Electric vs. Conventional Cars on Conservation

Earlier this week, Bjorn Lomborg wrote an intriguing op-ed for the Wall Street Journal titled \”Green Cars Have a Dirty Little Secret: Producing and charging electric cars means heavy carbon-dioxide emissions.\” I always enjoy reading Lomborg, but I\’m also the sort of person who prefers to read the research myself. The underlying article is \”Comparative Environmental Life Cycle Assessment of Conventional and Electric Vehicles,\” by Troy R. Hawkins, Bhawna Singh, Guillaume Majeau-Bettez, and Anders Hammer Strømman. It appears in the February 2013 issue of the Journal of Industrial Ecology (17: 1, pp. 53-64). 

The authors point out in acronym-heavy style that comparing the environmental costs of electric vehicles (EVs) with internal combustion engine vehicles (ICEVs), it\’s important to do a life cycle assessment (LCA) that considers all aspects of producing the car, using the car, and the energy sources that propel the car, so as to take account of global warming potential (GWP) and other environmental costs. To make this more concrete, the comparison is between a car similar to a Nissan Leaf electric vehicle with a car similar to a conventional engine Mercedes A-series, which are comparable cars in size and power. Under certain conditions, electric cars are more environmentally friendly than conventional engines, but that conclusion holds only under certain conditions.

Source of electricity. If the electricity for the electric car is generated by wind power or hydroelectic power, then no carbon is emitted in producing that electricity. But if the electricity is generated by burning coal, carbon and a number of other pollutants are created. While electric cars reduce tailpipe emissions, it may be with a tradeoff of increasing emissions elsewhere. In addition, if the internal combustion engine is a diesel, it will run relatively clean. Thus, they write:

\”When powered by average European electricity, EVs [electric vehicles) are found to reduce GWP [global warming potential] by 20% to 24% compared to gasoline ICEVs [internal combustion engine vehicles] and by 10% to 14% relative to diesel ICEVs under the base case assumption of a 150,000 km vehicle lifetime. When powered by electricity from natural gas, we estimate LiNCM [lithium-ion battery] EVs offer a reduction in GHG [greenhouse gas] emissions of 12% compared to gasoline ICEVs, and break even with diesel ICEVs. EVs powered by coal electricity are expected to cause an increase in GWP of 17% to 27% compared with diesel and gasoline ICEVs.\”

Number of miles the car is driven. Producing the large and powerful batteries needed for electric cars has environmental costs. By the calculations of this group, in a conventional car about 10% of the effect on climate change happens in production, and the rest in the use of the car over its lifetime. But for an electric car, about 50% of the effect on climate change happens in production, with the rest occurring over its lifetime (depending on the underlying source of the electricity used). As a result, the number of miles that a car is driven over its lifetime ends up making a big difference in its environmental effect. They write:

\”Because production impacts are more significant for EVs than conventional vehicles, assuming a vehicle lifetime of 200,000 km exaggerates the GWP benefits of EVs to 27% to 29% relative to gasoline vehicles or 17% to 20% relative to diesel because production-related impacts are distributed across the longer lifetime. An assumption of 100,000 km decreases the benefit of EVs to 9% to 14% with respect to gasoline vehicles and results in impacts indistinguishable from those of a diesel vehicle.\”

The discussion ranges over a number of other factors: different technologies for making the batteries for electric cars, environmental costs of producing batteries, environmental costs of different sources for producing electricity, how often the batteries need to be replaced, environmental costs at the end of vehicle life, the efficiency of the vehicle in using energy, and other issues. They also note that electric vehicles are a technology that is developing and evolving quite rapidly, and so any calculation of costs and benefits will need to be updated. But as for where we stand right now, here\’s a summary:

\”Our results clearly indicate that it is counterproductive to promote EVs in areas where electricity is primarily produced from lignite, coal, or even heavy oil combustion. At best, with such electricity  mixes, local pollution reductions may be achieved. Thus EVs are a means of moving emissions away from the road rather than reducing them globally. Only limited benefits are achieved by EVs using electricity from natural gas. In the absence of foreseeable improvements to electricity mixes, a more significant reduction in GWP could potentially be achieved by increasing fuel efficiency or shifting from gasoline to diesel ICEVs without significant problem-shifting (with the exception of smog). … Our results point to some probable problem shifts, irrespective of the electricity mix. EVs appear to cause a higher potential for human toxicity, freshwater eco-toxicity, freshwater eutrophication, and metal depletion impacts…. The many potential advantages of EVs should therefore serve as a motivation for cleaning up regional electricity mixes, but their promotion should not precede commitment to grid improvement.\”

But here\’s a coda from their analysis that struck me as interesting. Say for the sake of argument that a main effect of moving to electric cars was just to shift pollution to the factories that make batteries and to the facilities for generating electricity. It may be easier for society to set up incentives and programs for reducing pollution at a relatively few fixed big sites, rather than dealing with pollution from millions of tailpipes.

For some other recent examples of choices and tradeoffs that I\’ve discussed on this blog, see:

Top Incomes, Marginal Product, and Rent-Seeking

In thinking about what marginal tax rates to impose on those with the highest incomes, a key question is the extent to which those top incomes reflect outcome that is actually produced.For example, one story that economists often tell about  higher inequality is that, because of developments in information and communications technology, and globalization it has become possible for those with superstar skill levels to produce much more–and their higher incomes reflect that increase in production. An alternative story about higher inequality is that those at the highest income levels have considerable discretion a bout negotiating their compensation, and that when a wave of deregulation, globalization, and new technology disrupts the existing arrangements for top-level pay, those with top incomes will find themselves in a position to award themselves a larger share of the pie.

