Financial Literacy

The great difficulty with lifetime financial choices is that you only get to do them once. With lots of choices in  a market, like buying dinner or buying clothes, the choices are made and the consequences are experienced in a fairly short time. Mistakes are fairly small-scale. If you don\’t like the clothes or the restaurant, go somewhere else next time. Indeed, one of the ways that competitive market forces work to encourage value and quality is through this process of repeated (or not!) purchases. But in a single lifetime, you get to try out precisely one set of lifetime financial choices. If at age 50 or 60 or 70 or 80 you wish that you had done something different earlier in life, you can\’t go  back to your 20s and 30s and 40s and live it over again.

When I talk about \”financial literacy\” to make these choices sensibly, I don\’t mean anything too sophisticated–just the basics to get by. For example, consider a person who can\’t answer the following three questions, which are examples given by Annamaria Lusardi and Olivia S. Mitchell in \”The Economic Importance of Financial Literacy: Theory and Evidence,\” published in the March 2014 issues of the Journal of Economic Literature. (Full disclosure: The JEL is published by the American Economic Association, which also publishes the Journal of Economic Perspectives, where I work as Managing Editor.) The JEL isn\’t freely available on-line, but many in academia at least should have access through a library subscription. Here\’s your three question financial literacy quiz:

  • Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow: [more than $102; exactly $102; less than $102; do not know; refuse to answer.]
  • Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy: [more than, exactly the same as, or less than today with the money in this account; do not know; refuse to answer.]
  • Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” [true; false; do not know; refuse to answer.]

Remember, these questions are multiple choice, and you don\’t need to really understand the subject in any depth to make a plausible guess at the correct answers. These three questions were included as part of the Health and Retirement Survey in 2004, which is a nationally representative sample of Americans age 50 and over. Apparently, about one-third of Americans are able to answer all three of these questions correctly.

As Lusardi and Mitchell point out, many other surveys similar findings, and the young often do worse than their elders. However, it seems that most Americans are actually pretty optimistic about their financial literacy. They write (citations and references to tables omitted): \”Even though actual financial literacy levels are low, respondents are generally rather confident of their financial knowledge and, overall, they tend to overestimate how much they know. For instance, in the 2009
U.S. Financial Capability Study, 70 percent of respondents gave themselves score of 4 or higher (out of 7), but only 30 percent of the sample could answer the factual questions correctly …\”

Of course, a lack of financial literacy has many costs. People don\’t save enough, so that they become more vulnerable if their car breaks down, or someone in the family gets sick, or loses a job.  They are also vulnerable to costly financial decisions. Instead of having a bank account, they end up paying high fees through pawn shops and payday loans. They often pay high credit card fees. They end up in costly arrangements when buying cars or appliances or houses, and when interest rates fall (as in the last few years), they fail to refinance their mortgage or other loans. They end up poor in retirement.

Regulators have in the past tended to respond to these issues by requiring more and more disclosure, but adding more fine print is not the superhighway to financial literacy. The harder challenge is to specify a smaller number of clear choices, with sensible default options that will work for most of those who choose note to make a choice. People have different needs and desires, so this isn\’t easy. On the other hand, people who function in 21st century America need to deal with health care choices, consumer electronics, software, map-reading, insurance, and lot of other issues. Most of them can manage the basics of financial literacy, too. But they need to learn it relatively young, because knowing when you\’re 60 what you should have done when you were 25 is not useful.

Many U.S. states have at least some elements of personal finance in their high school curriculum requirements, but it\’s not clear how well the lessons are being communicated, either to high school students or to adults interested in learning more. As Lusardi and Mitchell write: \”Much work remains to be done. Very importantly, there has been no carefully-crafted cost–benefit analysis indicating which sorts of financial education programs are most appropriate, and least
expensive, for which kinds of people.\”

Inequality and Redistribution: An International View

The issue of income inequality is international. The IMF Fiscal Affairs Department provides an overview in an IMF Policy Paper \”Fiscal Policy and Income Inequality,\” published January 23, 2014.

As a starting point, consider inequality across the world by region, as shown in Figure 1. The measure of inequality here is the Gini coefficient, a measure of inequality which ranges from zero where everyone has the same income to 1 when one person has all the income. The measure of income here is \”disposable income,\” which means that it is income after taxes and after transfers of income, but it does not include \”in-kind\” transfers like the provision of food stamps or Medicaid in the United States. The number in parentheses shows the number of countries in each group.

As the figure shows, inequality has been rising in advanced economies, even after the redistributive effects of government tax and spending programs are taken into effect. But it\’s also interesting to note that in these groupings, the amount of income inequality has been and remains much higher in other regions of the world. The IMF writes:

\”Between 1990 and 2010, the Gini for disposable income has increased in nearly all advanced and emerging European economies. Over one-third of advanced economies and half of emerging Europe experienced increases in their Ginis exceeding 3 percentage points, with most of the increases in emerging Europe occurring between 1990 and 1995 during the early years of their transition to market-based systems. Inequality also rose in most economies in Asia and the Pacific and in Middle East and North Africa. While average inequality fell in sub-Saharan Africa over this period, it still rose by more than 3 percentage points in more than one-fourth of these economies. Inequality also increased in over one-third of the economies in Latin America, although on average there was a slight decline. However, since 2000 there has been a substantial decline in the Gini in nearly all countries in this region. … \”More striking than changes in inequality within regions are the persistent differences across regions. For instance, between 1990 and 2010, average inequality in each region changed by less than 3¼ percentage points. In contrast, average inequality in the two most unequal regions
(sub-Saharan Africa and Latin America) remained 12 percentage points higher than the two most equal regions (emerging Europe and advanced economies).\” 

The long-term patterns of inequality at the very top of the income distribution vary as well.  For one group of countries–including the US, Canada, the UK, China, and India–the share of gross income going to the top 1% fell through much of the 1950s and 1960s, but has now risen back to levels similar to the 1920s and 1930s. However, in another group of countries–France, Germany, Japan, Sweden–the share of gross income going to the top 1% declined, but then has pretty much flattened out.

