Month: April 2016

Overall US life expectancy is rising, but US suicide rates are also rising. The Centers for Disease Control and Prevention have recently published some short \”Data Briefs\” showing the patterns. In terms of age groups, suicide rates are up for all age groups except for those over 75 years of age. By ethnicity, the increases in suicide rates are largely explained by a rise in suicides in the white population. In terms of methods of suicide, the share of suicides by firearms is falling, while the share by suffocation is rising.

I won\’t offer any instant-insight analysis here about deeper meanings and policy implications. My heart just goes out to those who have committed suicide, and to everyone who has lost a dear one to suicide. But here are some figures to illustrate the patterns. Sally C. Curtin, Margaret Warner, and Holly Hedegaard wrote \”Increase in Suicide in the United States, 1999–2014 ,\” as National Center for Health Statistics Data Brief #241 (April 2016). The overall trend of suicides (adjusted for shifts in the age of the population) looks like this;

The breakdown by age group shows that suicide rates have risen among all under-75 age groups, but the highest suicide rates are in the 45-64 age bracket, and that\’s also where the biggest increases in the suicide rates have occurred. The first figure shows the rates for females; the second for males.

The same three authors also wrote \”Suicide Rates for Females and Males by Race and Ethnicity: United States, 1999 and 2014.\” The abbreviation API refers to Asian or Pacific Islanders, and the abbreviation AIAN refers to American Indian or Alaska Native. Of course, a much larger share of the US population is white than in the American Indian/Alaska Native category, so the rise in the suicide rate among whites is the primary driver of the rise in the overall suicide rate. The first figure shows suicide rates for females, and the second for males.

Finally, the share of suicides in which a firearm was used remains large, but has declined over time, while the share of suicides involving suffocation has risen. 

Social scientists go to sleep every night muttering \”correlation is not causation.\” The correlation between rates of crime and rates of incarceration offers a useful example. The Council of Economic Advisers lays out many of the relevant issues in its April 2016 report, \”Economic Perspectives on Incarceration and the Criminal Justice System.\”  The report discusses in some detail how levels of police and rates of arrest haven\’t changed all that much, but the likelihood of arrest leading to a conviction and the length of prison sentence given a conviction are on the rise. There\’s also some discussion of how the rest of a community is affected by high incarceration rates. Here, I\’ll focus on what the report has to say about reducing crime.

There\’s clearly a correlation in the US between a falling rate of crime and a rising rate of incarceration during the last few decades. Using figures from the CEA report, here are the basic patterns.

But of course, if you take any two patterns that show a long-term trend, they will be either positively or negatively correlated with each other. The question of whether one factor caused the other is more difficult to answer. As a starting point, it\’s easy enough to note that incarceration rates are not the only longer-term patterns that affect levels of crime. As the report notes:

Demographic changes also likely play a part; the youth proportion of the U.S. population (ages 15-30) declined by 12 percent between 1980 and 2013, reducing the general propensity for criminal behavior which is more prevalent among young people. Improvements in police tactics and technology used in policing may have also played a role. Other potential explanations include declines in alcohol consumption, decreases in “crack” cocaine use, and a reduction in exposure to lead …

In addition, the effects of incarceration on crime are governed–like so many other things–by a law of diminishing returns. When the incarceration rate starts rising, you will be (on average) locking up more of those who committed the most severe crimes and who look the most like career criminals. As the incarceration rate gets ever-higher, you will be (on average) locking up a greater share of those who committed relatively less severe crimes and who are relatively less likely to be career criminals. The CEA report puts in this way (citations and footnotes omitted):

\”Researchers who study crime and incarceration believe that the true impact of incarceration on crime reduction is small, with a 10 percent increase in incarceration decreasing crime by just 2 percent or less …  Additional incarceration may be particularly ineffective in reducing crime when incarceration rates are already high. When incarceration rates are high, further incarceration entails incapacitating offenders who are on average lower risk, which means that their incarceration will yield fewer public safety benefits. Thus, given the size of the U.S. incarcerated population, the aggregate crime-reducing impact of increasing incarceration rates is likely to be minimal.\”

Economists tend to look at crime, like so many other issues, as a matter of balancing costs and benefits. For example, most jurisdictions in the US have decided that a rigid enforcement of speed limits wouldn\’t provide benefits that would be worth the costs to the criminal justice system. The United States may well have reached that point at which costs exceed benefits with incarceration. Here\’s an example from the CEA report:

\”Cost-benefit analyses of incarceration weigh the direct costs of incarcerating an individual against the social value of crimes that may have been averted due to incarceration. Lofstrom and Raphael (2013) examine a 2011 policy change in California that resulted in the realignment of 27,000 State prisoners to county jails or parole. They find that realignment had no impact on violent crime, but that an additional year of incarceration is associated with a decrease of 1 to 2 property crimes, with effects strongest for motor vehicle theft. Applying estimates of the societal cost of crime, the authors calculate that while the cost of a year of incarceration is $51,889 per prisoner in California, the societal value of the corresponding reduction in motor vehicle thefts is only $11,783, yielding a loss of $40,106 per prisoner. Notably, this net loss per prisoner would be larger if the study considered the additional costs of collateral consequences, such as lost earnings or potential increases in re-offending due to incarceration. These estimates highlight the fact that there are more cost-effective ways of reducing crime than incarceration, such as investing in law enforcement, education, and policies that expand economic opportunity.\”

When the report refers to alternative law enforcement efforts, one approach is more police. Here\’s the CEA:

\”In contrast to studies of incarceration and sentencing, research shows that investments in police have high returns. In a study of the impact of a mass layoff of highway troopers in Oregon, DeAngelo and Hansen (2014) found that traffic fatalities and non-fatal injuries significantly increased, due to a greater prevalence of dangerous driving and drunk driving. The estimates in this paper suggest that the state trooper salary cost required to save a life is $309,000, which is very low compared to estimates of the statistical value of life, which range from $1 million to $10 million …\”

Indeed, the report offers a striking figure showing some international comparisons on police, judges, corrections officials, and prisoners across countries. Relative to the size of its population, the US compared to the rest of the world is light on police, but heavy corrections officers and prisoners.

Putting these various factors together:

\”CEA conducted “back-of-the-envelope” cost-benefit tests …

• We find that a $10 billion dollar increase in incarceration spending would reduce crime by 1 to 4 percent (or 55,000 to 340,000 crimes) and have a net societal benefit of -$8 billion to $1 billion dollars.
• At the same time, a $10 billion dollar investment in police hiring would decrease crime by 5 to 16 percent (440,000 to 1.5 million crimes) have a net societal benefit of $4 to $38 billion dollars.\”

A final step to reduce crime is to find ways to improve high school graduation rates. The CEA report puts it this way:

\”Lochner and Moretti (2004) conduct a cost-benefit analysis of the effect of increasing the high school graduation rate on crime and arrest rates. Comparing costs and benefits in 1990, they estimate that while the yearly per pupil cost of secondary school is $6,000, the societal benefit from reducing crime is $1,170-$2,100 per additional male graduate, including reductions in victim costs, property damages, and incarceration costs. When these benefits are considered alongside an $8,040 increase in annual income from a high school degree, the benefits of an additional high school graduate are tremendous … In aggregate, the authors calculate that a 1 percent increase in the total high school graduation rate generates a $1.4 billion benefit due to reductions in crime rates.\”

Crime is falling for lots of reasons over the last three decades. Rising incarceration may well have been a moderate contributor to the fall in crime back in the 1980s, when the incarceration rate was relatively low. But by the 2000s, when the incarceration rate had more than doubled, it had become a costly and not-very-powerful way of reducing crime. From that perspective, it\’s not a coincidence that California and other states have been scaling back on their incarceration rate in the last few years. As various states are recognizing, there are more cost-effective alternatives to keep the crime rate on a downward trend.

Everyone needs a few scary stories for telling around the campfire, and for economists, stories about hyperinflation are an obvious choice. Four years ago, \”Hyperinflation and the Zimbabwe Example\” (March 5, 2012) was a vivid story. But Venezuela is now providing a more current example. 

For up-to-date figures, a useful place to turn is the Troubled Currencies Project run by Steven Hanke.
The official exchange rate is 10 Venezuelan bolivars for $1 US. As inflation has hit and the value of the bolivar has plummeted, the black market exchange rate looks like this:

One can then infer an annual rate of inflation from these changes, which is shown by the blue line, with Venezuela\’s official inflation rate appearing in red: :

The facts emerging from Venezuela\’s hyperinflation are unsurprisingly grim. Annual inflation has run above 700% during some periods. According to summaries of the available data (like here and here), the IMF estimates that Venezuela\’s economy shrunk by 10% in 2015, and per capita GDP will be the same size in 2018 as it was back in 2000. Poverty rates, which fell from 60% to 30% with the rise of oil prices in the early 2000s, are now above 70% and rising. One estimate is that the cost of buying a basic basket of food for a month is eight times what would be earned at the minimum wage–always assuming a worker can find that minimum wage job in the first place.

