conversableeconomist

World Trade by Region

One prism for looking at patterns of global trade is to consider trade between regions of the world. The rows of the table show the origin of world merchandise trade according to the region of the country involved; the columns show the destination of that trade. Thus, if you go to the South and Central America row, you can see that countries of this region exported $201 billion in merchandise to each other in 2012, only slightly more than the $186 billion these countries exported to North America and the $172 billion they exported to Asia. At least to me, this suggests that there are substantial possibilities for gains from trade within the countries of South America.

I include this table in each edition of my Principles of Economics text (and if you\’re teaching an intro econ course, I encourage you to check it out). Here are some lessons try to highlight: 
First, the bulk of world trade involves high-income areas of the world, either as exporters, importers, or both. For example, the single biggest number is the $4,382 billion that countries in Europe sell to each other. The level of trade between North American countries appears low compared to Europe, but this is because the European Union includes 27 nations while the trade
in the North American region is between the United States, Canada, and Mexico. Remember,
exports from Germany to Sweden count as international trade, but sales from California to New York would not be counted in this table, since they occur within the U.S. economy.
Second, trade between high-income regions and low-income regions is fairly extensive. Perhaps the most vivid example of this point is trade of $3,012 billion between the nations of Asia.  Asia includes the high-income economies like Japan and Korea, upper-middle income countries like China and Thailand, lower-middle-income countries like Indonesia and Vietnam, and low-income countries like Cambodia. 
Third, high-income regions are important as markets to the other regions. The countries of Africa, for example, export more than three times as much to the European Union as they do to other countries of Africa. As noted above, countries of Latin America almost as much to North America than they do to each other.
Finally, trade between some regions is very low; for example, between Africa and Latin America, or between the Middle East and the Commonwealth of Independent States. Indeed, some regions of the world seem economically disconnected from each other. I suspect that in a globalizing world economy, these connections will be gradually created and growing over time. 

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Double Irish Dutch Sandwich

Want a glimpse of how companies can shift their profits among countries in a way that reduces their tax liabilities? Here\’s the dreaded \”Double Irish Dutch Sandwich\” as described by the International Monetary Find in its October 2013 Fiscal Monitor. This schematic to show the flows of goods and services, payments, and intellectual property. An explanation from the IMF follows, with a few of my own thoughts.

The IMF writes (footnotes omitted):

\”So many companies exploit complex [taz] avoidance schemes, and so many countries offer devices that make them possible, that examples are invidious. Nonetheless, the “Double Irish Dutch Sandwich,” an avoidance scheme popularly associated with Google, gives a useful flavor of the practical complexities. Here’s how it works (Figure 5.1):

•• Multinational Firm X, headquartered in the United States, has an opportunity to make profit in (say) the United Kingdom from a product that it can for the most part deliver remotely. But the tax rate in the United Kingdom is fairly high. So . . .

•• It sells the product directly from Ireland through Firm B, with a United Kingdom firm Y providing services to customers and being reimbursed on a cost basis by B. This leaves little taxable profit in the United Kingdom. Now the multinational’s problem is to get taxable profit out of Ireland and into a still-lower-tax jurisdiction.

•• For this, the first step is to transfer the patent from which the value of the service is derived to Firm H in (say) Bermuda, where the tax rate is zero. This transfer of intellectual property is made at an early stage in development, when its value is very low (so that no taxable gain arises in the United States).

•• Two problems must be overcome in getting the money from B to H. First, the United States might use its CFC [controlled foreign corporation] rules to bring H immediately into tax. [Note: The \”controlled foreign corporation\” rules seek to reduce the ability of companies to move profits to another country via a pure paperwork transaction to what is really the same company.] To avoid this, another company, A, is created in Ireland, managed by H, and headquarters “checks the box” on A and B for U.S. tax purposes. This means that, if properly arranged, the United States will treat A and B as a single Irish company, not subject to CFC rules, while Ireland will treat A as resident in Bermuda, so that it will pay no corporation tax. The next problem is to get the money from B to H, while avoiding paying cross-border withholding taxes. This is fixed by setting up a conduit company S in the Netherlands: payments from B to S and from S to A benefit from the absence of withholding on nonportfolio payments between EU companies, and those from A to H benefit from the absence of withholding under domestic Dutch law.

This clever arrangement combines several of the tricks of the trade: direct sales, contract production, treaty shopping, hybrid mismatch, and transfer pricing rules.

A few quick thoughts of my own here.

1) The description of this arrangement is not from a muck-raking journalist nor from a lefty lobbying group. When it comes to knowing what happens in the world of international finance, the IMF is a mainstream and establishment source.

2) Under U.S. tax law, these profits would be subject to U.S. tax law if and when they are repatriated to the United States as dividends to shareholders. As the IMF writes (citations omitted): \”The United States will charge tax when the money is paid as dividends to the parent—but that can be delayed by simply not paying any such dividends. At present, one estimate is that nearly US$2 trillion is left overseas by U.S. companies.\” Here\’s a post from about a year ago on the reasons why U.S. firms find it useful to hold liquid assets overseas.

3) There is an ongoing cat-and-mouse game in corporate tax avoidance, in which government tax agencies write regulations, well-paid corporate tax attorneys construct arrangements to pay lower taxes within the rules, the government tax agencies write more regulations, and so on–in a spiraling descent into ever-greater complexity and confusion. As with many pointless and destructive games, the answer is to define the rules for a different game. President Obama has proposed one corporate tax reform, and other proposals are floating around. When the economic incentives to shift profits are powerful, the corporate tax attorneys will find ways to make it happen. Thus, one goal of such reform should be to reduce the underlying incentives for this sort of profit-shifting.

