Year: 2013

In monetary policy jargon, \”taking away the punch bowl\” refers to a central bank action to reduce the stimulus that it has been giving the economy. 

Thus,  last Wednesday, Ben Bernanke discussed the possibility that if the U.S. economy performs well, the Federal Reserve would reduce and eventually stop its \”quantitative easing\” policy of buying U.S. Treasury bonds and various mortgage-backed securities. Everyone knows this needs to happen sooner or later, but Bernanke\’s comments raised the possibility that it might be sooner rather than later, and at least for a few days, stock markets dropped and broader financial markets were shaken.
Various blog commentaries and press reports referred to Bernanke\’s action as taking away the \”punch bowl\” (for example, here, here, and here). 

The \”punch bowl\” metaphor seems to trace back to a speech given on October 19, 1955, by William McChesney Martin, who served as Chairman of the Federal Reserve from 1951 through 1970, to the  New York Group of the Investment Bankers Association of America. Here\’s what Martin said to the financiers of his own time, who presumably weren\’t that eager to see the Fed reduce its stimulus, either:

\”If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff. If businessmen, bankers, your contemporaries in the business and financial world, stay on the sidelines, concerned only with making profits, letting the Government bear all of the responsibility and the burden of guidance of the economy, we shall surely fail. … In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects–if it did not it would be ineffective and futile. Those who have the task of making such policy donl t expect you to applaud. The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just
when the party was really warming up.\”

Monetary policy in the 1950s got a lot less attention than it does today: indeed, there was a significant group of economists who believed that it was completely ineffectual. The old story told by Herb Stein in his 1969 book, The Fiscal Revolution in America, was that President John F. Kennedy used to remember what Martin did by \”the fact that William McChesney Martin was head of the Federal Reserve, and that \”Martin\” started with an \”M\”, as did \”monetary,\”  so he knew that monetary policy was what the Federal Reserve did.  (Apparently he was not bothered by the fact that \”fiscal\” and \”Federal Reserve\” both start with an \”f\”.)\”

But Martin viewed monetary policy very much as a balancing act. As he once said in testimony before the U.S. Senate: “Our purpose is to lean against the winds of deflation or inflation, whichever way they are blowing.” (In  the Winter 2004 issue of the Journal of Economic Perspectives, where I\’ve been managing editor since 1986,  Christina Romer and David Romer wrote \”Choosing the Federal Reserve Chair: Lessons from History,\” which puts Martin\’s views on monetary policy in the context of other pre-Bernanke Fed chairmen.)

Martin held the view that monetary policy could be useful in reducing the risk of depressions and inflations, but that it wasn\’t all-powerful. In the 1955 speech, he said:

\”But a note should be made here that, while money policy can do a great deal, it is by no means all powerful. In other words, we  should not place too heavy a burden on monetary policy. It must be accompanied by appropriate fiscal and budgetary measures if we are to achieve our aim of stable progress. If we ask too much of monetary policy we will not only fail but we will also discredit this useful, and indeed indispensable, tool for shaping our economic development. …

\”Nowadays, there is perhaps a tendency to exaggerate the effectiveness of monetary policy in both directions. Recently, opinion has been voiced that the country\’ s main danger comes from a roseate belief that monetary policy, backed by flexible tax and debt management policies and aided by a host of built-in stabilizers, has completely conquered the problem of major economic fluctuations and relegated them to ancient history. This, of course, is not so because we are dealing with human
beings and human nature.

\”While the pendulum swings between too little or too much reliance upon credit and monetary policy, there is an emerging realization more  and more widely held and expressed by business, labor and farm organizations that ruinous depressions are not inevitable, that something can be done about moderating excessive swings of the business cycle. The idea that the business cycle can be altogether abolished seems to me as fanciful as the notion that the law of supply and demand can be repealed. It is hardly necessary to go that far in order to approach the problems of healthy economic growth sensibly and constructively. Laissez faire concepts, the idea that deep depressions are divinely guided retribution for man\’s economic follies, the idea that money should be the master instead of the servant, have been discarded because they are no longer valid, if they ever were.\”

It seems to me that at least some of the current discussion of the Fed has a similar tone to what Martin is describing of exaggeration in both directions. Some critics argue that the extraordinary monetary policies undertaken since the later part of 2007 are useless. On the other extreme, other critics argue that if only those extraordinary policies had been pursued with considerably more vigor, the U.S. economy would already have returned to full employment. In other words, the Fed is either ineffectual or all-powerful–but the truth is likely to exist between these extremes.

