Year: 2013

In the past, those with student loans had more debt that those without such loans, but also had similar credit scores and were more likely to have a home loan or a car loan. The reason, of course, is that hose with student loans also are more likely to have attended colleges and universities, and the improved job prospects from higher education in some sense outweighed the student loan debt. But now the pattern has altered, as Meta Brown and Sydnee Caldwell of the New York Federal Reserve report.

Here are a couple of illustrative figures looking at home loans and car loans. Notice that up to about 2008, those with student debt were more likely to have home and car loans. Since then, they have become slightly less likely to have such debt.

Here\’s a figure, showing credit scores for 25 and 30 year-olds, with and without student debt. Notice that up to about 2008, credit scores were similar for those with and without student debt–essentially, the higher level of debt for those with student loans, who were also more likely to have home and car loans, was counterbalanced by their higher earning power. But since 2008, the credit scores of 25 and 30 year-olds without student debt have risen, while those with student debt have been flat or slightly declining.
 

Of course, these numbers are averages. Probably the key fact to remember about student debt is that there is enormous variation in the payoff to higher education depending on the school you attend, your major, whether you complete a degree, and other factors. For previous posts on student loan issues, see \”Student Loan Snapshots\” (March 4, 2013) and \”Average College Student, Average Loan\”
(March 27, 2012). 

When it comes to worrying about future financial dangers, Raghuram Rajan has a track record. Back in 2005, he presented a paper at a high-profile conference of central bankers called, \”Has Financial Development Made the World Riskier?\” He answered \”yes,\” and took a lot of criticism for a few years–before the financial crash and Great Recession from 2007-2009 largely proved him right.

Rajan has now given the first Andrew Crockett Memorial Lecture at the Bank of International Settlements, titled \”A step in the dark: unconventional monetary policy after the crisis.\” With economic predictions, as with stock market forecasters, it\’s always wise to note that past performance is no guarantee of future success. But it\’s always worth learning about how Rajan sees the world. He writes:  

\”Two competing narratives of the sources of the crisis, and attendant remedies, are emerging. The first, and the better known diagnosis, is that demand has collapsed because of the high debt build up prior to the crisis. … But there is another narrative. And that is that the fundamental growth capacity in industrial countries has been shifting down for decades now, masked for a while by debt-fuelled demand. More such demand, or asking for reckless spending from emerging markets, will not put us back on a sustainable path to growth. Instead, industrial democracies need to improve the environment for growth. The first narrative is the standard Keynesian one, modified for a debt crisis. It is the one most government officials and central bankers, as well as Wall Street economists, subscribe to, and needs little elaboration. The second narrative, in my view, offers a deeper and more persuasive view of the blight that afflicts our times.\”

Rajan argues that the extraordinary steps taken by the Federal Reserve and other central banks in the heat of the financial crisis and recession was brave and correct. However, he points out that the policies of ultra-low interest rates since the end of the crisis have not restored the economy to health, and worries about some of the risks and problems that are being stored up.

\”Hindsight is 20–20. It now seems obvious that central banks should have done what they did then, but in many ways, the central banks were making it up as they went. Fortunately for the world, much of what they did was exactly right. They eased access to liquidity through innovative programs such as TALF, TAF, TARP, SMP, and LTRO. By lending long term without asking too many questions of the  collateral they received, by buying assets beyond usual limits, and by focusing on repairing markets, they restored liquidity to a world financial system that would otherwise have been insolvent based on prevailing market asset prices. In this matter, central bankers are deservedly heroes in a world that has precious few of them. … Be that as it may, the second stage of the rescue was to stimulate growth with ultra-low interest  rates. And thus far, the central banks have been far less successful.\”

For all the hot-tempered rhetoric about the actions of the Federal Reserve since about 2009, the truth is that economists don\’t have strong theory or evidence on how these policies should work. Rajan writes: 

\”Churchill could well have said on the subject of unconventional monetary policy, “Never in the field of economic policy has so much been spent, with so little evidence, by so few”. Unconventional monetary policy has truly been a step in the dark.\”

Rajan offers some discussion of the potential issues with a policy of sustained ultra-low interest rates. For example:

•  \”[F]inancial risk taking may stay just that, without translating into real investment. For instance, the price of junk debt or homes may be bid up unduly, increasing the risk of a crash, without new capital goods being bought or homes being built. … As just one example, the IMF’s Global Financial Stability Report (Spring 2013) points to the re-emergence of covenant lite loans as evidence that greater risk tolerance may be morphing into risk insouciance.
• \”[A]ccommodative policies may reduce the cost of capital for firms so much that they prefer labor-saving capital investment to hiring labor. …  Excessive labor-saving capital investment may defeat the very purpose of unconventional policies, that is, greater employment. Relatedly, by changing asset prices and distorting price signals, unconventional monetary policy may cause overinvestment in areas where asset prices or credit are particularly sensitive to low interest rates and unanchored by factors such as international competition. For instance, the economy may get too many buildings and too few machines, a consequence that is all too recent to forget.\”
• \”The spillovers from easy global liquidity conditions to cross-border gross banking flows, exchange rate appreciation, stock market appreciation, and asset price and credit booms in capital receiving countries – and eventual overextension, current account deficits, and asset price busts has been documented elsewhere, both for pre-crisis Europe and post-crisis emerging markets.\”
• Politicians may avoid taking necessary reforms, because they unwisely believe that central bankers have all the tools necessary to bring long-term economic health.
• \”Exiting central bankers have to be prepared to “enter” again if the consequences of exit are too
  abrupt. Will exit occur smoothly, or in fits and starts, or abruptly? This is yet another aspect of
  unconventional monetary policies that we know little about.\”

As America\’s population ages, many more elderly people are going to need services and supports, ranging from a little help at their own home to community based care, residential care facilities, and skilled nursing home care. The Congressional Budget Office usefully lays out the issues in its June 2013 report, \”Rising Demand for Long-Term Services and Supports for Elderly People.\”

The starting point, of course, is that the U.S. population is aging.

At present, the majority of the value of the provision of long-term care services is provided by \”informal care\”–that is, care provided without compensation by family and friends. The CBO estimated the value of this care by looking at estimates of the number of hours involved, and then valuing that time at $21/hour, which is roughly the average cost of hiring someone to provide this kind of care.

As the proportion of older adults climbs, especially those over 85, many of them are going to need greater assistance. Here\’s an estimate of the need for assistance among elderly people living in the community–that is, not those who need residential or skilled nursing home care. With more people living longer and with fewer children than previous generations, informal care is unlikely to be able to meet the growing need for these services.

Of course, as people become older they are more likely to need institutionalized care, as well.

I\’m not at all sure how best to start building social institutions to address these coming needs, but here are some thoughts.

1) It would of course be best if most people could make some provision for the costs of their own care. But many Americans don\’t have much in savings. And getting people to buy long-term care insurance is a tough sell, in part because it\’s unclear how this care will be provided several decades in the future and what it will cost, and in part because Medicaid eventually steps in and covers nursing home care for those whose assets are depleted–which gives people less incentive to buy private insurance. In fact, more than half of the current nursing home residents in the U.S. are having their bills paid by Medicaid. For more discussion, see this post on \”Long-Term Care Insurance in the U.S.\”

2) Some other high-income countries have government programs to pay for long-term care. Not surprisingly, they spend a substantially greater share of GDP on long-term than does the U.S. In any event, the long-term U.S. budget picture is grim enough that adding another entitlement for the elderly isn\’t likely. For more discussion, see \”Long-Term Care in International Perspective.\”

3) It\’s typically much less expensive if the elderly can continue to live in the community, whether in their own home or in some kind of community residence. CBO reports: \”In 2011, the annual cost of care for a resident paying either out of pocket or with private insurance in a semiprivate room in a nursing home averaged nearly $80,000.\” Living in the community is also what most of the elderly prefer. Thus, the challenge is how to retrofit homes to be safe for the elderly, and to start planning and setting up a network of community-based residences near shopping, libraries, parks, public transit, and health care, and providing a network of services, but in a way that continues to encourage the provision of informal care and support by family and friends. It will be difficult to draw this balance.

4) Much depends on the health status of the elderly a few decades from now. If the elderly not only live longer but remain relatively active and healthy, then that should lead to one blueprint for long-term care. If the elderly start living much longer, and if their health becomes especially frail for many years, another blueprint for long-term care will be needed. Again, I don\’t have a clear blueprint in my own mind for how to address these issues. But it is virtually certain that the need for long-term care for the elderly is going to rise dramatically, and pushing most of them into Medicaid-funded nursing homes is unlikely to be the best answer.

For economists around the world, 1776 means the publication date of Adam Smith\’s classic The Wealth of Nations.  Book IV, Chapter 7, is entitled \”Of Colonies.\” Smith expresses the view that Europe contributed very little to the economic success of its American colonies–except for some talented people. He also believed that the while England benefited from trade with its colonies, England also had to bear the costs of defense and of the monopolies on trade that it created. He painted a picture of how the American colonies might be allowed democratic representation, but viewed it as a politically unlikely outcome. He also predicted that even when a nation didn\’t benefit from having colonies, it was still reluctant to let the colonies go peacefully. The quotations here are from the ever-useful \”Library of Economics and Liberty,\” which has number of classic works  of economics freely available in searchable form on-line.

\”The policy of Europe, therefore, has very little to boast of, either in the original establishment or, so far as concerns their internal government, in the subsequent prosperity of the colonies of America. Folly and injustice seem to have been the principles which presided over and directed the first project of establishing those colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality…. 

