Monday, August 3, 2015

Summer 2015 Journal of Economic Perspectives Available Online

Since 1986, my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which about four years ago made the decision--much to my delight--that the journal would be freely available on-line, from the current issue back to the first issue in 1987. The journal's website is here. I'll start here with Table of Contents for the just-released Summer 2015 issue. Below are abstracts and direct links to all the paper. I will probably blog about some of the individual papers in the next week or two, as well.


Symposium on Automation and Labor Markets

"Why Are There Still So Many Jobs? The History and Future of Workplace Automation," by David H. Autor
In this essay, I begin by identifying the reasons that automation has not wiped out a majority of jobs over the decades and centuries. Automation does indeed substitute for labor—as it is typically intended to do. However, automation also complements labor, raises output in ways that leads to higher demand for labor, and interacts with adjustments in labor supply. Journalists and even expert commentators tend to overstate the extent of machine substitution for human labor and ignore the strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor. Changes in technology do alter the types of jobs available and what those jobs pay. In the last few decades, one noticeable change has been a "polarization" of the labor market, in which wage gains went disproportionately to those at the top and at the bottom of the income and skill distribution, not to those in the middle; however, I also argue, this polarization and is unlikely to continue very far into future. The final section of this paper reflects on how recent and future advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. I argue that the interplay between machine and human comparative advantage allows computers to substitute for workers in performing routine, codifiable tasks while amplifying the comparative advantage of workers in supplying problem-solving skills, adaptability, and creativity.
Full-Text Access | Supplementary Materials

"The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different?" by Joel Mokyr, Chris Vickers and Nicolas L. Ziebarth

Technology is widely considered the main source of economic progress, but it has also generated cultural anxiety throughout history. The developed world is now suffering from another bout of such angst. Anxieties over technology can take on several forms, and we focus on three of the most prominent concerns. First, there is the concern that technological progress will cause widespread substitution of machines for labor, which in turn could lead to technological unemployment and a further increase in inequality in the short run, even if the long-run effects are beneficial. Second, there has been anxiety over the moral implications of technological process for human welfare, broadly defined. While, during the Industrial Revolution, the worry was about the dehumanizing effects of work, in modern times, perhaps the greater fear is a world where the elimination of work itself is the source of dehumanization. A third concern cuts in the opposite direction, suggesting that the epoch of major technological progress is behind us. Understanding the history of technological anxiety provides perspective on whether this time is truly different. We consider the role of these three anxieties among economists, primarily focusing on the historical period from the late 18th to the early 20th century, and then compare the historical and current manifestations of these three concerns.
Full-Text Access | Supplementary Materials

"Is a Cambrian Explosion Coming for Robotics?" by Gill A. Pratt

About half a billion years ago, life on earth experienced a short period of very rapid diversification called the "Cambrian Explosion." Many theories have been proposed for the cause of the Cambrian Explosion, one of the most provocative being the evolution of vision, allowing animals to dramatically increase their ability to hunt and find mates. Today, technological developments on several fronts are fomenting a similar explosion in the diversification and applicability of robotics. Many of the base hardware technologies on which robots depend—particularly computing, data storage, and communications—have been improving at exponential growth rates. Two newly blossoming technologies—"Cloud Robotics" and "Deep Learning"—could leverage these base technologies in a virtuous cycle of explosive growth. I examine some key technologies contributing to the present excitement in the robotics field. As with other technological developments, there has been a significant uptick in concerns about the societal implication of robotics and artificial intelligence. Thus, I offer some thoughts about how robotics may affect the economy and some ways to address potential difficulties.
Full-Text Access | Supplementary Materials