As the IMF report points out, \”a large proportion of the differences in regional average disposable income inequalities can be explained by differences in fiscal policies, especially in the levels and composition of taxes and spending.\” As a starting point, here\’s a figure based on public opinion polls showing public support for redistribution. The horizontal axis shows support for redistribution in the late 1990s and the vertical axis shows support in the late 2000s. If a country is right on the black line, that means that polling data showed the same support for redistribution in the late 2000s as in the late 1990s. The USA, for example, is quite close to the black line. But most countries are above the line, showing that public support for redistribution increased.

Just to be clear, the points here are based on a combination of surveys. The IMF report explains:

\”These surveys, which include the World Value Surveys (WVS), Regional Barometers, and International Social Surveys, ask citizens whether they favor more or less redistribution. In the WVS, respondents are asked to indicate, on a scale from 1 to 10, whether “incomes should be made more equal” (1) or whether the country “needs larger income differences as incentive” (10). For our purposes, we divide these responses in two categories: answers 1 to 5 indicate that the respondents prefer more redistribution, and answers 6 to 10 indicate preference for less redistribution. A similar approach is applied to other surveys to find the share of the population that supports more redistribution. The evidence indicates that public support for redistributive policies has grown in recent decades. Between the late-1990s and the late-2000s, public support for redistribution increased in almost 70 percent of the advanced and developing economies surveyed. For instance, support increased substantially in Finland, Germany, and Sweden, and also in China and India … Support for redistribution grew more in countries where inequality increased and, more recently, in advanced economies where the crisis hit hardest. For instance, public support between the late-1990s and the late-2000s grew by more than 30 percentage points in China, Finland, Germany and several Eastern European countries, where the income Gini increased by over 20 percent. At the same time, support declined in countries where the Gini decreased, including in Bulgaria, Mexico, Peru, and Ukraine.\”

The IMF calculates how much redistribution is actually happening through tax and spending policies: that is, how much is the Gini coefficient reduced by the tax and transfer policies enacted by government. Here\’s a measure for the advanced economies, where the Gini based on market incomes would average .43, but the Gini based on disposable after-tax after-transfer income is .29.

As the figure shows, the U.S. does less redistribution than other high-income countries. But the figure also helps to illustrate a perhaps less-known point: the lower level of U.S. redistribution is more on the spending side than on the tax side. Many European countries collect a lot of their tax revenues through value-added taxes or energy taxes, which work like sales taxes in collecting a higher share of income from those who have lower incomes, and who consume a higher share of their income. Indeed, the amount of redistribution that the U.S. does through taxes hasn\’t changed much in the last couple of decades, but the amount of redistribution that it does through transfer spending programs has declined substantially, in part because the big entitlement spending programs like Social Security and Medicare are not especially aimed at the poor. The report has much more to say about the design of tax and transfer programs around the world.

U.S. Teen Birthrate Plummets

Teen birthrates in the United States have been falling for two decades–and falling at a faster rate in the last few years. Melissa S. Kearney and Phillip B. Levine explore possible reasons why in \”Teen Births Are Falling: What’s Going On?\” written as as March 2014 Policy Brief for the Economics Studies group at the Brookings Institution. Here\’s the trend:

To be sure, the U.S. teen birthrate remains well above that of most other high-income countries, where, as Kearney and Levine point out, the teen birthrate is usually in the range of 5-10 births per 1,000 women aged 15-19. Still, the teen birth rate in the U.S. has fallen by half in the last couple of decades. What might be the underlying causes?

There are three possibilities: teens having sex less often, teens who are having sex using contraception more often, and a higher number of abortions. The abortion rate among teens has not risen in a way that would explain the fall in teen births, so Kearney and Levine focus on the first two causes. They sum up their overall perspective in this way (citations omitted for readability):

\”To some extent, it is appropriate to consider teen childbearing to be the result of “non-decisions;” some teens are sufficiently ambivalent about becoming pregnant that they do not commit themselves to taking precautions against such an outcome. To illustrate this point, half of teens who report having an unintended pregnancy were not using contraception at the time of conception. This way of thinking about the issue allows for individual error and randomness in the process, but
ultimately considers that individuals – even teens – respond to the environment around them and make choices that either increase or decrease the likelihood of becoming a teen parent. Indeed, the data suggest as much, with teen childbearing rates rising and falling with environmental factors in systematic ways.\”

In ongoing research, they look at a number of these different environmental factors at the state level: different kinds of state sex education programs, from abstinence to contraceptive education; expansions of Medicaid that cover contraception or post-partum care for broader income groups; welfare payments; state abortion rules like waiting times or parental consent rules; child support enforcement; state unemployment rates, and more. These conditions will vary across states, and they are enacted at different times in different states. So you can do a statistical test to see how much of the variation across states in teen birthrates can be explained by these factors. The answer is \”very little.\” They write: \”We found that declining welfare benefit levels and expanded access to family planning services for lower income women through the Medicaid program were the only two
policies to have had a discernible effect. However, their effect is limited: we calculate that these two policies together account for only 12 percent of the reduction in teen childbearing between 1991 and 2008. Our analysis yields no evidence suggesting that other policies had a significant role in the decline.\”

Thus, if state-level differences are not the main factor, the next place to look is in broader economic or social patterns across states. In addition, these need to be factors that apply through both good and bad economic times over the last couple of decades. Indeed, although the U.S. has the highest rate of teen births across high-income countries, the rate of teen births has been falling in most countries, which suggests that at least some of the causes are broader than U.S. policies or socioeconomic conditions.

