Volunteers for Blood, Paying for Plasma

The U.S. seems to have a consensus, about which many people have strong feelings, that blood donors should be volunteers. However, the U.S. is also the country which relies most heavily for a paid supply of blood plasma, and in fact exports plasma to the rest of the world. Robert Slonim, Carmen Wang, and Ellen Garbarino explore this and many other aspects of \”The Market for Blood\” in the Spring 2014 issue of the Journal of Economic Perspectives. (Full disclosure: I\’ve been managing editor of the JEP since the first issue in 1987. All articles in JEP back to that first issue are freely available on-line compliments of the American Economic Association.)

Slonim, Wang, and Garbarino point out that a volunteer blood system can have problems in adjusting to fluctuations in demand for blood. For example, in the aftermath of disasters like the terrorist attacks of 9/11 or Hurricane Katrina in 2005, blood donations spike up. However, these events didn\’t actually lead to a large demand for blood, and since blood has a limited shelf life, a substantial share of these donations ended up being destroyed. On the other side, there are predictable seasonal fluctuations in demand for blood, like shortages in winter and around holidays. They have some sensible suggestions,within the context of a volunteer blood system, about how one might mobilize irregular donors of blood to address such fluctuations. 

For me, the most intriguing questions concern the issue of whether the blood supply should be paid or volunteer. Of course, the issue only affects donors of blood–everyone else in the health care system is expecting to be paid when they store and use this valuable health product. Slonim, Wang, and Garbarino write (citations and footnotes omitted): \”Even with a largely voluntary supply of blood, the blood industry can be regarded as a multibillion–dollar market because hospitals pay for blood products and charge patients for their use. For example, the cost of the components of each unit of blood sold to hospitals in the United States is approximately $570, with the cost for red blood cells at $229, platelets at $300, and plasma at $40. Hospitals transfuse this blood at estimated costs of between $522 and $1,183 per unit in the United States and Europe.\”

The question of whether a country relies on volunteer or paid blood supply is in part an historical accident, often relating to how blood systems evolved in the decades after World War II. Volunteer blood donation is more common in high-income countries, but many countries in Latin America rely on paid blood donors. In the past, it may have been true that blood from paid donors was less likely to be safe, but given modern techniques for screening blood (and plasma), this pattern no longer seems to be true. Looking at the evidence across countries, Slonim, Wang, and Garbarino state: Thus, while volunteer and nonvolunteer donor characteristics may differ, on the critical issue of blood safety, we find no evidence that countries with higher percentages of volunteer donors provide safer blood.\”

In the U.S, a divergence emerged in the 1970s when the blood supply became almost entirely dependent on voluntary donors, while the supply of blood plasma came to rely on paid donors. Slonim, Wang, and Garbarino write: \”In contrast to most high-income countries relying on
100 percent volunteer plasma supply, by 2004, 81 percent of US plasma supply was collected from paid donors. In 2004, the United States collected almost 70 percent of the world’s plasma, with 40 percent eventually used in North America, 32 percent used in Europe, and 19 percent used in Asia.\”

This divergence raises some uncomfortable questions for those who believe strongly that the blood supply should depend on volunteer donors. Why are all the arguments for volunteer blood donors equally true for plasma donors? More important, it raises a question of whether the U.S. and other countries that use a volunteer blood donor system are using a method that has worked fairly well in providing a steady supply, but is not providing a larger supply that would over time encourage innovation in health care goods and services that rely on blood. Here is how Slonim, Wang, and Garbarino make this point:

However, it is impossible to say how well the volunteer [blood donor] system has performed in an absolute perspective; for example, it is possible that if the blood supply was to increase via a market mechanism that priced blood to its marginal value, then healthcare providers would find innovative uses for it such as the recent trials on the use of plasma derivatives to treat Alzheimer’s. In other words, volunteer supply may meet current demand because the health industry is not aggressively pursuing research and development that might lead to greater demand for blood that they recognize the volunteer system cannot supply.

The volunteer system, however, has not done well in meeting plasma demand. The United States is the only country that is totally self-sufficient in all blood and plasma products and has accomplished this using a mostly for-profit plasma industry. Most other countries have to import at least some plasma products, with the single biggest importers being Germany, Austria, and Spain. Many countries remain unwilling to pay for plasma donations due to concerns regarding safety and ethics, which may explain the dramatically different usage rates for plasma products. For instance, in 2006 the US health care system used 105 grams per/1,000 people of the dominant plasma product (immunoglobulin) which was more than 250 percent of the rate in Italy, the United Kingdom, Germany, the Netherlands, and Japan, suggesting that the noncompensated plasma collection system might be limiting potential usage in many countries.

Making a transition from a volunteer blood supply to more of a paid blood supply seems to me fraught with practical difficulties. Disrupting the established methods of blood supply should not be done lightly. But it also seems to me that the issues here are neither about the safety of blood from paid donors, given the capabilities of modern blood testing, nor are the issues about the risk of exploiting paid blood donors, given that such arguments would apply equally well to the already widespread practice of paying plasma donors. The real issues should be about the practicalities of making such a change to more paid blood donation, at least in a partial way, and about the potential costs and benefits from such a transition.

The State of U.S. High School Education in Economics

Every two years the Council on Economic Education publishes \”Survey of the States: Economic and Personal Finance Education in our Nation’s Schools.\”

With two high-schoolers and a middle-schooler in my own family, I\’m well aware that class-time is tight, and it is impractical to just keep adding subjects and material.  Also, I have some qualms about how economics is sometimes taught at the high school level as a sort of watered-down intro college course, rather than as a subject with practical skills and lessons for everyday life as a consumer, worker, borrower and saver, insurance purchaser, manager, citizen, and voter. But it also seems to me that high school students face some genuine financial dangers in this world of credit cards and payday loans, rental agreements and lease-to-buy deals, choices among insurance policies with different deductibles, student loans and car loans–and these dangers that can seriously undermine their financial start as young adults. Thus, I do think it\’s worth finding some ways to squeeze in some additional learning about economics and financial health. What are the US states generally up to along these lines?

