Year: 2013

Consider the situation of high-achieving students from low-income families. In some ways, what happens to them has a disproportionate effect on the degree of economic and social mobility in U.S. society. One would expect a disproportionate share of this group to show upward mobility. But at least in college choices, many of them are heading for nonselective schools that seem below their ability level. Caroline M. Hoxby and Christopher Avery present the evidence in \”The Hidden Supply of High-Achieving, Low-Income Students.\” The conference paper was presented last week at the Spring 2013 Conference on the Brookings Papers on Economic Activity; Brookings also put out put a readable summary of \”Key Findings\”  with some infographics. 

Hoxby and Avery define the group of interest here as students from families with annual income less than $41,472 (the bottom quarter of households), SAT scores in the top 10% of the distribution of those taking the test (which is about 40% of high school graduates), and  high school grade point average of A- or higher. They have data from the SAT folks on where students apply, based on where they have their SAT scores sent. If the student\’s test score is close to the median SAT score of those attending, they call it a \”match.\” Students might also \”reach\” for a school where the median SAT score is above their own, or look for a \”safety school\” where the median test score is below their own. But the striking result is that so many high-achieving students from low-income families tend to apply to non-selective schools. 

The top figure shows application patterns for high-achieving students from high-income (top quarter of income distribution) families, while the figure beneath it shows application patterns for high-achieving students from low-income families.

Hoxby and Avery write: \”[W]e show that a large number–probably the vast majority–of very high-achieving students from low-income families do not apply to a selective college or university. This is in contrast to students with the same test scores and grades who come from high-income backgrounds: they are overwhelmingly likely to apply to a college whose median student has achievement much like their own. This gap is puzzling because the subset of high-achieving, low-income students who do apply to selective institutions are just as likely to enroll and progress toward a degree at the same pace as high-income students with equivalent test scores and grades. Added to the puzzle is the fact that very selective institutions not only offer students much richer instructional, extracurricular, and other resources, they also offer high-achieving, low-income students so much financial aid that the students would often pay less to attend a selective institution than the far less selective or non-selective post-secondary institutions that most of them do attend.\”

Most people start drawing Social Security benefits as soon as they retire. But as John B. Shoven explains in \”Efficient Retirement Design,\” a March 2013 Policy Brief for the Stanford Institute for Economic  Policy Research, this strategy is usually a mistake–and a mistake that have a loss in value of as much as $250,000. To understand the issues here, let\’s set the stage with some facts.

Most people have two major assets at retirement: Social Security and a retirement account like an IRA or 401k, where they have some choice about when and how to draw down that account. Most people follow a strategy where they draw on Social Security right when they retire. Shoven writes: \”Figure 1 shows the distribution of the months of delay between when someone retires (or when they become 62 if they retired before that age) and when they start their Social Security benefits. What you are supposed to see in Figure 1 is that the vast majority of people start their Social Security almost immediately upon reaching 62 or retiring….  Figure 1 makes it look like people think that starting Social Security and retiring are one and the same thing.\”

To understand the theme  here, it\’s useful to think of Social Security as a kind of annuity–that is, an investment that pays out some amount as long as you live. But Social Security is a special kind of annuity. If you delay receiving Social Security, your annual benefits are adjusted upward each year that you wait. In addition, Social Security payments are adjusted upward for increases in the cost of living each year. It\’s difficult and costly to take your own personal retirement benefits and try to buy that kind of inflation-adjusted private-sector annuity with these properties. With life expectancies getting longer and  today\’s climate of very low interest rates, buying a Social Security-style annuity is increasingly valuable.

 For most people, your standard of living after retirement will be higher if you spend the first few years after retirement living on your years on your discretionary retirement funds, and defer Social Security to get the higher benefits later. In effect, by using discretionary funds early in retirement, you are using those funds to \”buy\” a later date for starting Social Security benefits, which raises the value of that Social Security annuity.

Shoven demonstrates this point with a wide variety of examples, and in a working paper written with Sita Slavov, they consider even more examples and issues.  As one example, Shoven suggests looking at a married couple, both age 62, who want to retire. The husband\’s average earnings have been $56,000 per year, while the wife\’s average earnings have been $42,000 per year. They have $257,000 in their retirement accounts. One possibility is that they both start drawing Social Security immediately. However, in another alternative they instead live on their retirement account until age 66, when the lower earner starts drawing Social Security, and then at 70, the higher earner starts drawing Social Security. The husband\’s monthly Social Security check at age 70 will be 76 percent higher than if he had started drawing benefits at age 62.

This \”66/70 strategy,\” in which the lower earner of a couple doesn\’t draw Social Security benefits until age 66 and the higher earner defers benefits until age 70, is often a useful approach. In this example, the couple ends up with $600 more in income per month at age 70. The gain gets bigger over time, as Social Security benefits are adjusted upward. For example, if inflation is 2% per year, and the couple lives to age 90, their income would be $1400/month higher because of following the 66/70 choice for drawing Social Security benefits, instead of drawing the benefits when they retired at age 62. The gain over their lifetime from drawing benefits later is more than $200,000.