On some dimensions, the bad news shades into black comedy, like the unavailability of basic consumer goods like aspirin or diapers or toilet paper. Venezuela, like many countries, does not print its own currency, but instead relies on outside firms like De La Rue. Of course, hyperinflation means a dramatically increased need for currency if the economy is to function at all. However, Andrew Rosatti at Bloomberg is reporting that the outside firms are worried about being paid for providing currency. He writes: \”Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.\” If memory serves, the hyperinflation in Bolivia back in the 1980s led to a similar problem, in which it was reported that for Bolivia, the cost of importing its own currency became for a time the country\’s third-largest import.

But the short-term problems of inflation are only part of its effect; indeed, one might argue that the curse of high inflation rates is that they encourage an extreme short-term focus throughout the economy. One of the most succinct explanations of inflation and short-termism that I know appeared in an essay written back in 1992 by V.S. Naipaul, called \”Argentina and the Ghost of Eva Peron,\” in which Naipaul quoted \”Jorge\” on the situation of hyperinflation in Argentina. Here, I\’m quoting from the essay as reprinted in the 2003 collection of Naipaul\’s travel writing, The Writer and the World.

\”Another aspect of inflation is that you cease to worry about productivity and even technology. Now, that is the secret of all progress: productivity. But you really can get no more than 3 or 4 percent per annum improvement in productivity anywhere in the world. With inflation like ours you can get 10 per cent in one day, if you know when and where to invest. … It is much more important to protect your working capital than to think about long-term things like technology and productivity–although you try to do both.  So capital investment in Argentina is not even covering wear and tear. In short, when the current plant reaches the end of its working life there won\’t be a provision built up to purchase new capital equipment. This is the inevitable result of inflation, which is the monetary disease. Your money is disintegrating. It\’s like cancer. You live day to day. That\’s all you can do when you have inflation of more than 1 per cent per day. You cease to plan, You\’re just happy to make it to the weekend.\”

Here\’s a question that the Gallup Poll has been asking Americans every few years since the 1960s, most recently in December 2015 In your opinion, which of the following will be the biggest threat to the country — big business, big labor, or big government? Not to keep you in suspense: Big government is winning, or perhaps it\’s more accurate to say losing, this contest.

Here are the answers going back to 1965. It makes sense that the share of those listing \”big labor\” has dropped over time, given the decline in the share of US workers belonging to a union. It\’s interesting that the share naming big business as the biggest threat is about the same now as in the Carter era of the late 1970s. Sure, there have been some spikes in viewing big business as the biggest threat, like a spike probably related to Enron and other corporate governance scandals in the early 2000s and a spike around 2009 in the aftermath of the corporate and financial bailouts. But there doesn\’t seem to be an overall trend upward. For big government, on the other hand, there does seem to be a long-term upward trend: that is, given the way the question is phrased, the shift away from seeing \”big labor\” as the leading issue has been counterbalanced by a swing toward naming \”big government\” instead.

What\’s the political breakdown here? Here\’s the share naming big government as the biggest threat, broken down by party. It\’s no surprise that Republicans are most likely to name big government as the problem and Democrats are least likely, with Independents falling between. It\’s also perhaps expected that when Barack Obama was elected president in 2008, the share of Democrats naming \”big government\” as the biggest threat showed a big drop. But historically, it looks as if a little more than half of Democrats see \”big government\” as the biggest threat through the 1980s and 1990s, and in the December 2015 data as well.

Of course, it\’s worth noting (especially in an election year) that opposition to \”big government\” might not be a broad philosophical opposition to all big government, but  just be disappointment or opposition to the existing government–perhaps along with the evergreen belief that an alternative big government would perform better.

A subsidized employment program is when the government offers a subsidy to an employer (could be private sector or public sector) to hire those from a certain eligible group. The eligible group can be defined in many ways: for example, those who live in a certain set of neighborhoods, or those who have been unemployed for a certain time, or single mothers, or the disabled, or older workers, or those just emerging from jail or prison, or those who are already in some income-support program and trying to make a transition to work, or other groups. The basic idea of subsidized employment is that it\’s better to pay people to work than it is to support them while they aren\’t working–and further, there is a hope that subsidized work experience can be a transition to being hired by an employer who doesn\’t need a subsidy.