My own sense, as I\’ve argued on this blog more than once is that that extraordinary monetary policy steps taken by the Fed made sense in the context of the extraordinary financial crisis and Great Recession from 2007-2009, and even for a year or two or three afterward. But the Great Recession ended four years ago in June 2009. The extreme stimulus policies of the Fed–ultra-low interest rates and direct buying of financial securities–don\’t seem to pose any particular danger of inflation as yet, but they create other dislocations: savers suffer, and some will go on a \”search for yield\” that can create new asset market bubbles; money market funds are shaken; and banks and governments that can borrow cheaply are less likely to carry out needed reforms.  And of course, there is the problem of economic and financial problems that arise when the Fed does take away the punch bowl. For discussion of these concerns, see earlier blog posts here, here, here and here.

My own sense is that there are times for monetary policy to tighten and times for it to loosen, and the very difficult practical wisdom lies in knowing the difference. In a similar spirit, Martin started his 1955 speech this way: \”There\’s an apocryphal story about a professor of economics that sums up in a way the theme of what I would like to talk about this evening. In final examinations the professor always posed the same questions. When he was asked how his students could possibly fail the test, he replied simply, \’\’Well, it\’s true that the questions don\’t change, but the answers do.\”\”

Is there something about the latest wave of information and communication technologies that is especially destructive to jobs? David Rotman offers an overview of the arguments in \”How Technology Is Destroying Jobs,\” in the July/August 2013 issue of the MIT Technology Review.

On one side Rotman emphasizes the work of Erik Brynjolfsson and Andrew McAfee: \”That robots, automation, and software can replace people might seem obvious to anyone who’s worked in automotive manufacturing or as a travel agent. But Brynjolfsson and McAfee’s claim is more troubling and controversial. They believe that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States. And, they suspect, something similar is happening in other technologically advanced countries.\”

As one piece of evidence, they offer this graph showing productivity growth and private-sector employment growth. going back to 1947, these two grew at more-or-less the same speed. But starting around 2000, a gap opens up with productivity growing faster than private sector employment.

The figure sent me over to the U.S. Bureau of Labor Statistics website to look at total jobs. Total U.S. jobs were 132.6 million in December 2000. Then there\’s a drop associated with the recession of 2001, a rise associated with the housing and finance bubble, a drop associated with the Great Recession, and more recently a bounceback to 135.6  million jobs in May 2013. But put it all together, and from December 2000 to May 2013, total U.S jobs now are about 2.2% higher than they were back at the start of the century.

Why the change? The arguments rooted in technological developments sound like this: \”Technologies like the Web, artificial intelligence, big data, and improved analytics—all made possible by the ever increasing availability of cheap computing power and storage capacity—are automating many routine tasks. Countless traditional white-collar jobs, such as many in the post office and in customer service, have disappeared. W. Brian Arthur, a visiting researcher at the Xerox Palo Alto Research Center’s intelligence systems lab and a former economics professor at Stanford University, calls it the “autonomous economy.” It’s far more subtle than the idea of robots and automation doing human jobs, he says: it involves “digital processes talking to other digital processes and creating new processes,” enabling us to do many things with fewer people and making yet other human jobs obsolete.\”

Of course, there are other arguments about slower job growth rooted in other factors. Looking at the year 2000 as a starting point is not a fair comparison, because the U.S. economy was at the time in the midst of the unsustainable dot-com bubble. The current economy is still recovering from its worst episode since the Great Depression.  In addition, earlier decades have seem demographic changes like a flood of baby boomers entering the workforce from the 1960s through the 1980s, along with a flood of women entering the (paid) workforce. As those trends eased off, the total number of jobs would be expected to grow more slowly.

Another response to the technology-is-killing-jobs argument is that while technology has long been disruptive, the economy has shown an historical pattern of adjusting over time. Rotman writes: \”At least since the Industrial Revolution began in the 1700s, improvements in technology have changed the nature of work and destroyed some types of jobs in the process. In 1900, 41 percent of Americans worked in agriculture; by 2000, it was only 2 percent. Likewise, the proportion of Americans employed in manufacturing has dropped from 30 percent in the post–World War II years to around 10 percent today—partly because of increasing automation, especially during the 1980s. … Even if today’s digital technologies are holding down job creation, history suggests that it is most likely a temporary, albeit painful, shock; as workers adjust their skills and entrepreneurs create opportunities based on the new technologies, the number of jobs will rebound. That, at least, has always been the pattern. The question, then, is whether today’s computing technologies will be different, creating long-term involuntary unemployment.\”

Given that the U.S. and other high-income economies have been experiencing technological change for well over a century, and the U.S. unemployment rate was below 6% as recently ago as the four straight years from 2004-2007, it seems premature to me to be forecasting that technology is now about to bring a dearth of jobs. Maybe this fear will turn out to be right this time, but it flies in the face of of a couple of centuries of economic history.

