Monday, October 16, 2017

Learning, Not Just Schooling: World Development Report 2018

The World Development Report 2018, one of the flagship reports of the World Bank, focuses on the theme "LEARNING To Realize Education's Promise." The thrust of the report is that school enrollments are up dramatically in developing countries across the world, but in a disturbingly high number of cases, the larger numbers of children attending school are not leading to a similarly high increase in actual student learning.

For example, here's a figure showing rises in school attendance by region, over the long run. Primary school attendance has become almost (if not quite) universal around the world. Secondary school attendance is rising sharply in Sub-Saharan Africa and South Asia.
But as the report says at the very start (footnotes omitted):
"Schooling is not the same as learning. In Kenya, Tanzania, and Uganda, when grade 3 students were asked recently to read a sentence such as “The name of the dog is Puppy,” three-quarters did not understand what it said.1 In rural India, just under three-quarters of students in grade 3 could not solve a two-digit subtraction such as 46 – 17, and by grade 5 half could still not do so. Although the skills of Brazilian 15-year-olds have improved, at their current rate of improvement they won’t reach the rich-country average score in math for 75 years. In reading, it will take more than 260 years. Within countries, learning outcomes are almost always much worse for the disadvantaged. In Uruguay, poor children in grade 6 are assessed as “not competent” in math at five times the rate of wealthy children. ... 
Although not all developing countries suffer from such extreme shortfalls, many are far short of the levels they aspire to. According to leading international assessments of literacy and numeracy—Progress in International Reading Literacy Study (PIRLS) and
Trends in International Mathematics and Science Study (TIMSS)—the average student in low-income countries performs worse than 95 percent of the students in high-income countries, meaning that student would be singled out for remedial attention in a class
in high-income countries. Many high-performing students in middle-income countries—young men and women who have risen to the top quarter of  their cohorts—would rank in the bottom quarter in a wealthier country."

Here's one of many striking figures along these lines. It shows a share of second-graders who cannot read a single word of text, or who cannot subtract two-digit numbers. The footnotes warn that these figures draw upon individual studies, and the ones in India are focuses on rural areas, so the numbers should not be treated as nationally representative. But national data aren't available, and the evidence from the partial data is worrisome.

Of course, the educational system in any country faces difficulties that the schools alone are ill-suited to address. As the report notes: "[C]hildren often arrive in school unprepared to learn—if they
arrive at all. Malnutrition, illness, low parental investments, and the harsh environments associated with poverty undermine early childhood learning. Severe deprivations—whether in terms of nutrition,
unhealthy environments, or lack of nurture by caregivers—have long-lasting effects because they
impair infants’ brain development. Thirty percent of children under 5 in developing countries are
physically stunted, meaning they have low height for their age, typically due to chronic malnutrition.
The poor developmental foundations and lower levels of preschool skills resulting from deprivation mean many children arrive at school unprepared to benefit fully from it ..."

But with these outside issues and others duly noted, the report is also explicit and clear on the problems of teachers who lack skills and motivation, operating in a system of poor governance. education systems suffering under poor governance.  The report summarizes the needed policy reforms under three categories: 
  • Assess learning—to make it a serious goal. Measure and track learning better; use the results to guide action.
  • Act on evidence—to make schools work for all learners. Use evidence to guide innovation and practice.
  • Align actors—to make the whole system work for learning. Tackle the technical and political barriers to learning at scale.
The report rewards reading with a number of examples of such policies in action. But it's worth noting two broader points as well. One is that the report suggests that lack of inputs to education is not the primary problem in most places: "Public discourse often equates problems of education quality with input gaps. Devoting enough resources to education is crucial, and in some countries resources have not kept pace with the rapid jumps in enrollment. For several reasons, however, input shortages explain only a small part of the learning crisis. First, looking across systems and schools, similar levels of resources are often associated with vast differences in learning outcomes. Second, increasing inputs in a given setting often has small effects on learning outcomes. Part of the reason
is that inputs often fail to make it to the front lines."

The other issue is that all education-related policy reforms happen in a broader context. The report emphasizes over and over that education reforms happen in a context of whether a society is genuinely committed and dedicated to raising the educational performance of its young people. A society that is not committed will find numerous and ever-multiplying reasons to hesitate from any serious action: Can we really measure education outcomes accurately, after all? Is it worthwhile to track students? Might tracking make some students and teachers feel bad? Isn't experimenting with alternatives often a waste of time? Who decides what incentives should be built into the system, and will such incentives be allocated fairly or politically? Can't pretty much anyone teach young children, so there's no need to worry much about training? Shouldn't teachers be able to run their classrooms without outside interference? Shouldn't teachers or principals who have been in place for a long time receive considerable deference to their experience? 

These kinds of questions aren't wrong, or illegitimate. But they can very easily become an excuse for inertia. Only if a society is able to put the learning of children clearly first, in a way that makes flexibility and change imperative, will these kinds of questions turn into ways of usefully shaping new policies, rather than excuses for keeping the same system on track. The report notes various success stories.
"When improving learning becomes a priority, great progress is possible. In the early 1950s, the Republic of Korea was a war-torn society held back by very low literacy levels. By 1995 it had achieved universal enrollment in high-quality education through secondary school. Today, its young people perform at the highest levels on international learning assessments. Vietnam surprised the world when the 2012 results of the Programme for International Student Assessment (PISA) showed that its 15-year-olds were performing at the same level as those in Germany— even though Vietnam was a lower-middle-income country. Between 2009 and 2015, Peru achieved some of the fastest growth in overall learning outcomes—an improvement attributable to concerted policy action."
It's difficult to overstate the importance of education in economic development and growth. To put it bluntly, there are zero examples of countries in the modern world economy that have experienced lasting growth and development without a workforce of growing educational attainment and skills. The report includes various comments like this:
"When delivered well, education cures a host of societal ills. For individuals, it promotes employment, earnings, health, and poverty reduction. For societies, it spurs innovation, strengthens institutions, and fosters social cohesion. But these benefits depend largely on learning. Schooling without learning is a wasted opportunity. More than that, it is a great injustice: the children whom society is failing most are the ones who most need a good education to succeed in life."
It's easy to skim over such statements, and to view them as just another dose of overbroad feelgood boilerplate rhetoric. Except when you read it slowly, it's all true.

Friday, October 13, 2017

Independent Workers and Policy: Krueger's Moynihan Lecture

Alan B. Krueger delivered the annual Daniel Patrick Moynihan Lecture on Social Science and Public Policy, on the topic of "Independent Workers: What Role for Public Policy," for the American Academy of Political and Social Science on May 18, 2017. Video of the roughly hour-long actual lecture, which also shows the slides, is here. A revised and written-out version of the lecture, which I'll draw upon for this post, is posted here as Working Paper #615 for the Industrial Relations Section at Princeton University (September 2017). 

The issue here involves workers who do not have a "traditional" employment relationship: that is,  a job with a given employer and an expectation that the job is likely to continue into the future. Instead, independent workers work for themselves, and earn their living through a series of short-term interactions or time-limited contracts. As a result, they don't receive employer-provided benefits like health insurance, a pension plan, paid vacation, life insurance, and the like. 

How many workers fall into this category? Perhaps oddly enough, some main data sources disagree. Back around 1979, the tax data on people who reported self-employment income and the Census Bureau's Current Population Survey both suggested that about 8% of workers were self-employed. But since then, more people are reporting that they are self-employed on tax data, while fewer people are telling the survey that they are self-employed. On this one, I trust the tax data more! Krueger writes that this divergence "suggests to me that the job market has changed so quickly that many workers are fundamentally confused about the nature of their employment relationship."

