Year: 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2012 Actuarial Report on the Financial Outlook for Medicaid.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are a couple of additional comments on economic mobility:

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

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

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

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

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

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

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

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

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

It\’s common to describe the U.S. as having employer-based health insurance, and while that statement is broadly true, it doesn\’t capture the limitations of this approach. Hubert Janicki of the U.S. Census Bureau lays out some of the basic trends and patterns in \”Employer-Based Health Insurance: 2010,\” a February 2013 report. Here are a few facts:

The share of the U.S. population over the age of 15 covered by employment-based health insurance (either by their own employer or as a dependent) has been falling, dropping from 64.4% in 1997 to 56.5% in 2010.

Of the employed, 70.2% have employment based health insurance in 2010, down from 76.2% back in 2002. Of the employed, 18% have no health insurance in 2010, compared with 14.5% of the employed back  in 2002.

In other words, employer-provided health insurance has long fallen short of universal coverage, and it\’s been getting skimpier over the last decade or so. For example, those with lower incomes and those working for smaller firms are less likely to have employer-based health insurance.

\”By family income, the likelihood of working for an employer that offers any health insurance benefits increased with family income. Individuals with family incomes less than 138 percent of the federal poverty level were the least likely to work for an employer that offered health insurance benefits.Among these workers, 43.3 percent were employed in firms that offered health insurance benefits. In comparison, 63.9 percent of individuals with family incomes between 139 percent and 250 percent of the federal poverty level worked for such an employer. Among workers with family incomes 251 percent to 400 percent of the federal poverty level, 74.8 percent were employed in firms that offered health insurance benefits. Workers with family incomes 401 percent and above of the federal poverty level were themost likely to work for an employer that offered health benefits (80.9 percent). …

\”Less than one half (45.3 percent) of people working in firms with fewer than 25 employees received health insurance benefits compared with 88.8 percent for people who worked for firms employing 1,000 or more employees …\”

Of course, the limitations of employer-provided health insurance are not sufficient to prove that the Affordable Care Act passed into law in 2009 is a useful solution. Indeed, the looming presence of that act soon to take effect, together with the economic wreckage of the Great Recession, may help to explain the drop-off in employer-provided health insurance in the last few years. But whatever the limitations of that legislation, the shortcomings of employer-provided health insurance are very real.

It\’s always worth remembering (and I have noted before on this blog) that the predominance of employer-provided health insurance in the U.S. economy is an historical accident. Melissa Thomasson offers a nice overview in \”From Sickness to Health: The Twentieth-Century Development of U.S. Health Insurance,\” in the July 2002 issue of Explorations in Economic History, but that\’s not freely available on-line. However, Thomasson offers a brief overview at the Economic History Association website here. Thomasson points out that the number of Americans with health insurance went from 15 million in 1940 to 130 million in 1960. Blue Cross/Blue Shield plans began to be established in the 1930s. Then in World War II, the fateful decision was made to encourage employers to provide health insurance, and not to tax individuals on the value of that health insurance they received. Here\’s Thomasson:
 

\”During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers. … [I]n 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and the United Steelworkers Union that the term \”wages\” included pension and insurance benefits. Therefore, when negotiating for wages, the union was allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system.

\”Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer\’s contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943 which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income. While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s …\”

If you feed any industry with enormous tax breaks, especially especially an insurance industry that separates both providers and ultimate consumers from facing costs directly, you are likely to get high levels of spending that, on the margin, bring only very slight benefits.

At least as measured by emissions of carbon dioxide, \”Africa is the green continent,\” as Paul Collier and Anthony Venables note in the most recent issue of the World Economic Review. Of course, the reason is that the standard of living across Africa is so low that not much energy is being consumed. As the economies of Africa develop, can its energy demand be green?

The common relationship between economic growth and environmental pollution is sometimes called the \”environmental Kuznets curve.\” It\’s an inverted-U; that is, economic development first brings a rise in pollution, but then later leads to a reduction in pollution. Much of the underlying reason involves political tradeoffs: the very poor are more willing to sacrifice environmental protection for gains in consumption, while those who are better off become less willing to do so. For a review of these arguments in my own Journal of Economic Perspectives from back in 2002, see \”Confronting the Environmental Kuznets Curve\” by Susmita Dasgupta, Benoit Laplante, Hua Wang and David Wheeler.( Like all articles in JEP back to the first issue in 1987, it is freely available on-line courtesy of the American Economic Association.) Here\’s a figure from Collier and Venables, showing production of carbon dioxide relative to economic output as measured by GDP.

