August, 2011 - Conversable Economist

August 31, 2011 conversableeconomist

How Much Revenue from Limiting Deductibility?

One unattractive aspect of having certain expenditures be deductible in the U.S. tax code is that any deduction is worth more to someone in a higher tax bracket. Thus, when it comes to typical deductions like the mortgage interest deduction, the deduction for state and local taxes, the deduction for charitable contributions, or the deduction for large out-of-pocket health care expenditures, someone in a 35% tax bracket saves 35 cents off their tax bill for each $1 of deductible expense, while someone in a 15% tax bracket saves only 15 cents off their tax bill for each $1 of deductible expense. Of course, the two-third of taxpayers who don\’t have enough of these specific expenses to make it worthwhile to itemize their deductions just take the standard deduction, and get nothing extra off their tax bill for these expenses.

Proposals are always kicking around to reduce deductibility, by limiting the tax savings from a deductible expense to say, 28% or even 15%. How much revenue might such proposals raise?

What about limiting deductibility to 28%?
Daniel Baneman, Jim Nunns, Jeffrey Rohaly, Eric Toder, Roberton Williams estimate the revenue to be raised from a proposal to limit deductibility to 28% in a recent paper for the Tax Policy Center. They write (footnotes omitted):

\”To measure the revenue and distributional implications of these proposals, the analysis considers two baselines: current law and current policy. “Current law” is the standard baseline that official revenue estimators at the Joint Committee on Taxation use to score tax proposals. It assumes that tax law plays out as it is currently written. Most important, that means that the 2001–2010 income and estate tax cuts expire at the end of 2012 and that temporary relief from the alternative minimum tax (AMT) expires at the end of 2011. The “current policy” baseline assumes that Congress permanently extends all provisions in the 2011 tax code (except the 2 percent reduction in Social Security payroll tax) as well as AMT relief, indexed for inflation after 2011. …

[A] proposal from the Obama Administration … would limit the benefit of itemized deductions to 28 percent. .. Thus, for example, an additional $100 of itemized deductions would save a taxpayer in the 35 percent bracket only $28 rather than $35. The 28 percent limitation on itemized deductions would raise an estimated $288 billion over the next ten years compared with current law … Relative to current policy, the proposal would raise $164 billion.

The 5.3 million affected households in the top quintile would see their taxes go up by an average of about $2,900. The average tax increase for the 697,000 affected households in the top 1 percent would be about $13,300. Almost all of the tax increase—99.8 percent—would fall on households in the top quintile of the income distribution—those with cash incomes greater than $111,000. … The top 1 percent would bear 61 percent and the top 0.1 percent would pay a little more than one-third.\”

What about limiting deductibility to 15%?
The Congressional Budget Office does a regular report called \”Reducing the Deficit: Spending and Revenue Options.\” In the March 2011 report, Revenues–Option 7 is \”\”Limit the Tax Benefit of Itemized Deductions to 15 Percent.\” CBO estimates that this change could raise $1,180 billion over the next 10 years relative to current law, which is roughly four times as much as the 28% limitation would raise. The CBO doesn\’t do a distributional analysis, but this change would only affect those who already itemize deductions, and would have by far its largest effect on those with higher incomes.

Of course, there are justifications for the existing tax deductions, and reasons and history behind the justifications, and interest groups behind it all. But in a situation where all the meaningful options for long-term deficit reduction are going to be painful in one way or another, limiting deductibility has some advantages. It would raise revenue from those with higher incomes without increasing the marginal income tax rates, or part of the revenue could even be used to reduce the top marginal rates. Limiting deductibility also reduces the role of the federal government in certain aspects of the economy like providing incentives for greater mortgage borrowing. It should be in the mix of possibilities.