One eye-opener in the CEE report is that the question of whether a state \”requires\” economics in the curriculum often does not have a yes-or-no answer. Instead, the answer can be thought of as a set of questions: Does the state include economics in its standards? Is there a requirement that the standards be implemented? (Apparently, a \”standard\” and whether the standard is implemented are separate decisions!) Is there a requirement to offer a specific high school course? Is there a requirement that students take that high school course? Is there required testing of economic concepts?

Here\’s a table showing the trends in these categories since 1998. Economics is included in more standards, even in standards that are required to be implemented. However, fewer than half the states require offering a high school course in economics, or require that the course be taken by students.

What are the similar factors on the personal finance dimension? There was a huge jump in adding personal finance material to school standards from 1998 to 2000, and the requirements to implement these standards have grown over time. However, relatively few states require offering or taking a course in this area, and there is little testing of these topics.

My children joke about having yet another lecture on the perils of drugs, alcohol, and smoking, or about the need to stand up to bullies. Those subjects are worth addressing. But my suspicion is that many high school students will suffer from severe episodes of poor financial health in the 5-10 years after they leave high school–and that the prevalence of such episodes could be reduced with improved high school education in this area.

Teeth Whitening, Occupational Licensing, and Antitrust

The teeth-whitening industry has seen substantial growth in recent years, which raises this question: Should it be illegal for someone other than a dentist to do teeth-whitening? And do dentists as a group get to make this decision?

Here\’s a discussion of how this issue came to the fore in North Carolina, taken from a 2012 brief written by the Federal Trade Commission when the case of North Carolina State Board of Dental Examiners v. Federal Trade Commission  before the U.S. Fourth Circuit Court (citations and footnotes omitted for readability):

Since 1989, peroxide-based teeth whitening has become one of the most popular cosmetic dental services. Teeth whitening is available as an in-office treatment, or take-home kits, by dentists; as over-the-counter products; and at salons, malls, and other convenient locations by non-dentists. Although all these methods employ peroxide, they vary in important respects, including immediacy of results, ease of use, necessity of repeated application, need for technical or professional support, and price. Thus, while dentists’ “chair-side” services are quick and effective—usually providing results in a single visit—they are also “the most costly” alternative. At the other end of the spectrum, over-the-counter products, with relatively low concentrations of peroxide, are the least expensive, but with highly variable efficacy, as they require diligent and repeated application by consumers.

Growing demand for teeth whitening services led, around 2003, to the entry of non-dentist providers. These providers generally occupy an intermediate level—in terms of cost, convenience, and efficacy—between  dentists’ chair-side services and over-the-counter products.  They utilize intermediate-concentration peroxide, in a single, consumer-administered application, lasting an hour or less. Non-dentist services are often offered at prices hundreds of dollars less than dentists’ in-office services.  As competition from non-dentists mounted, North Carolina dentists demanded that the Board “do something” about the new market entrants.

These complaints apparently had almost nothing to do with consumer safety. They were almost entirely about the competition from lower prices for these services. Here\’s how members of North Carolina\’s Board of Dental Examiners are selected:

It consists of six licensed dentists, elected directly by other state licensed dentists; one licensed dental hygienist, elected by other licensed hygienists; and one consumer member, appointed by the governor. The six dentist-members must also be active practitioners while on the Board; thus, they provide for-profit dental services (some including teeth whitening), and have a significant financial interest in the business of their profession.

Unsurprisingly, this group decided that non-dentists should be barred from offering teeth-whitening services. These decisions about what only certain licensed practitioners are allowed to provide are typically not challenged by the antitrust authorities, so it was somewhat surprising that the FTC challenged this practice, and that the decision was upheld by the U.S. Fourth Circuit Court of Appeals. The case has now reached the the U.S. Supreme Court.

The broader issues at stake here go well beyond teeth whitening services in North Carolina. Aaron Edlin and Rebecca Haw review the arguments in \”Cartels by Another Name: Should Licensed Occupations Face Antitrust Scrutiny?\” which appears in the April 2014 issue of the University of Pennsylvania Law Review. Edlin and Haw point out that there are now hundreds of licensed occupations, like the dentists in North Carolina, who are often defining certain activities that those who lack such licensing are forbidden to do. They set the stage this way (again, footnotes omitted):

Once limited to a few learned professions, licensing is now required for over 800 occupations. And once limited to minimum educational requirements and entry exams, licensing board restrictions are now a vast, complex web of anticompetitive rules and regulations. . . . State-level occupational licensing is on the rise. In fact, it has eclipsed unionization as the dominant organizing force of the U.S. labor market. While unions once claimed 30% of the country’s working population, that figure has since shrunk to below 15%. Over the same period of time, the number of workers subject to state-level licensing requirements has doubled; today, 29% of the U.S. workforce is licensed and 6% is certified by the government. The trend has important ramifications. Conservative estimates suggest that licensing raises consumer prices by 15%. There is also evidence that professional licensing increases the wealth gap; it tends to raise the wages of those already in high-income occupations while harming low-income consumers who cannot afford the inflated prices.

As one starts trolling through specific examples of occupational licensing, state-by-state, a number of examples at least raise the question of whether the rules are more about protecting higher prices for some providers than providing services for consumers. Here are some examples from Edlin and Haw\’s discussion:

\”Where licensing was once reserved for lawyers, doctors, and other “learned professionals,” now floral designers, fortune tellers, and taxidermists  are among the jobs that, at least in some states, require licensing. … In Louisiana, for example, all flower arranging must be supervised by a licensed florist. . . . Minnesota (along with several other states) now defines the filing of horse teeth as the practice of veterinary medicine, a move that has redefined an old vocation as a regulated profession subject to restricted entry and practice rules. . . .Several states even prohibit the sale of caskets by anyone other than licensed funeral directors. . . . And although Louisiana restricts the sale of caskets, it does not regulate the design of caskets or even require that bodies be buried in a casket at all. . . . 