The hope that Africa might be able to minimize the rise or even sidestep the rise in pollution that often comes with technological development is rooted in several underlying facts. Africa has strong natural potential for use of some renewable energy resources, like solar power. In addition, Africa has what economists have long referred to as \”the advantages of backwardness\” (the phrase comes from the writings of Alexander Gerschenkron back in 1962, available at various places on the web like here ). The notion is that countries which start out behind may be able to catch up rapidly because they can draw on technologies already developed elsewhere. In some cases, they may even be able to leapfrog certain stages of techology; for example, many areas of Africa may move directly to mobile phones rather than land lines for all and, for example, to retail banking based on these phones, rather than following the historical path of phones and banking from high-income countries.

Could Africa also use modern technologies for energy conservation and alternative sources of energy to sidestep the environmental Kuznets curve? Collier and Venables pose this question in \”How Rapidly Should Africa Go Green? The Tension Between Natural Abundance and Economic Scarcity.\” The essay is a nice readable version of a more technical research paper that they published last year in Energy Economics–\”Greening Africa? Technologies, Endowments and the latecomer effect\”–which is available as a working paper here.  Their conclusion is not optimistic: 

\”Superficially, Africa appears well-suited for green energy. Sunshine, water, land, forests, and being a latecomer all confer significant advantages. However, energy generation, energy saving, and carbon capture are intensive in capital, governance capacity and skills. Unfortunately, all of these factors are scarce in Africa. These factor scarcities offset the advantages conferred by natural endowments and are often decisive. Similarly, the historic advantage of being a latecomer to the installation of generating capacity is offset by the historic disadvantage of the acute energy scarcity inherited from past under-investment: Africa cannot afford to wait for further developments in green technologies. Nevertheless, there is scope for Africa’s natural advantages for green energy to be harnessed to a global advantage. But to do so will require international action that brings global factor endowments to bear on Africa’s natural opportunities.\”

What sort of international action would be especially useful? They emphasize three possibilities: 1)
\”It is cheaper for the international community to pay for the installation of green technology in Africa’s new plants than to retrofit it in existing Northern plants;\” 2) \” A second Africa-specific opportunity in generation is for international public finance, perhaps through guarantees, to subsidize the cost of switching from gas flaring to either LNG or gas-fired electricity generation;\” 3) \”A third would be to provide international public subsidies or guarantees for hydropower mega-projects.\”

For an overview of the scale of this issue, a useful starting point is a 2011 World Bank report by

Last November, I pointed out that President Obama had campaigned in 2008 on a pledge to raise the minimum wage, but that this proposal had vanished during the rest of his first term. Now, after the election, Obama somewhat unexpectedly resurrected the proposal in his State of the Union address. For a review of the controversy over the economics of the minimum wage, a useful starting point is
\”Why Does the Minimum Wage Have No Discernible Effect on Employment?\” written by John Schmitt for the Center for Economic and Policy Research.

While Schmitt\’s title suggests, albeit in the form of a question, that it is an agreed-upon truth that the minimum wage has \”no discernible effect on employment,\” I would say that his own review of the evidence suggests that there is still a genuine controversy between those who see the employment effects of the minimum wage as nil and those who see it as small. As Schmitt writes in the conclusion: \”[W]hat is striking about the preceding review of possible channels of adjustment – including employment – is how often the weight of the empirical evidence is either inconclusive (statistically insignificant or positive in some cases and negative in others) or suggestive of only small economic effects.\”

There is a difficult problem of inferring causality here. Compared to the overall costs of firms, or even compared to the costs of low-wage labor, the effects of a slightly higher minimum wage are going to be hard to distinguish from everything else that\’s happening in the economy. The employment prospects for low-skilled workers have been falling for decades, and it would clearly be incorrect to blame that on the minimum wage. Rises in the minimum wage are more likely to occur when the economy is doing well and adding jobs, but it would clearly be incorrect to infer from this correlation that a higher minimum wage causes an increase in jobs. In addition, there are difficult questions of what is sometimes called \”publication bias\” in the minimum wage literature, in which researchers of different political bents may–surprise, surprise–tend to publish the results that confirm their pre-existing beliefs.