There are a few jobs where it\’s fairly straightforward to measure what workers produce: say, installing auto windshields or picking fruit. With authors or entertainers, you can look at how many books were sold or how many tickets and downloads purchased. But for many of those with top incomes, it is quite difficult to measure exactly what is produced, and so the evidence about whether top incomes primarily reflect output or what economists call \”rent-seeking\” depends on interpretations of indirect evidence. David Grusky has an interesting interview with Emmanuel Saez called \”Taxing Away Inequality,\” which explores these issues. It appears online at the Boston Review website, and also has a link to a 42-minute presentation that Saez gave in January on \”Income Inequality: Evidence and Policy Implications.\” 

Saez believes that rent-seeking is a big explanation for the higher pay at the top levels that is driving greater inequality. Here are some of his comments from the interview.

\”The changes in income concentration are just too abrupt and too closely correlated with policy developments for the standard story about pay equaling productivity to hold everywhere. That is, if pay is equal to productivity, you would think that deep economic changes in skills would evolve slowly and make a gradual difference in the distribution—but what we see in the data are very abrupt changes. Basically all western countries had very high levels of income concentration up to the first decades of the 20th century and then income concentration fell dramatically in most western countries following the historical narrative of each country. For example, in the United States the Great Depression followed by the New Deal and then World War II. And I could go on with other countries. Symmetrically, the reversal—that is, the surge in income concentration in some but not all countries—follows political developments closely. You see the highest increases in income concentration in countries such as the United States and the United Kingdom, following precisely what has been called the Reagan and Thatcher revolutions: deregulation, cuts in top tax rates, and policy changes that favored upper-income brackets. You don’t see nearly as much of an increase in income concentration in countries such as Japan, Germany, or France, which haven’t gone through such sharp, drastic policy changes. …\”

\”We know that in the long run economic growth leaves all incomes growing. If you take as a century long picture, from 1913 to present, incomes for all have grown by a factor of four. But then when you look within that century of economic growth, the times at which the two groups were growing are strikingly different. From the end of the Great Depression to the 1970s, it’s a period of high economic growth, where actually the bottom 99 percent of incomes are growing fast while the top 1 percent incomes are growing slowly. It’s not a good period for income growth at the top of the distribution. It turns out that that’s the period when the top tax rates are very high and there are strong regulations in the economy. In contrast, if you look at the period from the late ’70s to the present, it’s the reverse. That’s a period when the bottom 99 percent incomes are actually growing very slowly and the top 1 percent incomes are growing very fast. That’s exactly the period where the top tax rates come down sharply. So, of course this doesn’t prove the rent-seeking scenario but it is more consistent with it than with the standard narrative. …\”

\”For top earners, we need more research, but I have yet to see a study that shows me that when you increase top tax rates, top earners work less. An interesting study that was done by Robert Moffitt and Mark Wilhelm using the tax overhaul of 1986—Reagan’s big second tax reform. The study showed that when Reagan cut the top tax rate, pre-tax top income surged, but the authors looked at the hours of work of those high earners and couldn’t see any effect on their reported hours. Of course, it was a small sample, but I hope that in the future, researchers can look at margins like retirement—do highly paid executives retire earlier now that Obama has raised their tax rates? That’s exactly the type of study we need. And of course I would revise my views if you showed me convincingly that those top guys are indeed working a lot less.\” 

When it comes to higher marginal tax rates as a way of reducing inequality, Saez says: \”Tax policy is blunt, but it works.\” 

One argues with Saez at one\’s peril, so rather than making declarative statements about inequality and taxes and rent-seeking, I will just raise a few queries. 

1) Some proportion of high earners–granted, probably not a majority–are innovators who may well provide social benefits in excess of their incomes. As Saez notes, higher marginal tax rates are a blunt tool. The Bible verse tells about how it rains on the just and unjust alike; in a similar spirit, higher marginal taxes will fall on the productive and the rent-seeking alike. 

2) I suspect that 21st-century tax lawyers are an altogether different breed than tax lawyers who operated during the high marginal tax rates of the 1930 and 1940s and 1950s–more aggressive, sophisticated, and experimental. Thus, using the experience of higher marginal taxes and greater equality of incomes 60-80 years ago as evidence for current policy must be taken with a grain of salt. 

3) Cross-country comparisons about inequality and tax rates must also be taken with a grain of salt. The version of capitalism practiced in the U.S. economy differs in all kinds of ways from the versions of capitalism practiced in, say, Japan or Germany or Sweden. 

4) That said, I find myself troubled by how many top earners are paid. Many executives get stock options that pay off whether or not their company outperforms the market. Many professional investment managers are paid based on a percentage of the total assets they manage, not whether they outperform the average returns in the market. Those financial geniuses who cooked up all the complex mortgage-backed securities that went bust a few years back got very high pay and bonuses, and they didn\’t have to give that money back when the bubble went pop. 

In some ways, I would be happier with a rule that any company can pay anyone whatever they wish, but the compensation needs to be in the form of straight salary and bonus, paid each year. No deferred pay, or hidden perks, or golden handshakes, or stock options to be cashed in later. I suspect that paying top executives in this way would reduce pay for many of them considerably–which implies that those top earners have found ways to be compensated that even they are not willing to contemplate too openly.


From the Special-Effects Studio to Your Driveway

Last Sunday, the local Star Tribune newspaper published my op-ed on \”New technology: Driverless cars are just around the corner,\” subtitled \”But in the not-too-distant future, driverless cars will be leaving the special-effects studio and heading for your driveway.\” Regular readers of this blog will recognize some of the thoughts from my posts last October 31 on \”Driverless Cars.\” Here\’s the article:

A car without a driver has long been the stuff of B-grade entertainment. For children, there’s Herbie “The [Volkswagen] Love Bug” and “Chitty Chitty Bang Bang.”

Who can forget “Knight Rider,” the 1980s television show in which David Hasselhoff was routinely out-emoted by a custom Pontiac Trans Am? In the 1977 schlock classic “The Car,” a driverless Lincoln Continental terrorized a Utah town. The 1983 movie \”Christine” dramatized a Steven King story about a Plymouth Fury with a mean streak.

But in the not-too-distant future, driverless cars will be leaving the special-effects studio and heading for your driveway. Back in 2004, the U.S. Department of Defense held a contest to see if driverless cars could negotiate a 150-mile course. None of the entrants succeeded. By 2012, Google was announcing that its fleet of autonomous cars was logging several hundred thousand miles in real-world traffic on roads across California and Nevada.