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Snapshots of Global Energy Consumption

The global energy industry is going through a period of disruptive transition for at least four main reasons:

  1. There is an enormous surge of demand for energy, driven by economic growth in emerging economies like China. 
  2. There is also a surge in supply of fossil fuel energy, driven both by new discoveries of reserves and by more cost-effective methods of extracting reserves that had previously been thought too costly–like the hydraulic fracturing approach being used in the U.S. 
  3. There is enormous concern over the environmental consequences of energy use, ranging from concerns over conventional pollution as well as risks of climate change with fossil fuels, to issues of safety risks posed by nuclear power, to environmental costs of hydroelectric power. 
  4. Some alternative non-carbon energy technologies like solar and wind are promising enough to stir up interest, at least when they are accompanied by tax credits and government subsidies. 

As a context for thinking about these changes, last month I offered an overview of \”The U.S. Energy Picture.\” Here, I\’ll offer some global perspective on energy consumption, drawing from the BP Statistical Review of World Energy for 2014.

As a starting point, here are the patterns for consumption of \”primary energy,\” which is energy as produced directly from a natural input. (The other energy sources are all converted so that they are equal to the energy in barrels of oil.) Oil, shown by the green area, is the dominant fuel, but as the report notes, \”it has lost market share for 14 years in a row.\” Hydroelectric power is the blue area, and \”other renewables\” is the very skinny dark orange area. The report notes: \”Hydroelectric and other renewables in power generation both reached record shares of global primary energy consumption (6.7% and 2.2%, respectively).

As I\’ve explained here and here, it is by no means obvious that solar and wind are a cost-effective choice for energy production, either now or in the relatively near future, even with the benefits of lower carbon output figured into the mix. My guess is that they will continue to grow at what look like rapid rates, but because they are starting from such a small base, they will still be a relatively small share of global energy consumption a decade or two from now. As a sample calculation, imagine that the 2.2% of energy consumed that is wind and solar grows by 10% per year, every year for the next 20 years. And imagine also that total energy consumption grows by an average of 3% per year over the next 20 years. By my calculation, wind and solar would then have grown to only 8.2% of world consumption 20 years from now.

Here are some consumption patterns for the major energy sources oil, natural gas, nuclear energy, and coal. Be cautious about making comparisons between the figures too quickly, because what is being measured on the vertical axis is typically not the same.

For oil, consumption is fairly flat in North America and in Europe, but rising in South and Central America, in the Middle East, and especially in the Asia-Pacific region.

For natural gas, consumption is on the rise, not just in North American but in other regions, too.

For nuclear power, consumption has leveled off at around the start of the 21st century, and then dropped in the aftermath of the Fukushima disaster in March 2011. As I\’ve argued on this blog, nuclear power has come to be seen as involving very high start-up costs, even setting aside its environmental issues.

For hydroelectric, you can see that South and Central America, and the Asia Pacific region, have been on a dam-building spree the last decade or so.

For coal, consumption has been fairly flat or even falling in much of the world, but rising very quickly in the Asia-Pacific region, led by China and India.

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Main St., Wall St., Pennsylvania Ave., K St.

When I typed \”Main Street vs. Wall Street.\” into Google search, it spat back 218 million results. The juxtaposition of Main Street and Wall Street seems to have originated with a book called Main Street and Wall Street, written by a Harvard economics professor named William Z. Ripley and published in 1929. In a \”Personal Note\” at the the book, Ripley writes: \”I have confessed the theft of a part of my title to Mr. Sinclair Lewis, the distinguished author of Main Street. He has been pleased to send me his \”Godspeed\” in the enterprise.\”

For those whose most recent class in American literature is a few years behind them, Main Street was published in 1920 and became a best-seller. In the Main Street vs. Wall Street comparison, Main Street is meant to embody wholesomeness and \”real\” America as opposed to the detached and money-hungry financiers. From this perspective, it\’s always a little odd to remember that Lewis\’s book is about a young woman who moves from the city of St. Paul to a small town in Minnesota–and hates it because the town is ugly and its residents are mostly smug and unpleasant.

The Main Street/Wall Street metaphor remains a useful one. It captures a number of oppositions: average people and big business; workers and bosses; a real economy of goods and services vs. the financial sector; and a sense of powerlessness when decisions that can have such a large effect on households and towns are made by people who live very different lives in faraway places.
But to a large extent, the Main Street vs. Wall Street trope is also a product of its specific time and place, and represents a view of political economy that fit the economy of the 1920s better than the economy of today.

Back in the 1920s, the role of large corporations in the economy had been transformed by two events. First, there had been a wave of mergers around the start of the 19th century, well-described in Naomi Lamoreaux\’s book \”The Great Merger Movement in American Business, 1805-1904.\” The introductory chapter is available here. Lamoreaux compiles a table of holding companies where after the consolidations of that time, a single company held more than 70% of the market, between 40-70% of the market, or less than 40% of the market–and even the smallest of these categories is a very large chunk.

Many of these large enterprises were challenged both by the forces of competition and by the birth of antitrust enforcement with the creation of the Federal Trade Commission and the passage of the Clayton Antitrust Act in 1914. Still, their presence reshaped the organization of America\’s production.

The creation of these huge companies was then followed by a second step, which as Ripley described it was \”the great increase of popular investment in business and other corporations . . . But most persistent and striking of all has been the tendency, since the depression of 1920, toward the transformation of hitherto purely personal businesses, closely owned, into very widely held and loosely governed public enterprises.\” Among economists, a commonly used phase here is \”the separation of ownership and control,\” referring to the fact that in a publicly owned company, the shareholders own the company, but the company is controlled by a board of directors and its management. The phrase comes from a book by called The Modern Corporation and Private Property, written by Adolf Berle and Gardiner Means, and published three years after Ripley\’s book in 1932.

