Year: 2014

At least since the writing of David Ricardo in the early 19th century, economists have taught their little lessons about the potential economic benefits of trade with examples that used goods. Ricardo\’s famous illustration of comparative advantage involved production of wine and cloth. Generations of modern textbooks have written about oil and wheat, cars and computers, and many other pairs of goods. But the notion of international trade as involving physical goods is eroding. Prakash Loungani and Saurabh Mishra lay out some of the patterns in \”Not Your Father’s
Service Sector,\” appearing in the June 2014 issue of Finance & Development.

The basic story is that the revolution in information and communications technology has broken the old geographic bonds, where a service needed to be consumed where it was produced. Now, a wide array of services to be carried out in one place and consumed elsewhere. Loungani and Mishra write:

Using telecommunication networks, service products can be transported almost instantly over long distances. The range of service activities that can be digitized and globalized is expanding, from the processing of insurance claims and tax payments to the transcription of medical records to the provision of education via online courses. . . .And advanced market firms are stripping out the more standardized portions of their high value–added activities and relocating them to emerging market economies. Witness mushrooming business consulting and knowledge-processing offices and the boom in e-commerce and online retailers in emerging markets across the Middle East, Brazil, China, India, and Singapore. . . . The good news is that the spread of the service sector—and of service exports—in developing economies has outstripped the oft-cited example of information technology growth in India. Think of the mobile revolution that has transformed financial services in many countries in Africa, the Nigerian film industry, game design in Cambodia, accounting services in Sri Lanka, and human resources–processing firms in Abu Dhabi.

Trade in services has been growing almost three times as fast as trade in goods over the last decade or so. \”Though measuring services trade is difficult, it appears that developing economies’ share in world service exports increased from about 14 percent in 1990 to 25 percent in 2011.\”

Along with the developments in information and communications technology, the other big change is that services are in the process of becoming a bigger share of the overall value even for  many products that are sold as physical goods. Loungani and Mishra quote the old Silicon Valley line that
“70 percent of hardware is software.” They also point out that, in a truly ugly neologism, some writers have labelled this change as the “servitization of manufacturing.”

This argument is often phrased in terms of the \”smile\” diagram credited to management
guru Ram Mudambi. It suggests that companies will set up production chains within and across national borders depending on the amount of value created at different stages of production. Mudambi argues that for modern manufactured good, much of the value-added for the final product is created in the early stages of R&D, design and commercialization,and in the late stages of marketing, logistics, and after-sales services.

As global trade shifts to a greater emphasis on services, I suspect that it will begin to change the fundamental ways in which we think about what international trade means.

Global supply chains in services are enabled by information technology, not by ports, planes, trains and highways. Trade in services may be able to shift very rapidly: after all, if a company is buying a service to be delivered on-line, it may have  allegiance to the geographic location where that service is being performed. As the capabilities of information technology increase, and the speed and clarity and immediacy of online connections deepen, my suspicion is that many types of production will end up being divided and subdivided between locations in ways we have not yet begun to imagine.

And ultimately, I expect that the growth in services trade will reduce pressures for protectionism. Instead of talking about hypothetical trade in hypothetical completed goods–like cars and computers–it will become clear that portions of the value-added are often being created in different places. Pushing for trade protectionism in the name of specific products made in other countries like cars or steel or televisions is one thing, but I\’m not sure any similar protectionist movement will form to prevent, say, insurance record-keeping or checking diagnostic X-rays from happening in another country. In addition, countries will need to be wary of placing tariffs or other restrictions on imports, because many imports will be part of a global production chain, and domestic produces will be quick to point out how inhibiting their access to those global connections will injure the domestic economy.

Consider five low-carbon energy sources: solar, wind, hydroelectric, nuclear, and natural gas. Which ones offer is the most cost-effective way to reduce carbon emissions? Charles R. Frank, Jr., ranks natural gas first, and wind and solar last in \”The Net Benefits of Low and No-Carbon Electricity Technologies,\” written as Working Paper 73 for Global Economy & Development at the Brookings Institution (May 2014). Frank summarizes:

[A]ssuming reductions in carbon emissions are valued at $50 per metric ton and the price of natural gas is $16 per million Btu or less—nuclear, hydro, and natural gas combined cycle have far more net benefits than either wind or solar. This is the case because solar and wind facilities suffer from a very high capacity cost per megawatt, very low capacity factors and low reliability, which result in low avoided emissions and low avoided energy cost per dollar invested.

