Do Business Cycles Die of Old Age?

Whenever the US economy looks shaky, one of the most common questions I hear is whether this recovery has \”run its course\” or \”gotten old.\” The downturn of the US economy during the Great Recession ended back in June 2009, so it\’s now been about 80 months of an economy on an (often frustratingly slow) upswing. There\’s a basic statistical answer to this question, but there\’s also a broader issue that tackles of how to think about a \”business cycle.\”

When looking at the path of economies over time, you see recessions and recoveries. But there also a well-known is a common cognitive pattern of \”paraedolia,\” which refers to looking at randomness and perceiving patterns that aren\’t really there.  Even using the conventional term \”business cycle\” for patterns of recession and recovery hints at a belief that the economy is be based on underlying patterns and dynamics that will cause it to rotate in a preordained way from recovery to recession and back again. When people ask whether the recovery is \”getting old\” or has has gone on \”long enough,\” they are presuming this kind of \”cycle.\”

The statistical answer to whether economic upswings die of old age can be answered statistically, and Glenn D. Rudebusch summarizes the conventional wisdom very nicely in \”Will the Economic Recovery Die of Old Age?\”  written as the Federal Reserve Bank of San Francisco \”Economic Letter\” for February 8, 2016. Rudebucsh uses a kind of graph called \”survival analysis,\” which can be applied to people\’s chance of dying, to part of a machine wearing out or breaking, to whether economies fall into recession, and many other applications.

As an example, here\’s a survival curve for the probability of an American male dying in the next year, The graph shows that the chance of dying in the next year doesn\’t rise very much at all for men up to the age of about 50 or 60, but then it starts to rise steadily with age.

Probability of a person dying within a year: males, based on 2011 actuarial tables
A survival curve for the economy asks a question like: \”What\’s the chance of an economic recovery ending in the next month?\” Based on data for US business cycles going back to 1858, the patterns look quite different for before and after World War II. Here\’s Rudebusch\’s figure. Before World War II, there was a substantial rise in the chance of recession as an expansion aged: that is, after about four years, the chance of a recession int he next month has reached 20% and climbing. But since World War II, the chance of a recession rises by comparatively little as a recession ages: it\’s maybe  2% chance of recession in the next month after four years, but still only a 4% chance of recession in the next months after 10 years.

Probability of a recovery ending within a month

In short, US business cycles in the last 70 years or so don\’t seem to have a natural lifespan.

However, the notion of predictable cycles was once very hot stuff in the economics profession. One classic exposition is the great economist Joseph Schumpeter\’s 1939 book on Business Cycles (an abbreviated version is available on-line here). Schumpeter suggested that the rise and fall of the economy could be understood through a mixture of three different kinds of cycles: short-run, medium-run, and long-run. The short-term 3-5 year cycles were called Kitchin cycles, and Joseph Kitchin argued in 1923 that they were based on variations in of psychological factors and crop yields. (If you want more, see Joseph Kitchen, \”Cycles and Trends in Economic Factors,\” Review of Economics and Statistics, January 1923, 5:1, pp. 10-16.) The medium-run Juglar cycles were based on fluctuations in levels of fixed investment often stemming from waves of innovation, as first argued in an 1869 book by by Clément Juglar (a condensed English translation is available here). The long-run Kondratieff cycles happened every 50 years or so, give or take a decade or two, and were based on major technological shifts (an English translation of Nikolai Kondratieff\’s 1922 article is available here).  For example, Schumpeter suggests in his 1939 book that a Kondratieff cycle had run from the start of the Industrial Revolution in the 1780s up through 1842, when it was followed by what he called \”the age of steam and steel\” from 1842 and 1897, and then age of \”electricity, chemistry, and motors\” after about 1898.

But as Schumpeter was quick to note, the idea of three overlapping cycles wasn\’t meant to be definitive. He wrote: \”There are no particular virtues in the choice made of just three classes of cycles. Five would perhaps be better, although, after some experimenting, the writer came to the conclusion that the improvement in the picture would not warrant the increase in cumbersomeness.\”

For the modern economist, this notion of maybe three or maybe five overlapping cycles, happening over maybe 3-5 or 7-11 or 40-60 years, sounds a lot like an attempt to impose an overall template pattern that isn\’t really there on an essentially random set of events. Sure, one can look back after the fact and analyze the proximate causes of recessions, like the Federal Reserve raising interest rates to fight inflation in the early 1980s, or the aftermath of the dot-com investment boom in the later 1990s, or the housing price bubble leading up to the Great Recession. But those proximate causes were not an inevitable cycle; instead, they were the result of other economic events and policy choices.

So the good news is that the US economy doesn\’t seem to be doomed by any mechanical law of aging recoveries to enter a recession soon. After all, there was a period between recessions in the 1960s that lasted 106 months and the another period between recessions from the 1990s into the early 2000s that lasted 120 months. But on the other side, the US economic recovery is far from bulletproof, and remains vulnerable to twists of policy and fate.

Will Peak Oil or Renewables Make Climate Change Moot?

Hopeful onlookers sometimes point to two possible escape hatches from the problems of burning fossil fuels. One escape hatch is \”peak oil\”–that is, the argument that production of fossil fuel resources is near or its peak. In this view, the impending fall in fossil fuel production might well bring higher prices and other economic hardship, but at least emissions from burning fossil fuels would drop. The other escape hatch is a large rise in cost-competitive non-carbon sources of energy, like solar and wind, but also nuclear and hydroelectric power. If these sources of energy undercut fossil fuels on price, then the economy could make a transition away from fossil fuels to an economy that used on cheaper and abundant energy from these other sources.

But there\’s yet another possibility, and it\’s the one laid out by Thomas Covert, Michael Greenstone, and Christopher R. Knittel in their article, \”Will We Ever Stop Using Fossil Fuels?\” appearing in the Winter 2016 issue of the Journal of Economic Perspectives.  In this outcome, supply of fossil fuels isn\’t going to run out in the next few decades, and alternative non-carbon energy sources aren\’t going to become cost-effective for enough uses in that timeframe to substantially reduce consumption of fossil fuels, either. One might wish it was otherwise. As the authors write: \”After all, who wouldn’t prefer to consume energy on our current path and gradually switch to cleaner technologies as they become less expensive than fossil fuels? But the desirability of this outcome doesn’t assure that it will actually occur—or even that it will be possible.\” Because they believe that neither of the two escape hatches from the problems of burning fossil fuels are likely to be available, they argue that addressing issues like climate change and conventional air pollutants will require a strong policy intervention to reduce the use of fossil fuels.

When it comes to the supply of fossil fuels, an important lesson to remember that technological progress happens in many areas. It happens in solar and wind power, but it also happens in finding, developing, and extracting fossil fuels. examples include the discovery of  how to drill in ever-deeper water, as well as the more recent developments in getting oil and gas from tar sands and from hydraulic fracturing, As the authors write: \”It is an empirical regularity that, for both oil and
natural gas at any point in the last 30 years, the world has 50 years of reserves in the
ground. The corollary, obviously, is that we discover new reserves, each year, roughly
equal to that year’s consumption.\” Here\’s a figure showing the growth proven reserves of oil and gas reserves over time.

