Year: 2013

The number of Americans in federal prison has risen more than eight-fold in the last three decades, from 25,000 in 1980 to 213,000 today. While it seems plausible that some the increase has been useful and justified as part of an effort to reduce crime, it also seems plausible that the increase has probably gone too far. Julie Samuels, Nancy La Vigne and Samuel Taxy of the Urban Institute lay out this view in \”Stemming the Tide: Strategies to Reduce the Growth and Cut the Cost of the Federal Prison System.\”  Basically, their plan is to reduce prison time for nonviolent drug offenses.

What factors are driving the higher federal prison populations?

\”The short explanation for the rapid prison population growth is that more people are sentenced to prison and for longer terms. In fiscal year (FY) 2011, more than 90 percent of convicted federal offenders were sentenced to prison, while about 10 percent got probation. By comparison, in 1986, only 50 percent received a prison sentence, over 37 percent received probation, and most of the remainder received a fine. Though the number of inmates sentenced for immigration crimes has also risen, long drug sentences are the main driver of the population’s unsustainable growth. In 2011, drug trafficking sentences averaged 74 months, though they have been falling since 2008. Mandatory minimums have kept even nonviolent drug offenders behind bars for a long time. The average federal prison sentence in 2011 was 52 months, generally higher than prison sentences at the state level for similar crime types. This difference is magnified by the fact that, at the federal level, all offenders must serve at least 87 percent of their sentences, while, at the state level, most serve a lower percentage and nonviolent offenders often serve less than 50 percent of their time. … Before the Sentencing Reform Act of 1984 and mandatory minimums for drug offenses, a quarter of all federal drug offenders were fined or sentenced to probation, not prison. Today 95 percent are sentenced to a term of imprisonment. The average time served before 1984 was 38.5 months, almost half of what it is now. 

Samuel, La Vigne, and Taxy emphasize that the current system has a fair amount of discretion in how it handles drug offenders. For example, there is discretion over whether drug offenders will be prosecuted in the federal system or in a state system, where offenders are less likely to end up in prison. Prosecutors might choose to bring lesser charges, or judges might find various reasons to impose lower penalties. The Obama administration is putting this approach into effect, as Samuels, La Vigne and Taxy explain:

\”Until recently, some lower-level, nonviolent drug offenders were subject to mandatory minimum penalties regardless of their role in the organization. As mandatory minimum penalties were originally intended to target “serious” and “major” offenders, these terms of  imprisonment may be unnecessarily lengthy with no added benefit to public safety. Attorney  General Holder’s 2013 Department Policy Memo directs prosecutors to refrain from charging lower-level, nonviolent drug offenders with drug quantities that would trigger a mandatory minimum sentence.

But I confess that this  emphasis on discretion makes me a little queasy, because in a big country, discretion inevitably means that those who committed the same crime will end up being treated very differently by the criminal justice system, depending on accidents of geography and jurisdiction and which prosecutor and judge they face. Greater use of discretion now is probably a lawsuit for unequal treatment waiting to happen in the future. In addition, relying on the discretion of law enforcement is a way for legislators to duck responsibility.

Thus, I would favor changing the sentencing laws directly. For example, among the policies they discuss is one that would reduce mandatory minimum sentences fro some drug offenders: say, cutting certain 5-year minimums to 2, 10-year minimums to 5, and 20-year minimums to 10. They estimate that over time, this change would \”would have a monumental effect on the prison system.\”

There are also a range of options other than sentencing an offender to prison, like halfway houses and home confinement. However, it seems that increased use of probation is the only way to save money. Samuels, La Vigne, and Taxy explain:

\”The average cost of housing an inmate in a BOP facility in FY 2012 was over $29,000 annually. … [M]uch of these average costs of housing an inmate are fixed, as they go toward maintaining and staffing facilities (which are unlikely to close as a result of a shrinking prison population). Thus, the average marginal cost of increasing or decreasing the population by one inmate is $10,363. Average annual cost per inmate housed in a Residential Reentry Center (RRC, also known as a half-way house) for the BOP is $27,003. The BOP also has custody over offenders on home confinement, for which it pays contractors a flat fee for each offender. As documented by the GAO, the reimbursement rate to contractors for each inmate in home confinement that the BOP pays is pegged to half the overall per diem rate of an RRC, or over $13,500 annually. Any policy change that transfers an inmate from a BOP facility to home confinement would, under current contracting arrangements, cost more than keeping the inmate in a BOP facility ($13,500 versus $10,363, respectively). The annual cost of supervision by probation officers, however, is about $3,347 per offender.We estimate that augmenting this traditional probation with electronic monitoring to verify home confinement would cost a total of $5,890 annually …\”

In good cost-benefit fashion, Samuels, La Vigne, and Taxy frame their report in terms of cost savings and reducing prison overcrowding. While these benefits are not to be scorned, they fall short of capturing the main policy problem here. When the government of land of the free is locking up eight times as many people as 30 years ago–and remember, this article is only about federal prisons, not state ones–imprisonment becomes a central life experience for a larger share of the population, for their extended families, and for their communities. This is much more than a budgetary issue. Changing the law so that many fewer nonviolent drug offenders are in federal prison, along the lines suggested here, would still mean that the federal prison population was, say six times as high as in 1980, instead of eight times as high.