For a related post several weeks ago, see \”Tax Expenditures: One Way Out of the Budget Morass.\”

August 30, 2011 conversableeconomist

Noriel Roubini (aka "Dr. Doom") on Exchange Rates, China, and U.S. Investment

Nouriel Roubini, sometimes nicknamed \”Dr. Doom,\” is interviewed by Tom Keene of Bloomberg News at the Milken Institute Global Conference in May. An edited and shortened transcript of the interview is available (with free registration) in the Milken Institute Review (Third Quarter, pp. 65-74). Or you can watch the interview here. Some snippets:

On currency adjustment:
\”Exchange rate determination is really a beauty contest about which currency is the “least ugly,” and this changes depending on relative growth concerns, fiscal policy, financial stability, sovereign debt, interest rate policies, etc. At the moment, all the major currencies have reasons to be weaker. The trouble is, not all currencies can be weak. The currencies that should be depreciating are those of the U.S., U.K. and other countries that went bust in the financial bubble, and now need export growth to make up for anemic domestic demand during the period of balance sheet retrenchment. … Countries running current account surpluses can keep on accumulating reserves, and thereby prevent the appreciation of their currencies. By contrast, countries with deficits eventually run out of foreign exchange reserves, or the bond vigilantes impose discipline. The one exception is the United States: because the dollar is the major reserve currency, we can run larger deficits for longer. If the
dollar didn’t have reserve status, it would have collapsed a long time ago.\”

On the need for rebalancing China\’s economy:
\”In China today, half of GDP is in the form of fixed investment, while consumption is only 35 percent – and falling. That is not sustainable because no country can productively invest half its GDP for very long. Historically, every case of over-investment – the Soviet Union, East Asia in the 90s – has ended in a hard landing.\”

On the more rapid economic recovery in Asia:
The recovery in the Asian emerging markets has been a “V” [rather than a “U”] because their financial fundamentals were much sounder and they don’t have balance sheet problems comparable to the U.S. and Europe. In some countries, though, that recovery’s now leading to overheating.
Are they in control of their own destiny? Not if China shadows the dollar and everybody else shadows China; they are effectively adopting U.S. monetary and credit policies. As a result, there’s been excessive money growth, excessive foreign exchange intervention. You’re seeing overheating in credit that is spilling out as price pressure in the equity, commodity and real estate markets. And
therefore Asia is in danger of both goods and asset inflation.\”

Why the U.S. needs a weaker dollar:
\”Tim Geithner and others say they’re in favor of a strong dollar. But we actually need a weaker dollar, maybe 15 percent on a trade-weighted basis. Think about it rationally. Because of the asset bubble collapse, domestic demand is going to be anemic. So in order to maintain growth even close to potential, we need to reduce our trade deficit. How do you reduce this trade deficit? We have to have more private and public savings – but that’s going to slow down domestic demand even more. Therefore we need a weaker exchange rate to gradually improve the trade balance.\”

On U.S. firms sitting on their cash:
\”While the balance sheets of government and financial institutions are damaged, the corporate sector is in excellent shape. Corporations have used the crisis to cut costs, especially labor costs. They’re highly profitable and productive: earnings are going to be surprising. They are sitting on $2 trillion in cash in the U.S. alone. But they are not spending it. And even if they start to spend, it’s not clear why they’d choose to invest in slow-growing advanced economies rather than fast-growing emerging markets. One reason they’re not spending more is excess capacity: roughly a quarter of industrial
capacity is currently not used. Why would you want to do a lot of investment where there is excess capacity?\”

August 29, 2011 conversableeconomist

The Coming Urban World

A standard pattern in economic growth is that a rise in per capita GDP is accompanied by a larger share of the population living in urban areas. Thomas Nechyba and Randall Walsh describe the U.S. experience in a Fall 2004 article on \”Urban Sprawl\” in my own Journal of Economic Perspectives: \”Only slightly more than 5 percent of the U.S. population lived in urban areas in 1790, a figure that had tripled by 1850 and surpassed 50 percent by 1920. By the 2000 Census, 79 percent of all Americans lived in areas designated as “urban” by the Census Bureau.

But the trend toward urbanization is international, as the UNFPA noted in its 2007 State of World Population report on the theme: \”Unleashing the Potential of Urban Growth.\” \”In 2008, the world reaches an invisible but momentous milestone: For the first time in history, more than half its human population, 3.3 billion people, will be living in urban areas.\”