Moreover, the dawn of Main Street vs. Wall Street terminology happened at a time when the role of the federal government in the national economy was relatively small. Federal spending was less than 10% of GDP in the years before World War I, and after the wartime spending spike subsided, it was still typically 11-12% of GDP through the 1920s. The federal regulatory state was just beginning to be born, and federal redistribution of income to the poor or the elderly didn\’t yet exist in any substantial way.

But it\’s been a long time since the 1920s, and thinking of the economy in Main Street vs. Wall Street terms is somewhat out of date for two main reasons.

First, it has become clear over the decades that while corporate organizations do have considerable power, both economic and political, but they are by no means invulnerable. Ask iconic firms like IBM, AT&T, Kodak, Sears, US Steel, and United Airlines if they are all-powerful.  Look at the 30 companies in the Dow Jones Industrial Index over time and see how they have changed. By my count, only six of the companies in the Dow Jones average in 1976 are still there today–and several of those have changed dramatically: AT&T (no longer the monopoly provider of U.S. telephone services), DuPont, General Electric, and Proctor and Gamble, Standard Oil (N.J) (whichi became Exxon and eventually ExxonMobil), and United Aircraft (which became United Technologies). Moreover, as we enter an era of global supply chains and global competition, where the relative size of the U.S. economy is shrinking compared to the overall world economy, the notion of unconstrained U.S. firms is a lot less true than in the 1920s. General Motors, Chrysler, and Ford are certainly not insulated by their size from global competition.

Second, there are two players in the economic/political picture who played a much smaller role back in the 1920s: Pennsylvania Avenue and K St.

Pennsylvania Avenue runs diagonally from in front of the White House over to the Capitol Building in Washington, D.C. Federal government spending is now twice as large relative to GDP as it was back in the 1920s. Remember that back in the 1920s, the Federal Trade Commission had barely gotten underway. The Federal Reserve wasn\’t created until 1913, and much of the banking regulation wasn\’t legislated until the 1930s. The federal income tax was created in 1913.  Add in all the modern the federal regulatory apparatus–securities and banking regulation, environmental, workplace, consumer safety–and the size and reach of government power has dramatically increased. Households had good reason to be concerned with the looming rise of corporate power back in the 1920s, but the possible government counterweights to corporate power are now far more powerful.

But of course, the government is not run by omniscient public policy angels, but rather by everyday men and women who do it as a job. They bring their own areas of ignorance and bias, like anyone would, and find themselves surrounded by special interests that now swarm around the political process, who are sometimes nicknamed K St., because of the large number of lobbyist organizations on that street in Washington, D.C. Year in, year out, more is spend on lobbying than on campaign contributions. Campaign contributions happen under a glare of legally required disclosure; by comparison, lobbying money happens in the shadows. The money spent on lobbying is also probably more tightly focused, not just on big-picture items like companies that claim they will produce clean energy, but also on innumerable regulations where changing the word \”required\” to \”recommended\” at a key place in the fine print of legislation can be worth billions of dollars.

In some cases, certain events that are blamed on Wall Street get a hefty boost from crony capitalism cooked up in Pennsylvania Ave. and K St. Whether you opposed the various bailouts of the banks and car companies back in 2008 and 2009, or believed that they were an unpleasant necessity in a grim economic time, it would be peculiar to think of government bailouts as the free market at work. Similarly, whether you think that government subsidies for companies that claim they will soon produce environmentally-friendly products is crony capitalism or a worthwhile long-term economic investment, it would again be peculiar to think of them as the free market at work.

As I wrote earlier, the Main Street vs. Wall Street slogan does speak to some important and real tensions that continue in a modern economy. But we aren\’t in the economy world of Ripley\’s 1929 book, either. At least to some extent, giant U.S. corporations have been brought to heel with a mixture of domestic and global competition, which of course arises out of the decisions of consumers about what to buy, together with government oversight. And instead of the 1920s world where a relatively small central government and limited regulatory apparatus left corporate forces unconstrained, Pennsylvania Ave. and K St.  now have considerable power to enact laws, taxes and regulations with their own agendas in mind. The modern agenda for Main Street is how to use its diffuse but inexorable powers of consuming, working, and voting so that Wall Street, Pennsylvania Ave., and K St. are pressured to operate in a constructive tension against each other.

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Weather, Economics, and Ken Arrow

There\’s an old joke that the reason God created economists was to make weather forecasters look good. But the great economist Kenneth Arrow, early in his career, actually worked as a weather officer during World War II. Of course, for Arrow it was an opportunity to discover the formula that has been used ever since in flight planning and the optimal path of aircraft. Arrow tells the story in 1995 interview:

\”You must remember there was a little event called World War II, and I volunteered to go into something that would at least use my technical skills. They were looking for weather officers and a background in mathematics was sufficient. So I enrolled in that, was admitted into the program and spent more than four years of my life there, studying and then as a weather officer. Because I got very high grades, I was sent to research. I always said that they really knew I couldn\’t forecast; they just got me out of harm\’s way.