For some earlier posts on U.S. rates of imprisonment, see \”Too Much Imprisonment\” (November 30, 2011) and \”U.S. Imprisonment in International Context: What Alternatives?\” (May 31, 2012).

Here\’s a write-your-own punchline fact: The Buy Indian Act was signed into law by President William Howard Taft on June 24,  1910. The regulations that allow the law to be implemented and enforced were just completed on July 8, 2013, only 103 years later.

Paula Woessner provides an overview of he situation in \”Long-awaited rules require the BIA to \”buy Indian,\” published in the October 2013 issue of Community Dividend, a regular publication of the Federal Reserve Bank of Minneapolis. She writes:

More than a century after its passage, an act of legislation with the potential to transform the federal government’s purchasing practices in Indian Country finally has the force of law. Effective July 8, 2013, the U.S. Department of the Interior adopted final rules that require the Bureau of Indian Affairs (BIA) to give preference to Indian-owned or -controlled businesses in matters of procurement. The rules are the long-awaited last step in implementing the Buy Indian Act, a law signed on June 25, 1910. Although the act has been on the books since then, it was unenforceable until now because there were no rules adopted for implementing it. Rule writing didn’t begin in earnest until 1982 and then proceeded in fits and starts over the ensuing 30 years. It is now, at long last, completed.

It\’s a little hard here to say what happened, because the whole point is that for a century or so, not very much did happen and contracts did not typically flow firms owned by Native Americans. The key sentence of the 1910 act reads:

So far as may be practicable Indian labor shall be employed, and purchases of the products (including, but not limited to printing, notwithstanding any other law) of Indian industry may be made in open market in the discretion of the Secretary of the Interior.

Apparently the key words of this bill were not the instructions \”so far as may be practicable Indian labor shall be employed,\” but rather the phrase \”in the discretion of the Secretary of the Interior.\” Here\’s the U.S. Department of the Interior news release about the new rules.

I confess that I\’m not a big fan of rules that require the government to purchase goods and services from firms run by people of a particular ethnicity or gender. When government is buying goods and services, it should seek to get the best possible deal for taxpayers. Set-asides always come with the need for a bunch of well-meant rules. As Woessner explains,

The Buy Indian Act rules authorize the Secretary of the Interior to set aside procurement contracts for Indian economic enterprises (IEEs), which are defined as for-profit businesses that are at least 51 percent Indian-owned. The tribes or individual Indians that own the IEEs must manage the contract, receive the majority of earnings from it, and control the business’s daily operations. … Under the rules, the BIA must give Indian businesses first preference in procurement matters by seeking contract offers from at least two IEEs and then selecting one of them, so long as it is of a “reasonable and fair market price.” … Subcontracting is permitted, but at least 50 percent of the subcontracted work must go to IEEs.

So to hand out what is estimated to be about $45 million in contracts per year, the government will need to be deciding whether enterprises are truly Indian-owned, or whether the Indian ownership is a front for others. It will need to decide if the bids are a \”reasonable and fair market price.\” It will need to monitor subcontracting. When an agency has taken 103 years to write the implementation rules in the first place, it is reasonable to question how effectively it will carry out these tasks.

How do America\’s working-age adults stack up against their peers from the other high-income countries around the world? The OECD has started a survey called the Program for the International Assessment of Adult Competencies to answer this question. In 2011-2012, a nationally representative survey of 5,000 Americans age 16-65 took the test, along with adults from 22 other countries. The U.S. Department of Education now published an overview of the results in \”Literacy, Numeracy, and Problem Solving in Technology-Rich Environments Among U.S. Adults: Results from the Program for the International
Assessment of Adult Competencies 2012, First Look.\” The report was written by Madeline Goodman,
Robert Finnegan, Leyla Mohadjer. Tom Krenzke, and Jacquie Hogansee.

The PIAAC measures competence in several areas: literacy and reading components, numeracy, and problem solving in technology-rich environments. The evidence suggests that U.S. adults are below average in all of them. Here are three summary figures, for literacy, numeracy, and problem solving. The PIAAC average is shown, along with the US score. The unshaded bars above and below the US score are the countries with scores where the difference from the US score is not statistically significant. The shaded bars above and below show the countries where the scores are significantly different.