The potential safety benefits of driverless cars are remarkable. More than 30,000 Americans are killed each year in road accidents, and another 240,000 or so have injuries severe enough to require hospitalization. But the driverless car won’t get drunk. It won’t drive like an excitable teenager. It won’t suffer momentary lapses of attention. It will observe traffic rules. It won’t experience slowing reflexes or diminishing vision as it ages.

About 86 percent of U.S. workers drive to their jobs, and the average travel time is 25 minutes each way, according the U.S. Census Bureau. Multiply that by two directions, five days a week, 50 weeks a year, and the average person is spending more than 200 hours per year — the equivalent of five 40-hour workweeks — sitting in a car commuting to and from work.

In a world of driverless cars, this time — and all the additional time we now spend driving — could be used to work, draw up a shopping list, watch a movie, read a book, make a phone call, look out the window or even take a nap.

Traffic congestion could diminish, because automated cars, with their electronic reflexes, would be able to travel more closely — even “platooning” together into caravans. Also, automated cars can use narrower lanes and road shoulders, creating room for more lanes of traffic.
Ultimately, driverless cars could reshape our perspective on what it means to own a car. For example, instead of owning a car that is unused for 22 hours on many days, you might just dial up a car to pick you up and drop you off when you need it. The savants at Google predict that driverless cars could reduce the overall number of cars by 90 percent.

Imagine a long road trip where you can intentionally fall asleep “at the wheel” — and arrive safely the next morning.

* * *
Already headed this way

An evolution in which driving becomes more automated is already underway. Most cars now on the road have cruise control that regulates speed, antilock brakes that pump much faster than any human foot can and headlights that turn on automatically.

Newer cars are boasting features like the ability to “see” the area around a car and assist with stopping or swerving, and to parallel-park without a human hand on the wheel.
Parents of teenage drivers and insurance companies are encouraging the installation of equipment that monitors speed and watches to see whether braking is done gradually or suddenly. Cars now speak directions to the driver and accept a number of vocal commands.

What’s next? A vocal command to set cruise control, stop or turn? Cars that automatically come to a full stop at stop signs and red lights? Cars that cannot exceed the speed limit?

Eventually, some parking lot in a crowded downtown area will announce that it is open only for driverless cars. That is, you will need to drive up to the entrance, then let the car park itself. That parking lot will be able to cram many more cars into its space, with fewer door dings and fender dents. And so other parking lots will follow.

Some city will announce that cars linked together with “platoon” technology can drive in its carpool lanes or in special toll lanes. Some state with wide-open spaces will announce that driverless cars are legal on its miles of lightly congested highways. Some community will announce that when you reach a residential area, all human drivers must hand off to the automation system for a slow and safe drive down the last mile or two of local roads.

Of course, the primary response of every honest and red-blooded American to the prospect of driverless cars must be: “Who can I sue when it goes wrong?”

Driverless cars will assuredly require all sorts of legal changes. For example, the state of New York has a law requiring that drivers keep at least one hand on the steering wheel at all times. But California, Nevada and Florida have already passed laws about driverless cars, and other states won’t be far behind.

However, I suspect that a combination of our litigious culture and the auto insurance companies will actually create strong incentives for the adoption of driverless cars.

My car insurance company already offers a deal by which if I have equipment installed that can monitor my speed and whether I am prone to quick stops, I can pay less for my car insurance. What happens when your insurance company politely informs you that if your car has certain automatic features installed, your car insurance is one amount, and if you do not have those features, your car insurance is five times as much? Or that your car insurance rates will drop according to what proportion of the time you get out of the way and let the car drive itself?

* * *

These are the good old days

The technology for fully driverless cars is still a few years away from being commercially viable. But as it arrives, the social gains in safety, time and convenience will be too large to ignore. Federal and state governments have been mandating safety features in cars for years — and automated driving will eventually be safer than a significant share of the drivers currently on the road.

To save time, I’m already starting to get all nostalgic about the good old days of staring fixedly at the bumpers ahead of me and wincing every time someone in the next lane weaves back and forth. But before long, I suspect we will look back with bemusement on the days when enormous crowds of people each maneuvered their own piece of transportation machinery weighing several thousand pounds within a few feet of each other, both at high speeds and in stop-and-start conditions.

Automobile travel transformed how people relate to distance: It decentralized how people live and work, and gave them a new array of choices for everything from the Friday night date to the long-distance road trip. I occasionally marvel that we can take our family of five, with all our gear, door-to-door for a getaway to a YMCA family camp 250 miles away in northern Minnesota — all for the marginal cost of less than a tank of gas.

As driverless cars transform transportation yet again, adding levels of flexibility, safety and convenience, the car will become a sort of mobile room, just a place to spend time while the rest of our lives are going on.

Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul.

Financial Globalization Takes a Breather

 Global financial markets were expanding for several decades up to about 2007. Since then, they have been more-or-less treading water in absolute size. Financial markets are smaller as proportion to the global economy in 2011 and 2012 than they were back in 2005, 2006, and 2007. And if it wasn\’t for the enormous growth in government debt, which has helped to pump up the size of financial markets around the world, the global financial sector would look even smaller. Should we welcome this change? Fear it? Not care? The McKinsey Global Institute tackles this question in its March 2013 report Financial globalization: Retreat or reset? co-authored by Susan Lund, Toos Daruvala, Richard Dobbs, Philipp Härle, Ju-Hon Kwek, and Ricardo Falcón.

As a starting point, here\’s a snapshot of the evolution of global financial assets, broken down into equity, several types of bonds, and several types of loans. Growth rates for each subcomponent are off to the right, while the bottom row of circles shows global financial assets as a share of global GDP. In the most recent 2012 data, for example, global financial assets were $225 trillion, which was 312% of the size of global GDP.

 Similarly,  here\’s a figure showing annual cross-border capital flows. They take off 4-5% of world GDP back in 1980 and 1990, hitting 20% of world GDP in 2007, but now have fallen back to about 6% of global GDP.