 Indivar Dutta-Gupta, Kali Grant, Matthew Eckel, and Peter Edelman provide a useful overview of the existing research in \”Lessons Learned from 40 Years of Subsidized Employment Programs,\” published by the Georgetown Center on Poverty and Inequality in Spring 2016. The report calls subsidized employment a \”promising strategy,\” which seems a fair judgement if one mentally adds \”but not yet proven.\” There are two major federal government studies now underway involving subsidized employment. The \”Subsidized and Transitional Employment Demonstration (STED), 2010-2017\” being run by the US Department of Health and Human Services in seven cities and the Enhanced Transitional Jobs Demonstration study is being run in seven cities by the US Department of Labor. Results from these studies should become available over the next couple of years. 

The Council of Economic Advisers, an office made up of rotating advisory group of economists and their staff within the White House administrative structure, was created 70 years ago by the Employment Act of 1946.  In its First Annual Report to the President,  published in December 1946, the CEA tried to lay out its overall vision of public policy and the US economy. (For those who pay close attention to their prepositions, this First Annual Report to the President is not the same document as the first Economic Report of the President, which was published in January 1947. That document is a nuts-and-bolts overview of the status of the US economy circa 1946.)

Remember that back in 1946, the US economy had just gone through an extraordinary array of stresses and dislocations, including the brutality of the Great Depression from 1929-1933, the steep and severe recession of 1937-38, the disruptions of wartime production, and a post-World War II recession from February to October 1945. Thus, it\’s interesting to me that the CEA overview of economic policy sought to strike a balance between two extremes that have remained recognizable in policy discussions ever since, which they named \”The Spartan Doctrine of Laissez Faire,\” which had a somewhat fatalistic review that sometimes bad stuff just happens in the economy, and \”The Roman Doctrine of an External Remedy,\” which held that well-conceived government action could pretty much always prevent bad economic outcomes. Here\’s how the 1946 report described the two views.

\”THE SPARTAN DOCTRINE OF LAISSEZ FAIRE Early thinking about the general upswings and downswings of business were of a highly individualistic and essentially fatalistic character. Those who follow this line of thought—and some still do—accept the cycle as a result produced by causes deeply rooted in physical nature or in fundamental human behavior and following an intricate pattern of short-, medium-, and long-time swings. They do not claim that this pattern is precise as to timing or invariable as to magnitude, like the movement of the stars. But they do think in terms of essentially mechanical relationships rather than human institutions that can be modified by intelligent action in a republic, and human behavior that can be changed by wise leadership. …

THE ROMAN DOCTRINE OF AN EXTERNAL REMEDY Unlike those whose belief in the external character of the cycle causes them to conclude that nothing can be done about it but to adapt one\’s business operations or exploit it for individual profit, a second group would master the cycle by a remedy equally external to the processes of private business—the power of government to spend and create a purchasing medium. There has arisen in recent years a widespread belief that, whatever the \”cyclical\” forces beating upon business in general or whatever adaptations to such forces may be spontaneously made by the dictates of private managerial understanding or prudence, the economy as a whole may be kept on a reasonably even keel merely through the intervention of central government in the monetary and fiscal area. According to this philosophy of external remedy, the essential phenomenon of a business depression is a too restricted volume of purchasing power being turned into the system, and this particularly in the form of capital expenditures. The obvious remedy, therefore, is for central government to measure the amount of this aggregate deficiency and restore the Nation\’s business to a satisfactory state of activity by injecting an appropriate amount of the purchasing medium.  …

In discussing these polar extremes, the CEA report tried to stake out a middle ground, saying that \”it is with the 100-percenters or the 90-percenters that we disagree.\”

\”In contrast to the Spartan business theory and practice that carried a cult of individual self-reliance to the point of brutality and needless waste, we believe it is not fanciful to liken this doctrine of an overall offset to managerial maladjustment to the Roman system that swung to an extreme opposite to that of Sparta. Roman citizens were—for a time— relieved of the compulsion of relying on their own efforts to keep their economy as a desirable level. \”Bread and circuses\” were provided for all through the power of the state. Similarly, this theory relieves businessmen of the necessity of themselves making the business adjustments by which they would keep the system going at a satisfactory level. As we found in the Spartan school of thought, it is with the 100-percenters or perhaps the 90-percenters that we disagree. Extremists of the Roman doctrine says that we need not worry about any maladjustments in our enterprise system. Monopolistic price policies may curtail markets and cause unemployment. Excessive wage demands may drive costs up and paralyze profits, investments, and employment. We do not need to worry because we can always create full employment by pumping enough purchasing power into the system. If there is too much demand for labor and materials—that is inflation—we turn the faucet off and cause a contraction. Thus by manipulation of Government expenditures and taxation, continuing full employment is assured, and we do not need to worry about anything else in the economy.