The OECD has also published its own first tabulation of these results, with much additional discussion, in OECD Skills Outlook 2013: First Results from the Survey of Adult Skills. It note that only three countries have below-average scores in all of these domains: along with the United States, the other two are Ireland and Poland.  In a fact sheet summarizing the US results, the OECD writes: \”U.S. performance is weak in literacy, very poor in numeracy, but only slightly below average in problem solving in technology-rich environments.\” At the end of 2013, the OECD is scheduled to publish a follow-up study called \”Time for the U.S. to Reskill? What the Survey of Adult Skills Says.\”

But in some ways, these dismal findings about the competencies of US adults should be no surprise to regular readers of this blog. The US high school graduation rate rose from 6% in 1900 to 80% in 1970–and then had essentially no increase for 30 years before edging up a bit in the last decade or so. In the late 1960s the US led the world in high school graduation rate, but by 2000, it was below the average of high-income countries. Similarly, the US used to lead the world in the share of population that went on to additional education after high school,  but now it is middle of the pack. The share of Americans age 25-34 with a tertiary degree is lower than for those who are age 35-64–by this measure, access to higher education is diminishing, despite the fact that the US  spending far more than one would expect on higher educationi based on the US level of per capita GDP.

A prominent report back in 1983 argued that the US was engaging in \”unthinking, unilateral educational disarmament.\” The PIAAC evidence is a report card on the poor overall performance of the U.S. education system during the last four decades. 

It may seem obvious that walking is environmentally friendlier than driving. But as Richard B. McKenzie explains in \”Why Walking to Work Can be More Polluting Than Driving to Work,\” written as this week\’s featured article for the Library of Economics and Liberty weblog, one can make a plausible argument to the contrary.

Consider the choice between walking a mile and driving a mile. Walking a mile burns about 200 additional calories, which need to be replaced. McKenzie then looks back into the food supply chain. Only about 13% of the energy used in the production and distribution of food actually ends up as part of the calories that are actually in food. In addition, about one-third to one-half of the calories in the food that is produced are lost somewhere in the chain of production. McKenzie then adds:

Moreover, the human body is also not very efficient at converting the potential energy in the food it consumes into useful work: Only about 15 percent of the potential energy in food eaten goes into activities such as walking, as well as maintaining all bodily functions. This means that the energy that the human body actually converts into work is meager percentage-wise—something on the order of 1.3 percent of the fossil fuel energy that is used along the entire length of the food-supply chain. …

Derek Dunn-Rankin, a professor of engineering at the University of California, Irvine and an avid environmentalist, computes that a 180-pound person walking one mile to and from work at a pace of two miles per hour will burn 200 calories above the 2,000 calories burned each day to maintain the body\’s basic metabolism. However, the production of those 200 calories in food takes fifteen to twenty times as much energy in the form of fossil fuels. This means that driving a high fuel economy car (40 miles per gallon) will use, in fossil fuel energy, only about two-thirds to one half the energy that the person uses in replacing the calories expended on walks. (Heavier walkers use even more energy when they walk and when they replace the greater calories they expend in moving their weight.) Energy use and pollution do not have a one-to-one correspondence, which causes Dunn-Rankin to conclude, \”My bottom line would be that walking can be 1.5 to 2 times more polluting than driving (if you use a high mileage car). If you use a monster car, you are better off walking always.\”

Of course, this conclusion is a broad average. If you drive an especially huge and polluting car, then walking will be more environmentally friendly than driving. My guess is that if the calories you eat don\’t involve meat, or are less processed, then refueling from your walk will have a smaller environmental effect. But with those reservations duly noted, by all means walk that mile for your own personal health, instead of driving. But be aware that if you are the sort of person who drives a car with high fuel efficiency and who eats a full range of supermarket and restaurant food, then a decision to walk when running your errands or visiting the neighborhood may be putting your personal health ahead of a cleaner environment.

On June 24, 2009, President Obama signed into law the \”cash for clunkers\” act. The idea was that if people traded in an older and less fuel-efficient car, they could receive a voucher for $3,500 or $4,500 to be put toward the purchase of a new and more fuel efficient car. The program had two goals in mind: 1) stimulating the economy by encouraging people to buy new cars; and 2) reducing auto emissions as people used newer cars that had better pollution-control equipment and were  fuel-efficient cars. The program handed out $2.85 billion in vouchers in July and August 2009. How did it work? Ted Gayer and Emily Parker tackle that question in \”Cash for Clunkers: An Evaluation of the Car Allowance Rebate System.\” The more readable \”Policy Brief\” version of their analysis is here; the more detailed background paper is here. Short take: Having the government hand out vouchers for buying new cars was not a cost-effective program.