Frank\’s approach takes off from here: \”The benefits of a new electricity project are its avoided carbon dioxide emissions, avoided energy costs [that is, cost of fuel] and avoided capacity costs.\” For a summary of Frank\’s approach, consider this table, which shows the benefits and costs in these three categories. Notice that that the benefits and costs are measured per megawatt of electricity generated, and the changes are expresses relative to producing a megawatt less by burning coal.

The key factor in these calculations is that wind and solar run at much lower capacity than do hydro, nuclear, and combined cycle natural gas. (\”Combined cycle\” means that the power plant \”utilizes both a gas turbine and a steam turbine to produce electricity. The waste heat from the gas turbine burning natural gas to produce electricity is utilized to heat water and produce steam for the steam turbine to produce additional electricity.\”) As a result, you need to build a lot more solar or wind capacity to generate the same amount of electricity. Frank explains:

For example, adjusting U.S. solar and wind capacity factors to take account of lack of reliability, we estimate that it would take 7.30 MW of solar capacity, costing roughly four times as much per MW to produce the same electrical output with the same degree of reliability as a baseload gas combined cycle plant. It requires an investment of approximately $29 million in utility-scale solar capacity to produce the same output with the same reliability as a $1 million investment in gas combined cycle. Reductions in the price of solar photovoltaic panels have reduced costs for utility-scale solar plants, but photovoltaic panels account for only a fraction of the cost of a solar plant. Thus such price reductions are unlikely to make solar power competitive with other electricity technologies without government subsidies.

Wind plants are far more economical in reducing emissions than solar plants, but much less economical than hydro, nuclear and gas combined cycle plants. Wind plants can operate at a capacity factor of 30 percent or more and cost about twice as much per MW to build as a gas combined cycle plant. Taking account of the lack of wind reliability, it takes an investment of approximately $10 million in wind plants to produce the same amount of electricity with the same reliability as a $1 million investment in gas combined cycle plants.

Thus, when you adjust for the ability of the power plant to produce the same amount of electricity, the benefits of fewer carbon emissions, less need for fuel, and benefits from replacing capacity look much lower for solar and wind. Notice that this conclusion holds true even though the carbon emissions and costs of new energy from the solar and wind facilities are estimated as zero.

For some other recent posts on U.S. energy issues, see \”The U.S. Energy Picture\” (June 2, 2014), \”Comparing Electricity Production Costs: Fossil Fuels, Wind, Solar\” (April 24, 2014), and
\”Clean Energy: A Global Perspective\” (April 26, 2013).

It\’s a simple question: How well does the scientific research on health care issues match up with what health conditions impose the highest costs on people? James A. Evans, Jae-Mahn Shim, and John P. A. Ioannidis tackle this question in \”Attention to Local Health Burden and the Global
Disparity of Health Research,\” which appears in the April 2014 issue of PLOS One.

They make a plausible case that health care R&D is not correlated with actual health condisions. Measure the amount of health care R&D effort by looking at the number of research articles published in that area, labelled on the right-hand axis. Measure the effect of various health care problems by looking at estimates from the World Health Organzation on DALYs–which stands for disability-adjusted life years, on the left-hand axis. The idea of DALYs is not just to measure lives lost, but also to measure health costs that might, for example, result in losing half of one\’s ability work in a given year. The figure shows that these measures of actual health conditions and medical R&D do not line up well.

Of course, one wouldn\’t expect the correlation to be perfect. At any given time, some scientific areas are surely more \”ripe\” for discoveries than others. Making substantial progress against a disease with a smaller footprint beats making little or no progress against a disease with a larger footprint. But still, a correlation of essentially zero between health conditions and medical research should raise some eyebrows.

The authors argue that health care research tends to follow what is geographically common near that health care research, which is a nice polite way of saying that most health care research is in high-income countries and focuses on the health problems most common in high-income countries. Here are some differences in the burden of disease profiles across countries:

For example, consider the relative burden of infectious and malignant neoplasms (cancers) in rich and poor countries. Infectious diseases like diarrheal diseases, malaria and HIV naturally levy a much higher toll in less developed countries, while cancers incur a larger burden in more developed countries with longer life spans. Respiratory infections, perinatal conditions and injuries disproportionately afflict less developed countries, while neuro-psychiatric conditions like depression and schizophrenia and musculoskeletal diseases like arthritis and back pain represent a greater burden in wealthy countries. Note the conditions that most afflict poor populations only lightly affect the rich (e.g., infectious diseases, respiratory infections, perinatal conditions), while diseases that most afflict rich populations also levy a substantial toll on poor ones (e.g., cancers, neuro-psychiatric and musculoskeletal disorders). . . .