Krueger reports survey results that the employer-provided benefit which most concerns independent workers, far and away, is a lack of access to health insurance. While that concern is obviously immediate and foremost in people's minds, I'll add my own belief that many of the independent workers should probably also be quite concerned about longer-term issues, like a lack of retirement savings and a lack of ongoing job-training. What might be done here? Krueger suggests a number of small-scale policies, and one bigger policy. Without passing judgment on them, here are some of the options, with small-scale possibilities first:
"One policy proposal that has gained some traction is to have a carve out for intermediaries that permits them to provide benefits without risk that their contractors will be deemed employees. Indeed, my sense is that many of the new online intermediaries would like to provide some benefits to their workers but they refrain from doing so because they are worried that they will be classified as an employer if they provided access to benefits, such as life insurance. ...
"For the self-employed, however, health insurance expenses are excluded from income taxes but not from payroll taxes. With payroll taxes of around 15 percent, this creates a significant additional tax on the self-employed. That could easily be rectified through tax policy.

"As mentioned, the self-employed receive relatively little job training. The IRS is tough on the deductibility of training expenses for the self-employed. Particularly when it comes to safety-related training, it would make sense for the IRS to be more permissive in allow training deductions as a business expense. Congress could also enact tax credits to encourage job training, particularly for safety training, for self-employed workers. ...

Extend coverage under Title VII of the Civil Rights Act of 1964 to independent contractors. The self-employed currently have few options if they face discrimination. The arguments in favor of this proposal are obvious: (1) it would extend protections that already exist for employees to the self-employed; (2) discrimination is plainly unfair and economically inefficient if it originates from personal animus or ignorant stereotypes; and (3) there is an administrative system in place to enforce the policy. ...

Here’s a really ambitious, big idea: Hanauer and Rolf (2015) have proposed the idea of `Shared Security Accounts,' in which all workers would be covered by a universal system that provides health insurance, retirement benefits, paid leave, and so on. Employers and online platforms like Uber would contribute 25% of their workers’ compensation into a fund to pay for those benefits. Workers could choose which benefits they want. ... I should also note that Shared Security Accounts are not a total head-in-the-sky idea. Washington State and New Jersey have considered legislation along these lines for self-employed workers.
When thinking about public policy for such workers, Krueger describes some of  his objectives this way: 
  • Policy should be neutral with respect to self-employment vs. traditional W-2 employment (e.g., tax treatment of health insurance should be equivalent).
  • Policy should avoid creating incentives for employers to convert W-2 jobs into self-employed jobs. ... 
  • Self-employed workers should be covered by the same essential protections and benefits as W-2 employees (i.e., social compact applies equally).
It should be noted that these objectives are debatable. For example, consider a household with two adult workers: one has a job with health insurance, pension, and all the rest, while the other is an independent worker without such benefits. It's not obvious that public policy should seek to assure the same benefits for both workers. But it is obvious that if public policy does not make some efforts in this direction, we will end up--either when independent workers don't have a partner to provide benefits, or when our hypothetical two-person household separates or divorces--with a substantial number of workers who lack health insurance, life insurance, and retirement saving. If or when this happens, it will be a problem for the political system, not just for those workers. Better to think about some ways to address these issues in advance. 

Readers who would like more on the "gig economy" and independent jobs might start with these posts: 
(Full disclosure: Krueger was the Editor of the Journal of Economic Perspectives, and thus my boss, for the six years from 1996-2002.)

Thursday, October 12, 2017

The Lost US Lead in Education

In the middle of the 20th century, the US economy had the enormous advantage that its workforce was by far the most skilled in the world. That advantage has largely dissipated. Alexander Monge-Naranjo of the St. Louis Fed provides some basic facts in the short article "Workers Abroad Are Catching Up to U.S. Skill Levels" (Regional Economist, Third Quarter 2017, pp. 6-7). The underlying data here is from Robert Barro and Jong-Wha Lee, "A New Data Set of Educational Attainment in the World, 1950-2010," Journal of Development Economics, 2013, Vol. 104, pp.184-98.

Here's a comparison for 1950, showing what share of the workers in each country are in a given education group. The US is the light blue bars on the right of each cluster. Notice that the light blue bars are typically lower in the lower education categories, but higher in the higher education categories. Also, if you do a bit of mental addition, you see that countries like France, Germany, Japan, and South Korea had two-thirds or more of their population in the broader category of "primary school education or less" circa 1950.

The next comparison is different in two ways. It looks at data for 2010, and it focuses only on workers in  the 25-35 age bracket. By leaving out older workers, the focus is on what education level workers are likely to have in decades ahead. The light blue bars showing the US levels of education have clearly risen, but the other countries are now much more similar. Even in cases where a country like Germany looks lower in college degrees, it's worth remembering that Germany has an aggressive and far-reaching apprenticeship program that help to provide future workers with job-related training. One can of course raise the possibility that those South Korean college degrees might not be equal in quality, on average, to US college degrees. But the size of the changes is so enormous that quibbling over quality is not going to alter the main pattern.

The catch-up in education levels is also apparent, if not as pronounced, in emerging market economies. Here's a similar figure, for workers age 25-35 in 2010, comparing the US to emerging market economies of Brazil, China, India, Mexico and Russia.

I suppose there are a few themes to draw from this.

First, catch-up in education levels by the rest of the world is broadly a good thing, because it's a good thing for a range of reasons from economic to self-determination when more humans have a higher level of education.

Second, 1950 was a unique time, and it's implausible that the US would have maintained its status of dramatically higher education levels indefinitely.

Third, with those previous points acknowledged, the US has not done a good job in the last half-century of fostering the incentives, institutions, and culture that would have helped it to keep a lead in human capital. I'm not talking only or even mostly about the public schools here, but about the many contexts in which schools, colleges and universities, employers, and individuals make decisions about providing and working on their education.

Those interested in more details about the ongoing loss of the US position as the clearcut world leader in an educated workforce might be interested in a couple of previous posts:

Wednesday, October 11, 2017

Snapshots of the Global Robotics Industry

The International Federation of Robotics is an industry group. Each year, it publishes a World Robotics Report, and while you need to pay big money for the full report, the Executive Summary and some illustrative slides are freely available. Here are some snapshots of the global robotics industry, released in the last few weeks from the World Robotics Report 2017.
For industrial robots, "There are five major markets representing 74% of the total sales volume in 2016: China, the Republic of Korea, Japan, the United States, and Germany. Since 2013 China has been the biggest robot market in the world with a continued dynamic growth." Here's the pattern of industrial robot sales in the last 10 years by region.

When categorized by industry, most industrial robots are in the automotive or the electrical/electronics industries.

The stock of robots refers to the total number in service, rather than the sales in a given year. "The total worldwide stock of operational industrial robots at the end of 2016 increased by 12% to about 1.8 million units. Since 2010, the stock has been increasing considerably by 10% on average per year."

How does the number of industrial robots in the US compare to other countries? The answer presumably tells something about the potential for future expansion of the use of robots. One measure is to look at the number of robots in relation to the number of manufacturing jobs. By that measure, the US does not rank among the world leaders. The report explains (footnotes omitted):
"The average global robot density is about 74 industrial robots installed per 10,000 employees in the manufacturing industry in 2016. The most automated countries in the world are the Republic of Korea, Singapore, Germany and Japan. The Republic of Korea has by far the highest robot density in the manufacturing industry since 2010. 631 industrial robots were in operation in 2016 per 10,000 employees. The rate has been increasing from 311 units in 2010 due to continued installation of a large volume of robots since 2010 particularly in the electrical/electronics industry and in the
automotive industry. ... Up to 2009 Japan had the highest robot density worldwide. But since 2010 the Republic of Korea and since 2015 Singapore have topped Japan in this respect. Japan’s robot density has been declining since 2009. In 2016, 303 robots were installed per 10,000 employees in the manufacturing industry.
"The development of the robot density in China was the most dynamic one in the world due to the significant growth of robot installations in recent years. Particularly between 2013 and 2016, the rising rate of robot density accelerated in China, from 25 units to 68 units. Due to the dynamic development of robot installations since 2010, the robot density in the United States increased significantly from 114 installed robots per 10,000 employees in the manufacturing industry in 2009 to 189 robots in 2016."