Kearney and Levine point to a few factors that have probably hastened the decline in the U.S. teen birth rate in recent years: in particular, the popularity of the TV shows 16 and Pregnant and Teen Mom, as well as the overall pattern that teen birth rates tend to be lower when unemployment is higher. But in terms of explaining the long-term trend, and the broader trend across countries, they readily admit that the evidence in not yet conclusive, but end up focusing on two factors:

\”We speculate that there are two likely candidate explanations: (1) access to improved contraceptive technologies, most notably long-acting reversible contraception (LARCs) such as implants and intrauterine devices (IUDs) and (2) increased educational attainment along with better labor market prospects for young women. … The policy challenge that we believe offers the greatest potential is to address the needs of those young women who are not committed to avoiding a pregnancy. These are teens whose views are characterized by ambivalence. For them, the issue is more about finding ways to make them want to avoid a teen birth. …  Simply put, increased aspirations and expanded opportunities for young women have the potential to extend the downward trend in teen childbearing.\”

For those interested in this topic, and especially in unravelling the difficult questions of whether teen pregnancy causes poor economic outcomes or poor economic outcomes lead to more teen pregnancy, and why teen pregnancy rates vary across countries and U.S. regions, I recommend an article by Kearney and Levine in the Melissa S. Kearney and Phillip B. Levine tackle these questions in\”Why is the Teen Birth Rate in the United States So High and Why Does It Matter?\” which appears in the Spring 2012 issue the Journal of Economic Perspectives. (Full disclosure: I\’ve been Managing Editor of the JEP since 1987, and so am predisposed to believe that all article in the journal are well-exposited and of considerable interest.)

Selling a Kidney: Would the Option Necessarily be Beneficial?

The March 2014 issue of the Journal of Medical Ethics has a symposium on the issues of whether people should be allowed to sell a kidney. The lead article by Simon Rippon, \”Imposing options on people in poverty: the harm of a live donor organ market,\” is freely available on-line, but you need a subscription to read the comments.

Rippon aims to tackle head-on the claim, popular among economists, that offering people an additional option–in this case to sell a kidney–must make the people better off, because they don\’t need to choose the option, but if they wish to do so, they can. He clears the ground by saying: \”I know of no good reason for believing that there is anything intrinsically wrong with buying or selling

organs. It is certainly difficult to imagine any plausible explanation of the wrongness of selling organs that would not equally count against giving them away. It is true that these two types of act differ in that giving organs away is presumably motivated altruistically, whereas selling need not be—but it is not usually considered intrinsically wrong to act from non-altruistic motives. Even if giving organs away is morally better than selling them, it is implausible to suggest that we therefore ought to encourage donation by banning selling entirely, when the cost of doing so might be measured in the loss of thousands of innocent lives due to an inadequate supply of organs. For this reason I will set aside this objection to organ markets, and turn to another. My objection will not depend on the claim that there is anything intrinsically morally wrong with selling or buying organs.\”
Instead, Rippon makes an argument that when an option is available, at least some people will find themselves under social pressure to select that option, or will be held responsible for failing to choose it. \”For example, imagine a cashier at a rural filling station that is potentially vulnerable to an overnight robbery. It may be better for the cashier to have no key to the safe (and to have a
prominent sign displaying that information) than for the cashier to have the key which gives him the option to open it. Possession of the key would make the cashier vulnerable to threats, and the filling station worth robbing.\”
If selling a kidney was a legal option, Rippon argues: 

\”This means that even if you have no possessions to sell and cannot find a job, nobody can reasonably criticise you for, say, failing to sell a kidney to pay your rent. If a free market in organs was permitted and became widespread, then it is reasonable to assume that your organs would soon enough become economic resources like any other, in the context of the market. Selling your organs would become something that is simply expected of you as and when financial need arises. … 

We should ask questions such as the following: Would those in poverty be eligible for bankruptcy protection, or for public assistance, if they have an organ that they choose not to sell? Could they be legally forced to sell an organ to pay taxes, paternity bills or rent? How would society view someone who asks for charitable assistance to meet her basic needs, if she could easily sell a healthy ‘excess’ organ to meet them? … Wherever there is great value in not being put under social or legal pressure to sell something as a result of economic forces, we should think carefully about whether it is right to permit a market and to thereby impose the option on everyone to sell it.\”

The idea that certain activities should be banned not because they are necessarily wrong, but because otherwise there would be social pressure to participate, has some intuitive plausibility, but in practice, it leads to some of our trickiest social issues. For example, some European countries have at times banned headscarves, thus meaning that Islamic women are not under social pressure to wear them. There are arguments for banning circumcision, to protect families from social pressure to have the procedure done. That said, the concern that powerless people might be pressured into selling a kidney seems to me a legitimate concern and counterargument. The commenters on Rippon\’s essay raise a number of possible responses.

In one of the comments, Gerald Dworkin offers several responses. He argues the possibility of selling a kidney shouldn\’t be settled by pointing to a few possible bad outcomes, but instead requires a balancing of costs and benefits, in the context of a regulated market: \”To do so
he must establish that there is a class of harms that (1) are likely to occur, (2) are significant enough to outweigh the enormous benefit of saving people’s lives, and (3) cannot be mitigated sufficiently by intelligent regulation …\”

Dworkin points out that if Rippon\’s concerns were likely to occur, we have already entered that world. \”But we already have formal markets in blood, tissues, sperm and eggs. And lest one think that the sums offered in these markets are trivial, it is not uncommon for infertile couples to make offers of US$50 000 for eggs that meet their specifications. Is there any evidence of the kinds of speculative harms adduced by Rippon—ineligibility for bankruptcy protection or for public assistance—in these markets?\”