Symposium on Pre-analysis Plans in Economics

"Promises and Perils of Pre-analysis Plans," by Benjamin A. Olken
The purpose of this paper is to help think through the advantages and costs of rigorous pre-specification of statistical analysis plans in economics. A pre-analysis plan pre-specifies in a precise way the analysis to be run before examining the data. A researcher can specify variables, data cleaning procedures, regression specifications, and so on. If the regressions are pre-specified in advance and researchers are required to report all the results they pre-specify, data-mining problems are greatly reduced. I begin by laying out the basics of what a statistical analysis plan actually contains so those researchers unfamiliar with it can better understand how it is done. In so doing, I have drawn both on standards used in clinical trials, which are clearly specified by the Food and Drug Administration, as well as my own practical experience from writing these plans in economics contexts. I then lay out some of the advantages of pre-specified analysis plans, both for the scientific community as a whole and also for the researcher. I also explore some of the limitations and costs of such plans. I then review a few pieces of evidence that suggest that, in many contexts, the benefits of using pre-specified analysis plans may not be as high as one might have expected initially. For the most part, I will focus on the relatively narrow issue of pre-analysis for randomized controlled trials.
Full-Text Access | Supplementary Materials

"Pre-analysis Plans Have Limited Upside, Especially Where Replications Are Feasible," by Lucas C. Coffman and Muriel Niederle

The social sciences—including economics—have long called for transparency in research to counter threats to producing robust and replicable results. In this paper, we discuss the pros and cons of three of the more prominent proposed approaches: pre-analysis plans, hypothesis registries, and replications. They have been primarily discussed for experimental research, both in the field including randomized control trials and the laboratory, so we focus on these areas. A pre-analysis plan is a credibly fixed plan of how a researcher will collect and analyze data, which is submitted before a project begins. Though pre-analysis plans have been lauded in the popular press and across the social sciences, we will argue that enthusiasm for pre-analysis plans should be tempered for several reasons. Hypothesis registries are a database of all projects attempted; the goal of this promising mechanism is to alleviate the "file drawer problem," which is that statistically significant results are more likely to be published, while other results are consigned to the researcher's "file drawer." Finally, we evaluate the efficacy of replications. We argue that even with modest amounts of researcher bias—either replication attempts bent on proving or disproving the published work, or poor replication attempts—replications correct even the most inaccurate beliefs within three to five replications. We offer practical proposals for how to increase the incentives for researchers to carry out replications.
Full-Text Access | Supplementary Materials

Symposium on Doing Business
"Law, Regulation, and the Business Climate: The Nature and Influence of the World Bank Doing Business Project," by Timothy Besley
The importance of a well-functioning legal and regulatory system in creating an effective market economy is now widely accepted. One flagship project that tries to measure the environment in which businesses operate in countries across the world is the World Bank's Doing Business project, which was launched in 2002. This project gathers quantitative data to compare regulations faced by small and medium-size enterprises across economies and over time. The centerpiece of the project is the annual Doing Business report. It was first published in 2003 with five sets of indicators for 133 economies, and currently includes 11 sets of indicators for 189 economies. The report includes a table that ranks each country in the world according to its scores across the indicators. The Doing Business project has become a major resource for academics, journalists, and policymakers. The project also enjoys a high public profile with close to ten million hits on its website each year. With such interest, it's no surprise that the Doing Business report has come under intense scrutiny. In 2012, following discussions by its board, the World Bank commissioned an independent review panel to evaluate the project, on which I served as a member. In this paper, I first describe how the Doing Business project works and illustrate with some of the key findings of the 2015 report. Next, I address what is valuable about the project, the criticisms of it, and some wider political economy issues illustrated by the report.
Full-Text Access | Supplementary Materials

"How Business Is Done in the Developing World: Deals versus Rules," Mary Hallward-Driemeier and Lant Pritchett
What happens in the developing world when stringent regulations characterizing the investment climate meet weak government willingness or capability to enforce those regulations? How is business actually done? The Doing Business project surveys experts concerning the legally required time and costs of regulatory compliance for various aspects of private enterprise—starting a firm, dealing with construction permits, trading across borders, paying taxes, getting credit, enforcing contracts, and so on—around the world. The World Bank's firm-level Enterprise Surveys around the world ask managers at a wide array of firms about their business, including questions about how long it took to go through various processes like obtaining an operating license or a construction permit, or bringing in imports. This paper compares the results of three broadly comparable indicators from the Doing Business and Enterprise Surveys. Overall, we find that the estimate of legally required time for firms to complete a certain legal and regulatory process provided by the Doing Business survey does not summarize even modestly well the experience of firms as reported by the Enterprise Surveys. When strict de jure regulation and high rates of taxation meet weak governmental capabilities for implementation and enforcement, we argue that researchers and policymakers should stop thinking about regulations as creating "rules" to be followed, but rather as creating a space in which "deals" of various kinds are possible.
Full-Text Access | Supplementary Materials