The raw numbers seem to suggest that there is substantial potential for higher use of industrial robots in the United States, perhaps especially in industries not currently making much use of them. 

There is also a separate category, smaller but faster-growing, of "service robots." 

"It is not possible to estimate how many of these robots are still in operation due to the diversity of these products resulting in varying utilization times. Some robots (e.g. underwater robots) might be more than 10 years in operation (compared to an average life time of 12 years in industrial robotics). Others like defence robots may only serve for a short time. The main applications are: 
  • Logistic systems [that is, automated guided vehicles]
  • Defense robots 
  • Field robots (milking robots)
  • Public relations robots 
  • Powered human exoskeletons 
  • Medical robots. ... 

In professional applications, service robots are already having a significant impact in areas such as agriculture, surgery, logistics and underwater applications and are growing in economic importance. Driven by evolving security threats, there is a growing need to monitor everyday environments, which results in increased and difficult-to-manage workloads and data flows. To help meet this need, robots will play an even greater role in the maintenance, security and rescue market. Robotics in personal and domestic applications has experienced strong global growth with relatively few mass-market products: floor cleaning robots, robo-mowers and robots for edutainment. Future product visions point to domestic robots of higher sophistication, capability and value, such as assistive robots for supporting the elderly, for helping out with household chores and for entertainment."

Robots are coming to the global economy. If you are someone who worries about slow productivity and wage stagnation, as I do, it's a trend to be embraced. Moreover, the US economy and political system has only very limited control over how fast the robots come. If robots aren't embraced here, it will in no way stop them from being embraced elsewhere around the world. New technology involves change, pretty much by definition, but over time, the best course of action is to figure out how to work with the change.

Tuesday, October 10, 2017

Formal Jobs and Decent Work

Most people in the world work for some kind of private-sector business enterprise. The quality of these jobs varies enormously: for example, working for a medium or large and well-established employer in the US or another high-income country is a lot different from working for a small informal employer in a low-income country. The International Labour Organization explores the importance of formal enterprises to provide decent work in its recent report, "World Employment and Social Outlook 2017: Sustaining enterprises and jobs – Formal enterprises and decent work." It begins (footnotes omitted):
"Private sector enterprises account for the bulk of global employment: in 2016, 2.8 billion individuals were employed by the private sector, which represents 87 per cent of total employment, with the remaining 13 per cent in non-market services. Although pr
ivate enterprises’ share of employment differs across countries, a strong private sector is the foundation for growth, job creation and poverty reduction. ... While it is true that private sector enterprises are a major source of employment – 87 per cent of total employment, as stated previously – this includes employment generated by informal enterprises, which can be substantial, especially for some developing and emerging economies. According to ILO estimates, about half the world’s workforce is employed in the informal economy, the bulk of which isin the emerging and developing world."
The "nonmarket services" to which the report refers are "the common public sector (education,
health and social services, public administration and defence)."

A key insight of the report is that most employment in the formal sector of most countries occurs in large companies. Specifically companies with more than 100 employees make up 10% or less of total firms, but are typically 50-60% of formal sector employment. 

There does seem to be evidence that the share of employment as small and medium enterprises is rising modestly, from about 31% of total formal employment jobs in 2003 to more like 34% at present. In a number of countries, smaller firms may also function as a way for women to enter the (paid) labor force. 

But in some ways, the line between small, medium, and larger firms can be a little artificial. A friend of mine used to say: "You know what most small companies do? They sell to bigger companies." The point was that large firms make choices about what to do inside their company, and what to hire from outside the company--which in turn affects the opportunities for small and medium enterprises. There are certainly plenty of cases where a large firm drives smaller competitors out of the market, but there are also plenty of cases where a contract from a big firm is what gets a smaller firm off the ground. 

The policy challenge in many countries across the world is how to encourage the aspects of firms that provide decent employment and goods and services to buyers, while discouraging the anticompetitive or exploitative possibilities of firms. The report refers to the need of firms for "numerical and functional flexibility"-- meaning the ability to adjust quantities of workers, hours worked, worker training, and the production process in response to shifts in market conditions. The hard question here is one that is arising in labor markets all over the world, not just in emerging and developing economies. 

Extremely flexible jobs are often part-time or short-term or both. In this setting, employers don't worry much about putting time and resources into training workers: after all, those flexible workers might not be there next month or next week. Production processes are designed for interchangeable low-skill or maybe medium-skill workers. As a result, highly flexible job markets can also be markets which don't invest much in improving the skills of workers. As the report notes: "Particularly in the case of women, but also among youth, flexibility can come at the cost of lower wages and limited opportunities for career advancement ..." 

Indeed, the ILO report offers evidence that while informal jobs are more common in developing countries, if one focuses on the formal sector, part-time and temporary jobs are more common in developed economies. In addition, the report notes that while share of firms that provide training to full-time formal-sector employees is higher in developed economies, it is still not the most common practice.

The ILO report points to some evidence that firms which offer more training to employees also have higher profits, but of course, this correlation doesn't prove that if all firms offered training to employees, they would all have higher profits. Similarly, the report offers evidence that firms which export tend to be more productive and pay higher wages, but again, this correlation doesn't prove that if all firms tried to export, they would all pay higher wages. 

The underlying challenges here are a difficult ones. In a number of countries around  the world, especially in Africa, the Middle East, and south Asia, the working age population is still growing substantially. In these countries, a key social question is how to encourage or facilitate (or at least not to block) the growth of a very large number of private-sector employers. The US economy has also suffered in the last couple of decades from a slowdown in the rate of formation of new firms. 

An intertwined question is the incentives that a labor market provides for ongoing training and education. If firms do not perceive that a substantial numbers of employees are likely to remain for a period of years, then firms will not perceive it as worthwhile to spend time and energy on training employees. But prospective employees will have a hard time knowing what training would be useful to firms, and perhaps also a hard time raising funds to pay for the training themselves. As I've argued here in the past ("What is a `Good Job?' April 5, 2016), many people would like a job that offers a degree of stability and security, along with building skills so that over time you can assume greater responsibilities and receive higher pay. In our current economic environment, with the high value that it places of flexibility, thinking about the labor market institutions and practices that would help create this kind of decent work is a hard and necessary task. 

Monday, October 9, 2017

Richard Thaler: The 2017 Nobel Prize in Economics

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2017 has been awarded to Richard Thaler "for his contributions to behavioural economics." What is behavioural economics, and why does it merit the prize? The Nobel committee offers some useful resources for addressing these questions, including a  short  and readable "popular information" essay
"Easy money or a golden pension?Integrating economics and psychology,"  and a longer "advanced information" essay that digs a little deeper into the economics, "Richard H. Thaler: Integrating Economics with Psychology."

The committee writes: "Richard Thaler has contributed to expanding and refining economic analysis by considering three psychological traits that systematically influence economic decisions – limited rationality, perceptions about fairness, and lack of self-control." Here, I'll say a few words about each of these, and about the state of behavioral economics as a whole.

As an example of limited rationality, consider a survey question from one of Thaler's studies. 
"(a) Assume you have been exposed to a disease which if contracted leads to a quick and painless death within a week. The probability you have the disease is 0.001. What is the maximum you would be willing to pay for a cure?
(b) Suppose volunteers would be needed for research on the above disease. All that would be required is that you expose yourself to a 0.001 chance of contracting the disease. What is the minimum you would require to volunteer for this program? (You would not be allowed to purchase the cure.)"
Notice that in both (a) and (b), you are asked to put a monetary value on facing a 0.001 probability of death. However, for people who took this survey in 1980, a common answer to question (a) was $200, while a common answer to question (b) was $10,000. But the scenarios are framed differently, and Thaler often finds himself digging into "framing effects." He refers to this an example of an "endowment effect," which is that that when you already have something, you tend to set a price differently than if you don't have something. If you are selling your own house, you ask for a higher price than you would offer if buying an essentially similar house.

