportion of people whose income is less than $1.25 a day." (Thanks in large part to the explosive growth in the economies of China and India, this target was in fact reached five years earlier.) Many of the specific targets used the year 2015 as an end-date, and so the UN has been engaged in thinking about what the next set of goals or targets should be. Last summer, it settled on a list of 17 goals that include 169 targets.

The UN list seems open to two overall criticisms.  First, 169 targets is unwieldy--more a wish-list than a considered policy agenda. However, apparently now that it has been agreed upon altering the of 169 targets is politically impossible. More important, the UN list of goals and targets seems to imply that if we just agree on the 169 targets, we don't really need to discuss what actual policy choices would do the most to accomplish those goals and targets. But of course, if two policies seem likely to reduce poverty or improve health or protect the environment to the same extent, but one policy has much lower costs than the other, it makes sense to concentrate on the the cost-effective approaches first.

The Copenhagen Consensus Center has been taking on the job of commissioning research to evaluate policies to achieve the targets, when then draw on existing research about the costs and benefits of these policies. Based on these studies, which are available here, a group of three prominent economists--Finn Kydland, Tom Schelling, and Nancy Stokey--have just recommended a set of 19 policies and targets that all appear based on the existing research to have benefits that are at least 15 times greater than costs.

Here is the list of 19 priorities, quoted from the March 26 press release from the three economists. he underlying research papers with details about policies, costs, and benefits are available here.
1) Lower chronic child malnutrition by 40%. Providing nutritional supplements, deworming, and improving the balance of diet for 0-2 year olds will cost $11bn and prevent 68m children from being malnourished every year
2) Halve malaria infection. Distributing long lasting insecticide treated bed-nets and delaying resistance to the malaria drug artemisinin will cost $0.6bn, prevent 100m cases of malaria and save 440,000 lives per year.
3) Reduce tuberculosis deaths by 90%. Massively scaling up detection and treatment of tuberculosis will cost $8bn and save up to an additional 1.3m lives per year.
4) Avoid 1.1 million HIV infections through circumcision. Circumcising 90% of HIV-negative men in the 5 worst affected countries will cost $35m annually and avert 1.1m infections by 2030 with the preventive benefit increasing over time.
5) Cut early death from chronic disease by 1/3. Raising the price of tobacco, administering aspirin and preventative therapy for heart disease, reducing salt intake and providing low cost blood pressure medicine will cost $9bn and save 5m lives per year.
6) Reduce newborn mortality by 70%. Protecting expecting mothers from disease, having skilled medical staff support their deliveries, and ensuring high quality postnatal care will cost $14bn and prevent 2m newborn deaths per year.
7) Increase immunization to reduce child deaths by 25%. Expanding immunization coverage to include protection from forms of influenza, pneumonia and diarrheal disease will cost $1bn and save 1m children per year.
8) Make family planning available to everyone. Allowing women to decide if, when, and how often they become pregnant will cost $3.6bn per year, cut maternal deaths by 150,000, while allowing more attention and education to remaining children.
9) Eliminate violence against women and girls. Right now, every year 305 million women are domestically abused, costing the world $4.4 trillion in damages.
10) Phase out fossil fuel subsidies. Removing fossil fuel subsidies will lower carbon emissions and free up $548bn in government revenue to spend on for example, health, infrastructure and education.
11) Halve coral reef loss. Protecting marine habitats will cost $3bn per year but will prevent the loss of 3m hectares of coral reef, providing natural fishing hatcheries and boosting tourism.
12) Tax pollution damage from energy. Air pollution is the world’s biggest environmental killer, causing more than 7m annual deaths. Taxes proportional to the damage from air pollution and CO₂ will reduce environmental impacts efficiently.
13) Cut indoor air pollution by 20%. Providing more clean cookstoves will cost $11bn and prevent 1.3m deaths per year from indoor air pollution.
14) Reduce trade restrictions (full Doha). Achieving more free trade (e.g. the Doha round) would make each person in the developing world $1,000 richer per year by 2030, lifting 160m people out of extreme poverty.
15) Improve gender equality in ownership, business and politics. Ensuring women can own and inherit property, perform basic business needs like signing a contract and be represented in parliament will empower women.
16) Boost agricultural yield growth by 40%. Investing an extra $8bn per year in agricultural R&D to boost yields will reduce food prices for poor people, mean 80m fewer people go hungry and provide benefits worth $82bn per year.
17) Increase girls’ education by two years. Ensuring girls receive more education will increase their future wages, improve their health, reduce their risk of violence and start a virtuous cycle for the next generations.
18) Achieve universal primary education in sub-Saharan Africa. At a cost of $9bn per year, this target will ensure 30m more kids per year attend primary school.
19) Triple preschool in sub-Saharan Africa. Pre-school instils within children a life long desire to learn. Ensuring pre-school coverage rises from 18% to 59% will cost up to $6bn and will give that experience to at least 30m more children per year
What's the single best policy in terms of benefit-cost ratio? The background research paper by Kym Anderson suggests that completing the Doha talks for greater trade liberalization would have benefits for developing countries that are 2,100-4,700 times greater than costs. As Anderson points out, a growing body of work in international trade in the last couple of decades has pointed out that the static gains from trade--say, the U.S. trading wheat-for-oil with Saudi Arabia--are relatively small in the contest of an overall economy. Instead, the big gains from trade arise because of how trade leads to increases in productivity. For example, trade leads to spillovers of knowledge, or the spread of improved methods of management. Trade can stimulate international investment and growth of a financial sector, which has spillover effects for other firms. Global supply chains let producers specialize in the very specific areas where they have the greatest advantage. It lets producers in small countries take advantage of economies of scale when the produce for bigger markets, and lets consumers in small countries benefit from economies of scale when they import from other countries. Trade can provide an additional incentive for national governments to follow sensible macroeconomic and regulatory policies--which again can help all producers in an economy, not just exporters and importers.

