Year: 2015

On November 2, 1983, President Ronald Reagan signed the leglslation establishing a federal holiday for the birthday of Martin Luther King Jr., to be celebrated each year on the third Monday in January. As the legislation that passed Congress said: \”such holiday should serve as a time for Americans to reflect on the principles of racial equality and nonviolent social change espoused by Martin Luther King, Jr..\” Of course, the case for racial equality stands fundamentally upon principles of justice, not economics. But here are three economics-related thoughts for the day drawn from past posts.

1) Inequalities of race and gender impose large economic costs on society as a whole, because one consequence of discrimination is that it hinders people in developing and using their talents. Here\’s a reprint of a post on the subject of \”Equal Opportunity and Economic Growth\” from this blog  (August 20, 2012).

A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in \”The Allocation of Talent and U.S. Economic Growth,\” a Policy Brief for the Stanford Institute for Economic Policy Research.

Here\’s a table that illustrates some of the movement to greater equality of opportunity in the U.S. economy. White men are no longer 85% and more of the managers, doctors, and lawyers, as they were back in 1960. High skill occupation is defined in the table as \”lawyers, doctors, engineers, scientists, architects, mathematicians and executives/managers.\” The share of white men working in these fields is up by about one-fourth. But the share of white women working in these occupations has more than tripled; of black men, more than quadrupled; of black women, more than octupled.

Moreover, wage gaps for those working in the same occupations have diminished as well. \”Over the same time frame, wage gaps within occupations narrowed. Whereas working white women earned 58% less on average than white men in the same occupations in 1960, by 2008 they earned 26% less. Black men earned 38% less than white men in the typical occupation in 1960, but had closed the gap to 15% by 2008. For black women the gap fell from 88% in 1960 to 31% in 2008.\”

Much can be said about the causes behind these changes, but here, I want to focus on the effect on economic growth. For the purposes of developing a back-of-the-envelope estimate, Klenow builds up a model with some of these assumptions: \”Each person possesses general ability (common to
all occupations) and ability specific to each occupation (and independent across occupations). All groups (men, women, blacks, whites) have the same distribution of abilities. Each young person knows how much discrimination they would face in any occupation, and the resulting wage they would get in each occupation. When young, people choose an occupation and decide how
much to augment their natural ability by investing in human capital specific to their chosen
occupation.\”

With this framework, Klenow can then estimate how much of U.S. growth over the last 50 years or so can be traced to greater equality of opportunity, which encouraged many in women and minority groups who had the underlying ability to view it as worthwhile to make a greater investment in human capital.

\”How much of overall growth in income per worker between 1960 and 2008 in the U.S. can be explained by women and African Americans investing more in human capital and working more in high-skill occupations? Our answer is 15% to 20% … White men arguably lost around 5% of their earnings, as a result, because they moved into lower skilled occupations than they otherwise would have. But their losses were swamped by the income gains reaped by women and blacks.\”

At least to me, it is remarkable to consider that 1/6 or 1/5 of total U.S. growth in income per worker may be due to greater economic opportunity. In short, reducing discriminatory barriers isn\’t just about justice and fairness to individuals; it\’s also about a stronger U.S. economy that makes better use of the underlying talents of all its members.

2) Extensions in the period of copyright over time have meant that the speeches and writings of Martin Luther King Jr. and others in the U.S. civil rights movement are not easily available to, say, students in schools or the general public. This was one example I discussed in a post on \”Absurdities of Copyright Protection\” (May 13, 2014). The post discusses a paper by Derek Khanna called  \”Guarding Against Abuse: Restoring Constitutional Copyright,\” published as R Street Policy Study No. 20 (April 2014). Here, I\’ll just quote a couple of paragraphs from Khanna.

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

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

3) For those who would like to know more about the economics of thinking about cause-and-effect in discrimination issues, a starting point might this post with discussion of an interview with Glenn Loury (July 2, 2014). Here\’s a slice of the discussion from that post: 

A standard approach to studying discrimination in labor markets is to collect data on what people earn and their race/ethnicity or gender, along with a number of other variables like years of education, family structure, region where they live, occupation, years of job experience, and so on. This data lets you answer the question: can we account for differences in income across groups by looking at these kinds of observable traits other than race/ethnicity and gender? If so, a common implication is that the problem in our society may be that certain groups aren\’t getting enough education, or that children from single-parent families need more support–but that a pay gap which can be explained by observable factors other than race/ethnicity and gender isn\’t properly described as \”discrimination.\” Loury challenges this approach, arguing that many of the observable factors are themselves the outcome of a history of discriminatory practices. He says:

\”By that I mean, suppose I have a regression equation with wages on the left-hand side and a number of explanatory variables—like schooling, work experience, mental ability, family structure, region, occupation and so forth—on the right-hand side. These variables might account for variation among individuals in wages, and thus one should control for them if the earnings of different racial or ethnic groups are to be compared. One could put many different variables on the right-hand side of such a wage regression.
Well, many of those right-hand-side variables are determined within the very system of social interactions that one wants to understand if one is to effectively explain large and persistent earnings differences between groups. That is, on the average, schooling, work experience, family structure or ability (as measured by paper and pencil tests) may differ between racial groups, and those differences may help to explain a group disparity in earnings. But those differences may to some extent be a consequence of the same structure of social relations that led to employers having the discriminatory attitudes they may have in the work place toward the members of different groups.