"The Microeconomic Dimensions of the Eurozone Crisis and Why European Politics Cannot Solve Them," by Christian Thimann

The academic and policy debate about the crisis in Europe's single currency area is usually dominated by macroeconomic and public sector considerations. The microeconomic dimensions of the crisis and the private sector issues typically get much less attention. However, it is the private sector hiring choices of domestic and foreign firms that will ultimately be decisive. This paper argues there are two main problems holding back private sector employment creation in the stressed eurozone countries. First, there is a persistent competitiveness problem in some of the eurozone countries due to high labor costs relative to underlying productivity. Second, widespread structural barriers make job creation in these countries far more arduous than in many other advanced economies, and even more arduous than in some key emerging economies and formerly planned economies. Structural barriers to private sector development are particularly widespread in the areas of labor market functioning, goods market functioning, and government regulation. Evidence from the World Economic Forum's Global Competitiveness Index and the World Bank's Doing Business dataset confirms the immense size and persistence of these barriers, despite improvements in some countries in recent years. The paper also presents a novel explanation for the difficulty of structural reforms in the eurozone, tracing the challenge to the current trend to "Europeanize" and "politicize" economic reform discussions in national policy fields where "Europe" is not a legitimate actor and the European political level is not effective.
Full-Text Access | Supplementary Materials

"E-Books: A Tale of Digital Disruption," by Richard J. Gilbert
E-book sales surged after Amazon introduced the Kindle e-reader at the end of 2007 and accounted for about one quarter of all trade book sales by the end of 2013. Amazon's aggressive (low) pricing of e-books led to allegations that e-books were bankrupting brick and mortar book booksellers. Amazon's commanding position as a bookseller also raises concerns about monopoly power, and publishers are concerned about Amazon's power to displace them in the book value chain. I find little evidence that e-books are primarily responsible for the decline of independent booksellers. I also conclude that entry barriers are not sufficient to allow Amazon to set monopoly prices. Publishers are at risk from Amazon's monopsony (buyer) power and so sought "agency" pricing in an effort to raise the price of ebooks, promote retail competition, and reduce Amazon's influence as an e-retailer. (In the agency pricing model, the publisher specifies the retail price with a commission for the retailer. In a traditional, "wholesale" pricing model, publishers sell a book to retailers at a wholesale price and retailers set the retail price.) Although agency pricing was challenged by the Department of Justice, it may yet prevail in some form as an equilibrium pricing model for e-book sales.
Full-Text Access | Supplementary Materials

"The Indian Gaming Regulatory Act and Its Effects on American Indian Economic Development," by Randall K. Q. Akee, Katherine A. Spilde and Jonathan B. Taylor

The Indian Gaming Regulatory Act (IGRA), passed by the US Congress in 1988, was a watershed in the history of policymaking directed toward reservation-resident American Indians. IGRA set the stage for tribal government-owned gaming facilities. It also shaped how this new industry would develop and how tribal governments would invest gaming revenues. Since then, Indian gaming has approached commercial, state-licensed gaming in total revenues. Gaming operations have had a far-reaching and transformative effect on American Indian reservations and their economies. Specifically, Indian gaming has allowed marked improvements in several important dimensions of reservation life. For the first time, some tribal governments have moved to fiscal independence. Native nations have invested gaming revenues in their economies and societies, often with dramatic effect.
Full-Text Access | Supplementary Materials

"Recommendations for Further Reading," by Timothy Taylor
Full-Text Access | Supplementary Materials

Editorial Note: Correction to Jeffrey B. Liebman's "Understanding the Increase in Disability Insurance Benefit Receipt in the United States"
Full-Text Access | Supplementary Materials

Friday, July 31, 2015

After the Wright Brothers, Why Did US Mostly Lose the Airplane Market?

One of the puzzles of economic history is why, given that Orville and Wilbur Wright invented the airplane and received a patent, why did the US economy almost immediately fall behind in actual manufacturing of airplanes?