\”Proven reserves\” is a specific term referring to reserves that are available at (more-or-less) current prices, and given current levels of technology.  Geologists also estimate fossil fuel \”resources,\” which are the quantities of fossil fuels known to exist, but not economically viable–yet. The known resources are maybe 3-4 times the size of the \”proven reserves. And then there are enormous other fossil fuel resources, like oil shale and methane hydrates, which are not currently counted as either reserves or resources, but technological  developments over time could bring them into the market as well.  As Covert, Greenstone, and Knittel write: \”If the past 35 years is any guide, not only should we not expect to run out of fossil fuels any time soon, we should not expect to have less fossil fuels in the future than we do now. In short, the world is likely to be awash in fossil fuels for decades
and perhaps even centuries to come.\”

When thinking about non-carbon technologies, it would take a book-length manuscript to go through all the possible developments. The authors thus focus on a few key points. Global demand for energy seems certain to rise dramatically in the decades ahead with overall economic development in today\’s low-income and emerging economies. The question about non-carbon energy sources is not whether they will expand (spoiler alert: they will expand), but whether they will expand so quickly and dramatically that they undercut fossil fuels in a wide array of uses. This outcome may be desirable, but that doesn\’t make it likely or even possible. As the authors write:

[T]he International Energy Administration Agency (2015) projects that fossil fuels will account for 79 percent of total energy supply in 2040 under the current, business-as-usual policies, which already takes into account some rise in these alternative noncarbon energy production technologies. In the medium-run of the next few decades, none of these alternatives seem to have the potential based on their production costs (that is, without government policies to raise the costs of carbon emissions)
to reduce the use of fossil fuels dramatically below these projections.

The paper offers a few comments in passing about carbon capture technology, nuclear power, and hydro power, but the main focus is on solar and wind technologies as alternative methods of generating electricity, and on whether developments in battery technology will make fully electric cars viable. Overall, Covert, Greenstone, and Knittel write:

Our conclusion is that in the absence of substantial greenhouse gas policies, the US and the global economy are unlikely to stop relying on fossil fuels as the primary source of energy. The physical supply of fossil fuels is highly unlikely to run out, especially if future technological change makes major new sources like oil shale and methane hydrates commercially viable. Alternative sources of clean energy like solar and wind power, which can be used both to generate electricity and to fuel electric vehicles, have seen substantial progress in reducing costs, but at least in the short- and middle-term, they are unlikely to play a major role in base-load electrical capacity or in replacing petroleum-fueled internal combustion engines. Thus, the current, business-as-usual combination of markets and policies doesn’t seem likely to diminish greenhouse gases on their own.

Twenty Years Since the Welfare Reform of 1996

Twenty years ago in 1996, President Bill Clinton signed into law the Personal Responsibility and
Work Opportunity Reconciliation Act, more commonly known as \”welfare reform.\” The welfare reform of 1996 sought to \”end welfare as we know it,\” as President Clinton had often stated. The Winter 2016 issue of the Journal of Policy Analysis and Management has a \”Point/Counterpoint\” exchange on the effects, which at least for now is freely available on-line, although many readers will also have access through library subscriptions.  The intellectual combat here isn\’t in the binary, black vs. white. fire vs. ice, war-of-the-worlds style. Instead, Ron Haskins takes the position the glass-half-full position in \”TANF At Age 20: Work Still Works\” (pp. 224-231), and then the team of  Sandra K. Danziger, Sheldon Danziger, Kristin S. Seefeldt, and H. Luke Shaefer takes the glass-half-empty position in \”From Welfare to a Work-Based Safety Net: An Incomplete Transition\” (pp. 231-238). The authors then offer a response-and-rejoinder to each other, as well.

In his overview called \”Welfare Reform: A 20-Year Retrospective,\” Richard V. Burkhauser offers some reminders of the intensity of the rhetoric back in 1996 when the welfare reform bill was on the verge of being signed into law. On one side, here\’s Democratic New York Senator Daniel Patrick Moynihan:

“The welfare bill terminates the basic federal commitment to support dependent children. It endangers children with absolutely no evidence that this radical idea has even the slightest chance of success . . . The current batch in the White House have only the flimsiest grasp of social reality, thinking anything doable and equally undoable. As, for example, the horror of this legislation …” 

And here\’s an opposing view, from Republican Florida Congressman Clay Shaw:

“When the Senate passed, with a good bipartisan vote, with half the Democrats joining the Republicans, I began to think the President would sign this bill . . . July 31st has got to go down as Independence Day for those who have been trapped in a system that has been left dormant and left to allow people to actually decay on the layers of inter-generational welfare which has corrupted their souls and stolen their future . . . It will work …\” 

In terms of nomenclature, the previous welfare program called Aid to Families with Dependent Children (AFDC) now became Temporary Assistance for Needy Families program (TANF). The change in name was mean to reflect a change in emphasis. AFDC had been an \”entitlement\” program, meaning that if you qualified for the program as a low-income family with children, you were entitled to the payment. The central change in TANF was that welfare became a work-based program. Recipients now had to either work or be preparing for work through education or job training to be eligible for welfare. In addition, time limits were placed on the length of time welfare could be received during a lifetime.

The adoption of TANF was not the disaster that some had predicted. Welfare enrollments did drop dramatically and work levels rose, as Haskins describes:

The welfare caseload, which had increased almost every year since the beginning of the War on Poverty in the mid-1960s, fell every year after 1994 before increasing slightly during the Great Recession of 2007. Over the six years between 1994 and 2000, the caseload fell by about 60 percent to a level roughly equal to the 1971 level. The decline in the rolls over this period was accompanied by a 16 percent increase in work by all single mothers and a 35 percent increase in work by never-married mothers, the subgroup of single mothers who were most likely to go on welfare. Meanwhile, the poverty rate among single mothers and their children fell from 44 percent to 33 percent, a decline of 25 percent to its lowest level on record.

Moreover, poverty rates among the key group of households headed by single mothers. Here\’s a figure from Hansen\’s paper. The top line shows the poverty rate in this group if you look at earned income only. The next line down shows the poverty rate if you include cash benefits including TANF, but also unemployment insurance, general assistance, Supplemental Security Income, and others). The next line down adds in the value of food stamps. The line under that adds the value of the Earned Income Tax Credit. The bottom line also adds income from other household members and government stimulus/recovery payments. Right after 1996 welfare reform, the poverty rate for this group declines, and at least according to the bottom line in the figure hasn\’t changed much since then.

But of course, nothing is truly simple in social science. As all the authors in the symposium point out, the welfare reform law of 1996 was operating in a broader economic and policy context. The economic context was the dot-com boom of the late 1990s. When President Clinton signed the welfare reform law in August 1996, the unemployment rate was 5.1%, and it would fall all the way to 3.9% by late in 2000. In other words, it was a good economic time to impose work requirements.

The policy context was that the shift in welfare from AFDC to TANF was accompanied at about the same time by a substantial shift in other programs to provide work support. As the Danziger et al. team of authors point out, \”For example, the Earned Income Tax Credit (EITC), which provides tax credits to families with children and low earnings, was increased significantly in the early 1990s, the minimum wage was increased in 1997, and access to medical care was expanded by the State Child Health Insurance Program of 1997.\” For an earlier post about how a Congressional Budget Office report on how government work-support programs largely offset the falls in welfare payments, see \”Where Has Welfare Reform Taken Us?\” (January 23, 2015).

The broad shift to work requirements as part of welfare remains popular, and on its own specific terms, successful. Both sets of authors in this symposium support the shift, which represents a real change from how welfare was regarded before 1996. As Haskins writes: \”Low-income working families with children receive more help from government than ever before—and there is bipartisan agreement that this is good policy.\” But the shift raises some obvious questions. What about assistance to those adults who are disconnected from work and don\’t have children, or to parents who are disconnected from work and do have children?  And given that nearly half of all households headed by single mothers do not earn enough to be above the poverty line based on their own income, as shown in the figure above, what can be done to raise the payoff for low-skilled and low-wage work?