The work on flight planning came about when a group associated with some aircraft company had an idea for navigation using the wind. The idea was that when you\’re flying, of course, you\’re drifting, you point your plane in one direction but the wind modifies it. And the object was to get from one place to another as fast as possible. An applied mathematician directed me to European literature on that subject. Some of it was in German, and my German was mediocre, but I could struggle through it. All the literature assumed that the world was flat, that everything was on a plane, which may be germane if you\’re flying a hundred miles. But we were already flying planes across the Atlantic, from Newfoundland to Scotland. It turned out to be an interesting mathematical problem to change these results to be applicable to the sphere–and that was my contribution. The results are used routinely by firms that supply the airline companies with the optimal routes and they must be based ultimately on my work–there is only one solution. There were articles in the practical literature a few years later which picked up on it, but I\’ve never traced my influence on the actual practice.\”

What about the contest for inexactitude between economics and weather forecasting? Arrow doesn\’t speak directly to the issue in the 1995 interview. But he does say: \”[O]ne thing I learned from meteorology is that being an actual science was no guarantee of exactness.\”
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Do Markets Work for Bees?

President Obama has released a \”Presidential Memorandum — Creating a Federal Strategy to Promote the Health of Honey Bees and Other Pollinators\” (June 20, 2014). The report begins:

\”Pollinators contribute substantially to the economy of the United States and are vital to keeping fruits, nuts, and vegetables in our diets. Honey bee pollination alone adds more than $15 billion in value to agricultural crops each year in the United States. Over the past few decades, there has been a significant loss of pollinators, including honey bees, native bees, birds, bats, and butterflies, from the environment. The problem is serious and requires immediate attention to ensure the sustainability of our food production systems, avoid additional economic impact on the agricultural sector, and protect the health of the environment. … 

The continued loss of commercial honey bee colonies poses a threat to the economic stability of commercial beekeeping and pollination operations in the United States, which could have profound implications for agriculture and food. Severe yearly declines create concern that bee colony losses could reach a point from which the commercial pollination industry would not be able to adequately recover. The loss of native bees, which also play a key role in pollination of crops, is much less studied, but many native bee species are believed to be in decline. Scientists believe that bee losses are likely caused by a combination of stressors, including poor bee nutrition, loss of forage lands, parasites, pathogens, lack of genetic diversity, and exposure to pesticides.\”

Naturally, the proposed government solution is the creation of a Pollinator Health Task Force to create a National Pollinator Health Strategy, with representation from 17 different government agencies. We\’ll see how that goes in the next six months or so, when the strategy is supposedly due. In the meantime, few economists can read about a government strategy for the health of bees without contemplating how basic economic concepts have been applied to to bees and pollination–in a way that may have some lessons for the task force.

For economists, the theory of externalities had been around since the 1920s, expecially in the work of A.C. Pigou and his 1920 book, The Economics of Welfare. Basically, the notion is that situations can arise in economic production when private cost to the producer is not the same as social cost. For example, if a firm can emit pollution without restraint, then the firm bears no private cost of doing so, but society bears a social cost from that pollution. When this kind of \”externality\” arises, there can be a role for government to require (in this case) the firm to bear the cost of the pollution that it emits. However, a few decades after Pigou, economists had not identified many real-world examples of such divergences between private and social costs other that pollution.

In a 1952 article, James Meade suggested the example of bees living near an apple orchard (Economic Journal, \”External Economies and Diseconomies in a Competitive Situation\”). Meade argued that if an apple farmer considered increasing the size of the orchard, part of the benefit would be that nearby bees could produce more honey–but the apple farmer would not benefit from this additional honey, and thus had a reduced incentive to increase the size of the orchard. Similarly, if a beekeeper was considering an increase in the number of bees, part of the benefit would be greater pollination that would raise the size of the apple harvest–but the beekeeper had no way to benefit from a larger apple harvest, and thus had a reduced incentive to increase the number of bees.

In this situation, both apple farmers and beekeepers could benefit from expanding together, but acting individually, they had an inappropriately low incentive to do so. In Meade\’s scenario, their private benefits from expanding didn\’t match the social benefits of doing so. Meade saw this as an example of where government intervention in markets might be useful, writing that \”we can obtain formulae to show what subsidies and taxes must be imposed.\” A couple of generations of introductory economics teachers faithfully told stories to their students about how private markets would fail to work well in the case of apple orchards and bees.

However, in 1960 Ronald Coase published his famous article, \”The Problem of Social Cost\” (Journal of Law and Economics, October 1960, available at various places on the web including here). Coase pointed out that many problems of externalities could be considered in terms of property rights: In one famous example, if a farmer has a property right not to have sparks from a train engine set the fields afire, then the train will need to pay to reduce such sparks; if the train has a property right to emit sparks, then the farmer will need to pay to reduce the sparks. Thus, the government doesn\’t need to regulate sparks from trains: it only has to make the property rights clear, and let the parties act accordingly.

In 1973, Stephen Cheung applied Coase-style logic of property rights to \”The Fable of the Bees: An Economic Investigation\” (Journal of Law and Economics, April 1973, available various places including here). Cheung  pointed out that while Meade and others had interpreted the externality of bees as a reason for government subsidies and taxes, the actual real-life beekeeper industry had dealt with the issue through property rights. Cheung was writing from the University of Washington, close to actual apple-growing country. He noted, a bit acerbically:

It is easy to understand why the \”apples and bees\” example has enjoyed widespread popularity. It has freshness and charm: the pastoral scene, with its elfin image of bees collecting nectar from apple blossoms, has captured the imagination of economists and students alike. However, the universal credence given to the lighthearted fable is surprising; for in the United States, at least, contractual arrangements between farmers and beekeepers have long been routine. This paper investigates the pricing and contractual arrangements of the beekeeping industry in the state of Washington, the location having been selected because the Pacific Northwest is one of the largest apple-growing areas in the world.