State cosmetology boards have responded to competition from two increasingly popular practices—African-style hair braiding and eyebrow threading—by demanding that braiders and threaders obtain cosmetology licenses before they can lawfully practice their craft. Neither practice requires sharp instruments or chemicals, and neither involves a significant risk of infection. Now manystate cosmetology boards want braiders and threaders to attend two years of school (with a price tag of $16,000) to learn cosmetology procedures and techniques irrelevant to their practice, pass an exam, and pay yearly dues to maintain a license in cosmetology—a profession they have no interest in
practicing. . . .

For example, in many states, dental licensing boards restrict the number of hygienists a dentist can hire to two.72 The anticompetitive effects of this restriction are well known; in 1987, the FTC published a policy paper showing that dentist-to-hygienist ratios tend to raise prices but not quality. . . .At least one state has taken the hygienist restrictions further. In 2001, the South Carolina Board of Dentistry required that exams performed by a licensed dentist accompany all cleanings. The rule frustrated the state legislature’s attempt to extend in-school dental cleanings to rural and other underserved children. ….

Nurse practitioners and physician assistants are trained in some of the same skills as family practice physicians but need not learn the more advanced skills essential to obtaining a medical degree. . . . For many procedures, outcome studies reveal that the extenders’ services are as safe and effective as that of physicians. Extenders have been essential to low-cost convenience clinics like CVS’s MinuteClinics and public health initiatives aimed at serving low-income individuals with restricted access to medical care. Undoubtedly influenced by powerful lobbying from the American Medical Association (AMA), twelve states (including more populous states such as California, Texas, and Florida) require physician supervision over all nurse practitioner activity. Several states prohibit nurse practitioners from prescribing medication. . . . In addition, many states define title certification and abstraction as the “practice of law,” which effectively inflates demand for legal services by requiring attorney representation at all real estate transactions.

Other \”recent additions to the list of professions requiring licenses include locksmiths, beekeepers, auctioneers, interior designers, fortune tellers, tour guides, and shampooers.\” Of course, the standard argument in favor of occupational licensing is that it protects consumers by assuring that they will receive higher-quality services. In many cases, this argument seems very unlikely to be true. For example, there didn\’t seem to be any evidence that the non-dentist teeth whitening services in North Carolina were ineffective or harmful to consumers. Consumers wouldn\’t seem to be at any particular health or safety risk from unlicensed flower arrangers. And if you don\’t like the service provided by a hair-braider or an interior designer, well, just like if you don\’t like a certain restaurant or movie theater, you can exercise your power as a consumer not to give them any more business.

But the connection between occupational licensing and quality of service can also be examined more systematically. These rules about what services need an occupational license vary considerably across states. In practical terms, this variation across states is part of what helps licensing to restrict competition from those in other states: indeed, Michelle Obama has advocated policy changes so that states would recognize certain out-of-state licenses held by military spouses. In research terms, the variation across states has allowed a wave of studies to confirm that occupational licensing is often quite effective at raising prices, but the quality benefits are often difficult to find in the data.

Edlin and Haw take a middle ground here. They argue that occupational licensing may have benefits for consumers in some cases, but they also argue that when those who are licensed start setting the rules for what those who are not licenses are allowed to do–like the nondentist teeth whiteners in North Carolina–then the competition authorities like the Federal Trade Commission should be allowed to challenge these rules. They write: \”Our proposal recognizes the potential benefits of licensing—preventing charlatanism and injury to the public—but rejects the idea that the potential
benefits justify total antitrust immunity for licensing.\”

Absurdities of Copyright Protection

Copyright protection has lost touch with its intended purpose. Derek Khanna lays out some striking evidence in \”Guarding Against Abuse: Restoring Constitutional Copyright,\” published as R Street Policy Study No. 20 (April 2014).

As a starting point, the fundamental purpose of copyright is not to help authors gain a reward in the market. The fundamental purpose is to advance science and the arts, which means encouraging others to build on pre-existing work. For this purpose, copyright protection must strike a balance between protecting the ability of authors to earn a reward, on one side, but also assuring that what they have created enters into the public domain so that it can be used by others, on the other side

Here\’s the purpose of copyright according to the U.S. Supreme Court (Feist Publications Inc. vs. Rural Telephone Service Co., 499 US 340 [1991], citations omitted): \”It may seem unfair that much of the fruit of the compiler\’s labor may be used by others without compensation. As Justice Brennan has correctly observed, however, this is not \”some unforeseen byproduct of a statutory scheme.\” . . . It is, rather, \”the essence of copyright\” . . . and a constitutional requirement. The primary objective of copyright is not to reward the labor of authors, but \”[t]o promote the Progress of Science and useful Arts.\” Art. I, § 8, cl. 8. . . .To this end, copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work.\” Just to be clear, the quoted passage about \”the Progress of Science and useful Arts\” is from Art. I, § 8, cl. 8 of the U.S. Constitution.

Here\’s the heart of Khanna\’s argument (footnotes omitted):

That original U.S. statute created a 14-year term, with the option of a 14-year extension if the author was still alive. Until 1976, the average copyright term was 32.2 years. Today, the U.S. copyright term is the life of the author, plus 70 years. By contrast, patent terms have changed very little. Today’s term for utility patents is either 17 years from patent issuance or 20 years from patent filing, whichever is longer. (The term for design patents, which resemble copyrights in some key respects, is still the original 14 years.) As legal historian Edward Walterscheid puts it,  while patents and copyrights were included in the same clause of the Constitution and originally had the same or similar durations, the patent term has increased by just 43 percent while the copyright term has increased by almost 580 percent. Congress must justify why a 20-year term can provide sufficient incentive to inventors, but not to writers and artists.

 There\’s a lot of history and law about why this has happened: for even more detail than this article, you can look at Khanna\’s articles in the Cardozo Arts and Entertainment Law Journal here and here. Here, I just want to focus on the some of the peculiar results from this large and fairly recent extension of copyright–basically, a lot of stuff that would have gone off copyright in the last few decades is now still covered, and trying to figure out what is still covered by copyright from a few decades back can be quite difficult. Here are some examples lifted from Khanna\’s essay (with footnotes omitted for readability).