So, the question arises: Should an analyst who is trying to measure the extent of “economic discrimination” hold the group accountable for the fact that they have bad family structure? Is a failure to complete high school, or a history of involvement in a drug-selling gang that led to a criminal record, part of what the analyst should control for when explaining the racial wage gap—so that the uncontrolled gap is no longer taken as an indication of the extent of unfair treatment of the group?

Well, one answer for this question is, “Yes, that was their decision.” They could have invested in human capital and they didn’t. Employer tastes don’t explain that individual decision. So as far as that analyst is concerned, the observed racial disparity would not be a reflection of social exclusion and mistreatment based on race. … But another way to look at it is that the racially segregated social networks in which they were located reflected a history of deprivation of opportunity and access for people belonging to their racial group. And that history fostered a pattern of behavior, attitudes, values and practices, extending across generations, which are now being reflected in what we see on the supply side of the present day labor market, but which should still be thought of as a legacy of historical racial discrimination, if properly understood.

Or at least in terms of policy, it should be a part of what society understands to be the consequences of unfair treatment, not what society understands to be the result of the fact that these people don’t know how to get themselves ready for the labor market.

Ernest Hemingway\’s 1926 novel The Sun Also Rises, which is available various places around the web like here, includes the following snippet of dialogue:

\”How did you go bankrupt?\” Bill asked.
\”Two ways,\” Mike said. \”Gradually and then suddenly.\”

Many economists will recognize this as a version of an apercu offered a number of times over the years by the prominent macroeconomist Rudiger Dornbusch, who liked to say (for example, in this interview about Mexico\’s economic crisis in the 1990s):

\”The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.\”

What I am dubbing the Hemingway Law of Motion clearly has wide applicability. It\’s when the creaking of your back porch doesn\’t matter much, until the day you put a foot through the floor. It\’s when the cracks and rust on the bridge don\’t seem to matter, until the day the bridge goes down. It\’s the concern that you can see signs that the risk of a financial crisis or a stock market run, but little action is taken until the crisis is upon us. It\’s the concern that the costs and risks of climate change may look quite reasonable, until something large and perhaps irreversible happens all at once.

The Hemingway Law of Motion is simultaneously a useful reminder in some cases and a rhetorical trick in other cases. It\’s a useful reminder that the world often isn\’t smooth and linear. Instead, the world full of tipping points and thresholds. When warning signs exist, they may not steadily rise to a predictably timed crescendo. Instead, those who interpret the warning signs correctly and take action will often look like alarmists, because if they act in time, the negative event never actually materializes–and so was it really necessary for them to make such a fuss in the first place?

But the dynamic of \”gradually, then suddenly\” can also be an excuse for acting when evidence doesn\’t yet exist. It\’s almost always possible to identify some reason for concern, and if you leap from \”some reason \” to a definitive conclusion, there is a real chance of error. This reaction is related to various logical fallacies, like the \”hasty generalization\” fallacy of moving from a small piece of evidence to a sweeping conclusion, or the \”argument from ignorance\” fallacy which holds that because we don\’t yet know enough, a preferred argument must be treated as correct. Thus, one needs some structure of theory and evidence to evaluate whether the Hemingway Law of Motion is likely to be in effect. Recognizing this point doesn\’t make controversies evaporate, of course, but at least it channels the controversy toward theory and evidence, rather than grandstanding and assertion.

Homage: I was once a big fan of The Sun Also Rises, although I haven\’t revisited the book for years. But I saw the snippet of Hemingway dialogue quoted in by Kevin M. Warsh in \”Chapter 4: Rethinking Macro: Reassessing Micro-foundations,\” which appears in the recent book Across the Great Divide: New Perspectives on the Financial Crisis, edited by Martin Neil Baily and John B. Taylor, which triggered the thoughts here.

The rising costs of Medicare are one of the great question marks for health care policy and federal budget policy. Tricia Neuman, Juliette Cubanski, Jennifer Huang, and Anthony Damico offer a useful analysis of one aspect of Medicare costs–how those costs vary by the age of the recipient–in \”The Rising Cost of Living Longer: Analysis of Medicare Spending by Age for Beneficiaries in Traditional Medicare,\” a January 14, 2015 report for the Kaiser Family Foundation.

As a starting point, remember that the number of elderly in the U.S. population is rising: the number of Americans age 65 and over will more than double from 2010 to 2050; the number of Americans 80 and over will nearly triple; and the number of American 90 and over will quadruple.

It\’s already true, as one might expect, that older Americans typically have higher health care costs paid by Medicare. (One caveat: The results that follow are based on data from \”traditional\” Medicare, in which the governmment reimburses service providers as services are paid, and thus don\’t include the 25% of Medicare Advantage recipients, a program where the government pays the  health care provider a fixed amount each month. Of course, the hope of a fixed payment or capitated health care plan is that it gives the provider an incentive to find ways of holding down costs.) For example, those 80 and older are 24% of those receiving traditional Medicare, but receive 33% of Medicare spending.

Moreover, on a per capita basis, Medicare costs are rising faster for those at later ages. In 2000, for example, Medicare typically spent about 2.4 times as much for a 90 year-old as for a 65 year-old. By 2011, it was spending about 2.8 times as much (if one leaves out Part D, the drug benefit, which didn\’t exist in 2000).