The standard answer has been to blame the patent system: in particular, the Wright brothers put a huge amount of time and energy into trying to defend their 1906 patent for a flying machine against Glenn H. Curtiss and others who were seeking to manufacture planes. The argument goes that both firms put so much time into the patent battles that they lost their focus on actually manufacturing planes. An example of this argument from a 2014 opinion piece in the Wall Street Journal is here.
(Ironically, the Curtiss-Wright company would later be formed in 1929 from the merger of these two firms.)

In "Blaming Wilbur and Orville," Tom D. Crouch reviews a couple of recent books on the Wright brothers and the shortcomings of the Wright Company in the Summer 2015 issue of the Business History Review (89:2, pp. 339-343). He writes:

"That America had fallen far behind Europe in aviation by 1917 is beyond doubt. Every American airman who flew into combat in the “war to end all wars” did so in an airplane entirely designed and almost entirely built in Europe, except for those naval aviators operating Curtiss flying boats in search of enemy U-boats. ... 
In fact, while there was much concern at the time, little solid evidence exists to indicate that the patent suits had any serious impact on American aviation. How then are we to explain the fact that the nation that had given birth to the airplane had fallen so far behind?
The answer lies in a 1913 congressional study of aeronautical expenditures by the nations of the world. Germany led the world, with $28,000,000 spent on aviation between 1908 and 1913. France, Russia, Italy, and Austria followed close behind, with England in sixth place with a total national expenditure of $3,000,000 for aeronautics. Having spent only $435,000 for all flight-related activity during that five-year period, the United States was in thirteenth place, behind Japan, Chile, Greece, and Brazil. (All figures are from Aeronautics in the Army, hearing before the Committee on Military Affairs, U.S. House of Representatives, sixty-third Congress, first session, 1913.) In addition to official appropriations, several leading aeronautical powers had also established national subscriptions that provided an additional $7,100,000 in private financial support for their aeronautical industries. Once again, Germany led the way, with $3,500,000 in private funds, followed by France ($2,500,000), Italy ($1,000,000), and Russia ($100,000). According to official U.S. government estimates, the other nations of the world had spent a total of $93,620,000 in public and private funds on aviation between 1908 and 1913. 
That money was spent on direct purchases of aircraft and engines and on government-sponsored research and development programs. Each of the European powers that went to war in 1914 already maintained sophisticated aeronautical research laboratories. In the United States, the National Advisory Committee for Aeronautics was not authorized by Congress until 1915, and its first flight laboratory was not established until 1917. 
In America, ... flying was the domain of aerial showmen out to thrill the crowds at local meets and air shows with old-style pusher biplanes. In Europe, on the other hand, rich prizes were established to promote improvements in airframe and engine technology. Competition encouraged the development of aircraft that could fly higher, faster, and farther. ... With war clouds glowering on the horizon, European nations had invested heavily in a set of new technologies with military potential. Americans, an ocean away from potential conflict, did not see the need to support the embryonic industry. ... [T]he failure of other American aircraft builders to keep up with advances in Europe had little to do with the patent wars and everything to do with a limited market and the low level of public and private investment in flight technology.

I think the overall lesson here is that patents matter, and so do resources expended in fighting over patents. However, a more fundamental determinant of who ultimately wins in market competition isn't about who gets the first patent, but who makes the continual investments in production and in follow-up improvements.

Thursday, July 30, 2015

Pushing on a String: An Origin Story

There's a long-standing metaphor in monetary policy that the central bank "can't push on a string." It means that while a central bank can certainly slow down an economy or even drive an economy into recession with an ill-timed or too-large increase interest rates, the power of monetary policy is not symmetric.  When a central bank reduces interest rates in an attempt to stimulate the economy, it may not make much difference if banks don't think it's a good time to lend or firms and consumers don't think it's a good time to borrow. In other words, monetary policy is like a string with which a central bank can "pull" back the economy, but pushing on a string just crumples the string.

The "can't push on a string" metaphor appears in many  intro-level economics texts. It has also gotten a heavy work-out these last few years as people have sought to understand why either economic output or inflation wasn't stimulated more greatly by having the Federal Reserve's target interest rate (the "federal funds" rate) near zero percent for going on seven years now, especially when combined with "forward guidance" promises that this policy would continue into the future and a couple trillion dollars of direct Federal Reserve purchases of Treasury debt and mortgage-backed securities.