Contrary to what most of us have thought, apple blossoms yield little or no honey. But it is true that bees provide valuable pollination services for apples and other plants, and that many other plants do yield lucrative honey crops. In any event, it will be shown that the observed pricing and contractual arrangements governing nectar and pollination services are consistent with efficient allocation of resources.

Much detail followed about how beekeepers actually move and locate their hives across different areas and crops throughout the year, along with the contractual arrangements beekeepers actually were reaching with farmers. In short, while economists like Meade were hypothesizing about how markets couldn\’t address the issues of bees, actual beekeepers in real market were signing contracts that seemed to address these problems just fine.

What about the modern problems with bees? In “Colony Collapse Disorder: The Market Response to Bee Disease,” Randal R. Rucker and Walter N. Thurman take a Cheung-like perspective in a 2012 paper written for the Property and Environment Research Center (PERC). From the overview: \”Too often it is presumed when reading about environmental issues in the doom-and-gloom media that
politicians are needed to save the day. In the case of colony collapse, luckily it never got to political intervention. As is often the case, the uncoordinated market quietly resolved what had been posited as a major crisis.\”

Colony collapse was a real problem. As Rucker and Thurman write (citations omitted):

In October 2006, David Hackenberg, a Pennsylvania beekeeper, took 3,000 honey bee (Apis mellifera) colonies to Florida for the winter. In mid-November, when he checked on the hives he had left in Tampa, he discovered that 360 out of 400 were practically empty—there were no adult bees in the hives and no dead bees in or near the hives. On further investigation, he found that roughly 2,000 of the hives he had taken to Florida had been wiped out. Hackenberg began making phone calls describing his losses, and within a week other beekeepers were reporting similar experiences. In February 2007, reports of this new bee affliction made national news and was christened Colony Collapse Disorder. … Between 2007 and 2011, approximately 30 percent of U.S. bees alive each fall failed to survive to pollinate blossoms in the spring. Widespread die-offs due to disease have long been recorded, but CCD has been worse than most.

Of course, colony collapse disorder quickly became a sort of Rorschach test for environmental policy, where just about any possible environmental problem was listed as a possible case of the bee problems.

Rucker and Thurman point out that outbreaks of bee disease are not new: reading their article is your chance to get up to speed on varroa mites, tracheal mites, the bacterial infection called American foulbrood, and the nosema and chalkbrood fungus. Colony collapse disorder doesn\’t seem to have a single cause, but two bee pathogens not previously active in the U.S. seem to be playing a role: in case you need to know, they are the Israeli Acute Paralysis Virus and and adult honey microsporidian parasite called Nosema ceranae.

The authors also point out that beekeepers lose some bees every winter, and so they often split healthy hives into two separate hives. If necessary, they can also buy or trade with other beekeepers for queens or additional bees. Replacing the losses from colony collapse disorder has thus imposed costs, but otherwise been fairly straightforward. As a result, the number of bee colonies was actually higher in 2009 than in 2006, ever after several years of colony collapse disorder.

The USDA collects information on the U.S. honey industry: for example, see Tables 46-48 in this 2014 report. Their data shows 2.6 million bee colonies in 2013, which is roughly the same total going back to the mid-1990s, and slightly higher than the totals in 2005 and 2006, before colony collapse disorder hit. The data also shows a decline in U.S. honey production from highs of about 220 million pounds for some years in the 1990s down to a little under 150 million pounds in 2011, 2012, and 2013. However, imported honey has been on the rise. U.S. honey import were in the range of 150-200 million pounds per year in the late 1990s, but have climbed to reach 323 million pounds in 2013. Of course, a rise in honey imports will compete with domestic supply. But given the higher costs of honey production while combating colony collapse disorder and continued strong demand, honey has risen sharply in price in the last few years, from about $1.00 per pound in 2005 and 2006 to over $2.00 per pound in 2013.

At least to me, all of this looks like markets in action: shocks to supply, producers finding ways to adjust, globalization of the product, production costs and demand interacting to affect price.  I am underconfident that the 17 agencies participating in the Pollinator Health Task Force, starting their deliberations a mere eight years after the problem became apparent, will add much value, although I\’m sure National Honey Board could use some support for its grant program to study bee health. Maybe the task force should have some actual private-sector beekeepers and pollination customers, not just government officials? Or is that crazy talk?

A lively December 2013 interview about economics and the bee industry with Walter Thurman, one of the authors of the PERC paper, is available here. The website also includes a variety of links to articles applying economic concepts to the bee industry.

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The Shifting U.S. Wealth Distribution

The wealth distribution is not the income distribution: wealth is the accumulation of assets over time, while income is typically measured as what a household receives during a year. No one should expect wealth to be equal at a point in time, because there is no reason to expect that the typical 55 or 60 year-old will have accumulated the same assets over time as the typical 25 or 30 year-old. But that said, when the overall distribution of wealth is shifting over time, it is a legitimate cause for concern.

Fabian T. Pfeffer, Sheldon Danziger and Robert F. Schoeni offer an overview of the evidence in \”Wealth Levels, Wealth Inequality, and the Great Recession,\” a short June 2014 \”Research Summary\” written for the Russell Sage Foundation. The more detailed research paper, \”Wealth Disparities Before and After the Great Recession,\” appeared last year in The ANNALS of the American Academy of Political and Social Science (November 2013, v. 650, pp. 98-123), which doesn\’t seem to be freely available on-line, although some readers will have access through library subscriptions.

Much of this research draws on data from the Panel Study of Income Dynamics, a fascinating data set that started with a nationally representative sample of 18,000 people in 5,000 families back in 1968, and since then has tracked that group of families over time, together with their children and grandchildren, and marriages and remarriages. The survey now covers about 9,000 families and 22,000 individuals. Thus, rather than taking snapshots of people over time, like most economic data, this PSID tracks households over time.