\”Although American thought has largely been of the Spartan pattern of self-reliance, not without some of the brutally wasteful accompaniments of laissez faire, and although the softer Roman philosophy of external salvation has been aggressively sponsored in recent years, we believe the great body of American thinking on economic matters runs toward a more balanced middle view. This view stresses the importance of having the specific wage-profit-investment-disbursement relationships soundly adjusted at the points where business is actually done, markets found, and jobs created. …

\”For the actual operation of the major forms of business, we need the intimately informed and flexible decision making of private individuals in their business relations and of executives of business organizations. But we must recognize also that the practically sound and individually efficient management of private farming, manufacturing, transportation, distribution, and banking in the practical situations in which the active managers must make their decisions will not, year in and year out, add up to a sustained and satisfactorily stabilized total utilization of the Nation\’s resources in producing the national well-being of which we are in fact capable. Hence experience and experimentation teach us that there is an important area of Government action in stimulating, facilitating, and complementing the enterprise of private business even if individually well managed.  This functional differentiation and cooperation between private enterprise and public enterprise is in our view something quite different from and much better suited to our situation and temperament than the nationalization of industries to which our English cousins have now resorted. Nor does it involve that regulation of actual business operation which would constitute bureaucratic \”regimentation.\” 

Along with the more modern view of government macroeconomic policy that the report summarized as when government is either \”pumping enough purchasing power into the system\” or \”we turn the faucet off,\” the CEA report also emphasized the importance of consultation and communication that between \”the most thoughtful and responsible leaders\” representing business, labor, consumers, and various levels of government. Such consultation sounds a little strange to my modern American ear: perhaps naive, or old-fashioned, or European, or all of those. But that doesn\’t mean we couldn\’t do with more of it. Here\’s the 1946 report:

We believe, therefore, that when the Congress instructed the Council of Economic Advisers to set up consultative relations \”with such representatives of industry, agriculture, labor, and consumers, State and local governments, and other groups as it deems advisable,\” this outlines one of the major features of our work and one of the most important ways in which we may prove of aid in creating and maintaining conditions of maximum employment and the high standards of living that go with it. By consulting with the most thoughtful and responsible leaders of these groups with reference to conditions which would promote the welfare of the country as a whole, we believe that our counsel and advice on the national economic program will reflect a realistic grasp of the needs and difficulties of the several factors in the total economic process. We trust also that in the course of these consultations we may reflect back to the leaders of these groups something of the demands that successful operation of a total system make upon each of its component parts. In particular, we trust that we may translate objectively to the representatives of the various business, labor, and agricultural groups the purposes and methodology of the Government programs so that, instead of blind opposition which might arise through misunderstanding, there may always be constructive criticism, which will lead to useful adaptation.

When it comes to international flows of debt and equity, the US economy as a whole has developed an interesting pattern: those from other countries are net buyers of US debt, while US investors and firms are net buyers of foreign companies–in the form of stock market equity investments and foreign direct investment. Pierre-Olivier Gourinchas discusses this pattern in \”The Structure of the International Monetary System,\” an overview of recent research in this area appearing in the NBER Reporter (2016, Number 2, pp. 13-17).  He explains the pattern this way:

As financial globalization proceeded, U.S. investors concentrated their foreign holdings in risky and/or illiquid securities such as portfolio equity or direct investment, while foreign investors concentrated their U.S. asset purchases in portfolio debt, especially Treasuries and bonds issued by government-affiliated agencies in areas such as housing finance, and cross-border loans.

Here\’s a figure illustrating the pattern, with net debts owed from the US economy to the rest of the world at the bottom, and net portfolio equity and foreign direct investment by US investors in the rest of the world on top.

Why does this matter? Here are a few of the consequences as Gourichas lays them out.

1) Essentially, the US economy has been able to borrow cheaply from the rest of the world, and then invest those funds in companies around the world. The average return on equity over sustained periods of time is higher than the return on debt. Gourinchas cites estimates that the gap has been between 2.0 and 3.8% per year since 1973.

