Month: May 2014

Here\’s one snapshot of how the U.S. economy evolved in the last 15 years: an identical number of total hours worked in 1998 and 2013, even though the population rose by over 40 million people, but a 42% gain in output. Shawn Sprague explains in \”What can labor productivity tell us about the U.S. economy?\” published as the Beyond the Numbers newsletter from the U.S. Bureau of Labor Statistics for May 2014. Sprague writes:

\”[W]workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998—approximately 194 billion labor hours. What this means is that there was ultimately no growth at all in the number of hours worked over this 15-year period, despite the fact  that the U.S population gained over 40 million people during that  time, and despite the fact that there were thousands of new businesses established during that time. And given this lack of growth in labor hours, it is perhaps even more striking that American businesses still managed to produce 42 percent—or $3.5 trillion—more output in 2013 than they had in 1998, even after adjusting for inflation. . . .One thing can be said for certain: the entirety of this additional output growth must have come from productive sources other than the number of labor hours. For example, businesses may increase output growth by investing in faster equipment, hiring more high-skilled and experienced workers, and reducing material waste or equipment downtime. In these and other cases, output may be increased without increasing the number of labor hours used. Gains in output such as these are indicative of growth in  labor productivity over a period.\”

A lot can be said about this basic fact pattern. Of course, the comparison years are a bit unfair, because 1998 was near the top of the unsustainably rapid dot-com economic boom, with an unemployment rate around 4.5%, while 2013 is the sluggish aftermath of the Great Recession. The proportion of U.S. adults who either have jobs or are looking for jobs–the \”labor force participation rate\”–has been declining for a number of reasons: for example, the aging of the population so that more adults are entering retirement, a larger share of young adults pursuing additional education and not working while they do so,  a rise in the share of workers receiving disability payments, and the dearth of decent-paying jobs for low-skilled labor.

Here\’s a figure showing the patterns of hours worked, output, and productivity in the aftermath of the Great Recession. Sprague explains: \”[A]s the recession began, productivity flattened out as output and hours both fell approximately in concert with one another. Output and hours continued to fall together until the latter part of the recession, when the fall in output ceased but hours continued to decline. During this period there was substantial productivity growth: from the fourth quarter of 2008 through the fourth quarter of 2009, productivity grew 5.6 percent. In fact, this was the highest four-quarter rate of productivity growth recorded in more than 35 years.\”

Here\’s a figure showing productivity growth rates in the post-World War II era. Notice that annual rates of productivity growth were relatively rapid from about 1947-1973 at 3.2% per year. Then there is a dramatic slowdown of productivity growth in the 1970s, and while higher rates follow in the 1990s and more recently, the U.S. economy has failed to return to the more rapid productivity growth of the 1950s and 1960s. As I\’ve noted from time to time in previous posts (for example, here and here), there is no more important question for the long-run health of the U.S. economy than whether a fairly robust rate of productivity growth can be sustained.

The more immediate question is what to make of an economy that is growing in size, but not in hours worked, and that is self-evidently having a hard time generating jobs and bringing down the unemployment rates as quickly as desired. I\’m still struggling with my own thoughts on this phenomenon. But I keep coming back to the tautology that there will be more good jobs when more potential employers see it as in their best economic interest to start firms, expand firms, and hire employees here in the United States.

I  have written an essay for the June 2014 issue of Finance and Development on the subject of \”Economics and Morality\” (51: 2, pp. 34-38). Here are the opening paragraphs, the closing paragraphs, and a couple of snippets in between. Of course, I encourage you to read the whole thing.

\”Economists prefer to sidestep moral issues. They like to say they study trade-offs and incentives and interactions, leaving value judgments to the political process and society. But moral judgments aren’t willing to sidestep economics. Critiques of the relationship between economics and moral virtue can be grouped under three main headings: To what extent does ordinary economic life hold a capacity for virtue? Is economic analysis overstepping its bounds into zones of behavior that should be preserved from economics? Does the study of economics itself discourage moral behavior? …\”

\”Rather than focusing on philosophical abstractions about the moral content of work, consider a prototypical family: parents working, raising some children, friendly with coworkers and neighbors, interacting with extended family, involved with personal interests and their community. It seems haughty and elitist, or perhaps betraying unworldly detachment, to assert that people who work are condemned to live without virtue—unless they can squeeze in a bit of virtuous activity in their spare time. On the other hand, it seems bizarrely and unrealistically high minded to assert that daily work surrounds people every day with transformational opportunities for virtue. A middle ground might be to accept that while moments of grace and opportunities for virtue can occur in all aspects of life, including economic life, the range and variety of opportunities for virtue may vary depending on the characteristics of one’s economic life. …\”

\”A standard complaint about studying economics is that the subject is “all about getting money and being rich.” … Economists can feel unfairly singled out by this complaint. After all, many academic subjects study unsavory aspects of human behavior. Political science, history, psychology, sociology, and literature are often concerned with aggression, obsessiveness, selfishness, and cruelty, not to mention lust, sloth, greed, envy, pride, wrath, and gluttony. But no one seems to fear that students in these other disciplines are on the fast track to becoming sociopaths. Why is economics supposed to be so uniquely corrupting? After all, professional economists run the ideological gamut from far left to far right, which suggests that training in economics is not an ideological straitjacket.\”