The McKinsey Global Institute has published a couple of interesting reports on global urbanization recent months. \”Urban world: Mapping the economic power of cities,\” came out in March 2011.
\”Half of the world’s population already lives in cities, generating more than 80 percent of global GDP today. But the urban economic story is even more concentrated than this suggests. Only 600 urban centers, with a fifth of the world’s population, generate 60 percent of global GDP. In 2025, we still expect 600 cities to account for about 60 percent of worldwide GDP—but the cities won’t be
the same. … Today, major urban areas in developed regions are, without doubt, economic giants.
The 380 developed region cities in the top 600 by GDP accounted for 50 percent of global GDP in 2007, with more than 20 percent of global GDP coming from 190 North American cities alone. … Over the next 15 years, the makeup of the group of top 600 cities will change as the center of gravity of the urban world moves south and, even more decisively, east. … By 2025, we expect 136 new cities to enter the top 600, all of them from the developing world and overwhelmingly (100 new cities) from China. These include cities such as Haerbin, Shantou, and Guiyang. But China is not the only economy to contribute to the shifting urban landscape. India will contribute 13 newcomers including Hyderabad and Surat. Latin America will be the source of eight cities that include
Cancún and Barranquilla.\”

Here are predictions from McKinsey on the world\’s top 25 cities in 2025, ranked by GDP, per capita GDP, GDP growth, and Total population. Cities in blue are in the developing world, and they dominate the last two columns.

Cities in economic terms are bundles of economies of scale and agglomeration. For example, cities can act as a hub for economies of scale in production and lower transportation costs. They can provide a density of potential workers, employers, and customers, in a way that reduces risk for all parties and enables a greater division of labor. They can facilitate spillovers of information and skills, and serve as a breeding ground for entrepreneurship. However, the power of scale and agglomeration have a negative side, as well. The cost of living and especially housing is typically higher in cities. Agglomeration can lead to pollution and stress on infrastructure, including congested transportation facilities and issues in providing water and electricity. Urban networking can can also facilitate criminal activity. Cities often create extremes of wealth and poverty rubbing shoulders, which can create political and social stresses. (For an exposition of cities along these lines, see Edward L. Glaeser\’s article \”Are Cities Dying\” in the Spring 1998 issue of the Journal of Economic Perspectives, which is too far back to be freely available on-line, but can be downloaded if you have access to JSTOR).

The McKinsey Global Institute makes this point as well: \”As urban centers grow, they benefit from agglomeration—or economies of scale—that enable many industries and service sectors to have higher productivity than they do in a rural setting. It is also much less expensive to provide goods and services in concentrated population centers. Our research indicates that the cost of delivering basic services such as water, housing, and education is 30 to 50 percent cheaper in concentrated population centers than it is in sparsely populated areas. Very large cities attract the most talent and inward investment, and they are often at the center of a cluster of smaller cities, which creates network effects that spur economic growth and productivity.\”

But as McKinsey also argues that while huge cities are engines of economic growth, they can become so large that their diseconomies begin to slow them down. The largest future growth may not be in the largest cities: \”Contrary to common perception, megacities have not been driving global growth for the past 15 years. In fact, many have not grown faster than their host economies, and we expect this trend to continue. We estimate that today’s 23 megacities will contribute just over 10 percent of global growth to 2025, below their 14 percent share of global GDP today. Instead, we see the 577 fast-growing middleweights in the City 600 contributing half of global growth to 2025, gaining share from today’s megacities.\”

The McKinsey Global Institute has takes up these issues of how the cities can contribute to growth, but also how the size of cities can limit their growth, in a series of reports, including a February 2009 report on cities in China, and an April 2010 report on urbanization in India.
The latest report on this subject from August 2011 discusses: \”Building globally competitive cities: The key to Latin American growth.\” A few snippets from the report:

\”Cities are critical to Latin America’s overall economy. The region’s 198 large cities—defined as having populations of 200,000 or more—together contribute over 60 percent of GDP today. The ten largest cities alone generate half of that output. Such a concentration of urban economic activity among the largest cities is comparable with the picture in the United States and Western Europe today but is much more concentrated than in any other emerging region. China’s top ten cities, for instance, contribute around 20 percent of the nation’s GDP.\”
\”Yet Latin America has already won a large share of the easy gains that come from expanding urban populations. Today, many of Latin America’s largest cities are grappling with traffic gridlock, housing shortages, and pollution, all symptoms of diseconomies of scale. For the region’s largest cities to sustain their growth, they need to be able to address challenges not only to their economic performance but also to the quality of life experienced by their citizens, sustainable resource use, and the strength of their finances and governance.\”
\”Between 2007 and 2025, we expect the region’s top ten cities to display below-average growth in both population and GDP, while the rest of Latin America’s large cities are likely to expand their populations at an above-average rate. These cities are projected to generate almost 40 percent of the region’s overall growth between 2007 and 2025, almost 1.5 times the growth the top ten cities are expected to generate. What accounts for this shift in the balance of economic power? In Latin America’s largest cities, signs of diseconomies of scale such as congestion and pollution have started to outweigh scale benefits, diminishing the quality of life they can offer citizens and sapping their economic dynamism. At the same time, economic liberalization across the region has reversed the centralizing bias that concentrated economic activity in the largest cities. The more decentralized economic approach has given middleweight cities a boost. These medium-sized urban centers lag behind larger cities in their per capita GDP today, but many have not yet run into the diseconomies of scale faced by larger cities.\”

August 26, 2011 conversableeconomist

Sky-High Textbook Prices–And My Suggested Solution for Intro Economics

High textbook prices are modest problem in the context of soaring costs of higher education, but many of the costs of tuition and room and board are more-or-less concealed from many students, while textbook costs are in their faces and their pocketbooks. According to a recent short story in the Chronicle of Higher Education, 7 in 10 Students Have Skipped Buying a Textbook Because of Its Cost, Survey Finds.\” The article refers to a survey done by the U.S. Public Interest Research Group of 1,905 students at a range of 13 campuses. \”Separate analyses from the U.S. Public Interest Research Group have found that textbook costs are typically comparable to 26 percent of tuition at state universities and 72 percent of tuition at community colleges.\”

This evidence basically confirms what has been found by other groups. Back in May 2007, the Advisory Committee on Student Financial Assistance, which produces reports for the U.S. Department of Education, published “Turn the Page: Making College Textbooks More Affordable.” Some comments from that report:

“Annual per student expenditures on textbooks can easily approach $700 to $1,000 today.\”
\”Nearly all the components of college expenses outpaced the CPI from 1987 to 2004 for both two-year and four-year public colleges.. . . Textbook expenses rose far more rapidly than the prices of other commodities nationwide: 107% at two-year public colleges and 109% at four-year public colleges, compared to 65% for the CPI.”
“Even after accounting for total grant aid, textbooks and other learning materials appear to be unaffordable for students from low- and moderate-income families at both two- and four-year public colleges.”
“Students today see the traditional textbook for many undergraduate courses as a disposable resource, not a long-term reference book, in part because frequent edition updates can render it obsolete quickly, and the digital era has changed attitudes toward the nature of printed material.”

In July 2005, the GAO published a report called College Textbooks: Enhanced Offerings Appear to Drive Recent Price Increases\” (GAO-05-806). Some comments from the report:

“Increasing at an average of 6 percent per year, textbook prices nearly tripled from December 1986 to December 2004, while tuition and fees increased by 240 percent and overall inflation was 72 percent.\”
\”While many factors affect textbook pricing, the increasing costs associated with developing products designed to accompany textbooks, such as CD-ROMs and other instructional supplements, best explain price increases in recent years.\”
\”U.S. college textbook prices may exceed prices in other countries because prices reflect market conditions found in each country, such as the willingness and ability of students to purchase the textbook.\”

Economics textbooks are not exempt from these trends, of course. Take a look at prices for the best-selling and best-known introductory economics textbooks. A copy of the full-year, micro and macro version will typically list at more than $200, although students can often get discounted copies at sellers like Amazon.com for about $170-$180.

My solution is my own introductory textbook, \”Principles of Economics.\” The second edition of this text is out this fall through Textbook Media, Inc. The pricing works this way: $17 for access to an online e-textbook which has search, notes, and chat options, but that can\’t be printed; $22 for the e-textbook along with the ability to print out PDF files of the chapters; and $33 for the e-textbook along with a black-and-white printed softcover version of the book. Textbook Media is a small company. It has no sales force to knock on the doors of professors and take them to lunch. It sponsors no junkets. The book is printed in black and white. But it does have e-textbook functionality, a workbook of problems and answers, a test bank, and some other add-ons. If you want a micro or a macro split, they are available. Of course, I think the content and exposition of the book is excellent on its own merits. But given the issue of soaring textbook prices, the price alone should make it worth a look.