"Mental accounting" is another example of a limited rationality. "One example is how many people divide their household budget into one account for household bills, another for holidays, etc., with rules that prevent using money from one account to pay for something in another." As one example, may people have both a savings account, where they receive a low rate of interest, and a credit card overdraft, on which they are paying a high rate of interest. However, they don't use the savings account to pay off the credit card, because a "savings account" is separate in their minds from their consumption spending. And of course, this separation may be good thing, if it helps people discipline themselves to pay off their credit card debt without eliminating their saving. 

In another well-known example of mental accounting, found that taxi drivers in New York City seem to think of each working day as a separate mental account, in which they try to earn a target amount of money. As a result, in days with high demand, taxi drivers reach their target daily income sooner and quit early, while in days with low demand, taxi drivers work longer hours.  "In other words, each working day seems to correspond to a separate mental account. Drivers therefore drive less on days with high demand and more on days with low demand, which is the opposite of what standard economic theory would predict."

 On the importance of perceptions of fairness in economic transactions, there is a body of evidence pointing out that if workers feel that they are paid at an unfairly low rate, their motivation may decline in a way that reduces their productivity. The recent storms in Texas, Florida, and the Caribbean have offered an example of perceptions of fairness in consumer markets: should stores raise the prices of highly-desired items during a disaster? Of course, economic analysis sees both sides of these issues. Unmotivated workers with low productivity is problem, but in some cases, a firm that can't limit or cut pay will instead find that it needs to lay off substantial numbers of workers, or even go broke. Charging higher prices around the time of a storm may seem unfair, but if charging low prices means that the first wave of buyers completely empties the shelves, leaving nothing for those who come later, then that's a problem, too. As the Nobel committee writes:
"Large-scale experiments conducted by Richard Thaler and other behavioural economists, have shown that notions about fairness play a major role in decision-making. People are prepared to refrain from material benefits to maintain what they perceive as just distributions. They are also prepared to bear a personal cost for punishing others who violate basic fairness rules, not only when they themselves are affected but also when they see someone else affected by injustice."
On the issue of self-control, "we are tested by short-term temptations that threaten long-term well-being. This could be food and drink, smoking, consumption, saving for distant goals, or post-retirement planning. A person who chooses a longer education has a lower income during their studies, but can in return look forward to benefits in the future."  Thus, rational people who know they have weak self-control may try to commit themselves to a course of action that they know will make them happier in the future. Signing up and pre-paying for an exercise class or a diet program are examples (after all, if you need to exercise or diet, why not just do it on your own?)

But probably the most prominent example of Thaler's work on self-control is about saving for retirement. Many people don't put aside nearly enough for retirement; of those who do put aside enough, many put a large share of their assets in something that is safe but has a very low return, rather than recognizing that a saver with a long-term perspective should probably put funds in the stock market--because over a long period of several decades they are extremely likely to come out ahead. To alter behavior, consider a policy in which instead of having people try to save on their own, they are instead automatically enrolled in a saving program, where the money is invested in a stock market index fund. Anyone who wants to opt out of the program would be allowed to do so! But the evidence strongly suggests that most people will stick with the automatic savings plan, and will end up later in life feeling very pleased that they did so. 

Thaler and a co-author have pushed for what they call the “Save More Tomorrow” (SMarT) plan, where after you sign up, the contribution you make to your retirement savings increases gradually each year. For example, the plan could specify that when you get a raise, half of the raise goes into additional saving, until your saving has increased to some desired level. 

Behavioral economics and the interaction of psychology and economics has been offering a rich array of insights across many areas of economics for several decades. Indeed, some of the early exposure for Thaler's work happened though a series of columns he wrote in the late 1980s and into the 1990s for the Journal of Economic Perspectives, where I labor in the fields as Managing Editor. The Nobel committee even gives a little shout-out to JEP, writing about the "well-known `Anomalies' series in the Journal of Economic Perspectives." The existence of behavioral effects in economics is extremely well-established, and research in this area has also opened up some ongoing big-picture questions. 

For a first example, the subject of economics has for a long time offered a battleground between those who emphasized the advantages of market forces and those who countered with the situations where government intervention seemed potentially useful. It may seem at first glance that behavioral economics should offer a substantial boost to those arguing for additional government intervention, which might aim at helping people accomplish what they would actually prefer--if they weren't struggling with issues of self-control, fairness, mental accounting, endowment effects, and other issues. In a 2008 book called Nudge: Improving Decisions About Health, Wealth, and Happiness,"
Thaler and co-author Cass Sunstein discussed these possibilities. In earlier work, they had referred to a philosophy of "libertarian paternalism," which may sound like an oxymoron, but refers to a policy of thinking seriously about the default options and information that will be offered to people--and then letting people make up their own minds after that.

But the insights of behavioral economics--like limited rationality and lack of self-control--apply with equal force to the actions of legislators, regulators, and politicians. For an example, I've written about a study of behavioral biases among development professionals in "Focusing Behavioral Economics on Development Professionals" (December 10, 2014). In "Who Will Nudge the Nudgers?" (July 21, 2015), I describe an essay arguing that less-than-rational biases may well be even prevalent among government decision-makers. Cass Sunstein, a frequent co-author of Thaler's, has made similar points. The case that behavioral economics should lead us toward rethinking a lot of government policy is easy to make; the case that it should lead to a greater degree of intervention in markets is far from proven. 

A second big-picture topic is that while psychology and behavioral economics is often focused on the decision-making of individuals, the field of economics typically looks at the outcomes when individuals interact in markets, which may be rather different. For example, consider a person who for some psychological and behavioral reason would be willing to pay triple the market price for any food that is labelled "fat-free." If we conducted a study, we might find a few such people. But for economists, the key point is that just because such people would be willing to pay triple the market price doesn't mean they have to do so; instead, such people can just pay the market price, like everyone else. In other words, market forces resulting from the large-scale interaction of buyers and sellers will in some cases make behavioral leanings moot. An active area of research looks at markets that have some behavioral participants and some rational participants, and considered what outcomes arise. 

Finally,  in many cases, the effects from behavioral economics are meaningful, but small. For example, consider the issue that many people buy the extended service warranty on large appliances like refrigerators or washing machines. Viewed strictly as insurance policies, these are often a bad deal, but people are paying for peace of mind and to reduce a fear of a later case of buyer's regret. This phenomenon is interesting, but it's a relatively small-scale. Similarly, the observation that retail stores or gas stations are more likely to post a "cash discount" sign than a "credit card surcharge" sign is an interesting application of applied psychology, but it probably doesn't have a big effect on quantity or price of gasoline in the market as a whole. Many of the insights of behavioral economics can be viewed as a very useful warning to be wary of how choices and information are framed and presented, of how marketing is trying to influence your behavior. 

To this point, the "killer app" for behavioral economics--that is, the area of the economy where these effects are especially large and meaningful--are the settings in financial market, like how much people save, how they save it, and how financial markets can at times act irrationally. But researchers are on the lookout for other killer apps for behavioral economics, and I wouldn't be at all surprised if others emerge over time.  

