Year: 2013

My go-to source for budget deficit projections is the Congressional Budget Office, which has just released \”The 2013 Long-Run Budget Outlook.\” Here\’s the long-run overview in one diagram, showing federal debt held by the public a a share of GDP during the history of the United States–and projected into the future.

The figure illustrates a few overall patterns worth remembering. First, through most of U.S. history, spikes in the ratio of federal debt/GDP were related to wars: the Revolutionary War, Civil War, World War I, and World War II. Before the last few years, there were two other bumps in the debt/GDP ratio. One was the Great Depression. The other was the deficits of the 1980s. Second, the run-up in federal debt during the Great Depression and its aftermath has been quite steep, and the level of debt/GDP ratio we have reached has been exceeded in U.S. history only during World War II.

Of course, these facts do not make a case that the deficits of the last few years were improper public policy; indeed, given the depth of the Great Recession, it seems to me that large federal deficits for a few years were an appropriate response (although I have my disagreements with the specific spending and tax choices that were made). But the recession ended four years ago in June 2009. The pattern historical data, and the projections, do suggest that the federal debt is on a trajectory that makes it a legitimate reason for concern.

At several places, the CBO report rehearses the four main arguments for why a rising debt/GDP ratio can have negative effects. First, when the government borrows heavily, it can mean less financial capital available for private investment. Second, heavily government borrowing leads to high interest payments, which put pressure on the rest of the budget. Third, running high deficits now reduces the flexibility of the government to use high budget deficits in the future. (I sometime say: \”The federal government can afford the big budget deficits associated with one Great Recession, but I\’m not sure it can afford to pay for a second one.) Fourth, if the borrowing becomes very large indeed, there is a heightened risk of a financial runs and crisis.

The CBO report is full of details about the rationale behind its underlying \”baseline\” projections for all the different categories of federal spending and taxes. The main difficulty with the \”baseline\” projections (which are the ones shown above) is that they are based on the assumption that everything in current law will happen. However, Congress has become astute at gaming these projections, by inserting deficit cuts that are scheduled to take place in the future like cuts in the Medicare program to physician payment, and thus make the baseline debt projections appear lower, but then these cuts don\’t actually take place when the time comes. Thus, the CBO also looks at an alternative fiscal scenario that seems to me more realistic. This  \”extended alternative fiscal scenario\” assumes \”that the automatic reductions in spending required by the Budget Control Act for 2014 and later will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place); that lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2023, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that after 2023, federal spending for programs other than Social Security and the major health care programs will rise to its average percentage of GDP during the past two decades, rather than fall significantly below that level, as it does in the extended baseline.\”

In this scenario, \”according to CBO’s central estimates, debt under the extended alternative fiscal scenario
would reach 190 percent of GDP in 2038—compared with 108 percent of GDP under the extended baseline …\”  These estimates are based on a model that reflects how the higher deficits will slow down the economy. According to the CBO central estimates: \”when the deficit goes up by $1, private saving rises by 43 cents (so national saving falls by 57 cents), and foreign capital inflows rise by 24 cents, ultimately leaving a decline of 33 cents in investment …\”

The U.S. budget deficits are not some Sword of Damocles, hanging by a thread over the U.S. economy. Instead, they more resemble water erosion digging away at the base of a riverbank and making the land above unstable, or the process of aging and metal fatigue that eventually makes a bridge unsafe. The costs of sustained excessive government borrowing sneak up over time.

For a number of American children, a preschool program like Head Start is too late and too little. It\’s too late because it doesn\’t start until age 3 or 4, and for a number of at-risk groups substantial cognitive gaps are already apparent at that age. It\’s too little because whatever the merits of Head Start (and I\’ve expressed some skepticism about the program here and here), it\’s a program that only has the children for a few hours a day. It\’s time to tackle a more controversial and difficult reality that is blocking equality of opportunity for many American children: the low quality of the parenting they receive. Richard V. Reeves, Isabel Sawhill and Kimberley Howard open up this subject in their essay \”The Parenting Gap,\” which appears in the Fall 2013 issue of Democracy. (A background paper with some statistics and numerical calculations by Reeves and Howard is available here.)