Rather than try to unpick this empirical puzzle here–for those who are interested, Schmitt provides a nice overview of the key paper and their methods–I\’d like to focus on a separate issue, which I call the Law of Many Margins. The \”law\” simply points out that when a rule is imposed, like a minimum wage, there are almost always a wide variety of possible reactions to that law. Schmitt provides a list of 11 possible reactions (!) to a higher minimum wage. They are:

1. Reduction in hours worked (because firms faced with a higher minimum wage trim back on the hours they want)
2. Reduction in non-wage benefits (to offset the higher costs of the minimum wage)
3. Reduction in money spent on training (again, to offset the higher costs of the minimum wage)
4. Change in composition of the workforce (that is, hiring additional workers with middle or higher skill levels, and fewer of those minimum wage workers with lower skill levels)
5. Higher prices (passing the cost of the higher minimum wage on to consumers)
6. Improvements in efficient use of labor (in a model where employers are not always at the peak level of efficiency, a higher cost of labor might give them a push to be more efficient)
7. \”Efficiency wage\” responses from workers (when workers are paid more, they have a greater incentive to keep their jobs, and thus may work harder and shirk less)
8. Wage compression (minimum wage workers get more, but those above them on the wage scale may not get as much as they otherwise would)
9. Reduction in profits (higher costs of minimum wage workers reduces profits)
10. Increase in demand (a higher minimum wage boosts buying power in overall economy)
11. Reduced turnover (a higher minimum wage makes a stronger bond between employer and workers, and gives employers more reason to train and hold on to workers)

The evidence on many of these  points is ambiguous at best, and indeed may vary across industries or geographic areas or employers. But it\’s worth noting that which of these effects arise, and with what magnitude, can only be settled by empirical evidence, not theoretical assertions.

I confess that I find it hard to get too excited about modest increases in the federal minimum wage every few years, which has been happening for decades. As Schmitt points out, the evidence is that this pattern of minimum wage increases has had at most a small effect on employment and other outcomes. But the minimum wage was $5.15/hour in 2007, when President Bush signed legislation to raise it to $7.25/hour by 2009. Given an unemployment rate that has been stuck near or above 8% for four solid years now, my preference would be to de-emphasize rises in the minimum wage for awhile longer–and instead focus on other methods to help the working poor.

 The Clean Water Act of 1972 regarded water pollution a something that came out of a pipe–typically from either an industrial facility or a sewage treatment plant–and passed into streams, rivers, lakes, or ocean. Thus, the legislation was based on a process of issuing permits for what could come out of these pipes, and on phasing back those pollutants. But the success of the Clean Water Act in reducing these \”point-source\” discharges means that the primary source of U.S. water pollution is \”nonpoint\” pollution–that is, runoff from agricultural and urban areas.

Karen Fisher-Vanden and Sheila Olmstead set the stage for one way in which environmental regulators are trying to tackle the issue of nonpoint source pollution in their article, \”Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis,\” which appears in the most recent (Winter 2013) issue of my own Journal of Economic Perspectives. Like all articles in JEP back to the first issue in 1987, it is freely available on-line courtesy of the American Economic Association. Fisher-Vanden and Olmstead write (citations and footnotes omitted):

 \”The stated goals of the Clean Water Act were: 1) the attainment of fishable and swimmable waters by July 1, 1983; and 2) the elimination of all discharges of pollutants into navigable waters by 1985. Obviously, those deadlines have been postponed through amendments, and distinctions have since been made between different types of pollutants. …  The Clean Water Act’s main tool is a set of effluent standards, implemented through point-source permitting. The National Pollutant Discharge Elimination System (NPDES) specifies quantitative effluent limits by pollutant, for each point source, based on available control technologies. For the most part, industrial point source compliance with these permits has been high. Municipal sewage treatment has also expanded dramatically, resulting in impressive improvements in urban water quality—for examples, see Boston Harbor and the Hudson River near New York City.