\”The English Puritans, restrained at home, fled for freedom to America, and established there the four governments of New England. The English Catholics, treated with much greater injustice, established that of Maryland; the Quakers, that of Pennsylvania. The Portugueze Jews, persecuted by the Inquisition, stripped of their fortunes, and banished to Brazil, introduced by their example some sort of order and industry among the transported felons and strumpets by whom that colony was originally peopled, and taught them the culture of the sugar-cane. Upon all these different occasions it was not the wisdom and policy, but the disorder and injustice of the European governments which peopled and cultivated America. …\”

\”When those establishments were effectuated, and had become so considerable as to attract the attention of the mother country, the first regulations which she made with regard to them had always in view to secure to herself the monopoly of their commerce; to confine their market, and to enlarge her own at their expence, and, consequently, rather to damp and discourage than to quicken and forward the course of their prosperity. In the different ways in which this monopoly has been exercised consists one of the most essential differences in the policy of the different European nations with regard to their colonies. The best of them all, that of England, is only somewhat less illiberal and oppressive than that of any of the rest.\”

\”In what way, therefore, has the policy of Europe contributed either to the first establishment, or to the present grandeur of the colonies of America? In one way, and in one way only, it has contributed a good deal. … It bred and formed the men who were capable of achieving such great actions, and of laying the foundation of so great an empire; and there is no other quarter of the world of which the policy is capable of forming, or has ever actually and in fact formed such men. The colonies owe to the policy of Europe the education and great views of their active and enterprising founders; and some of the greatest and most important of them, so far as concerns their internal government, owe to it scarce anything else.\”

\”To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow-citizens to found and maintain such an empire. Say to a shopkeeper, Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops; and you will not find him very forward to embrace your proposal. But should any other person buy you such an estate, the shopkeeper would be much obliged to your benefactor if he would enjoin you to buy all your clothes at his shop. England purchased for some of her subjects, who found themselves uneasy at home, a great estate in a distant country. The price, indeed, was very small, and instead of thirty years purchase, the ordinary price of land in the present times, it amounted to little more than the expence of the different equipments which made the first discovery, reconnoitred the coast, and took a fictitious possession of the country. The land was good and of great extent, and the cultivators having plenty of good ground to work upon, and being for some time at liberty to sell their produce where they pleased, became in the course of little more than thirty or forty years (between 1620 and 1660) so numerous and thriving a people that the shopkeepers and other traders of England wished to secure to themselves the monopoly of their custom. Without pretending, therefore, that they had paid any part, either of the original purchase-money, or of the subsequent expence of improvement, they petitioned the parliament that the cultivators of America might for the future be confined to their shop; first, for buying all the goods which they wanted from Europe; and, secondly, for selling all such parts of their own produce as those traders might find it convenient to buy. … A clause in the famous act of navigation established this truly shopkeeper proposal into a law.\”

\”In order, however, to obtain this relative advantage in the colony trade, in order to execute the invidious and malignant project of excluding as much as possible other nations from any share in it, England, there are very probable reasons for believing, has not only sacrificed a part of the absolute advantage which she, as well as every other nation, might have derived from that trade, but has subjected herself both to an absolute and to a relative disadvantage in almost every other branch of trade. … \”

Smith discussed various possibilities for how Great Britain might deal with its colonies. One proposal was that Great Britain should just \”voluntarily give up all authority over her colonies,\” which would then allow Britain and America, in friendship to benefit from free trade between them. But he despaired of this possibility. 

\”To propose that Great Britain should voluntarily give up all authority over her colonies, and leave them to elect their own magistrates, to enact their own laws, and to make peace and war as they might think proper, would be to propose such a measure as never was, and never will be adopted, by any nation in the world. No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expence which it occasioned. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride of every nation, and what is perhaps of still greater consequence, they are always contrary to the private interest of the governing part of it, who would thereby be deprived of the disposal of many places of trust and profit, of many opportunities of acquiring wealth and distinction, which the possession of the most turbulent, and, to the great body of the people, the most unprofitable province seldom fails to afford. The most visionary enthusiast would scarce be capable of proposing such a measure with any serious hopes at least of its ever being adopted. If it was adopted, however, Great Britain would not only be immediately freed from the whole annual expence of the peace establishment of the colonies, but might settle with them such a treaty of commerce as would effectually secure to her a free trade, more advantageous to the great body of the people, though less so to the merchants, than the monopoly which she at present enjoys. By thus parting good friends, the natural affection of the colonies to the mother country which, perhaps, our late dissensions have well nigh extinguished, would quickly revive. It might dispose them not only to respect, for whole centuries together, that treaty of commerce which they had concluded with us at parting, but to favour us in war as well as in trade, and, instead of turbulent and factious subjects, to become our most faithful, affectionate, and generous allies …\”

As an alternative, Smith suggested that there could be taxation with representation: that is, Americans could be given representation in the British parliament. He argues that if Americans were offered such a possibility, many of their leaders would be delighted with the chance to rise in British politics. But denied such a possibility, the American leaders feel a