Reeves, Sawhill, and Howard discuss some of the evidence that parents with lower levels of income or education provide a lower quality of parenting in terms of time and enrichment For example: 

\”High-income parents talk with their school-aged children for three hours more per week than low-income parents, according to research by Meredith Phillips of UCLA.They also provide around four-and-a-half extra hours per week of time in novel or stimulating places, such as parks or churches, for their infants and toddlers. Less-advantaged parents are struggling to make a living and often lack a partner to help them build better lives. Less money typically means more stress, tougher neighborhoods, and fewer choices. This is not to say that there has been a deterioration in parental investment in poorer families. In fact, parents without a high-school diploma spent more than twice as much time each day with their children in the 2000s than they did in the mid-1970s, according to data from the American Heritage Time Use Study, marshaled by Harvard’s Robert Putnam. But parents with at least a bachelor’s degree increased their investment of time more than fourfold over the same period, opening up a gap in time spent with kids, especially in the preschool years. The quality of time matters as much as the quantity of time, of course. In a famous study from the mid-1990s, Betty Hart and Todd R. Risley from the University of Kansas found large gaps in the amount of conversation by social and economic background. Children in families on welfare heard about 600 words per hour, working-class children heard 1,200 words, while children from professional families heard 2,100 words. By the age of three, Hart and Risley estimated, a poor child would have heard 30 million fewer words at home than one from a professional family. …. Our analysis suggests that the biggest gaps are not between the helicopter parents at the top and ordinary families in the middle, but between the middle and the bottom.  \”

The effects of different qualities of parenting are apparent early in life.

\”Gaps in cognitive ability by income background open up early in life, according to research by Tamara Halle and her colleagues at Child Trends, a non-profit research center focused on children and youth. Children in families with incomes lower than 200 percent of the federal poverty line score, on average, one-fifth of a standard deviation below higher-income children on the standard Bayley Cognitive Assessment at nine months—but more than half a standard deviation below higher-income peers at two years. This is the social science equivalent of the difference between a gully and a valley. These early months are critical for developing skills in language and reasoning—and, of course, months in which parents play the most important role. Closing ability gaps in the first two years of life—pre-pre-K, if you like—means, by definition, closing the parenting gap. … Research to date suggests that parenting accounts for around one-third of the gaps in development …\”

 As the authors point out, public policy about parenting is an ideological hot potato. Conservatives tend to be comfortable with judging some parenting as low quality, but uncomfortable with enacting any public policy to change the situation. Liberals are in theory more comfortable enacting policies to help low-income children, but are often so deeply uncomfortable with making any judgments about the quality of parenting that they prefer to advocate policies like government support of preschool, or assistance with income and jobs for those in need. The authors are also brutally honest that the evidence for the effectiveness of public policy in this area is not strong: \”Let us be blunt: The evidence, in fact, is that many attempts  to use tax dollars to improve parenting have failed to show significant effects. In particular, it is hard to find evaluations providing strong evidence that outcomes for the children are permanently influenced—surely the ultimate objective.\”

However, they also point out that other countries like Netherlands and the United Kingdom have much more active programs of home visitation for parents of newborns. In the U.S., the Affordable Care Act passed in 2010 allocates $1.5 billion over five years for increased home visitation programs. Studies by the Department of Human Services have identified several home visitation programs that had some effect at least one year after enrollment. A private organization called the Nurse Family Partnership has been testing and expanding approached to home visitation for several decades. Under these kinds of programs, new parents and parents of pre-school children might receive biweekly home visits invitations to regular meeting groups of new parents, and perhaps also some access to educational books and toys.

Again, the evidence about long-term efficacy of such programs, especially at a large scale, is still in a nascent stage. But these authors offer a radical thought: It may well be true that the government should reallocate a substantial share of the money that it currently spends on preschool programs and move it toward parental visit programs for families with very young children. Reeves, Sawhill, and Howard write: \”Parents influence their child’s fortunes right from their first breath, while pre-K is aimed at 4-year-olds. In child-development terms, four years is an eon. By the time pre-K kicks in, big differentials in test scores are already apparent. … In the last five years, the federal government has allocated $37.5 billion to Head Start—25 times as much as promised to home-visiting programs over the next five. This may not be the optimum ratio in terms of promoting greater mobility and opportunity. …\”

The World Trade Report 2013 from the World Trade Organization has the theme: \”Factors shaping
the future of world trade,\” which in a number of ways turns out to be factors that will shape the future of the world economy as a whole. Here are some of the facts and themes that jumped out at me.

1) International trade plays a growing role in the world economy. Here\’s a figure showing the ratio of world exports of goods and services to world GDP. Trade rose sharply from less than one-fifth of world GDP in the mid-1980s to nearly one-third of world GDP in 2012–and world trade seems to have largely recovered from the dip during the Great Recession.

2) The rise is trade is primarily a rise in manufacturing trade. At least so far, services trade is growing in synch with overall trade, but most trade still involves manufacturing. The first figure shows the growth of manufacturing trade relative to agriculture and fuel/minerals.