CARS (that is, Car Allowance Rebate System) did encourage people to buy cars during the two months it was in operation. Here\’s a figure showing monthly car sales. The gray band is the recession. The red band is the actual cash-for-clunkers program. Clearly, there\’s a boost when the program was in operation, but just as clearly, there\’s no particular deviation from the long-run trend.

Indeed, it looks as if the main effect of the program was that some of the people who were thinking about buying a car in the next few months anyway accelerated their purchase, so the sustained effect was minimal. Gayer and Parker write that the \”CARS program led to approximately 380,000 additional vehicle sales during the time of the program. This number represents the number of vehicles sales that would not have occurred during this time period without the CARS program. The existing evidence also suggests that these sales were pulled forward from sales that would have occurred otherwise in the future. Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.\”

What does this mean in terms of jobs? The additional spending can be linked to 2,000 to 3,000 extra jobs during and right after the bill. Gayer and Parker put this in context using estimates from the Congressional Budget Office about cost-per-job-saved of various policy steps taken during the recession. As many readers know, the details of these job-saved estimates can be controversial. But the bottom line is that if you are using federal spending to save jobs, cash-for-clunkers is a highly ineffective way of doing so.

What about on the environmental side? About 700,000 cars were purchased with the cash-for-clunkers vouchers, which is less than 1% of the total cars in the United States. Moreover, most of these cars would have been purchased in the next few months, even without the program. So the potential environmental gains are a modest speed-up in the purchase of cars with better fuel efficiency and pollution-control equipment. Gayer and Parker write: \”Overall, the average fuel economy of the vehicles traded in under the CARS program was 15.7 miles per gallon and that of new vehicles purchased under the program was 24.9 miles per gallon.\”

The social cost of carbon emissions is again a controversial topic, but the current US government estimate is a cost of $38 per ton; that is, a method of reducing carbon emissions that costs less than $38/ton is a good deal for society, but a method of reducing carbon emissions that costs more than $38/ton is a poor deal. Even if one has qualms about the specific number, even the most ardent environmentalists should prefer methods of reducing carbon emissions at the lowest cost–because more carbon will be reduced in that way. By this standard, cash-for-clunkers wasn\’t as bad as some alternatives, but neither was it cost-effective. Here\’s some context on cost-per-ton of reduced carbon emissions from Gayer and Parker:

Gayer and Parker also write: \”Note that these estimates of the reduction in gasoline consumption and emissions do not account for the energy consumed by prematurely disposing of used vehicles and the manufacturing of additional vehicles due to the CARS program, which would offset some of the program’s environmental benefits.\”

So to sum up: The taxpayer-funded cash-for-clunkers program was not a cost-effective way of job creation or helping the environment. Indeed, the main benefits probably went to those who were already thinking about a new car and were in a financial position to proceed immediately with buying one. Not surprisingly, those who used the taxpayer-funded cash-for-clunkers vouchers were usually people with above average-incomes.

I should say up front that I know little about financial investment strategies; indeed, all of my retirement assets are in various Vanguard no-load passively managed index funds. But after watching the financial sector jolt the U.S. economy both in recession that followed the dot-com boom of the 1990s and in the more recent Great Recession, I do spend a little more time looking at broad financial indexes than I used to. Here\’s what\’s called the Shiller P/E ratio. A P/E ratio looks at the total price of stocks compared with the earnings of companies, and thus gives a sense of how the stock market is being valued.  If you calculate a price/earnings ratio using annual data, then in a dismal economic year like 2008 when profits are very low, the P/E ratio will spike dramatically. To avoid these somewhat meaningless short-term spikes, the Shiller P/E ratio looks the current price of stocks divided by the average profit levels over the previous 10 years, so that it is less influenced by economic conditions this year.

The Shiller P/E is now 24.8. As the figure shows, it is higher than at any time except the peak of the dot-com boom and its aftermath, and Black Tuesday back in 1929 at the front edge of the Great Depression. In other words, when the P/E ratio has reached this level in the past, sometimes it has gone still higher (as in the dot-com boom), but over the last 130 years it has then always fallen back.  

I\’m not the right person to ask about what this means from an investment point of view: as I said, I\’m a boring index-fund investor. (John Hussman, who knows quite a bit about investments, discusses this pattern over at his website. Full disclosure: Many years back at Stanford, John was a teaching assistant for me and had an office down the hall. We are friends who have fallen out of touch.) My broader concern for some time has been that the extremely low interest rate policies that have been pursued by the Federal Reserve and central banks around the world run a risk of pumping up asset bubbles in other markets, which may pop painfully later on. The IMF has expressed similar concerns, along with Raghuram Rahan (a University of Chicago economist now heading India\’s central bank), economists at the Bank of International Settlements, and others. 