In addition, Dworkin draws an provocative parallel to the arguments over physician-assisted suicide, another area in which there is fear of social pressure if the option is open. He writes: \”To use an analogy, many of the same arguments apply to legalising physician-assisted suicide. Those who are dying, and using up family resources, may be pressured into such suicide by family
members. They may be looked upon as ‘selfish’ by society for using scarce resources. But, on the other side, if we keep assisted-suicide illegal, we prevent dying patients from ending their life
sooner rather than later. I think the ability to determine the timing of your death is sufficiently important to expose those who do not wish to die sooner to pressures they will have to resist.
Similarly, I believe that greater access to organs necessary to continued life for many people justifies imposing risks of social pressures which, at the moment, we have little evidence will occur (or not) and have even less evidence are not preventable by regulation.\”

My sketch here cannot do justice to all of the arguments involved, but I will add two points. First, at present, the main source of kidney donations is people who die unexpectedly, with a few voluntary donors. In the meantime, thousands of Americans die every year awaiting a kidney transplant. I can easily imagine that a substantial group of healthy people might not be willing to donate a kidney for free, but would be willing to do so for substantial compensation, and encouraging transplants from healthy donors could save thousands of lives. Second, it troubles me that we often expect the donors of kidneys and blood to act out of sheer altruism, but we have no such expectation of any of the other participants in an organ transplant, like the health care providers or the hospital.

For those interested in how economists view this issue, the Journal of Economic Perspectives had a Symposium on Organ Transplants in the Summer 2007 issue with two Nobel laureates among the authors. (Full disclosure, I\’ve been the Managing Editor of JEP since 1987.) All articles in JEP are freely available, courtesy of the American Economic Association.

U.S. Economy Looking Good, By Comparison

The recovery of the U.S. economy since the end of the Great Recession in June 2009 has been sluggish and weak–and still much better than in most high-income countries. Here a figure from the 2014 Economic Report of the President, released earlier this week.

The figure shows Real GDP per Working Age Population. Real GDP means that it is measuring national economic output adjusted for inflation. By looking at \”working age population,\” it is adjusting for size of population but not (in a direct way) for level of unemployment. The horizontal axis measures quarters that have passed since the start of the recession. The vertical axis set the measure of output for each country equal to 100 at that time, so that you can easily compare the patterns across countries since that time. A few lessons jump out at me.

1) The U.S. and Germany are the only two of the 12 countries shown that have recovered back to the level of output/working-age population from before the Great Recession.

2) It\’s natural for Americans to focus on the problems of the U.S. economy, but by comparison, the U.S. economy is looking pretty good. The euro crisis isn\’t in the headlines right now, and I sometimes read that the crisis is past us. But look at the output/population level in Greece or in Italy, still sinking. The euro-area unemployment rate is up around 12%, and is at 25% in Spain and Greece. Germany, thanks to flexibility of its labor market institutions and benefits from the euro zone, has been doing well, too.

3) Ukraine was added to this graph at what I suspect was the last minute. You can see the shock that hit Ukraine\’s economy back in 2008, and how slow it has been to recover.

4) International comparisons are always a bit tricky. After all, the U.S. has been less affected by the euro crisis than countries of the European Union. Nonetheless, the basic fact is that the U.S. economy is leading the way in this comparison group, which suggests that U.S. economic policy in the aftermath of the Great Recession did something right. To put it another way, critics of the U.S. fiscal and monetary policies in the aftermath of the Great Recession need to explain why, if the policies were so bad, the outcome has been comparatively so good.

Hoxby on Education Reform

The basic student experience in many schools is quite similar to what it was a half-century ago. Te school day is divided into periods, each period is a subject, each subject has a teacher, and it all happens in a building that has been there for decades. Nowadays there\’s some additional technology mixed in. But perhaps, for at least some schools, a bigger shake-up is called for? Caroline Hoxby offers some thoughts in \”The Global Achievement Gap,\” published in the journal Defining Ideas from the Hoover Institution. In  my own reading, her essay suggests to me three potentially useful ways of shaking up public schools.

1) More extensive use of information technology.

Hoxby\’s example here is the \”Rocketship\” schools that operate in Santa Clara, California–that is, in the middle of Silicon Valley. She writes:

The Rocketship schools are hybrid schools that serve students who are largely poor and Hispanic or black. They attain some of the highest scores for students from such backgrounds among California schools. Their students spend part of each day in a \”learning lab\” in which they work on computers. The schools also use computer-based technology for curricular enrichment, diagnosis, and tracking progress. (Although the Rocketship schools are charter schools and largely admit students via lottery, they have not yet been evaluated using lottery-based methods. Thus, some of their high performance may be due to motivated or able students\’ self-selecting into them. However, what really interests us here is their financial model.)

The Rocketship schools have current per-pupil expenditures equal to 79 percent of that of traditional public schools in their county: $7,492 for Rocketship and $9,463 for the other schools. How do they manage this? First, their ratio of pupils to classroom teachers is 30.5 while the traditional public schools\’ is 21.6. Thus, Rocketship schools need only two teachers for every three teachers whom the traditional public schools need. According to their accounts, this entire reduction is attained by means of computers being used for mundane instruction and practice of skills. Second, Rocketship schools spend a much lower share of their budget on the wages and salaries of non-teachers: 12.7 percent as opposed to 32.6 percent. This is largely because they have approximately one non-teaching staff member for every three such people at traditional public schools. The schools’ explanation is that they have less need for administrators and support staff because technology performs many of the tracking and paperwork tasks that such people perform in traditional public schools.