The first use of "pushing on a string" in a monetary policy context may have occurred in hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough (D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p. 377, during a discussion of what the Fed might be able to do to end deflation.

Governor Eccles: Under present circumstances there is very little, if anything, that can be done.
Mr. Goldsborough: You mean you cannot push a string.
Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and, as I have said several times before this committee, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation monetary action can very effectively curb undue expansion.
Mr. Brown: That is a case of pulling the string.
Governor Eccles: Yes. Through reduction of discount rates, making cheap money and creating excess reserves, there is also a possibility of stopping deflation,  particularly if that power is used combined with this broadening of eligibility requirement.
Later in the hearings, several other speakers refer back to the "push on a string" comment, which clearly had some resonance. Although I have seen the "can't push on a string" metaphor attributed to John Maynard Keynes in a number of places, I haven't seen an actual primary source where Keynes used the phrase.

 For those who like digging into monetary policy metaphors, here's a post about the speech where William McChesney Martin coined the metaphor that the job of a central bank is, when the party is just starting to heat up, to take away the punch bowl.

Wednesday, July 29, 2015

Snapshots of the Global Energy

When the BP Statistical Review of World Energy is published each year, I skim through the figures and tables as a way of grounding myself in some basic facts. Here's are a few things that caught my eye this year.

Here's a figure showing the primary global sources of energy and how they have evolved over time. For comparison, the different types of energy are all converted to "oil equivalents." The green area at the bottom is oil; red is natural gas; light orange is nuclear; blue is hydroelectric; darker orange is the non-hydro renewables like solar and wind; and the gray on top is coal. As the report notes: "Oil remains the world’s dominant fuel. Hydroelectric and other renewables in power generation both reached record shares of global primary energy consumption (6.8% and 2.5%, respectively)."

A more detailed breakdown of these sources of energy offers some additional insights. As Bob Dudley notes in his introduction to the report: "The US replaced Saudi Arabia as the world’s largest
oil producer – a prospect unthinkable a decade ago. The growth in US shale gas in recent years
has been just as startling, with the US overtaking Russia as the world’s largest producer of oil and gas." For oil, the big recent shift is the fall in prices, due both to this rising supply and because "[g]lobal primary energy consumption increased by just 0.9% in 2014, its slowest rate of growth since the late 1990s, other than immediately after the financial crisis." Here's the long-term pattern of oil prices, with the inflation-adjusted price in light green. The current price is now under $60/barrel, so you need to imagine that what looks like a relatively small drop in oil prices on the right-hand side of the figure just keeps falling.
For natural gas prices, the interesting fact is that unlike oil, there isn't a single global price. It's much more costly to ship natural gas all over the world, and so the surge of natural gas supply in the US has kept US natural gas prices lower than prices elsewhere in the world, giving US producers who consume energy a competitive advantage. The US price for natural gas is shown by the red line.

The quantity of coal consumed has been rising sharply, especially in Asia, in a way that if it continues will make it essentially impossible to achieve a significant reduction in global carbon emissions.

The quantity of nuclear power has declined in the last five years or so, especially in the Asia-Pacific region after the Fukushima disaster in Japan in 2011.
Hydroelectric power is also on the rise, especially in the Asia-Pacific region. It is notable how little hydro power there is in Africa, a region that desperately needs more and more reliable electrical power.

While non-hydro remain small slice of total global energy production, if one focuses just on their role in producing electricity, their share is somewhat higher--now above 10% in the Europe and Eurasia region.  Within the EU region alone, the report notes that non-hydro renewables now provide 17% of electrical power (although this has been achieved through hefty public subsidies that are now under reconsideration in a number of countries).

Tuesday, July 28, 2015

What is Discouraging the Registered Voters Who Don't Vote?

After each national election, the US Census Bureau asks questions in its Current Population Survey about whether people voted, and if not, why not. Thom File wrote the July 2015 report called "Who Votes? Congressional Elections and the American Electorate: 1978–2014."  Probably the headline finding of the report is that the percentage of Americans who voted in the 2014 federal elections was the lowest in an off-presidential-year election since the start of this data series in 1978.  The percentage of Americans who voted in presidential elections had been dropping up until about 2000, but since then has rebounded a bit.