There are two main responses to concerns about the U.S. manufacturing sector: either the changes in manufacturing are mainly part of a long-run structural shift that goes back decades in the U.S. economy and is happening in high-income economies across the world, or there is something new and worrisome happening in the last decade or so.  Robert Z. Lawrence and Lawrence Edwards discuss \”US Employment Deindustrialization: Insights from History and the International Experience,\” written as Policy Brief #PB13-27 for the Peterson Institute for International Economics.  They come down more heavily on the \”long-run structural shift\” side of the argument.

Serious discussion of the U.S. manufacturing sector is based on three claims:

1) If you measure the output of the U.S. manufacturing sector in terms of the value-added in that sector, there is no trend up or down in recent decades. As Lawrence and Edwards write: \”Measured in 2005 dollars, manufacturing share of gross US output was 17.5 percent in 1947 and 17.3 percent in 2005. Between 1947 and 2005 the share averaged 17.3 percent and was essentially trendless …\” Value-added is calculated by taking the total revenues of a firm and then subtracting the value of purchased inputs of goods and services: thus, it includes not only profit but costs of labor and depreciation incurred by the firm itself in the course of production.

2) The number of jobs in manufacturing has fallen over time; in particular, the total number of U.S. manufacturing jobs didn\’t change much in the 1990s, but the U.S. manufacturing sector lost 5.8 million jobs from 2000-2010. However, Lawrence and Edwards point out if you look at the proportion of total U.S. jobs that are in manufacturing, it looks like a straight-line drop over time.

3) The manufacturing sector has a particular importance in any advanced economy. As Lawrence and Edwards write: \”[M]anufacturing activity is strongly associated with economic growth, because manufacturing serves as the fulcrum of supply chains that combine and process raw materials and services to produce goods.1 In addition, the sector is among the most dynamic—accounting for about 70 percent
of US spending on business research and development—and it regularly outstrips the rest of the economy in productivity growth.\”

Taking these factors together, a pattern arises that is familiar across high-income economies. For the U.S. economy, the price of manufactured goods relative to services has been dropping about 2% per year since 1960, driven by the relatively faster gains in productivity in the manufacturing sector. Consumers have increased their purchases of goods relative to service by about 0.5% per year since 1960. Putting these together, the amount spent on goods relative to services by U.S. consumers has been dropping about 1.5% per year since 1960. Thus, it takes fewer workers in U.S. manufacturing to produce the goods that American consumers want to buy, and this would hold true even if there was no international trade.

Lawrence and Edwards readily admit that trade makes a difference to the U.S. manufacturing sector, too. If the U.S. economy didn\’t run large trade deficits, they estimate that U.S. manufacturing jobs would be at a higher level–but such jobs would still be steadily declining over time at about the same rate.

These issues are common across high-income countries. Here\’s a table showing the decline in U.S. manufacturing jobs compared with some other high income countries, and the U.S. experience is about average. Notice that countries like Japan and Germany, which have often had substantial trade surpluses in recent decades, have still experienced a decline in manufacturing jobs.

The drop in the share of consumption represented by goods is also common across these countries.

There are some potential bright spots for U.S. manufacturing. Cheaper energy in the U.S. economy would give the energy-intensive manufacturing sector a boost. A reduced trade deficit and stronger recovery from the Great Recession would help manufacturing jobs. Advances in automation could improve the competitiveness of the U.S. manufacturing industry, although it would also contribute to the long-run decline in jobs. Similarly, wrapping the U.S. manufacturing sector into global supply chains can be a way to preserve U.S. manufacturing expertise–and in the 21st century, being apart from global supply chains in some sectors be an economic death sentence. New high-value, high-technology products may be manufactured in the U.S. economy. But while these steps can help keep manufacturing a lively and important part of the U.S. economy, the long-term decline in manufacturing jobs seems likely to continue.

Finally, here\’s a post from about a year ago on a global manufacturing report from the McKinsey Institute that includes useful figures showing patterns of manufacturing output and jobs over time in different countries.

President George W. Bush signed the Troubled Asset Relief Program into law on October 3, 2008. What has happened with it five years later? For me, the main difficulty in thinking about TARP has been keeping track of all the things it ended up doing. The U.S. Treasury has a useful website that runs through the details of TARP. As one might expect, it\’s slanted toward the position that TARP was a good idea. But that bias doesn\’t affect the actual numbers of what the government spent and the extent to which it has been paid back.

TARP was authorized to spend $700 billion. What did it actually do? The money went five places: 1) $68 billion to the insurance company AIG; 2) $80 billion to the auto companies; 3) $245 billion to bank investment programs; 4) $27 billion to credit market programs; and 5) $46 billion to housing programs. The other $235 billion in spending authorization was cancelled. Let\’s unpack these categories and see what happened.