\”The parliament of Great Britain insists upon taxing the colonies; and they refuse to be taxed by a Parliament in which they are not represented. If to each colony, which should detach itself from the general confederacy, Great Britain should allow such a number of representatives as suited the proportion of what is contributed to the public revenue of the empire, in consequence of its being subjected to the same taxes, and in compensation admitted to the same freedom of trade with its fellow-subjects at home; the number of its representatives to be augmented as the proportion of its contribution might afterwards augment; a new method of acquiring importance, a new and more dazzling object of ambition would be presented to the leading men of each colony. Instead of piddling for the little prizes which are to be found in what may be called the paltry raffle of colony faction; they might then hope, from the presumption which men naturally have in their own ability and good fortune, to draw some of the great prizes which sometimes come from the wheel of the great state lottery of British polities.

\”Unless this or some other method is fallen upon, and there seems to be none more obvious than this, of preserving the importance and of gratifying the ambition of the leading men of America, it is not very probable that they will ever voluntarily submit to us; and we ought to consider that the blood which must be shed in forcing them to do so is, every drop of it, blood either of those who are, or of those whom we wish to have for our fellow-citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress, feel in themselves at this moment a degree of importance which, perhaps, the greatest subjects in Europe scarce feel. From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world. … Almost every individual of the governing party in America fills, at present in his own fancy, a station superior, not only to what he had ever filled before, but to what he had ever expected to fill; and unless some new object of ambition is presented either to him or to his leaders, if he has the ordinary spirit of a man, he will die in defence of that station.\” 

And of course, Smith\’s prediction, published in 1776 but largely written several years earlier, came true. To repeat, on this Fourth of July: \”From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world.\”

Douglas Clement has a characteristically excellent interview with Susan Athey, appearing in the June 2013 issue of The Region, which is published by the Federal Reserve Bank of Minneapolis. Athey is a professor at Stanford\’s Business School, winner of the  John Bates Clark medal in 2007, and also has been Chief Economist at Microsoft since 2007. Here are some snippets:

On whether the arrival of \”big data\” means that theory is now less important:

\”In fact, the need for theory is in some ways magnified by having large amounts of data. When you have a small amount of data, you can just look at the data and build your intuition from it. When you have very large amounts of data, just taking an average can cost thousands of dollars of computer time. So you’d better have an idea of what you’re doing and why before you go out to take those averages. The importance of theory to create conceptual frameworks to know what to look for has never been larger … I think what is true is that when you have large amounts of data, if you ask it the right questions, you have a greater ability to let the data speak, and so you can be much less reliant on assumptions. But you still need a strong conceptual framework to understand what’s coming out.

\”And I would say in the business world, this is where there’s an enormous scarcity of talent. I see that there are a fair number of statisticians out there, not nearly enough, but a fair number of data scientists out there. There’s a huge demand for them still. But among data scientists, the ones who can define a question and introduce a new way of looking at the data—those data scientists are rock stars. They’re pursued by every company and they move up the hierarchy very quickly. They’re giving presentations to top executives and are extraordinarily influential. And there are never enough of them.\”

Why economics should focus more on issues of big data: 

\”I think that the data scientists should take a little more economics. That would help; economics puts a lot of emphasis on the conceptual framework. And I also think that economics should be paying a lot more attention to the statistics of big data.
Right now, economics as a profession has very little market share in the business analysis of this big data. It’s mostly statisticians. We’re just not training our undergraduates to be qualified for these jobs. Even our graduate students, even someone with a Ph.D. from a very good economics department really doesn’t have the right skills to analyze the kinds of data sets that big Internet firms are creating. … We’re a little bit behind. Econometrics, at the undergraduate level, is not appreciated as much as an expertise that’s extremely important for future employment, and we certainly don’t see a lot of economics majors going on to take extra steps beyond what’s required….I really think we need to make some changes in education. What happens at the top Ph.D. programs isn’t going to really impact the overall workforce. But what we do at the undergraduate level and whether we start offering more advanced or master’s level courses becomes more important—because, really, with just an undergraduate degree it’s hard to be very successful on the technical side at any of these firms.\”

How big data will generate future productivity gains: 

\”Companies in all sorts of different industries are starting to generate large amounts of data. The Internet companies were built from the ground up on that data. Other companies are just starting to think about what they do with the data. If you think about these kind of general purpose innovations like the computer, it took us a while to figure out what to do with the computer. It replaced the secretary and the typewriter, but it took another 15 years before the personal computer really changed the way we do commerce, which you would say really comes with the Internet and businesses being built around it.\”

\”With the big data, of course, the Googles and the Facebooks and so on were born on that. But if you take, say, a car manufacturer that might be getting real-time information from monitoring devices within the cars, there’s a first level of things you can do with that data. Like you can look at aggregate failure rates, or something, for certain types of things. You can identify problems.\”