The \”Happy Birthday to You\” example

\”As one clear illustration of the costs of extremely long copyright, Warner/Chappell claims a copyright to “Happy Birthday to You,” which the Guinness World Records book calls the most famous song in the English language. Due to the copyright claim, every time someone wants to use a portion of this song in a video or performance, they have to pay a license fee or risk being sued. The Warner/Chappell claim is based upon a published version of piano arrangements from 1935. The authenticity of the claim is under dispute, with some arguing that the song was written earlier and by someone else. Robert Brauneis of George Washington University Law School has argued pretty persuasively that Warner/Chappel does not own a lawful copyright to this song. But while the court tries to sort this out, people will have to pay rents to Warner/Chappel to publicly perform the most famous song in the English language. This discourages some people from performing this song publicly. Restaurants such as Applebee’s and Shoney’s have developed songs that are used instead of “Happy Birthday to You” to avoid copyright infringement and avoid paying hefty royalties. . . .So far, they have collected an estimated more than $2 million annually in licensing fees for the song. According to one estimate, it is the song that earns the highest royalty rates. Under current law, “Happy Birthday to You” will remain under copyright until 2030, but we should expect a push to continue to expand copyright even further beyond 2030.\”

Learning about the U.S. Civil Rights Movement

Excessively long copyright terms help explain why Martin Luther King’s “I Have a Dream” speech is rarely shown on television, and specifically why it is almost never shown in its entirety in any other form. In 1999, CBS was sued for using portions of the speech in a documentary. It lost on appeal before the 11th Circuit. If copyright terms were shorter than 50 years, then those clips would be available for anyone to show on television, in a documentary or to students. When historical clips are in the public domain, learning flourishes. Martin Luther King did not need the promise of copyright protection for “life+70” to motivate him to write the “I Have a Dream” speech. (Among other reasons, because the term length was much shorter at the time.) … 

Eyes on the Prize is one of the most important documentaries on the civil rights movement. But many potential younger viewers have never seen it, in part because license requirements for photographs and archival music make it incredibly difficult to rebroadcast. The director, Jon Else, has said that “it’s not clear that anyone could even make ‘Eyes on the Prize’ today because of rights clearances.” The problems facing Eyes on the Prize are a result of muddied and unclear case law on fair use, but also copyright terms that have been greatly expanded. If copyright terms were 14  years, or even 50 years, then the rights to short video clips for many of these historical events would be in the public domain.

The Problem of \”Orphan Works\” Where the Copyright Holder from a Long-Ago Work Cannot be Located

Carnegie Mellon University
Libraries submitted a filing to the Copyright Office last year
explaining that, when they tried to digitize and provide
web-based access for their collection, 22 percent of the publishers
could not be found. Google Books digitizes a large
amount of the world’s books. Alas, for many older works, it
is extremely costly or impossible for them to track down the
rightful owner of the work. …

In 1930, 10,027 books were published in the United States. In 2001, all but 174 of these titles are out of print. But for the Sony Bono Copyright Extension [Act of 1998], digital archives could be made
of remaining copies of the 9,853 works not currently being published. But under CTEA, and with likely future term extensions, digital archivists “must continue to wait, perhaps eternally, while works disappear and opportunities vanish.” As one example, the early volumes of periodicals such as the
New Yorker, Time magazine and Reader’s Digest “provide an unparalleled window into early 20th century American life and culture [but] few if any of these works can be found online because they are still under copyright. Until they fall into the public domain, the process of clearing rights for each
article, drawing, and photograph makes digital archiving of
such composite works practically impossible.”

Plays and Music

How many plays from the 1920s, 1930s and 1940s have high schools had to pay large fees to license and reproduce? Certainly those plays are not too old for literary and cultural value. Under a shorter copyright term, as the founders intended, written music from that era would be available to anyone for free with the click of a button, rendering most of the early jazz movement in the public domain. Would schools not be more likely to have jazz clubs for students if most of the music could be printed for free? . . . A number of orchestras have stopped performing Peter and the Wolf, by Prokofiev, because when the work returned to copyright protection after having been in the public domain, the cost of sheet music became prohibitive. In a survey by the Conductors Guild, 83 percent of orchestral conductors have a general practice of conserving resources by limiting their performances and recordings of copyrighted works. About 70 percent said they are no longer able to perform some works previously in the public domain . . .\”

The \”Missing 20th Century\” of Books

When books enter the public domain, there is an explosion in readership and availability, because public domain works can be provided for free online. In fact, works are significantly more available once they enter the public domain. A 2012 review of books sold through Amazon showed that those published after the critical public domain cut-off date of 1923 are available at a dramatically lower rate than books from the prior century. This is what The Atlantic magazine has referred to as “The Missing 20th Century.” The spike in availability starts right after works enter the public domain. This study shows there are 700 percent more books available from the 1910s than from the 1950s, even though there were many more books published in the 1950s. Another study by the same economist showed that, when books enter the public domain, audio versions of those works become significantly more available and are of equal quality to those of copyrighted books.

These examples can be multiplied, but I hope the basic lesson is clear. Excessively long copyright terms are not serving the purpose of promoting the arts, but have become a trough where lawyers, big corporations, and political interests joust and feed. Those who hold copyrights for successful older materials would of course like to see those copyrights extended. This no surprise, of course. I\’m sure that those who hold patents on, say, successful prescription drugs would like to see the patents extended, too. But it is, of course, wild ironic that the Disney Company manages to lobby for continual extensions of  copyright to keep exclusive rights to Mickey Mouse and others–when so many the classic movies of that the company produced were based on works in the public domain: for example, Snow White, Sleeping Beauty, the music in Fantasia,  Jungle Book, Pinocchio, Aladdin, Beauty and the Beast, Alice in Wonderland, Swiss Family Robinson,and many more. 