AIG

The government justification for investing in AIG looks like this: \”At the height of the financial crisis in September 2008, American International Group (AIG) was on the brink of failure. At the time, AIG was the largest provider of conventional insurance in the world. Millions depended on it for their life savings and it had a huge presence in many critical financial markets, including municipal bonds. AIG’s failure would have been devastating to global financial markets and the stability of the broader economy. Therefore, the Federal Reserve and Treasury acted to prevent AIG’s disorderly failure.\” The Treasury used its $67 billion to buy AIG stock and it has sold off that stock since then, finishing in December 2012. The Treasury ended up making a gain of $5 billion. The Federal Reserve Bank of New York also loaned AIG $112 billion, and has ended up making a gain of $7 billion as that loan has been repaid. These gains end up in the U.S. Treasury.

The auto industry

Treasury reports: \”The Automotive Industry Financing Program (AIFP) was created to prevent the collapse of the U.S. auto industry, which would have posed a significant risk to financial market stability,threatened the overall economy, and resulted in the loss of one million U.S. jobs. Treasury invested approximately $80 billion in the auto industry through its Automotive Industry Financing Program. As of September 30, it has recovered $53.3 billion or more than 66% of the funds disbursed through the AIFP program.\” The Treasury exited its investment in Chrysler in 2011, and the government now owns only about 7% of GM stock, down from 60% at the peak. The website reports that \”the auto industry rescue may end up as a net cost to the government.\” It\’s useful to remember that the TARP money wasn\’t all that the government did. As I discuss here, the government also stage-managed an accelerated bankruptcy process that reorganized the ownership of Chrysler, in a way that did much less for the bondholders than a standard bankruptcy process, and more  for the the employees. The firms were also handed created tax breaks not usually available to bankrupt firms worth tens of billions of dollars.

Bank investment programs

This was actually five separate sub-programs; for example, it includes the \”stress tests\” under which bank regulators re-examined the balance sheets of many banks under a variety of different scenarios, and pushed some of them to raise more outside private capital as a result. But in terms of spending, the biggest element was the Capital Purchase Program that provided investments and loans to about 700 banks. \”Treasury has recovered almost $225 billion from CPP through repayments, dividends, interest, and other income – compared to the $204.9 billion initially invested. Treasury has recovered more than 100 percent of that amount through repayments, dividends, interest, and other income. Treasury continues to recover additional funds.\”

Credit Market Programs

\”Three programs were launched: the Public-Private Investment Program (PPIP), the SBA 7(a) Securities Purchase Program, and the Term Asset‐Backed Securities Loan Facility (TALF). Although the specific goals and implementation methods of each program differed, the overall goal of these three programs was the same—to restart the flow of credit to meet the critical needs of small businesses and consumers.​\” These three programs are no longer making loans and are in the process of being wound up. They have either repaid the government money invested, or are on their way to doing so.

Housing Programs

There are two main programs here. The Making Home Affordable Program is aimed at assisting households that are faced with foreclosure on their home mortgage. The website reports that 1.2 million households have negotiated lower mortgage payments (usually with some write-down of the principal) and another 200,000 have arranged to sell their homes for less than the mortgage. The Hardest Hit Fund aimed at mortgage borrowers in 18 states where the fall in housing prices was especially severe and/or the unemployment rate was exceptionally high. It allocated funds to state-based programs. As of second quarter 2013, the summary report is that it has spent $1.6 billion to assist about 126,000 households nationally. Here in late 2013, these programs are still taking applicants, which seems misguided to me. They were badly needed during the past few years, when they did relatively little.

Overall, the Treasury reports that TARP is likely to end up costing the federal government about $40 billion. As this review should help to clarify, most of that is for the auto company bailout, and the rest is the housing and credit market programs. The bank investment programs and the AIG investment have ended up making money for the government. This outcome wasn\’t unexpected. The economic theory behind a lender-of-last-resort program is well-established. In the middle of a financial panic, as in fall 2008, financial markets can lock up. In that setting, having a deep-pockets government agency like the Treasury or the Federal Reserve provide capital can restart the financial markets. Even better, when the government provides financial liquidity during a crisis, it can then often make money when it cashes out its financial stake after the crisis has passed, when the economy has improved.

Of course, the fact that most of the TARP spending has ended up being repaid doesn\’t settle the issue of whether it was a good idea. Here are some outstanding issues:

1) The bailouts of 2008 raise an issue of whether systemically important financial institutions can reasonably expect future bailouts if they get in trouble. If so, they may engage in overly risky behavior in the future. The government can make many promises that it won\’t bail out large institutions in the future, but if push comes to shove, will those promises be kept?

2) We don\’t get to replay history to find out how alternative policies would have worked. What if AIG, the car companies, or some of the banks had been required to reorganize through a normal bankruptcy process?

3) Many firms went broke in the Great Recession. As a matter of fairness, what makes the firms that TARP helped so special?