The Danziger, Danziger, Seefeldt, and Shaefer group writes: \”We want to make the work-based
safety net more effective without returning to AFDC.\” Their opening essay lists four proposals along these lines, and the follow-up essay lists four more. I\’m not endorsing everything on their list, but here are the eight items, in two groups of four:

1. Adoption of a public responsibility to provide work opportunities to those for whom employer demand is limited, especially when unemployment is high. This includes transitional jobs or public subsidies to private-sector firms, nonprofit agencies or government agencies.

2. Expanded child care subsidies.

3. Reducing barriers to TANF entry by requiring states to spend a larger fraction of block grant funds on cash assistance and raising the TANF block grant to reflect economic and demographic changes. 

4. Modifying the SSI [Supplemental Security Income] program by adding part-time or temporary disability benefits. …

First, because the federal minimum wage has not increased since 2009, an increase would reduce earnings poverty for single mothers, who are disproportionately represented among minimum wage workers. The Congressional Budget Office (2014) estimated that a $10.10 per hour wage would raise earnings for 16.5 million workers and reduce poverty by about 900,000, while reducing employment by about 0.3 percent (about 500,000 jobs).

Second, Hoynes (2014) proposes to raise the EITC for families with one child so that it is equivalent to that of two-child families, adjusted for family size. This would increase the maximum EITC for one-child families by about 40 percent for those in the bottom two quintiles. …

Third, Ziliak (2014) proposes to convert the Child and Dependent Care Credit from a nonrefundable to a refundable credit. For example, for children under the age of five whose families have less than $25,000 in adjusted gross income, the refundable credit would be $4,000 for the first child in a licensed facility and half that for a child in an unlicensed facility. Low-income families do not benefit much from the current credit because they have little taxable income.

Fourth, families with incomes below $3,000 do not benefit at all from the $1,000 per child tax credit and other low-income families do not receive the full credit because their income tax liability is lower than $1,000 per child. The Center for American Progress (2015) has proposed making the credit fully refundable. This would provide needed cash income for the disconnected and additional income for TANF recipients, particularly if the credit could be delivered on a monthly basis.

These changes are essentially incremental. For example, proposals like a substantial increase in the Earned Income Tax Credit for all recipients are not includes. Moreover, I don\’t think of all of these changes as being work-related: for example, making the Child and Dependent Care Credit refundable doesn\’t encourage work in any direct way. Nonetheless, I\’m broadly sympathetic toward proposals that support the households of low-income workers, and especially those with children.

Breaking Down US Inflation Rates by Category

Since 2000, the Federal Reserve has focused on the Personal Consumption Expenditures price index for its primary measure of inflation, rather  than the better-known Consumer Price Index. (For the reasons behind this choice and distinctions between the measures, see this post on \”Consumer Price Index vs. Personal Consumption Expenditures Index,\” from January 17, 2012.) The PCE price index can also be broken down into a bunch of price indexes by type of product, and comparing these subsidiary price indexes with the overall PCE price index offers some views on long-term patterns of what drives inflation.

The best-known breakdown of the PCE price index, and the one used by the Fed, is to focus on the \”core\” price index that excludes food and energy prices. The blue line shows the \”core\” index, while the red line shows the overall PCE index. As you see, they are much the same over time, but the overall index fluctuates more because it includes the comparatively volatile energy and food prices.

Just how volatile are energy prices? The price index for \”energy goods and services\’ appears in blue. it\’s highly correlated with the rises and falls in crude oil, and as you can see it dances around considerably. (Everything is measured here as the percent change from a year earlier.) The reason that overall PCE price index is currently lower than the \”core\” index in the figure above is largely because the core index doesn\’t include energy.

Although the core PCE price index also leaves out food, the volatility in prices for food is a lot less extreme than for energy prices. The blue line shows the price index for food, with the overall PCE price index appearing in red.

Another way to slice up the overall PCE price index is to look at changes in the price index for goods and for services separately; moreover, we can separate out durable and nondurable goods, and further separate out some more specific categories of interest. For example, the price index for durable goods appears here in blue, with the overall PCE price index again appearing in red for comparison. What\’s interesting here is that inflation in durable goods prices has been consistently below the overall inflation rate for decades; indeed, the inflation rate for durable goods has been consistently negative since the mid-1990s. Part of the reason here is that technological change in some durable goods like those related to computing and information technology has been so extreme that goods have become cheaper over time; another part of the reason is the role of cheap imported products in holding down prices.

The blue line in the next figure shows a subset of the durable goods price index, which is the price index for the subcategory of \”video, audio, photographic, and information processing equipment and media.\” Again, for comparison the overall PCE price index is shown by a red line. In this subcategory, the inflation rate has actually been negative for most of the years back to 1960, except for a period in the 1970s. Moreover, the deflation rates in this subcategory have consistently been around 10% per year and sometimes even lower for two decades.

In comparison, the price index for nondurable goods, shown below by the blue line, is much closer to the overall PCE price index. Nondurable goods includes energy, which helps to explain why the blue line fluctuates more than the red line which again shows the overall PCE index.

The price index for services, on the other side, tends to be somewhat higher than overall PCE price index, as shown in the graph below by the blue line often being a bit above the red line in recent decades. About two-third of consumer expenditures on on services, rather than goods.

Within the category of services, what are some of the major subcategories that are tending to keep inflation higher in this broad area? The blue line in this figure shows the inflation rate for housing and utilities (which includes both the price of renting a home and an imputed price when owners \”rent\” their own house to themselves) which tended to be lower than the overall PCE inflation rate shown by the red line in the 1970s and 1970s, but was often higher from the 1980s up through the early 2000s.

Health care costs in the PCE index include both what people pay out of pocket, and also the costs of health insurance premiums payed by employers on people\’s behalf. Inflation in those health care costs, as shown by the blue line, was consistently higher than the overall PCE index for most of the time up to the last decade or so.

The price index for education services includes what people spend on higher education, as well as private schools. Inflation in this area has been consistently above the overall average of the PCE price index.

I\’ll also toss in one component of education that isn\’t included under services, but rather under goods: the price index for educational books. For several decades, it has been rising more rapidly than the overall PCE index.

These sorts of figures and tables aren\’t the final word, of course. There are hard questions in measurement of inflation that have to do with making sure that when you measure price changes you also adjust for changes in quality, and also adjust for changes in the patterns of what people are buying. The PCE index arguably makes such adjustments  better than the Consumer Price Index, but the problems remain large.

But with those kinds of concerns duly noted, it seems fair to say that over the long-term, the process of US inflation is a balancing act between price inflation for services that rise at a higher-than-average rate and price inflation for durable goods that rises at a lower-than-average rate.

A Peek at Russia\’s Economy

Even before the recent plummeting of the price of oil, Russia\’s economy was showing signs of slowdown and stress. With oil prices now in the neighborhood of $30-$35 per barrel, and maybe with additional declines still to come, Russia\’s economy is already in recession and probably headed for worse.

Guillaume Vandenbroucke offers some graphs that put the long-term course of Russia\’s economy in some useful perspective in \”Rising Productivity, Declining Population Impact Russia’s Economy,\” which appears in the January 2016 issue of the Regional Economist published by the Federal Reserve Bank of St. Louis (pp. 10-11). Russia\’s economy has a truly terrible period in the 1990s, in the aftermath of the breakup of the Soviet Union. This figure shows how the level of per capita GDP has evolved in the Russian Federation, the US, and the world economy since 1989.

Another perspective on the same data is to look at Russia\’s per capita GDP relative to the United States. Russia started out at 18% of the US level, dropped by 9% of the US level, and is now back to about 15% of the US level. In both figures, you can see that Russia\’s period of catch-up growth has slowed substantially in the last five years or so.