Another benefit of integrating information technology is that it allows 

2) Find \”master teachers,\” pay them accordingly,  and restructure the rest of the teaching staff.
There is now a solid body of empirical evidence suggesting that most of the best teachers are born, not made. In other words, the best teachers are identifiable by the comparatively strong education gains of their students even in the first year or two of teaching. While teachers of all skill levels do improve with experience, those at the top remain at the top.  One recent study found that if a teacher in the bottom 5% is replaced by an average teacher, the average student in that classroom will see a salary gain of $80,000 over their lifetime. As Hoxby points out, schools that have flexibility often hire teachers in two categories: highly skilled master teachers and then a number of less-experienced teachers.  The result is that the school can pay salaries to the master teachers salaries similar to those received by \”some private sector occupations that are filled by people with baccalaureate or more education (but not a professional degree or PhD): accountants, compensation and benefits managers, computer programmers, editors, landscape architects and surveyors, property managers, occupational therapists, regional planners, public relations specialists, and buyers for major retail stores.\” Hoxby writes: 

\”One might wonder how it is possible that US public schools could, within their current budgets, pay teachers in a manner that is so competitive with private sector rewards. The main explanation is that although high value-added teachers are currently underpaid, low value-added teachers who have high seniority, master\’s degrees, and other paper credentials are systemically overpaid relative to their alternative jobs. They have no incentive to leave teaching, therefore. They also have no incentive to improve their value-added. Low value-added teachers absorb so much of the total compensation budget that little is left for high value-added starting teachers, who are not only underpaid if they do teach but who tend to leave teaching as a result.\” 

3) Expand the school day and the school year. 
The standard school day, sending the kids home at 2:30 or 3 in the afternoon, is clearly structured around families that have a parent staying home. The same with the standard school year, in which families are presumed to have ways to look after their children for 10-12 weeks in the summer.  Again, schools with flexibility tend to experiment with 8-5 school days and with year-round school calendars. Hoxby again: 

\”Traditional public schools spend considerable effort ensuring that the number of hours that a teacher is in the classroom is below some amount, that her hours for preparation are above some amount, that the days in the school year are below some amount, and that professional development days are above some amount. In contrast, many choice schools recognize that students’ achievement can be directly affected by the hours and days they spend on school grounds, in the school’s custodial care (not necessarily in instruction), and on fundamental tasks like reading. Thus, it is not unusual to see choice schools experiment with year-round calendars; school days that start early and end late; and school days that contain substantial periods for meals, homework, and play. Choice schools often make these changes pay for themselves by substituting non-teachers for teachers efficiently (when instruction is not going on), by reducing losses associated with students taking books and materials home, and by reducing the need for remediation and disabled instruction.\”

Hoxby is a big believer in school choice and charter schools as ways to drive a process of experimentation and evolution in how K-12 education is delivered.  My point here is not to argue the case for how such change should be implemented, but to point out that most K-12 schools basically operate in a mid-20th century structure, with some computers sprinkled on top. Education is so very important for social and economic equality within the United States and for economic growth in the context of a globalizing economy. For so many students, U.S. schools badly need shaking up.  

Investigating Why People Vote

For economists, why people vote has  long been a puzzle. After all, why go to the time and trouble of turning up at the polls for any big election, when the probability that your vote will decide the election is essentially zero? In Chapter 20 my Principles of Economics textbook on \”Public Choice\” (which I commend to the attention of college teachers out there), I sum up the argument this way: 

\”In a 1957 work, An Economic Theory of Democracy, the economist Anthony Downs stated the problem this way: “It seems probable that for a great many citizens in a democracy, rational behavior excludes any investment whatever in political information per se. No matter how significant a difference between parties is revealed to the rational citizen by his free information, or how uncertain he is about which party to support, he realizes that his vote has almost no chance of influencing the outcome. . . . He will not even utilize all the free information available, since assimilating it takes time.” In his classic 1948 novel Walden II, the psychologist B. F. Skinner puts the issue even more succinctly via one of his characters, who states: “The chance that one man’s vote will decide the issue in a national election . . . is less than the chance that he will be killed on his way to the polls.”

Indeed, one of the arguments for compulsory voting  is that otherwise, not enough people will bother. The arguments for why people vote quickly seem to invoke social motivations: that is, people vote because they feel part of a broader society, and participating in that society seems like a social norm that is worthwhile to them. But finding a way to confirm this feeling, rather than to assert its existence, and to measure its intensity has been elusive. 

Stefano DellaVigna, John A. List, Ulrike Malmendier, and Gautam Rao offer a deeply interesting experiment along these lines in \”Voting to Tell Others,\” which is available as NBER Working Paper #19832 (January 2014), but they have also written a nice readable overview for the Vox website here. Along with what the study has to say about voting, it also offers an interesting and hands-on method for  doing social science.

The authors mix together two sorts of data. One set of data they create themselves by interviewing people in some Chicago suburbs about whether they voted. However, some of the people received a flyer on their doorknob in advance. Some of the flyers said that a someone would come to do a five-minute survey. Other flyers said that it would be a five-minute survey \”on your voter participation in the 2010 Congressional election.\” Some of the flyers also promised to pay $10 for participating in the survey, and some said that the survey would take 10 rather than 5 minutes. Thus, the first set of data is how many people come to the door with and without the flyers, with longer and shorter times, with a promise of monetary payment and without. But the second big source of data is that the researchers had already accessed the voting rolls, so they actually already knew whether people had voted. Thus, they could compare the answers people gave, and whether people were more likely to respond to the survey, according to whether they had actually voted.

With this study design in in place, they draw several conclusions:

Finding 1: Voters do not feel pride from saying they voted, but non-voters do feel shame …  In fact, voting households are slightly less likely to answer the door and do the survey when they are informed about the turnout question. However, non-voters sort out significantly, decreasing their survey participation by 20%. … We find that the effect of reducing payment by $10 is comparable to the sorting response of non-voters to the election flyer. In other words, non-voters appear to dislike being asked whether they voted as much as they dislike being paid $10 less for completing the survey. … 

Finding 2: Non-voters lie and claim they voted half the time, while voters tell the truth … We find that voters tell the truth and say they voted 90% of the time, while non-voters lie and claim to have voted 46% of the time.