\”I have become wary over the years of questions framed in a way that seeks to pit economics against moral virtue in a winner-takes-all brawl. No economist would recommend consulting an economics textbook as a practical source of transcendent moral wisdom. As the recent global economic crisis reminded anyone who needed reminding, economics doesn’t have answers for all of the world’s economic problems. But to be fair, moral philosophers don’t have answers for all the world’s spiritual and ethical problems. In his famous 1890 Principles of Economics textbook, the
great economist Alfred Marshall wrote that “economics is the study of people in the everyday business of life.” Economists cannot banish the importance of moral issues in their field of study and should not seek to do so. But when moral philosophers consider topics that touch on the ordinary business of life, they cannot wish away or banish the importance of economics either.\” 

It\’s common to talk about economic development \”in Africa,\” and I\’ve done so on this blog a few times (for some examples, here, here, here and here). But \”Africa\” includes 54 countries and 1.1 billion people, so does referring to it as a single unit make any economic sense? In my reading, one of the themes of the African Economic Outlook 2014, recently published by the African Development Bank Group, OECD, and the UN Development Programme, is that thinking about Africa as a whole does make some economic sense.

The reason is that in the modern global economy, there are no examples of small stand-alone economies that have achieved a high standard of living. Instead, the high-income countries either have an enormous internal market (the US and Japan, for example) or have close economic ties to a number of other national economies (like the countries of the European Union), or both. If the national economies of Africa are going to build on their real if modest economic progress of the last decade or so, one of the big reasons will probably be that they bolster trade relationships within the countries of Africa, as well as tap into international flows of goods, services, people, and finance. To some extent, this change is already underway.

As far as trade within Africa, one subsection of the report is headlined: \”Africa is the world’s fastest growing but least globally integrated continent. … There is only low level connectivity between African economies – although this is gradually improving . . .. This is largely due to an incomplete
legal architecture for regional integration, poor physical infrastructure and one-way trading relationships. Leading African exporters such as Angola, Algeria, Egypt, Libya, Morocco, Nigeria and South Africa have stronger economic links to the rest of the world than with regional neighbours.\” As one example of the issues, the 54 nations of Africa are divided into eight somewhat overlapping regional economic groups, all proceeding with various steps of economic integration at different speeds.

Here\’s a figure comparing intra-Africa trade with other trading partners. A common pattern–say, if one looks at the EU or at North America–is that trade volumes are larger with those who are geographically close. But intra-African trade (the black dashed line) is similar trade between African nations and the US, and lags behind Africa\’s trade with China or especially the EU.

Basic steps to encourage intra-African trade are still lacking. It\’s costly for people to move between countries: \”Africans need visas to get into at least two thirds of other African countries.\” It\’s hard for goods and services to move, because of missing infrastructure: \”While there has been progress in developing regional transport corridors, there are still missing links – which are investment opportunities for African and foreign investors. From the Ethiopia-Djibouti corridor, to Lagos-Abidjan, major road corridor upgrades are needed to link key cities to ports and airports. …  Increasing attention is being given to obstacles such as regulatory bottlenecks, the opaque legal environment and institutional inefficiencies holding up new infrastructure.\”

The economies of Africa are becoming more closely tied to the buying power in the rest of the world economy in various ways. One of the most visible signs is the type and size of financial flows to Africa. The graph shows four kinds of financial flows: remittances sent back to Africa from emigrants working abroad; official development assistance; portfolio investment, which consists of cross-national financial investments that don\’t involve a management interest and thus can be liquidated very quickly; and foreign direct investment, which consists of cross-national financial investments that do have a management interest.

Notice that remittances are now the single biggest category of financial flows into Africa–bigger than foreign aid. Notice also that foreign direct investment, which often involves transfers of management expertise, business connections, and technology as well as financial capital–outstrips portfolio investment.

A common question is whether the foreign direct investment into Africa is all about outsiders developing oil and minerals. That\’s clearly a big part of the picture, but not all of it. Here\’s a breakdown of foreign direct investment into African countries that are resource-rich, and those that are not. The absolute amounts of FDI into the resource-rich countries is larger, but the flow to the non-resource-rich is catching up–and is already larger as a share of GDP.

The overall effect of these foreign capital inflows is that Africa is able to finance more investment than if it had to depend solely on national saving. Here\’s a figure showing that Africa\’s investment/GDP ratio and its rate of economic growth have outstripped Latin America in recent years, although not reaching the levels of high-growth Asian economies.

One of the intriguing possibilities for Africa\’s economic future is for its economies to become more integrated into \”global value chains,\” in which intermediate inputs to production are produced in a number of different countries. The report devotes a special section and several chapters to this possibility.

\”In the past, for a country to industrialise it had to develop the domestic capacity to perform all major steps in the value chains of complex  manufactured products. Today, through linking into an international production network, countries can establish a specific section of a product’s value chain without having all the upstream capabilities in place. These remain elsewhere and are linked through shipments of intermediate products and communication of the know-how necessary for the specific step in the value chain present in the country. . . . Through participation in a value chain, countries and firms can acquire new capabilities that make it possible to upgrade, i.e. to capture a higher share of the value added in a global value chain. The development experiences of several Asian countries show how industrialisation depends on linkages and on innovations arising from knowledge spillovers. For instance, China integrated into global value chains by specialising in the activities of final product assembly and was capable of upgrading its participation by building a competitive supply base of intermediate goods (developing linkages) and by enhancing the quality of its exports. At the firm level, economic upgrading is defined as “moving up” the value chain into higher-value activities, which theoretically enables firms to capture a higher share of value in the global value chain and enhances competitiveness . . .