From one point of view, as the McKinsey report emphasizes, the stagnation of financial assets and the drop in cross-border capital flows since about 2007 is nothing but the pendulum swinging back: after all, if we agree that many credit markets and stock markets around the world were pumped up by an unsustainable bubble back in 2007, then it shouldn\’t be any surprise to find that after the crisis, the size of financial assets relative to the economy falls. If we agree that a lot of the cross-border flows in Europe, which are probably the single main driver of that spike in cross-border flows around 2007, were an unsustainable part of a borrowing boom from countries like Greece and Ireland, then its no shock that these flows will drop off.

But the McKinsey folks are brave (or foolhardy?) enough to make another point that isn\’t popular to hear right now: Just because the financial sector had an unsustainable bubble back in 2007 doesn\’t mean that a financial sector which grows more slowly and appropriately over time is counterproductive. If there is less credit available in many developing countries, because cross-border capital flows are cut back, growth in many of those countries will be hindered. In addition, if global markets are permanently stunted, then investors in high-income countries, including pension funds, insurance companies, and mutual funds, will receive lower returns and less diversification of their portfolios.

The goal of public policy should not be to cripple capital markets, but rather to rein in their excesses and focus their energies on more productive paths. What does that mean in practice? For example, the McKinsey folks suggest that as banks face tighter regulation to reduce their risk exposures, corporations will need to borrow more through bond markets–which are not backed by a government guarantee!

In addition, developing economies as a group have a relatively small financial sectors, which probably need to expand as their economies grow. The McKinsey folks write: \”Developing nations also have significant room to deepen their financial markets. On average, equity market capitalization is equivalent to 44 percent of GDP in developing countries, compared with 85 percent in advanced economies. Credit to households and debt of corporations combined is only 76 percent of GDP in emerging markets, compared with 146 percent of GDP in advanced economies. McKinsey research has estimated that small and medium-sized enterprises (SMEs) in emerging markets face a $2 trillion credit gap, and 2.5 billion adults around the world lack access to banking services. If developing nations converge to the average financial depth currently seen in advanced economies over the next two decades, their financial assets could grow from $43 trillion today to more than $125 trillion by 2020.\”

Global financial markets should be nudged a bit toward longer-term financing, like foreign direct investment where investors take a partial ownership stake, rather than short-term lending. Banks may take on more of an advisory role, being paid by fees to help their customers raise money in bond markets and make necessary deals, rather than risking their own capital on such deals.

In short, a correction in financial markets was unavoidable, and the ground rules under which financial markets were operating prior to 2007 were clearly inadequate, But financial markets themselves are not the enemy.

Next Steps for Economies of the Middle East

The economies of the Middle East, with their low growth and high unemployment, are one part of what is making the politics of the region so volatile. The March 2013 issue of Finance & Development, from the IMF, has a group of articles on various aspects of the economic challenges for the Middle East. Here are some of the main points as I see them.

As a starting point, growth in the region has been relatively slow, with high unemployment–all in a political context with relatively little outlet for people to determine the course of their governments.On this figure, the vertical axis measures annual per capita income growth from 2000-2011, while the horizontal axis is a measure of political \”Voice and accountability.\” The countries of the Middle East are mostly grouped in that bottom left area: low growth and low voice.

 Here\’s a figure showing how growth rates in the economies of the Middle East and North Africa region have lagged behind other regions over 1975-2008 period (blue bars)–although the comparison does look a little better for this region if one looks just at the 2000-2008 period (brown bars).

One of the striking fact patterns is that while the share of wages in GDP has dipped in many countries in the last 10-15 years, including in the United States, it was dropping harder and faster in the Middle East and North Africa than elsewhere. 

What policies can the countries of the Middle East and North Africa region undertake to spur growth? Many of the same suggestions come up in several of the Finance & Development articles.

1) Improve the environment for private-sector growth– or at least don\’t strangle private-sector firms.

Vali Nasr writes: \”The Arab population today numbers 400 million, which will double to 800 million by 2050. Population growth makes aggressive economic growth an urgent imperative. Even to
tread water and maintain current living standards, the Arab economies would need to grow at “tiger-economy” rates of 9 to 10 percent for a decade or more. That is a daunting task, one the public sector cannot accomplish alone. Growth must come from the private sector, and that requires reform of the
economy: removing regulations, relaxing government control, promoting trade, and bolstering the rule of law.  …Middle-class entrepreneurs represent the best hope for betterment of their countries—and the most potent weapon against extremism and for democracy. Until now the Arab
world’s tiny middle class has relied on state salaries and entitlements, with few ties to free markets. The growth of local entrepreneurship on the back of burgeoning capitalism—and integration with the world economy—could help change that. \”

Here\’s a figure based on surveys of companies in the region as to what the biggest problems are that they face when they think about investment. More detailed measures of corruption and regulatory burdens suggest that these are getting worse, rather than better.

2) Expand (non-oil) trade, both with the rest of the world and, perhaps just as important, with countries in the region.

David Lipton writes: \”The Middle East and North Africa is a diverse region, encompassing 20 countries with a population of more than 400 million people and $3 trillion in GDP—about 6 percent of the global population and 4 percent of global GDP. Country circumstances vary widely. Some countries in the region possess vast oil and gas reserves, while others must import both energy and food. The most telling economic statistic about the region, however, is that non-oil exports of the region, the whole region, are $365 billion, about the same as the exports of Belgium, a country of 11, not 400, million people. This region suffers from a lack of integration into the world economy.

Here\’s a figure showing non-oil merchandise exports as  share of GDP. The Middle East and North Africa region has seen some gains in recent decades, but in an age of globalization, it isn\’t keeping up with the rest of the emerging and developing countries of the world. This isn\’t so much a matter of explicit tariffs, which aren\’t that much higher for the region than for other emerging and developing economies, but other non-tariff trade restrictions.

