conversableeconomist

The Middle East: Slow Growth and Stagnant Job Creation

For a summit of the Group of Eight on May 27, 2011, the staff of the IMF produced a useful memo on the economies of the Middle East and North Africa (MENA) region: \”Economic Transformation in MENA: Delivering on the Promise of Shared Prosperity.\” The fundamental issue for the region, as I see it, is that unemployment rates are very high and economic growth rates are low. Moreover, the region barely participates in the global economy, other than oil, and has a poor climate for starting businesses. So it\’s not clear where future growth in jobs will come from. Here are figures to illustrate these themes:

Per capita economic growth has been slow in this region from 1980 to 2010, compared to Asia, Latin America, and even Africa.

Unemployment is a severe problem for countries in this region. Overall unemployment rates are often in the range of 10-15%. Youth unemployment rates often exceed 20%.

 
Other than oil, this region participates little in globalization. The top lines show non-oil export as a share of world exports for emerging Asia and for all emerging and developing economies. The bottom line, down around 1-2%, is the share of non-oil world exports for the Middle East and North Africa region.

The business climate for the Middle East and North Africa region isn\’t strong. In this \”spider web\” diagram, each of the labels around the outside shows a measure of  how easy it is to do business in an area, based on World Bank data. The countries of the world are ranked on these criteria, and lower rankings are better. The dashed line shows the average country ranking for emerging Asia on these measures; the dark blue line shows the average ranking for oil importing countries in the Middle East and North Africa.

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Accountable Care Organizations

Accountable care organizations are one of the hot ideas for holding down health care costs; they are an attempt to find a middle way between the problems of fee-for-service and the problems of capitated insurance plans like health maintenance organizations.

A problem with fee-for-service, of course, is that it reduces the incentives to hold down costs when providing or consuming health care services. A problem with a capitated plan, which pays a fixed amount per patient, is that it provides too much incentive to hold down on costs by delaying or denying health care. The idea of an accountable care organization is that it receives a fixed payment per person, but it is also evaluated on the basis of many criteria for the delivery of high-quality care: that is,  measures like how many people get appropriate preventive care services, whether chronic conditions are treated in ways that avoid unneeded hospitalization, whether various protocols are follows in dealing with certain conditions, and the like. These measures of the quality of care should help to reduce the concern that health care will be delayed or underprovided. In addition, Accountable care organizations that perform well on these measurements can receive bonus payments–which they can use to fund programs that encourage health and wellness behavior that help to meet these goals, but are not the kinds of programs for which a health care provider can usually gain reimbursement.

For an overview of the movement toward developing measures of the quality of health care, and how these might be used by accountable care organizations, one useful starting point is an article in the Spring 2011 issue of my own Journal of Economic Perspectives by Mark McClellan:  Reforming Payments to Healthcare Providers: The Key to Slowing Healthcare Cost Growth While Improving Quality? \”

For a skeptical view of accountable care organizations, one starting place would be a recent blog by  Robert Samuelson, the always-lucid Washington Post economics columnist. He writes: \”Participation in the program may be modest, and savings are likely to be minuscule. ACOs make for good press releases and bad public policy. They give the impression that the administration is “doing something” about health spending when it isn’t.\” For another skeptical view, a doctor named Scott Gottlieb, writes \”Accountable Care Organizations: The End of Innovation in Medicine?\” He argues that similar arrangements have not controlled costs in the past, and are unlikely to be a source of innovations in health care.
 

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Setting up a discussion of the Obama stimulus package

Last week I gave a talk to an alumni group here at Macalester College about budget deficits in the short run and in the long run. For the short-run portion of this talk, I set up my discussion with two figures. I reproduce them here, in part for those who would like to cut-and-paste a copy for their own presentations.