Perhaps at some point in the future, trade in services in the global economy will grow more rapidly than goods. But at least so far, this isn\’t true. In particular, the graph on the right shows the share of services in overall trade of goods and services, and it\’s not budging much.

3) Global manufacturing trade is mostly carried out by a small number of transnational corporations that often make direct investment in other countries as part of building global supply chains in which products are increasing produced in multiple stages across countries.  

\”With some notable exceptions, such as the major oil companies, firms that engaged in FDI [foreign direct investment]– that is, the ownership and management of assets in more than one country for the purposes of production of goods and services – were relative rarities before 1945. In the post-1945 period, however, FDI has surged, growing more rapidly than either production or international trade … By 2009, it was estimated that there were 82,000 multinationals in operation, controlling more than 810,000 subsidiaries
worldwide. Upwards of two-thirds of world trade now takes place within multinational companies or their
suppliers – underlining the growing importance of global supply chains … Manufacturing is increasingly managed through complex global supply chains – effectively world factories – which locate various stages of the production process in the world’s most cost-efficient locations …\”

Here\’s a table showing the share of exports from various countries that are accounted for by the largest exporters. For example, in the US economy, the top 1% of exporters account for 80% of all exports. In developing countries, a common pattern is that the top five exporting firms do about about 80% of the country\’s exports.

In a world of global supply chains,exports from one country embody and include imports from other countries. Thus, it is becoming increasingly important to measure global trade based on the value-added within each country, not on the total value of gross imports and gross

4) The broad currents of world trade have shifted. Three decades ago, the majority of world trade was North-North–that is, it was trade between high-income countries of the world. Now, only about one-third of world trade is North-North, and the share that is North-South and South-South is expanding rapidly.

5) For decades after the late 1940s, the political focus of efforts to increase world trade looked at how to reduce tariffs. But that effort has been so successful that the more important trade barriers today are nontariff barriers, and how to reduce costs of  transportation. The report cites evidence that \”transportation costs represent a greater barrier to trade than policy-induced obstacles, such as tariffs. At a price of US$ 100 per barrel of oil, they estimate transportation costs to be equivalent to an average tariff of 9 per cent, nearly double the WTO’s estimate of the average applied tariff.\” Transportation and communications infrastructure are likely to be especially important in building ties from the less-developed economies of the world to the global economy. For example, the report cites evidence that the continent of Africa has fewer kilometers of road now than it did several decades ago.

6) Many countries have seen increasing remittances from migrants. \”Officially recorded migrant remittances to developing countries, estimated at US$ 406 billion in 2012, are now more than three times the size of ODA [official development assistance–aka, \”foreign aid\”]. Compared with other private capital flows, remittances have showed remarkable resilience during the recent financial crisis.\” Here\’s list of some of the countries where the level of remittances is equal to 20% or more of GDP.

7) Comparative advantage has become more fluid. Classroom examples of the drivers of international trade tend to dwell on how identifiable products like cars and computers and oil and wheat are traded between countries, and how the key driver of trade is that it is relatively cheaper (in an opportunity cost sense) to produce certain goods in one country than in another. But with the changes in world trade, these sorts of examples do a less good job of representing what trade actually happens and what determines that trade. In a world economy where trade involves a supply chain of partially-completed intermediate goods, looking at examples of completed goods like cars and computers will miss some of the point. The locations of production will be determined by choices made by a relatively few large exporters about global production chains, and by their decisions about foreign direct investment. In turn, these decisions will be shaped by local investments in transportation and communications infrastructure, and in the other institutional, legal, and human capital support that a local economy can give to an international producer. These sorts of advantages are less related to wages, productivity, and natural resources in a static sense than in the common textbook examples. Instead, this is a sort of flexible comparative advantage that will often shift and change.

Medicare is same insurance program across the country. Everyone across the country pays the same taxes to support Medicare and the elderly across the country pay the same premiums. But Medicare spending per enrollee varies considerably across states. Here\’s a table from the Kaiser Family Foundation showing spending per Medicare enrollee by state of residence, using data from the Center for Medicare and Medicaid Services. Some states like Florida, Illinois, Louisiana, and Texas have average spending per Medicare enrollee more than 10% above the national average; a number of others, like Hawaii, Montana, and Idaho have spending more than 10% below the national average.

This well-known leads to some obvious questions: Can these differences in spending can be accounted for by differences in age, income, health status, or variations in the cost of health care across regions? Joseph P. Newhouse, Alan M. Garber, Robin P. Graham, Margaret A. McCoy, Michelle Mancher, and Ashna Kibria discuss the evidence on this question in \”Variation in Health Care Spending: Target Decision Making, Not Geography,\” published by the Institute of Medicine (a part of the National Academy of Sciences) in July. The report can be read for free on-line, and the prepublication galleys can be downloaded here.