Here\’s the change in wealth over time based on PSID data. The data is shown by percentiles. Thus, the 95th percentile of the wealth distribution saw its wealth rise by more than 100% in inflation-adjusted dollars from 1984-2007, before a drop-off when the Great Recession hit.  The median household saw it\’s wealth rise by almost 50% from 1984 to 2007, but the decline in wealth since then means the median has less wealth today than in 1984. The 25th percentile doesn\’t have much wealth, and saw little change in its wealth from 1984 to about 2005, but then saw a drop with the Great Recession. Clearly, this pattern shows a greater dispersion of wealth over time.

However, in the research paper these authors point out that a different source for looking at the distribution of wealth, the Survey of Consumer Finances done o has somewhat different findings for those at the bottom of the wealth distribution. The SCF is done opnce every three years for the Federal Reserve, and it is a nationally representative survey that looks at about 6,500 households–although it looks at different ones each time.

This chart is one I created by cutting a few columns  from the chart in their paper, for ease of readability. Notice that both sources of data show a similar rise in wealth inequality over time as measured by the Gini coefficient. The other measures of inequality are percentile ratios. For example, the first row looks at the ratio of wealth for the 50th percentile compared to the 25th percentile: that ratio was 8.7 in 2003, but rose to 31.3 by 2010, according to the PSID data. What jumps out at me from this table is that the percentile ratios are fairly similar in both data sets if one is comparing to the 50th percentile or the 75th percentile but the inequalities look much larger in the PSID when comparing to the 25th percentile.

My guess is that this difference is less meaningful than it looks. Consider a hypothetical example. Say that the 95th percentile of has wealth of 1000, while the 25th percentile of has wealth of 10–so the ratio is 100:1 (roughly similar to the PSID ratio for 2003). Now the wealth for the 95th percentile rises to 1600, while the wealth of the 25th percentile falls to 2. Now the ratio is 800:1. But notice that if the 25th percentile had only fallen to, say, 5, then the ratio would have been 320:1. In other words, those at the 25th percentile have close to zero wealth. And when you are dividing by a small number, when that small number goes up and down by amounts that are high in percentage terms but small in absolute value, the ratio will also jump around considerably. The PSID and the SCF data are clearly different for the 25th percentile, but in absolute levels, both are close to zero and small. The basic story of rising inequality of wealth doesn\’t change much.

In the short term of a few years, like the time from the Great Recession to the present, the distribution of wealth is essentially driven by the value of people\’s assets: both financial assets and housing prices. No income group has recovered from the negative effects of the Great Recession on wealth. But those at higher wealth levels were already ahead of the game, and those with near-zero wealth levels are even farther behind.

conversableeconomist

Administrators Take Over Academia

Some decades ago, institutions of higher education used to follow a philosophy of \”faculty governance,\” which was that the faculty of the school–especially the tenured faculty–took the lead in running the institution. But at many places, that philosophy has been on life-support for decades. Consider these comments from economist Barbara Bergmann from almost a quarter-century ago in 1991, when she was president of the American Association of University Professors (AAUP).

Undetected, unprotested, and unchecked, the excessive growth of administrative expenditures has done a lot of damage to life and learning on our campuses. On each campus that suffers from this disease, and most apparently do, millions of dollars have been swallowed up. Huge amounts have been devoted to funding administrative positions that a few years ago would have been thought unnecessary. If it were just a matter of the money wasted, that would be bad enough. But the bloating of college administrations over the past decades has made administrative performance worse rather than better. It has bogged us down in reels of time-consuming and despair-creating red tape. It has
fostered delusions of grandeur among some of the administrative higher-ups, whose egos have grown along with the size of the staffs under their supervision.

John W. Curtis and Saranna Thornton quote Bergmann in their recent essay \”Losing Focus: The Annual Report on the Status of the Profession, 2013-14,\” published in the March-April 2014 issue of Academe

(which is published by the AAUP). The essay has lots of detail about salary increases, the role of sports in the budgets of higher education, and more. Here, consider two figures. 
The first shows percentage change in number of employees at higher education institutions from from 1975-76 up to 2011. The U.S. government statistics are that the enrollment in post-secondary education was 8.8 million in Fall 1975, and 21.8 million in Fall 2013 (see Table 3 in this issue of the Digest of Education Statistics)–an increase in enrollments of about 150%. How did the higher education sector respond to this more-than-doubling of enrollment? Well, the part-time faculty rose by 286%, non-tenure-track full-time faculty rose by 259%, and full-time nonfaculty professionals rose by 369%, and full-time executives rose by 141%. Meanwhile, the full-time tenured and tenure-track faculty, who are theoretically at the heart of a philosophy of faculty governance, increased by 23%. 
As the share of tenured faculty members has fallen and the share of non-faculty employees of higher education has risen, pay raises have followed. This figure is divided into public and private schools, but the overall pattern is similar. The total pay raises for professors, associate professors and assistant professors from the late 1970s up to the present have lagged well behind the pay raises for those at the top of the administrative hierarchy. 
Institutions are made up of groups of people, and when some groups become relatively larger and better-paid than other groups, the balance of power in the institution shifts. Bergmann was already concerned about excessive growth of administration in higher education a quarter-century ago. Many faculty at institutions of higher education have been quite willing to hand over the reins of steering their institutions to non-faculty professionals, and instead to retreat to their research and their classrooms. Many administrators have been quite willing to take up those reins. The role of tenure-track faculty in higher education has diminished, and the role of administrators has increased. For those who would like more detail, a February 7, 2014, post with a similar theme is here. 