Those who follow this blog will have some prior familiarity with Thaler and his work. For example, interviews with Thaler and one of his talks were discussed at:

Friday, October 6, 2017

Interview with Ricardo Hausmann: Venezuela's Economy

Ricardo Hausmann is a Harvard economics professor, but he's also from Venezuela--and in fact worked in Venezuela's government for a couple of years back in the early 1990s. For the present government of Venezuela, his criticisms have made him persona non grata, and his brother-in-law, a journalist in Venezuela, recently spent seven months in jail and remains under house arrest. In "How did Venezuela get to this point?" Cardiff Garcia interviews Hausmann for the Financial Times (October 3, 2017). A full transcript of the interview is here, or you can listen to it here.  Here are a few points that caught my eye:

Venezuela was one of the fastest-growing economies in the world from 1925-1975
"[O]il became Venezuela’s largest export in 1925, and Venezuela became the largest exporter in the world in 1929. And it remained so until about 1965. In that period, say between 1925 and 1975 call it, that 50 year period, Venezuela was the fastest growing country in the world, and it went from being a very poor Latin American country with an income similar to that of say Central American countries at that time to being the richest Latin American country. And that reflected itself in the fact that it attracted massive immigration. It attracted some 700,000 Spaniards, Italians and Portuguese in a country that at the time had something like seven million people. It attracted probably something like a million Colombians and so on. So it was a magnet. It was wealthy, prosperous. It used massively its resources to invest in infrastructure. When democracy came along it prioritised education, health, public housing. And it was a fairly prosperous place. University education was free. Not only primary and secondary but university education was free. There was very cheap access to electricity, water and so on. So it was a fairly prosperous place."
Venezuela has hobbled its own golden goose, the oil industry
"Let me just give you a sense of the magnitude of the mismanagement of the oil industry. In 1998, the year before Chávez got elected, or the year in which in December of that year Chávez got elected and he took power in February 1999. In 1998, Venezuela produced 3.7 million barrels of oil [per day]. Today it’s producing about two. If Venezuela had maintained its market share in the world oil industry -- which it could have because it had infinite reserves, it had the largest reserves in the world -- it would be producing two million barrels more than it is currently producing. With the same market share. So the collapse is immense relative to history, and it’s immense relative to this opportunity cost of where it should have gone had it just kept its market share the way it was. 
"That collapse of the oil industry happened in two steps. First, all the know-how of that industry, centuries of man-years of experience was lost in the firing of these people. They were not only fired but persecuted, so most of them left the country. Many of them left the country. And they caused, for example, an oil boom in Colombia [where many of them moved to]. Colombia went from producing 200,000 barrels of oil [per day] to a million barrels of oil thanks to the fact that Venezuelans knew how to extract much more oil from the fields that Colombia was already exploiting. So there was a massive loss of human capital. 
"They also wanted to create a politically conscious oil company, so they started to put an enormous amount of social programmes and other things on the books of PDVSA, the oil company. And as a consequence they starved the company from investment and they ran the company in an amazingly corrupt way, and this is really not just talk about corruption but evidence of corruption in massive ways. ... So they really destroyed the hen that laid the golden eggs ..."
And it wasn't just the oil industry that was taken over and ruined ... 
"So he [Chavez]took over significant chunks of the Venezuelan economy, and the typical thing is that the moment they took over a company, they ran it to the ground. Production collapsed. They nationalised the steel company. The steel company at the time of nationalisation was producing 4.5 million tons of steel with 5,000 workers. It now has 22,000 workers but it’s producing something like 200,000 tons of steel. So they ran those companies to the ground. Aluminium is almost not done any more, when Venezuela was producing about a million tons of aluminium back when…"
The size of Venezuela's economy has fallen by about half since 2013
"So official numbers would suggest that GDP in per capita terms since 2013 has fallen 37%. If you add to that the impact of the decline in the price of oil to income, national income has declined by over 50%. But if you exclude from that the GDP generated by the government itself which is just estimated by the number of employees the government has, or if you disregard other parts of the economy that are grossly mismeasured, just look at goods like agriculture, manufacturing, mining, even construction and so on, that part of the economy declined by in excess of 55%. So there’s been this massive collapse in output, massive collapse in incomes.
"If you look at the minimum wage, which in Venezuela given this incredibly fast inflation and so on has become the median wage, the median wage if you estimate it at the black market rate is something like $20 a month. But you might say: Well, but, what is this black market rate? What does that mean? So we have been measuring the minimum wage in calories. We look at the market prices of things and we calculate what is the cheapest calorie a family could buy? And if you do that calculation in 2012, a family could buy 55,000 calories a day with the minimum wage. And now a family can buy 7,000 calories. So if you think that a median wage has to sustain a family of five, well five people could not eat enough calories if they spent 100% of their income in the cheapest calorie and no income in housing, footwear, transportation or anything else.
"So as a consequence, incomes per capita have collapsed to a degree that it is hard to transmit and understand, and that collapse in private incomes is accompanied by a collapse in public services like healthcare for example. They are just beyond belief. People have been writing pieces that I’m sure are going to win a Pulitzer Prize, because it’s just astonishing how life expectancy rates, how the prevalence of diseases that had been eradicated… Venezuela was the first country to eradicate malaria back in 1961. Even before the US did. And malaria is back big time. Measles is back big time. There are no drugs for HIV. There are no drugs for hypertension. There are no machines to do dialysis. There are no cancer drugs."
While it may  be useful or necessary at some point to restructure Venezuela's debts, current lending to Venezuela seems exploitive such that Hausmann refers to it as "hunger bonds"
"So usually you think that the capital markets are there to provide capital for good ideas that are going to generate value and pay back the loans and create other benefits for the borrower. So you think of capital markets as being angels for good in the world. But when capital markets have to deal with a government that is willing to compromise future cash flows for any cash up front, and it’s not using the resources to create any good things for the future, then you’re giving money to an authoritarian regime to mismanage in the short run and you are condemning the future of the country with obligations that they will not be able to afford to pay. So that’s why I call them hunger bonds.

"A very clear example that prompted this was Goldman Sachs lending the government $850 million at an interest rate of 50%. No-one has a project that pays 50%. So the government has $850 million now, then they have to pay an amount going forward that they will not have the resources to pay it with. Because they’re not using the money in any investment programme that will be able to pay for that debt. That debt is just to prop up the current regime, and in my mind that makes that debt odious. It’s a debt of the regime, it’s not a debt that should bind the people of a country, because the regime does not represent the people and the regime cannot commit the future of the country."
Here's an post from last year on "Hyperinflation and the Venezuela Example" (April 28, 2016). Steve Hanke notes that while the official inflation rate in Venezuela was 741% as of February 2017, the unofficial inflation rate implied by the black-market exchange rate is more like 2500%.

Thursday, October 5, 2017

Foreign Direct Investment in the US: Size and Effects

Foreign direct investment refers to a situation when a foreign firm invests in an affiliate in a substantial enough way that it gains some voice in the management of the enterprise. This is often defined in terms of having ownership of at least 10 percent of the company. The US is quite open to foreign direct investment from abroad. Michael Cortez tells the story in "Foreign Direct Investment in the United States," published by the Economics and Statistics Administration of the US Department of Commerce (ESA Issue Brief #06-17, October 3, 2017). The quick overview of 2016 sounds like this:
"FDI inflows on a historic cost basis in 2015 were the largest on record at $465.8 billion while 2016 inflows, though slightly lower at $457.1 billion, were at the second highest level on record. FDI in these two years was more than double the average annual inflows of roughly $200 billion for 2012-2014. Increased investment in manufacturing, specifically in chemical manufacturing, accounted for most of the investment gains for both 2015 and 2016.
"The United States had an inward FDI stock of $3.3 trillion and $3.7 trillion, on a historical-cost basis, for 2015 and 2016 respectively. The United States’ FDI stock in 2015 ($5.6 trillion on a current-cost basis) was more than three times larger than that of the next largest destination country. Total inward stock in the United States grew at an average annual rate of 7.8 percent per year from 2009-2016."

A common reason for foreign direct investment is that it helps a company be more confident about its international supply lines. Another reason for FDI in the United States is to take advantage of US-based expertise and R&D, Thus, it's no surprise that US-based firms with foreign direct investment are active in exports and in research and development. Cortez writes:
"Majority-owned U.S. affiliates of foreign entities exported $352.8 billion in goods, accounting for over 23 percent of total U.S. goods exports in 2015 (the most recent year for which this data is available). They are also a catalyst for research and development, spending $56.7 billion in 2015 on R&D and accounting for 15.8 percent of the U.S. total expenditure on R&D by businesses."