ADDED: Arnold Kling at Econlog responds with a tough-minded comment about college faculty in a post titled \”But Why Would Greg Mankiw Adopt?\”: \”I can see why students would have an incentive to adopt a cheaper textbook. But professors, and particularly professors who author competing textbooks, have no such incentive. And they are the ones who drive adoption.\”

August 25, 2011 conversableeconomist

Unrequited Economic Optimism from the Congressional Budget Office?

The Congressional Budget Office has just published its August 2011 \”The Budget and Economic Outlook: An Update.\” Although the language of the report is concise and unemotional, many elements of the report seem to me to carry a message that the worst of our economic travails are over. However, the report also points out that its economic forecasting and analysis was completed in early July, and the economy has had some worse-than-expected news since then. Here, I\’ll start with optimism, and then finish with the more grim recent economic news.

What about housing prices?
The CBO believes that the bursting bubble of housing prices has just about run its course. This figure shows two housing price series: Federal Housing Finance Agency and the Standard & Poor\’s/Case-Shiller index. As CBO explains: \”The FHFA index covers only homes financed using mortgages that have been purchased or securitized by Fannie Mae or Freddie Mac. TheS&P/Case-Shiller index also includes sales financed with mortgages that do not conform to the size or credit criteria for purchase by Fannie Mae or Freddie Mac.\” But the CBO is predicting that for the country as a whole, housing prices are soon going to start rising again.

What about employment?
The good news here is that the bad news is diminishing. The first figure shows the ratio of unemployed people to job openings. After the 2001 recession, the ratio of unemployed to job openings rose to almost 3:1, before falling back to 1.5:1 in about 2007. Then during the recession, the ratio took off and reached almost 7:1, before now falling to about 4.5:1. The second figure shows net job gains in recent months, which aren\’t large, but are better than a sharp stick in the eye. The third figure shows that the unemployment rate peaked at 10.1% in November 2009, but was down to 9.1% by July 2011. The CBO projections are for the unemployment rate to fall modestly to 8.5% by fourth quarter 2012, and then to fall more rapidly.

What about business investment?
Much of business investment just replaces worn-out capital. Net investment takes total investment and subtracts out the depreciation of existing capital, so that it is only looking at the addition to the capital stock. During the recession, many firms were postponing this new investment, but the CBO predicts that a bounceback is near.

What about real GDP?
I quote: \”For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy’s actual and
potential output) by 2017.\” As with the unemployment rate, the forecast here is for modestly good news in 2012, followed by much better news in 2013 and after.

Is all this too optimistic?
The CBO makes a point of emphasizing that its economic forecasts were completed in early July. Since then, the European debt crisis has exploded, the federal government seemed unable to grapple seriously with debt issues and raising the debt ceiling, the stock market fell, economic statistics were released suggesting that the recession was deeper than previously believed, and more. Some of the figures above have little break in the line between present data and the forecast: the forecasts are based on the earlier uncorrected data, which after revision was worse than previously known.

At least for me, it\’s a natural reaction to look at these CBO forecasts that economic turnaround and catch-up are around the corner and roll my eyes in disbelief. Pessimism seems so worldly-wise; optimism seems so naive. But if the CBO is correct, whoever is elected president in 2012 is going to look like a miracle worker for the economy–mainly because by 2013 the U.S. economy will finally be escaping the sluggishness of the Long Slump and experiencing a robust economic recovery.

August 24, 2011 conversableeconomist

Less Migration Within the United States

Raven Molloy, Christopher L. Smith, and Abigail Wozniak discuss \”Internal Migration in the United States\” in the Summer 2011 issue of my own Journal of Economic Perspectives. They begin (parenthetical citations omitted throughout:

\”The notion that one can pick up and move to a location that promises better opportunities has long been an important part of the American mystique. Examples abound, including settlers making the leap over the Appalachians prior to the Revolutionary War; the nineteenth century advice to “Go west, young man, go west” often attributed to newspaper editor Horace Greeley; John Steinbeck’s tale of the Joad family heading west in the 1930s to escape the Dust Bowl in The Grapes of Wrath; and the mid twentieth-century Great Black Migration northward out of the poverty of sharecropping and low-wage labor in the South. Indeed, it is widely believed that internal migration rates in the United States—that is, population flows between regions, states, or cities within a country—are higher than in other countries. This belief is not exactly wrong, but reality is more complex. For example, the Dust Bowl migrants of the 1930s were not representative of their time, but rather were an exceptional case during a period of markedly low internal migration. While the United States has historically had one of the highest rates of internal migration in the world by many measures, citizens of some other countries—including Finland, Denmark, and Great Britain—appear equally mobile. Moreover, internal U.S. migration seems to have reached an inflection point around 1980. As shown in Figure 1, the share of the population that had migrated between states trended higher during much of the twentieth century, with the exception of the Great Depression. However, migration rates have been falling in the past several decades, calling into question the extent to which high rates of geographic mobility are still
a distinguishing characteristic of the U.S. economy.\”

Molloy, Smith and Wozniak offer evidence that the decline in U.S. mobility is a very broad-based–and not a trend that has been made notably worse by the recent woes in the U.S. economy and housing market. They write: \”By most measures, internal migration in the United States is at a 30-year low. Migration rates have fallen for most distances, demographic and socioeconomic groups, and geographic areas. The widespread nature of the decrease suggests that the drop in mobility is not related to demographics, income, employment, labor force participation, or homeownership. Moreover, three consecutive decades of declining migration rates is historically unprecedented in the available data series. The downward trend appears to have begun around the 1980s, pointing to explanations that should be relevant to the entire period, rather than specific to the current recession and recovery—that is, the decline in migration is not a particular feature of the past five years, but has been relatively steady since the 1980s.\”

They also offer some international comparisons. They write: \”Overall, the secular decline in geographic mobility appears to be specific to the U.S. experience, since internal mobility has neither fallen in most other European economies nor in Canada—with the United Kingdom as a notable exception.\” But while the most other countries have not been experiencing a decline in mobility, mobility levels in the U.S. continue to be higher than in most places. Here\’s an illustrative figure:

August 23, 2011 conversableeconomist

Peter Rossi\’s Metallic Laws of Policy Evaluation

In an article by Jens Ludwig, Jeffrey R. Kling and Sendhil Mullainathan in the Summer 2011 issue of my own Journal of Economic Perspectives, called \”Mechanism Experiments and Policy Evaluations,\” they introduced me to the \”metallic rules\” of the eminent sociologist Peter H. Rossi. The rules come from Rossi\’s 1987 article,“The Iron Law of Evaluation and Other Metallic Rules,” Research in Social Problems and Public Policy, vol. 4, pp. 3–20. The article is pre-web, and the publication is not easily available, but David Roodman at the Center for Global Development tracked down the article a couple of years ago, and posted an excerpt summarizing the rules on his Microfinance Open Book Blog. Rossi died in 2006; a brief obituary and some remembrances from colleagues are available at the website of the American Sociological Association.

Here are Peter Rossi\’s \”metallic rules\” of policy evaluation from his 1987 article:

A dramatic but slightly overdrawn view of two decades of evaluation efforts can be stated as a set of “laws,” each summarizing some strong tendency that can be discerned in that body of materials. Following a 19th Century practice that has fallen into disuse in social science, these laws are named after substances of varying durability, roughly indexing each law’s robustness.

The Iron Law of Evaluation: The expected value of any net impact assessment of any large scale social program is zero.
The Iron Law arises from the experience that few impact assessments of large scale social programs have found that the programs in question had any net impact. The law also means that, based on the evaluation efforts of the last twenty years, the best a priori estimate of the net impact assessment of any program is zero, i.e., that the program will have no effect.

The Stainless Steel Law of Evaluation: The better designed the impact assessment of a social program, the more likely is the resulting estimate of net impact to be zero.
This law means that the more technically rigorous the net impact assessment, the more likely are its results to be zero—or no effect. Specifically, this law implies that estimating net impacts through randomized controlled experiments, the avowedly best approach to estimating net impacts, is more likely to show zero effects than other less rigorous approaches.

The Brass Law of Evaluation: The more social programs are designed to change individuals, the more likely the net impact of the program will be zero.
This law means that social programs designed to rehabilitate individuals by changing them in some way or another are more likely to fail. The Brass Law may appear to be redundant since all programs, including those designed to deal with individuals, are covered by the Iron Law. This redundancy is intended to emphasize the especially difficult task faced in designing and implementing effective programs that are designed to rehabilitate individuals.