They look at Medicare data by \”hospital referral region,\” or HRR, which can be thought of the geographic region in which most people are referred to a certain group of hospitals.  They report: \”Recent reports
by the Dartmouth Institute for Health Policy and Clinical Practice and the Medicare Payment
Advisory Commission (MedPAC) estimate that unadjusted Medicare spending per beneficiary is
50-55 percent higher in HRRs in the highest quintile of spending relative to those in the lowest
quintile. Medicare service use (adjusted for demographics and beneficiary health) is approximately 30 percent greater in the highest quintile compared with the lowest …\”

The report also looks at variation across hospital referral areas (HRRs) after adjusting for patient demographics, health status, and also for the costs of health care inputs in that area. After these adjustments, here is a bar graph ranking the HRRs from lowest montly cost (Rochester, NY) to highest (Miami, Florida). They write: \”Areas to the far left in Figure 2-5a have utilization roughly $50 to $150 below the adjusted national mean, whereas those on the far right have utilization roughly $100 to $200 above the adjusted national mean.\”

A close look at the underlying spending patterns reveals that 73% of this variation across the geographic areas is due to a single category of spending: specifically, spending for \”post-acute care\”–that is, the follow-up care after hospitalization–and most of the rest of the variation is due to variation in acute (inpatient) care.
These findings for Medicare are representative of a large literature showing that patterns of U.S. health care for all age groups vary considerably across cities and states. For example, the decision between heart surgery and treatment with blood pressure medications, or the proportion of mothers who have a C-section, or the choices about all kinds of minor surgery vary considerably across locations. There is often with no evidence that the area making the more expensive choice has better health outcomes, which suggests that if health providers in some areas could learn from those in other areas–or if health care reimbursement plans can be jiggered to reward certain choices and discourage others–overall health care costs could be reduced with little or no adverse effect on health.

But not much is known along these lines so far. As the Institute of Medicine report notes, \”By creating the Center for Medicare and Medicaid Innovation, the ACA [Affordable Care Act] generated a thousand pilot demonstrations of new payment models. It is too early to know which of these models will prove to control health care costs and improve quality.\” Also, the author suggest: \”Additionally, Congress should give CMS [Centers for Medicare and Medicaid Services] the flexibility to experiment with the mix of payment mechanisms, rates, and performance metrics that will align provider incentives with high-value care.\” Given that rising health care costs and the geographic variations in health care use have both been well-known for several decades, the fact that experimentation with different payment methods \”to align provider incentive with high-value care\” is really just getting underway seems to me rather disheartening.

Once every three years, the Bank of International Settlements publishes the results of a survey about the size of foreign exchange markets. The most recent \”Triennial Central Bank Survey,\” subtitled \”Foreign exchange 
turnover in April 2013: preliminary global results,\” has some familiar news.  

Foreign exchange markets are extraordinarily large. \”Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This is up from  $4.0 trillion in April 2010 and $3.3 trillion in April 2007.\” The growth rate of the foreign exchange market in recent years has been about 35% annually.

What accounts for this very large total? In round numbers, world GDP is about $70 trillion, and world exports are about 30% of that amount–call it $21 trillion per year. Clearly, foreign exchange markets are not mainly driven by the direct needs of exchanging currency for exports and imports. Flows of foreign direct investment around the world were about $1.3 trillion in 2012. Total global holdings of portfolio investment were about $39 trillion in 2011. Thus, it doesn\’t seem that the need to exchange currency for either foreign direct investment or for portfolio investment can explain what\’s happening in foreign exchange markets, either. The remaining possible explanation is that the enormous size of exchange rate market arises primarily out of short-term decisions about hedging risk and seeking return in a global economy, where many financial and nonfinancial firms are continually adjusting their exposure to the possibilities of future movements in exchange rates.

Another main message of the BIS report concerns the role of the U.S. dollar in foreign exchange markets. It continues to be true, as it has been for decades, that many foreign exchange trades between currencies A and B involve first turning a currency into U.S. dollars, and then switching to the other currency. \”The US dollar remained the dominant vehicle currency; it was on one side of 87% of all trades in April 2013. The euro was the second most traded currency, but its share fell to 33% in April 2013 from 39% in April 2010. The turnover of the Japanese yen increased significantly between the 2010 and 2013  surveys. So too did that of several emerging market currencies, and the Mexican peso and Chinese  renminbi entered the list of the top 10 most traded currencies.\”

I\’ll attach a list of currencies, in the order they are traded in foreign exchange markets. Of course, the report has more details about changes since the first survey in 1998, as well as the specific financial instruments used.