And just in case you think this is over? Khanna points out that the forces arguing for ever-longer copyright have inserted a provision in the drafts of the trade agreement called the Trans-Pacific Partnership Treaty which would extend copyright to life of the author plus 100 years–and by making this part of an international agreement, it would then become much more difficult for Congress to alter it in the future.

NAFTA Turns 20

The North American Free Trade Agreement turns 20 this year. What\’s has it done? Gary Clyde Hufbauer, Cathleen Cimino, and Tyler Moran discuss the evidence in \”NAFTA at 20: Misleading  Charges and Positive  Achievements,\” written for the Peterson Institute for International Economics (May 2014, Number PB14-13).

For those who don\’t remember, NAFTA was a burning political issue of its time, perhaps the single largest  issue launching Ross Perot as a third-party candidate for president in 1992. In June 1992, before the November election, Perot was for a time polling ahead of both George Bush and Bill Clinton. NAFTA was the first time the U.S. had signed a major trade agreement with a country that wasn\’t another high-income country, and Perot and others made dire predictions about the result. Hufbauer, Cimino, and Moran summarize the political debate:

\”In truth the claims on both sides of the NAFTA issue 20 years ago were overblown. Since the Mexican economy is less than one-tenth the size of the US economy, it is not plausible that trade integration could dramatically shape the giant US economy, even though integration could exert a substantial impact on the relatively small Mexican economy. But exaggeration and sound bites are the weapons of political battle, and trade agreements have been on the front line for two decades. President Bill Clinton, for example, declared that NAFTA would “create” 200,000 American jobs in its first two years and a million jobs in its first five years. Not to be outdone, NAFTA opponents Ross Perot and Pat Choate projected job losses of 5.9 million, driven by what Perot derided as a “giant
sucking sound” emanating from Mexico that would swallow American jobs. Both of these claims turned out to be overblown, especially the one advanced by Perot and Choate.\”

Of course, most economists see trade agreements in a fundamentally different way than these kinds of politically driven predictions, not about adding to the total number of jobs nor subtracting from the total number of jobs in any significant way, but instead about adding competitive pressures that restructure the labor market–adding jobs in some areas and reducing them in others. The restructuring of an economy from lower-productivity to higher-productivity jobs is a fundamental part of what raises the standard of living over time. Public policy has a legitimate role to play in smoothing this transition.

Hufbauer, Cimino, and Moran point out that every year, even when the economy is growing well, about four million Americans lose jobs involuntarily through layoffs or shutdowns. They estimate that about 5% of this job churn, perhaps 200,000 jobs per year, can be attributed to expanded trade with Mexico.  Despite the dire predictions of NAFTA opponents, the U.S. economy boomed through the rest of the 1990s, and after the 2001 recession, the unemployment rate was 5% or less from June 2005 through February 2008, before the Great Recession hit with full force. NAFTA had essentially no effect on the total number of US jobs.

As the Pew surveys on public perception of FTA [free trade agreement] effects on jobs seem to confirm, American workers who owe their jobs to rising exports are usually oblivious to their dependence on foreign sales (in sharp contrast to workers who lose their jobs to rising imports). Based on the increase in US exports to Mexico, averaging $25 billion annually between 2009 and 2013, about 188,000 new US jobs were supported each year by additional sales to Mexico. The figure is almost as large as the jobs lost, but the jobs gained in other sectors pay better. On average, the export-related jobs pay 7 to 15 percent more than the lost import-competing jobs. Th e wage diff erential, while positive, is only part of overall US gains from trade with Mexico. . . .

Amidst the arithmetic of jobs lost and gained, it should not be forgotten that a large portion of two-way trade among the NAFTA economies represents imported intermediates that raise the competitiveness of US firms, enabling them to improve their export profile in world markets. In other words, imports benefit not just US consumers but also US firms that can acquire just the right intermediate components at the right price. . . . [G]ains to the US economy average several hundred thousand dollars per net job lost.

What about effects on wages? Interestingly, it turns out that various studies which do find that U.S. trade with China has had a negative effect on US manufacturing wages, similar studies do not find that trade with Mexico has had a similar effect. They explain:

Possibly the main reason the wage impact between Chinese and Mexican imports differs is that US trade with Mexico is roughly balanced and has a large intraindustry component (e.g., autos and parts shipped in both directions), whereas US trade with China is highly unbalanced and entails very large US imports of consumer goods in exchange for much smaller US exports of capital goods. Because of these features, US imports from Mexico compel considerably less job churn between industrial sectors than US imports from China, and this could account for the difference in estimated wage impact.

Overall, here\’s a picture showing how bilateral merchandise trade between the U.S., Canada, and Mexico has risen since the passage of NAFTA. The blue bars show bilateral imports and exports  before the free trade agreement; the dark green bars show how much trade would have increased if it had just mirrored overall economic growth; and the light green bars show the increase in trade above that level.

Hufbauer, Cimino, and Moran estimate the gains in this way:

\”Ample econometric evidence documents the substantial payoff from expanded two-way trade in goods and services. Through multiple channels, benefits flow both from larger exports and larger imports. … The channels include more efficient use of resources through the workings of comparative advantage, higher average productivity of surviving firms through “sifting and sorting,” and greater variety of industrial inputs and household goods.  … As a rough rule of thumb, for advanced nations, like Canada and the United States, an agreement that promotes an additional $1 billion of two-way trade increases GDP by $200 million. For an emerging country, like Mexico, the payoff ratio is higher: An additional $1 billion of two-way trade probably increases GDP by $500 million. Based on these rules of thumb, the United States is $127 billion richer each year thanks to “extra” trade growth, Canada is $50 billion richer, and Mexico is $170 billion richer. For the United States, with a population of 320 million, the pure economic payoff is almost $400 per person.\”

As we look around the globalizing economy today, one emerging pattern is regional mixtures of the technology and design skills of high-income countries with the manufacturing skills of lower income economies. We see Factory Asia, with Japan and Korea partnering with China, Thailand, Indonesia, and others. We see Factory Europe, with Germany in particular partnering with countries of eastern Europe. And we see Factory North America, with the U.S. and Canada partnering with Mexico. In a sense, the NAFTA agreement back in 1994 was a test of the willingness of the U.S. economy to embrace–at least hesitantly!–the future of a globalizing economy. As the bulk of the world economy continues its shift toward middle income economies, the U.S. economy will face a continual series of adjustments to the globalizing  economy in the decades ahead.