Many of the factors that hinder economic integration across Africa, or affect economic growth in Africa more broadly, also affect the prospects for Africa\’s participation in global value chains. Still, there are a few initial promising signs. Some African countries are making a push to be involved in the business outsourcing market: \”The global business processing outsourcing market was forecast to grow 5.1% in 2013 and reach USD 304 billion. The race is on among countries such as Egypt, Kenya, Ghana, Mauritius, South Africa, Tunisia and Uganda to become the new “India” in Africa using incentives and special economic zones to develop their outsourcing sectors.\”

Perhaps the biggest problem is that global value chains as they currently exist are regionally concentrated: around east Asia, the European Union, and North America. Geographic areas like Africa or Latin America are thus trying to break into these existing networks:

\”Despite their name, global value chains exhibit high regional concentration, which is shrinking slowly. Africa does not play a significant role yet. When measuring the linkages between major supply-chain traders, the strongest relationships can be found within the regional blocks of East Asia, Europe and North America. About 85% of global value chain (GVC) trade in value added takes place in and around these three hubs. While other regions remain marginal, their share has increased from only 10% in 1995 to 15% in 2011. Africa’s share in GVC participation increased from 1.4% to 2.2% during the same time.\”

So-called \”shadow banks\” were at nexus of the financial market meltdown that brought on the Great Recession. But what\’s a \”shadow bank\” and why does it cause problems?  Daniel Sanches offers an overview in \”Shadow Banking and the Crisis of 2007-08,\” in the Business Review of the Federal Reserve Bank of Philadelphia (2014, Q2, pp. 7-14).

As a starting point, think about how a plain vanilla ordinary bank functions in the economy, acting as a financial intermediary between savers and borrowers. Here\’s a schematic taken from Chapter 29 of my Principles of Economics textbook (and of course, I encourage those teaching intro econ next year to check it out.) Savers deposit money in banks. Banks lend those funds to borrowers. Borrowers repay the loans with interest, and the original savers are paid some of that interest, along with having the ability to withdraw their money as desired.

But here\’s the potential problem. Once the money is loaned out, the borrowers are on a schedule to repay gradually over time. However, the original savers want the ability to withdraw their money any time they please. The assets of the bank (the loans it has made) are long-term, while the liabilities of the bank (the money it owes to savers) are potentially very short-term. In the textbook, I call this the \”asset-liability time mismatch.\” Before the enactment of deposit insurance, if the original savers heard that their bank had made a lot of loans that might not pay off, they have an incentive to \”run\” on the bank, quickly withdrawing their deposits and bringing the bank to its knees. When the government started requiring deposit insurance, it knew that savers no longer had an incentive to monitor whether their bank was behaving prudently, and so the government also installed a system of bank regulation.

Sanches says it this way:

\”This description of a typical banking crisis clearly reveals why banks are fragile: They fund illiquid assets with deposits that can be withdrawn at will. Economists usually refer to this practice as maturity transformation. It is important to mention that this role played by banks has a value for society. People have a preference for holding highly liquid assets — assets that are easy to sell without taking a loss — but the most profitable investments take a long time to pay off. Banks offer demand deposit contracts that give people ready access to their funds and a higher rate of return than they would get by holding liquid assets directly. Banks are able to offer a higher rate of return to depositors because they pool resources in such a way that permits them to invest a significant fraction of their assets in higher-yielding, long-term projects such as mortgages and other types of long-term loans. Normally, funding illiquid assets with short-term liabilities works fine. But
when depositors begin to worry about losses, a bank run may ensue.\”

The combination of deposit insurance and bank regulation worked to keep the U.S. financial system fairly stable for about 70 years from the late 1930s up to the start of the Great Recession. But during the last few decades, a new type of financial structure arose. Here\’s a schematic from Sanches showing how a shadow bank works:

As he writes, step 1 is for the bank to make loans. However, in this case the bank does not wish to continue holding or servicing the loans, and so it sets up an SPV, or special purpose vehicle, which purchases the loans from the bank. Next, the special purpose vehicle issues asset-backed securities (ABS), which are just financial securities where the return is determined by the loans that the SPV purchased from the bank. Outside investors can buy these asset-backed securities.

There is nothing necessarily wrong with any of this. By selling off the loans to a special purpose vehicle, the bank insulates itself from the risk that loans might go bad. As a result, the bank regulators are pleased. The loans that are sold to the SPV might be home mortgages, or car loans, or money owed to credit card companies, or they might be loans to businesses, like the short-term loans called \”commercial paper.\” Instead, the outside investors in the SPV bear that risk. Imagine, for example, that the outside investor is a large pension fund or insurance company, with long time horizons. The pension fund isn\’t set up like a bank to make business loans. But by purchasing a portfolio of such loans made through an SPV, the pension fund or insurance company can be well-positioned to bear the risk that some loans won\’t pay off, as long as on average it receives a solid return over time.

But several issues can arise in the new financial structure, as well. One risk is that that when banks know that they are not going to be holding the loans themselves, but rather selling the loans along to an SPV, they are likely to put less time and attention into evaluating the risk of the loans. The loans in an SPV may end up being riskier than expected, and if investors recognize that these risks are high, they will be less willing to invest in certain kinds of SPVs. In turn, if banks face a situation where it\’s hard for them to re-sell their loans to an SPV, and the banks have decided that they no longer wish to hold loans themselves, then the banks will cut back sharply on making loans in the first place.