The future US workforce needs a wide range of skills, only some of which are likely to be delivered through a conventional two-year or four-year college degree. Natalia Aivazova looks at \”Role of Apprenticeships 
in Combating Youth  Unemployment in Europe and the United States,\” written as Policy Brief PB13-20 (August 2013) for the Peterson Institute for International Economics.

As a starting point, here\’s a graph showing what share of students age 15-19 are in apprenticeship programs in EU countries. In Austria and Denmark, it\’s more than one-quarter; in Germany, it\’s more than one-third. And it\’s worth emphasizing that this measure of apprenticeships tends to understate what overall share of the population had an apprenticeship at some point in time; for example, a 15 year-old may not have an apprenticeship now, but might have one in the next year or two.

This EU data doesn\’t include estimates for the United States, but a recent OECD report called \”A Skills beyond School Review of the United States,\” by Małgorzata Kuczera and Simon Field, offers some information on the US situation.

\”Registered apprenticeship programs are overseen by the Office of Apprenticeship in the US. There is no direct federal funding for apprenticeship programs, but the Office of Apprenticeship supports programs that seek federal recognition through regulations, technical assistance, maintenance of a national database, issuance of certificates, and promotional activities. Registered Apprenticeship programs are provided by employers, employer associations, joint labor/management organizations, government agencies and the military. Each industry establishes its own minimum age requirement (at least 16 with a typical minimum of 18). Most programs require applicants to have a high school diploma or GED certificate. Some require
completion of subjects such as algebra, or technical topics such as blueprint reading. As of 2008, about 27 000 registered apprenticeship providers were training about 480 000 apprentices — about 0.3% of the total work force. While there are registered apprenticeship programs for over 1 000 occupations, apprenticeship tends to be concentrated in fields that require little or no postsecondary education. But in response to calls from the Government Accountability Office (GAO) the U.S. Department of Labor has made efforts to expand registered apprenticeships in sectors with good employment prospects, and requiring mid and
high level skills such as health care and IT.\” 

For some sense of the promise of internships, look at unemployment rates for younger people in the 15-24 across a number of countries. Of course, the lack of apprenticeships isn\’t the only reason, nor even close to the main reason, that youth unemployment is above 50% in Spain and Greece. But it\’s nonetheless intriguing that the countries with the lowest youth unemployment rates tend to be those with the highest share of apprenticeships.

Most Americans seem to have a constricted view of apprenticeships: sure, they are fine for a few students that are entering the construction trades and not likely to flourish in a four-year college. But perspective is much too narrow. Apprenticeships can cover a wide range of possible jobs. Apprenticeships can build both specific job-related skills and also soft skills like showing up on time, ready to work. They can also help create connections between young people and the workforce at a time in history when the older connections–like following in the same career as your parents, or the friends of your parents–is clearly not working for many young people. And yes, for the substantial portion of U.S. students who aren\’t likely to flourish if they tried to follow the path of extending their formal education for four more years after high school, apprenticeships offer another path to skilled jobs with decent pay and prospects for career advancement. Here\’s some background from Aivazova on the situation in Germany and Austria (citations omitted):

\”Apprentices typically spend one or two days a week in a vocational school where they are taught based on a federally agreed program of both general and occupation-specific instruction. The rest of the workweek is spent on the job, in a training program designed by the specific firm  in collaboration with education authorities, sector employers,  and employee organizations. Apprenticeships last two to four  years, depending on the profession, and are followed by a final  examination. In Germany, 59 percent of apprentices are then employed by the firm that trained them. Apprenticeships are  offered in over 300 occupations, of which 60 percent are in  the service sector and 40 percent are in industrial production …

\”In 2006, the  top two apprentice occupations in Germany were automotive mechanics and retail sales. In Austria, the most popular  apprentice occupations were retail trade, office work, and  heavy goods and automotive maintenance.  Retail trade and manufacturing are more likely to employ  youth, and apprentices in Austria and Germany are smartly  choosing to enter those sectors. Little wonder then that  German and Austrian youth, already professionally trained in  the sectors most likely to employ them, have an easier time finding work. …

\”To implement successful apprenticeship programs, governments should pass legislation to create nationally recognized  apprenticeship-completion certifi cates as well as regulate apprenticeship content to ensure quality and transferability of skills.  Apprentices should be given a stipend (typically one-third to  one-half of the wage of a regular employee in that sector) and  other benefits such as health insurance. … Critical to  the success of apprenticeships is participation of labor unions and private businesses. To attract firms they must be given considerable autonomy in developing the on-the-job training components of apprenticeships. If necessary, firms can also be offered tax incentives and training subsidies.\”

For previous posts on apprenticeships, see \”Taking Apprenticeships Seriously\” (February 18, 2013) and \”Apprenticeships for the US Economy\” (October 18, 2011).