\”But there’s a whole other level of optimizations that can be done. And I think that idea will apply across many industries. They’ll start with just the basics of, let’s figure out how to prioritize problems. For example, with software you can get telemetry data about, where are the bugs? What’s causing crashes? That’s sort of the first level of what you do with data: You use the data to identify problems and make priorities. The more frequent the crash, the higher you prioritize in fixing that problem. But there’s a next level, which includes real-time machine learning, customization, personalization, optimization, where industry as a whole is just inventing what to do with it. And there could be some really radical breakthroughs in different industries. They’re just very hard to anticipate as they start to use these data.\”

On the idea that auction design needs to focus not only on getting the highest bid, but also on attracting lots of bidders:

\”So if you’re thinking about how to design an auction, or how to design a market more generally, even though it can be tempting to focus on what happens once the people are in the room, it can be more important to start with designing your marketplace to get people to come, to start with. This insight is one that I’ve brought to other settings. I think, for example, it applies in online auctions. When a large company like eBay or an online advertising firm is designing its marketplace, for example, it can be more important to design your marketplace to attract bidders and make sure they’re there to participate than it is to try to extract every last cent out of them once they get there. If potential bidders are not making enough profit to make it worth their time to come, they won’t come. And thin markets can be much more problematic.\”

On the difference between profit-seeking search engines and competitive search engines: 

\”[A] profit-maximizing search engine cares how much surplus the advertisers get versus the search engine. As a result of that, a monopolist search engine will tend to raise reserve prices [meaning the lowest price they’ll accept] too high in order to extract more surplus from the advertisers even if it means eliminating ads that the consumers might have liked to see. In contrast, a competitive search engine—one that’s competing for advertisers and users—will be more likely to choose the welfare-maximizing point.  A more realistic model would also incorporate the other content that gets crowded off the page by the ads; such a model would be more likely to see a monopolist search engine put up too many ads relative to what consumers would like, but again competition would typically push a firm closer to welfare maximization in order to keep both sides of the market participating.\”

Cato Unbound for June 2013 has a lively and provocative set of essays on \”The Political Economy of Recycling.\” The lead essay is by Michael Munger, with comments from Edward Humes, Melissa Walsh Innes, and Stephen Landsberg.  All of the essays are full of lively examples and sharp writing. Here are three examples from Munger, but these essays have many more treats in store.

Example 1: Wash Your Garbage

\”When I was working on recycling policies for cities, I read a lot of web sites that described what was expected of good citizens.  Note that these policies were not mandatory; they were just what a moral person was expected to do.  The duties of good citizens came down to three things:  (1) recycle everything; (2) sort it assiduously; and (3) wash it carefully. Note that this whole approach is entirely insulated from costs or the logic of price.  The reason “we” recycle is that people in our town are good people, not people motivated by money. …

\”The result is that people drive, sometimes several miles or more, to sort their garbage into little bins like they were playing demented Tetris.  Bottles and glass here, plastic here, paper here, aluminum there.  In many cities, the resulting separated waste is actually picked up, re-mingled, and landfilled, because it has no economic value whatsoever.  But that’s okay, because the important thing is the moral act of recycling, not the saving of resources. The strangest part of this fetishization of garbage … is the practice advocated by many small towns:  run your garbage through the dishwasher.  …

\”Curious, I phoned the public relations officers with the recycling departments in several small cities in the Northeast.  I asked one extremely cheerful and energetic young woman how her city could justify asking people to put their garbage in the dishwasher.  Isn’t that pretty expensive, in terms of human time, and the energy to heat the water, compared to the value of the garbage? Using the same tone of voice one would use to talk to a five year old—she clearly thought I was not the sharpest can lid in the recycle bin—she gave me the most concise explanation I have encountered in the whole genre.  She said, “Oh, you have to understand, sir.  Recycling is always cheaper, no matter how much it costs!” …. The problem is that, from economic perspective, from the perspective of balancing resource use, that’s just not true.  If you are trying to save energy and resources such as water and time, it never makes sense to put your garbage in the dishwasher.

Example 2: Required Composting Goes Awry

\”The state of North Carolina, where I live, has a law against disposing of yard waste in a standard landfill.  This makes some sense. Yard waste decomposes naturally and turns into compost eventually, so it can be disposed of more safely than the dangerous waste we put in landfills.  But the city of Durham, where Duke University is located, decided that they would do the state one better.  The city council required all citizens to dispose of their yard waste at curbside, where it was picked up by city trucks and taken to the city composting facility.

\”The city collected an extra fee—about $60—from residents to operate this service.  Expenses were much greater than that, but the theory was that the composted yard waste could be resold to pay the rest of the costs of the operation.  Best of all, there would be no need for landfilling the yard waste once the operation was up and running:  yard waste in, compost out, with no waste going to any other kind of disposal. The problem was that much of the yard waste was large stumps and tree limbs, resulting from several hurricanes and large storms.  The “compost pile” quickly became the “stump dump,” an enormous pile of rubbish.  The idea that the stuff was valuable was just wrong. It was garbage, not “black gold.”