The first figure shows three paths for the unemployment rate. The middle line shows the path for the unemployment rate presented by Christina Romer, head of President Obama\’s Council of Economic Advisers, in January 2009–more specifically, it\’s actual data up though 2008, and then a forecast after that date. The bottom line shows Romer\’s prediction that the unemployment rate would be lower if the \”stimulus package\” legislation — the American Recovery and Reinvestment Act of 2009– was enacted. The top line shows the actual path of the unemployment rate. This version of the figure appears in \”Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act,\” by James Feyrer and Bruce Sacerdote, NBER Working Paper 16759, February 2011.   

Of course, this figure is often used to argue that the stimulus didn\’t work. But of course, it is equally possible that the January 2009 forecast was too optimistic, and that the stimulus made the unemployment rate lower than it would otherwise have been. 
The Congressional Budget Office publishes regular estimates of the effects of the ARRA legislation. The May 2011 report, for example, states that the legislation: 

— Lowered the unemployment rate by between 0.6 percentage points and 1.8 percentage points,
— Increased the number of people employed by between 1.2 million and 3.3 million, and
— Increased the number of full-time-equivalent jobs by 1.6 million to 4.6 million compared with what would have occurred otherwise …

Here\’s a useful CBO figure for illustrating their case that the stimulus improved matters.
With these two figures to set up the discussion, one can then talk about what makes a stimulus package more or less effective in a variety of contexts. Is it timely, temporary and targeted? What about factors like the pre-existing level of debt, the extent to which the economy is open to international trade, the response of monetary authorities, and other factors?

In their NBER paper, Fehrer and Sacerdote summarize some of the conflicting evidence about the effects of the stimulus. Their own findings, as summarized in the abstracts are: \”A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration. However, the overall results mask considerable variation for different types of spending. Grants to states for education do not appear to have created any additional jobs. Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000.\”

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Green Energy is not Growth Energy

Last week Germany announced that it would phase out its nuclear power plants over the next decade or so, and instead substitute green energy sources like wind and solar. I blogged that government support for green energy may be justifiable on environmental grounds, or perhaps on ground of making the a country less dependent on imported energy. However, green energy is likely to cost more as fossil fuel–or at best, cost the same–and that isn\’t going to boost the economy as a whole. Here is some other commentary I\’ve seen in the last week or so related to these issues.

1) At the Technology Review website, Peter Fairley discusses how the policy, if implemented, can lead to higher energy costs and even blackouts in the short term. In the longer term, a Germany that relies less on nuclear power may well end up burning more coal.

2) The Washington Post editorialized on \”Germany\’s nuclear energy blunder,\” pointing out that if implemented, Germany will probably end importing more electricity–much of it produced by burning fossil fuels.

3) Via Clive Crook\’s blog at The Atlantic, I found a couple of sets of quick estimates of how unlikely it is that Germany can find enough wind and solar power to substitute for its electricity generation, and thus how phasing out nuclear energy will lead to higher carbon emissions: one set of number is the Breakthrough Institute, the other from Roger Pielke.

4) Finally, for a misguided argument along the German lines, the June 19 issue New Republic carries a leader called \”Waste of Energy\” (available by subscription only) lamenting that President Obama had deserted the agenda he laid out in February 2009 to wean the U.S. off of fossil fuels. They write: \”From the day he took office, Barack Obama had a unified theory of how the United States could recover and prosper. At the center of his plan–which he voiced in an address to a joint session of Congress in February 2009–was the need to reduce the use of carbon-based fuels …\” The editors at TNR argue that this is a recipe both for environmental gains, which is plausible enough, and also for economic gains, which is not plausible. Indeed,
the TNR editors argue, quite remarkably, that moving away from carbon-based energy is \”the most convincing framework for ensuring America\’s future prosperity.\”

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The Miles-per-Gallon Fallacy

 Here\’s a gentle brain-twister: 
Person A upgrades their car from one that gets 11 MPG to one that gets 13 MPG. 
Person B upgrades their car from one that gets 29 MPG to one that gets 49 MPG. 