A more detailed breakdown of per capita Medicare spending by age shows a steady rise with age, although this peaks out around age 95, and also offers a more detailed sense of which expenditures are rising and falling with age. The data also allows separating out the health care costs of those who died in a specific year, which offers at least a rough way of looking at the extent to which end-of-life health care costs are influencing these spending patterns. Thus, the blue line shows per capita payments from traditional Medicare by age in 2011. The orange line, slightly lower, leaves out those who died in 2011. Notice that both lines rise, although the blue line rises more sharply, which suggests that end-of-life costs play a role in the higher costs by age, but are by no means the main factor.

However, the rise in per capita Medicare spending by age is not uniform across the categories of spending. Per capita spending on home health care and on Part B (providers that are not hospitals) peaks at age 83; inpatient care peaks at around 89; per capita spending on home health care peaks at 96; per capita spending on skilled nursing care peaks at 98; and per capita spending on hospice care peaks at age 104. As the share of those over-80 and over-90 rises, the blend of services that Medicare pays for will be shifting, too.

The data offers some additional insight into end-of-life spending. For example, here is per capita Medicare spending on those who died in 2011, by age. Notice that the per capita level of spending for those in their last year of life at more than $33,000 is almost four times as high as the average for those who are not in their last year of life, shown in the earlier figure as about $8,600. In a previous post on \”Trends in End-of-Life Care\” (February 25, 2013), which found that about 25% of Medicare payments are for those in their last year of life. But in addition, it\’s interesting that the amount spent in last year of life is highest at about age 70, and falls after that point. The implication would seem to be that more extreme health care spending efforts are being made to assist the \”younger old\” at around age 70 than the \”older old\” in their 90s and beyond.

The use of hospice care also seems to have increased substantially in the last decade or so. On a per person basis, about $550 was spent for hospice care for 100 year-olds in 2000; in 2011, about $3,049 was spent on hospice care for 100 year-olds.

The recent drop in oil prices is large, a drop of almost 50% over the last six months of 2014 from slightly over $100/barrel of crude oil to about $50/barrel. However, drops of similar magnitude are not uncommon. The World Bank notes:

Between 1984-2013, five other episodes of oil price declines of 30 percent or more in a six-month period occurred, coinciding with major changes in the global economy and oil markets: an increase in the supply of oil and change in OPEC policy (1985-86); U.S. recessions (1990–91 and 2001); the Asian crisis (1997–98); and the global financial crisis (2007–09). There are particularly interesting parallels between the recent episode and the collapse in oil prices in 1985-86. After the sharp increase in oil prices in the 1970s, technological developments made possible to reduce the intensity of oil consumption and to extract oil from various offshore fields, including the North Sea and Alaska. After Saudi Arabia changed policy in December 1985 to increase its market share, the price of oil declined by 61 percent, from $24.68 to $9.62 per barrel between January-July 1986. Following this episode, low oil prices prevailed for more than fifteen years.

Here\’s a graph comparing recent drops in oil prices in the last 30 years.

For a longer-term comparison, here\’s a graph taken from the BP Statistical Review of World Energy 2014. Focus here on the lighter green line, which is adjusted for inflation. This graph is from last summer, so it doesn\’t show the recent drop of oil prices to the $50/barrel range. Still, you can see at a glance that even after falling to $50/barrel, the current drop doesn\’t come close (yet!) to matching what happened in the 1980s.

What\’s the explanation for the fall in oil prices? Through 2014, U.S. shale production has continually exceeded expectation, while forecasts of global demand for oil have been scaled back. OPEC announced in November 2014 that it would not scale back production, thus apparently opting to keep its market share rather than to push the price of oil back up. There had been concerns that oil output might fall sharply in places like Iraq and Libya (because of local wars) and in Russia (because of potential economic sanctions), but neither seemed to cause oil output to decline as feared. The appreciation of the U.S. dollar also had an effect: \”In the second half of 2014, the U.S. dollar appreciated by 10 percent against major currencies in trade-weighted nominal terms. A U.S. dollar
appreciation tends to have a negative impact on the price of oil as demand can decline in countries that experience an erosion in the purchasing power of their currencies.\”

Of course, a drop in the price of oil tends to benefit those who are buyers, including households and industries that use energy, while imposing costs on those who are sellers, like producers of oil. At a national level, the World Bank puts it this way (citations omitted):

Empirical estimates suggest that output in some oil-exporting countries, including Russia and some in the Middle East and North Africa, could contract by 0.8–2.5 percentage points in the year following a 10 percent decline in the annual average oil price. …  In some countries, the fiscal pressures can partly be mitigated by large sovereign wealth fund or reserve assets. In contrast, several fragile oil exporters, such as Libya and the Republic of Yemen, do not have significant buffers, and a sustained oil price decline may require substantial fiscal and external adjustment, including through depreciation or import compression. Recent developments in oil markets will also require adjustments in macroeconomic and financial policies in other oil-exporting countries, including Russia, Venezuela, and Nigeria. …

A 10 percent decrease in oil prices would raise growth in oil-importing economies by some 0.1–0.5 percentage points, depending on the share of oil imports in GDP. … In Brazil, India, Indonesia, South Africa and Turkey, the fall in oil prices will help lower inflation and reduce current account deficits—a major source of vulnerability for many of these countries. Their fiscal and current accounts could see substantial improvements.