What\’s particularly striking is the low level of interregional trade. There may be political constraints against opening up trade with other regions of the world, but the countries of the Middle East do very little trade with each other, either.

3) Reform the financial sector, especially the banks, so that banks do less lending to government and more lending to private sector firms. 

Adofo Barajas writes: \”Using standard measures of depth in banking (ratio of private sector credit to GDP) and stock markets (market turnover or ratio of value traded to GDP), it appears that  financial development is quite adequate in the MENA region, amply surpassing the averages in other emerging market and developing economies. … [W]hile the capacity of MENA economies to generate deposits has been quite substantial, the intermediation of those funds by banks into private sector credit has not been as impressive. MENA banking systems are more likely to send funds abroad or invest in domestic securities—government bonds, for example—than increase credit one-for-one with additional deposits received. … This is partly due to heavy public sector borrowing, particularly in certain non-GCC countries. For example, in Algeria, banks lend almost 50 percent more to the government than to the private sector, in Syria over 20 percent more, and in Egypt roughly the same amount as to the private sector. On average, MENA banking systems lend close to 13 percent of GDP to the government and to state-owned enterprises.\”

Masood Ahmed adds: \”Only 10 percent of firms finance investment in the MENA region through
banks—by far the lowest share among the world’s regions—and 36 percent of firms in the region identify access to finance as a major constraint, surpassed only in sub-Saharan Africa. … The cost of lost opportunities from limited access to finance is large. Empirical estimates show that raising access
to finance in the MENA region to the world average could boost per capita GDP growth by 0.3 to 0.9 percentage point. …

4) Stop subsidizing prices, and instead focus on helping those with low incomes.

Price subsidies are a costly and inefficient way to help the poor, because most of the benefit of such lower prices goes to those who buy more of the good–that is, those with middle and upper income levels. Masood Ahmed notes: \”IMF estimates indicate that untargeted subsidies now cost the MENA region’s budgets almost 8 percent of GDP. Generalized subsidies are an inefficient means of social
protection: only about 20 to 35 percent of spending on subsidies reaches the lowest 40 percent of the income distribution. By contrast, in well-designed means-tested cash transfer systems, typically 50 to 75 percent of spending reaches the bottom 40 percent.\”

I don\’t want to be a pure economic determinist. There are any number of political, ideological, cultural and raw power play clashes happening across the Middle East that don\’t have a lot to do with whether per capita economic growth is 1% higher or lower. But living in a country with better prospects for jobs and careers and growth does help to take the edge off social turmoil. For more discussion, here\’s a post from August 2011 on \”High Food Prices and Political Unrest\” in the Middle East, and here\’s a post from January 2012 with more wide-ranging discussion of the \”Economic Underpinnings of Arab Spring.\”

Medicaid: Expanding the Largest Health Insurance Program

\”Medicaid now covers over 62 million Americans, more than Medicare or any single private insurer. Medicaid covers more than 1 in 3 children and over 40% of births. In addition, millions of persons with disabilities rely on Medicaid, and so do millions of poor Medicare beneficiaries, for whom Medicaid provides crucial extra help. More than 60% of people living in nursing homes are covered by Medicaid.\”

That comment is from \”Medicaid, A Primer,\” just published by the Kaiser Commission on Medicaid and the Uninsured and subtitled \”Key Information on the Nation’s Health Coverage Program for Low-Income People.\” The report also discusses how the Affordable Care Act seeks to use Medicaid as one of its main mechanisms for expanding health insurance coverage. The Kaiser report says less about the costs of the program, but on that topic we can turn to the Medicaid actuaries in their

2012 Actuarial Report on the Financial Outlook for Medicaid.

Although Medicaid is the primary program to provide  health insurance for those with low incomes, and although most of the participants are low-income children and (in some states) their parents, it has also long been true that most of the spending in Medicaid is on the elderly and the disabled. For illustration, here is figure from the Medicaid actuaries. The aged and disabled are 26% of Medicaid participants, but account for 64% of Medicaid spending.The Kaiser report notes:  \”In 2009, per enrollee payments for children covered by Medicaid were about $2,300, compared to $2,900 per non-elderly adult, $15,840 per disabled enrollee, and $13,150 per elderly enrollee.\”

By design, Medicaid has traditionally only been aimed at covering some of the poor. The Kaiser report explains: \”The cost of Medicaid is shared by the federal government and the states. The federal government matches state Medicaid spending based on a formula specified in the Social Security Act. By statute, the federal match rate is at least 50% in every state, but the lower a state’s per capita income, the higher the federal match rate it receives. …The federal core groups that states must cover to receive federal Medicaid matching funds are pregnant women, children, parents, elderly individuals, and individuals with disabilities, with income below specified minimum thresholds, such as 100% or 133% of the federal poverty level (FPL). One group that historically has been excluded from the core groups is non‐elderly adults without dependent children (“childless adults”). … [R]eflecting their more constrained eligibility, at any given  point during the year, only about 40% of poor parents and just a quarter of poor childless adults are covered by the program, and poor adults are more than two-and-a-half times as likely as poor children to be uninsured.\”

Here\’s a figure from the Kaiser report showing what percentage of different populations is covered by Medicaid (but remember, this will vary across states). Even among children below the poverty line, 70% are covered by Medicaid; for their parents, it\’s 40%. Among the elderly, 63% of nursing home residents are on Medicaid.

As another way of looking at the design of the Medicaid program, consider what services it covers. Medicaid is 15.5% of total U.S. health care spending, and roughly the same percentage of total U.S. hospital costs. However, it is a much lower percentage of doctor visits, and a much higher percentage of total national spending on nursing home care, home health care, and other residential care.