The report includes lots of detail on voting rates by different demographic groups, but what caught my eye back in the statistical tables was a listing of the main reasons given by those who didn't vote. The total of 47.6 million is the number of registered citizens who reported not voting: that is, the total doesn't include those who said "don't know" or refused to answer.  Here's the list of reasons for not voting from Table 10 of the most recent data:
For comparison, here's the list of main reasons for not voting (again, among registered citizens who answered this question) after the 2012 presidential election.
What strikes me about the list is, well, how obvious it is. Why don't people vote? Mostly because they are too busy, not interested, forgot, out of town, sick, or don't any of like the candidates. The harder question is whether it should be viewed as an important policy goal to raise the voter turnout rate; at some times and places, voting has even been mandatory. As we endure the steady diet of polling data during the next 16 months of run-up to the November 2016 election, it's worth remembering the old truth that what matters isn't what's said to pollsters, but rather who actually turns out a casts a ballot.

Monday, July 27, 2015

Global Anti-Tobacco Policy

Tobacco use could lead to 1 billion premature deaths in the 21st century. That's the estimate of Prabhat Jha and Richard Peto in their 2014 review article in the New England Journal of Medicine, "Global Effects of Smoking, of Quitting,and of Taxing Tobacco" (January 2, 2014, 370: pp. 60-68).  They write (footnotes omitted):
"On the basis of current smoking patterns, with a global average of about 50% of young men and 10% of young women becoming smokers and relatively few stopping, annual tobacco-attributable deaths will rise from about 5 million in 2010 to more than 10 million a few decades hence, as the young smokers of today reach middle and old age. ...There were about 100 million deaths from tobacco in the 20th century, most in developed countries. If current smoking patterns persist, tobacco will kill about 1 billion people this century, mostly in low- and middle-income countries. About half of these deaths will occur before 70 years of age."
What might be done about it? The World Health Organization offers an overview of policy choices in "WHO REPORT ON THEGLOBAL TOBACCO EPIDEMIC, 2015Raising taxes on tobacco." Here's a figure from the report showing prevalence of smoking around the world. The obvious concern is that rates of smoking will rise as the economies of low-income and middle-income countries grow.
The WHO report looks at a suite of policy options, shown below, but the main emphasis of this year's report is on raising tobacco taxes to at least 75% of the retail price. Here's the full group of policies, and what share of the world population is affected by them.
Like many teachers of economics, I suspect, I use cigarette taxes as an example of elasticity of demand--that is, how does the quantity demanded shift with an increase in price. Here are some comments from the WHO report about tobacco taxes:

"Despite the fact that raising tobacco taxes to more than 75% of the retail price is among the most effective and cost-effective tobacco control interventions (it costs little to implement and increases government revenues), only a few countries have increased tobacco taxes to best practice level. Raising taxes is the least implemented MPOWER measure – with only 10% of the world’s people living in countries with sufficiently high taxes – and is the measure that has seen the least improvement since we started assessing these data. ...
"Research from high-income countries generally finds that a 10% price increase will reduce overall tobacco use by between 2.5% and 5% (4% on average). ... Most estimates from low- and middle-income countries show that a 10% price increase will reduce tobacco use by between 2% and 8% (5% on average). Studies from a number of countries typically show that half of the decline in tobacco use associated with higher taxes and prices results from reduced prevalence (i.e. from users quitting). The remaining half comes from reduced intensity of use (i.e. users consuming less by switching from daily to occasional smoking, or reducing the number of cigarettes smoked each day). 
"In the United States of America (USA), cigarette prices rose nearly 350% between 1990 and 2014, in large part because of a five-fold increase in average state cigarette taxes and a six-fold increase in the national cigarette tax . During this time the number of cigarettes smoked per capita dropped by more than half, and the percentage of adults who smoke fell nearly one third. Tax and price increases in Brazil explain nearly half of the 46% reduction in adult smoking prevalence between 1989 and 2010.
"Tobacco use among young people is very price sensitive, with reductions in tobacco use in this group two to three times larger with a given price increase than among adults.  ... Tobacco use is increasingly concentrated in populations with the lowest income and socioeconomic status, and explains a large proportion of socioeconomic disparities in health. At the same time, lowest-income populations are also more responsive to price increases than higher-income users. The monetary burden of higher tobacco taxes falls more heavily on the wealthiest users, whose tobacco use declines less, while most of the health and economic benefits from reductions in tobacco use accrue to the most disadvantaged populations, whose tobacco use declines more when taxes increase. In Thailand, the Asian Development Bank estimates that 60% of the deaths averted by a 50% tobacco price increase would be concentrated in the poorest third of the population, who would pay only 6% of the increased taxes. ...
"In China, research suggests that raising taxes on cigarettes so that they account for 75% of retail prices –up from 40% of the share of price in 2010– would avert nearly 3.5 million deaths that would otherwise be caused by cigarette smoking."
With tobacco consumption, as with so many other vices that other people have, it's easy to slip into prohibitionist rhetoric. As an inveterate consumer of caffeine myself, and someone who likes a nice glass of wine or a hand-crafted bourbon from time to time, I'm not a supporter of the prohibitionist impulse. There are negative social consequences of making it too highly profitable for producers to evade government rules and overly high taxes and supply something that many people want. But tobacco use poses an enormous public health danger, and I have no problem with government making real efforts to discourage it.