Two other points seems worth making. First, investments in energy production, once they are made, often have some element of sunk costs. Lots of investments in greater supply of energy have been made in the last 10 years or so as oil prices rose rapidly–not just investments in oil, but in many forms of energy production including renewables, and in forms of energy conservation like cars that get higher gas mileage. Those investments are now in  place, and remain in place even when oil prices fall. This is part of the reason why the fall in oil prices that happened back in the 1980s persisted for about 15 years: past investments were locked-in. It suggests that the current drop in oil prices may persist for a few years, too.

Second, the historical pattern is that sharp rises and sharp falls in oil prices have asymmetric effects: that is, sharp rises in oil prices are often accompanied by severe economic disruptions in oil-importing countries and industries, while falls in oil prices have positive but milder effects over a period of time, as the savings from lower oil prices filter more broadly through the economy.

I read a lot of mysteries, and so of course I\’m a fan of the extraordinarily accomplished and Donald Westlake. He is perhaps best-known for his comic crime novels, including those featuring John Dortmunder books, but he also wrote some excellent tough-guy noir crime novels under the name Richard Stark, and dozens of other novels. Westlake diesd in 2008, but a collection of his miscellaneous nonfiction writings was just published in The Getaway Car, edited by Levi Stahl. Much of it is blessedly unrelated to economics, but here\’s a passage that caught my eye about payments for short stories, from a short essay that Westlake wrote in 2000 to an anthology of mystery stories.

\”The durability of the short story is astonishing, all in all. It does not these days make any reputations, nor are the financial rewards particularly lush. Today\’s slick magazines pay for a short story exactly what the slick magazines of the twenties paid for a short story; not adjusted dollars, real dollars [by which I think Westlake means that the nominal dollar payments are the same]. F. Scott Fitzgerald got the same pay from the magazines as today\’s writers in similar venues, but in his day that was enough to keep him in Paris, whereas today the same income is enough to keep you on the farm. 

\”Today\’s digest-size magazines pay just what their uncles, the pulps, used to pay. Up and down the market, this is the one and only example in the entire American economy of a durable and successful resisitance to inflation. 

\”Then why does the short story continue to endure? Given the way our world works, the modest financial return very strongly implies a modest readership; if the millions were clamouring for short stories as though they were Barbie dolls, the price would go up. … So it must be love that keeps the form alive, the writers love for the work.\”

Some quick reflections.

1) There\’s some career advice here for all those students, year after year, who tell you so seriously that it breaks your heart that they \”just want to be a writer.\”

2) Are there other examples of nominal prices that haven\’t changed for a number of decades in the US economy?

3) For teachers of econmomies, even quick and dirty examples of supply and demand are always useful, if they can catch the attention of students. You\’re welcome.

4)  Those of us who write blog posts surely sympathize with writing short stories for love and a modest readership. As a practical working writer, Westlake focused mainly on novels in part because the financial rewards were better. Writing books, instead of blog posts? Hmmm.

A fluid labor market can offer considerable protection for workers, in the sense that if you don\’t like your current employer, or your current employer lays you off, you have the ability to get another job. When the labor market is less fluid, getting jobs is harder (especially for new entrants) and negotiating for better compensation is trickier (because everyone knows that other job options may be hard to find). Steven J. Davis and John Haltiwanger offer evidence that the fluidity of the U.S. labor market has been decreasing for several decades in their paper \”Labor Market Fluidity and Economic Performance.\” A version of the paper was originally presented last August at the annual Jackson Hole conference held by the Federal Reserve Bank of Kansas City. I\’ll quote here from a November 26, 2014 version of the paper posted at the KC Fed website. However, a version of the paper is also available as National Bureau of Economic Research Working Paper No. 20479, issued in September 2014.

As a starting point, considers some evidence on job flows. As Davis and Haltiwanger explain: \”Job creation is the sum of employment gains at new and expanding establishments, and job destruction is the sum of employment losses at exiting and shrinking establishments.\” Here\’s the quarterly pattern of job creation and hires since 1990. Hires is greater than job creation (notice that the right-hand and left-hand axis are measured differently), because when (for example) workers at two different companies switch jobs, both companies have hired someone, but there is no overall job creation at either firm.  Notice that the rate of job creation has been sagging since the 1990s, well before the Great Recession.

Here\’s the quarterly pattern of job destruction since 1990, where teh overall level of job destruction includes both layoffs initiated by the firm and quits initiated by workers themselves. The data moves around a lot in recessions–for example, you can see the rise in layoffs and drop in quits during the Great Recession around 2008-2009–but since 1990, there is also a gradual decline in rates of job destruction.

To get an overall view, combine the rates of job creation and destruction, and call that \”job reallocation.\” This data is available on an annual basis back to 1979, and the pattern looks like this. (An establishment is a single location; a firm may have a number of establishments. So when someone moves from one establishment to another within a given firm, it\’s picked up by one line, but not the other.)