\”But the gains from point source controls are reaching their limits. Even if all point sources were to achieve zero discharge, only 10 percent of US river and stream miles would rise one step or more on EPA’s water quality ladder. Nonpoint source pollution such as agricultural and urban runoff, atmospheric deposition, and runoff from forests and mines has become the major concern of water pollution abatement efforts. In fact, nonpoint source pollution from agricultural activities is now the primary source of impairment in US rivers and streams. Nonpoint source pollution involving nutrients like nitrogen and phosphorus causes excessive aquatic vegetation and algae growth and eventual decomposition, which deprives deeper waters of oxygen, creating hypoxic or “dead” zones, fish kills, and other damages. This problem is geographically widespread; seasonal dead zones in US coastal waters affect Puget Sound, the Gulf of Mexico, the Chesapeake Bay, and Long Island Sound. However, agricultural nonpoint source pollution is essentially unregulated by the Clean Water Act …\”

Before discussing what efforts are being made to address nonpoint source pollution, it\’s worth nothing that there are legitimate questions about whether the costs of the Clean Water Act have exceeded the benefits.  For example, in the Winter 2002 issue of my own Journal of Economic Perspectives, A. Myrick Freeman III reviewed studies bearing on \”Environmental Policy Since Earth Day I:What Have We Gained?\” Even if one goes beyond just looking at immediate economic gains and takes into account survey evidence on people\’s willingness to pay for knowing that water is cleaner (so-called \”contingent valuation\” evidence), the overall costs seem to far outstrip the benefits.

The intuition behind this result is that there were some prominent bodies of water that were highly contaminated, and that have improved substantially since the passage of the law. But the law was not just applied to a few high-profile cases of water pollution: it imposed costs everywhere. Moreover, as noted above, the law called for (eventually) the total elimination of all discharges, and even a passing acquaintance with the law of diminishing returns suggests that reducing pollution by one-third or one-half or more might be done at fairly low cost, but when it comes to figuring out how to reduce that last bit of pollution, the marginal costs may climb very high. .

But the question of past costs and benefits of the Clean Water Act is, well, water under the bridge. At present, the situation is that the law has been so effective at reducing point-source emissions that the main source of water pollution is nonpoint sources, and especially runoff from agriculture. There are a variety of voluntary programs to encourage reducing nonpoint source pollution. But such programs generally lack teeth. Thus, environmental regulators have been trying in some areas to tackle the problem through a back door–by creating a structure for tradeable emissions permits. As Fisher-Vanden and Olmstead describe it, the current clean water law

\”…  requires states to establish a Total Maximum Daily Load (TMDL)—basically a “pollution budget”—for each water body that does not meet ambient water quality standards for its designated use, despite point source controls. Designated uses include recreational use, public water supply, and industrial water supply, and each designated use has an applicable water quality standard. State courts began ordering the developmentof TMDLs in the 1980s and 1990s in response to lawsuits by environmental groups.Since 1996, the states in cooperation with the Environmental Protection Agency have completed thousands of TMDLs. Establishing a TMDL is a “holistic accounting exercise” in which all permitted sources and land uses within a watershed drainage area, including agriculture and urban runoff, are inventoried and allocated responsibility for portions of the pollution budget. While regulators cannot implement enforceable caps on agricultural pollution through this process, they have recognized the importance of incorporating agricultural abatement into clean-up processes, and water quality trading is one tool they have employed for this purpose.\”

They discuss a number of examples. In one fairly straightforward program here in Minnesota, the \”Southern Minnesota Beet Sugar Cooperative, a beet processor, pays its 256 grower-members to invest in phosphorus-reducing land management changes so that the processor can meet its permit requirements for expanded production. In this case, the beet growers and the processing facility are treated under the processor’s permit as a single source to meet an overarching phosphorus effluent cap.\” A more complicate case involves the Chesapeake Bay, which receives discharges from six states and the District of Columbia, and in which three of the states are allowing for trading of water quality permits. Fisher-Vanden and Olmstead discuss several dozen of these programs around the country.

The practical and political advantage of using marketable permits are well-known among economists, and are a staple of most intro econ classes: specifically, those who need to reduce emissions can think about whether to do it themselves, or whether to pay some other economic actor–like a farm–for reducing emissions. With this choice, emissions get reduced, which after all is the goal, at lowest possible cost. But the practical problems of implementing such a scheme over a large area like the Chesapeake Bay, making sure that reductions in nonpoint source pollution really happen, and in a way that doesn\’t clean up one area of the Bay at the expense of another area, can be quite complex. My own sense is that the Total Maximum Daily Load concept is a very useful one for thinking about the causes of water pollution, but it\’s time to stop putting all the requirements on the point-source emitters of water pollution. For bodies of water that are not meeting ambient quality standards, there should be requirements for both point and nonpoint emitters to reduce their water pollution–with trading of emissions permits allowed between them.