conversableeconomist

Generational Flip-Flop

Throughout human history, the overall pattern of intergenerational transfers has been clear. Transfers from adults to children are substantial. Not that long ago, transfers to the elderly were quite low, because people tended to work until they died, at which point many of them left bequests to the next generation. Even in more recent times,when social programs began to create transfers from working-age adults to the elderly, the combination of support for those who are younger when alive and bequests after death meant that the overall pattern of intergenerational transfers went from older to younger.

But with the relatively smaller number of children in many countries, the relatively larger of elderly, and the growing costs of government programs to support the elderly, the fundamental historical pattern of transferring assets from older to younger generations seems to have flip-flopped in several countries–with more on the way.

Ronald D. Lee and Andrew Mason tell the story in \”Generational Economics in a Changing World,\” which appeared in Population and Development Review, January 2011 (supplementary issue), pp.  115-142.  Many in academia will have access to the journal through library subscriptions, but the article is not freely available on-line. They draw upon the work of 23 country teams participating in the National Transfer Accounts project. For an overview of this project,  a useful starting point is the 2011 book edited by Lee and Mason called Population Aging and the Generational Economy: A Global Perspective. The book has 32 chapters by about 50 economists and demographers.

The fundamentals of the generational flip-flop story can be told through a figure that shows patterns of income and consumption over the life cycle. Each figure has refers to three sets of societies: \”hunter-gatherers,\” based on data from anthropological studies; poor countries, which is based on data from Kenya, Indonesia, Philippines, and India; and rich countries, based on data from Japan, the United States, Sweden and Finland. The first figure shows age on the horizontal axis. The vertical axis is the number expressed as ratio to average labor income for those in the 30-49 age bracket. The dashed lines show income; the solid lines show consumption.

First consider income and consumption for children. For all three kinds of societies, the \”income\” lines are essentially zero for those under age 15 or so, who don\’t produce much. The consumption lines for children rise from about .3 of an adult\’s labor income at birth to .4 by teenage years. Consumption of children is notably higher in the rich countries.

Then consider the income-earning years. Remember that the vertical axis is scaled as the ratio of average income for someone in the age 30-49 age bracket, so it\’s no surprise that all three of the income-earning lines rise to be equal to roughly 1 for that age interval. However, it\’s interesting to note that peak income-earning drops off sharply first in the hunter-gatherer countries, and then then a few years later in the poor countries, and then a few years after that (just after age 60) in the rich countries. In all three of these types of societies,  consumption during peak income-earning years is about .6 of typical adult\’s income; after all, a substantial chunk of that income is going to support children at this time.

Now look at the older age brackets. Note that on average, even at age 70, the hunter-gatherers have income well above consumption. In those societies, transfers from older to younger generations continue pretty much up to death. For poor societies, income drops below consumption at about age 60, but consumption stays more-or-less flat to the end of life. For the rich societies, income drops below consumption about age 65. At that point, income in rich countries keeps falling sharply, dropping below the level for poor countries by the late 60s. Moreover, consumption of the elderly in rich countries is not flat, but instead is rising; indeed, consumption levels of the elderly as a share of the income of a working adult are higher than at any earlier point in life!

Looking at a broader group of countries, Lee and Mason state: \”We show that the direction of intergenerational transfers in the population has shifted from downward to upward, at least in a few leading rich nations.\” In particular, they look across countries and present calculations of the average age at which income is earned, and the average age at which consumption happens.

For example, in the United States the average age for earning $1 of income is 43.4 years, while the average age for $1 of consumption is 41.3 years. Thus, the U.S. maintains the traditional pattern of overall transfers from older to younger.

As you might expect, this pattern of older-to-younger transfers is more extreme in low income countries. For example: In India, the average age of income is 39.5 years, and the average age of consumption is 30 years. In Kenya, the average age of income is 35.7 years, and the average age of consumption is 23.9 years.

But in a few countries, the classic pattern that has lasted throughout human history has now been reversed. In Japan, the average age of income is 45 years, while the average age of consumption is 45.8 years. In Germany, the average age of income is 42.2 years and the average age of consumption is 44.9 years.