What to make of this decrease in the fluidity of the U.S. labor market in the last several decades? Here are some thoughts from Davis and Haltiwanger:

• \”Long-term declines in job and worker reallocation rates hold across states, industries, and demographic groups defined by gender, education and age. Fluidity declines are large for most groups, and they are enormous for younger and less educated workers.\”
• Many factors contributed to reduced fluidity: a shift to older firms and establishments, an aging workforce, the transformation of business models and supply chains (as in the retail sector), the impact of the information revolution on hiring practices, and several policy-related developments. Occupational labor supply restrictions, exceptions to the employment-at-will doctrine, the establishment of protected worker classes, and “job lock” associated with employer-provided health insurance are among the policy factors that suppress labor market fluidity. As yet, however, we know little about how much these policy factors contributed to secular declines in fluidity.\”
• \”The loss of labor market fluidity suggests the U.S. economy became less dynamic and responsive in recent decades. Direct evidence confirms that U.S. employers became less responsive to shocks in recent decades, not that employer-level shocks became less variable. … Since 2000, job reallocation and the employment share of young firms have declined sharply in high-tech industries. These developments raise concerns about productivity growth, which has close links to creative destruction and factor reallocation in prominent theories of innovation and growth and in many empirical studies.\”
• \”If our assessment of how labor market fluidity affects employment is approximately correct, then the U.S. economy faced serious impediments to high employment rates well before the Great Recession. Moreover, if our assessment is correct, the United States is unlikely to return to sustained high employment rates without restoring labor market fluidity.\”

I\’ll only add that the decline in labor market fluidity isn\’t a result of any one factor, and some of the economic and demographic forces behind the decline may be unavoidable or desireable. But the decline is also worrisome for the long-term health of the U.S. labor market and economy. When discussing policies that affect labor markets, whether they contribute to the ongong decline in fluidity should be part of the conversation.

It\’s easy to sketch a diagram showing a tradeoff between environmental protection and economic growth. But what\’s the actual empirical evidence on how much environmental protection reduces economic growth? This question turns out to be harder to answer than you might think.

As a starting point, measuring the costs of environmental protection isn\’t easy, because the ways in which firms and consumers adapt and react to environmental laws isn\’t easy to measure.  The costs and indeed the relevance of environmental protection is also relatively small for many firms, compared to many other costs and issues they face: wages and a workforce with the needed skills; the costs and reliability of suppliers; the reliability of transportation, communication, and energy infrastructure; the abilities of competitors and challenges of international markets; along with taxes, workforce and land-use regulations. When asking how even fairly substantial changes in environmental rules affect productivity, it might be hard to sort out environmental rules from the rest of these factors.

In addition, high-income countries tend to have both higher environmental standards and higher productivity levels than low-income countries, and so a simple correlation will tend to show that but enviromental standards are associated with economic productivity. But this is another case where correlation is unlikely to be causal. Instead, it\’s more likely that high-income countries find it easier to put a priority on environmental protection and to spend the necessary resources than low-income countries. In addition, stronger environmental standards for high-income countries might lead pollution-emitting production activities to be located more in low-income countries; in this case, looking at pollution just in the high-income country after an environmental rule is passed would give a misleading impression of how much it affected pollution.

Finally, there is a theory called the \”Porter hypothesis,\” named after Michael Porter at Harvard University, which cites evidence that when environmental goals are set in a strict way, but firms  are allowed flexibility in how to achieve those goals in the context of a competitive market enviroment, firms often become quite innovative–and in some cases, the innovations induced by the new environmental rules save enough money that the rules end up imposing no economic costs at all. For an early statement of the Porter hypothesis and a counterpoint, the interested reader might look up the 1995 exchange on the subject in the Fall 1995 Journal of Economic Perspectives. Michael E. Porter and Claas van der Linde make their case in \”Toward a New Conception of the Environment-Competitiveness Relationship,\” (9:4, 97-118), and Karen Palmer, Wallace E. Oates, and Paul R. Portney respond in \”Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?\” (9:4, 119-132).

For a flavor of the argument, Porter and van der Linde argue that firms are often not especially knowledgeable about their internal environmental costs and benefits, and when regulation refocuses their attention, substantial gains are possible. They write (citations omitted):

In 1990, for instance, Raytheon found itself required (by the Montreal Protocol and the U.S. Clean Air Act) to eliminate ozone-depleting chlorofluorocarbons (CFCs) used for cleaning printed electronic circuit boards after the soldering process. Scientists at Raytheon initially thought that complete elimination of CFCs would be impossible. However, they eventually adopted a new semiaqueous, terpene-based cleaning agent that could be reused. The new method proved to result in an increase in average product quality, which had occasionally been compromised by the old CFC-based cleaning agent, as well as lower operating costs. It would not have been adopted in the absence of environmental regulation mandating the phase-out of CFCs. Another example is the move by the Robbins Company (a jewelry company based in Attleboro, Massachusetts) to a closed-loop, zero-discharge system for handling the water used in plating. Robbins was facing closure due to violation of its existing discharge permits. The water produced by purification through filtering and ion exchange in the new closed-loop system was 40 times cleaner than city water and led to higher-quality plating and fewer rejects. The result was enhanced competitiveness.