4) TARP was intertwined with separate but related actions by the Federal Reserve, by bank regulators, with bankruptcy processes for the car companies, various tax law changes, and so on. As a result, it\’s hard or impossible to evaluate the effect of TARP in a vacuum.

5) When you step in during a crisis, there is some luck involved if your intervention works out well.

Here\’s the pattern of American daily calorie consumption since the early 20th century. I suspect that some of the the ups and downs from 1900 up to about 1980 are due to issues with data and measurement, as well as social trends that came and went. But there\’s no mistaking the rise in the last few decades.

From an international perspective, Americans consume a large amount of sugar (whether from cane or beets) and related high-calorie sweeteners like high-fructose corn syrup.

The Credit Suisse Research Institute ponders the economic background and health consequences of these patterns in \”Sugar Consumption at a Crossroads,\” a report released in September 2013. A sizeable share of the report looks at the evidence linking sugar consumption in various forms to obesity, the health consequences of obesity, and possible policy options like a tax on sugary beverages.  Here, I\’ll stick to looking at patterns of consumption and production.

The report emphasizes that the growth in U.S. consumptin of calories can be linked to sweetened beverages: \”Sweetened  beverages are now delivering  an increasingly greater percentage of the sugars that are ingested in an average diet. Between 1955  and 2000,  the consumption  of  soft drinks in the USA increased from about ten gallons/person to  54 gallons/person and then declined by around 20% until 2012, but with an equivalent increase in the consumption  of fruit juices and bottled water. According to  the USDA, the beverage industry now accounts for 31% of total sweetener  deliveries  and we estimate  that 43% of added sugars in a normal US diet come from sweetened  beverages. A similar stabilizing trend can be seen in most other developed markets, while consumption is still on the rise in emerging markets.:

and is unsurprisingly dominated by sugar. Each of the major groups (high-intensity/artificial sweeteners,
sugar, and high-fructose corn syrup) has been growing at a similar rate of circa 2% per annum, though the most recent numbers have natural high intensity\\sweeteners growing rather faster.\”

\”Many countries have regimes that protect the local production through various mechanisms including support prices, import restrictions, production quota, etc. Examples include the US Farm Act, the European Union Sugar Regime, or the Chinese government’s controls on imports. Put simply, the complexity of the infrastructure surrounding sugar is significant. Thus, the traded market (or the “world market”) is only 55–60 million tons, and is sometimes referred to as the residual market (where the sugar that is not a part of the special agreements is bought and sold). The largest producer of sugar by some distance is Brazil (22% of world production), followed by India (15%), China (8%) and Thailand (6%). However, India and China consume all they produce, so if we look at the supply to the “world market” instead, this is dominated by Brazil (supplies typically half the “world market”) and Thailand (10%–15%). 

The “residual” nature of the world market has made the “world price” very volatile and sensitive to movements in global supply versus demand. … Brazil’s cost of production is generally thought to be USD 18 cents/lb. and, in the long term, this should be the floor of the market. As we mentioned earlier, most of the markets are protected/controlled, which means the local price bears little significance to the world price – and trades at a significant premium (see Figure 20). These regimes have been in place for many years and are designed to protect the local farmers from the vagaries of the world price and guarantee them an economic return. …
Finally, the market for HFCS [high fructose corn syrup] is similar in size to that of HIS, but is concentrated in three major markets: USA, China and Japan. The principal requirement for HFCS to flourish is government support. HFCS can only truly become established where it is allowed and where there is enough supply of starch. …

Here\’s a figure showing the retail price of sugar. It can\’t be compared directly to Brazil\’s cost of production of 18 cents per pound, but the comparison is nonetheless interesting.

If one is concerned about the effects of high levels of sugar consumption on public health, what might be done? One option is to have a tax on foods that are high in sugar, which presumably would need to include not just sugared soft drinks, but also many kinds of drinks flavored with sugar or fruit juice, and other high-sugar foods. The Credit Suisse report leans in favor of such taxes; my own somewhat more pessimistic review of the workability and desirability of such taxes is here.

Another option is technological: that is, find a way to sweeten foods that doesn\’t have (many) calories. The difficult here is that while most societies have no regulation that limit loading up food and drink with sugar, they often have strict regulations about using alternative sweeteners. The Credit Suisse report writes: \”The market for high-intensity sweeteners, both natural and artificial, is completely open, but the products are the most heavily regulated among sweeteners. These regulations vary from country to country. A high-intensity sweetener cleared in one country may be banned in another. The artificial sweetener industry’s profile on health is somewhat colored and many still see some of these products in a bad light. This is not the case for natural HIS, the largest portion of which is made of polyols (sugar alcohols).\” At least so far, many people have more fear of how artificial sweeteners may affect their health than about how high sugar intake might affect their health. Also, many of the artificial sweeteners don\’t really taste like sugar.