I haven't read all the background paper, much less all the research cited in those papers, and so I don't have strong opinions about whether this list of 19 targets is necessarily the best one. But if the choice is between spreading out the scarce resources of time, money, and enthusiasm that are available for development efforts across 169 targets, or focusing those resources on the much smaller number of targets and policies with high payoffs, I know which approach is likelier to benefit low-income people around the world.

Wednesday, March 25, 2015

The Rise of Mortgages: Too Much House?

Economists sometimes argue that more choices must either be neutral or good. The logic is that if you don't want any of the additional choices, then don't take them, and you are equally well off. If you do want one of the additional choices, you are then better off.  Of course, this argument is not airtight. It assumes that there are no costs of evaluating more choices, and it presumes that the chances of choosing wisely and well are not diminished as the number of choices rises.

For one case in which these issues arise, consider the many changes in financial markets and government regulations that have made it vastly easier for people to take out a mortgage loan and buy a house. I certainly view the option to take out a mortgage loan as beneficial to me, because rather than spend years saving up enough money to buy a house outright, I can live in the house while paying down the mortgage over time. But this additional choice also brings dangers. People are often notably bad at evaluating situations where the costs and benefits are spread out over time. We find ourselves in situations where we would like to save money, or start exercising more, or eating healthier--but always starting tomorrow, never today. Many people find themselves running up credit card bills to have the benefits of consumption now, with the costs of paying shoved into the future. Thus, it wouldn't be surprising to find that when the option to take out a long-term mortgage becomes available, people are tempted to over-borrow.

My grandmother used to have a saying about people who bought all the house that the bank told them they could afford, and often a little more: "You can't eat bricks and mortar."

For example, one common rule-of-thumb when applying for a mortgage is that you can "afford" a house if the loan payments will be 30% or less of gross income. Of course, this rule is based on the likelihood that the loan will be repaid to the bank, not on whether you will feel good in a year or five years about how much you have spent. If someone told you what was the most you could spend on some other purchase--like a car or a vacation--you probably wouldn't feel semi-obligated to spend that actual amount.