In contrast, Palmer, Oates, and Portney acknowledge that such cases are possible, but suggest that they are rare exceptions. They cite evidence from firm surveys done by the Bureau of Economic Analysis that suggest that offsetting gains from environment regulations are only about 2% of the costs. They write:

The major empirical evidence that they advance in support of their position is a series of case studies. With literally hundreds of thousands of firms subject to environmental regulation in the United States alone, it would be hard not to find instances where regulation has seemingly worked to a polluting firm\’s advantage. But collecting cases where this has happened in no way establishes a general presumption in favor of this outcome. It would be an easy matter for us to assemble a matching list where firms have found their costs increased and profits reduced as a result of (even enlightened) environmental regulations, not to mention cases where regulation has pushed firms over
the brink into bankruptcy. … [W]e spoke with the vice presidents or corporate directors for environmental protection at Dow, 3M, Ciba-Geigy and Monsanto—all firms mentioned by Porter and van der Linde in their discussion of innovation or process offsets. While each manager acknowledged that in certain instances a particular regulatory requirement may have cost less than had been expected, or perhaps even paid for itself, each also said quite emphatically that, on the whole, environmental regulation amounted to a significant net cost to his company. We have little doubt about the general applicability of this conclusion.

More recently, Stefan Ambec, Mark A. Cohen, Stewart Elgie, and Paul Lanoie looked at the evidence on \”The Porter Hypothesis at 20 Can Environmental Regulation Enhance Innovation and Competitiveness?\” in a 2011 working paper for Resources for the Future. Tomasz Koźluk and Vera Zipperer have now published \”Environmental policies and productivity growth: a critical review of empirical findings,\” in the OECD Journal: Economic Studies (vol. 2014: 1, pp. 1-32).

These papers reiterate the more-or-less standard conclusion that it\’s hard to disentangle costs of environmental protection and overall economic growth, for all the reasons given above.  They emphasize that the Porter hypothesis only holds for well-designed environmental policies: for example, policies that require firms to take specific anti-pollution actions do not offer flexibility to meet clear goals. Koźluk and Zipperer also offer some useful discussion of potential channels in which environmental protection might improve overall economic productivity. For example, when some industries have costs of cleaning up water, it may reduce costs for other industries that make use of clean water. If the revenues from a carbon tax or other pollution tax are used to reduce the marginal rates of other taxes, the economy could benefit. If environmental regulations are more likely to drive inefficient companies out of business, then more-efficient companies could benefit–leading to an overall gain in efficiency for the economy. Stricter environmental rules could encourage companies to produce better equipment for monitoring and addressing pollution, which could then give those companies an advantage in the global economy for selling such equipment.

But this is still a lot of \”ifs.\” In a December 2014 OECD working paper, Koźluk and Zipperer, together with Silvia Albrizio and Enrico Botta, offer then own attempt at addressing these questions in \”Do Environmental Policies Matter for Productivity Growth? Insights from New Cross-Country Measures of Environmental Policies\” (Economic Department Working Papers No. 1176).

They create a measure of \”environmental policy stringency\” that is based on policy measures affecting air pollution and climate issues. Their measure combines market-based and non-market-based policies. Market-based policies include taxes on carbon dioxide, nitrogen oxides, sulfur oxides, and diesel fuel, as well as trading schemes that involve incentives to use renewable energy or to save energy. Non-market policies include setting emissions standards for these emissions, along with particulate emissions, as well as government research and development spending on less-polluting energy. They have data back to the 1990s for a range of high-income countries. Here\’s one way of looking at their current results. The horizontal axis shows the stringency of their environmental policy measure for non-market instruments, while the vertical axis shows the stringency for market-based instruments (both measured on a scale from 0-6). Poland, for example, stands out as country with above-median market based standards, but below-median nonmarket standards.

The authors then compare this data on environmental rules to productivity data at the national, industry, and firm level. They summarize the results this way:

There is no empirical evidence of permanent effects of environmental policy tightening on multifactor productivity growth (MFP), positive or negative. Analysis based on a new cross-country dataset with unprecedented time-series coverage finds that all effects tend to fade away within less than five years. No lasting harm to productivity levels is found at the macroeconomic, industry or firm levels. … Most advanced industries and firms see the largest gains in productivity levels, while less productive firms are likely to see negative effects. Highly productive firms, often the largest firms in the industry, may be best suited to profit rapidly from changing conditions – seizing new market opportunities, rapidly deploying new technologies or reaping previously overseen efficiency gains. They may also find it easier to outsource or relocate production abroad. Less advanced firms may need higher investments to comply with the new regulation, exhibiting a significant temporary fall in productivity growth. Assuring a swift reallocation of capital and minimising barriers to entry are necessary conditions for the efficiency gains from environmental policy tightening to be translated into economic growth. A non-negligible part of the productivity gains is likely to come from the exit of the least-productive firms.

Of course, this study isn\’t the final word. It is focused on high-income countries, which start off with (roughly) similar kinds of environmental protection compared with many other countries in the world, and also start off with (roughly, over several decades) levels of productivity growth. But that said, the study suggests that an important reason why stricter environmental policy doesn\’t impose lasting costs on productivity is because it helps drive less efficient firms out of business and thus allows more efficient firms to expand.

A couple of months after a US national election is finished, and the Federal Elections Commission has updated its statistics on campaign contributions and the heat and energy has died down a bit, I like to check the invaluable Open Secrets website run by the Center for Responsive Politics for what actually happened with campaign spending. Here are a few things that caught my eye.