A final option is some sort of social attitude adjustment. Just as shifts in social attitudes brought us the explosion in soft drink consumption, and more recently the explosion in bottled water consumption, a future change could mean lower consumption of added sugars. The Credit Suisse report has some suggestive if not dispositive evidence here. If one looks across regions of the United States, those regions with a higher average level of education and higher average levels of income are more likely to consume diet soda. Of course, this kind of correlation doesn\’t prove a cause and effect. But it does suggest that there are different cultural norms even within the United States about drinking sugared soda, and thus some hope for a healthier set of sugar-consumption norms to emerge.

Douglas Clement has a lively and incisive interview with Richard Thaler in the September 2013 issue of the The Region magazine, which is published by the Federal Reserve Bank of Minneapolis. Thaler is well-known as one of the leading figures in \”behavioral\” economics, which involves thinking about how common psychological factors may cause people to act in ways that differ from what is predicted in a basic economic model of people purposefully pursuing their own self-interest. Here are a few of Thaler\’s comments that jumped out at me.

Getting started in thinking about behavioral economics

[L]ater I would call them anomalies, but for a while I just called them “the list.” And I started writing a list of funny behaviors on my blackboard, such as paying attention to sunk costs. I mean, at first they were just stories. Like, a buddy of mine and I were given tickets to a basketball game. Then there’s a blizzard and we don’t go. But he says, “If we had paid for the tickets, we would have gone.” Another thing on the list was a story about having a group of fellow grad students over for dinner and putting out a large bowl of cashew nuts. We started devouring them. After a while, I hid the bowl in the kitchen and everyone thanked me.But as econ grad students, of course, we immediately started asking why we were happy about having a choice removed. For years, some of my friends referred to my new research interests as “cashew theory.”

Behavioral economics and finance

The biggest surprise about behavioral economics, I think, looking back on it all, is that the subfield where behavioral has had the biggest impact is finance.If you had asked me in 1980 to say which field do you think you have your best shot at affecting, finance would have been the least likely, essentially because of the arguments that [Gary] Becker’s making: The stakes are really high, and you don’t survive very long if you’re a trader who loses money.But for me, of course, that was exactly the attraction of studying finance …

The random walk and the rationality assumption

Bob Shiller has this great line in one of his early papers to the effect that if you see a random walk, concluding from that that prices are rational is the greatest error in the history of economic thought. Why? Because it could be a drunken walk. A drunken man will have a random walk and it’s not rational.

No free lunch and price is right?

I separate these two aspects of the efficient markets argument: Whether you can get rich (the “no-free lunch” part) and whether the “price is right.” It’s hard to get rich because even though I thought Scottsdale real estate was overpriced, there was no way to short it. Even if there were a way—[Robert] Shiller tried to create markets in that, so that you could have shorted it—you might have gone broke before you were right. …  I think it’s hard to beat the market. Nobody thinks it’s easy, and so that part of the hypothesis is truer, but if we look at what happened to Nasdaq in 2000, and then the recent crash, well, of course, we’ve never gotten back to 5,000. So it’s very hard to accept that markets always get prices right. … If anything, the Internet has wildly exceeded our expectations, but the Nasdaq has still not gotten close to where it was in 2000. So I think it’s pretty obvious that market was overheated, just like the Las Vegas and Phoenix real estate markets were, but you couldn’t say necessarily when it was going to end.

A story of a non-price behavioral economics intervention in the United Kingdom

Let me tell you another story about the U.K. We had a meeting with the minister in charge of a program to encourage people to insulate their attics, which they call “lofts”—I had to learn that. Now, any rational economic agent will have already insulated their attic because the payback is about one year. It’s a no-brainer. But a third of the attics there are uninsulated. The government had a program to subsidize insulation and the takeup was only 1 percent.

The ministry comes to us and says, “We have this program, but no one’s using it.” They came to us because they had first gone to the PM or whomever and said, “We need to increase the subsidy.” You know, economists have one tool, a hammer, and so they hammer. You want to get people to do something? Change the price. Based on theory, that’s the only advice economists can give. …

So we sent some team members to talk to homeowners with uninsulated attics. “How come you don’t have insulation in your attic?” They answered, “You know how much stuff we have up there!?” So, we got one of the retailers, their equivalent of Home Depot, that are actually doing the [insulation] work, to offer a program at cost. They charge people, say, $300; they send two people who bring all the stuff out of the attic. They help the homeowners sort it into three piles: throw away, give to charity, put back in the attic. And while they’re doing this, the other guys are putting in the insulation. You know what happened? Up to a 500 percent increase. So, that’s my other mantra. If you want to get somebody to do something, make it easy.