This kind of research clearly doesn\’t fit the stereotype of the economist sitting in an office, downloading electronic data to a spreadsheet. Instead, these researchers hired \”many\” undergraduate students to distribute the flyers, and 50 people to carry out the surveys, thus accumulating a dataset of over 13,000 households. Because of the pre-planned and random variation across the different households, with and without flyers before the survey, and with different information on the flyers, there is compelling reason to believe that they are capturing something real about how people think about voting.

Of course, one may raise concerns that the 2010 Congressional elections in in Illinois were a special case in some way, and the result might not generalize elsewhere. Those who raise such objections now have a template for the follow-up research they should to address those concerns.

U.S. Debt: Short-Term Kerfkuffle, Long-Term Challenge

It\’s hard for me to care much about the details of the proposed fiscal year 2015 budget just released by the White House, because no one else seems to care much, either. Indeed, the focus on short-term budget issues is causing us to lose focus on the fact that U.S. government borrowing is on an unsustainable long-run path.

Under the Congressional Budget Act of 1974, the President is required to submit a budget to Congress by the first Monday in February. This year\’s proposed budget arrived the first Tuesday in March. President Obama\’s Office of Management has now missed the legally mandated timeline four of the last five years. This delay might seem to make it harder for Congress to meet its own legislatively required deadlines, except that the chair of the Senate Budget Committee, Patty Murray, has already announced that the Senate won\’t take up a budget this year–and indeed, the Senate hasn\’t passed a budget at all in four of the last five years. Murray says that the Senate will rely on the spending limits over the next two years that were in the bipartisan deal enacted by Congress and signed into law by President Obama. However, the Obama budget proposes breaking those same spending limits.

Rather than agonizing over fine-print details of budget proposals, I\’m more likely to head for the \”Historical Tables of the U.S. Budget,\” a highly useful resource for looking at long-run trends, and for the \”Analytical Perspectives\” volume of the budget, which breaks down issues like tax expenditures, infrastructure spending, and others.  But unlike in years past, these volumes apparently weren\’t ready to be released with the rest of the already-late budget earlier this week, and are supposed to be published next week.

All of this just illustrates a theme that is already apparent to anyone who watched politics: the process for producing a federal budget is broken. Alan J. Auerbach and William G. Gale offer a reminder of why this matters in \”Forgotten but Not Gone: The Long-Term Fiscal Imbalance.\” To set the stage for their discussion, here are two figures from a report last month from the Congressional Budget Office. The first shows budget deficits as a percentage of GDP over time. The second shows the accumulated federal debt owed to the public as a share of GDP over time.

Notice that budget deficits have fallen sharply in the last few years, as one would hope and expect given that the actual recession ended in June 2009. However, the deficits have not yet fallen back to the average for the last 40 years. In addition, the accumulated level of federal debt, while lower as a share of GDP than the peak reached when World War II was fought with borrowed money, is already higher than at any other point in U.S. economic history. Here are some comments from Auerbach and Gale:

First, ignoring projections for the future, the current debt-GDP ratio is far higher than at any time in U.S. history except for a brief period around World War II. The painful budget deals  in 1990 and 1993 occurred when the debt-GDP ratio was more than 20 percent of GDP lower  than it is now. …

Second, while we clearly face no imminent budget crisis, the 10-year budget outlook
remains tenuous and is worse than it was last year, primarily due to changes in economic conditions … There is no “smoking gun” in the 10-year projections, “just” a continuing imbalance  between spending and taxes. . . .  Notably, there is no suggestion in the projections that the debt-GDP ratio will fall. In the  past, when the U.S. has run up big debts, typically in wartime, the debt-GDP ratio has  subsequently been cut in half over a period about 10-15 years. Under current projections, the debt-GDP ratio will rise, not fall; the only question is how fast. …

Third, the fiscal problems worsen after the next 10 years. Results over the longer term
depend very much on one’s choice of forecasts, in particular regarding the growth in health care spending. Nevertheless, under the most optimistic of the health care spending scenarios we  employ, the debt-GDP ratio will rise to 100 percent in 2032 and 200 percent by 2054 and then continue to increase after that. All told, to keep the 2040 debt-GDP ratio at its current level, 72  percent, in 2040, would require immediate and permanent policy adjustments – reductions in  spending or increases in taxes – of 1.9 percent of GDP under current policy. To keep the ratio at  its current level through 2089 would require immediate and permanent adjustments of about 3.5  percent of GDP.

As Auerbach and Gale point out, none of the short-term arguments over raising the debt ceiling or spending caps in the next couple of years map out any route toward these kinds of changes. Of course, projecting the future is always full of uncertainty. You can read their paper for an in-depth discussion of underlying assumptions. But uncertainty should imply planning, rather than inaction. As Auerbach and Gale write:

\”The debt-GDP ratio has already doubled, to more  than 70 percent. The future is already here. There are benefits to getting the deficit under  control – including economic growth and fiscal flexibility – regardless of whether the long-term  problem turns out to be as bad as mainstream projections suggest. … [P]urely as a matter of arithmetic, the longer we wait, the larger and more
disruptive the eventual policy solutions will need to be … Policy makers certainly may not want to reduce spending or raise taxes during a weak period for the economy, but that is different from not planning ahead.\” 

For past blog posts on the economic costs of large budget deficits, see here and here.

Primer on Ukraine\’s Economic Troubles

With the Russian invasion of Ukraine and the prospect of a combustible great powers confrontation, the natural reaction of any economist is: \”So what\’s up with Ukraine\’s economy, anyway?\” Let other people look at maps; I look at economic statistics.