For a US-focused discussion of trends in smoking since the release of the Surgeon General's report that smoking is hazardous to your health, see "Smoking, 50 Years Later" (January 28, 2014). For a discussion of the recent controversies over e-cigs and vaping, see "E-cigs: The Bootlegger/Baptist Opposition" (May 21, 2015)

Friday, July 24, 2015

Parsing a Financial Transactions Tax

Controversies over a financial transactions tax have a long history in economics (going back Keynes' advocacy of such a tax in the 1930s) and public policy (the British have imposed a "stamp duty" on stock transfers over more than three centuries from 1694 to the present). Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, Jim Nunns, and Steve Rosenthal take stock of the issues in "Financial Transaction Taxes in Theory and Practice," published as a June 2015 discussion paper by the Tax Policy Center. Here's the summary of the arguments for and against (citations omitted):

"Proponents advocate the FTT [financial transactions tax]on several grounds. The tax could raise substantial revenue at low rates because the base—the value of financial transactions—is enormous. An FTT would curb speculative short-term and high-frequency trading, which in turn would reduce the diversion of valuable human capital into pure rent-seeking activities of little or no social value. They argue that an FTT would reduce asset price volatility and bubbles, which hurt the economy by creating unnecessary risk and distorting investment decisions. It would encourage patient capital and longer-term investment. The tax could help recoup the costs of the financial-sector bailout as well as the costs the financial crisis imposed on the rest of the country. The FTT—called the “Robin Hood Tax” by some advocates—would primarily fall on the rich, and the revenues could be used to benefit the poor, finance future financial bailouts, cut other taxes, or reduce public debt. 
"Opponents counter that an FTT is an “answer in search of a question”. They claim it would be inefficient and poorly targeted. An FTT would boost revenue, but it would also spur tax avoidance. As a tax on inputs, it would cascade, resulting in unequal impacts across assets and sectors, which would distort economic activity. Although an FTT would curb uniformed speculative trading, it would also curb productive trading, which would reduce market liquidity, raise the cost of capital, and discourage investment. It could also cause prices to adjust less rapidly to new information. Under plausible circumstances, an FTT could actually increase asset price volatility. An FTT does not directly address the factors that cause the excess leverage that leads to systemic risk, so it is poorly targeted as a corrective to financial market failures of the type that precipitated the Great Recession. Opponents claim that even the progressivity of an FTT is overstated, as much of the tax could fall on the retirement savings of middle-class
workers and retirees."
Their paper offers an overview of the current uses of a financial transactions tax and the existing evidence on these various claims. Without attempting to be in any way exhaustive, here are some of the points that caught my eye:

The US has had financial transactions taxes in the past, and continues to have such a tax at a low level today. 