However, it does seem plausible to me that technological development in tandem with globalization are altering pay levels in the labor force, contributing to higher pay at the top of the income distribution and lower pay in the middle. For some discussion of technology and income inequality, see my post earlier this week on \”Rock Music, Technology, and the Top 1%,\” and for some discussion of technology and \”hollowing out\” the middle skill levels of the labor force, see my post on \”Job Polarization by Skill Level\” or this April 2010 paper by David Autor  (Full disclosure: Autor is also editor of the Journal of Economic Perspectives, and thus is my boss.)

Given that new technological developments can be quite disruptive for existing workers, the conclusion I draw is the importance of finding ways for more workers to find ways to work with computers and robots in ways that can magnify their productivity. Rotman mentions a previous example of such a social transition: \”Harvard’s [Larry] Katz has shown that the United States prospered in the early 1900s in part because secondary education became accessible to many people at a time when employment in agriculture was drying up. The result, at least through the 1980s, was an increase in educated workers who found jobs in the industrial sectors, boosting incomes and reducing inequality. Katz’s lesson: painful long-term consequences for the labor force do not follow inevitably from technological changes.\” It feels to me as if we need a widespread national effort in both the private and the public sector to figure out ways in which every worker in every job can use information technology to become more productive.

The arguments over how technology affects jobs remind me a bit of an old story from the development economics literature. An economist is visiting a public works project in a developing country. The project involves building a dam, and dozens of workers are shoveling dirt and carrying it over to the dam. The economist watches for awhile, and then turns to the project manager and says: \”With all these workers using shovels, this project is going to take forever, and it\’s not going to be very high quality. Why not get a few bulldozers in here?\” The project manager responds: \”I can tell that you are unfamiliar with the political economy of a project like this one. Sure, we want to build the dam eventually, but really, one of the main purposes of this project is to provide jobs. Getting a bulldozer would wipe out these jobs.\” The economist mulls this answer a bit, and then replies: \”Well, if the real emphasis here is on creating jobs, why give the workers shovels? Wouldn\’t it create even more jobs if they used spoons to move the dirt?\”

The notion that everyone could stay employed if only those new technologies would stay out of the way has a long history. But the rest of the world is not going to back off on using new technologies. And future U.S. prosperity won\’t be built by workers using the metaphorical equivalent of spoons, rather than bulldozers.

In the old days, like six or seven years ago, one could teach monetary policy at the intro level as consisting of basically one tool: the central bank would lower a particular target interest rates to stimulate the economy out of recessions, and raise that target interest rate when an economy seemed to be overheating. But after the last few years,  even at the intro level, one needs to teach about some additional tools available to monetary authorities. One set of tools goes under the name of \”macroprudential policy.\”

The idea here is that in the past, regulation of financial institutions focused on whether individual companies were making reasonably prudent decisions. A major difficulty with this \”microprudential\” approach to regulation, as the Great Recession showed, is that it didn\’t take into account whether the decisions of many financial firms all at once were creating macroeconomic risk. In particular, when the central bank was looking at whether the economy was in sinking into recession or on the verge of inflation, it didn\’t take into account whether the overall level of credit being extended in the economy was growing very rapidly–like in the housing price bubble from about 2004-2007. I discussed some of the evidence on how boom-and-bust credit cycles are often linked to severe recessions in a March 2012 post on \”Leverage and the Business Cycle\”  as well as in a February 2013 post on \”The Financial Cycle: Theory and Implications.\”

Macroprudential policy means using regulations to limit boom-and-bust swings of credit. Douglas J. Elliott, Greg Feldberg, and  Andreas Lehnert offer a useful listing of these kinds of policies, how they have been used in the past, and some preliminary evidence on how they have worked in \”The History of Cyclical Macroprudential Policy in the United States,\” written as a working paper in the Finance and Economics Discussion Series published by the Federal Reserve.