Chronic Disease

The definition of \”chronic disease\” is a little loose, but it generally refers to persistent conditions that for the population as a whole can often be addressed with preventive measures, lifestyle changes, or prescription drugs. In \”Checkup Time: Chronic Disease and Wellness in America,\” a January 2014 report published by the Milken Institute, Anusuya Chatterjee, Sindhu Kubendran, Jaque King, and Ross DeVol point out: \”According to the Centers for Disease Control and Prevention (CDC), chronic illness affects one of every two adults in the U.S., and they are responsible for 75 percent of health-care costs.\”

Their report estimates costs for five most common chronic diseases: cancer, diabetes, heart disease, hypertension, and stroke. One set of costs are treatment costs; a much bigger cost is the reduction in GDP when people are unable to work to their usual productivity, or at all. Of course, the measure here underestimates the full social cost because it does not seek to place a monetary value on the costs of death and suffering.

Efforts to reduce the  burden of chronic disease have had some successes. As the Milken report notes:

\”Strategies to battle heart disease have had the most success in lowering prevalence and easing the economic burden. Much of the credit goes to public anti-smoking initiatives. …  Learning from that, we can be optimistic that aggressive campaigns to address obesity, improve nutrition, and motivate physical activity will bear fruit in the future. Simple physical movement not only helps to control weight but has been effective in cutting cholesterol levels. Keeping bad cholesterol in check through exercise and nutrition can restrain the menaces of stroke and hypertension. . . . More personalized treatment before disease onset can reduce incidence, and better disease management can curtail the need for sudden visits to expensive sites of services, such as emergency rooms and hospital admissions.The American College of Cardiology and American Heart Association now recommend statins for people at risk of heart disease. If diabetes patients and their doctors manage the disease well, they can avoid potentially grave glycemic events that send costs climbing. \”

Similarly, the Centers for Disease Control notes on its website: \”Four modifiable health risk behaviors—lack of physical activity, poor nutrition, tobacco use, and excessive alcohol consumption—are responsible for much of the illness, suffering, and early death related to chronic diseases.\”

In short, finding ways to deal better with the incidence of chronic disease offers the possibility of a three-way win: 1) better health and improved life expectancies for many 2)  helping to hold down health care costs by avoiding costly episodes of hospitalization; and more speculatively, 3) the possible of building a new job-rich industry with the task of helping those with chronic diseases stick to their daily regimen.

This last point is worth a bit more explication. A chronic disease can be thought of as a set of conditions where the incidence and/or the severity of the condition can be greatly reduced if people f they take the recommended medications, or follow the recommended diet, or do the recommended exercises. However, if a person who already has with a chronic condition doesn\’t follow the day-to-day recommended regimen–say someone with high blood pressure or a diabetic–the result can be a severe and costly episodes of hospitalization. The U.S. health care system is generally quite good at dealing with poor health after it occurs, but traditionally, it has not been primarily focused on prevention, wellness, and helping peoples stick to their health regimens. The Milken report notes:

\”Outside of the medical complex, there is much room for improvement in wellness and illness prevention initiatives. A range of organizations, such as employers, local government agencies, and nonprofits, can promote healthy living through wellness programs. Integrating exercise, nutrition awareness, and other good-for-you practices is the cornerstone of preventing chronic disease and reducing health-care costs.\”

Personal habits and public policies regarding cleanliness changed so much in the 19th and into the early 20th century that historians sometimes write of a \”sanitation revolution,\” which led to dramatic improvements in public health. It\’s time to ramp up a \”chronic disease revolution,\” which would include the health care system but also reach beyond it. Modern information technology, and the coming arrival of the \”Internet-of-things\” will open up new possibilities here. A pillbox could be wired into the Internet, and if it isn\’t opened at the appropriate times during the day, the person would receive a text or email, and then a phone call, and then maybe a personal visit of reminder. It\’s now possible for a home machine to take a small blood sample from a diabetic, analyze that sample, and send in the results. Information technology makes it much easier to have interactive systems that offer reminders about diet or exercise. The benefits from improved management of chronic conditions is potentially very large.

GDP Snapshots from the International Comparison Project

Here\’s a snapshot of per capita GDP just published by the World Bank in \”Purchasing Power Parities and Real Expenditures of World Economies: Summary of Results and Findings of the 2011 International Comparison Program.\” I\’ll say more about how this calculation is done below. But first, consider the overall pattern. The colored vertical slices are countries, ranked in order of their per capita GDP, although only some of the countries are labelled. The horizontal axis shows the share of global population in each country–adding up 100% of global population. The vertical axis shows per capita GDP for that country. Thus, India and China show up as wide countries, reflecting their large populations, but below the world average of $13,460 for per capita GDP.

As another viewpoint on this data, consider the 12 largest economies of the world. It\’s no surprise to see the U.S. and China at the top of the list, but did you know that India is now the third-largest economy in the world, surpassing Japan and Germany? Indeed, six of the 12 largest economies in the world are now \”middle-income\” countries, shown in boldface type, not high-income countries.  The final column shows the rankings on a per capita basis. By this measure, the U.S. ranks behind a number of tiny economies like Qatar, United Arab Emirates, Luxembourg, and Macao, which have populations so small that they don\’t show up as vertical bars on the chart above. The middle column, the \”exchange-rate based\” measure, will be discussed below.

Here\’s one more angle on countries in the global economy. The top panel on \”Expenditure Share\” shows, for example, that 50.3% of global GDP is in high-income economies, 48.2% is in middle-income economies, and just 1.5% is in low-income economies.  The bottom panel shows the comparisons on a per-person basis: for example, GDP per capita is about $40,000 in the high-income countries, $9,000 in the middle income countries; and $1,800 in the low-income countries.