Part of the credit crunch during the Great Recession was because investors became aware that at least some of the SPVs that included home mortgages were quite risky–but they didn\’t know which ones. As a result, they became unwilling to invest in any SPVs based on home mortgages for a time.

Another issue arises if those investing in the SPV are not an entity like a pension fund, with long-term time horizons and an ability to ride out the bumps in the market, but instead have very short-term time horizons. Imagine that you are running a corporation or a big financial organization like a pension fund, and you need to keep a certain amount of your money in cash, so that you can use it to pay bills and payroll. However, as Sanches points out: \”Until 2011, large commercial depositors could not receive interest on their short-term deposits, another motivation for them to seek an alternative place to park their funds.\” When interest rates were very low, pension funds were searching for options to hold cash that paid a higher interest rate, too.

As a place to invest their liquid assets and still earn some return, these institutions turned to what\’s called the \”repo\” market, where repo is short for \”repurchase.\” The market works this way. On one side you have parties who hold some financial assets, which could be Treasury bonds or mortgage-backed securities or car-loan-backed securities or something else. These institutions may often be investment banks or broker dealers. These institutions want to borrow some funds, and they offer the securities they hold as collateral. On the other side of the market, you have the big corporations and financial funds that are looking for a place to park their short-term cash and get some interest.

This is called the \”repo\” market because the financial transaction works this way: The investment bank or whoever owns the financial assets sell those assets to the corporation or financial fund, but part of the sale is an agreement to repurchase the asset at a slightly higher price the next day. The slightly higher price acts like an interest rate paid for borrowing. Now imagine that this transaction is repeated every day. The result is that the borrower has some amount that is continually being borrowed–that is, it is continually selling assets every day and buying them the next day. On the other side, the lender is receiving a steady stream of payments for their cash–that is, it is continually buying asset every day and reselling them, according to the repurchase contract, the following day. every day. It\’s a lot like a very strange bank, where every day all the depositors come and deposit their money, it is loaned out for one day, and at the end of the day all the depositors come and with draw their money–and this pattern is repeated every day. Sanches explains like this:

As should be clear by now, the “banker” in the repo transaction is the repo borrower, which typically is an investment bank or the broker-dealer arm of a large bank holding company. These institutions use the funds they borrow in the repo market to finance a wide range of activities, some of them quite risky. …  The growth of the repo market prior to the financial crisis of 2007-08 was extraordinary. The volume of repo transactions reported by primary dealers (those who trade directly with the Federal Reserve System) had grown from roughly $2 trillion in 1997 to $7 trillion in 2008. This estimate, of course, leaves out unreported transactions. … [T]he overall size of the repo market just before the financial crisis was roughly the same as the size of the
traditional banking sector as measured by total assets. …

The repo market may sound a little peculiar, but it works just fine–as long as the financial assets that are being bought and sold are extremely safe and secure, like U.S. Treasury borrowing. But in the years leading up to the financial crisis in 2007-2008, repo contracts began to be based more and more on other financial instruments, like mortgage-backed securities. In addition, financial funds like money market mutual funds, which are required by law to invest in short-term assets as a way of holding down their risks, began to put a portion of their funds into the very short-term repo markets.

As it became clear that mortgage-backed securities were not safe, those who had been putting the $7 trillion into the repo market backed away. Those who had grown to depend on being able to borrow that money–by rolling over the repo loans every day–found themselves rather suddenly without access to capital. Sanches explains this way:

\”A depositor with serious doubts about the underlying value of the collateral can do two things: either ask for more collateral or simply not renew the repo. Both actions can be interpreted as a decision to withdraw funds from the shadow banking system, much like the decision bank depositors make to withdraw funds from their bank when they believe they might not be able to get all their money out. Repo lenders initially asked for more collateral, but ultimately they simply refused to renew their loans. In other words, the repo market froze Because investors could not tell safe MBS [mortgage-backed securities] from risky MBS in most cases, they withdrew their funds even from shadow banks that probably had safe MBS to secure repos. This problem was severe enough to turn the initial panic into a systemic event — a banking crisis. Thus, the financial crisis was not very different from the banking crises of old. Investors in the repo market behaved pretty much like bank depositors did during U.S. banking crises before 1933. And the outcome was certainly very similar. The initial banking crisis spread to other financial markets, and several financial firms either failed or had to be rescued by the federal government to prevent further failures.\”

In broad terms, one way to think about these issues is that the old model of the plain-vanilla bank, making and holding loans, has been breaking down for some years now. Instead, there is a more complex web of investors in special purpose vehicles, often tied to banks if technically separate from them, who structure their financial transactions to have the overall effect of making deposits, lending, borrowing, and investing, but without having those actions happen in the organizational structure of a conventional bank. The task of creating a new structure of financial regulation to address the new realities is quite incomplete. The implementation of the Dodd-Frank financial reform legislation passed back in 2010 is only about half-completed, and for all the new requirements it seeks to impose, it does essentially nothing to address repo markets or issues of lending and borrowing financial securities.