One basic but quite useful contribution of the paper is to organize a list of macroprudential policy tools. One set of tools can be used to affect demand for credit, like rules about loan-to-value ratios for those borrowing to buy houses, margin requirements for those buying stocks, the acceptable length of loans for buying houses, and tax policies like the extent to which interest payments can be deductible for tax purposes.  Another set of tools affects the supply of credit, like rules about the interest rates that financial institutions can pay on certain accounts, or the interest rates that they can charge for certain loans, along with rules about how much financial institutions must set aside in reserves or have available as capital, any restrictions on the portfolios that financial institutions can hold, and the aggressiveness of the regulators in enforcing these rules. Here\’s a list of macroprudential tools, with some examples of their past use.

One interesting aspect of these macroprudential policy tools is that many of them are sector-specific. When the central bank thinks of monetary policy as just moving overall interest rates, it constantly faces a dilemma. Is it worth raising interest rates for the entire economy just because there might be a housing bubble? Or just because the stock market seems to be experiencing \”irrational exuberance\” as in the late 1990s? Macroprudential policy suggests that one might address a housing market credit boom by altering regulations focused on housing markets, or one might address a stock market bubble by altering margin requirements for buying stock.

 Do these macroprudential tools work? Elliott, Feldberg, and Lehnert offer some cautious evidence on this point: \”In this paper, we use the term “macroprudential tools” to refer to cyclical macroprudential tools aimed at slowing or accelerating credit growth. … Many of these tools appear to have succeeded in their short-term goals; for example, limiting specific types of bank credit or liability and impacting terms of lending. It is less obvious that they have improved long-term financial stability or, in particular, successfully managed an asset price bubble, and this is fertile ground for future research. Meanwhile, these tools have faced substantial administrative complexities, uneven political
support, and competition from nonbank or other providers of credit outside the set of regulated institutions.  … Our results to date suggest that macroprudential policies designed to tighten credit
availability do have a notable effect, especially for tools such as underwriting standards, while
macroprudential policies designed to ease credit availability have little effect on debt outstanding.\”

When the next asset-price bubble or credit boom emerges–and sooner or later, it will–macroprudential tools and how best to use them will become a main focus of public policy discussion.

For more background on the economic analysis behind macroprudential policy, a useful starting point is \”A Macroprudential Approach to Financial Regulation,\” by Samuel G. Hansen, Anil K. Kashyap, and Jeremy C. Stein, which appeared in the Winter 2011 issue of the Journal of Economic Perspectives.  (Full disclosure: My job as Managing Editor of JEP has been paying the household bills since 1986.) Jeremy Stein is now a member of the Federal Reserve Board of Governors, so his thought on the subject are of even greater interest.

Here are some patterns in world energy markets that caught my eye, taken from the just-released BP Statistical Review of World Energy 2013.

For starters, here\’s the long-run pattern of world oil prices. The top line is the relevant one, because the prices are adjusted to 2012 dollars. To me, the striking pattern is that real oil prices are at their all-time high since the Pennsylvania oil boom of the 1860s added enough supply to bring real oil prices down. The severity of the price shocks of the mid- and late 1970s stand out here. but the increase in oil prices since about 2000 is also striking. Even in a U.S. economy that relies more on services and information than on old-style heavy manufacturing, this price increase must be contributing to the economic sluggishness of the last few years. 

What about natural gas prices? The time series here doesn\’t go back so far: only to  1995. What\’s interesting to me here is that natural gas prices around the world move more-or-less in harmony up to about 2008. But since then, natural gas prices in the U.S. have dropped and stayed down, while those in Germany, the UK, and Japan dropped in the recession but have since increased. Natural gas is not (yet?) a unified world market, because it cannot be cheaply transported in volume around the world.  Thus, the recent increases in unconventional natural gas production in North America have brought down prices here, but not in the rest of the world.

What about coal? Here I\’ll focus on quantities, not prices. As the report notes: \”Coal remained the fastest-growing fossil fuel, with China consuming half of the world’s coal for the first
time – but it was also the fossil fuel that saw the weakest growth relative to its historical average. …
 Global coal production grew by 2%. The Asia Pacific region accounted for all of the net increase, offsetting a large decline in the US. The Asia Pacific region now accounts for more than two-thirds of global output. Coal consumption increased by a below-average 2.5%. The Asia Pacific region was also responsible for all of the net growth in global consumption. A second consecutive large decline in North America (-11.3%) more than offset growth in other regions; EU consumption grew for a third consecutive year.\” It appears that North America is finding ways to substitute natural gas for coal on the margin, which is clearly a \”win\” for the environment.