Who saves more on gas?
A and B would actually save the same amount. Here\’s the explanation from Hunt Allcott in the May 2011 issue of the American Economic Review (p. 98). 
As an example, consider two pairs of vehicles. The first pair is two vans, one rated at 11 MPG and the other at 13 MPG, and the second pair is two cars rated at 29 and 49 MPG. Many people intuitively believe that conditional on gas price and miles driven, the difference in fuel costs between the second pair is much larger, because the difference in MPG is much larger. In fact, the fuel cost differences are almost exactly the same: the difference between each pair of vehicles in gallons of gasoline consumed per mile driven is 0.014. Interestingly, if this misperception has any magnitude outside of the laboratory, it would make us more likely to buy a Hummer and more likely to buy a Prius, while making us less likely to buy a medium-MPG car. This is because it causes us to underestimate the relative costs of the lowest-MPG vehicles and overestimate the relative savings of the highest-MPG vehicles.

In short, when it comes to making cars more fuel-efficient, what might look like modest MPG gains for the lowest-MPG vehicles actually matter quite a bit more than whether someone who is already in a high-MPG vehicle makes additional gains.

And maybe some smart marketing person or heads-up government regulator should be figuring out a way for car buyers to learn about how many gallons it takes to travel a mile–or 100 miles?–not how many miles to a gallon.

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Does federal regulation impose costs of $1.75 trillion per year?

Last week, Cass Sunstein–a Chicago law professor and economist released a plan for regulatory reform.  Commentary on the proposals sometimes mentioned that the reforms were small in size, because federal regulations impose a cost of $1.75 trillion on the U.S. economy. As best as I can tell, that number comes from a study done under contract for the Small Business Administration by  Nicole V. Crain and W. Mark Crain, two economists from Lafayette College. Here, I ask two overall questions about that interpreting that estimate. 1) How much can this estimate of the costs of federal regulation be trusted? 2) Even if the estimate is true, what about potential benefits of regulation?

 1) How much can this estimate of the costs of federal regulation  be trusted? 

An estimated cost of $1.75 trillion is certainly large. Is its size plausible? As you would expect, the authors break down their estimates into some major categories, which looks like this:

I\’m not familiar with all the underlying sources here, but the environmental and tax compliance numbers are roughly in line with other estimates I\’ve seen. But the single largest factor here is the economic cost, which is determined by an \”original regression analysis using World Bank Regulatory Quality Index.\” The Regulatory Quality index is one part of the World Bank\’s overall Worldwide Governance Indicators. As researchers who help to put together this data point out, it is based on survey evidence of from a mixture of commercial business information providers, public sector organizations, nongovernment organizations, and firms and households.

The key regression uses data on 25 OECD countries from 2002 to 2008. It uses per capita GDP as the dependent variable. The Regulatory Index for that country is one explanatory variable. Other control variables are foreign trade as a share of GDP, country population, primary school enrollment as a share of the eligible population, and fixed broadband subscribers per 100 people. Crain and Crain choose a \”minimal\” level of regulation, look at how far the U.S. is above that level, and then use the estimated coefficient to project how much U.S. per capita GDP is reduced by having that higher level of regulation.

As Crain and Crain point out, this broad approach is not new to them: other academic studies have used indexes of regulatory quality from the World Bank, OECD, and other sources. The Office of Management and Budget has experimented with a similar approach in the past. I\’m not aware of any efforts to build up estimates of economic costs of regulation one regulatory agency and one main law at a time. But this regression approach is clearly open to a lot of questions. Cross-country regressions are notorious for having a hard time getting at cause and effect. How much does one trust a result based on seven years of data on perceptions of regulation? As the authors point out, they did a similar study back in 2005 using OECD survey data on regulation, and comparing that study with this one implies that the cost of U.S. regulation rose 70% from 2004 to 2008!

Overall, I wouldn\’t be shocked if the economic costs  of regulation are large. But I lack confidence in this specific estimate.