[M]alaria, tetanus, Chagas disease, measles, Vitamin A deficiency, lymphatic filariasis, schistosomiasis, and diphtheria most disproportionately afflict poor populations. Other conditions also inflict a greater burden in less developed countries, including fires, violence, drowning, and poisoning, as also glaucoma, peptic ulcers and ear infections.

The authors raise a potentially deeper problem as well: \”Not only environmental but the biological context of disease is likely to be different in less developed countries.\” An understanding of certain disease based on the populations and environmental conditions of high-income countries may be only partly transferable to the occurrence of that same disease in low-income countries.

It seems clear that medical research is, to a considerable extent, chasing market size, not disease burden. When you consider the number of advertisements for treatments to grow hair or to improve the sex lives of older men, who can doubt it?

I\’m usually opposed to book-burning, but I\’ve recently discovered that Haverford College, where I graduated in 1982, used to have a tradition of book-burning that seems to me admirable and even enviable. It worked like this: Back in the 1880s, the sophomore class was responsible for choosing their least favorite book. They then planned an elaborate ceremony–marches, costumes, songs–to be held near the end of the academic year. A common highlight of the ceremony was that the worst book was put on trial, with arguments for and against, and when the inevitable conviction was announced, a copy of the book was burned at the stake. Of course, the fact that a book was convicted and executed one year didn\’t mean that students were able to avoid reading it the next year.

Some details are available at at a website run by the Quaker and Special Collections part of the Haverford Library. Here\’s one of the invitations to the event (the pointing fingers are added to the image by the librarians, and at the website they link to comments and translations):

When Americans consider the costs and benefits of policy actions, should we also be counting costs and benefits for people  in other countries? Ted Gayer and W. Kip Viscusi point out in \”Determining the Proper Scope of Climate Change Benefits,\” (June 3, 2014) that U.S. environmental regulators seem to have started counting global benefits when looking at costs and benefits of U.S. policies with regard to climate change.

Of course, any benefits from reducing climate change have global effect. Gayer and Viscusi refer to one which estimated that for a global reduction in the effects of climate change, the United States would receive 7-10% of the benefits. They point out that if the U.S. benefited relative to it share of world GDP, it would receive 23% of the benefits from reducing effects of climate change. Here\’s a recent example comparing global benefits to domestic costs (footnotes omitted):

More recently, the EPA proposed regulations to limit CO2 from existing power plants.
For this rule, EPA estimated climate benefits amounting to $30 billion in 2030 using a 3 percent discount rate. However, assessing these benefits in a manner that is consistent with the methodology developed by the Working Group, only 7 to 23 percent of these benefits would be domestic benefits. As a result, the domestic benefits amount is only $2.1 billion-$6.9 billion, which is less than the estimated compliance costs for the rule of $7.3 billion. (Note, however, that EPA also claims substantial air-pollution co-benefits for this rule, associated with reductions in particulate matter and ozone.)

In other words, the estimates are that the global benefits of the rule exceed the costs, but the U.S. benefits are much smaller, and may possibly (depending on how other factors are counted) not exceed the costs.

This concept of counting global benefits of U.S. regulatory actions is a clear departure from established practice. U.S. environmental laws and guidance for regulations are quite careful to specify that the cost-benefit calculations should be done for Americans. Explicit guidance for regulatory authorities from President Obama, as from previous presidents, has emphasized that they are to consider costs and benefits for \”the American people.\”As once example, Gayer and Viscusi write:

Subsequently, the U.S. Office of Management and Budget (OMB) developed a guidance document (known as Circular A-4) for regulatory impact analyses that maintained an emphasis on domestic benefits but permitted the reporting of foreign benefits if reported separately: “Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.”