Earlier this month, I noted that Gary Becker viewed time as the fundamental constraint that inevitably leads people to live in a world of scarcity–and therefore a world in which economic choices must be made. A reader sent me a  reminder about some speculation on what a situation without scarcity would look like. Scott Gordon offered a brief speculation on \”The Economics of the Afterlife\” in the February 1980 issue of the Journal of Political Economy  (88:1, pp. 213-214). Gordon wrote:

\”I start with one postulate: that in Heaven there is no scarcity. As David Hume recognized, all conflict springs from scarcity, so it is not necessary to describe Heaven as characterized by justice, peacefulness, mutual love, etc., since these are derivatives from the no-scarcity postulate. One might wonder how economic analysis could be applied to a regime of no scarcity, but this is exactly the point: we can use the analysis, not to describe how to allocate resources efficiently, but to discover the characteristics Heaven must have if no such allocation is necessary.\”

However, as Gordon points out, even if time is infinite in Heaven, scarcity in terms of time would still exist, because people would not be able to do everything at once, and thus would need to decide what to do sooner and what to do later. Gorgon draws the logical inference:

For Heaven to be characterized by no scarcity, it is necessary that Heaven time be different from World time. Tentatively, let us assume that Heaven time, in addition to being infinite in length, is also infinite in width. Instead of being represented by a Euclidian line which has length but no width, a Heaven time line would have both length and width and would be infinite in both dimensions. In such a regime, there would be no time constraint upon actions or experiences. This would be a condition of no scarcity, since at every instant there is an infinite amount of time.

But if the infinite range of all possible experiences could occur within an instant of time, additional instants of time would be superfluous. Heaven would thus be simultaneously rapturous and brief. Gordon sums up:

I conclude from this that, if the basic postulate of Heaven is the absence of scarcity, then the afterlife will be exquisitely intense in experience but fleetingly brief. Perhaps the reason why most people display great reluctance to experience the bliss of Heaven is due to the fact that, being accustomed to thinking in terms of World time, where duration is of the essence, they find the brevity of Heaven time unappealing. Of course, in making this suggestion, I am assuming that most people have all along known intuitively what economics only just now has proven logically.

Longer life expectancy is a profound blessing associated with economic development. But it raises questions for the lifetime balance between work years of earning income and retirement years of spending it. James M. Poterba explores the issues in \”Retirement Security in an Aging Population,\” which was delivered as the Richard T. Ely Lecture in January, and has now been published in the May 2014 issue of the American Economic Review: Papers & Proceedings (104:5, pp. 1–30). The AER is not freely available on-line, but many readers will have access through library subscriptions.

As a starting point, contemplate the rise in life expectancy for Americans during the 20th century. In 1900, for example, men had a life expectancy of 51.5 years, and less than a 50% chance of reaching age 65. If they reached 65, they had an additional life expectancy of 13.5 years. By 2000, men had a life expectancy at birth of 80 years, and 86.1% of men would reach age 65, when they would have an additional life expectancy of 20.4 years.

In the study of economics, no good news goes unpunished. The typical pattern across a lifetime is that children and young adults consume more than they earn, adults from age 25-65 earn more than they consume, and then adults over age 65 again consume more than they earn. Here\’s a table from Poterba showing the averages:

The difficulty arises, of course, because many people have life profiles of income and consumption that don\’t match this average. When average retirement is longer, and especially when a portion of that retirement is more likely to be spent in the above-85 age group that is more prone to physical and cognitive limitations, saving for retirement needs to be on average correspondingly larger, too.

For a sense of the differing results of working and saving over a lifetime, consider this table showing the sources of income for those over age 65. The columns show figures by income \”quartile,\” that is, by dividing the population of elderly by income into quarters. The top panel shows the percentage of people in that income quartile receiving income from a certain source, while the bottom panel shows the amount of income received from that source.

One way to think about these patterns is to divide the elderly population into three groups. First consider the lowest income quartile. About three-quarters  of this group receives Social Security, and about one-quarter receives some income from other assets. But for this group, 85% of annual income comes from Social Security. Of course, this calculation is based on income, so it doesn\’t count the value of in-kind benefits like Medicare, Medicaid (which covers nursing care for the low-income elderly) or Food Stamps. Also, at least some of the elderly in this group probably own their home outright, and for that group their out-of-pocket housing expenses may be relatively low. But the hard reality from this data is that something like one-quarter of the elderly will have no financial assets and perhaps no housing assets either at retirement. They will be reliant on Social Security and various public assistance programs.

Now consider the upper quartile. Although about three-quarters of this group also receives Social Security, it is not the primary source of income. Some of those in this over-65 group have not yet started receiving Social Security income, because half of this top quarter is still earning income, which accounts for 43% of the average income of this group (although this average includes both those who are working and those who are retired). More than half of this group have pension income, and three-quarters have income from other assets. This part of the population is also eligible for Medicare, and a fairly large share probably own their homes outright as well. Together with average income of $78,000, this top quarter of the over-65 population is in essentially good shape for retirement, even a retirement that lasts a few years longer than expected.

The third group is those in the middle. Some of this group, especially those in the third quartile rather than the second, are continuing to work and earn income, and a substantial share have some pension income. Still, Social Security accounts for 83% of the income of the second quartile (almost as high as for the first quarter) and well over half of average income in the third quartile. Average annual income for these groups is $15,400 for those in the second quartile and $26,600 for those in the third quartile, which with some mixture of Medicare, public assistance programs, family support, and maybe owning a house can be enough to scrape by. This is a group where public policy that provides incentives for additional saving in a retirement account while working, or working a few more years before retirement, might make a considerable difference.

The options for addressing the retirement financing challenge posed by longer lives is straightforward enough. For the lowest-income groups, we will need additional public support. For the middle-income groups, we need incentives for greater saving during working life, and incentives for working a few more years before retirement. The high-income group is already largely looking after itself, often by working a few more years before retirement.