The Affordable Care Act seeks to use Medicaid as a tool for expanding the number of low-income Americans with health insurance. The Kaiser report explains: \”The ACA expands Medicaid by establishing a new Medicaid eligibility group for adults under age 65 with income at or below 138% FPL [federal poverty line].These adults make up about half the uninsured. Accounting for enrollment among adults who gain Medicaid eligibility due to the expansion, as well as increases in participation among children and adults eligible for Medicaid prior to the ACA, Medicaid enrollment is expected to increase by 21.3 million by 2022. (Note: The ACA does not change Medicaid eligibility for the elderly and people with disabilities.) The Medicaid expansion is effectively a state option. Although the ACA required states to expand Medicaid, in its June 28, 2012 ruling on the constitutionality of the ACA, the Supreme Court curtailed HHS’ ability to enforce the requirement. Specifically, the Justices ruled that HHS cannot withhold federal matching funds for the “traditional” Medicaid program if a state does not implement the Medicaid expansion. The Court’s decision effectively converted the Medicaid expansion to a state option. States that do expand Medicaid must expand it to the 138% FPL threshold to receive the enhanced federal match.\”

While the Affordable Care Act can encourage states to expand Medicaid coverage, it\’s not yet clear how many states will do so. Such attempts will also face some long-standing problems. One issue is that many of those currently eligible for Medicaid don\’t participate, and it\’s not clear how many people will come into the program as a result of expanding eligibility further. The Kaiser report states: \”About 85% of children who are eligible for Medicaid or CHIP participate. However, participation rates among adults are lower – 63% for adults overall and only 38% among childless adults. More than 70% of uninsured children are potentially eligible for Medicaid or CHIP but not enrolled.\”

There\’s also a problem of whether physicians will accept Medicaid patients, and the expansion in the number of Medicaid patients, for treatment.  Here, the Affordable Care Act requires states to raise the pay of Medicaid up to the level of Medicare–a whopping increase in many cases. The KFF report explains: \”A recent report of the General Accountability Office shows that 83% of primary care physicians (PCP) and 71% of specialists serving children participate in Medicaid and CHIP. However, among PCPs who participate, only 45% accept all new Medicaid and CHIP patients (children), compared to 77% who accept all new privately insured children. Among participating specialty care physicians, about half accept all new children covered by Medicaid and CHIP, while almost 85% accept all new privately insured children. … In 2012, Medicaid fees for primary care services averaged 59% of Medicare fees for the same services, and the Medicaid‐to‐Medicare fee ratio for services overall was 66%.53 The ACA requires states to pay primary care physicians at least Medicare rates for many primary care services in 2013 and 2014, in both fee‐for‐service and managed care. The magnitude of the primary care fee increase for the affected services – 73% on average – is unprecedented in Medicaid.\”

What does all of this mean about the costs of the system? The KFF report point out that for the federal government, Medicaid is 7.1% of all outlays. It is the single largest source of federal revenue going to states. States spent 16.7% of their general funds on Medicaid, making in the second-largest item in most  state budgets after elementary and secondary education. Overall, the federal government funds about 57% of Medicaid spending overall. Of course, the Medicaid actuaries in their most recent annual report have chapter and verse on costs. They work through a variety of scenarios about how many states will expand Medicaid coverage under the Affordable Care Act, how many people will take up the additional coverage, how much health care costs will rise, and so on. I\’ll focus here on their main estimates.  The actuaries write:

\”From program inception, the cost of Medicaid has generally increased at a significantly faster pace than the U.S. economy. In 1970, combined Federal and State expenditures for Medicaid represented 0.5 percent of gross domestic product (GDP), but this percentage grew to 0.9 percent in 1980, 1.2 percent in 1990, 2.1 percent in 2000, and 2.8 percent in 2011. As illustrated by the actuarial projections in this report, Medicaid costs will almost certainly continue to increase as a share of GDP in the future under current law. Although much of Medicaid’s expenditure growth (both past and future) is due to expansions of eligibility criteria, the per enrollee costs for Medicaid have also usually increased significantly faster than per capita GDP. This growth pattern is not unique to Medicaid. Costs for virtually every form of health insurance, public and private, have increased rapidly …. Over the next 10 years, expenditures are projected to increase at an average annual rate of 6.4 percent and to reach $795.0 billion by 2021.\”

Here\’s a figure that shows Medicaid spending in nominal dollars over time, with annual growth rates of that spending. 
 Here\’s a figure that shows rising Medicaid expenditures as a share of GDP. 

Here\’s the figure showing the estimates from the actuaries of how Medicaid enrollment has expanded over time–and the added expansion that is expected to happen as part of the Affordable Care Act. The actuaries write: \”The Affordable Care Act is projected to increase Medicaid expenditures by a total of $514 billion for 2012 through 2021, an increase of about 9 percent over projections of Medicaid spending without the impact of the legislation. Most of this increase is projected to be paid by the Federal government ($468 billion, or about 91 percent), which would be about 15 percent greater than projected Federal expenditures excluding the impact of the Act.\”

About a year ago (February 10, 2012), I posted on some of these same issues in \”Medicaid in Transition.\” 

Global Electronic Connectedness

 We live in a world where mobile and cellular phones are becoming universal, and internet connectivity is rising fast.  A half-century ago, Marshall McLuhan wrote about the previous century of electronic interconnection (telegraph, radio, telephone, television) and what was to come. He argued: \”The new electronic interdependence recreates the world in the image of a global village.\” The 2013 ICT Facts and Figures (that is, Information and Communications Technology) from the International Telecommunication Union gives a sense of how we are heading for that global village.

The number of subscriptions to mobile and cellular services is approaching the world population.

Of course, there is variation around the world, and this is a case where 100% is not the upper limit. After all, many people will have multiple phone lines for work and home purposes. As the report notes:  \”Mobile-cellular penetration rates stand at 96% globally; 128% in developed countries; and 89%in developing countries.\” The relatively low level of mobile-cellular penetration in Africa is not a surprise, but I don\’t know why there is such a high level of penetration in the CIS or Commonwealth of Independent States countries–that is, many of the countries that used to make up the Soviet Union.

 What about use of the internet? The proportion of those using the internet is rising fast everywhere, but is more than twice as high in developed economies. Here are overall statistics, and a breakdown by region.

The next wave, of course, is the combination of these two–that is, the share of population with mobile broadband access, effectively turning your phone into a useful internet connection.