These figures to up to about 2014, but 2015 was a severe recession for Russia and 2016 could be worse. Simeon Djankov gives a sense of the long-term trajectory of Russia\’s economy under Vladimir Putin in \”Russia’s Economy under Putin: From Crony Capitalism to State Capitalism,\” written as
Policy Brief PB 15-18 for the Peterson Institute for International Economics in September 2015. Djankov wrote (citations omitted):

However, the last five years have witnessed a significant slowdown in Russian economic growth (figure 1). The OECD growth forecast for this year is a decline of 3 percent, followedby a modest growth of about 1 percent in 2016. The World Bank projects an economic contraction by 2.7 percent in 2015, before reaching 0.7 percent growth in 2016 … 

Here\’s Djankov\’s figure showing the slowdown of Russian growth rates over five year intervals up through 2010-2014. As I\’ll argue in a minute, the forecasts he was citing last fall for a stagnant Russian economy in 2016 are probably too optimistic.

Here\’s Djankov\’s summary of the overall direction of Russia\’s economy under Putin (again, citations and footnotes omitted):

Vladimir Putin’s career at the helm of Russian politics started in 1999 and will likely continue beyond 2018, the year of the next presidential elections. Under President Putin’s leadership—the longest of either the Soviet or modern Russian era—the Russian economy has shifted from crony capitalism to state capitalism, distinguished by five features. 

First, state ownership in sectors like finance, energy, transportation, and the media have increased—reversing a previous trend towards more private property. The role of the state in industry has also been strengthened through the creation of vertically-integrated national champions. 

Second, strategic energy exports are increasingly used as instruments of foreign policy. In Europe, Russia has undermined the rival gas pipeline project Nabucco—which was supposed to supply Central and Southern Europe—by buying Turkmen gas and redirecting it into Russian pipelines. Russia also diversified its exports to include markets in China, Japan, and Korea by building the Trans-Siberian oil pipeline, as well as the Sakhalin–Khabarovsk–Vladivostok gas pipeline in the Russian Far East. Under Putin, Russia has also restored its nuclear industry, with $50 billion allocated from the federal budget to nuclear power since 2003. Nuclear projects—for example in Bulgaria, Hungary, and Slovakia—serve as diplomatic weapons.

Third, plentiful revenues from extractive industries have obfuscated the need for structural reforms in Russia since 2004, the end of Putin’s first presidential term. Pension, healthcare, and education reforms have stalled, and efforts to decentralize public finances were reversed towards the end of his second term in 2008. With economic growth stagnating recently, however, reforms may become a necessity.

Fourth, the share of extreme wealth in the Russian economy has risen, with 111 Russians on the 2014 Forbes World’s Billionaires list, up from 42 a decade earlier. These billionaires may account for as much as a third of the country’s wealth. Large infrastructure projects like the Sochi 2014 Olympics, the 2018 World Cup, and the Kerch Strait bridge linking Russia with Crimea, are entrusted to a group of billionaires with close links to the president.

Fifth, Putin’s assertive foreign policy has incurred economic sanctions by the European Union and the United States. So far, the Russian economy has weathered these sanctions better than most economic analysts predicted. Still, the resulting stagnation has brought about a policy of import substitution. This has increased corruption for government-funded projects, especially in procuring financing for projects with dubious rates of return, and has reduced access to new technologies in many industries. Retaliatory trade policies have increased the prices of basic food and consumer products and have made it more difficult for foreign companies to invest and operate in Russia.

Many of same issues some up, if stated in more bureaucratic language, in the International Monetary Funds \”Country Report No. 15/211Russian Federation,\”  published in August 2015. For example, the IMF wrote:

Over 2011–14, Russia’s growth decelerated more (relative to pre-crisis performance) than in most other countries and comparator groups. While some of Russia’s growth deceleration is attributable to the stabilization of oil prices, it also reflects stalled structural reforms, weak investment, declining total factor productivity (TFP), and adverse population dynamics. In particular, excessive regulation, weak governance, and a large government footprint in the economy have discouraged efficiency-enhancing investment. …

Adverse population dynamics have contributed to the decline in the labor force, while low statutory retirement ages have reduced workers’ incentives to extend their working life. Administrative barriers, high regulation, weak governance (including perceptions of corruption and weak property rights protection), and poor infrastructure have limited investment and growth. The significant presence of state-owned enterprises (SOEs) in key sectors of the economy has also made it difficult to increase competition and efficiency. Several new anti-crisis initiatives aimed at supporting different sectors through subsidies, guarantees, restrictions on the participation of foreign producers in public procurement, and import substitution-like polices, have introduced additional distortions which will put a drag on growth. Finally, the banking system is highly concentrated, lacks depth, and is inefficient at channeling savings to investment.

Back in August 2015, the IMF estimates of Russia\’s economic growth were similar to those mentioned above by Djankov: that is, the IMF was expecting  -3.4% growth in 2015, followed by 0.2 percent in 2016. But those estimates were based on assuming the world price of oil was above $60/barrel through 2015 and 2016, while the world price of oil now seems likely to be half that level or less, perhaps even through 2017.

The IMF report include a useful figure giving a sense of the connection between oil prices and Russia\’s economy. The dashed red line shows the price of oil, measured on the left-hand axis. The blue line shows the annual growth rate of Russia\’s economy, measured on the right-hand axis. When the price of oil was rising from 2000-2007, Russia\’s economy was growing at 8-10% per year. When the the price of oil dropped in the worldwide Great Recession, so did Russia\’s economy. The price of oil rebounded, but it was no longer rising, and Russia\’s rate of growth was slower and declining.  To think about what will happen for Russia\’s economy in 2016, keep extending the red dashed line down–because the price of oil is now lower and still falling. The blue line that is already in recession for 2015 seems very likely to worsen.

The IMF also note many of the structural shortcomings in Russia\’s economy that are limiting its resilience and growth. Here\’s a figure with some comparisons. When it comes to property rights, Russia ranks below Vietnam and Mexico; when it comes to quality of roads, Russia is behind Brazil, Philippines, and India; when it comes to burden of government regulation, Russia is behind Indonesia and China; and when it comes perceptions of corruption, Russia appears worse than Nicaragua, Kazakhstan, and Gambia.

The discussions by Djankov and the IMF imply a broader policy agenda, but I wanted to take note of a particular issue for Russia at the intersection of its education system and its labor markets. This issue is discussed at greater length in a paper by Lilas Demmou and Andreas Wörgötter called \”Boosting Productivity inRussia: Skills, Education, and Innovation,\” published as OECD Economics Department Working Papers No. 1189 in March 2015. The authors point out that Russia\’s has a fairly flexible labor market, with fairly low unemployment and decent job creation, but \”many new jobs are also of low quality.\” New job creation often tend to be low productivity and low-paid, jobs, often in the informal economy, not much protected by labor laws, without benefits or options for building skills and training.

One result is a high level of wage result is high wage inequality, higher than in the US economy.  Another outcome is very high labor market turnover, often with more than 30% of Russia\’s entire workforce separating from their job in a given year.

Russia has high levels of educational attendance, up through the \”tertiary\” college and university level. It continues to have some strong examples of high-quality of scientific and technical research. But much of the education system is of low quality. Demmou and Wörgötter cite an international survey of employers that ranks the quality of Russia\’s education system 78th out of the 140 countries surveyed. The education system is often disconnected from needs of labor markets in general. Moreover, it\’s hard to start new high-productivity firms that would offer a promise of higher-paying jobs in a Russian economy that is politically oriented, dominated by billionaires running \”national champion\” firms, with lousy infrastructure and poor governance, and struggling with international sanctions.

The Life of US Workers 100 Years Ago

Carol Boyd Leon has written \”The Life of American Workers in 1915\” for the February 2016 issue of the Monthly Labor Review, which is published by the US Bureau of Labor Statistics.  A century ago in 1915 was when publication of the Monthly Labor Review started. It\’s roughly when my grandparents were born. I confess that I\’m a sucker for these kinds of historical comparisons: for me, it\’s like a glimpse through a time machine. Here are some of the comparisons that caught my eye (with footnotes omitted throughout).