But even if this practice of counting global benefits in the cost-benefit calculation is a departure from the norm, should it become standard practice? Or is it the kind of practice that will only be followed when convenient? The practice of counting global effects in U.S. government cost-benefit decisions raises some tricky issues. As Gayer and Viscusi point out, if U.S. government actions are to take benefits to foreign citizens into account on a regular basis, the policy implications could be striking.

It is important to note that granting the GHG [greenhouse gas] benefits to non-citizens equally to the benefits to citizens represents a dramatic shift in policy, and if applied broadly to all policies, would substantially shift the allocation of societal resources. The global perspective would likely shift immigration policy to one of entirely open borders, as the benefits to granting citizenship to poor immigrants from around the world would dominate any costs to current U.S. citizens. It would suggest a shift away from transfers to low-income U.S. citizens towards transfers to much lower-income non-U.S. citizens, elevating policy challenges such as eradicating famine and disease in Africa to the most pressing concerns for U.S. policymakers, trumping most domestic efforts in terms of their impact on social welfare. And a shift in policy towards fully counting the costs and benefits towards citizens of all other countries would suggest a drastic change in defense policy. A shift in policies to foster such efforts, while in many cases worthwhile, would not be consistent with the preferences of the U.S. citizens who are bearing the cost of such programs and whose political support is required to maintain such efforts.

It\’s easy to imagine other difficult situations that would arise. Imagine that U.S. environmental standards are tightened, and that as a result some U.S. companies decide to locate their manufacturing elsewhere. In this case, the economic gains received in other countries would be counted as a plus for the policy, which would presumably could be used to offset any economic costs the policy created in the U.S. economy.

Even if one takes the reasonable position that the U.S should give weight to benefits and costs incurred in other countries, there is a question of who determines how much weight will be given. Imagine a U.S. law which requires that U.S. companies abroad operate in a way that has certain standards for lower pollution, worker safety, not bribing public officials, and the like. Now also imagine that the other country would prefer not to have such laws, or to have lower standards. If the government of another country does not favor such laws, does the U.S. claim that people of that country gain anyway?

Economists often work with models that assume a diminishing marginal utility of of income: that is, gains or losses to people with low levels of income should have more social value than same-sized gains or losses to those which higher levels of income. (For example, this is the standard justification why society should favor a degree of redistribution, because the social cost of transferring a certain amount of income from those with higher incomes is less than the social benefit received by the recipients who have lower incomes.) But if this kind of cost-benefit analysis is to be applied to the world as a whole, costs and benefits in low-income countries will receive a greater weight than costs and benefits of the same size in high-income countries.

It seems to me that as a practical matter, the current federal rules about evaluating costs and benefits of government regulatory policies are correct: that is, evaluate them first in terms of effects on U.S. citizens, and if there are also effects on the rest of the world, by all means list them–but list the non-U.S. effects separately.

Bayer and Viscusi write: \”The question of whose preferences are to be counted in the calculation of net benefits is known as standing. There has been limited academic discussion about economic standing, with the more recent studies suggesting that standing cannot be resolved based on principles of benefit-cost analysis but instead depends on the ethical consensus of society …\” Of course, this is both true and a way for economists to make sure that the buck does not stop with them, but instead is handed off to \”the ethical consensus of society.\”

Epilogue: When thinking about how people regard their own well-being, in comparison to how they regard the well-being of people who live in faraway places, I always remember the comment by Adam Smith in his first book, The Moral Sentiments (Chapter III, Part III), where he points out
that for most people, losing your little finger would feel like a much larger calamity than the death of hundreds of millions of people in a faraway place like China. (Here, I quote from the ever-useful version of the book at the Library of Economics and Liberty website.)

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

Smith goes on to argue that people should and in fact do care about those who live elsewhere. I would add that governments should care about those in other places, too. But whether it\’s the case of climate change, or some other issue, it\’s important first to be clear on whether U.S. policies have benefits that exceed costs for the U.S. population, and then to look at the global dimensions.

In August 2013, the Federal Reserve Board of Governors, the key decision-making authority, had a full complement of seven members. Since then, four of them have resigned and one had their term in office expire, meaning that President Obama has found himself with a need to fill five slots. Here\’s the membership from August 2013:

• Ben Bernanke  (chairman, resigned January 31, 2014)
• Janet Yellen (vice-chair, became chairman on February 3, 2014)
• Elizabeth Duke (resigned August 31, 2013)
• Sarah Bloom Raskin (resigned March 13, 2014)
• Daniel Tarullo (term expires January 31, 2022)
• Jeremy Stein (resigned May 28, 2014)
• Jerome Powell (appointed in 2012 to a term that expired January 31, 2014) 

The prospect of having one president appoint five of the seven positions on the Board of Governors at about the same time is not how this institution is supposed to work.  Each member of the Board of Governors is appointed to a 14-year nonrenewable term, with confirmation required by the U.S. Senate. This pattern is intended to guarantee that the president can make a new appointment once every two years.