There is nothing inherently unsustainable about societies in which flows of funds, as a whole, are transferred from younger to older generations. In the narrow programmatic sense, it is true in many countries that that the current promises of payments to the elderly do not have sufficient funding in the existing programs, and so the facts of accounting will at some point force these programs to evolve. But in a broader sense, a younger-to-older society will need to run on a set of social expectations and arrangements that are different from any previous society in human history, and will involve social, political, and institutional changes that I think we are only dimly beginning to discern.

conversableeconomist

Hyperinflation and the Zimbabwe Example

Back in the Paleolithic era when I was learning economics, Germany\’s hyperinflation of the 1920s was the classic example of hyperinflation. When I was teaching intro economics classes in the late 1980s, I would use hyperinflation examples from Latin America, and by the mid-1990s, I could use examples from eastern Europe after the collapse of the Soviet Union. But for the next few years, I suspect, the canonical example of hyperinflation will be what has happened in Zimbabwe from 2007-2009, which has the dubious distinction of being the only hyperinflation of the still-young 21st century. Janet Koech of the Federal Reserve Bank of Dallas offers a nice overview of \”Hyperinflation in Zimbabwe,\” which appears in the Annual Report of the Globalization and Monetary Policy Institute. 

Koech reports: \”From 2007 to 2008, the local legal tender lost more than 99.9 percent of its value.\” Here\’s a picture of the infamous $100 trillion bill, issued in 2009. The existence of the bill is black comedy, because represents economic devastation for the 12 million or so people of Zimbabwe.

Hyperinflation doesn\’t have a precise definition, but a common rule-of-thumb is that it occurs when the rate of price inflation exceeds 50% per month. If this rate is compounded over a year, prices multiply by a factor about 130 in a year. Here\’s the monthly inflation rate taking off in in Zimbabwe.

Zimbabwe\’s economic disaster was built on terrible economic policy and bad luck. A combination of droughts and ill-designed land \”reforms\” savaged production of important crops like maize and tobacco. Government spending was nearly uncontrolled. Foreign debts mounted. And then the government of Zimbabwe tried to solve its problems by turning on the printing presses.

Koech writes: \”Hyperinflation and economic troubles were so profound that by 2008, they wiped out the
wealth of citizens and set the country back more than a half century. In 1954, the average GDP per
capita for Southern Rhodesia was US$151 per year (based on constant 2005 U.S.-dollar purchasing power-parity rates). In 2008, that average declined to US$136, eliminating gains over the preceding 53
years …\”

Hyperinflation causes extraordinary contortions in an economy. When all prices are rising dramatically all the time, comparing prices become essentially impossible, and the price mechanisms itself breaks down. Koech describes (footnotes omitted):

\”The Economic Times newspaper noted on June 13, 2008, that “a loaf of bread now costs what 12 new cars did a decade ago,” and “a small pack of locally produced coffee beans costs just short of 1 billion Zimbabwe dollars. A decade ago, that sum would have bought 60 new cars.” At the height of the hyperinflation, prices doubled every few days, and Zimbabweans struggled to keep their cash resources from evaporating. Businesses still quoted prices in local currency but revised them several times a day. A minibus driver taking commuters into Harare still charged passengers in local currency but at a higher price on the evening trip home. And he changed his local notes into hard currency three times a day.

The government attempted to quell rampant inflation by controlling the prices of basic commodities and services in 2007 and 2008. Authorities forced merchants—sometimes with police force—to lower prices that exceeded set ceilings. This quickly produced food shortages because businesses couldn’t earn a profit selling at government-mandated prices and producers of goods and services cut output to avoid incurring losses. People waited in long lines at fuel stations and stores. While supermarket shelves were empty, a thriving black market developed where goods traded at much higher prices. Underground markets for foreign exchange also sprang up in back offices and parking lots where local notes
were converted to hard currencies at much more than the official central bank rate. Some commodities, such as gasoline, were exclusively traded in U.S. dollars or the South African rand, and landlords often accepted groceries and food items as barter for rent.\”

Here are some manifestations of hyperinflation: empty supermarket shelves (after all, anything real will hold value better than a hyperinflating currency) and gallows humor.

By early 2009, no trust in the Zimbabwe currency remained, and the Zimbabwe economy essentially \”dollarized.\” Koech writes: \”While the South African rand, Botswana pula and the U.S. dollar were granted official status, the U.S. dollar became the principal currency. Budget revenue estimates and planned expenditures for 2009 were denominated in U.S. dollars, and the subsequent budget for 2010 was also set in U.S. dollars. An estimated four-fifths of all transactions in 2010 took place in U.S. dollars, including most wage payments …\”

Here\’s the Dishonor Role of Hyperinflations during the last couple of hundred years.