On the creation of the job creation and destruction data

\”Steve Davis and I met back in the mid-1980s, and we had this idea that to understand how the labor market works, it would be critical to understand the ongoing process of what we called job creation and job destruction. In the mid-1980s, we got to know Dunne, Roberts, and Samuelson, who were using lower-frequency Census data to study the entry and exit of firms and firm dynamics. We asked them if they thought it was possible to get access to the data to look at higher frequencies, say monthly or quarterly. And they said, “Well, we don’t know, but why don’t you call these guys up?”

So Steve and I called up the Census Bureau. Robert McGuckin, the director of the Bureau’s Center for Economic Studies (CES) at the time, invited us to come give a seminar. We got two reactions. Bob McGuckin was incredibly enthusiastic. But some of the folks said, “You guys are nuts!” They kept saying that the data were not intended for this task, that we were pushing them in a way they weren’t meant to be pushed. Steve and I were cognizant of that, but we started working with the data and realized their potential, and that led to us developing these concepts of job creation and destruction and how to measure them.

Over the years, one of our most satisfying accomplishments was to convince the statistical agencies that this was important. The Census Bureau and the Bureau of Labor Statistics (BLS) now have regular programs where they are turning out the kind of statistics that we developed. Back in the 1980s, there were only a handful of people working with the firm-level data. We literally were in basement rooms without windows. Now the CES has 100 staff members and 15 research data centers spread across the country — and most of the staff work in rooms that have windows!\”

Recruiting intensity in the Great Recession

\”We were struck by the fact that there was a pattern in the job-filling rate that was not consistent with the standard search-and-matching model: Businesses that were very rapidly expanding filled their jobs much faster than other kinds of businesses. In the standard search-and-matching model, if you want to expand quickly, you just post more vacancies. We found that was true — businesses that were expanding rapidly did post more vacancies — but we also found that they filled them much more quickly. So what’s going on there? The model that we came up with is that firms don’t just post vacancies, they also spend time and resources on hiring people. So if you want to hire more people, you can raise the wage you offer, or you can
change the way that you screen workers — these are just two examples of the variety of margins that a firm can use. As shorthand, we’ve called these margins “recruiting intensity.” We also found that recruiting intensity dropped substantially in the Great Recession and has been slow to recover.\”

When policy tries to stop job destruction 

\”I think the evidence is overwhelming that countries have tried to stifle the [job] destruction process and this has caused problems. I’m hardly a fan of job destruction per se, but making it difficult for firms to contract, through restricting shutdowns, bankruptcies, layoffs, etc., can have adverse consequences. The reason is that there’s so much heterogeneity in productivity across businesses. So if you stifle that destruction margin, you’re going to keep lots of low-productivity businesses in existence, and that could lead to a sluggish economy. I just don’t think we have any choice in a modern market economy but to allow for that reallocation to go on. Of course, what you want is an environment where not only is there a lot of job destruction, but also a lot of job creation, so that when workers lose their jobs they either immediately transit to another job or their unemployment duration is low. …

I think lots of countries hear this advice from economists or from organizations like the International Monetary Fund or the World Bank, so they open up their markets, they open up to trade, they liberalize their labor and product and credit markets. And what happens is, job destruction goes up immediately, but job creation doesn’t. They realize that they’ve got a whole bunch of firms that can’t compete internationally, and they’re in trouble. …  On the one hand, there is lots of evidence that countries that distort the destruction margin find themselves highly misallocated, with low productivity and low job growth. On the other hand, it’s difficult to just let things go without having well-functioning market institutions in place …\”

 A slowdown in new business formation

\”We’ve always known that young businesses are the most volatile. They’re the ones experimenting, trying to figure out if they have what it takes to be the next Microsoft or Google or Starbucks. But now we’re seeing a decline in the entry rate and a pretty stark decline in the share of young businesses. … But it’s also important to recognize that the decline in the share of young firms has occurred because the impact of entry is not just at the point of entry, it’s also over the next five or 10 years. A wave of entrants come in, and some of them grow very rapidly, and some of them fail. That dynamic has slowed down. Should we care? The evidence is we probably should, because we’ve gotten a lot of productivity growth and job
creation out of that dynamic. A cohort comes in, and amongst that group, a relatively small group of them takes off in terms of both jobs and productivity. So the concern is, have we become less entrepreneurial? If you’re not rolling the dice as often, you’re not going to get those big wins as often. …  