\”More than half (52.4 percent) of the 100 million people living in the United States [in 1915] were less than 25 years old; by comparison, the U.S. population has grown over the last century to more than 321 million, and only one-third of that total is under age 25. Not quite 5 percent of the population in 1915 was age 65 or older, compared with 14 percent today. Life expectancy at birth for people born in 1915 was just 54.5 years, whereas the most recent life expectancy estimate is 78.8 years.\”

\”About half the population in 1915 lived in rural areas, meaning areas with fewer than 2,500 residents. In 2010, by contrast, only 1 in 5 people lived in a rural area. Not surprisingly, mobility within the United States was more limited than it is now, and people born in the United States were likely to stay within their home state. In 1915, about 78 percent of U.S.-born individuals were living in the state in which they had been born, compared with 59 percent in 2010.\”

Labor force participation rates (which of course measure only paid employment outside the home) show a substantial fall for men in every age group, and a large rise for women in every age group.

\”[I]n 1915, only an estimated 18 percent of the population ages 25 and older had completed high school, and only about 14 percent of people ages 14–17 were in high school. … While failure to graduate remains a concern, more than 86 percent of the U.S. population age 25 in 2010–14 had completed high school or more.\”

Nearly one-third of Americans were farmworkers back in 1910, compared with less than 1% of the workforce today. However, less than 5% of workers in 1910 were professional or technical workers, compared with about 28%  of the workforce today, and less than 10% of workers in 1910 were service workers, compared with more than 17% today.

In terms of the nonfarm industries where people worked, about one-third of the workforce was in manufacturing in 1910, compared with under 9% today. The share of the nonfarm workforce in construction was about twice as high in 1910 as today (9.1% then vs. 4.5% now), and the share working in transportation and public utilities was three times as high in 1910 as today (12.6% then vs. 3.8% now). Nearly 15% of the workforce was in domestic or personal service back in 1910, compared with about 1% today. On ther other side, the share of workers in \”other professional services\” has climbed from 3% in 1910 to 28.9% today, and the share working in wholesale and retail trade and in government have also climbed notably.

\”If you were alive in 1915, chances are you rented your house or apartment; the ratio of renters to homeowners was about 4 to 1 in 1920. In contrast, by 2004, 69 percent of American families owned rather than rented their residence, although that proportion slipped to 64 percent by the fourth quarter of 2015.24 The cost of a home in 1915 was about $3,200 ($75,600 in 2015 dollars), compared with today’s median home value of $183,500. … Mortgages were typically for just 5 to 7 years and required downpayments ranging from 40 to 50 percent of the home purchase price. In contrast, the median downpayment on a new mortgage in 2015 was 10 percent of the purchase price. Ethnic groups formed their own loan associations because banks could raise the mortgage rate, reduce the loan term to 3 years, and foreclose after two late payments.\”

\”Whether or not your abode was a single-family home or a crowded tenement, it probably was heated by a potbelly stove or by a coal furnace in the basement. It wasn’t until the coal shortage during World War I that oil or gas-powered central heating became a popular replacement for the hand-fired coal furnaces and stoves. Your home probably wasn’t yet wired for electricity; less than a third of homes had electric lights rather than gas or kerosene lamps. However, electricity was the byword of new middle-class homes, which sported electric toasters and coffee pots. … Telephones could be found in at least a few million homes. However, direct dialing did not exist until the 1920s. If your home had an indoor toilet, the toilet likely was located in a closet or a storage area. It would be a few more years until it was common for toilets, sinks, and bathtubs to share a room. … Although some households had running water in 1915, many rural families and city dwellers did not. Less affluent residents still heated a boiler full of water on a coal or wood range, rubbed clothes on a washboard, used a hand ringer, and hung clothes to dry. Homes without gas or electric heat were harder to clean because of soot from the fireplace or wood stove.\”

\”A high percentage of people in cities and factory towns walked to work. If you were like most people at the time, however, you lived in a nonurban area. If you didn’t work at home, you also may have traveled to your job by foot, or you may have gotten there on horseback or by mule. … In urban areas, 1915–20 was the heyday of streetcars: miles of track peaked just 2 years later at nearly 73,000. Horse-drawn streetcars and buses led to home construction some 3 to 5 miles from downtown. Within the city, electric streetcars and trolleys may have been your means of transportation, speeding you to your job at 20 miles per hour. … Although automobiles had only recently been invented, an estimated 2.3 million cars were registered in 1915. Olds Motor Works, which was early on the scene, produced some 5,000 cars in 1904, but these were overshadowed by the popularity of the more affordable Ford Motor Company’s Model T, colloquially referred to as “Tin Lizzy.\”\”

\”The latest workplace rage was scientific management, which involved motion and time studies to determine the most efficient way to perform a work task. In 1911, Frederick Winslow Taylor wrote a seminal work on the subject—The Principles of Scientific Management—which suggested that greater workplace efficiency can be achieved by training employees to do a single job, such as opening mail, inspecting ball bearings, performing accounting tasks, or selling products. Taylorism pushed the division of labor to its logical extreme but did not take into account worker satisfaction. Similarly, in 1913, Henry Ford instituted the assembly line into his Ford Model-T car manufacturing plants to boost both efficiency and production.\”

\”For workers who were hired on a full-time basis, the workweek—when not reduced to part time— was generally long. Workers in manufacturing averaged 55 hours at work per week, and production workers in manufacturing averaged about 49 weekly hours of paid work. The latter figure may reflect that few workers indeed were compensated for time off, and factory workers hours could be shortened from one day to the next. It wasn’t until 1919 that close to half of American workers had a 48-hour workweek; in 1915, only one-eighth of workers had a workweek capped at 48 hours.\”

\”BLS reported about 23,000 industrial deaths in 1913 among a workforce of 38 million, equivalent to a rate of 61 deaths per 100,000 workers. In contrast, the most recent data on overall occupational fatalities show a rate of 3.3 deaths per 100,000 workers.\”

\”According to a U.S. News and World Reports article comparing income in 1915 and 2015, “back in 1915 . . . you were doing about average if you were making $687 a year, according to the Census. That is, if you were a man. If you were a woman, cut that number by about half.” In terms of 2015 dollars, the average pay of $687 for men is equal to $16,063, which is well below today’s income. Median annual earnings for men ages 15 and over in 2014 were $40,638 ($50,383 for men who worked full time), and median annual earnings for women in 2014 were $28,394 ($39,621 for women who worked full time). … The wage comparison becomes even more dramatic if one considers that benefits now add substantially to the total compensation of some workers. By contrast, benefits were meager or, more commonly, nonexistent a hundred years ago.\”

\”Although some employers were subject to minimum pay regulations, many workers, especially
women, earned less than minimum wage. For instance, Tentler reported that “in New York City’s
garment industry, operating under a minimum wage protocol, an economist found in 1914 that from
one-fourth to one-half of the workers in the different occupations investigated were earning less than
minimum pay, ‘the employers claiming that the workers in question were learners.’” The learning
period was sometimes unpaid, and employers would lay off apprentices after one season rather than
increase their pay.\”

Keynes on "Ruthless Truth-Telling"–and the IMF Connection

Back in 2006, Mervyn King–who was then the Governor of the Bank of England–gave a talk about \”Reform of the International Monetary Fund,\” in which he offered a lovely snippet of rhetoric from John Maynard Keynes. In talking about how the IMF must persuade, rather than order or mandate, King said: 

With countries naturally reluctant to cede any control over their own monetary and fiscal policies, it is likely that the IMF will have as instruments only the powers of analysis, persuasion, and, in Keynes’ own favourite words, “ruthless truth-telling”.