How are these kinds of calculations carried out? To compare the size of national economies, each of which is measured in its own home currency, you need an exchange rate. One obvious option is to use the market exchange rate, but there are two substantial difficulties with this approach.

One difficulty is that exchange rates can move quite a bit over a few months or a year. For example, a euro was was  worth $1.46 in May 2011, $1.21 in July 2012, and $1.35 in February 2013. If you converted the GDP of the euro-zone into US dollars using the market exchange rate, it would have looked as if the euro-zone GDP had a depression-style nosedive during the year that the value of the euro fell, and then had an epic boom in the six months as the value of the euro rose. But that conclusion would have been wrong, because was based on the fluctuating market-based foreign exchange rate, not on actual changes in what was being produced and consumed in the euro-zone economy. Of course, even more severe movements in market exchange rates–like the value of the Argentinian peso falling from $0.25 in early 2011 to about $0.12 now–would be even more misleading if used to draw conclusions about changes in actual GDP.

The other difficulty is that what it costs to buy a certain item in a high-income economy like the United States may be quite a bit different–and often higher–than what it costs to buy the same item in a low-income country. As a result, income in a low-income country can often buy more,which makes comparisons to income in high-income countries treacherous. This is why in the middle column of the table above, the share of of middle-income economies in the global economy looks so much smaller when calculated using market exchange rates.

To overcome the problems with using market-based exchange rates, a common approach since the 1970s has been to used \”purchasing power parity\” exchange rates determined by the International Comparison Project, which is now part of the World Bank. A PPP exchange rate is based on an effort to figure out the \”purchasing power\” of a currency in terms of what that currency can buy. Calculating the PPP exchange rate is now done once every six years, because it is  an enormous project, involving the collection of a wide range of price data in 199 different countries, trying to adjust for differences in quality, and then compiling it all into comparable price indexes. The just-released report is based on data for 2001. The report explains:

\”PPPs are price relatives that show the ratio of the prices in national currencies of the same good or service in different economies. For example, if the price of a hamburger in France is €4.80 and in the United States it is $4.00, the PPP for hamburgers between the two economies is $0.83 to the euro from the French perspective (4.00/4.80) and €1.20 to the dollar from the U.S. perspective (4.80/4.00). In other words, for every euro spent on hamburgers in France, $0.83 would have to be spent in the United States to obtain the same quantity and quality—that is, the same volume—of hamburgers. Conversely, for every dollar spent on hamburgers in the United States, €1.20 would have to be spent in France to obtain the same volume of hamburgers. To compare the volumes of hamburgers purchased in the two economies, either the expenditure on hamburgers in France can be expressed in dollars by dividing by 1.20 or the expenditure on hamburgers in the United States can be expressed in euros by dividing by 0.83.

PPPs are calculated in stages: first for individual goods and services, then for groups of products, and finally for each of the various levels of aggregation up to GDP. PPPs continue to be price relatives whether they refer to a product group, to an aggregation level, or to GDP. In moving up the aggregation hierarchy, the price relatives refer to increasingly complex assortments of goods and services. Thus, if the PPP for GDP between France and the United States is €0.95 to the dollar, it can be inferred that for every dollar spent on GDP in the United States, €0.95 would have to be spent in France to purchase the same volume of goods and services. Purchasing the same volume of goods and services does not mean that the baskets of goods and services purchased in both economies will be identical. The composition of the baskets will vary between economies and reflect differences in tastes, cultures, climates, price structures, product availability, and income levels, but both baskets will, in principle, provide equivalent satisfaction or utility.\”

Clearly, these PPP exchange rates for 199 economies have a healthy dose of arbitrariness and judgement. Indeed, in 2010 Angus Deaton devoted his Presidential Address to the American Economic Association (freely available on-line here) to detailing the \”weak theoretical and empirical foundations\” of such  measurements. To some extent, such problems may be unavoidable: it\’s surely a Herculean task to calculate and defend a single monetary measure that can compare average standard of living in, say, the United States, Japan, China, India, Brazil, Indonesia, Egypt and Nigeria, along with more than 100 other countries. But the undoubted imperfections of economic statistics don\’t make such statistics meaningless. It only means they should be interpreted with a skeptical recognition that they are estimates that can have substantial margins of error.

Patterns of U.S. Imprisonment

When it comes to locking people up, the U.S. is an outlier among high-income countries. Melissa S. Kearney and Benjamin H. Harris lay out \”Ten Economic Facts about Crime and Incarceration in the United States\” in a paper written for the Hamilton Project at the Brookings Institution. Here\’s a sampling.

As a starting point, the incarceration rate for the U.S. is vastly higher than for the usual comparison group of high income countries–the number of inmates per 100,000 population is about six times higher in the U.S. than the average for OECD countries.

The U.S. has historically tended to be above-average in its incarceration rates, but this extreme outlier status is relatively recent. Back in the 1970s, for example, the U.S. incarceration rate was in the range of 250 per 100,000 people. By about 2005, the incarceration rate had more than tripled.

Of course, a tripling of the incarceration rate means roughly a tripling of the costs of running prisons, too–with a total cost now at about $80 billion per year.

There seems to me solid evidence that the rise in U.S. incarceration rates in the 1980s and 1990s are part of what helped to bring down the crime rate during that time. But the social costs of imprisonment are much larger than the bills paid by government: they include the reduction in future income earned after being released from prison, the costs of loss of freedom to those who are imprisoned, and costs that absence imposes on families and friends. With the monetary and nonmonetary costs in mind, it seems to me that the U.S. has been resorting to imprisonment far too easily for those who have committed non-violent offenses. If the goal is to continue the reduction in crime rates, finding a way on the margin to spend less on prisons and more on police is probably a productive tradeoff.

For some earlier posts on U.S. rates of imprisonment, see \”Reducing the Federal Prison Population,\” (November 8, 2013),  \”Too Much Imprisonment\” (November 30, 2011) and \”U.S. Imprisonment in International Context: What Alternatives?\” (May 31, 2012).