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Academic Journals: Print Fading

When I started my job as Managing Editor of the Journal of Economic Perspectives, we distributed about 25,500 print copies of each early issues in the late 1980s. In 2011 we distributed about 13,000 print copies of each issue.  But compared to a lot of leading law reviews, our print circulation is doing extremely well. Ross E. Davies looks at \”Law Review Circulation 2011: More Change, More Same,\” in a just-released paper for the Journal of Law, available on SSRN here.

Here is a table with a few illustrative numbers on the drop-off of print subscriptions at law reviews, whihc are extreme.

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Some Law Review Annual Print Circulation Figures
Law Reviews
1974-75
1990-91
2010-2011
Harvard
10,193
7,768
1,896
Yale
4,250
3,700
1,520
Columbia
3,831
2,676
1,076
Michigan
3,038
2,382
   777
Northwestern
1,918
951
 514
Boalt (California)
2,734
1,740
719

For law reviews, one standard explanation is the arrival of Lexis-Nexis and then other methods of doing legal research on-line. These reasons apply to my own journal, as well. Back issues of my journal have been available though JSTOR for years.

My impressionistic sense is also that law reviews occupy a less central place in the practice of law than they did a few decades ago.For example, Supreme Court Chief Justice John Roberts has on several occasions said in interviews that he doesn\’t find law reviews very useful. Here\’s a 2011 comment: \”Pick up a copy of any law review that you see, and the first article is likely to be, you know, the influence of Immanuel Kant on evidentiary approaches in 18th Century Bulgaria, or something, which I’m sure was of great interest to the academic that wrote it, but isn’t of much help to the bar.” As reported after a 2010 interview, \”Roberts said he doesn’t pay much attention to academic legal writing. Law review articles are `more abstract\’ than practical, and aren’t `particularly helpful for practitioners and judges.\’\”

For my own journal, I think (or hope?) that the issues are more about alternative methods of access to the journal rather than a perceived lack of relevance. For example, several thousand AEA members have been choosing to get my journal on CD-ROM rather than on paper–and the CD-ROM for any given issue includes about a decade of back issues, too. About two years ago, the AEA voted to make the articles from journal freely available on-line–both current issues and archives. Very soon, it will also be possible to download entire issues onto your own CD-ROM, or on to an e-reader like a Kindle or Nook.

Reducing the barriers to accessing academic journals by making it electronically available seems like an unambiguously good thing. But I do worry about the ongoing decline of print. It\’s a bit like the old koan, \”If a tree falls in the forest, and no one hears it, does it make a sound?\” In my world, if a journal is made available on-line, does anyone actually read it? Sure, the AEA can send out a blast e-mail to let members know that the issue is available. I probably delete a dozen e-mail notifications of something or other almost every day, without giving them much of a look.

The question for my own journal, and for many publications, is how to get the attention of readers if you aren\’t arriving in physical print form. Attention is a bit \”sticky,\” in the sense that people get used to looking at certain things and not others. In running a journal, you worry that the journal might fall out of the rotation of what people are looking at. Moreover, I worry that the digital world might undervalue a certain kind of intellectual serendipity: the process of looking up an article on one subject, and in the print copy or further along the bookshelf, running across something quite different.

Of course, being freely available over the web also offers enormous opportunities for my own journal to garner attention and to be the outcome of serendipitous searching. Perhaps the real message here is to spend some time surfing purposefully but whimsically in your areas of professional interest, so that you remain open to finding new information sources and new perspectives.

Here\’s a July 11, 2011 post with further thoughts on Online Access and Academic Journals.

conversableeconomist

Some Facts about American Unions

The Bureau of Labor Statistics published annual report on union membership, \”UNION MEMBERS — 2011,\” in late January.  Here are some facts about American unions in 2011, along with some historical perspective and international comparisons. I\’ll also mention some of the general lessons I see in these patterns:

First, some highlights from the BLS report (references to the detailed data tables omitted here):

\”In 2011, the union membership rate—the percent of wage and salary workers who were members of a union—was 11.8 percent, essentially unchanged from 11.9 percent in 2010 …