That phrase \”ruthless truth-telling\” struck a chord, and  quick Google search will confirm that it has been cited in many places since. I ran across it again in editing the article by Barry Eichengreen and Ngaire Woods in their article on \”The IMF’s Unmet Challenges,\” which appears in the just-released Winter 2016 issue of the Journal of Economic Perspectives.  But what I hadn\’t known, until the authors told me, was that when Keynes mentioned \”ruthless truth-telling,\” he wasn\’t actually commenting about the IMF at all. Instead, the phrase appears in a letter that Keynes wrote to General Jan Smuts on November 27, 1919. It appears in The Collected Writings of John Maynard Keynes, edited by Elizabeth Johnson and Donald Moggridge, in Volume 17, Activities 1920–1922: Treaty Revision and Reconstruction (pp. 7-8)

At the time, Keynes is about to publish The Economic Consequences of the Peace, which suggested that the Versailles Treaty at the end of World War I was far too harsh toward Germany, and thus was likely to lead to future conflict. The book was a best-seller, and it\’s one reason why the very different approach of the Marshall plan was politically acceptable after World War IL But back in 1919, copies of the manuscript have been circulating, and Keynes has been receiving mostly friendly criticism from a variety of early readers. Here\’s a snippet from the letter that Keynes wrote to Smuts on November 27, 1919:

My book is completed and will be issued in a fortnight\’s time. I am now so saturated with it that I am quite unable to make any judgement on its contents. But the general condition of Europe at this moment seems to demand some attempt at an éclairecissement of the situation created by the treaty, even more than when I first sat down to write. We are faced not only by the isolation policy of the U.S., but also by a very similar tendency in this country. There is a growing an intelligible disposition to withdraw (like America), so far as we can, from the complexity, the expense, and the unintelligibility of the European problems: and particularly as regards financial assistance, the Treasury is inclined, partly as a result of our own financial difficulties and partly because of the hopelessness of doing anything effective in the absence of American help, to let Europe stew. Also anti-German feeling here is, still, stronger than I should have expected.  But perhaps most alarming is the lethargy of the European people themselves. They seem to have no plan; they take hardly any steps to help themselves; and even their appeals appear half-hearted. It looks as though we were in for a slow steady deterioration of the general conditions of human life, rather than for any sudden upheaval or catastrophe. But one can\’t tell. 

Anyhow, attempts to humour or placate Americans or anyone else seem quite futile, and I personally despair of results from anything except violent and ruthless truth-telling–that will work in the end, even if slowly.  

There is of course some irony that a phrase about \”ruthless truth-telling\” is often used out of its context as if Keynes was referring to the IMF. But the hope that \”violent and ruthless truth-telling … will work in the end, even if slowly,\” remains perpetually relevant.

(Full disclosure: I\’ve been Managing Editor of the Journal of Economic Perspectives since the inception of the journal in 1987. All JEP articles back to the first issue are freely available on-line compliments of the journal\’s publisher, the American Economic Association.)

Winter 2016 Journal of Economic Perspectives Available Online

For about 30 years now, my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which back in 2011 made the decision–much to my delight–that the journal would be freely available on-line, from the current issue back to the first issue in 1987. Here, I\’ll start with Table of Contents for the just-released Winter 2016 issue. Below are abstracts and direct links for all of the papers. I will almost certainly blog about some of the individual papers in the next week or two, as well.


Symposium: The Bretton Woods Institutions

\”The International Monetary Fund: 70 Years of Reinvention,\” by Carmen M. Reinhart and Christoph Trebesch
A sketch of the International Monetary Fund\’s 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a \”demand driven\” theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively \”new\” IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became the key focus after the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in th e developing economies and have now migrated to advanced economies. As a consequence, the IMF has engaged in \”serial lending,\” with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency; this has been most evident in Greece since 2010. We conclude with the observation that the IMF\’s role as an international lender of last resort is endangered.
Full-Text Access | Supplementary Materials

\”The IMF\’s Unmet Challenges,\” by Barry Eichengreen and Ngaire Woods
The International Monetary Fund is a controversial institution whose interventions regularly provoke passionate reactions. We will argue that there is an important role for the IMF in helping to solve information, commitment, and coordination problems with significant implications for the stability of national economies and the international monetary and financial system. In executing these functions, the effectiveness of the IMF, like that of a football referee, depends on whether the players see it as competent and impartial. We will argue that the Fund\’s perceived competence and impartiality, and hence its effectiveness, are limited by its failure to meet four challenges—concerning the quality of its surveillance (of individual countries, groups of countries, and the global system); the relevance of conditionality in loan contracts; the utility of the Fund\’s approach to debt problems; and the Fund\’s failure to adopt a system of governance that gives appropriate voice to different stakeholders. These problems of legitimacy will have to be addressed in order for the IMF to play a more effective role in the 21st century.
Full-Text Access | Supplementary Materials

\”The New Role for the World Bank,\” by Michael A. Clemens and Michael Kremer
The World Bank was founded to address what we would today call imperfections in international capital markets. Its founders thought that countries would borrow from the Bank temporarily until they grew enough to borrow commercially. Some critiques and analyses of the Bank are based on the assumption that this continues to be its role. For example, some argue that the growth of private capital flows to the developing world has rendered the Bank irrelevant. However, we will argue that modern analyses should proceed from the premise that the World Bank\’s central goal is and should be to reduce extreme poverty, and that addressing failures in global capital markets is now of subsidiary importance. In this paper, we discuss what the Bank does: how it spends money, how it influences policy, and how it presents its mission. We argue that the role of the Bank is now best understood as facilitating international agreements to redu ce poverty, and we examine implications of this perspective.
Full-Text Access | Supplementary Materials

\”The World Bank: Why It Is Still Needed and Why It Still Disappoints,\” by Martin Ravallion
Does the World Bank still have an important role to play? How might it fulfill that role? The paper begins with a brief account of how the Bank works. It then argues that, while the Bank is no longer the primary conduit for capital from high-income to low-income countries, it still has an important role in supplying the public good of development knowledge—a role that is no less pressing today than ever. This argument is not a new one. In 1996, the Bank\’s President at the time, James D. Wolfensohn, laid out a vision for the \”knowledge bank,\” an implicit counterpoint to what can be called the \”lending bank.\” The paper argues that the past rhetoric of the \”knowledge bank\” has not matched the reality. An institution such as the World Bank—explicitly committed to global poverty reduction—should be more heavily invested in knowing what is needed in its client countries as well as in international coordination. It should be consi stently arguing for well-informed pro-poor policies in its member countries, tailored to the needs of each country, even when such policies are unpopular with the powers-that-be. It should also be using its financial weight, combined with its analytic and convening powers, to support global public goods. In all this, there is a continuing role for lending, but it must be driven by knowledge—both in terms of what gets done and how it is geared to learning. The paper argues that the Bank disappoints in these tasks but that it could perform better.
Full-Text Access | Supplementary Materials