How much should you be saving for retirement? Poterba offers some eye-opening illustrative calculations. He looks at a typical path of income over time, and then asks, if at age 65 you want to buy an annuity that will provide amount equal to half of your age-65 income for the rest of your life, what share of income should you be saving? He does the calculations separately for men and women, in parat because different life expectancies. He considers several different \”real\” rates of return (that is, the rate of return above inflation). He looks at whether you save for 40 year, 30 years, or 20 years. And he looks at whether you want an annuity that will pay a fixed nominal amount, or one that will increase its payments by 3% per year, to offset any increases in the cost of living.

As one example of the bottom line, say that you are a man who will save for 30 years and get a 3% real return.You want to buy the annuity that starts off at half your age 65 income, and then increases 3% per year. Then over those 30 years, you need to be saving 23.9% of your income each year. The average personal saving rate for Americans–that is, saving divided by after-tax income–has been about 5% in recent years. In short, many Americans are not saving nearly enough, including many who have the income level that if it was a priority, they could manage to put more aside. Some Americans already know that they aren\’t going to have much income in retirement, but I suspect that in the next decade or so, many more Americans are going to reach retirement and feel surprise and disgruntlement over the low level of income they are facing.

Basically, the story is that the number of mergers and acquisitions has rebounded from the lows of the Great Recession, but the total for 2013 was pretty average. Some press sources, like the Economist magazine, are chirping about the possibility of a new wave of mergers and acquisitions right around the corner. They have been making that prediction for a couple of years now, and sooner or later it will be correct.

The report also shows the size distribution of mergers. Remember that the very small number of mergers under $50 million is not because such mergers don\’t occur, but because the smaller mergers need not be reported to the antitrust authorities.

Out of all the proposed mergers, typically about 3-4% lead to a request from the antitrust authorities for more information, and ultimately a few dozen of the mergers are challenged. This percentage may seem low. But remember that firms who know that the antitrust authorities are looking are less likely to propose an anticompetitive merger in the first place. And remember further that the job of the antitrust authorities is not to make judgments about whether the merger makes sense from a business point of view, or whether the price is a fair one, but only to judge whether it might lead to anticompetitive outcomes.

The report also offers quick overviews of the more prominent antitrust enforcement actions over the last year. For teachers of economics looking for a quick example, here are two good examples, with links to the underlying case documents. In both cases, the antitrust authorities allowed a merger to proceed only after the firm agreed to divest various assets in a way that was intended to preserve competition.

One case is the merger between US Airways and American Airlines (or AMR Corporation). The report notes:

In United States, et al. v. US Airways Group, Inc. and AMR Corporation, the Division
and the states of Texas, Arizona, Pennsylvania, Florida, Tennessee, Virginia, and the District of Columbia challenged the proposed $11 billion merger between US Airways Group, Inc. and American Airlines’ parent company, AMR Corporation. The complaint alleged that the transaction, as originally proposed, would substantially lessen competition for commercial air travel and result in passengers paying higher airfares and receiving reduced service. In addition, the transaction would reduce competition in the market for slots at National Airport where the merged carrier would control almost 70% of the slots. A proposed consent decree settling the suit was filed November 12, 2013, requiring US Airways and American to divest slots and gates in key constrained airports across the country to low cost carriers in order to enhance system-wide competition in the airline industry and address the competitive harm that would result from the proposed transaction. Specifically, the companies are required to divest or transfer: (i) 104 air carrier slots and related gates and facilities at Washington Reagan National Airport; (ii) 34 slots at New York LaGuardia Airport and related gates and facilities; and (iii) two gates and
related facilities at each of five airports: Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles International, and Miami International. These divestitures are the largest ever in an airline merger and will allow low cost carriers to fly more direct and connecting flights throughout the country in competition with the legacy carriers. This will result in more choices and more competitive airfares for consumers. The court entered the consent decree on April 25, 2014.

Another case that might make a useful example, given the general preoccupation of many college students with the beer industry, is the proposal from Anheuser-Busch (ABI) to purchase Modelo. The \”competitive impact statement\” filed by the antitrust authorities notes:

The beer industry in the United States is highly concentrated and would become more so
if ABI were allowed to acquire all of the remaining Modelo assets required to compete in the United States, as the transaction was originally proposed. ABI and MillerCoors, the two largest  beer brewers in the United States, account for more than 65% of beer sold in the United States.  Modelo is the third largest beer brewer, constituting approximately 7% of national sales, and in  certain MSAs its market share approaches 20%. Heineken and hundreds of smaller fringe competitors comprise the remainder of the beer market. In the 26 MSAs alleged in the  Complaint, ABI and Modelo control an even larger share of the market, creating a presumption  under the Clayton Act that the merger of the two firms would result in harm to competition in  those markets.

The Hart-Scott-Rodino report sums up the consent decree:

In United States v. Anheuser-Busch InBev SA/NV and Grupo Modelo S.A.B de C.V., the
Division challenged Anheuser-Busch InBev’s (ABI) proposed acquisition of the remaining
interest in Grupo Modelo that ABI did not already own. According to the complaint filed on January 31, 2013, as originally proposed, the $20.1 billion transaction would have substantially lessened competition in the market for beer in the United States as a whole and in 26 metropolitan areas across the United States, resulting in consumers paying more for beer and diminished innovation. ABI’s Bud Light is the best selling beer in the United States, and Modelo’s Corona Extra is the best selling import. On April 19, 2013, a consent decree was filed settling the suit and requiring Modelo and ABI to make divestitures that would fully replace Modelo as a competitor in the United States. The decree called for the divestiture of Modelo’s entire U.S. business including perpetual and exclusive licenses of Modelo brand beers for distribution and sale in the United States, its most advanced brewery, Piedras Negras, and its interest in Crown Imports, LLC (Crown) to Constellation Brands, Inc. (Constellation) or an alternative purchaser. Crown was the joint venture established by Modelo and Constellation to import, market, and sell certain Modelo beers into the United States. The decree was entered by the court on October 24, 2013.