But the reality of terms and appointments to the Fed has one key difference from how it is drawn up on paper. People often leave terms early–that is, in less than 14 years. In that case, the replacement appointee serves out the remainder of that term, and the replacement then can be appointed to their own 14-year term after that. For example, Alan Greenspan first joined the Federal Reserve Board of Governors in 1987 and served out the remainder of the term that expired in 1992, before then being appointed to his own 14-year term which expired in 2006. Ben Bernanke was filling out a partially completed term at the Fed when he was a member from 2002-2005, but was then appointed to his own 14-year term in 2006.

So far, President Obama has appointed Stanley Fischer, who was confirmed by the U.S. Senate for a spot on the Board of Governors on May 28, but needs to be confirmed again to become vice-chair. The president has sent the Senate two other nominations: one for Jerome Powell to begin his own 14-year term, and Lael Brainerd, who had been undersecretary of international affairs at the U.S. Treasury. Powell and Brainerd are wending their way toward confirmation votes before the U.S. Senate. But even if or when they are confirmed, two of the seven slots on the Board of Governors will be empty. [Added: Powell and Brainerd were confirmed by the Senate today, June 12.]

The Federal Reserve has highly competent staff, and it can certainly continue to operate with its current complement of three official members (or four, given that Powell is continuing to serve while waiting to be confirmed to a new term). But the rationale for a seven-member board rotating on a 14-year cycle is that debate and discussion among a cohesive group are important to diagnosing the economy and to making policy decisions in this area, and that there is a value in continuity of experience with a slow and occasional inflow of fresh voices.

The Fed faces a number of tough decisions in the next few years: when and how to back away from policies of quantitative easing and return interest rates to more historically normal levels; how to deal with its new regulatory and consumer protection responsibilities in the aftermath of the Dodd-Frank financial reform legislation; and more broadly how to think about U.S. monetary policy in a globalizing economy where the euro is a soap opera and the U.S. economy is a decreasing share of world output. Although the new arrivals at the Board of Governors are certain to have background experience in at least some aspects of central bank operations already, the only way to accumulate experience on the job is actually to do the job.

There\’s no particular blame to be placed here for the high level of turnover at the Fed. But it\’s not how the institution is supposed to work. Here\’s my pledge: In the extremely off-chance that I am nominated to fill one of the vacant Board of Governor slots, I will only accept with the intention of serving the full 14-year term.

Yu Xie asks \”Is U.S. Science in Decline?\” in the Spring 2014 Issues in Science and Technology. The article is an abbreviated version of the Henry and David Bryna Lecture for 2013 that Xie gave at the National Research Council. The talk can be viewed here, and I\’ll lift a few of the slides from the talk for this post. As an overall perspective, Xie writes:

\”Science is now entering a new world order and may have changed forever. In this new world order, U.S. science will remain a leader but not in the unchallenged position of dominance it has held in the past. In the future, there will no longer be one major world center of science but multiple centers. As more scientists in countries such as China and India actively participate in research, the world of science is becoming globalized as a single world community. . . .Just because science is getting better in other countries, this does not mean that it’s getting worse in the United States. One can imagine U.S. science as a racecar driver, leading the pack and for the most part maintaining speed, but anxiously checking the rearview mirror as other cars gain in the background, terrified of being overtaken. Science, however, is not an auto race with a clear finish line, nor does it have only one winner. On the contrary, science has a long history as the collective enterprise of the entire human race. In most areas, scientists around the world have learned from U.S. scientists and vice versa. In some ways, U.S. science may have been too successful for its own good, as its advancements have improved the lives of people in other nations, some of which have become competitors for scientific dominance.\”

[O]ur analysis of earnings using data from the U.S. decennial censuses revealed that scientists’ earnings have grown very slowly, falling further behind those of other high-status professionals such as doctors and lawyers. This unfavorable trend is particularly pronounced for scientists at the doctoral level. . . . [S]cientists who seek academic appointments now face greater challenges. Tenure-track positions are in short supply relative to the number of new scientists with doctoral training seeking such positions. As a result, more and more young scientists are now forced to take temporary postdoctoral appointments before finding permanent jobs. Job prospects are particularly poor in biomedical science . . .