The Zinc Law of Evaluation: Only those programs that are likely to fail are evaluated.
Of the several metallic laws of evaluation, the zinc law has the most optimistic slant since it implies that there are effective programs but that such effective programs are never evaluated. It also implies that if a social program is effective, that characteristic is obvious enough and hence policy makers and others who sponsor and fund evaluations decide against evaluation.

August 23, 2011 conversableeconomist

Prenatal Inequality

Douglas Almond and Janet Currie discuss \”Killing Me Softly: The Fetal Origins Hypothesis,\” in the Summer 2011 issue of my own Journal of Economic Perspectives. They begin (parenthetical citations deleted throughout):

In the late 1950s, epidemiologists believed that a fetus was a “perfect parasite” that was “afforded protection from nutritional damage that might be inflicted on the mother.” The placenta was regarded as a “perfect filter, protecting the fetus from harmful substances in the mother’s body and letting through helpful ones.” Nonchalance existed with regard to prenatal nutrition. During the 1950s and 1960s, women were strongly advised against gaining too much weight during pregnancy. During the baby boom, “pregnant women were told it was fine to light up a cigarette and knock back a few drinks.” Roughly half of U.S. mothers reported smoking in pregnancy in 1960.

But what if the nine months in utero are one of the most critical periods in a person’s life, shaping future abilities and health trajectories—and thereby the likely path of earnings? This paper reviews the growing literature on the so-called “fetal origins” hypothesis. The most famous proponent of this hypothesis is David J. Barker, a British physician and epidemiologist, who has argued that the intrauterine environment—and nutrition in particular—“programs” the fetus to have particular metabolic characteristics, which can lead to future disease.\”

Almond and Currie offer a thoughtful overview of the evidence that a wide array of environmental factors may have long-run effects not only on health, but also on economic outcomes like wages. These environmental factors that can affect fetal development include both extreme situations like famine, but also milder environmental factors like infectious diseases, exposure to pollution, maternal diet, and even severe weather during a pregnancy. Thinking through what constitutes cause-and-effect evidence for these issues often involves a search for a natural experiment. Two of the points they make about the implications of their argument as a whole, several points struck me with particular force:

1) There\’s a long-standing argument in the social sciences about nature vs. nurture, but arguments over genetic influence are getting a lot more complex these days than what I learned back in grade-school about Gregor Mendel and his pea plants. The current subject of epigenetics explores how the same genes can lead to different characteristics. As Almond and Currie write in this context about fetal effects: \”[T]he hypothesized effects reflfl ect a specific biological mechanism, fetal “programming,” possibly through effects of the environment on the epigenome, which are just beginning to be understood. The epigenome can be conceived of as a series of switches that cause various parts of the genome to be expressed—or not. The period in utero may be particularly important for setting these switches.\”

2) While this literature is still young and growing, it could turn out to be true that one of the most important ways to help children is to help their pregnant mothers. Almond and Currie write: \”[O]ne of the most radical implications of the fetal origins hypothesis may be that one can best help children (throughout their life course) by helping their mothers. That is, we should be focusing on pregnant women or perhaps even women of child-bearing age if the key period turns out to be so early in pregnancy that many women are unaware of the pregnancy. Such pre-emptive targeting would constitute a radical departure from current policies that steer nearly all healthcare resources to the sick, i.e., the “pound of cure” approach. That said, the existing evidence is not sufficient to allow us to rank the cost-effectiveness of interventions targeted at women against more traditional interventions targeted at children, adolescents, or adults.\”

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August 22, 2011 conversableeconomist

Gains from Emigration

Much of the literature on international migration takes the perspective of the receiving county: for example, how might immigrants into the United States be affecting wages for U.S. citizens or government budgets. The Summer 2011 issue of my own Journal of Economic Perspectives has a three-paper symposium on emigration–that is, looking at international migration from the perspective of the migrants themselves and the sending countries. Here are some highlights:

1) Allowing much higher levels of international migration could provide gains to the migrants themselves that are enormous relative to size of world GDP. Michael A. Clemens offers a striking back-of-the-envelope calculation in \”Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?\” Clemens writes:

\”Divide the world into a “rich” region, where one billion people earn $30,000 per year, and a “poor” region, where six billion earn $5,000 per year. Suppose emigrants from the poor region have lower productivity, so each gains just 60 percent of the simple earnings gap upon emigrating—that is, $15,000 per year. This marginal gain shrinks as emigration proceeds, so suppose that the average gain is just $7,500 per year. If half the population of the poor region emigrates, migrants would gain $23 trillion—which is 38 percent of global GDP. For nonmigrants, the outcome of such a wave of migration would have complicated effects: presumably, average wages would rise in the poor region and fall in the rich region, while returns to capital rise in the rich region and fall in the poor region. The net effect of these other changes could theoretically be negative, zero, or positive. But when combining these factors with the gains to migrants, we might plausibly imagine overall gains of 20–60 percent of global GDP.\”

Of course, Clemens goes into considerably more depth in the article, and argues that gains of this magnitude are plausible given the studies that have been done and the current state of knowledge of this area. I would emphasize further that many studies of migration look either at effects on those in the receiving country, or on those in the sending country, but somehow seem to leave out the gains to the migrants themselves–which may well be the dominant part of a broad social welfare calculation.

2) Remittances sent back to their country of origin by migrants now top$300 billion per year. Dean Yang discusses this point in \”Migrant Remittances,\” along with going into more detail on why remittances are sent and how they are used. Yang offers this striking figure comparing the level of remittances over time to official development assistance, foreign direct investment, and portfolio investment. He writes: \”But since the late 1990s, remittances sent home by international migrants have exceeded offifi cial development assistance and portfolio investment, and in several years have approached the magnitudes of foreign direct investment flows.\”

Yang also provides a table showing which countries depend most heavily on remittances, including 22 countries where remittances are more than 10% of GDP.

3) Brain-drain is a beg-the-question label for a phenomenon whose importance has not been demonstrated. One common concern about rising global migration is whether it will impoverish sending countries through loss of skilled labor. John Gibson and David McKenzie tackle this question in \”Eight Questions about Brain Drain.\” They write:

The term “brain drain” dominates popular discourse on high-skilled migration, and for this reason, we use it in this article. However, as Harry Johnson (1965, p. 299) noted, the term brain drain “is obviously a loaded phrase, involving implicit definitions of economic and social welfare, and implicit assertions about facts. This
is because the term ‘drain’ conveys a strong implication of serious loss.” It is far from clear such a loss actually occurs in practice; indeed, there is an increasing recognition of the possible benefits that skilled migration can offer both for migrants and for sending countries. Thus, Prime Minister Manhoman Singh of India recently said: “Today we in India are experiencing the benefifi ts of the reverse flow of income,
investment and expertise from the global Indian diaspora. The problem of ‘brain drain’ has been converted happily into the opportunity of ‘brain gain’ …\”

Also, I hadn\’t known: \”The term “brain drain” was coined by the British Royal Society to refer to the
exodus of scientists and technologists from the United Kingdom to the United States
and Canada in the 1950s and 1960s.\”

August 19, 2011 conversableeconomist

Summer 2011 Journal of Economic Perspectives

I\’m the managing editor of the Journal of Economic Perspectives, published by the American Economic Association. It\’s an academic journal, but it\’s meant to be a journal that\’s readable by those who have some background in economics–like those who took several undergraduate courses in college in the subject. The AEA makes all of the articles the journal freely available on-line to all, and the Summer 2011 issue is now available.

I\’ll comment on the specifics of some of these articles over the next week or so, but here\’s the table of contents for the issue. Again, all of these articles are available on-line at the JEP website.

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Symposium: Field Experiments

“Why Economists Should Conduct Field Experiments and 14 Tips for Pulling One Off,” by John A. List

“Mechanism Experiments and Policy Evaluations,” by Jens Ludwig, Jeffrey R. Kling and Sendhil Mullainathan

“The Role of Theory in Field Experiments,” by David Card, Stefano DellaVigna and Ulrike Malmendier

“Field Experiments with Firms,” by Oriana Bandiera, Iwan Barankay and Imran Rasul

Symposium: Emigration

“Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” by Michael A. Clemens

“Eight Questions about Brain Drain,” by John Gibson and David McKenzie

“ Migrant Remittances,” by Dean Yang