\”And then it caught fire.  Spontaneous combustion deep inside the pile, a common result of decomposition and pressure, found enough oxygen to begin to smolder.  The city tried to put it out by soaking the pile, but that just made the smoke worse. The fire could not be completely extinguished for weeks, and neighbors for miles downwind complained of the pollution. So the waste that homeowners paid extra for reusing was dumped instead in the main garbage staging facility. But remember, the law prohibits disposal of yard waste in landfills in North Carolina.    So, Durham shipped all its trash, including grass clippings, to a landfill more than 85 miles away in Lawrenceville, VA.  The clean-up and the extra hauling charges cost Durham an extra $1 million compared to landfill disposal.\”

Example 3: Recycling vs. Reducing the Waste Stream

\”There are two ways to think of the solution to a problem.  Consider the problem of polio, a disease that killed tens of thousands and ruined the lives of millions around the world in the 1930s through 1950s.  One solution was to try to ease the suffering of polio victims, developing better iron lungs and systems of braces, wheelchairs, and prosthetics to make it possible that they could live some kind of life.  This industry was enormous, and highly profitable. The other solution was to develop a vaccine, the one that Dr. Jonas Salk finally perfected in 1952, and which showed itself to be effective within a decade.  By the late 1960s, polio had been reduced sharply in the United States.  Now, it is almost unknown here and in most of the rest of the world.  Of course, the makers of braces, crutches, and iron lungs took a beating, because no one needed their products anymore.  But the total costs to society were dramatically reduced, even accounting for the “loss” to the equipment manufacturers.

\”When it comes to waste management, we are at the stage of manufacturing braces and iron lungs.  Our brightest and most motivated young people are pawing through garbage, arguing about who is more holy and who is most devoted to the misleadingly moralized cause of recycling.  Huge investments in industry and innovation are being misdirected–may I say “thrown in the garbage”?–because we are working on the wrong problem. … 

\”We need to be working on the waste management equivalent of the Salk vaccine:  prevent the creation of a massive and expensive waste stream at the source.  We have to change the incentives so that manufacturers are responsible for the waste they create, the packaging they use to move products, the containers they use to hold liquids, food items, and consumer goods. …

Who will solve the problem, and how?  I am a Hayekian; I have no idea.  And unlike the Salk vaccine there may not be any one identifiable person or idea that solves the problem.  What I do know is that if we recognize that the answer is not arguing over how to handle garbage that already exists, we have to produce less garbage in the first place.  The answer may be counterintuitive, of course.  Where we have reduced the amount of plastic in bottles and aluminum in cans by more than 50% in the last decade, the answer may be to increase the sturdiness of containers so that they can be reused. Instead of reducing the bulk of pallets and packages, the answer may be to make packages reusable, in the same way that shipping containers are now refilled and reused rather than melted down and reprocessed after a single use.

\”If we start asking the right question—not how to recycle garbage, but how to prevent garbage’s existence—we might make progress.  As it stands, too many people, and too many large powerful corporations, have a financial stake in the status quo. They are making the waste management equivalent of iron lungs and polio braces.\”

How many people in the world have a million dollars or more in financial assets? That is, leave aside the value of real estate or other owned property. Capgemini and RBC Wealth Management provide some estimates in a report that seeks to define the global market for the wealth management industry, the World Wealth Report 2013.

The report splits High Net Worth Individual (HNWI, natch) into three categories. Those with $1 million to $5 million in financial assets are in the \”millionaire next door\” category, and while I find that name a bit grating, it\’s fair enough. After all, a substantial number of of households in high-income countries that are near retirement, if they have been steadily saving throughout their working life, will have accumulated $1 million or more. The next step up is those with $5 million to $30 million in financial assets, who this report calls the \”mid-tier millionaires.\” At the top, with more than $30 million in financial assets are the \”ultra-HNWI\” individuals. Here\’s the global distribution:

A few quick observations:

1) The \”ultra-HNWI\” individuals are less than1% of the total HNWI population, but have  35% of the total assets of this group. The \”millionaires next door\”  with $1 million to $5 million are 90% of the high net worth individual population, and have 42.8% of the total net worth of this group.

2) Another table in the report shows that 3.4 million of the high-net worth individuals–about 28% of the total–are in the United States.  The next four countries for number of people in the high net worth category are Japan (1.9 million), Germany (1.0 million), and China (643,000) and the UK, (465,000).

3) World population is about 7 billion. So the 12 million or so high net worth individuals are about one-sixth of 1% of the world population.