At some deeper level, however, Xie\’s article doesn\’t quite come to grips with fundamental problem. Many people support public funding for scientific research because they believe that it will translate into a stronger U.S. economy, along with better-paying jobs and a rising standard of living over time. This argument as a strong historical foundation: that is, there are many examples in the U.S. and in other countries where scientist and industry interacted in this way. But in a globalizing economy, the linkage from science to the economy is less clear. If a new scientific discovery leads to a company with a U.S. headquarters and research lab, but production facilities someplace like Mexico, China, Indonesia, or South Africa, the economic payoff from that scientific discovery becomes less clear. Thus, while I would support a dramatic expansion of R&D efforts, I also believe that the U.S. needs to be rethinking the institutions and information pipelines that connect scientific discoveries, new and expanding companies, and a productive U.S. workforce.

I have viewed Fair Trade labeling as a benign if rather limited movement. On one side, the Fair Trade organization certifies that a product like coffee was produced in a way that lived up to a certain code of conduct for how workers were treated, environmentally friendly practices, and the like. On the other side,  consumers in high-income countries who are willing to pay higher prices for goods like coffee produced according to such standards could then identify this output. But how much does Fair Trade really help workers in low-income countries? The Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda (FTEPR) research team, based at SOAS at the University of London, set out to gather evidence on this question. The main authors are Christopher Cramer, Deborah Johnston, Carlos Oya and John Sender, but the process of data collection and processing was extensive and required a full-time research officer in the UK, as well as research supervisors in Ethiopia and Uganda, and many other contributors. The total cost of the study ran about 700,000 British pounds. The group has now published \”Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda\” (April 2014) and the results will be disheartening for supporters of fair trade.

The researchers chose about a dozen local areas by to collect detailed evidence in rural areas of Ethiopia and Uganda, focusing on coffee and flower producers in Ethiopia and coffee and tea producers in Uganda. They then sought to interview enough people in each of these local areas that they could have a locally representative sample of wages and earnings for that area, looking both at those who worked for a local certified Fair Trade producer and those who didn\’t. They tried to gather data on each member of entire households, including children, and they returned to these areas for either 2-3 years to do follow-up surveys.  Some people were surveyed more intensively or by different methods than others, but the overall result is that data was gathered from thousands of local farm workers. As the study authors wrote: \”[T]he over-arching research question was whether a poor rural person dependent on access to wage employment for their (and their family’s) survival is better served by employment opportunities in areas where there is a Fairtrade certified producer organization or in areas where there is none.\”

And after several years of effort, what did the researchers find?

\”This research was unable to find any evidence that Fairtrade has made a positive difference to the wages and working conditions of those employed in the production of the commodities produced for Fairtrade certified export in the areas where the research has been conducted. This is the case for ‘smallholder’ crops like coffee – where Fairtrade standards have been based on the erroneous assumption that the vast majority of production is based on family labour – and for ‘hired labour organization’ commodities like the cut flowers produced in factory-style greenhouse conditions in Ethiopia. In some cases, indeed, the data suggest that those employed in areas where there are Fairtrade producer organisations are significantly worse paid, and treated, than those employed for wages in the production of the same commodities in areas without any Fairtrade certified institutions (including in areas characterised by smallholder production). At the very least, this research suggests that Fairtrade organizations need to pay far more attention to the conditions of those extremely poor rural people – especially women and girls – employed in the production of commodities labelled and sold to ‘ethical consumers’ who expect their purchases to improve the lives of the poor. . . .

Another issue of importance both to the Fairtrade literature and more widely is the governance and structure of producer cooperatives. The research finds a high degree of inequality between members of these cooperatives, i.e. the area cultivated with the certified crop (tea and coffee) and the share of the cooperative’s output are very unevenly distributed among members: there are large numbers of members who have tiny plots of land and sell very little to the cooperative, and there is a small number of members who dominate sales to and through the cooperative. One clear implication of this is that the many benefits of being a member of a Fairtrade certified cooperative – tax breaks, direct marketing channels to high-value niche markets, international donor financed subsidies – accrue very unequally. Fairtrade may ‘work’ but it does not quite do what it says on most of the labels: it aggravates rural inequality and at best may do so by supporting the emergence of rural capitalist producers; and it fails to make a difference, on the data collected, to the welfare of the poorest people involved in the Fairtrade chain, i.e. manual agricultural wage workers. . . .