2) What about benefits of regulation?

Even if the $1.75 trillion in costs of federal regulation is accurate, it would not address whether those regulations have benefits that might exceed their costs. I don\’t know of overall evidence on this point (which is more than a little bothersome!), but in the Spring 2002 issue of my own Journal of Economic Perspectives, A. Myrick Freeman III of Bowdoin College wrote on \”Environmental Policy Since Earth Day I: What Have We Gained?\”

Freeman emphasizes that some environmental regulations are cost effective, and others not so much. He writes: 

\”Among the winners in terms of net economic benefits are the following: the removal of lead from gasoline; controlling particulate matter air pollution; reducing the concentration of lead in drinking water under the Safe Drinking Water Act; the setting of maximum allowable concentrations on some volatile organic compounds under the Safe Drinking Water Act; the cleanup of those hazardous waste sites with the lowest cost per cancer case avoided under Superfund; and probably also the control of emissions of chlorofluorocarbons. … The environmental rules that appear to be losers in terms of net economic benefits include the following: mobile source air pollution control; much of the control of discharges into the nation’s waterways, with the exception of some lakes and rivers that were especially polluted; and many of the regulations, standards and cleanup decisions taken under the Federal Insecticide, Fungicide and Rodenticide Act, the Toxic Substances Control Act, the Safe Drinking Water Act and Superfund.\”

It\’s bothersome but true that many government regulations have not received dispassionate cost-benefit analysis. My guess is that such analysis would encourage more regulation in some areas, where benefits are far in excess of costs, and less regulation in others. The goal should be to get more bang for the bucks spent on regulatory costs. For example, if it is costing corporations $100 billion a year to fill out tax forms, it\’s worth asking whether there are win-win ways to change the tax code so that corporations spend less and the federal government collects more.

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Social Security turns an uncomfortable corner

Discussions of Social Security often focus on the a year like 2038, when the mid-range forecast of the Social Security actuaries says that the trust fund will be emptied. But in this year, 2011, Social Security has turned an uncomfortable corner.

The figure, taken from the annual report of the Social Security actuaries released in May 2011, tells the story.  Up until 2011, the \”non-interest income\” for the Social Security trust fund–which basically means payroll taxes–exceeded the costs of the system. Under the rules of federal budget accounting, Social Security was providing extra funds that could be used to purchase Treasury bonds, and thus reduced the amount size of the budget deficit that needed to be financed by borrowing from the public.After 2011, however, the costs of the system are slated to exceed non-interest income. Under federal budget accounting rules, now each year the rest of the budget will need to repay the Social Security trust fund. .

Thus, we are switching from a situation where the Social Security system helped to hold down the federal deficit each year, to a situation where the Social Security system will be contributing to a larger federal deficit each year. To be sure, this effect won\’t be large for a few years. But I suspect that this change will gradually bring changes to Social Security into the debates over reducing budget deficits in a way that they haven\’t previously been.

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David Hume and the $20 bill on the sidewalk

 David Hume (1748) wrote in An Enquiry Concerning  Human Understanding: 

\”A man who at noon leaves his purse full of gold on the pavement at Charing-Cross, may as well expect that it will fly away like a feather, as that he will find it untouched an hour after. Above one half of human reasonings contain inferences of a similar nature, attended with more or less degrees of certainty proportioned to our experience of the usual conduct of mankind in such particular situations.\”

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When Should Short-Term Fiscal Stimulus Go Into Reverse?

If policy-makers use fiscal policy–that is, some mixture of government spending and tax cuts–to stimulate an economy in recession, at what point should this short-term  policy be reversed? Alan Auerbach and William Gale point out that over the last four U.S. recessions, the willingness to reverse short-term fiscal policy has diminished.