One grim piece of news for the U.S. economy in the last few decades has been that the high school graduation rate flattened out around 1970. In a modern economy that depends on skills and brainpower, this is a troubling pattern. Richard J. Murnane considers the evidence and explanations in \”U.S. High School Graduation Rates: Patterns and Explanations,\” in the most recent issue of the Journal of Economic Literature (vol. 51:2, pp. 370–422). The JEL is not freely available on-line, although many in academia will have on-line access through their library or through a personal membership in the American Economic Association. Here\’s how Murnane sets the stage (footnotes and citations omitted for readability):

\”During the first seventy years of the twentieth century, the high school graduation rate of teenagers in the United States rose from 6 percent to 80 percent. A result of this remarkable trend was that, by the late 1960s, the U.S. high school graduation rate ranked first among countries in the Organisation for Economic Co-operation and Development (OECD). The increase in the proportion of the labor force that had graduated from high school was an important force that fueled economic growth and rising incomes during the twentieth century.

Between 1970 and 2000, the high school graduation rate in the United States stagnated. In contrast, the secondary school graduation rate in many other OECD countries increased markedly during this period. A consequence is that, in 2000, the high school graduation rate in the United States ranked thirteenth among nineteen OECD countries.

Until quite recently, it appeared that the stagnation of the U.S. high school graduation rate had continued into the twenty-first century. However, evidence from two independent sources shows that the graduation rate increased substantially between 2000 and 2010. This increase prevented the United States from losing further ground relative to other OECD countries in preparing a skilled workforce. But graduation rates in other OECD countries also increased during that decade. As a result, the U.S. high school graduation rate in 2010 was still below the OECD average.\”

Here\’s a figure showing the patterns. The horizontal axis shows (approximate) birth year. The vertical axis shows the  high school graduation rate for those who were 20-24 at the time. Thus, for example, the upward movement of the graph for those born around 1980 is based on data when those people had reached the age of 20-24.

Why the stagnation in high school graduation rates from 1970 up to about 2000? Clearly, it\’s not because the labor market rewards to getting a high school degree had declined; in fact, the gains from a high school degree had increased. Research has looked at explanations especially relevant at certain places and time, like a boom in demand for Appalachian coal in the 1970s that might have made a high school degree look less value to lower-skilled labor in that area, or how the crack epidemic of the late 1980s and early 1990s altered the expected rewards to finishing high school for a group of young men in certain inner cities, or how the end of certain court-ordered desegregation plans led to higher dropout rates for some at-risk youth.

While all of these explanations have an effect in certain times and places, Murnane suggests a bigger cause: a pattern of increasing high school graduation requirements that started in the 1970s. He writes: \”In summary, my interpretation of the evidence is that increases in high school graduation requirements during the last quarter of the twentieth century increased the nonmonetary cost of earning a diploma for students entering high school with weak skills. By so doing, they counteracted the increased financial payoff to a diploma and contributed to the stagnation in graduation
rates over the last decades of the twentieth century.\”

Why have high school graduation rates apparently risen in the last 10 years or so? Murnane offers some fragmentary evidence that better-prepared ninth graders, expanded preschool programs, and reductions in teen pregnancy may have played a role. But his conclusion is modest: \”In summary, there are many hypotheses for why the high school graduation rate of 20–24-year-olds in 2010 is higher than it was in 2000, and why the increase in the graduation rate was particularly large for blacks and Hispanics. However, to date, there is no compelling evidence to explain this encouraging
recent trend.\”

Murnane offers the useful reminder that voting to raise graduation standards is easy, but raising the quality of education so that a rising share of students can meet those standards is hard. \”An assumption implicit in state education policies is that the quality of schooling will improve sufficiently to enable high school graduation rates to rise even as graduation requirements are stiffened. Indeed, many states increased public expenditures on public education to facilitate this improvement. However, it has proven much more difficult to improve school quality than to
legislate increases in graduation requirements.\”

My own concern about high school graduation requirements is that they are too often focused on getting a student into a college, any college, rather than moving the student toward a career. A high school student in the 25th percentile of a class should still be able to graduate from high school. But while some students who performed poorly in high school will shine in college–and should have an opportunity to do so–it is an unforgiving fact that many students at the bottom of the high school performance distribution will have little interest or aptitude in signing up for more schooling.

In the Spring 2013 issue of the Journal of Economic Perspectives, Julie Berry Cullen, Steven D. Levitt, Erin Robertson, and Sally Sadoff tackle this question: \”What Can Be Done To Improve Struggling High Schools?\” They point out that the overall high school graduation rates do not show the depth of the problem in a number of inner-city school districts. They conclude: \”In spite of decades of well-intentioned efforts targeted at struggling high schools, outcomes today are little improved. A handful of innovative programs have achieved great success on a small scale, but more generally, the economic futures of the students at the bottom of the human capital distribution remain dismal. In our view, expanding access to educational options that focus on life skills and work experience, as opposed to a focus on traditional definitions of academic success, represents the most cost-effective, broadly implementable source of improvements for this group.\” (Full disclosure: I\’ve been the Managing Editor of the Journal of Economic Perspectives for the past 27 years, so I am predisposed to find all of the articles intriguing. All JEP articles back to the first issue in 1987 are freely available on-line courtesy of the American Economic Association.)