\”The World Trade Organization and the Future of Multilateralism,\” by Richard Baldwin
When the General Agreement on Tariffs and Trade was signed by 23 nations in 1947, the goal was to establish a rules-based world trading system and to facilitate mutually advantageous trade liberalization. As the GATT evolved over time and morphed into the World Trade Organization in 1993, both goals have largely been achieved. The WTO presides over a rule-based trading system based on norms that are almost universally accepted and respected by its 163 members. Tariffs today are below 5 percent on most trade, and zero for a very large share of imports. Despite its manifest success, the WTO is widely regarded as suffering from a deep malaise. The main reason is that the latest WTO negotiation, the Doha Round, has staggered between failures, flops, and false dawns since it was launched in 2001. But the Doha logjam has not inhibited tariff liberalization far from it. During the last 15 years, most WTO members have massively lowered barriers to tr ade, investment, and services bilaterally, regionally, and unilaterally—indeed, everywhere except through the WTO. For today\’s offshoring-linked international commerce, the trade rules that matter are less about tariffs and more about protection of investments and intellectual property, along with legal and regulatory steps to assure that the two-way flows of goods, services, investment, and people will not be impeded. It\’s possible to imagine a hypothetical WTO that would incorporate these rules. But the most likely outcome for the future governance of international trade is a two-pillar structure in which the WTO continues to govern with its 1994-era rules while the new rules for international production networks are set by a decentralized process of sometimes overlapping and inconsistent mega-regional agreements.
Full-Text Access | Supplementary Materials

\”Will We Ever Stop Using Fossil Fuels?\” by Thomas Covert, Michael Greenstone and Christopher R. Knittel
Scientists believe significant climate change is unavoidable without a drastic reduction in the emissions of greenhouse gases from the combustion of fossil fuels. However, few countries have implemented comprehensive policies that price this externality or devote serious resources to developing low-carbon energy sources. In many respects, the world is betting that we will greatly reduce the use of fossil fuels because we will run out of inexpensive fossil fuels (there will be decreases in supply) and/or technological advances will lead to the discovery of less-expensive low-carbon technologies (there will be decreases in demand). The historical record indicates that the supply of fossil fuels has consistently increased over time and that their relative price advantage over low-carbon energy sources has not declined substantially over time. Without robust efforts to correct the market failures around greenhouse gases, relying on supply and/or demand forces to limit greenhouse gas emissions is relying heavily on hope.
Full-Text Access | Supplementary Materials

\”Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us,\” by Christiane Baumeister and Lutz Kilian
It has been 40 years since the oil crisis of 1973/74. This crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks. In recent years, a large literature on the economic determinants of oil price fluctuations has emerged. Drawing on this literature, we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014. We then discuss why oil price fluctuations remain difficult to predict, despite economists\’ improved understanding of oil markets. Unexpected oil price fluctuations are commonly referred to as oil price shocks. We document that, in practice, consumers, policymakers, financial market participants, and economists may have different oil price expectations, and that, what may be surprising to some, need not be equally surprising to others.
Full-Text Access | Supplementary Materials

\”Using Natural Resources for Development: Why Has It Proven So Difficult?\” by Anthony J. Venables
Developing economies have found it hard to use natural resource wealth to improve their economic performance. Utilizing resource endowments is a multistage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy. Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures. This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.
Full-Text Access | Supplementary Materials


\”Power Laws in Economics: An Introduction,\” by Xavier Gabaix
Many of the insights of economics seem to be qualitative, with many fewer reliable quantitative laws. However a series of power laws in economics do count as true and nontrivial quantitative laws—and they are not only established empirically, but also understood theoretically. I will start by providing several illustrations of empirical power laws having to do with patterns involving cities, firms, and the stock market. I summarize some of the theoretical explanations that have been proposed. I suggest that power laws help us explain many economic phenomena, including aggregate economic fluctuations. I hope to clarify why power laws are so special, and to demonstrate their utility. In conclusion, I list some power-law-related economic enigmas that demand further exploration.
Full-Text Access | Supplementary Materials

\”Roland Fryer: 2015 John Bates Clark Medalist,\” by Lawrence F. Katz
Roland Fryer is an extraordinary applied microeconomist whose research output related to racial inequality, the US racial achievement gap, and the design and evaluation of educational policies make him a worthy recipient of the 2015 John Bates Clark Medal. I will divide this survey of Roland\’s research into five categories: the racial achievement gap, education policies and reforms, economics of social interactions, the economics of discrimination and anti-discrimination policies, and further topics involving the black-white racial divide.
Full-Text Access | Supplementary Materials

\”Retrospectives: What Did the Ancient Greeks Mean by Oikonomia?\” by Dotan Leshem
Nearly every economist has at some point in the standard coursework been exposed to a brief explanation that the origin of the word \”economy\” can be traced back to the Greek wordoikonomia, which in turn is composed of two words: oikos, which is usually translated as \”household\”; and nemein, which is best translated as \”management and dispensation.\” Thus, the cursory story usually goes, the term oikonomia referred to \”household management\”, and while this was in some loose way linked to the idea of budgeting, it has little or no relevance to contemporary economics. This article introduces in more detail what the ancient Greek philosophers meant by \”oikonomia.\” It begins with a short history of the word. It then explores some of the key elements of oikonomia, while offering some comparisons and contrasts with modern economic thought. For example, both Ancient Greek oikonomia and contemporary economics study human behavior as a relationship between ends and means which have alternative uses. However, while both approaches hold that the rationality of any economic action is dependent on the frugal use of means, contemporary economics is largely neutral between ends, while in ancient economic theory, an action is considered economically rational only when taken towards a praiseworthy end. Moreover, the ancient philosophers had a distinct view of what constituted such an end—specifically, acting as a philosopher or as an active participant in the life of the city-state.
Full-Text Access | Supplementary Materials

\”Recommendations for Further Reading,\” by Timothy Taylor
Full-Text Access | Supplementary Materials

\”The Doing Business Project: How It Started,\” correspondence from Simeon Djankov
Full-Text Access | Supplementary Materials

Interview with Timothy Taylor: Thoughts on Business and Government

Back in late November, I posted about a quotation that I have used in classroom lectures and put up on the bulletin board outside my office about the different roles that should be played by government and business. It\’s from from an October 1990 opinion column by Donald Kaul, who was a prominent opinion columnist, mainly with the Des Moines Register, from the 1970s through the 1990s. Kaul wrote: 

We have come to rely upon capitalism for justice and the government for economic stimulation, precisely the opposite of what reason would suggest. Capitalism does not produce justice, any more than knife fights do. It produces winners and energy and growth. It is the job of government to channel that energy and growth into socially useful avenues, without stifling what it seeks to channel. That\’s the basic problem of our form of government: how to achieve a balance between economic vitality and justice. It is a problem that we increasingly ignore.

Russ Roberts, who runs the EconTalk portion of the ever-useful Library of Economics and Liberty website, talked with me about differentiating the roles of economics and government in a conversational ramble posted on that website earlier this week. (If you\’re not familiar with EconTalk, it\’s a series of one-hour podcasts that can be listened to online or downloaded with a wide variety of people: for example, the four podcasts posted in January were with Nobel laureate James Heckman, with an expert on the secondary market for collectible sneakers named Josh Luber, with Greg Ip of the Wall Street Journal about his new book Foolproof, and with economist Robert Frank who thinks a lot about economic puzzles in everyday life like \”why grooms typically rent tuxedos but the bride usually buys her gown, why bicycles can be more expensive to rent than cars, the effects of the price of corn on the price of pork, and why scammers who invoke Nigeria keep using the same old story.\”

Regular readers of this website will recognize in the interview with me some issues that have been documented on this website over time. Here are a couple of my comments from the uncorrected transcript. 
On wanting businesses to focus on their capitalistic knife fight

Well, I guess when I look out there for concerns, for example, about health care or about fair wages or benefits for people, there are just a wide variety of things that–you think about companies where we are always sort of telling them to do these things. You know, we are telling them to, you know, provide job training. We tell the private sector, with the housing permits, to build a certain amount of affordable housing. And to build parking spaces, and to clean up the environment. And it\’s not that the instinct behind those things is necessarily completely wrong. As I was saying at the beginning: I think that there is a role for government regulation of different kinds. But I guess I am often put in mind of the stories about golden geese and eggs and what happens if you don\’t pay attention to your golden geese.