Given that FDI emphasizes manufacturing, R&D, and exports, it's not a surprise that the jobs with US affiliates of foreign firms tend to pay well.
"Majority-owned U.S. affiliates of foreign entities employed 6.8 million U.S. workers in 2015, up from 6.6 million in 2014, and provided compensation of nearly $80,000 per U.S. employee in 2015. That is higher than the U.S. average of $64,000 in the economy as a whole for the same year."

Wednesday, October 4, 2017

The Gherkin Story: For Explaining Exchange Rate Risk

I've long believed that exchange rates can be the single toughest subject to teach to introductory economics students. Talking about travelling abroad and exchanging currency can help understand how someone can benefit or lose from movements in exchange rates. But when trying to explain exchange-rate risk for nations or private firms who have borrowed in one currency and need to repay in a different currency, more practical examples are a big help, too. Adam T. Jones,William H. Sackley and Ethan D. Watson have a very nice example all worked out and ready to be plugged into your reading list or lecture notes. It appears as "Teaching exchange rate risk using London's Gherkin building: How investors were in (and out of) a pickle," in the Journal of Economic Education (2017, 48:4, 276-287). (The JEE is not freely available online, but many readers will have access through a library subscription.)

The Gherkin is the nickname for an iconic office building in London, built in the early 2000s. As the authors note (citations and footnotes omitted): "Sir Norman Foster, a world-famous British architect known for innovative and sustainable designs, scaled back the design to the 41-story structure that is the current Gherkin building. Construction on the building began in 2001 and was completed in 2003. Foster’s client was Swiss Reinsurance Company, Ltd. (Swiss Re), a global insurer and reinsurer. Swiss Re invested a total of 228.6 million pounds sterling (GBP) in land and construction cost. Swiss Re occupied just over half of the Gherkin as their British headquarters, and leased out the remainder. In late 2006, Swiss Re began seeking a purchaser in hopes of executing a sale-leaseback of the Gherkin building, near the top of the real estate market cycle. ..."

Here's a picture of the Gherkin.

Essentially, the problem arose because part of the deal was financed with debt, some in British pounds and some in Swiss francs. This arrangement made some sense. Swiss Re, which was continuing to lease space in the building, was paying rent in Swiss francs. So the new owners could use rent from the British tenants to pay the debt that was denominated in pounds, and the rent from Swiss Re to pay the debt denominated in francs. However, the purchase contract also had a rule that the ratio of the loan to the value of the building could not exceed 67%. Notice that the value of the loan was in pounds and francs, while the value of the building was solely in pounds. So when the value of the Swiss franc rose substantially against the pound, the loan-to-value ratio rose well above the 67% limit. As a result, the lenders of the debt demanded more collateral, and ended up foreclosing on the building. Here's how Jones, Sackley and Watson tell it (again, citations and footnotes omitted):
"Unfortunately, the structure of the deal eventually led to financial implosion. There were two important aspects to the structure of the deal. First,GBP 396 million of the GBP 600 million purchase price was financed with debt, and the rest was equity investment from the IVG Euro Select 14 Fund and Evans Randall’s equity investment. The GBP 396 million loan was denominated in two currencies: GBP 212 million worth was borrowed in British pounds, and GBP 184 million worth (CHF 447 million) was borrowed in Swiss francs. Second, the deal structure also included a loan-to-value clause, which required the group to not exceed a 67 percent loan-to-value ratio. ...
"[I]n reality the financing of the building in two currencies was reasonable, because the lease paymentswere being collected in pounds sterling and Swiss francs. Swiss Re occupied approximately half the building and paid their rent in francs. The other tenants were British firms paying rent in pounds sterling. Therefore, the lease payments were providing a partial hedge of the foreign exchange risk for interest payments but not the principal value of the loan. Thus, despite some rent being paid in francs, IVG was exposed to a less than fully hedged, foreign exchange risk.
"At the time the deal was struck, the CHF per GBP exchange rate was approximately 2.4 Swiss francs per British pound.After the deal was struck, the value of the pound relative to the franc dropped (franc’s value appreciated) significantly from late 2007 until late 2011. In the end, the franc appreciated over 60 percent causing the value of the debt to increase by approximately GBP 100 million. ... [T]he increased loan value triggered the 67 percent loan-to-value (LTV) limit clause in the financing because the new ratio would have exceeded 79 percent under the new exchange rate. 
"As a result of the increased LTV ratio exceeding the contractual limit, the consortium of financing banks, led by BayernLB, demanded more collateral and blocked the flow of rental income. Thus, in a twist of irony, the owners of a building leased to a firm that mitigates risk were unable to navigate the risks of a complicated financial structure and defaulted on their debt. The Gherkin building was placed into receivership in 2013, and was sold in foreclosure to Brazil’s Safra Group for GBP 726 million in 2014 ..."
Jones, Sackley and Watson offer a detailed description of how to walk through this example in a classroom setting. To me, the example is especially interesting because it's a vivid example of the subtle ways that exchange rate risk can arise. One of my standard examples of exchange rate risk involves working through what would happen to a bank in Thailand that borrowed in US dollars, but loaned in Thai baht. A sharp depreciation of the baht can then make it impossible to repay the US dollar loan, as in the east Asian financial crisis of 1998-99 (for discussion, see Ch. 31 of my principles of economics textbook). But apparently, the rent from the tenants of the Gherkin was enough to continue paying off the debts involved in its purchase. In this case, the foreign exchange risk instead arose from how the exchange rate movements affected the loan-to-value ratio in the contract.

Tuesday, October 3, 2017

Some Economics of Immigration

The Fall 2017 issue of the Cato Journal includes 11 accessible papers on "The Economics of Immigration." Here, I'll mention some insights that especially caught my eye from two of the papers.

One of the most powerful concerns about immigration of low-skill workers is that even if it provides benefits for high-skilled workers (because services that they purchase from low-skilled workers become cheaper), it has a negative effect on the wages of low-skilled US workers. Giovanni Peri is among those who has most strongly made the argument that immigration does not in fact injure the wages of low-skilled workers, and he explains his case in "The Impact of Immigration on Wages of Unskilled Workers."  Peri begins:
"Immigrants did not contribute to the national decline in wages at the national level for native-born workers without a college education. This article reviews how the timing of their immigration and skill sets of immigrants between 1970 and 2014 could not have been responsible for wage declines. This article then reviews other evidence at the local level that implies immigration is not associated with wage declines for noncollege workers, even if they are high school dropouts. Higher immigration is associated with higher average wages. Causality is difficult to tease out but numerous factors could explain the positive association between the quantity of immigrants and native wages." 

Peri points out that immigration happens disproportionately at both ends of of the skill dimension: that is, both low-skill and high-skill. In fact, high-skill immigration has at most times been higher than low-skill immigration. Thus, if you believe that immigrants drive down wages for native workers of the same skill level, you need to argue that immigration has helped to reduce inequality of wages by driving down wages of high-skilled US workers.

But in fact, we know that wage inequality has been rising and high-skill US workers as a group have done well in recent decades. This suggests that either the effect of immigration is small compared with other economic determinants of wages, or that the connection from immigration to wages is more complex. For example, Peri discusses evidence that in areas with high levels of low-skill immigration, local firms shift their production processes in a way that uses more low-skilled labor--thus increasing the demand for such labor. In addition, immigrant low-skilled labor has tended to focus on manual tasks, which has enabled native-born low-skilled labor to shift to nonmanual low-skilled tasks, which often pay better. Metropolitan areas with especially high levels of immigrant labor are not, on average, places with lower wages for noncollege workers, and are on average places with higher wages for college workers. In short, Peri is agreeing with the evidence that shows stagnant wages for low-wage workers, but arguing that the facts do not support thinking that immigration is a cause of this problem.