Total spending for the 2014 Congressional races looks like it will come in at about $4 billion, quite similar to the amount spent in 2012 and 2010. In the context of a high-income country with a population of nearly 320 million, this is not a large amount. As I point out in my Principles of Economics textbook (which I naturally recommend for its combination of high quality and moderate price), \”For example, consumers in the U.S. economy spend about $2 billion per year on toothpaste. In 2012, Procter and Gamble spent $4.8 billion on advertising, and General Motors spent $3.1 billion. Americans spend about $22 billion per year on pet food—three times as much as was spent on the 2012 election.\” As another comparison, Americans spend about $8 billion each year celebrating Halloween.  With the US government making decisions that involve $3.5-$4 trillion in spending and taxes, not to mention the nonmonetary effects of other laws regulatory rulings, people are going to allocate resources to try to affect those outcomes.

House

Financial activity for all House candidates, 2013-2014

Senate

Financial activity for all Senate candidates, 2013-2014

An alternative measure from Open Secrets looks at the average spending per candidate, not overall. By this measure, spending by House candidated was largely equal between Democrats and Republicans, but Democratic candidates for the Senate spent more than twice as much as Republican candidates.

Before the Great Recession, the primary tool for the Federal Reserve to conduct monetary policy was by altering the federal funds interest rate. As the recession got underway, the Fed started cutting this interest rate in August 2007 and by December 2008, it was down to almost zero percent, where it has remained. As the figure shows, the Fed consistently reduced interest rates during periods of recession (the shaded areas), but the Great Recession was the only episode during this time period where the economic contraction was so severe that the rate was taken all the way to zero.

But the Great Recession ended in June 2009. The recovery, unpleasantly sluggish though it has been, has now been underway for more than five years. As we start 2015, an obvious question is when the Fed will raise interest rates. Eric Rosengren of the Federal Reserve Bank of Boston offers some insight about how the Fed is viewing this question based on comparing current economic conditions with the two previous times that the Fed acted to raise the federal funds interest rate in a substantial way: that is, the rises in February 1994 and in June 2004.

First, the November 2014 unemployment rate was 5.8%.  In June 2004, the Fed tightened when the unemployment rate was 5.6%. In February 1994, the Fed tightened with the unemployment rate was 6.6%. Notice that in both cases, the Fed acted to raise interest rates at a time when the unemployment rate was still falling–not waiting until the unemployment rate had bottomed out. The underlying argument here is that it makes sense to raise interest rates when the economy has a reasonable degree of forward momentum.

What about inflation? The measure of inflation used here is based on the personal consumption expenditure index, which the Fed uses instead of the better-known Consumer Price Indes. The previous two tightenings happened when the inflation rate was about 2%, maybe just a bit  higher. The current inflation rate is closer to 1.5%. The lack of inflationary pressure means that the Fed can feel itself under less pressure to raise interest rates.

What about economic growth? The 1990-91 recession ended in March 1991, so the tightening was a bit less than three years later, when growth had rebounded for a quarter to a 4% rate, and been re-established at rates above 2% per year. The 2000-2001 recession ended in November 2001, and the tightening came less than three years later, again after growth had rebounded to hit 4% for at least a quarter or two. In the aftermath of the Great Recession, growth has not rebounded as quickly. However, the most recent GDP data suggest that the economy was growing at 4% or faster in the second and third quarter of 2014.

Rosengren presented these slides at the meetings of the Allied Social Sciences in Boston on January 3. The panelists in the meeting didn\’t try to reach any specific consensus on the subject, but it\’s fair to say that several of them expect the Fed to raise interst rates later in 2015, but perhaps later in the year rather than earlier.

Why wait? Part of the reason is to make sure that the preliminary figures showing more rapid GDP growth in the second and third quarter of 2014 hold up as they are revised. More broadly, given the sluggish pace of the recovery so far, and the continued low rates of inflation, there seems to be more reason to worry about raising rates too soon than there is about waiting a few more months.

However, one sometimes hears a worry that the Fed should beware of raising interest rates because it might hurt the stock market. This didn\’t happen the last two times the Fed raised interest rates. Remember that the Fed seeks to raise rates at a time when the economy has solid forward momentum. Remember also that people investing in stocks are looking ahead at what is likely to happen, and investors have been well aware for some time that the Fed was likely to raise rates in 2015. The February 1994 and June 2004 rises in the federal funds rate left the stock market with more room to rise, and the same could well hold true this time.

There has also been concern that policies of ultra-low interest rates run a risk of creating other distortions in financial markets, as investors search for more lucrative returns. As one example, I wrote about potential issues in the leveraged loans sector a few months ago. Other concerns are discussed here, here, and here. Lower interest rates also create winners and losers: they obviously help borrowers, like the federal government, corporations that borrrow, and housing market, but they hurt those who planned on receiving higher interest payments, including pension funds, insurance companies, and older Americans.

In the depths and turmoil of the Great Recession, the Fed was correct to pull out all the stops, cut the federal funds interest rate to near-zero, assure that credit was available across financial markets, and use quantitative easing. The Fed closed down its organizations for emergency lending by 2011. It has started a slow process of reversing quantitative easing in October 2014. Steps toward raising the federal funds interest rate above zero seem likely to follow later in 2015.