For example, in the deep recession of 1981-82, President Reagan had pushed for tax cuts in 1981. But in
August 1982, when the recession was not yet over,  Congress passed and Reagan signed the Tax Equity and Fiscal Responsibility Act (TEFRA), scaling back those tax cuts. Similarly, in the recession of 1990-91, the first President George Bush and Congressional leaders produced legislation aimed at reducing in October 1990–when the recession was still going on.

This pattern has changed, so that instead of acting to reduce looming deficits while the recession is still going on, the U.S. now continues its fiscal stimulus policies a couple of years into the recovery. For example, the recession that ended in November 2001 was followed by additional tax cuts in 2002 and 2003. Now, with a recession that ended two years ago in June 2009, there is still a widespread belief that it is \”too soon\” to undertake a serious effort to reduce the budget deficit.

I\’m a reluctant and dour Keynesian who supports aggressive fiscal policy during a recession, especially a dire event like the Great Recession of 2007-2009 — but who views such policies as only helping to ameliorate the pain of the recession itself. The arguments for continuing fiscal stimulus for several years after a recession has ended are much weaker. The Congressional Budget Office forecasts that the U.S. economy won\’t return to full employment until 2016. It seems unwise, to plan on eight consecutive years of fiscal stimulus, from when the recession became apparent in 2008 until the economy returns to full employment in 2016. In fact, global capital markets, looking at the projected rise in the debt/GDP ratio, may be unwilling to let the U.S. government borrow to pursue such a policy.

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Germany\’s Nukes and The Limits of "Green" Energy

Germany has announced plans to phase out all its nuclear reactors by 2022.  It\’s worth taking this pledge with spoonfuls of salt. Sweden has been announcing various plans to phase out its nuclear reactors since the 1970s, but because they provide half of Sweden\’s electricity, the phase-out hasn\’t happened. Germany\’s plan is to move to \”renewable\” energy sources like solar, wind, and hydroelectric. But Germany\’s location doesn\’t make it a natural site for solar or wind-power, and it is unlikely to go on a dam-building spree.

Green energy is worth investigating, researching, and perhaps even subsidizing to some extent because it is green: that is, it has potential to reduce air pollutants like sulfur and particulates, as well as the risks posed by climate change. In addition, it could help in reducing dependence on foreign supplies of oil. But it is extremely unlikely to provide a surge of economic growth.

Germany\’s Chancellor Angela Merkel said:\”We believe that we can show those countries who decide to abandon nuclear power — or not to start using it — how it is possible to achieve growth, creating jobs and economic prosperity while shifting the energy supply toward renewable energies.\”

Green technologies like solar and windpower are not yet cost-competitive in providing major support to a national power-grid. At least in the short- and medium-run, green energy means higher electrical bills or higher government subsidies. Neither is a pathway to economic growth–although they may be worth doing as a cost for meeting environmental goals.Government policies provide high prices for producers of green energy can subsidize job creation in those industries, but just as high prices for oil create jobs in oil-related industries without stimulating economic growth, high prices for alternative energy won\’t stimulate growth, either. I expect that Germany\’s industrial sector, which uses about half of the country\’s electricity, will make that point clear when the time is right.

Perhaps eventually, with sufficient research and technological gains, renewable energy resources can become cost competitive with fossil fuels, hydro, and nuclear. But compare for a moment the productivity gains that have come from technological developments in information technology, including computing and telecommunications and the internet. These gains arise partly because of \”Moore\’s law,\” which is essentially that the price of computing power falls by half every two years. As computing power has gotten cheaper, it has allowed users of this technology to find an ever-widening array of productivity-enhancing applications. But even the most ardent advocates of green power do not seriously believes that technological breakthroughs will cause the cost of electricity to drop by half every two years for several decades, nor that lower energy costs alone can trigger waves of productivity growth in other industries. Again, the bottom line is that green energy is worth investigating because offers the possibility of environmental gains. However, Germany\’s Merkel is almost certainly incorrect in believing that it can be a basis for future productivity growth.