We’ve been struck by how rare success is for young businesses. When you look at normal times, the  fraction of young small businesses that are growing rapidly is very small. But the high-growth firms are growing very rapidly and contribute substantially to overall job creation. If you look at young small businesses, or just young businesses period, the 90th percentile growth rate is incredibly high. Young businesses not only are volatile, but their growth rates also are tremendously skewed. It’s rare to have a young business take off, but those that do add lots of jobs and contribute a lot to productivity growth. We have found that startups together with high-growth firms, which are disproportionately young, account for roughly 70 percent of overall job creation in the United States.

The labor share of national income is falling, both in the U.S. (see here and here) and around the world (see here and here). One useful way to gain understanding on this issue is to break down the different components of labor and capital income and see what\’s driving the change. The Congressional Budget Office provides a useful overview of this approach with U.S. data in its July 2013 report, \”How CBO Projects Income.\”

Here\’s a figure showing the labor share of income for the U.S. economy as a whole, as well as for as for the business sector as a whole and the corporate sector (that is, businesses that are officially incorporated). As I\’ve noted before, back around 1980 when I was first getting my feet wet in economic data, the standard line belief was that the labor share of income was roughly constant. Even into the 1980s and 1990s, one could argue that the labor share of income was hovering in more-or-less the same fairly narrow range. But the fairly drop in labor share of income since about 2000, down to 59.3% of total income in 2011, is below any post-1950 value.

The figure also shows that the big drop in labor\’s share of income has occurred in the corporate sector.

Why has the fall been so large in recent years? Clearly, the depth of the Great Recession and the sluggishness of the economy since the end of the recession in 2009 make a difference to what labor is receiving. The typical pattern is is that labor income tends to rebound as an economy recovers, but the recovery has been so listless that labor\’s share has stayed low.

But there are also concerns that the decline in labor\’s share of income may be a more long-term phenomenon, tied to technology and globalization. Here\’s the CBO comment (footnotes leading to citations of research on these points omitted):

\”For example, technological change may have reduced the returns to labor relative to capital in several ways: By expanding options for employing capital in place of labor (such as through automation); By reducing the relative price of capital goods, especially those used for communications and information processing; and By increasing the pace at which skills tied to old technologies become obsolete, thereby reducing the productivity of workers whose skills are not up to date. Moreover, technological change has increasingly contributed to the globalization of markets for services as well as for goods. At the same time, globalization of labor and product markets may have increased the returns to capital relative to labor by enabling the United States to specialize in the production of goods and services that require the capital inputs that it has in abundance relative to most other countries.Globalization may have also eroded the bargaining power of workers by increasing the mobility of capital.

Here are a few other aspects to the labor-share-of-income story. One is that the roughly constant labor share of income from 1950 to about 2000 may be a bit misleading in some ways, because it was actually made up of some offsetting trends.

The relative stability of the overall labor share between 1950 and 2000 reflected in large part the offsetting effects of changes in the sectoral composition of the economy. Expansion of the nonprofit sector, which includes most hospitals, for example, put upward pressure on the labor share because that sector is labor-intensive and has a high labor share of income. In contrast, growth of income generated by owner-occupied housing, which represents the bulk of income generated by the household sector, increased the income going to capital and put downward pressure on the labor share of income.

As the second arguments here notes, the drop in labor income as a share of GDP can also be viewed as a rise in capital income as a share of GDP. Moreover, in the economic statistics behind these calculations, owner-occupied homes are treated as if they were rental businesses, with those who own the home acting as \”landlords\” who rent the home to themselves. The value of living in the home that you own (which is estimated or \”imputed\” by the government statisticians) is treated as capital income.As CBO explains: \”That imputed net rental income is recorded in the NIPAs [National Income and Product Accounts] as the difference between the value generated from housing services and expenses such as mortgage interest, maintenance and repairs, property insurance premiums, property taxes, and depreciation.\”

Here\’s the pattern of \”Rental and Royalty Income of Persons since 1950. Clearly, most of fluctuation in the last 40 years is related to  this imputed \”household rental income\” from those living in homes that they own. Compared to the period from the mid-1970s to the early 1990s, this factor can help to explain why capital income is about 1% of GDP higher, and thus why the labor share of income is lower. (The drop around 2006 is presumably due to the drop in housing prices at about that time.)