Most Americans see themselves as \”middle class.\” But in most low-income countries, \”middle class\” is more likely to describe an aspiration than a sense of belonging. As a result, the economic, sociological, and political role of the \”middle class\” can be quite different across high-income and low-income countries.

At least, this is the case made by Alexandre Dormeier Freire in a boxed commentary appearing in the Global Wage Report 2014-2015, from the International Labour Organization. Friere writes (citations omitted):

In developed economies, many people define themselves as middle class, and so the idea represents a shared sense of how most people in a society live. In emerging and developing economies, being middle class is typically more of an aspiration, representing how most people would like to live.

Economists sometimes represent the middle class as an average class located in an interval of 75 per cent to 125 per cent of the median income. But most authors agree that great heterogeneity characterizes the middle class. Consequently, notions such as lower middle class, upper middle class and even old vs new middle class have appeared, conveying a certain difficulty in providing an accurate and precise definition. When it comes to emerging and developing economies, authors are confronted with the difficulty of applying a notion that is linked to the Western context. Ravallion simply considers that “someone is middle class if that person would not be considered poor in any developing country, implying a lower bound of $9 a day.”

From an economic point of view, the middle class is considered the driver of modern consumption societies. From a sociological perspective, the formation of a social class includes other factors: a specific economic position (possibly creating conflicts of interest with other social classes) and a consciousness of having similar conditions. Today in Western societies, relatively high levels of consumption of goods and services define, or are a major attribute of, the middle class. Some identify this increasing consumption as consumerism and argue that this profoundly changes traditional social relations within the middle class because people tend to be more individualistic than class-oriented, and social relations are driven by more hedonistic and individualistic patterns. In this view, both factors contribute to the erosion of the class identity in all societies. In emerging and developing economies, such consumption is still perceived more as a privilege of the upper middle class than as a unifying social force, as in Western-based societies.

To flesh this out a bit, results from a Pew Foundation survey back in 2012 showed how Americans categorized themselves. Notice that only 7% of Americans identify themselves as \”lower class\” and only 2% as \”upper class.\” Apparently, the \”middle class\” includes 91% of the U.S. population.

How does this differ for lower-income countries? In its Global Employment Report 2013, the ILO categorizes the population of low-income countries by the fairly standard measures of \”extremely poor,\” which consumption of less than $1.25 per person per day; \”moderately poor,\” from $1.25 to $2 per day; near-poor, from $2 to $4 per day; \”middle class,\” between $4 and $13 per day; and \”above middle class,\” which is above $13 per day in consumption. By this standard, the \”middle class\” in the developing world is on the rise, but is not yet more than half the population.

The ILO report sums up the patterns this way:

As the total share of poor and near poor workers gradually fell, an estimated 41.6 per cent of the developing world’s workers were attaining the middle and upper-middle-classes in 2011. This is a remarkable development given that in 2001, less than 23 per cent of the developing world’s workforce was middle-class versus 53.7 per cent living in poverty. The decade from 2001 to 2011 saw rapid growth in middle-class employment, with an increase of nearly 401 million middle-class workers (above US$4 and below US$13) and an additional increase of 186 million workers above the US$13 a day line. Current ILO projections indicate that the number of workers in the middle-class and above in the developing world could grow by an additional 390 million by 2017, with the share of middle-class workers rising to 51.9 per cent.

It may be a fool\’s mission to try to generate a shared idea of \”middle class\” that reaches across the experience of the U.S., other high-income countries, and also low-income countries around the world. The growth of income inequality in the U.S. and other high-income countries may be eroding the shared sense of \”we\’re almost all middle class,\” at the the same time that growth in emerging economies is moving toward a situation where a majority fall within at least some definition of teh middle class.

But in a rough-and-ready way, I think the key factor in defining the middle class may be a sense of whether your life typically involves living from week-to-week or month-to-month relying on a regular paycheck. For example, I think that the reason many objectively low-income people in the U.S. view themselves as \”middle class\” is that they are working for livilng. Similarly, high-income people in the U.S. view themselves as \”middle class\” because they have bought into a world of high expenses, and thus they also feel an ongoing pressure that they are working to pay their regular expenses.  In low-income countries, the key step that often moves people up to the \”middle class\” is a regular job with a paycheck, as opposed to holding a series of ad hoc, temporary, and subsistence jobs.

Freire makes the interesting suggestion that the \”middle class\” shares a consumerist mindset, which offers both a kind of shared social identity, support for a set of political institutions, and a functional basis for ongoing economic growth. In low-income economies, building support for institutions, laws, and infrastructure that allow the middle class to grow and flourish may be a delicate political business when the middle class is a minority. But as the middle class moves toward becoming a majority, I wonder if building building support for these institutions, laws, and infrastructure may become easier.

Obviously, the middle class in lower-income developing countries will not equal the buying power of the middle class in high-income countries any time soon. But that said, the new middle class in low-income countries will in many ways have much more in common with the middle class around the world than did the \”absolutely poor\” living on less than $1.25 per day.  A certain kind of shared globa consumerism–bolstered by cheap computing power, cellphones, brand names, news, movies music, and the Internet–may be on its way.

Full disclosure: I was an outside reader of the ILO Global Wage Report 2014-15 last summer, and received a modest honorarium for commenting on a draft of the report.