Those who want more details, information about price trends, and the like, can start by consulting the ITU  report on \”Measuring the Information  Society 2012.\”  In my own life, my sense is that at least so far the internet is often a way of accomplishing the same pre-internet tasks faster: that is, it\’s faster and easier to find an article, send a manuscript, check a quotation, fine a movie time, pay a bill, get directions, buy a book, drop a note to a friend, and so on. But I suspect that in the global village, my personal life and my environment are going to be shaped more and more by abilities, activities, and interconnections that would have been inconceivable before the global village. Of course, this blog is one such activity.

Next Stage for China\’s Economy

When you look at China\’s annual rates of economic growth, no major problem is apparent. Here\’s a figure showing annual growth rates for China since 1980, generated using the World Development Indicators from the World Bank. Sure, there\’s a little dip back in the 1989-1990, and the growth rate has slowed a bit since the go-go days of 2006 and 2007 just before the Great Recession hit. But take a look just under the surface, and it becomes clear that the main engine of China\’s economic growth needs to change.

For two recent papers discussing the \”rebalancing\” that China\’s economy needs, I recommend \”A Blueprint for Rebalancing the Chinese Economy,\” by Nicholas Lardy and Nicholas Borst, written as Policy Brief PB 13-02 for the Peterson Institute for International Economics, and \”What\’s Next for China?\” by Jonathan Woetzel, Xiujun Lillian Li, and William Cheng from McKinsey. For example, Lardy and Borst start this way:

\”For the past several years China’s top leadership has repeatedly described the country’s current economic model as “uncoordinated, unsteady, imbalanced, and unsustainable.” This language is in sharp contrast to what has been a decade of apparent success: high-speed economic growth and emergence into the ranks of middle-income countries. What accounts for this discontinuity between rhetoric and record? Chinese policymakers have correctly assessed that the country’s economic growth over the past decade has been based on superelevated levels of investment and systematic suppression of private consumption. Th e resulting capital-intensive growth model has not generated adequate gains in consumption and employment and instead has built up significant distortions
in the economy.\”

The way I sometimes think about these issues, in looking at data on China\’s economy, is that something clearly happened around 2001. For example, here\’s a figure from Lardy and Borst showing patterns of household consumption and investment over time. Starting around 2001, consumption starts a fall of about 10 percentage points of GDP, and the investment rate–which had already been sky-high at about 35% of GDP, rises about 10 percentage points of GDP.

Remember, the years after 2001 are a time when economic growth rates were high and rising in China–but consumption as a share of GDP was falling. Similarly, wages as a share of GDP take a downturn after about 2001.

The trade statistics also show changes happening around 2001. Through the 1980s and 1990s, China ran trade surpluses some years and trade deficits other years, and overall was fairly close to an equal balance between exports and imports. But around 2001, China\’s trade surplus starts climbing to about 10% of GDP in 2006, 2007, and 2008.. The main driver is a surge in China\’s exports, which were around 10-15% of GDP in the 1980s and 15-20% of GDP in the 1990s, but have been more like 30% of GDP and higher from 2003-2011. Here are a couple of figures using the World Bank data to illustrate these points.

So what happened around 2001 that caused exports to take off? One factor was that China entered the World Trade Organization that year. In theory, this reduced barriers for both imports and exports, but China\’s exporters found it far easier to charge into the rest of the world than the rest of the world found it to charge into China. Another factor, emphasized by Lardy and Borst, is that back in 2001 China\’s central bank was keeping the exchange rate of its currency pegged to the U.S. dollar. Thus, when the U.S. dollar began to depreciate in value in 2001, China\’s currency also depreciated against all trading partners other than the United States–thus providing an additional spur to exports.

In most economies, when businesses start selling a lot more, then households end up making more money, too. Either the higher sales get passed along in the form of wages to workers, bonuses to managers, interest payments to bondholders, or dividend payments to shareholders. But China\’s financial sector remains underdeveloped, and when firms found themselves sitting on much higher profits and revenues, their easiest course of action (and one encouraged by the government) was to plow those funds back into investment, rather than in one way or another having them end up as household income for consumption purposes.

Everyone from outside economists to the Chinese government seems to agree that \”rebalancing\” China\’s economy toward greater consumption is needed, and a variety of policies are available to help make this happen. For example, Lardy and Borst emphasize several steps: 1) letting China\’s exchange rate continue to fall, which will exert pressure to reduce China\’s exports and increase imports; 2) allowing interest rates to rise, which will reduce the incentive of firms to borrow and invest and put more income in the pockets of savers; 3) removing the controls that keep energy prices artificially low, which effectively provide a subsidy to heavy manufacturing, rather than domestically-oriented service industries; 4) a rise in government spending on health and education services, especially those targeted at the poor.

Woetzel, Li, and Cheng from McKinsey take a slightly different emphasis, and focus on what kinds of policies might help to raise household incomes, thus rebalancing consumption in that way. Thus, they emphasize another set of policies: 1) government policy-makers should scale back on their efforts to hold down wages; 2) deregulation of the financial sector could help household savers get more money and small and medium firms have greater access to capital; and 3) China should encourage entry of new firms in many industries. In some ways, these suggestions can be seen as a way of trying to build the connections from the business sector back to the household sector, so that when companies make money, the gains turn into higher household income rather than an even-higher surge of investment.

The hardest time to reform can sometimes be when things seem to be going reasonably well. (For example, consider the list of economic reforms that the U.S. economy did not implement in the years leading up to the Great Recession.) China\’s economic growth rate remains high. Its trade imbalance has come down a bit in the last few years. But China\’s leadership has shown an intriguing streak of pragmatism and flexibility in its economic policies over the last few decades, and the time has come for one more change of pace for the world\’s second-largest economy.