Finally, here\’s an image of overall global energy consumption since 1987.

As the report summarizes: \”World primary energy consumption grew by a below-average 1.8% in 2012. Growth was below average in all regions except Africa. Oil remains the world’s leading fuel, accounting for 33.1% of global energy consumption, but this figure is the lowest share on record and oil has lost market share for 13 years in a row. Hydroelectric output and other renewables in power generation both reached record shares of global primary energy consumption (6.7% and 1.9%, respectively).\” I would also note that while percentage gains in renewable energy sources can appear large from their very small starting point, they remain a tiny part of overall world energy consumption. 

I\’m always on the lookout for real-world applications about how technology is altering the distribution of income. Applications that have intuitive appeal for students are even better! Thus, I enjoyed on several levels Alan Krueger\’s recent talk at the Rock and Roll Hall of Fame, \”Rock and Roll, Economics, and Rebuilding the Middle Class.\” Krueger uses the music industry as a microcosm for technological trends that have led to greater inequality in recent decades. I\’ll start here with some facts and exhibits.

Prices for concert tickets have been rising quickly. Since the early 1980s, overall price inflation is up about 150%, but the price of concert tickets is up about 400%.

 The share of concert revenue received by the top 1% of performers has more than doubled in the last 30 years or so. 

How has technology contributed to this change? Krueger explains: 

\”Technological changes through the centuries have long made the music industry a super star industry. Advances over time including amplification, radio, records, 8-tracks, music videos, CDs, iPods, etc., have made it possible for the best performers to reach an ever wider audience with high fidelity. And the increasing globalization of the world economy has vastly increased the reach and notoriety of the most popular performers. They literally can be heard on a worldwide stage. But advances in technology have also had an unexpected effect. Recorded music has become cheap to replicate and distribute, and it is difficult to police unauthorized reproductions. This has cut into the revenue stream of the best performers, and caused them to raise their prices for live performances. My research suggests that this is the primary reason why concert prices have risen so much since the late 1990s. In this spirit, David Bowie once predicted that “music itself is going to become like running water or electricity,” and, that as a result, artists should “be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left.” While concerts used to be a loss leader to sell albums, today concerts are a profit center.\”

Krueger also points out that which bands become popular is to some extent a matter of luck, and once a band has become popular, that popularity can then be to some extent self-sustaining.

Much of the rest of the talk is given over to applying these lessons to the broader economic picture. Technology has altered many industries so that some ways of earning money have been decimated, while others have been encouraged. The share of income going to the top 1% for the U.S. economy as a whole has been rising. In many cases, who ends up in this top 1% has an element of luck in the sense that very large economic returns are a matter of fortunate timing, not just skill. Those who run the first company to invent a certain product may end up very rich, while those who were just a few weeks or months behind end up with much less. Certainly the current top executives of big companies are lucky in the sense that instead of earning 25 times as much as the pay of an average worker, as CEOs did back in the 1970s, the timing of their career now allows them earn 200 times the pay of an average worker.

Krueger is not a newcomer to the economics of rock \’n roll. For one of his earlier efforts, see \”Rockonomics: The Economics of Popular Music,” by Marie Connolly and Alan B. Krueger. They quote  the  well-known noneconomist Paul Simon: “The fact of the matter is that popular music is one of the industries of the country. It’s allcompletely tied up with capitalism. It’s stupid to separate it.” It\’s available as a 2005 working paper from the Princeton UJniversity Industrial Relations Section.

A common complaint from some of those learning economics, and from some economists themselves, is that the formal study of economics is straitjacket that limits analysis and constrains policy conclusions–in particular that it leads to an overappreciation of market forces and an underappreciation of the usefulness of government interventions. This belief seems misguided to me. John Maynard Keynes, who said so many things so well, once wrote (in his introduction to Cambridge Economic Handbooks: \”[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.\”

Dani Rodrik spells out very nicely how neoclassical economics has proved no hindrance to his work that has often questioning what was at the time mainstream economic wisdom in an interview published in the April 2013 issue of the World Economics Association Newsletter. Here are a few of Rodrik\’s comments. 