Mark Gertler on Financial Crisis Dynamics

David A. Price interviews Mark Gertler in Econ Focus, published by the Federal Reserve Bank of Richmond (Fourth Quarter 2013, pp. 32-36), mainly focusing on the dynamics of financial crisis ad th Great Recession. Here are some of Gertler\’s comments:

On how he looks back at the causes of the financial crisis of 2007-2008: 

I liken the crisis to 9/11; that is, there was an inkling that something bad could happen. I think there was some sense it was going to be associated with all the financial innovation, but just like with 9/11, we couldn’t see it coming. When we look back, we can piece everything together and make sense of things, but what we didn’t really understand was the fragility in the shadow banking system, how it made the economy very vulnerable. I always think of the Warren Buffet line, “You don’t know who’s naked until you drain the swimming pool.” That’s sort of what happened here. I think when we look back on the crisis, we can explain most of what happened given existing theory. It’s just we couldn’t see it at the time. 

On the concept of \”financial accelerators\” that Gertler developed with Ben Bernanke and Simon Gilchrist: 

That’s what we wanted to capture with the financial accelerator, that is, the mutual feedback between the real sector and the financial sector. We also wanted to capture the primary importance of balance sheets — when balance sheets weaken, that causes credit to tighten, leading to downward pressure on the real economy, which further weakens balance sheets. I think that’s what helped to develop the concept of financial accelerators one saw in the financial crisis. . . .Then we found some other implications, like the role of credit spreads: When balance sheets weaken, credit spreads increase, and credit spreads are a natural indicator of financial distress. And again, you saw something similar
in the current crisis — with a weakening of the balance sheets of financial institutions and households, you saw credit spreads going up, and the real economy going down.

I didn’t speak to Bernanke a lot during the height of the crisis. But one moment I caught him, asked him how things were going, and he said, “Well, on the bright side, we may have some evidence for the financial accelerator.”

 On the Federal Reserve holding high levels of excess reserves: 

The way I think about it is that we had a collapse of the shadow banking system, a drastic shrinkage of the shadow banking system. What were shadow banks doing? They were holding mortgage-backed securities and issuing short-term debt to finance them. What’s happened is that that market has moved to the Fed. The Fed now is acting as an investment bank, and it’s taking over those activities. Instead of Lehman Brothers holding these mortgage-backed securities, the Fed is. And the Fed is issuing deposits, if you will, against these securities, the same way these private financial institutions did. It’s
easier for the Fed, because it can issue essentially risk-free government debt, and these other institutions couldn’t. . . .It’s possible, as interest rates go up, that the Fed could take some capital losses, as private financial institutions do. But the beauty of the Fed is it doesn’t have to mark to market; it can hold these assets until maturity, and let them run off. So I’m in a camp that thinks there’s been probably a little too much preoccupation with the size of the balance sheet.

On the state of knowledge about optimal capital ratios: 

[W]hat do we do ex ante before a crisis? How should regulation be designed? That’s a huge question that we still haven’t figured out. For example, what’s the optimal capital ratio for a financial institution? . . . I’m reminded of a comment Alan Blinder makes. There are two types of research: interesting but not important, and incredibly boring but important. And figuring out optimal capital ratios fits in the latter category. The reality is that we don’t have definitive empirical work,  and we don’t have definitive theory that gives us a clear answer.

Gary Becker and the Time Constraint

Like every student of economics, I frequently find myself confronting the objection that economics is built on an unrealistic and unpalatable assumption that people should be viewed as selfish and rational. While some economic models do take such an approach as a simplified starting-point for analysis, that assumption is not the fundamental starting point of the economic approach. Instead, the starting point for economic analysis is that we live in a world of scarcity–most fundamentally a limit on the time available to us–and so we have no alternative but to make choices. The famous economist Gary Becker, whose time ran out when he died earlier this week, made this point at the start of his 1992 Nobel prize lecture

\”My research uses the economic approach to analyze social issues that range beyond those usually considered by economists. . . . Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences. 

The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. Forward-looking behavior, however, may still be rooted in the past, for the past can exert a long shadow on attitudes and values. Actions are constrained by income, time, imperfect memory and calculating capacities, and other limited resources, and also by the available opportunities in the economy and elsewhere. These opportunities are largely determined by the private and collective actions of other individuals and organizations.

Different constraints are decisive for different situations, but the most fundamental constraint is limited time. Economic and medical progress have greatly increased length of life, but not the physical flow of time itself, which always restricts everyone to twenty-four hours per day. So while goods and services have expended enormously in rich countries, the total time available to consume has not. Thus, wants remain unsatisfied in rich countries as well as in poor ones. For while the growing abundance of goods may reduce the value of additional goods, time becomes more valuable as goods become more abundant. Utility maximization is of no relevance in a Utopia where everyone’s needs
are fully satisfied, but the constant flow of time makes such a Utopia impossible.\”

Becker\’s Nobel lecture goes on to review his work in some key areas: discrimination, crime and punishment, formation of human capital, and structure of families. But here, I\’d point out a different implication of Becker\’s view.

There is a long-standing prediction, traceable at least as far back as John Stuart Mill\’s Principles of Political Economy in 1848  (for example, here), which looks forward to the end of scarcity. The argument is that someday–perhaps not too far into the future–there will be \”enough\” economic growth. When that time arrives, people will able to work less or not at all, while enjoying a sufficiency of the material goods that what want along with the time to pursue higher goals. When this time arrives, Mill wrote: \”There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living, and much more likelihood of its being improved, when minds ceased to be engrossed by the art of getting on. Even the industrial arts might be as earnestly and as successfully cultivated, with this sole difference, that instead of serving no purpose but the increase of wealth, industrial improvements would produce their legitimate effect, that of abridging labour.\”

When Becker points out that that the starting point for economic analysis is scarcity, that the most fundamental embodiment of scarcity is the limits of time, and that time becomes more valuable as per capita incomes rise, his argument implies that economic growth will never render the economic analysis of tradeoffs obsolete.