Òscar Jordà, Moritz Schularick, and Alan M. Taylor explore some big-picture issues with this dynamic in "Mortgaging the Future?" written as an "Economic Letter" for the Federal Reserve Bank of San Francisco (March 23, 2015, 2015-09). From their abstract: "In the six decades following World War II, bank lending measured as a ratio to GDP has quadrupled in advanced economies. To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. This “Great Mortgaging” has had a profound influence on the dynamics of business cycles."

Here's an illustration showing the ratio of mortgage lending to the total value of housing in the United States. In 1960 and in in 1990, with some bumps between, mortgages were equal to about 30% of the value of the housing stock: to put it another way, on average people were living in houses where 70% of the value of the house was their own equity in the home. By 2010, mortgages were 50% of the value of the housing stock. 


Across the high-income countries of the world, mortgage lending has become the dominant business for banks, rather than lending to businesses or making other kinds of loans to individuals. 


From an overall macroeconomic point of view, bank lending as a share of GDP is rising, and much of that lending is due to increases in housing lending. Jordà, Schularick, and Taylor present some correlations across data from 17 countries and reach this conclusion: 
The vast expansion of bank lending after World War II is one of the most extraordinary developments in the history of modern finance and macroeconomics.... [I]n the postwar period an above average mortgage-lending boom unequivocally makes both financial and normal recessions worse. ...  In contrast, booms in nonmortgage credit have virtually no effect on the shape of the recession in the same postwar period. Why the difference? At this point we can only speculate. A mortgage boom gone bust is typically followed by rapid household deleveraging, which tends to depress overall demand as borrowers shift away from consumption toward saving. This has been one of the most visible features of the slow U.S. recovery from the global financial crisis ... 
In other words, the tacit encouragement from regulators, the financial industry, and the tax code to buy a house doesn't just run a risk that some homebuyers will overborrow. It also makes recessions worse and, as in 2007-2009, can even threaten broader financial stability. 

At the household level, this sharpens the question of what we think of as the expected or normal amount of housing consumption. Back in  the early 1970s, the average new single-family house had 1,660 square feet, which peaked at over 2,500 square feet for a new house in 2007, and then declined a bit after bubble in housing prices popped.

Let me offer a speculation: Say that the rules for taking our a mortgage had been tighter over time. Imagine the standard was that banks would decide what you can afford based on 25% of your income, not 30%, or that mortgages were typically available for 15 or 20 years, not 30. My guess is that bank lending for mortgages would be smaller. The size of homes might well have increased, but not as quickly. Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living. The US economy would be less vulnerable to recession. People who were less stretched in making their mortgage payments would be less likely to face default or foreclosure. And my guess is that many of us would have adapted perfectly well to living in smaller homes, because the smaller size would be usual and typical and what we expect. The money we weren't spending on housing would easily be spent on other forms of consumption.

In short, the push for making mortgage loans more easily available is sometimes presented as if it can only make people better off. Either they can borrow the same amount as before, or they can decide that they would prefer to borrow more. But making mortgages more available also has number of tradeoffs, both for individuals who "can't eat bricks and mortar" and for the broader economy.

Tuesday, March 24, 2015

Singapore Snapshots and Lee Kuan Yew

There's a long tradition in political economy, stretching back at least to Plato's discussion of "philosopher-kings," which speculates that the best form of government might be a benevolent dictatorship. In a way, this argument is bulletproof, because any response that points out the real-world problems of dictatorship can be countered by saying that it's just not sufficiently benevolent. But in my lifetime, the best example anyone could cite of a benevolent dictatorship that seemed to be working pretty well was Lee Kuan Yew, who was the official leader of Singapore from 1959 to 1990, and the unofficial leader for some years after that. He died on Monday at the age of 91.  Thus, it seems a useful time for a quick review of the economy he left behind.

In some ways, the most straightforward case for Lee Kuan Yew is in the basic economic statistics of long-term growth. Here's a figure using World Bank data showing per capita GDP in Singapore, adjusted for inflation. During the 53 years from 1960 to 2013, Singapore's economy averaged more than 5% annual growth on a per person basis. For perspective, Singapore's per capita GDP was about 16% of the US level in 1960, and now is almost 80% of the US level.