"From 1914 to 1966, a federal FTT was levied on sales and transfers of stock. The rate
was originally 0.02 percent of the stock’s par value ...In 1959, after firms had become practiced at manipulating par value to avoid tax, the base was changed to market value, and the rate was cut to 0.04 percent. From 1960 to 1966, stocks were taxed at the rate of 0.10 percent at issuance and 0.04 percent on transfer. ... In 1934, the Securities Exchange Act (Section 31) granted the SEC the authority to fund its oversight operations with fees on self-regulatory bodies such as the New York Stock Exchange. At present, a 0.00184 percent fee is levied on sales of securities, and a $0.0042 fee per transaction is levied on futures transactions. Debt instruments are exempt from the tax."

Many other high-income economies have financial transaction taxes now, although others have recently repealed such taxes. 
"Many G20 countries tax some financial transactions. The most common form is a tax on secondary market equity sales at a rate of 0.10 to 0.50 percent. Such taxes were imposed, as of 2011, in China, India, Indonesia, Italy, South Africa, South Korea, and the United Kingdom. Italy, Russia, Switzerland, and Turkey imposed taxes and/or capital levies on debt financing, typically on issuance rather than on secondary markets. But many developed nations have repealed FTTs in recent decades, presumably because of competitive pressures stemming from globalization and technological changes that have made remote trading less costly. Germany, Italy, Japan, the Netherlands, Portugal, and Sweden have repealed STTs [securities transaction taxes] in the last 25 years."
The design of a financial transactions tax requires answering a number of questions, and just listing the questions helps to understand the possibilities for shifting and reformulating financial transactions in ways that would reduce the reach of such a tax. 

"The first design question is the geographic reach of the tax. Should the application of the tax turn on the residence of the issuer of the security; the residence of the buyer, seller, or intermediary; or the location of the trade? ... Second, which securities are covered by the tax: stocks, bonds, derivatives? ... A third issue is which financial markets are subject to the FTT. Does the tax apply only to exchange-based transactions or also to over-the-counter transactions? ... A fourth issue is whether the tax excludes market makers. ... Most recent proposals choose to tax market makers. A fifth issue is whether the tax exempts government debt. ... Turning to the tax rates, there are further questions. Is the tax ad valorem or a flat fee per share traded? ... A final issue is whether the tax is coordinated internationally."
The question of whether a financial transactions tax would hinder financial markets from working well or would discourage speculative trading and pointless volatility is undecided in the research literature. 

"[A]lthough empirical evidence shows clearly that FTTs reduce trading volume, as
expected, it is unclear how much of the reduction occurs in speculative or unproductive
trading versus transactions necessary to provide liquidity. The evidence on volatility
is similarly ambiguous: empirical studies have found both reductions and increases in
volatility as a result of the tax."

Overall, the dogmatic argument that a financial transactions tax is unworkable is clearly false. It operates in a lot of countries. The wide-eyed hope that such a tax can be a truly major revenue source also seems to be false. In part because of concerns over the risk of creating counterproductive incentives--either just to structure transactions in a way that minimizes such a tax or even to react in a way that reduces liquidity and increases volatility in financial markets--the rate at which such taxes are set is typically pretty low. As the authors write, "the idea that an FTT can raise vast amounts
of revenue—1 percent of gross domestic product (GDP) or more—has proved inconsistent with actual experience with such taxes."

The question with any tax is not whether it is perfect, because every real-world tax has some undesirable incentive effects. The question is whether a certain tax might have a useful role to play as part of the overall portfolio of real-world taxes. For what it's worth, this particular review of the evidence leaves me skeptical that expanding the currently existing US financial transactions tax from its very low present level would be a useful step. The authors of this paper are careful to adopt a fairly neutral on-the-one-hand, on-the-other hand pose, without making any firm recommendation. But in the conclusion, they do write:
An FTT at the rates being proposed and adopted elsewhere would discourage all trading, not just speculation and rent seeking. It appears as likely to increase market volatility as to curb it. It would create new distortions among asset classes and across industries. As a tax on gross rather than net activity, and as an input tax that is not creditable and thus cascades, the FTT clearly can most optimistically be considered a second-best solution. Over the long term, it appears poorly targeted at the kinds of financial-sector excesses that led to the Great Recession.