On the usefulness of the economics toolkit

\”I have never thought of neoclassical economics as a hindrance to an understanding of social and economic problems. To the contrary, I think there are certain habits of mind that come with thinking about the world in mainstream economic terms that are quite useful: you need to state your ideas clearly, you need to ensure they are internally consistent, with clear assumptions and causal links, and you need to be rigorous in your use of empirical evidence. Now, this does not mean that neoclassical economics has all the answers or that it is all we need. Too often, people who work with mainstream economic tools lack the ambition to ask broad questions and the imagination to go outside the box they are used to working in. But that is true of all “normal science.” Truly great economists use neoclassical methods for leverage, to reach new heights of understanding, not to dumb down our understanding. Economists such as George Akerlof, Paul Krugman, and Joe Stiglitz are some of the names that come to mind who exemplify this tradition. Each of them has questioned conventional wisdom, but from within rather than from outside. …

\”The criticism of methodological uniformity in Economics can also be taken too far. Surely, the use of mathematical and statistical techniques is not a problem per se. Such techniques simply ensure our arguments are conceptually and empirically coherent. Yes, excessive focus on these techniques, or the use of math just for its own sake, are a problem–but a problem against which there is already a counter-movement from within. In the top journals of the profession, I would say most math-heavy papers are driven by substantive questions rather than methods-driven concerns. \”

 On the critique that many economists are narrow in their outlook.
 

\”There are powerful forces having to do with the sociology of the profession and the socialization process that tend to push economists to think alike. Most economists start graduate school not having spent much time thinking about social problems or having studied much else besides math and economics. The incentive and hierarchy systems tend to reward those with the technical skills rather than interesting questions or research agendas. An in-group versus out-group mentality develops rather early on that pits economists against other social scientists. All economists tend to imbue a set of values that tends to glorify the market and demonize public action. What probably stands out with mainstream economists is their awe of the power of markets and their belief that the market logic will eventually vanquish whatever obstacle is placed on its path.\”

My perhaps old-fashioned view of government is that it exists to carry out tasks on behalf of the citizenry. Although the government needs to hire people to carry out those tasks, government employees are not a purpose of government; instead, they are a cost of carrying out government tasks. I would like the federal bureaucracy to be well-managed by tough cost-cutters, so that as high a proportion as possible of tax money can flow to program beneficiaries, infrastructure needs, and the like, not government paychecks. Thus, I get a queasy feeling from \”Sizing Up the Executive Branch,\” a January 2013 report from the U.S. Office of Personnel Management.

The figure shows total civilian employment by the federal government in the last eight years. NSFTP, the blue bars, shows Non-Seasonal Full-Time Permanent employees. Other, shown by the red bars,  is part time, seasonal, and nonpermanent employees.

Whenever I see these numbers, the sheer size of federal employment widens my eyes. About 144 million Americans are employed, and more than 1% of them work are civilian employees of the federal government. While unemployment rates have been wrenchingly high for the last five years, government employment has been growing. The number of non-seasonal permanent full-time federal employees rose by about 250,000 from 2006 to 2011–a rise of about 15%–before falling back slightly in 2012.

It\’s plausible that the Great Recession from 2007-2009 required hiring additional government employees, but now that the end of the recession is four years behind us, will we see the federal civilian employment levels drop substantially–say, by 10% or more? Much of what the government does is manage information about programs and people. Developments in information and communications technology should make it possible to do these tasks more efficiently, if they are implemented by thoughtful managers with a cost-cutting focus. No politician publicly advocated a permanent increase of several hundred thousand federal employees, but it just happened anyway.

If you are interested in discussion of the pay of federal employees relative to their private-sector counterparts, see my February 2012 post \”Government Workers: It\’s Not the Wages, It\’s the Benefits.\” 

Note added later: Louis Johnston points out that in the notes under Table 3 of this report, it reads: \”The Department of Defense, Department of Homeland Security, Department of Justice, Department of the Air Force, Department of the Army, Department of the Navy, and the Department of Veterans Affairs have each grown by more than 10,000 employees over the past eight fiscal years. Over the last eight fiscal years those seven agencies have grown by over 230,000 employees.\” However, remember that this report is only civilian employees of the federal government–not armed forces. So most of the increase is the civilian national security apparatus in various forms.

China\’s wages have risen quickly in the last decade or so, but not quickly enough to keep up with productivity growth. (To put it another way, the share of national income earned by labor is falling in China, as elsewhere.) One factor that has prevented wages from rising even faster is that China has had a vast number of underemployed workers. As China\’s industry expanded, it could keep drawing more and more of these underemployed workers into its higher-productivity sectors, but the presence of these underemployed workers held the average pay raise below what it would otherwise have been. However, Mitali Das and Papa N’Diaye explain that this dynamic is reaching its end in \”The End of Cheap Labor,\” which appears in the June 2013 issue of Finance and Development. They refer to some of the best-known work of development economist Sir Arthur Lewis, who won the Nobel prize back in 1979, to set up their argument.