Shoven concludes: \”The general message, however, is that Social Security deferral is a good deal for most people. Wehave looked at people with far less in terms of assets than the couple just described. We have looked at the matter by race, by education and by health. …Our conclusion is that most people should be using at least a substantial part of their retirement savings to defer Social Security rather than supplement it. Almost no one is getting it right.\”

The question of why people don\’t delay Social Security benefits hasn\’t been much researched, but it\’s fun to speculate. For some people, presumably the answer is just that they haven\’t considered deferring Social Security for a few years after retirement.  Some people might fear that Social Security won\’t be there in the future. Others might be concerned that if they don\’t take Social Security immediately, they might die before receiving it (although in this case, death would seem to be a bigger problem than leaving some government benefits unclaimed!). Not taking Social Security immediately upon retirement feels like \”leaving money on the table.\” Spending your discretionary money first feels as you are giving up your flexibility and your cushion. But although these kinds of feelings are real, they don\’t change the arithmetic of the situation, which shows that spending discretionary retirement income first and drawing Social Security later will provide gains to most people.

Standard macroeconomic theory suggests that a central government can ameliorate swings in the business cycle through fiscal policy. Thus, when an economy is in recession, it\’s a good time for the government to prop up demand with some combination of tax cuts or spending increases. Conversely, when an economy is running red-hot, it\’s a good time for the government to slow down demand with some combination of tax increases or spending cuts. Indeed, a number of tax and spending programs adjust this way automatically, without the passage of legislation, and thus are know as \”automatic stabilizers.\” The Congressional Budget Office has published a short  primer: \”The Effects of Automatic Stabilizers on the Federal Budget as of 2013.\” 

For example, during the sluggish aftermath of the Great Recession, more people are drawing unemployment benefits, and relying on programs like Food Stamps and Medicaid. Conversely, the unemployed and underemployed are making lower income tax payments than they would have made if employed. These effects are built into the design of the tax code and into the design of safety net programs. This is how automatic stabilizers work. The CBO reports: \”In fiscal year 2012, CBO estimates, automatic stabilizers added $386 billion to the federal budget deficit, an amount equal to 2.3 percent of potential GDP … That outcome marked the fourth consecutive year that automatic stabilizers added to the deficit by an amount equal to or exceeding 2.0 percent of potential GDP, an impact that had previously been equaled or exceeded only twice in the past 50 years, in fiscal years 1982 and 1983 …\”

Here\’s a figure showing the actual budget deficits with the automatic stabilizers, and then what the budget deficit would have looked like in the absence of automatic stabilizers. Notice that during the dot-com boom years of the late 1990s, the actual budget surplus was larger than it would have been without the automatic stabilizers–that is, the stabilizers were working to slow down the economy. Around 2005, the automatic stabilizers were neither making the actual budget deficit higher or lower. But then during the recent recession, as in past recessions, the automatic stabilizers contribute to making the deficit larger.

For the record, you may sometimes hear someone make a comment about the “cyclically adjusted deficit” or the “structural deficit.” These terms refer to what the budget deficit (or surplus) would be without the automatic stabilizers–it\’s the blue line in the figure above.

As a policy tool, automatic fiscal stabilizers have the great advantage that they take effect in real time as the economy changes, without a need for legislation. Even those who may oppose discretionary fiscal policy, where additional tax cuts or spending increases are passed after a recession is underway, don\’t oppose the idea that when people\’s income falls, their taxes should fall and their use of safety net programs should rise.

Most people are familiar with the benefits of diversification of their investments. \”Don\’t put all your eggs in one basket!\” But in one particular way, most investors seem dramatically underdiversified in this globalizing economy: that is, they have a disproportionate share of their investments in their own country, rather than diversified across the countries of the world. In the most recent issue of the Journal of Economic Literature, Nicolas Coeurdacier and Hélène Rey discuss what is known about \”Home Bias in Open Economy Financial Macroeconomics.\” The JEL is not freely available on-line, but many academics will have access either through library subscriptions or through their membership in the American Economic Association.

As as starting point, consider this table. The first column is a list of countries. The second column shows what share of the total global market for equities is represented by the domestic market in that country. Thus, the Australian stock market by value is 1.8% of the value of all global stock markets. The U.S. stock market by value is 32.6% of the value of all global stock markets. The second column shows the share of investments by people in each country that are in the stocks of their own country. Thus, Australia\’s stock market is 1.8% of the world total, but people in Australia have 76.1% of their equity investments in the Australian stock market. This is home bias in action. 