\”Consumption of fixed capital,\” perhaps better known as depreciation, is another reason why the capital income share has risen over time. From the government statistician point of view, the value from using up or wearing down fixed physical capital is a form of capital income. CBO explains: \”Consumption of fixed capital
has grown as a share of GDI since the mid-1970s, largely as a result of the shift in investment spending toward assets with shorter service lives (especially computers, communications equipment, and software) and thus higher rates of depreciation.\” Again, this factor can help to explain why the capital share of total income is larger and the labor share of income is correspondingly smaller.

Finally, a big share of capital income is profits to firms. Profits fluctuate a lot year to year, but if you squint a bit at this figure, it looks as if there is an overall downward tend in profits from the 1950s to the 1970s, and then an upward trend in profits since then. Of course, higher profits being earned by firms can also be explained to some extent by the opportunities opened up by technology and globalization discussed earlier.

From all of this, here are a few take-away thoughts: The labor share of income in the U.S. economy is historically low. Some of this will self-correct as employment gradually rises again. Some of  it is due to change in technology and globalization that have raised the return to capital and put downward pressure on the pay of substantial groups of workers. Some of the fall in labor\’s share of income is due, in a statistical sense, to less-discussed factors affecting capital income like a rise in recent decades in the value of living in a home that you own, and to the fact that capital investment in information technology has a shorter life and depreciates faster than past capital investment.

One of my guilty pleasures is reading a fair amount of mystery/crime/suspense fiction. As someone who edits, writes, and explains for a living, I\’m intrigued by how the top writers in this form manage to keep me turning pages and paying close attention, chapter after chapter. After all, the top authors (with arguably a tiny handful of exceptions over the decades) not great novelists. The top authors are working with pretty much the same basic plotlines as other writers in this form. But at least to me, their prose has a propulsive force.

Elmore Leonard\’s Ten Rules of Writing

1. Never open a book with weather.
2. Avoid prologues.
3. Never use a verb other than \”said\” to carry dialogue.
4. Never use an adverb to modify the verb \”said”.
5. Keep your exclamation points under control. You are allowed no more than two or three per 100,000 words of prose.
6. Never use the words \”suddenly\” or \”all hell broke loose.\”
7. Use regional dialect, patois, sparingly.
8. Avoid detailed descriptions of characters.
9. Don\’t go into great detail describing places and things.
10. Try to leave out the part that readers tend to skip.

My most important rule is one that sums up the 10.
If it sounds like writing, I rewrite.

For academics, I\’d suggest particular attention to rule #2, about avoiding prologues, and rule #10, about leaving out the part that readers tend to skip. I see a lot of early drafts where the first paragraph, or first two or three paragraphs, is just throat-clearing. And academic prose is full of self-indulgence passages that were apparently important to the author, but which matter little or at all to readers.

Heading into the Great Recession, many people thought they had family and friends upon whom they thought they could draw for support. But when the crunch hit, the support wasn\’t there. Here\’s the evidence drawing from a short paper by Julie Siebens of the U.S. Census Bureau in \”Extended Measures of Well-Being: Living Conditions in the United States: 2011.\”

The Survey of Income and Program Participation, on which this data is based, asks (among other questions) about a list of nine possible hardships: 1) difficulty meeting essential expenses; 2) not paying rent or mortgage; 3) getting evicted; 4) not paying utilities; 5) having utilities cut off; 6) having phone service cut; 7) not seeing a doctor when needed; 8) not seeing a dentist when needed, or 9) not always having enough food.
In 2011, 6% of US families reported experiencing three or more of these hardships. In the lowest quintile of the income distribution, 12.2% reported experiencing three or more of these hardships.

Here\’s an illustrative figure showing what share of people reported experiencing certain hardships in 2011.

But what jumped out at me was the follow-up figure: Of those who experienced hardships, what were their expectations about how much they could rely on family and friends, and to what extent were those expectations met?

The common pattern is that about half of households expected that family or friends could help. But in fact, a much smaller proportion actually received the help they had expected. It would take a fine novelist or playwright to do justice to the underlying stories of disappointment behind these graphs. In some cases, people probably had unrealistic expectations of how much their family and friends were willing to help out. In other cases, it\’s probably the case that family and friends were also being hit by economic bad news of their own, and weren\’t in any position to help out.

 In economic and social terms, the Great Recession is not nearly as severe as the Great Depression of the 1930s. But in somewhat the same way that the Great Depression cast a dark shadow over political attitudes that lasted for years, I suspect that the Great Recession will leave its own lasting shadows. For more than five years now, Americans experiencing a society in which jobs were hard to come by–whether for themselves or for their friends, family, and neighbors–and a society in which family and friends didn\’t prove able to help each other in the ways that had been expected.