\”In Sir Arthur Lewis’s seminal work (1954), developing economies are characterized by two sectors: a low-productivity sector with excess labor (agriculture, in China’s case) and a high-productivity sector (manufacturing in China). The high-productivity sector is profitable, in part, because of the surplus of labor it can employ cheaply because of the low wages prevalent in the low-productivity sector. Because productivity increases faster than wages, the high-productivity sector is more profitable than it would be if the economy were at full employment. It also promotes higher capital formation, which drives economic growth. As the number of surplus workers dwindles, however, wages in the high productivity sector begin to rise, that sector’s profits are squeezed, and  investment falls. At that point, the economy is said to have crossed the Lewis Turning Point. …

\”Recent developments in the Chinese labor market seem somewhat contradictory. On the one hand, aggregate wage growth has remained about 15 percent during the past decade, and corporate profits have remained high. Wage growth lags productivity, resulting in rising profits, which suggests that China has not reached the so-called Lewis Turning Point … at which an economy moves from one with abundant labor to one with labor shortages. At the same time, though, since the financial crisis began, industry has increasingly relocated from the coast to the interior, where the large reserve of rural labor resides. As a result, previously large gaps between the demand for and supply of registered city workers have progressively narrowed, and worker demand for higher wages and better working conditions has risen—suggesting the onset of a structural tightening in the Chinese labor market.\”

Part of their argument is based on estimates of how many workers in China remain in the low-productivity sectors, and thus could still transfer over to the high-productivity sectors. But such estimates are inevitably a little shaky. They are on stronger ground, it seems to me, in pointing out that \”demographics virtually guarantee that China will cross the Lewis Turning Point—almost certainly before 2025.\”

Here\’s a figure showing the annual growth rate of China\’s working-age population. Back in the 1970s and 1980s, the China\’s working age population was growing at 10-15% per year. But as the effects of the one-child policy began to bite, growth in the working-age population is slowing, and will start to shrink around 2020. 

As another illustration, here\’s a figure showing the total size of China\’s \”core group\” of workers age 25-39, compared with the size of the group of those under age 15 and over age 64. In the 1970 and 1980s, the boom in China\’s working-age population meant that the number of \”core workers\” outstripped what can be viewed as the \”dependent\” population for a few years. This pattern of a surge in workers is sometimes called the \”demographic dividend.\” But the \”core group\” is already starting to shrink in size, and the number of elderly in China is about to take off. China\’s labor market is clearly evolving toward a very different situation. 

For a more in-depth discussion of these patterns, I recommend a couple of articles from the Fall 2012 issue of the Journal of Economic Perspectives: Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong contributed \”The End of Cheap Chinese Labor.\” and Xin Meng writes on \”Labor Market Outcomes and Reforms in China.\”  (Full disclosure: I\’m the managing editor of JEP, so I am predisposed to believe that all of its content is fascinating and well-done. It\’s also freely available compliments of the American Economic Association.)
 

What are the world\’s biggest health problems and risks? The Global Disease Burden study, a collaborative project that in its most recent version includes 488 co-authors from 303 institutions in 50 countries, tries to answer that question. A nice summary of some of the results is available from the Institute for Health Metrics and Evaluation at the University of Washington in its report \”The Global Burden of Disease: Generating Evidence, Guiding Policy.\”

There are perhaps two main ways to measure health effects. The simpler one is how many deaths are caused. A more complex one uses DALYs, or \”disability-adjusted life years,\” a measure that was first developed in the first Global Disease Burden study in the 1990s, but has become common since. It seeks to measure how many healthy years of life are lost: thus, if someone\’s health is injured, there is a cost in DALYs even if their life expectancy doesn\’t change. Of course, if their health is diminished and life expectancy falls, too, the cost in DALYs is greater.