There is evidence out there, the last 10 or 15 years that the rate of startups in the U.S. economy has been steadily diminishing–not just since the Recession, but since the late 1990s. And that a smaller share of the workforce now works for smaller companies than used to, 10, 15, 20 years ago. I think that–I sometimes think to myself: If someone came along like the modern Henry Ford and had an idea for an enormous factory which would provide an enormous number of jobs to the working middle class, where could that modern Henry Ford build that factory? Would they even be able to build it? At least in any urban area in the United States? Or would they be swamped for 5 or 10 or 15 years in permits and regulations and zoning and traffic and on and on and on? And I think that we are in danger of looking at the private sector as that golden goose, that we can just tell it to do things. And what we really want companies to do, we really want them to engage in that capitalistic knife fight. We really want them to focus their energy on: how do you make things, and things better? We really want them to compete with each. We don\’t want them to compete on the basis of who can survive the ordeal of getting a zoning permit. And so–I think we are in some danger of making it much harder for both small companies to get started and also for the companies that we tend to glamorize–you know, the old big auto companies, the companies that had huge numbers of middle class jobs–we\’ve made it very difficult for a company like that to keep functioning, if one did come along and was trying to grow. … 

It has to come from someplace

[Y]ou are reminding me a little bit of a conversation I had with an old friend of mine a few years back, a non-economist. We were talking about the minimum wage and I was trying to explain sort of an economic viewpoint of the minimum wage–in a nonpartisan kind of way. So what I was sort of saying was, \’Look, minimum wage, the extra money for that minimum wage, it has to come from someplace. And maybe it comes from hiring fewer workers or maybe it comes from more productivity or maybe it comes from cutting certain job perks or it comes from higher prices to consumers or it comes from lower wages–but it comes from some place. And so, without specifying the place, you have to understand where it comes from. And you have to think about that tradeoff.\’ And my friend looked at me for a long slow moment and said, \’You know, I really don\’t like to think of the world that way.\’ …  And I thought to myself, \’That\’s just a perfect answer.\’ Because it was an honest answer and it was an accurate answer. But that sense of:\’ I just don\’t like to think of the world that way\’ seems to me the sort of thing you are talking about. And I guess–we\’re both trained as economists and so we\’re both almost forced by our way of thinking to think about the world in that kind of a way. 

[T]here\’s this movie, I don\’t know, maybe 20 years ago now, called Dave. I don\’t know if you remember. It was back in the 1990s. It had Kevin Kline, who I really like. … And at the tail end of the movie–so the movie is kind of doofus ordinary guy ends up as President; comedy results. And then at the very end of the movie he has his big breakthrough, leadership breakthrough; and his leadership breakthrough was he would just pass a law and guarantee everyone a job so there would no longer be any unemployment. … And I remember thinking to myself: Yeah, you know, you don\’t think this has ever occurred to anybody before? It didn\’t occur to anybody in Sweden or Japan or Germany? No other countries figured out: Oh, yeah, if we just passed that law–you just sort of think–I think a lot of people think that way: Why don\’t we just get rid of unemployment and give everybody a job? And of course if you think about the tradeoffs, you think to yourself: Do you have to take the job they offer you? Do you have to take the pay they offer you? Can they make you move? How do private sector employers react to these jobs? What would the cost be of it? Can you fire people? It\’s on and on and on. But as my friend said: \’I just don\’t like to think about it that way.\’ So I think that\’s really an important thing to think about.

Interview with Richard Thaler: More on Behavioral Economics

James Guszcza has a lively interview with Richard Thaler in the Deloitte Review (Issue 18, published January 26, 2016). Last week I offered a link to video and slides from Thaler\’s Presidential Address to the American Economic Association in early January on the subject of \”Behavioral Economics: Past, Present and Future.\” The interview covers the same broad subject, but in a more free-flowing way. Here are a few of Thaler\’s comments.

On life among the Econ: 

\”Economists assume that the people they study, so called homo economicus, or what I call Econs, are really smart. They know as much economics as the best economist. They make perfect forecasts, have no self-control problems and are complete jerks. They’ll steal your money if they can and get away with it. Most of the people I meet don’t have any of those qualities. They have trouble balancing their checkbook without a spreadsheet. They eat too much and save too little. But nevertheless they’ll leave a tip at a restaurant even if they don’t plan to go back. So for the last four decades I’ve been pleading with economists that we should be studying Humans, not these mythical Econ creatures.\” 

(The description of economists as a tribe of Econ traces back to a very funny satire written in 1973 by an economist named Axel Leijonhufvud, called \”Life Among the Econ,\” which was published in what was then called the Western Economic Journal, now known as Economic Inquiry (Septermber 1973, 11:3, pp. 327-337). The opening lines are: \”The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours. such as the Polscis and the Sociogs.\” Now back to Thaler.)

On whether financial markets are efficient:

\”The efficient market hypothesis has two components that I call the “no free lunch” component and the “price is right.” The no-free-lunch component says you can’t beat the market. And I would say that component of the hypothesis is at least approximately true. Most active managers fail to beat their passive benchmarks. The active management industry as a whole doesn’t really provide much in the way of value. I say that as a principal in an active money management firm where we do think we provide value. But the industry we belong to as a whole doesn’t seem to. So I think that part is reasonably true. And nobody’s ever really been hurt by assuming that they can’t beat the market. Certainly individual investors would probably be better off if they believed that.

\”The more important part is the “price is right” component, which is saying that asset prices are equal to the true intrinsic value. … But there are these little cases where we can see “misbehaving” up close and personal. Here’s a current one involving a closed-end mutual fund. I should say a closed-end mutual fund is a kind of mutual fund where the managers collect a pot of money and invest it and then the shares in the fund are traded and the prices of the fund can diverge from the value of the assets that they own. …  One of these closed-end funds happens to have the ticker symbol CUBA. Now, in spite of having the CUBA ticker symbol, it of course has never invested in Cuba, which would be illegal. And even if it weren’t illegal, there are no securities to buy. So it really has nothing to do with Cuba. For years it was selling for about a 10 or 15 percent discount. The day that President Obama announced his intention to relax relations with Cuba, it went to a 70 percent premium. And it’s now selling for about a 40 percent premium. If anybody can explain to me why that’s rational and what it would have to do with the possible relaxation of relations with Cuba, let me know.\”

Fairness and long-term profit maximization

\”It seems clear to me that firms have lots of social responsibilities that are perfectly consistent with profit maximization if they care about the long run. … Here’s an example …The morning after a blizzard, a hardware store that has been selling snow shovels for $15 raises the price to $20. Is that fair? People hate it. Now I asked my MBA students that question and most of them thought it was just fine. After all, that was the correct answer in a different course, right? In their microeconomics class, they would say there’s a fixed supply, demand shifts to the right, and the price goes up. Now what do real firms do? … Home Depot . . . whoever else is doing this, they want to be around for the long run. And if they double the price of plywood the day after a hurricane, good luck getting people to come in and buy all the stuff they’re going to need to remodel their house. So firms that act responsibly are going to have loyal customers over the long run. And that just makes sense. And so maximize profits, sure, but make sure you’re maximizing  profits over the long run, not over a week.\”

Nudging for good or evil

\”In the book Nudge we coined the term “choice architecture.” The idea is you can design the environment in which people choose to help them make better decisions. … Now, that said, whenever anybody asks me to sign a copy of Nudge I always write “nudge for good.” And that’s a plea, not an expectation. Firms can nudge for good or for evil.\”

Rationality May Need Some Nudging

\”Keep in mind that I am still an economist at heart. I would like markets to be more efficient. … I’m a believer in rational behavior as a goal. I just don’t think people are very good at it on their own, so we should help if we can.\”