The third column of the table is a common measure of \”equity home bias\” or EHB, defined as:

Home bias has been declining over the last few decades in most high-income countries, and some low-income countries, but it remains high. Here are some illustrative figures for home bias in equities, bonds, and bank assets.

But despite the declines in home bias, it remains notably high. Why are people around the world not taking better advantage of the opportunities for global diversification? This puzzle hasn\’t been fully resolved, but Coeurdacier and Rey discuss the answers that have been proposed. For example:

• People must weigh the benefits of global diversification against the risk of being exposed to fluctuations in exchange rates, and they may not have an easy way to protect themselves against those fluctuations. 
• Some people have wage income where they are already somewhat exposed to economic fluctuations in other countries, while other people do not–which will affect how much diversification they can achieve by investing in other countries. 
• Many domestic firms already have significant exposure to international markets, and so investing in those firms means that people are more exposed to economic factors in other countries than it might at first appear.
• Benefits of global diversification need to be weighed against the transactions costs of making such investments, which include differences in tax treatments between national and foreign assets or differences in legal frameworks. Some countries have regulations that make the transactions costs of foreign investment deliberately higher. 
• Many investors have better information on investments in their own country than on investments in other countries, so the perceive the foreign investments as being riskier. 
• Many investors have certain \”behavioral\” biases like overconfidence or focusing on what is familiar that tend to drive them toward toward investing in home assets, rather than foreign ones.

These points and others in the essay are all well-taken and reasonable. But at the end of the day, it feels to me that a substantial puzzle remains. Sure, Brazil has promising economic prospects in the next few decades. But Brazilian investors have 98.6% of their equity investments in the Brazilian stock market? One wonders if, say, events in Europe over the last few years would be evolving differently if at least some prominent banks and investors had spread their money across Europe and around the world–not just keeping it in their own countries. While it\’s easy to list reasons why one might not want to overload one\’s portfolio with foreign investments, my sense is that many people use those reasons to justify their visceral discomfort with investing more abroad. Personally, I\’m probably not as globally diversified as I should be, either.

The 2013 edition of the Economic Report of the President, written annually by the President\’s Council of Economic, is now available. I\’ll probably do several posts about various themes and topics from the report during the next week or so. Here, I want to focus on some perspectives that the report offers about the sluggish economic recovery.

One intriguing insight, at least for me, is that the pace of the recovery of the economy from the end of the recession has in some ways actually been not too far from historical patterns. However, this recession was exceptionally long and deep, which helps to explain why the recovery feels so inadequate. For example, here\’s a figure showing the pattern of employment after recession. On the horizontal axis, the date of 0 is the \”trough\” or final month of the recession. That level of employment is set equal to an index number of 100 on the vertical axis. Notice that after the trough of the recession, the growth in jobs has been similar to aftermath of the 1991 recession and faster than the 2001 recession. However, if you look at the time before the recession, the fall in jobs during the recession, before the trough, was much longer and much deeper in the Great Recession.  

But there are some other ways of looking at this slower growth, as well. For example, compare the U.S. recovery to that of the economy of the countries of Europe that are in the euro area, or the economy of the United Kingdom. The pattern looks similar in 2007, leading up to the recession, and through 2008 and into 2009, when the recession hit. The recovery for the euro area also looked farly similar to the U.S. experience for a time, up to early 2011. At about that time, the euro area economy began to suffer through its own second wave of problems. Thus, while real GDP in the U.S. economy had exceeded pre-recession levels by late 2011, real GDP in the euro area and the UK has not yet recovered to pre-recession levels.  The U.S. recovery has been sluggish; for the euro area, the recovery is not yet complete.

The report also points out that there is an historical pattern that periods of economic recovery have been experiencing slower growth with each business cycle since 1960. Consider the figure below, showing real GDP from 1960 to 2012. Each of the dashed lines is an extrapolation from the period of economic growth before a recession hit. The slopes of those dashed lines are getting flatter over time, showing that the growth phase of each business cycle has been slowing down.

There are two broad reasons for this slowdown. Real GDP growth is in part due to population growth: more population has meant more workers and faster growth, but population growth has been declining over time, reducing the rate of GDP growth. The other factor is that productivity levels have sagged since the 1960s. There was a modest resurgence of productivity growth for a time in the second half of the 1990s and into the early 2000s, but that boost seems to have faded. 

One of my ongoing mental tasks during the past few years and the next few years is to organize my thoughts about the patterns of the Great Recession and its aftermath, and to put those patterns in historical and international context.

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

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

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

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

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

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

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

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

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

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

• \”Paper Towels v. Air Dryers: (December 10, 2012) 
• \”Real Tree or Artificial Tree?\” (December 24, 2012) 
• \”Reusable Grocery Bags Can Kill (Unless Washed)\” (February 7, 2013) 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Already headed this way

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

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

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

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

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

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

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

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

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

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These are the good old days

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

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

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

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

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

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

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

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

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

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

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

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

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

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