Here\’s a figure showing the top 10 leading diseases and injuries on a global basis, shown with blue diamonds, and the top 10 risk factors for for deaths, shown with brown diamonds. The horizontal axis shows their cost in deaths in 2010. The vertical axis shows their cost in DALYs. Thus, \”Low Back Pain\” among the top 10 diseases and injuries based on DALYs, although it is not a direct cause of death. Lung cancer and diarrhea cause a similar number of deaths, but diarrhea is far worse in terms of DALYs.  A few of the high risk-factors that jump out at me as being a little unexpected to find in the top 10 are \”Diet low in fruit,\” \”Household air pollution,\” and \”High sodium.\”

What problems are getting better, and what  problems are getting worse? Here\’s a figure which lists the top 25 risk factors, from left to right. Thus, in keeping with the figure above, the first five are \”High blood pressure,\” \”Smoking,\” \”Household air pollution,\” \”Diet low in fruit,\” and \”Alcohol use.\” However, rather than showing the level of health damage done, the figure shows how the level if injury changed from the 1990 data in the first Global Disease Burden study to the 2010 data used in this study.

Clearly, the three big success stories in the last two decades in terms of reduced DALYs are a reduced health cost from \”Household air pollution,\” from \”Childhood underweight,\” and from \”Suboptimal breastfeeding.\”

Among the rising problems, the world is managing to combine a rising number of DALYs from \”High body mass index\” with people having health problems from \”Diet Low in Fruit,\” \”High sodium,\” \”Diet Low in Nuts and Seeds,\” \”Diet low in whole grains,\” \”Diet low in vegetables,\” \”Diet low in omega-3,\” \”High-processed meat,\” and \”Diet low in fiber,\” not to mention \”Smoking\” and \”Alcohol.\” In short, a large share of the world\’s health risk factors, and a large share of the problems that are getting worse, have to do with what people are putting in their mouths.

Between credit cards, debit cards, automatic deposits, automatic payments, making payments via a smartphone, and similar technologies, it seems as if cash must be on the way out. But John C. Williams explains otherwise in \”Cash Is Dead! Long Live Cash!\” an essay written for the 2012 Annual Report of the Federal Reserve Bank of San Francisco.  Williams writes :

\”[S]ince the start of the recession in December 2007 and throughout the recovery, the value of U. S. currency in circulation has risen dramatically. It is now fully 42% higher than it was five years ago. … Over the past five years, cash holdings increasedon average about 7¼% annually, more than three times faster than theeconomy’s growth rate over this period. At the end of 2012, currency in circulation stood at over $1.1 trillion, representing a staggering $3,500 for every man, woman, and child in the nation.\”

To get a sense of what\’s happening here, consider this figure. The red line in the middle shows growth of GDP over time. The green line at the bottom shows the growth of U.S. currency in circulation in denominations of $50 or less. The blue line at the top shows total currency in circulation: that is, the gap between the green line and the blue line is made up of $100 bills.

From 1989 through the early 1990s, the growth of currency with denominations of $50 or less pretty much tracked the rise in GDP. But with the arrival of all the alternative methods of payment listed above, the rise in currency in denominations of $50 or less began to lag well behind the rise of GDP. However, overall currency in circulation, and especially those $100 bills, have risen faster than the rise in GDP.

Part of the story here is that in the scary economic times of the last few years, when many financial institutions looked unsafe, more Americans have been holding cash. Williams writes: \”As fears about

But it\’s not just Americans who hold U.S. currency. If you were a European looking  at the financial and banking struggles across the continent, holding some U.S. dollars in the form of cash might make some sense. Williams writes: \”As Europe’s crisis worsened in the spring of2010, U.S. currency holdings rose sharply. And they continued to rise as economic and political turmoil and uncertainty about the future sent Europeans scrambling to convert some of their euros to dollars. It’s estimated that the share of U.S. currency held abroad rose from about 56% before the tumultuous events of the past five years to 64% in 2011.\” My guess is that many of the newly well-to-do in China, India, Brazil and Russia have also built up a stash of U.S. $100 bills.

In both of these situations, it\’s important to notice that with interest rates at such extremely low levels, those who decide to hold cash are not giving up much in terms of foregone interest payments.

Two other explanations are sometimes offered for the rise of cash, but they are probably minor factors. First, price levels in general have risen, and so more people are likely to use $100 bills for transactions–like buying a tankful of gasoline or going grocery shopping. While this is probably a contributing factor,  not that many people are walking around with $100 bills in their wallets for daily transactions. Second, $100 bills may be used to pay those in the \”gray economy,\” all those people who work jobs that are paid in cash and  not reported to the IRS or Social Security or unemployment insurance or workman\’s compensation. Again, this is probably a contributing factor, but most cash-based employers are not handing their nanny or gardener a few $100 bills.