One of the standard arguments as to why the U.S. and other high-income countries should support trade with low-income countries and foreign aid to those countries is that it would reduce the pressures for emigrants to leave those countries. For example, during the arguments over the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, it was common to hear supporters argue that if the U.S. wasn\’t willing to import goods from Mexico, it would end up importing immigrants instead. Similar arguments have been made that western European countries should support trade and aid to Africa and Asia, so that pressure for immigration flows to Europe would be reduced.

But do the facts support this arguement? In the Center for Global Development Working Paper 359 (March 2014), Michael Clemens asks \”Does Development Reduce  Migration?\” He argues that the evidence supports a \”migration transition,\” in which economic growth actually stimulates emigration from a low-income country until it reaches upper-middle income levels–and only leads to less immigration at that point. Clemens writes:

\”In short, the best-available data show an unmistakable inverted-U pattern across countries in the relationship between overall economic development and emigration. The data offer no sign that among low-income or lower-middle-income countries, rising incomes are associated with smaller emigrant stocks or lower net emigration rates. To the contrary, typical countries in this group show a positive, significant association between average incomes and emigration. The relationship changes markedly somewhere around PPP$6,000–8,000. Among countries above this level of income—upper-middle-income countries or richer—higher incomes are associated with reduced emigration. But even the very richest countries do not systematically exhibit lower emigration rates than the poorest countries.\”

Here\’s one of the pieces of evidence behind that claim. The graph is based on plotting data by country. The horizontal axis shows per capita GDP for each country; the vertical axis shows the percentage of the population of that country which has emigrated. The graph shows curves fitted through this data for 1990, 2000, and 2010. The common pattern is that emigration is lower for the lowest-income and highest-income countries, and higher for middle-income countries.

Why might this pattern hold true? Clemens considers a range of possibilities. For example, people in the poorest countries may be less likely to have the resources to emigrate. Perhaps people in middle-income countries are more likely to have some level of connectedness to high-income countries that makes migration seem more thinkable and less risky.

But as researchers seek to disentangle the underlying rationale behind the migration transition, the assumption that economic development in low-income countries will reduce migration doesn\’t seem likely to hold up well. After all, economic development in China and India in recent decades doesn\’t seem to have reduced emigration from those countries–even if a number of those emigrants eventually head back to their home countries. At least for the next few decades, the future of the globalizing economy may also be a future of ever-evolving pressures for rising migration levels.

Prices for gasoline and diesel fuel vary a great deal around the world, because some countries tax these goods heavily, while others subsidize them. Lucas W. Davis considers the effects in \”The Economic Cost of Global Fuel Subsidies,\” published in the May 2014 issue of the American Economic Review: Papers & Proceedings (104:5,  pp. 581–585). (The AER is not freely available on-line, but many readers will have access through library subscriptions.)

Here\’s a graph showing gasoline prices in countries around the world, on the horizontal axis, and gasoline consumption per year, per person, on the vertical axis. The size of the circle for each country is proportional to total consumption of gasoline in that country. Thus, for example, the U.S., Canada, and Kuwait are roughly similar in their per capital consumption of gasoline, but because of the much larger population of the United States, the circle denoting U.S. consumption is larger. Similarly, although per capital consumption of gasoline is much lower in India and China than in the United States, the much larger populations of those countries mean that total consumption of gasoline is larger–as shown by the size of the circles for those countries.

Of course, many factors will affect fuel consumption in an economy besides the after-tax price: fro example, countries with higher per capita GDP tend to consume more fuel, and countries that are large and sprawling will tend to consume more fuel for transportation than smaller countries where more people live in urban areas. Still, a couple of themes from this graph catch my eye.

1) The price of gasoline in the U.S. is well below that many other high-income countries. That isn\’t the only reason the U.S. consumes so much more fuel on a per capita basis–as a high-income and geographically sprawling country, one would expect U.S. fuel consumption to be higher–but it\’s one of the reasons. The higher taxes on gasoline are part of a general pattern where the governments of most high-income countries rely more heavily on consumption taxes, including value-added taxes as well as taxes on specific goods like gasoline, than does the U.S. government.

2) Venezuela has the lowest fuel prices of any country: indeed, their prices are well below the actual world market price. Presumably, the political leadership in Venezuela believes that its political base supports this policy–and this belief may well be correct. But subsidizing fuel has a cost, which in Venezuela\’s case is about $14 billion out of a GDP of $380 billion–that is, almost 4% of GDP in Venezuela goes to fuel subsidies. For comparison, the U.S. defense budget is projected to be 3.6% of GDP this year. When Venezuela spends, in proportional terms, the amount of the U.S. defense budget on fuel subsidies, it give up the possibility of spending those funds on health care, education, income support, and so on. Indeed, the bulk of fuel subsidies don\’t go to the poor–who don\’t have enough income to buy a lot of fuel at any price–but instead go to those with middle- and upper-level incomes.