\”In 2011, 7.6 million employees in the public sector belonged to a union, compared with 7.2 million union workers in the private sector. The union membership rate for public-sector workers (37.0 percent) was substantially higher than the rate for private-sector workers (6.9 percent). Within the public sector, local government workers had the highest union membership rate, 43.2 percent. This group includes workers in heavily unionized occupations, such as teachers, police officers, and firefighters. Private-sector industries with high unionization rates included transportation and utilities (21.1 percent) and construction (14.0 percent), while low unionization rates occurred in agriculture and related industries (1.4 percent) and in financial activities (1.6 percent). Among occupational groups, education, training, and library occupations (36.8 percent) and protective service occupations (34.5 percent) had the highest unionization rates in 2011. Sales and related occupations (3.0 percent) and farming, fishing, and forestry occupations (3.4 percent) had the lowest unionization rates….

By age, the union membership rate was highest among workers 55 to 64 years old (15.7 percent). The lowest union membership rate occurred among those ages 16 to 24 (4.4 percent).\”

My sense is that many people know the unionization rate is higher in the public sector than in the private sector. However, it wasn\’t until recently that a majority of the absolute number of unionized workers in the country were in the public sector. Even within the private sector, some of the highest unionization rates are often found in very regulated industries like utilities. In the U.S. private sector, unionization rates are down into single digits and continuing to fade.

Historically, the unionization rate in the United States shows one big rise, leading to a peak in the early 1950s when about one-third of non-agricultural workers belonged to a union. The pattern has been one of decline ever since.

Clearly, the decline in unions has been long and steady, occurring under both political parties. If not for the rise in public sector unions, the decline would have been even more severe. Thus, it doesn\’t make sense to blame this decline on some single event in the last decade or two or three–it\’s bigger than that. In the Winter 2008 issue of my own Journal of Economic Perspectives, Barry T. Hirsch offered an explanation in his paper \”Sluggish Institutions in a Dynamic World: Can Unions and Industrial Competition Coexist?\”  His argument is that overtime, in the dynamic and competitive U.S. markets, formal union rules are too inflexible, and thus impose extra costs on firms which over time make the firms less able to compete. He argues: \”If worker-based institutions are to flourish, they must add value and permit companies to perform at levels similar to those obtained under evolving nonunion governance norms.\”

International comparisons show that the the U.S. economy is something of an outlier in its low levels of union membership. The first column of the table shows the union membership rate in 2006. The second column shows the union \”coverage rate,\” which refers to the total share of workers whose compensation is determined by union bargaining, even if some of those workers are not union members. In the United States, union membership and union coverage are very similar. For example, the BLS report notes that in 2011, the U.S. economy had 14.8 million union members and another 1.5 million workers who did not belong to a union, but whose jobs are covered by a union contract. About half of that 1.5 million are government workers. However, in some other countries, like France, the gap between union membership and union coverage can be quite substantial.  In Japan, it is even possible to be a union member but not to have wages determined by a bargaining contract.

Clearly, it is possible for high-income countries around the world like Germany, France, Sweden, the United Kingdom, and Canada to grow and continue to be high-income even with far higher rate of unionization than the U.S. economy. The extremely wide variation across countries also suggests that unionization may be a rather different phenomenon across countries.

With this wide variation in mind, I\’ve grown cautious over the years about all blanket statements about unionization–positive or negative. In the private sector, American-style unionization has essentially failed to propagate; in the public sector, it has had at best only very partial success. But back in 1970, the great sociologist Albert Hirschman wrote a book called Exit, Voice, and Loyalty. He argued that when members of any organization are faced with conflict, they must choose between expressing their disagreement through \”voice\” or leaving the organization through \”exit.\” Many American workplaces are essentially organized around the principle where the voice of workers is constrained and the possibility of exit is emphasized. I sometimes wonder if a different kind of American labor organization might do a better job of using voice to improve productivity and in that way raise the compensation of its members.

Source note: Thanks to Danlu Hu for putting together the time series graph of unionization rates over time and the data table on international comparisons.

For unionization rates over time, the data from 2001 to 2011 is readily available at the Bureau of Labor Statistics website. Data on U.S. union membership going from 1930 to 1994.is available at
.  The remaining data can be found by hunting around the BLS website, or else by looking at the 2004 paper by Gerald Mayer, \”Union Membership Trends in the United States.\”

The data on international comparisons is from the Data Base on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts, 1960-2010, maintained by the  (ICTWSS), available here at the website of the Amsterdam Institute for Advanced Labor Studies.