In conclusion, it may be argued, for the areas and producer organisations where this research was conducted, that Fairtrade certification has failed to benefit poor wage workers because it has overlooked their existence, because it has proven institutionally incapable of monitoring effectively the wages and conditions of those working in production conditions (e.g. flowers) where there is acknowledged hired labour, despite the existence of auditing procedures against the Hired Labour Standard, and because it is relatively ineffective compared to other factors that are more likely to influence both productive efficiency and working conditions. … 

The reasons for Fairtrade’s failure to make a clear positive difference to wages and conditions, or to the amount of work offered, are fairly clear. They have to do – especially in the production of “smallholder” commodities – with what this research suggests has been in the past a wilful denial of the significance of wage labour and an obsessive concentration on producers/employers and their organisations. … [T]his research suggests that a large number of obstacles remain in implementing improved standards in a way that will benefit rural workers. First and foremost is the need not just for more monitoring and evaluation, but also for better methods. And they have to do – again, especially where Fairtrade certification is awarded to cooperatives – with the espousal of a romantic ideology of how cooperatives operate in poor rural areas.

Of course, it would be unwise to condemn all of Fair Trade based on a single study of about a dozen local areas in two countries. Matt Collin and Theo Talbot at the Center for Global Development take on the task of putting the results in context in a blog post. They point out that although the study was focused on wage-earning farmworkers, not on the farm-owners. Although the study tried to compare farmworkers at Fair Trade operations to similar farmworkers at similar non-Fair Trade operations, such comparisons are always difficult. The results show that the Fair Trade workers were paid less, but they do not conclusively show that Fair Trade is what caused the workers to be paid less. Some other studies of Fair Trade have have found more positive results for how the pay of the small number of Fair Trade producers is increased.

Perhaps you don\’t quite remember this event. But back in 1982, the videocassette recorder was just about about to wipe out the movie industry, and probably also the television industry. We know this is true because of the April 12, 1982, Congressional testimony from Jack Valenti, then the President of the Motion Picture Association of America, given in hearings before the House of Representatives, Committee on the Judiciary, Subcommittee on Courts, Civil Liberties, and the Administration of Justice.

Valenti was arguing in favor of a bill that would allow a charge to be imposed on all makers of VCRs and blank videotapes, most of which were at that time made by Japanese firms, with the proceeds to be distributed to the U.S. film and television industry. If you need a reminder to be skeptical when business leaders prophecy doom and gloom if their industry has to adapt to new technology, here\’s a sample of the rhetoric from Valenti. It\’s a minor classic in the genre of special interest pleading, in which an industry is about to experience worse than a tidal wave, worse than an avalanche, but indeed a jungle, where it will hemorrhage and bleed and be strangled–but the industry\’s real concern, as we all know, is that it just wants to protect the old and the poor and the sick.

I am merely coming to start off by talking about the American film and television industry, not as an economic enterprise, but as a great national asset to this country, to the U.S. Treasury and the strength of the American dollar. And I am not just talking on behalf of people whose names are household words, like Clint Eastwood and some of his small band of peers. I am speaking on behalf, as he is, as he will no doubt tell you on behalf of hundreds of thousands of men and women who without public knowledge or recognition, who are not besieged by fans, but who are artisans, craftsmen, carpenters, bricklayers, all kinds of people, who work in this industry, not only in this State but in the 50 States where American films are shot on location. And they deserve no less, Mr. Chairman, than the concern of the Congress for the preservation of their industry. . . .