Intergenerational Economic Mobility

How much is being born into a certain part of the income distribution correlated with where you end up in the income distribution as an adult? Leila Bengali and Mary Daly offer some striking figures in \”U.S. Economic Mobility: The Dream and the Data,\” written as the Federal Reserve Bank of San Francisco Economic Letter for March 4. 
The best way to compare life outcomes across generations is a disputed topic, and Bengali and Daly tackle it this way. They use data from the Panel Study of Income Dynamics, which is a \”longitudinal\” survey: that is, it started off in 1968 with a sample of 5,000 families and has tracked those families, and their children, over the decades. As they write: \”Specifically, we adjust family income for inflation and family size, and compare families with fathers age 36 to 40 with those of their children when they reached the same age bracket.\” This measure of family income includes both taxable income and transfer payments. 

In this figure, the horizontal axis shows \”Birth income quintile,\” that is, if you divide the income distribution into fifths, or \”quintiles,\” where were children born. \”For each birth quintile, five bars describe the distribution of income rank as adults. For example, for all those born into the bottom quintile, 44% are still in that quintile as adults. About half as many, 22%, rise to the second quintile by adulthood. The percentages go down from there. … Similarly, those born into the top income quintile are relatively likely to remain in the top. Among children born into the top quintile, 47% are still there as adults. Only 7% fall to the bottom quintile. The experiences of those born into the middle three quintiles are quite different. The distribution among income quintiles as adults is much more even for those born in these three middle groups, suggesting significant mobility for these individuals. … This pattern has led researchers to conclude that the U.S. income distribution has a fairly mobile middle, but considerable “stickiness at the ends” …\”

What about if we bring education into the picture? Again, start with birth income quintile, but now just look the bottom quintile–no college or college–and the top quintile–no college or college. \”For example, only 5% of children born into the bottom quintile who don’t graduate from college end up in the top quintile. By contrast, 30% of bottom-quintile children who graduate rise to the top quintile. The pattern is different for children born into the top quintile. Most stay in or near the top quintile regardless of whether they graduated from college. Still, the tendency to stay at the top is much more pronounced for those with a college degree. The distributions among income quintiles are similar for children born to parents in the bottom quintile who complete college and for children born into the top quintile who do not get a degree. This suggests that a child born to a bottom quintile family who graduates from college has similar mobility to a child born to a top quintile family who does not finish college. … However, it’s important to note that access to college is not equal across income distribution. Over half of children born into the top quintile graduate from college. By contrast, only 7% of those born to parents in the bottom quintile get a college degree. … This indicates that birth circumstances contribute to the stickiness at the top and bottom of income distribution, either directly or through differential access to education.\”

Here are a couple of additional comments on economic mobility:

First, the appropriate level of mobility across the income distribution is a difficult question upon which to be honest. Most parents I know are more in favor of economic mobility in the abstract than in the particular case of their own children. In the abstract, sure, it\’s easy to argue that every child should have an equal opportunity for their efforts and abilities to take them to the top of the income distribution. But it\’s a hard mathematical fact that not everyone will end up at the top; indeed, half of all students will inevitably fall below the median. It\’s a little less comfortable to argue that every child should have an equal opportunity for their efforts and talents to land them in the middle of the income distribution; and it\’s downright uncomfortable to argue that every child should have an equal opportunity for their talents and efforts to land them at the bottom of the income distribution. As parents, my wife and I make a considerable effort to assure that the opportunities for the efforts and talents of our own children will be above-average.

Second, for the record, the original idea of the \”American dream\” as discussed by the Pulitzer prize-winning historian James Truslow Adams in his 1931 book The Epic of America wasn\’t just about economic mobility, but was also about social equality and the greater freedom that Americans had to to choose their own personal path than did European societies that were more bound by class and social expectations. For my post from back in July 2011 on this subject, see here.

Student Loan Snapshots

The total value of outstanding student loans has nearly tripled in the last eight years–and 17% that total value is owed by people over the age of 50. These and more disturbing facts are apparent from a presentation by Donghoon Lee of the New York Federal Reserve on \”Household Debt and Credit: Student Debt,\” given last week as part of the quarterly release of data on overall household debt and credit trends.

Start with the big picture. Total student debt outstanding has risen from about $350 billion in 2004 to $950 billion by fourth quarter 2012. One-third of that debt is owed by people over the age of 40, and shockingly, at least to me, 5% is owed by people over the age of 60.

Other kinds of debt like credit card loans, auto loans, and home equity loans are down from the peaks they hit just before the recession, while student loans are way up. The increase is built on more students taking out loans each year, and the average balance per borrower is rising.

Perhaps not surprisingly, given these borrowing trends combined with poor job prospects and continued high unemployment, the rate of delinquencies on loans is up. This is measured in two ways. Some borrowers are not yet \”in repayment,\” because they are able to defer their loan for some reason–like they have continued on to another degree. The figures on the right don\’t count the loan as delinquent if you aren\’t yet \”in repayment.\” But for those in repayment, on the right, about one-third of all borrowers are more than 90 days delinquent on their payments, compared with one-fifth back in 2004.

To me, the difficult issue with student loans is that, on average, they are still a good deal, in the sense that on average the income gains from a college education make it possible to repay the average loan and still to come out way ahead. But of course, not everyone is borrowing the average amount. One-eighth or so of borrowers have more than $50,000 in outstanding loans, and 3.7% have more than $100,000 in outstanding loans. Here\’s a distribution of how much student debt people have incurred.

Not everyone will earn the average income of a college graduate, either. Those who borrow to fund a year or two of higher education but then don\’t complete a degree, for example, are less likely reach that average. Those who attend certain schools with poor job placement records, or who major in areas that typically have limited job prospects or low average pay, are going to have a tougher time.

As a father of teenagers, I\’m acutely aware of the fail-safe parenting rule: \”Just don\’t let them screw up their lives before the age of 20.\” Very large numbers of young people–if not still teenagers, still in their early or mid-20s–are in grave danger of screwing up their financial lives even before they are launched in the adult world of work. Borrowing for higher education is on average a good deal, but there\’s often a lot of cheerleading around the student loan process, too. If students are going to be on the hook for these loans, they need to be made aware of how their choices about how much to borrow, where to attend, and what to study affect the risk of ending up delinquent on the loan.