A number of scientists believe that rising levels of carbon dioxide are likely to lead to climate change. Maybe they are incorrect! But prudence suggests that when enough warning sirens are going off, you should at least start looking at options. In that spirit, I found it useful to consider Robert S. Pindyck essay on \”Pricing Carbon When We Don’t Know the Right Price,\” in the Summer 2013 issue of Regulation magazine. The issue also includes four other articles on carbon tax issues. Pindyck sets the stage in this way:

\”There is almost no disagreement among economists that the true cost to society of burning a ton of carbon is greater than its private cost. … This external cost is referred to as the social cost of carbon (SCC) and is the basis for the idea of imposing a tax on carbon emissions or adopting a similar policy such as a cap-and-trade system. However, agreeing that the SCC is greater than zero isn’t really agreeing on very much. Some would argue that any increases in global temperatures will be moderate, will occur in the far distant future, and will have only a small impact on the economies of most countries. If that’s all true, it would imply that the SCC is small, perhaps only around $10 per ton of CO2, which would justify a very small (almost negligible) tax on carbon emissions, e.g., something like 10 cents per gallon of gasoline. Others would argue that without an immediate and stringent GHG abatement policy, there is a reasonable possibility that substantial temperature increases will occur and might have a catastrophic effect. That would suggest the SCC is large, perhaps $100 or $200 per ton of CO2, which would imply a substantial tax on carbon, e.g., as much as $2 per gallon of gas. So who is right, and why is there such wide disagreement?\”

Pindyck acknowledges the uncertainty over how the atmospheric science of climate change, but as befits an economist, his main focus is on the economic issues. He points to the often cited study by Michael Greenstone, Elizabeth Kopits and Ann Wolverton, who published a 2011 paper on \”Estimating the Social Cost of Carbon for Use in U.S. Federal Rulemakings: A Summary and Interpretation.\” They estimated a \”central value\” for the social cost of carbon of $21 per ton of carbon dioxide emissions. But as Pindyck points out, this central value is of uncertain value for three reasons. First, the link from climate change to an effect on economic output \” is completely ad hoc and of almost no predictive value. The typical IAM [\”integrated assessment model\”] has a loss function that relates temperature increases to reductions in GDP. But there is no economic theory behind the loss function; it is simply made up. Nor are there data on which to base the parameters of the function; instead the parameters are simply chosen to yield moderate losses that seem “reasonable” (e.g., 1 or 2 percent of GDP) from moderate temperature increases (e.g., 2° or 3°C). Furthermore, once we consider larger increases in temperatures (e.g., 5°C or higher), determining the economic loss becomes pure guesswork. One can plug high temperatures into IAM loss functions, but the results are just extrapolations with no empirical or theoretical grounding.\”

A second problem is that the \”central value\” doesn\’t reveal anything about the potential risk of catastrophe–and by the time one has combined the uncertainties of how well climate science can predict catastrophic weather changes that are 50 or 100 years away, combined with uncertainties over the economic costs of those weather changes, this problem is severe.

The third problem is choosing a \”discount rate\”–that is, how should we best compare the costs of acting in the near-term to reduce carbon emissions with the benefits that would be received in 50 or 100 years? Presumably, a substantial share of the benefits will go to people who do not yet exist, and who, presuming that economic growth continues over time, will on average have considerably higher incomes than we do today.  Placing a high value on those future benefits means that we should be willing to sacrifice a great deal in the present; placing a lower value on those future benefits means a smaller willingness to incur costs in the present. But deciding how much to discount the future is an unsettled question in both economic and philosophy.

Pindyck\’s policy proposal is to set a low carbon tax now. He argues: \”Because it is essential to establish that there is a social cost of carbon, and that social cost must be internalized in the prices that consumers and firms actually see and pay. Later, as we learn more about the true size of
the SCC, the carbon tax can be increased or decreased accordingly.\” My own views on this subject favor a \”Drill-Baby Carbon Tax.\”

But I\’d take a moment here to note that the temptation to argue based on the low-probability chance of catastrophe needs to be handled with care. After all, there are lots of possible sequences of events that are low-probability, but potentially catastrophic. Those who want to limit use of fossil fuels call up  certain climate change scenarios. Those who are anti-science point to the possibility that scientists working with genetics or nanotechnology over the next century will create a doomsday plague. Those who favor huge spending on defense and espionage point to the possibility that a rogue government or a group of terrorists will be able to arm themselves with weapons of mass destruction. Those who favor aggressive space exploration talk about the possibility of the earth suffering a devastating strike from an asteroid in the next century or two. Write your own additional political, economic, and science fiction disaster scenarios here! My point is that being able to name a catastrophe with a low but unquantifiable probability is a fairly cheap tool of argumentation.