Ukraine has a population of 46 million, roughly the same as South Korea, South Africa, Spain, or Colombia. Its economy in 2012 was $176 billion (measured in current US dollars), which is a little larger than New Zealand or Vietnam, but a little smaller than Romania or the Czech Republic.  Thus, per capita GDP in Ukraine was about $3800 in 2012, which is roughly similar to Indonesia, El Salvador, and Albania, in what the World Bank categorizes as the \”lower middle income\” part of the income distribution.

The CIA World Factbook summarizes Ukraine\’s economic situation in recent years like this: \”Ukraine\’s dependence on Russia for energy supplies and the lack of significant structural reform have made the Ukrainian economy vulnerable to external shocks. Ukraine depends on imports to meet about three-fourths of its annual oil and natural gas requirements and 100% of its nuclear fuel needs. After a two-week dispute that saw gas supplies cutoff to Europe, Ukraine agreed to 10-year gas supply and transit contracts with Russia in January 2009 that brought gas prices to \”world\” levels. The strict terms of the contracts have further hobbled Ukraine\’s cash-strapped state gas company, Naftohaz. Outside institutions – particularly the IMF – have encouraged Ukraine to quicken the pace and scope of reforms to foster economic growth. … Ukraine\’s economy was buoyant despite political turmoil between the prime minister and president until mid-2008. The economy contracted nearly 15% in 2009, among the worst economic performances in the world. In April 2010, Ukraine negotiated a price discount on Russian gas imports in exchange for extending Russia\’s lease on its naval base in Crimea.\”

From a broader macroeconomic perspective, the key problem for Ukraine\’s economy is that it has been running very large trade deficits. In addition, Ukraine\’s economy is highly interconnected with other countries: exports and imports both run at about 50-60% of GDP.  Because Ukraine\’s trade deficits are large, Ukraine depends on large inflows of capital from other countries, and thus has high and unsustainable levels of debt service to pay. A potential answer here is to devalue the currency, and there was a 40% devaluation back in 2008. But when so much of what a country buys and sells is in world markets, a large devaluation of your currency is wildly unpopular–in effect, it makes the cost of all exports fall and the cost of all imports rise.

Let\’s take a stroll through these facts, using graphs generated from the World Development Indicators website run by the World Bank. As a starting point, here\’s are exports and imports as a share of GDP in Ukraine. Notice that Ukraine\’s level of trade is high, with exports and imports both exceeding half of GDP. Notice also that a big trade deficit (red line above the blue line) opened up around 2008, and again in 2012.

Here\’s a graph just focusing on Ukraine\’s current account balance since 2004. The trade deficit was  almost 8% of GDP back in 2008, and larger in 2012.

An economy with a large trade deficit depend on equally large inflows of foreign capital. When it appears that those inflows of capital will not be repaid, and thus are unlikely to continue, the IMF often enters the picture. When the global economic crisis hit in 2008, the market collapsed for Ukraine\’s main export, steel, and international capital stopped going to Ukraine.  The value of Ukraine\’s currency plunged 40%–in other words, Ukraine\’s exports were selling for 40% less on world markets and Ukraine\’s imports cost 40% more. Here\’s a graph created by the useful site showing the exchange rate for Ukraine\’s currency, the hryvnia, in terms of how many hryvnia per euro. More hyrivia per euro means that the currency is getting weaker. You can see the major currency depreciation, followed by a more-or-less stable currency up until very recently, and then another huge depreciation.

Back in 2008 Ukraine\’s banking system (like the banks of most developing countries) had borrowed in foreign currencies, and when the Ukrainian currency was worth so much less, those loans couldn\’t be repaid on time.  In 2008, the IMF loaned Ukraine  $16.8 billion. As always, the IMF loan was intended as short-term help so that the economy could get over the short-term crisis over the hump so that it has some time to put its economic house in order. The banking system was recapitalized, and Ukraine agreed to policies like reducing energy subsidies and restraining wage subsidies (while protecting those with low incomes).

But by  December 2013, the economic situation in Ukraine was looking dire all over again. The same cycle of large trade deficits, capital inflows that turned on and then turned off, and banks that couldn\’t repay their international loans had surfaced all over again. But this time, the IMF felt that Ukraine had not kept its promises of reform in 2008, and was reluctant to step in again.   That\’s when Vladimir Putin stepped up with his plan to buy $15 billion in Ukrainian bonds and also to offer lower natural gas prices.

The IMF put out a press release on December 19, 2013, summarizing its concerns about Ukraine\’s economy. Here are a few points that caught my eye:  

\”The Ukrainian economy has been in recession since mid-2012, and the outlook remains challenging. In January–September 2013 GDP contracted by 1¼ percent y-o-y, reflecting lower demand for Ukrainian exports and falling investments. … Weak external demand and impaired competitiveness kept the trailing 12-month current account deficit elevated at about 8 percent of GDP by end-September despite a significant reduction in natural gas imports. The high current account deficit amid less favorable international market environment pressured international reserves, which fell below the equivalent of 2½ months of imports by end-October 2013. The fiscal stance loosened in 2012–13, contributing to the buildup of vulnerabilities. Large pension and wage increases, generous energy subsidies, and soccer cup spending led to a widening of the combined deficit of the general government and the state-owned company Naftogaz to 5½ percent of GDP in 2012. In 2013, the combined government-Naftogaz deficit is projected to expand to 7¾ percent of GDP. … An inefficient and opaque energy sector continues to weigh heavily on public finances and the economy. Overall energy subsidies in Ukraine reached about 7½ percent of GDP in 2012. The very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage one of the highest energy consumption levels in Europe. As a result, Naftogaz’s losses in 2013:H1 more than doubled and the company is late on payments for imported gas.\”

The IMF writes that Ukraine has \”low program policy ownership,\” which basically means that the government doesn\’t do what it says it will do, like trimming back on energy subsidies and wage subsidies. For example, a table at the bottom of the IMF reports that real (inflation-adjusted) wages in Ukraine rose 8.8% in 2011, 14.2% in 2012, and 9.3% in 2013, which is not a sign of economic health, but rather a sign that the government and its pet energy company are borrowing hand-over-fist to subsidize wages in many areas.