What economic challenges is Singapore facing now? The IMF published a staff report on Singapore's economy in October 2014. The overall outlook for Singapore's economy remains strong. For example, the IMF writes:

"GDP tripled from less than US$100 billion in 2000 to almost US$300 billion in 2013. Strong growth and low unemployment and inflation have been achieved along with some strong social indicators (e.g. high life expectancy and home ownership). At the same time, however, compared to high-income peers, the labor share of income is low and inequality and the cost of living are high, adversely affecting some population groups. Key supporting factors for Singapore’s strong growth performance have been a stable macroeconomic environment, continuous reforms to upgrade transportation infrastructure and the broader business climate, and a liberal regime for the inflow of foreign workers. The economy remains well-diversified. Known as a financial center and trading hub, Singapore retains a competitive manufacturing sector which contributes more than one sixth of GDP. ... ... The authorities’ plan to raise social and infrastructure spending by 1−2 percent of GDP over the medium term should help reduce the large current account surplus. Financial regulation and supervision is among the best globally and Singapore is a frontrunner in implementing global regulatory reforms."

Here are a few other points that caught my eye. Singapore's population has risen by about one-third since 2000, most of that from foreign immigration (the birthrate in Singapore is quite low). In the last few years, the government has sought to slow the inflow of immigrants, and instead to provide subsidies for firms to make investments that can raise the productivity of land and labor--thus also seeking to assure that the economy remains more than just a financial center, but is diversified into other sectors. In 2013, unemployment fell to 1.9%.

Many of immigrants since 2000 worked in lower-wage jobs, and so inequality in Singapore has risen since 2000. The rise was particularly marked in the 2000-2006 period.

Overall, the level of income inequality in Singapore as measured by the Gini coefficient is roughly at US levels, although redistributive tax and spending policies do reduce that level somewhat.


Against Singapore's economic gains under Lee Kuan Yew, there has also been a legacy of repression of free speech and repression of political opposition. There have been laws about everything from spitting on the sidewalk to improper disposal of used chewing gum. For more severe crimes, there has been a threat of harsh legal penalties including caning and capital punishment. Back in the 1990s, one wag christened Singapore as "Disneyland with the death penalty."

Like dictators everywhere, Lee Kuan Yew made the claim that excesses were justified by the necessity of bringing civil order and economic prosperity to a potentially fragmented multi-ethnic and multi-religious country. Singapore had been a British colony, then controlled by Japan during World War II, then again under British control, then merged into Malaysia in 1963, before becoming a separate and independent country in 1965.  In a New York Times profile in 2010, Lee was quoted as saying: “I’m not saying that everything I did was right,” he said, “but everything I did was for an honorable purpose. I had to do some nasty things, locking fellows up without trial.” His obituary in the New York Times quoted this comment: "Many people say, ‘Why don’t we open up, then you have two big parties and one party always ready to take over?’ “ Mr. Lee said in a speech in 2008. “I do not believe that for a single moment.” He added: “We do not have the numbers to ensure that we’ll always have an A Team and an alternative A Team. I’ve tried it; it’s just not possible.”

On the other side, by the standards of murderous and genocidal dictators around the world--which of course is setting the bar dismally low--the level of political repression in Singapore was not very extreme. Lee Kuan Yew did start backing away from formal control of government back in the early 1990s, a quarter-century before his death. Opposition parties won a substantial share of the vote int he 2011 elections. While he was certainly well-to-do economically, he did not pile up personal riches beyond the dreams of avarice. He presided over a government that hired top managers from the public and private sector and strongly discouraged official corruption.

Lee Kuan Yew, taking his economic and political record as a whole, is probably about as close an example of a benevolent dictator as the real world  in modern times can offer.  I feel incapable of rendering any final judgement on his career. Singapore's economic and political path may not have been the best, but it was also far from the worst. Of course, such judgments are not up to me anyway, but instead are most appropriately made by the the people of Singapore as their country evolves after the passage of their nation's founding father.