conversableeconomist

Expanding Apprenticeships

It\’s a commonplace of the education world that not all students learn the same way. Some learn by reading, some by conversation, some by writing notes. Some learn better as individuals; some do better in groups. And it\’s time for the U.S. to recognize that some would learn better if we got them out of the existing school system and involved in apprenticeships. Robert I. Lerman lays out the issues and possibilities in \”Expanding Apprenticeship Opportunities in the United States.\”

What Lerman means by \”apprenticeships\” are a program where in the last couple of years of high school, students would apply for a program where they would complete high school, and maybe get a few college credits, while taking classes but also working about 2,000 hours (that is, the equivalent of 50 weeks of 40 hour workweeks, spread over a couple of years). Here are some of Lerman\’s points that caught my eye (citations omitted):

\”Despite the well-documented high average returns to college, variations in interests, capacities, and learning styles suggest many young people would benefit far more from alternative pathways to rewarding careers than  they do from academic-only pathways. …

\”Today apprentices make up only 0.2 percent of the U.S. labor force, far less than in Canada (2.2 percent), Britain (2.7 percent), and Australia and Germany (3.7 percent). In addition, government spending on apprenticeship programs is tiny compared with spending by other countries and spending on less-effective career and community college systems that provide education and training for specific occupations. While total annual government funding for apprenticeship in the United States is only about $100 to $400 per apprentice, federal, state, and local annual government spending per participant
for two-year public colleges is approximately $11,400. Not only are government outlays sharply higher, but the cost differentials are even greater after accounting for the higher earnings (and associated taxes) of apprentices compared to college students. Given these data, at least some of the low apprenticeship penetration can be attributed to a lack of public effort in promoting and supporting apprenticeship and to heavy subsidies for alternatives to apprenticeship. …

\”Unlike programs in Austria, Germany, and Switzerland, the  apprenticeship system in the United States is almost entirely divorced from high schools and serves very few workers under the age of twenty-five. …

\”Only a few states, notably Georgia and Wisconsin, now operate youth apprenticeship programs that provide opportunities to youth ages sixteen to nineteen. State funding pays for coordinators in local school systems and sometimes for required courses not offered in high schools. In Georgia, 143 out of 195 school systems currently participate in the apprenticeship program, serving a total of 6,776 students. These apprentices engage in at least 2,000 hours of work-based earning, as well as 144 hours of related classroom instruction. The Wisconsin program includes one-year to two-year options for nearly 2,000 high school juniors and seniors, requiring from 450 to 900 hours in work-based learning and two to four related occupational courses. The program draws on industry skill standards and awards completers with a  Certificate of Occupational Proficiency in the relevant field. Some students also receive technical college academic credit. In Georgia, the industry sectors offering apprenticeship range  from business, marketing, and information management to health and human services and technology and engineering. The Wisconsin youth apprenticeship programs are in food and natural resources, architecture and construction, finance,  health sciences, tourism, information technology, distribution  and logistics, and manufacturing. …

Two studies of the earnings gains of apprentices and government costs in the United States find that the social benefits outweigh the social and government costs by ratios of 20:1 to 30:1 … 

Britain’s success in expanding apprenticeship positions from about 150,000 in 2007 to over 850,000 in 2013 offers one example for how to create successful national and decentralized marketing initiatives. …  Stimulating a sufficient increase in apprenticeship slots is the most important challenge. Although it is easy to cite examples  of employer reluctance to train, the evidence from South Carolina and Britain suggests that a sustained, business-oriented  marketing effort can persuade a large number of employers to participate in apprenticeship training. Both programs were able to more than quadruple apprenticeship offers over about five to six years. … Compared to expanding the demand for apprentices, increasing supply by attracting sufficient applicants for apprenticeship is likely to be relatively easy.

For previous posts on apprenticeships, see \”Apprenticeships for the U.S. Economy\” (October 18, 2011),  \”Taking Apprenticeships Seriously\” (February 18, 2013), and \”Apprenticeships: Connecting Young Adults to Jobs\” (September 11, 2013).

Lerman\’s proposal is one of 14 appearing in an e-book called Policies to Address Poverty in America, edited by Melissa S. Kearney and Benjamin H. Harris and published by the Hamilton Project at the Brookings Institution. Each policy proposal is written by an expert in the field, and while the proposal themselves are short and readable, the footnotes and citations are available for those who want a deeper dive. Here\’s the list of topics:

  • Proposal 1. Expanding Preschool Access For Disadvantaged Children 
  • Proposal 2. Addressing The Parenting Divide To Promote Early Childhood Development For Disadvantaged Children 
  • Proposal 3. Reducing Unintended Pregnancies For Low-Income Women 
  • Proposal 4. Designing Effective Mentoring Programs For Disadvantaged Youth 
  • Proposal 5. Expanding Summer Employment Opportunities For Low-Income Youth 
  • Proposal 6. Addressing the Academic Barriers To Higher Education 
  • Proposal 7. Expanding Apprenticeship Opportunities in the United States 
  • Proposal 8. Improving Employment Outcomes For Disadvantaged Students 
  • Proposal 9. Providing Disadvantaged Workers With Skills To Succeed in the Labor Market 
  • Proposal 10. Supporting Low-Income Workers Through Refundable Child-Care Credits 
  • Proposal 11. Building On The Success of the Earned Income Tax Credit 
  • Proposal 12. Encouraging Work Sharing To Reduce Unemployment 
  • Proposal 13. Designing Thoughtful Minimum Wage Policy at the State and Local Levels 
  • Proposal 14. Smarter, Better, Faster: The Potential For Predictive Analytics and Rapid-Cycle Evaluation To Improve Program Development And Outcomes 
conversableeconomist