3) Worldwide, governments spend about $110 billion annually on fuel subsidies. Of that amount, 90% is for the ten countries listed in the table below. By the measure used here, the U.S. does not subsidize oil and gas production on an overall basis, given the mixture of gasoline taxes on one side and various ways of favoring oil-producers in the tax code on the other. Davis writes: \”Fuel subsidies also have a large impact on government budgets, requiring taxes to be higher than they would otherwise, and inhibiting the ability of government to address other fiscal objectives. Expenditures on energy subsidies in many of these countries exceed public expenditures
on health, education, and other key components of government spending.\”

4) Not all major oil exporters subsidize fuel. As Davis writes: \”Prices are at or above market in Iraq ($2.95 per gallon for gasoline), Mexico ($3.26), Russia ($3.74), and Canada ($5.00).\”

The potential problems that could arise as microbes become resistant to antibiotics were recognized quite early. For example, Sir Alexander Fleming shared the Nobel prize in physiology or medicine in 1945 \”for the discovery of penicillin and its curative effect in various infectious diseases.\” Near the end of his Nobel lecture, Fleming said:

\”I would like to sound one note of warning. Penicillin is to all intents and purposes non-poisonous so there is no need to worry about giving an overdose and poisoning the patient. There may be a danger, though, in underdosage. It is not difficult to make microbes resistant to penicillin in the laboratory by exposing them to concentrations not sufficient to kill them, and the same thing has occasionally happened in the body. The time may come when penicillin can be bought by anyone in the shops. Then there is the danger that the ignorant man may easily underdose himself and by exposing his microbes to non-lethal quantities of the drug make them resistant. Here is a hypothetical illustration. Mr. X. has a sore throat. He buys some penicillin and gives himself, not enough to kill the streptococci but enough to educate them to resist penicillin. He then infects his wife. Mrs. X gets pneumonia and is treated with penicillin. As the streptococci are now resistant to penicillin the treatment fails. Mrs. X dies.\”

As it turns out, the issue is not that that antibiotics \”can be bought by anyone in the shops,\” but instead that health care providers have been quick to prescribe antibiotics, repeatedly and for a wide range of conditions. Inevitably, not everyone takes the full dose, and in some cases the full dose doesn\’t quite end the infection. Some microbes become increasingly resistant to antibiotics. As economists have pointed out, this pattern is logically parallel to the issue of what can happen with the overuse of a shared public resource, the so-called \”tragedy of the commons.\”

Imagine a shared public resource like a common field where people can graze cattle. If there are too many cattle on the field, it will degrade the environment and everyone will suffer. However, each individual has an incentive to graze just a few more cattle on the field, because the individual will receive 100% of the benefits from adding a few cattle, while the costs of environmental degradation will be shared with everyone else who uses the field. Unless some social norms or rules prevent the outcome, overgrazing will result. Of course, the same logic can be applied to overfishing, overlogging, and indeed more broadly to issues like air and water pollution. In the case of antibiotic resistance, health care providers who prescribing antibiotics frequently and easily are seeking to benefit each individual patient, while the costs of accumulating resistance to antibiotics are shared across the population. In this way, the pursuit of health for individual way, resistance to antibiotics builds in a way that can impose heavy costs.

\”A post-antibiotic era—in which common infections and minor injuries can kill—far from being
an apocalyptic fantasy, is instead a very real possibility for the 21st century.\” So says the World Health Organization in its recent report: \”Antimicrobial Resistance: Global Report on surveillance.\”

The WHO report draws on evidence from around the world to note a growing rise in resistance to antibiotics for some major diseases: tuberculosis, pneumonia, malaria, HIV, influenza, and others. The report notes:

\”For several decades antimicrobial resistance (AMR) has been a growing threat to the effective treatment of an ever-increasing range of infections caused by bacteria, parasites, viruses and fungi. AMR results in reduced efficacy of antibacterial, antiparasitic, antiviral and antifungal drugs, making the treatment of patients difficult, costly, or even impossible. . . . Antibacterial resistance (ABR) involves bacteria that cause many common and life-threatening infections acquired in hospitals and in the community, for which treatment is becoming difficult, or in some cases impossible. . . .

Some estimates of the economic effects of AMR have been attempted, and the findings are disturbing. For example, the yearly cost to the US health system alone has been estimated at US $21 to $34 billion dollars, accompanied by more than 8 million additional days in hospital. Because AMR has effects far beyond the health sector, it was projected, nearly 10 years ago, to cause a fall in real gross domestic product (GDP) of 0.4% to 1.6%, which translates into many billions of today’s dollars globally.

What are the possible solutions? One possibility is to invent our way out of the problem with new groups of antibiotics. The WHO report documents a \”discovery void\” in new groups of antibiotic drugs in the last quarter-century. Perhaps some of this \”discovery void\” can be linked to a lack of economic incentives to discover new groups of antibiotics. But my understanding from a few researchers in this area is that it has been proving genuinely hard to find new classes of antibiotics. And even if a scientific discovery that could lead to new classes of antibiotics is made tomorrow, there would be years of health and safety testing ahead before it reached the health care market.

The other options all come down to ways to avoid overprescribing antibiotics–so that when they are really needed, they will still work. In too many places, antibiotics are prescribed for all sorts of conditions where they aren\’t going to be effective (like in response to viruses). In too many places, many steps could be taken to cut down on the risk of infections through basic steps like more hand-washing and sterilization, which would reduce the need to prescribe antibiotics. Steps like these need to be undertaking with some urgency, so that current antibiotics can keep working while we hunt for new ones.