Ukraine\’s economy has some strengths. Inflation is under control. Unemployment at about 8% is not  super-high. The accumulated public debt, at about 41% of GDP, is not especially high.  But Ukraine is also a highly open and not very diversified economy, and thus highly vulnerable to movements of a few key prices on world markets–steel exports, energy imports, its own exchange rate. Add undisciplined government spending that hands out copious energy and wage subsidies, together with an unstable financial sector and a lack of productivity growth, and Ukraine\’s economy is primed to melt down, as it did in 2008 and again in 2013. With the current turmoil, it\’s obviously not a convenient time for Ukraine to be building stronger economic and political institutions. But without such reforms and institutions, Ukraine\’s economy will remain highly unstable.

Remembering Anna Jacobson Schwartz, 1915-2012

Anna Jacobson Schwartz is probably best-known today as co-author with Milton Friedman of the 1963 classic, A Monetary History of the United States. But her extraordinary career covered so much more. The Fall 2013 newsletter of the Committee on the Status of Women in the Economics Profession (CSWEP) publishes eight remembrances of Schwartz from a memorial service held at the National Bureau of Economic Research in April 2013. Here are a few of the points that caught my eye. 

After Schwartz graduated from Barnard College at age 18, and completed her masters\’ degree at Columbia a year later, she worked for several years at the U.S. Department of Agriculture and the Social Science Research Council before joining the research staff at the National Bureau of Economic Research in 1941. As James Poterba writes: \”With the exception of a brief period in the early 1980s when she served as Staff Director for the U.S. Commission on the Role of Gold in the Domestic and International Monetary Systems and was the primary author for the first volume of the commission’s
report, Anna remained an NBER affiliate for the next 71 years. At the time of her death, she had the longest NBER affiliation of any researcher—by several decades. Although Anna held a number of adjunct teaching positions during the course of her career, the NBER was always her primary
affiliation.\” As Allan Meltzer wrote: \”I want to say that the fact that Anna never received an appointment at any major university is the clearest example I know of discrimination against women in the past.\”

Several of the speakers remembered her direct and no-nonsense intellectual style, over decades of papers, books, and NBER seminars. Here\’s a story from William Poole about a discussion with Schwartz in mid-2008:

\”I argued with her that the U.S. economy was in fact doomed to financial crisis in early 2006 when Ben Bernanke took office. By that time, almost all the rotten subprime paper had been created and much had been included in risky portfolios of undercapitalized financial firms. Thus, I argued to Anna, if the Fed had allowed Bear Stearns to fail, the crisis would have become acute at that time instead of six months later when Lehman failed. Her response, in the mildly disapproving but friendly tone she always used with friends, was, “Ah, Bill. But the economy will go on after the financial crisis. What the Fed has done, which would not have much affected the course of the financial crisis anyway on your own argument, has created a serious long-run problem. Given Lehman, and weak public understanding, the Fed has created the presumption that any large financial firm in trouble will be bailed out. That presumption will be with us for many years, long after the memory of the financial crisis has dimmed.” …

Of course, she was right—very right. She not only understood the facts of economic history but also why history developed the way it did. … She also understood that it could take decades to undo an unwise policy decision. And here we are. What the public “knows,” what the market “knows,” and what Congress “knows,” is that letting Lehman fail was a mistake. The now firmly embedded presumption in government and market behavior—the presumption of a bailout of any large financial firm in trouble—did not have to be this way.\”

(Here\’s a Wall Street Journal article from October 2008 reporting Schwartz\’s views.)

And a number of the speakers remembered her love of work, balanced with her commitment to family and personal life.  Michael Bordo, who co-authored 30 articles and two books with her, noted: \”What I remember most about Anna is how much she loved her work. Her whole life was organized around going to the office. She officially retired from the Bureau when she was 65, but she didn’t stop working until she was 94. She went into the Bureau every day when she was in her eighties and nineties, and she still put in a full eight-hour day. … Yet she was a balanced person. She had a great family—Isaac, a caring husband with a great sense of humor, who died in 1999, four children, and many grandchildren and great grandchildren, and they used to come into New York to see her often.\”

Eloise Pasachoff, one of Schwartz\’s grandchildren, captured this theme of a life lived full-speed ahead especially nicely:

\”Notwithstanding the popular saying to the contrary, it is possible to get to your deathbed and wish you had spent more time at the office. Not because you don’t wish you’d had more time with your family, too; not because you don’t have a full and rich and interesting personal life; but because what you do all day long at work grips you with a passion you want to pursue. There are more problems to solve, more questions to answer, more cases to build, more theories to debunk. Here was the most reliable conversation starter with my grandmother: “What are you working on?” And in her answer, she brooked no nonsense.  … What else did she want to do? She wanted to work full time and raise four kids. So she got help with excellent childcare. … I learned from my grandmother … to take time to take pleasure in the pleasures of life. My grandmother spent several hours every weekend listening to the Met’s opera broadcast. She loved a good Trollope novel. She made sure she didn’t miss a day of the New York Times or the Wall Street Journal. She relished her favorite foods. For a while, when I was living near her, we had dinner once a week, and it was wonderful to eat with someone who took such enjoyment over a meal. She loved trout; she loved stuffed cabbage; she loved pineapple upside-down cake; she loved rice pudding. And I loved spending time with this amazing woman who had such a rich and full and ongoing life.

I think I have a bigger lesson, and it’s about what they call “work-life balance.” Except when I think about my grandmother’s example, I want to call it “work-life joy.”

I like the idea of \”work-life joy\” very much.