Melting Pot, Salad Bowl, Chocolate Fondue

Here\’s an opinion piece with a Fourth of July spirit that I wrote for the (Minnesota) Star Tribune newspaper. It was published on Sunday, June 29, 2013.
\”Analogies for America: Beyond the Melting Pot\”
 Timothy Taylor

Melting pot or salad bowl? For decades now, these two contestants have been slugging it out in the contest for most appropriate metaphor for how the cultures and ethnicities of America fit together. But my preference is to think of America as chocolate fondue.
The popularization of “the melting pot” metaphor is usually traced to a soppy, sentimental and very popular play of that name by an immigrant named Israel Zangwill that opened in Washington in 1908. The melting pot metaphor is a way of expressing “E pluribus unum” — “Out of many, one” — the already old saying adopted in 1782 for the Great Seal of the United States (and which you can see on the back of the $1 bill). “E pluribus unum” has also been imprinted on U.S. coins since the 18th century.
The traditional criticism about the melting pot was that what is special about American culture isn’t its homogeneity, but rather its ability to absorb the elements of many cultures, then pass them around to everyone. For example, as John F. Kennedy wrote in his 1958 book, “A Nation of Immigrants”: “One writer has suggested that a ‘typical American menu’ might include some of the following dishes: ‘Irish stew, chop suey, goulash, chile con carne, ravioli, knockwurst mit sauerkraut, Yorkshire pudding, Welsh rarebit, borscht, gefilte fish, Spanish omelette, caviar, mayonnaise, antipasto, baumkuchen, English muffins, gruyère cheese, Danish pastry, Canadian bacon, hot tamales, wienerschnitzel, petit fours, spumoni, bouillabaisse, mate, scones, Turkish coffee, minestrone, filet mignon.’ ”
In our multicultural and individualist age, the common complaint is that the metaphor says that Americans should surrender our cultural and ethnic identities. This critique strikes me as overwrought. Yes, the culture of the country where you live is constraining. But what’s distinctive about modern America is the looseness of these constraints, and the array of available choices.
However, it does bother me that the melting pot metaphor is a relic of a bygone time, when melting different metals together was a common for many industrial workers. It also bothers me that melting different metals together produces a desired outcome only if you adhere to a formula. Bronze is copper and tin. Brass is copper and zinc. If you just dump different metals into a melting pot, what comes out is likely to be flawed and brittle, not strong or useful. When supporters of the melting pot metaphor start talking, it often turns out that they have a clear mental formula for what it means to be American — and it isn’t always my formula.

The notion of America as a salad bowl seems to have been popularized by the eminent historian Carl Degler. His book “Out of Our Past: The Forces that Shaped Modern America” was a commonly used textbook from the 1950s up through the 1980s. In the 1959 edition, he wrote: “[S]ome habits from the old country were not discarded; in those instances the children of immigrants even into the third and fourth generations retained their differences. In view of such failure to melt and fuse, the metaphor of the melting pot is unfortunate and misleading. A more accurate analogy would be a salad bowl, for, although the salad is an entity, the lettuce can still be distinguished from the chicory, the tomatoes from the cabbage.”
While the salad bowl metaphor has a healthy, crunchy “eat your vegetables” ring to it, it seems awkward to me as well. After all, who is the pale and crunchy iceberg lettuce? Who is arugula? Who are the artificial bacon bits? Who are anchovies? Salad ingredients are not all created equal.
Salad is always falling apart, and you can almost never get all of the ingredients, in just the right proportions, into your mouth at the same time. Imagine the oversized modern salad bar, with multiple kinds of lettuces and vegetables, but also seeds and nuts, tuna salad, slices of chicken or ham, bean salad, hard-boiled eggs, crackers and popcorn, along with choice of soup and dessert. It misses what is cohesive and distinctive about America to see the country as a long buffet of ingredients, which we all choose to exclude or include according to our transient appetites of day.
My own suggestion is that America is chocolate fondue. Our different cultural and ethnic backgrounds are the strawberries, pineapple, and cherries, the graham crackers and cookies, the pound cake and brownies, the rice crispy treats and marshmallows, the popcorn and the peppermint sticks. Then we are dipped in America. We swim in America. We are coated in America. Because Americans can and do come from all ethnicities and races, we all look like Americans.
Of course, chocolate doesn’t always deliver on its promise. It can become grainy, rancid, burnt and bitter. Some people have no taste for chocolate, or are even allergic to it. America has often not lived up to its promises and ideals. But when I think consider all the human beings who have ever lived, in all the different places and times around the world, I feel profoundly fortunate to be living in modern America.
There’s an old story about when heavyweight boxing champion Joe Louis decided to enlist in the U.S. Army in 1942. A friend of his objected, and said: “It’s a white man’s Army, Joe, not a black man’s Army.” But Joe Louis had observed the Nazi propaganda machine close up, as the result of his two epic fights against the German Max Schmeling (who was not a Nazi, but whom the Nazis attempted to exploit). So Louis told his friend: “Lots of things wrong with America, but Hitler ain’t going to fix them.”
In that spirit, I’d say lots of things are wrong with America, but often, the best answers for what’s wrong with America are a bigger dose of what’s right with America. On the Fourth of July, I choose to sit with family and friends, and to savor the textures and sweetness of our shared American experience.
————
Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at ­Macalester College in St. Paul. He blogs at http://conversableeconomist.blogspot.com.