Douglas S. Massey offers a thought-inducing essay on "The Counterproductive Consequences of Border Enforcement,"  which can offer one more example when talking about the law of unintended consequences. Here's the nutshell version of his argument (citations omitted):

"From 1986 to 2008 the undocumented population of the United States grew from three million to 12 million persons, despite a five-fold increase in Border Patrol officers, a four-fold increase in hours spent patrolling the border, and a 20-fold increase in the agency’s nominal budget. Whether measured in terms of personnel, patrol hours, or budget, studies indicate that the surge in border enforcement has had little effect in reducing unauthorized migration to the United States. The strategy of enhanced border enforcement was not without consequences, however, for although it did not deter Mexicans from heading northward or prevent them from crossing the border, it did reduce the rate of return migration and redirected migrant flows to new crossing points and destinations, with profound consequences for the size, composition, and geographic distribution of the nation’s unauthorized population. Here I draw on results from a recent study to explain how and why the unprecedented militarization of the Mexico-U.S. border not only failed to reduce undocumented migration but also actually backfired by turning what had been a circular flow of male workers, going mainly to three states, into a large and growing population of families in 50 states. ...
"Although the militarization of the border had no effect on the likelihood of initiating undocumented migration to the United States, it did have powerful unintended consequences-pushing migrants away from traditional crossing points in El Paso and San Diego into hostile territory in the Sonoran desert, which increased the physical risks of undocumented border crossing. It also increased the need to rely on paid smugglers, which in turn increased the costs of undocumented border crossing. Rising border enforcement had only a modest effect on the likelihood of apprehension during a crossing attempt and no effect at all on the likelihood of gaining entry over a series of attempts.
"The combination of increasingly costly and risky trips and the near certainty of getting into the United States created a decisionmaking context in which it made economic sense to migrate but not return home, so as to avoid facing the high costs and risks coming back. In response to the changed incentives, the probability of returning from a first trip fell sharply, going from a high of 0.48 in 1980 to zero in 2010. With no effect on the likelihood of departure or entry to the United States but a strong negative effect on the likelihood of returning to Mexico, only one outcome was possible: the net rate of entry increased and the growth of the undocumented population accelerated."
Those who want more on the economics of immigration might turn to the three-paper symposium in the Fall 2016 issue of the Journal of Economic Perspectives (where I work as Managing Editor). The three papers are:

Monday, October 2, 2017

Chronic Conditions and Health Care Costs

The technical definition of a chronic health condition is "a physical or mental health condition that lasts more than one year and causes functional restrictions or requires ongoing monitoring or treatment." I sometimes define it a bit more loosely as a condition where the symptoms can remain at least somewhat and sometimes quite substantially under control, with appropriate behavior, treatment and monitoring, but where a short-term lapse in behavior, treatment and monitoring can lead to substantial costs, both from the health care system and for the patient's health.  Christine Buttorff, Teague Ruder, Melissa Bauman offer some useful background in the chartbook, "Multiple Chronic Conditions in the United States" (RAND Corporation, May 2017).

Here's the share of US adults who have a certain prominent chronic condition. The four most common are hypertension, lipid disorders (like high cholesterol), mood disorders, and diabetes.

Of course, chronic conditions are complicated by the fact that many people have more than one of them: indeed, 12% of US adults have five or more chronic conditions.

Unsurprisingly, those who have more chronic conditions tend to have higher health care costs, emergency department visits, inpatient and outpatient stays, and use of prescription medication. Indeed, those with three or more chronic conditions account for 61% of total health care spending.
Or to describe the same general pattern in a different way, those who have five or more chronic conditions have health care spending that is, on average, 14 times as high as those who don't have any chronic conditions.
Chronic conditions pose a challenging social problem because we tend to think of them as a health care issue, but both the problem and the possible solutions are much broader than that. The effects of chronic conditions can include difficulties independent living, work life, and social limitations. The solutions often involve lifestyle changes, not just medication: for example, here's a list from the Mayo Clinic of ways of controlling high blood pressure without medication. A friend of mind had a back-pain problem severe enough that he would sometimes have to lay down on the floor in the middle of meeting, rather than keep sitting or standing. In his day-to-day struggles with back pain, one of the most important items was an appropriate mattress. To put it another way, society could address his back pain with medication or a good mattress--and the health care system tends to prioritize the first approach.

Of course,  a number of health care providers do have programs to try to hold down costs by encouraging nonmedical ways of addressing chronic conditions, and some of these programs are clearly successful. But I suspect that a substantial expansion in the nonmedical aspects of dealing with chronic conditions would have a high payoff, both in reduced health care costs and in improved health.

Friday, September 29, 2017

Interview with Lawrence Katz: Inequality, Mobility, and More

Douglas Clement has a characteristically excellent "Interview with Lawrence Katz" in The Region, from the Federal Reserve Bank of Minneapolis, published September 25, 2017. The subheading reads: "Harvard economist on the gender pay gap, fissuring workplaces and the importance of moving to a good neighborhood early in a child’s life." The interview offers lots to chew on. Here, I'll just pass along some of Katz's thoughts on a couple of points. 

One issue is about the causes of rising inequality of wages. Katz (together with co-author Claudia Goldin) have argued that the most important reason behind rising wage inequality is that in the race between rising demand for skilled labor and rising supply of skilled labor, demand has surged ahead. The implication is that the appropriate long-run response to address inequality would be to aim at a dramatic increase in the share of Americans receiving higher education. However, others have emphasized other issues that might relate to the role of inequality, like effects from increased international competition, or have pointed out that the rising incomes of top corporate executives doesn't seem to have an obvious link to a shortage of skilled college-educated workers. In this interview, Katz argues that rising demand for skilled labor remains the primary cause of greater wage inequality, and that a substantial increase in the share of Americans receiving quality higher education from the public sector is the appropriate answer.  He says:
"In 2016, the college premium continued to grow. This other chart is sort of my favorite. This tries to put it all together for 200 years. ...

"There is no systematic survey or data prior to the 1940s census on wages. But there was one very important employer in the United States who kept good records going back to the 1820s: the U.S. military when they were hiring civilian employees at forts all around the country. They would hire a blacksmith or clerk or day laborer and write down the employee’s characteristics and the wage they were paid and look at the gap between, for example, a clerical worker and a production worker working at a fort.
"The chart starting with the 19th century skill premium data based on the military wage series put together by the economic historian Bob Margo shows that there was a rising skill premium (that fed into the high school movement) prior to the big decline in the early 20th century. Our best evidence suggests that with the shift from the artisanal shop to larger and more mechanized factories, there was a big demand—with the growth of scale of individual enterprises—for engineers, managers, accountants and clerks relative to craft workers and even relative to other production workers. ...
"If you look at the past 30 years, there’s been a big increase in inequality, which you can measure by the Gini coefficient. You can do this for individuals, for family households. A big part of that increase is at the very upper end—which I won’t claim is largely the education return. But even if we exclude the top 0.5 percent [of the income distribution], there are very large differences; we estimate that, as recently as 2013, about two-thirds of that [increase in inequality] is due to the growth of the educational wage premium. Almost all of that is post-secondary college and post-college. So, if you’d kept the college premium at the 1980 level, you would’ve seen only a third as much of the growth of U.S. earnings inequality. ...
"What the government has done—in the ’50s and ’60s, even into the ’70s—is invested heavily in high-quality colleges. Think of University of California campuses or Florida State. But since then, there’s been very little investment in expanding quality higher education. There’s increased crowding at community colleges and state universities, and states have greatly cut back on appropriations for higher education, particularly in the Great Recession.
"The federal government has continued to have an important role, but it’s done it with flexible support through Pell grants targeted to low-income students. The problem is that we’ve had a surge of really low-quality colleges, and the worst of that is the for-profit sector, which Claudia, David Deming and I have studied. Particularly from the late ’90s to 2011 with this very large wage premium and funneling more federal funding into loans and Pell grants, a big part of that marginal growth—particularly for disadvantaged individuals—was at for-profit institutions for both associate’s degrees and bachelor’s degrees.
"It’s been a bit of a disaster. Even though these for-profit institutions have tried to be up to date, very flexible, with high-quality online instruction, we have repeatedly found very little economic return to degree programs at for-profit institutions; instead, it’s become a massive debt trap. I think there is something to be said for the quality and capabilities, the faculty, the peer effects of a traditional public or private nonprofit university.
"So, rather than what would’ve been the equivalent of the high school movement—developing more University of California campuses or more Florida public universities, so we weren’t rationing access to quality public colleges—we allowed the for-profit private sector to come in both as a nimble creative but also as an agile predator."
A second subject involves a classic social science question: to what extent are people with low-incomes held back by living in a primarily low-income community? If instead low-income people were integrated into a middle-income or high-income community, with the schools and public services of that community, as well as the peer effects and social connections, how much difference would it make. The Moving to Opportunity study is based on a social experiment in which some low-income people had the incentive and possibility to relocate to a higher-income community. Katz is Katz is principal investigator for this experiment, and he describes it in this way:

"The demonstration program ran in five cities: Boston, Baltimore, Chicago, New York and Los Angeles. And the families eligible were living in public housing in the highest-poverty census tracts with an over 40 percent poverty rate.
"Through a lottery, MTO allowed people to jump the queue to get housing vouchers providing housing support to live in an area of their choice. There were three groups: an experimental group that had to move to a low-poverty area if they wanted to move and received mobility counseling assistance as well, a second treatment group that received vouchers but wasn’t required to live in a low-poverty area, and a third group, the control group, who stayed where they were and kept their regular housing support. And we’ve been tracking them for 20 years.
"The first question was whether we could actually get a significant number of families to move to low-poverty neighborhoods even with these vouchers. We thought that about a third of them would be able to make such moves. But, in fact, through the hard work of these families and the counselors, almost half of the experimental group families leased up in a low-poverty area. ...
"And what we find for Moving to Opportunity is in the short run it clearly made the adults in the families happier and healthier. Measures of well-being and safety improved. There were big reductions in exposure to violence. But, economically, nothing much changed for the parents.
"But it’s significant that at the time of the moves, at baseline, we asked people why they wanted to move, and very few said they were moving because they were looking for a better job. Almost always it was safety, wanting to get out of more violent areas, worried for their kids. Or it was trying to improve their housing conditions.
"We saw huge improvements one year out, five years out, 10 to 15 years out in adult health. Large reductions in obesity, in depression, in diabetes and in biomarker indicators for long-term stress. This is sort of the equivalent of your best antidepressant and your best exercise and diet program in terms of long-run improvements in adult health and mental health!
"So until we did the latest study on long-term effects on the kids, the message from MTO has been that there were huge benefits to a family’s well-being and health, but not much economically, and we weren’t finding much on test scores for kids. We had a little bit of evidence of positive things for girls and, if anything, the boys were looking a bit negative. ...
"When we looked at those same kids who didn’t look that different in their school performance but were less involved in violent crime as adolescents, they seemed to be assimilating types of social capital that may not show up on standardized tests, a sort of savvy of living in a different type of neighborhood. As Chetty, Hendren and I observe, the younger MTO children becoming adults, we see them more likely to go to and persist in college, and we see them much more likely to work, and an almost 40 percent impact in their mid-20s on earnings. It really looks like a powerful impact."
An intriguing and important lesson here is that getting the full story can often involve looking at a broad array of outcome measures. For example, the parents of the low-income families didn't achieve higher incomes, but their stress levels and health improved dramatically. The children from the low-income families didn't have gains on school test scores, but they were less likely to be  involved in crime, more likely to attend college, and more likely to work. For the typical young person, often it's not that their test scores and academic achievement need to be sky-high; after all, there's no escaping the arithmetical reality that the average student is going to have average scores! But young people who have social connectedness, a sense of possibility, and persistence to keep learning and growing can take their average academic performance and turn it into a successful adult life. 

Thursday, September 28, 2017

Wealth Patterns in the United States

Wealth is not income. Income is what you receive in a certain period of time, perhaps a year. Wealth adds up all of your assets--bank account, value of equity in home, retirement savings, and so on. A substantial portion of retirees have high wealth, but low income. A substantial portion of young professionals in their 30s have high income, but (once their outstanding debts are taken into account), little wealth. The canonical source for looking at US wealth patterns is the Survey of Consumer Finances, carried out triennially by the Federal Reserve.

Results and highlights from the 2016  SCF appear in "Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances," in the Federal Reserve Bulletin (Summer 2017, in an article with a double-handful of co-authors: Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, Sarah Pack, John Sabelhaus, Jeffrey Thompson, and Richard A. Windle. The detailed survey results are here. The SCF and this article also look at patterns of income, but income data is readily available from other sources. Here, I'll focus on the discussion of wealth.

Here's a figure with some evidence on the shifting distribution of wealth. As the report explains: "The wealth share of the top 1 percent climbed from 36.3 percent in 2013 to 38.6 percent in 2016, slightly surpassing the wealth share of the next highest 9 percent of families combined (figure B). After rising over the second half of the 1990s and most of the 2000s, the wealth share of the next highest 9 percent of families has been falling since 2010, reaching 38.5 percent in 2016. Similar to the situation with income, the wealth share of the bottom 90 percent of families has been falling over most of the past 25 years, dropping from 33.2 percent in 1989 to 22.8 percent in 2016."

More from the report: "These patterns in net worth over the past several surveys were largely driven by the Great Recession and subsequent recovery in house and other asset prices. Declines in house prices in particular had a disproportionate effect on families in the middle of the net worth distribution, whose wealth portfolio is dominated by housing. Divergent trends in median and mean net worth over the past few surveys suggest substantial heterogeneity in wealth changes across families."

The report offers a detailed breakdown of financial and nonfinancial assets (like home equity) held by families, and also of different types of debts. However, some definitional issues should be noted. For example, are the Social Security payments you expect to receive after retirement an "asset" for you? In a broad economic sense, the answer is clearly "yes." But people do not have ownership of that asset in the way that they own their retirement account or their house, and putting a number on the current value of that asset requires making a bunch of assumptions about future patterns of work and marriage and possible political changes to Social Security. Thus, it isn't included in the SCF measure of wealth. As the report says: "Although the SCF measure of wealth is fairly comprehensive, some assets that may be widely held, such as defined-benefit pension and Social Security wealth, are not included in net worth definitions because of the many assumptions required to estimate their values."

Here's a table (a trimmed-down version of a larger table) from the report, showing some patterns of wealth.  One big difference that jumps out is the difference between "median" and "mean." Median net worth for all US families is $97,300, while mean net worth is $692,100.
Why such a huge gap?  For those who last encountered those definitions some years ago, "median" is technically the value where half of the values are above and half are below. Mean is the  average: that is, total sum divided by the number of people. When there are a small number of very high values, the mean will be much higher than the median. For an intuitive grip on the difference, imagine a three-person economy, where one person has $0 in wealth, one has $30,000 in wealth, and one has $3 million in wealth. The median here would be $30,000, with equal numbers of people above and below that value. The mean would be $3,030,000/3, which would be $1,010,000.

As the table shows, it's broadly true that those who are older or who have better education levels also tend to have higher net worth. However, mean net worth does tend to diminish just a bit for the older age groups, which makes some sense if that group is consuming wealth and passing it wealth to younger groups. The bottom half or so of the American population has relatively little in net worth, but it's not obvious from this table how big a problem that is. After all, one would expect most people in their 20s to have little net worth, and even people in their 30s who potentially have big home mortgages and high student debts might not have high net worth. The more troublesome groups, which are not the focus of this overview report, would be those in their 40s who are not yet taking real steps to accumulating wealth, or those in their 50s and 60s who are approaching retirement but have not yet accumulated much wealth.