But now we are facing a very new and a very troubling assault on our fiscal security, on our very economic life and we are facing it from a thing called the video cassette recorder and its necessary companion called the blank tape. And it is like a great tidal wave just off the shore. This video cassette recorder and the blank tape threaten profoundly the life-sustaining protection, I guess you would call it, on which copyright owners depend, on which film people depend, on which television people depend and it is called copyright. … 

Because unless the Congress recognizes the rights of creative property owners as owners of private property, that this property that we exhibit in theaters, once it leaves the post-theatrical markets, it is going to be so eroded in value by the use of these unlicensed machines, that the whole valuable asset is going to be blighted. In the opinion of many of the people in this room and outside of this room, blighted, beyond all recognition. It is a piece of sardonic irony that this asset, which unlike steel or silicon chips or motor cars or electronics of all kinds — a piece of sardonic irony that while the Japanese are unable to duplicate the American films by a flank assault, they can destroy it by this video cassette recorder. . . .

Now, I don\’t have to tell anybody in politics — I have spent most of my adult life in politics and you learn one thing. Nothing of value is free. It is very easy, Mr. Chairman, to convince people that it is in their best interest to give away somebody else\’s property for nothing, but even the most guileless among us know that this is a cave of illusion where commonsense is lured and then quietly strangled. That is what it is all about. Now, these machines are advertised for one purpose in life. Their only single mission, their primary mission is to copy copyrighted material that belongs to other people.  . . .

The permission of the copyright owner is required for the use of their programs in all markets. Now, I those markets include theaters, cable, pay cable, pay television, prerecorded cassettes, network television, syndicated television, video discs. Every one of those markets is going to be competing for Mr. Eastwood\’s new film \”Firefox.\” They are going to license that film at a negotiated price. Now, we cannot live in a marketplace, Mr. Chairman — you simply cannot live in a marketplace, where there is one unleashed animal in that marketplace, unlicensed. It would no longer be a marketplace; it would be a kind of a jungle, where this one unlicensed instrument is capable of devouring all that people had invested in and labored over and brought forth as a film or a television program, and, in short, laying waste to the orderly distribution of this product. . . .

This is more than a tidal wave. It is more than an avalanche. It is here. If those aftermarkets are decimated, shrunken, collapsed because of what I am going to be explaining to you in a minute, because of the fact that the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace. . . . We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages  of this machine. . . .

I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone. …

Movies are the single most recorded program type accounting for approximately 30 percent of all the recorded minutes. Now, what I am about to read you now boggles my mind and it is going to boggle the mind of everybody in the movie and television business in this city. If 56 of the 93 movies recordings made by the 250 households during the first 3 days of a diary week — just 56 of those movies are saved for the shelf and for additional playback — then the number of movies collected in a year by the Nation\’s 2.4 million VCR households, only 2.4 million, the number of movies collected would be 6,537,216. At a prerecorded purchase of $50, they would have a retail value of $3.2 billion.
Mr. Chairman, things like that could make a grown men cry. . . .

By 1990, the Japanese estimate that 30 to 35 million U.S. homes will be equipped with VCR\’s. VCR owners will buy about 225 million or 300 million blank tapes. But, and here is an explosive political fact, Mr. Chairman, two-thirds of U.S. households will not own VCR\’s, Mr. Chairman. One-third of VCR households will not be on cable or won\’t have access to cable. Now, if there is a scarcity of film and television entertainment, it won\’t be the well-groomed and the well-heeled that will suffer. It is going to be, as always it is, Mr. Chairman, the less-affluent, the disadvantaged people pressed against the wall, out of work, who can\’t afford these expensive machines, and free television to the sick and the old and the poor will remain the primary source of home entertainment. . . .The loser will be your public because they don\’t have these expensive machines. And that is what I am saying, sir. The public is the loser when creative property is taken and here is the reason why. The investment of hundreds of millions of dollars each year to produce quality programs to theaters and television will surely decline. … 

Mr. Chairman, I am done. The public interest is at stake here. It is the public interest that you have by solemn oath sworn to serve because what I am talking about and what the rest of these witnesses are talking about is making it possible for a steady stream of quality entertainment to reach people through their television sets and to keep the incentive and reward mechanism in line so that people can risk great sums of money in this very dicey forum. That is what is at stake, and, finally, the preservation of a huge and valuable trade asset that can\’t be duplicated by any country in the world.

Last week, I noted that I have authored an essay for the June 2014 issue of Finance and Development on the subject of \”Economics and Morality\” (51: 2, pp. 34-38), and I offered some snippets from the article.

There there is also an accompanying six-minute podcast/interview from the IMF where I talk about some of these issues. It\’s called \”How Economics Can Inform Moral Decisions.\” It\’s on Soundcloud, and a free registration is required to listen or download.