2) \”These large and growing U.S. excess returns have first-order implications for the sustainability of U.S. trade deficits and the interpretation of current account deficits. As an illustration of the orders of magnitude involved, suppose that the U.S. has a balanced net international investment position with gross assets and liabilities of 100 percent of GDP. An excess return of 2 percent per annum implies that, on average, the U.S. can run an annual trade deficit of 2 percent of GDP while leaving its net international investment position unchanged. More generally, since a large part of realized returns take the form of valuation gains due to changes in asset prices and exchange rates, the current account, which excludes non-produced income such as capital gains, will provide an increasingly distorted picture of the change in a country\’s external position.\”

3) \”[A] deterioration of the U.S. trade balance or of its net international investment position is often followed by a predictable depreciation of the U.S. dollar against other currencies. This depreciation may subsequently improve the U.S. trade balance along the usual channels, but it also improves the return on U.S. financial assets held abroad, thereby making the U.S. relatively richer.Most other countries don\’t seem to enjoy a similar advantage.\”

4) Why has this pattern of \”foreigners buy US debt, US investors buy foreign equity\” emerged? Gourinchas argues that a main reason is that \”it reflects a superior capacity of the U.S. to supply `safe\’ assets—assets that will deliver stable returns even in global downturns.\” As a result, the US economy can depend on an inflow of debt financing at low interest rates. On the other side, \”[w]illingly or not, global suppliers of safe-haven assets must bear more exposure to global risks.\” When a global recession occurs as in 2008, US-based investors will tend to bear heavier losses because they are more exposed to equity risks everywhere in the world. \”Lower funding costs come with a commensurate increase in the global exposure of their external balance sheet.\”

5) Finally, the US economy probably can\’t keep playing the role of providing such a disproportionately large share of safe assets for the entire global economy. Gourinchas argues: As the world economy grows faster than that of the U.S., so does the global demand for safe assets relative to their supply. This depresses global interest rates and could push the global economy into a persistent ZLB [zero lower bound] environment, a form of secular stagnation. … Finally, a body of empirical evidence suggests that environments with low interest rates may fuel leverage boom and bust cycles. The vulnerability of emerging and advanced economies alike to these crises has been amply demonstrated in the past.\”

The number of Mexicans apprehended at the US border is approaching a 50-year low, dropping back to levels last seen  in the 1960s. Most of the reason seems to be that immigration from Mexico dropped off several years ago, and has stayed low since then. Ana Gonzales-Barrera gives a quick overview of the evidence in \”Apprehensions of Mexican migrants at U.S. borders reach near-historic low,\” published on April 14 by the Pew Research Center.

Here\’s the annual data from the US Border Patrol on apprehensions at the US-Mexico border over time.

The number of border apprehensions is often taken as a rough-and-ready measure of the number of people seeking to enter the US illegally. The decline strongly suggests that fewer Mexicans are trying to do so. Here\’s data from the Mexican government on the emigration rate from Mexico per 100,000 in the last decade. Notice that the big decline happens some years ago, even before the start of the Great Recession.

Data from the US side of the border on the Mexican immigrant population in the US actually shows a downturn in recent years.

 Gonzalez-Barrera provided a useful figure in a longer report she wrote last fall at the Pew website about \”More Mexicans Leaving than Coming to the U.S.\” (November 19, 2015). 

These trends and the economic and demographic patterns behind them aren\’t new. I was blogging four years ago on the topic: \”Net Immigration from Mexico Stops–or Turns Negative\” (April 24, 2012). I wrote last year about \”The Declining Number of Illegal Immigrants\” (July 13, 2015) and about how \”China and India Overtake Mexico for Inflow of US Foreign-Born Residents\” (May 13, 2015).

How to limit or regulate the enormous inflow of immigrants from Mexico was a legitimate policy concern from the 1970s into the early 2000s. As Gonzalez-Barrera puts it, that migration was \”one of the largest mass migrations in modern history.\” But now that flow has fallen substantially, and even reversed itself. The main issue now is be how we deal with the after-effects of that enormous mass migration and the immigrants who are already here–many of whom have been here for quite some time.

In a \”noncompete contract,\” an employee signs a contract with an employer not to work for a competing firm for some period of time. The usual justification for such agreements is that it would be unfair an employee who has detailed knowledge of trade secrets or customer contracts to take that information to a competitor.

But about 18% of all US workers are covered by noncompete contracts, and it seems unlikely that they are all in possession of sensitive corporate data. As a Forbes magazine article reported in 2014, the Jimmy John\’s sandwich chain was requiring sandwich makers and drivers to sign a noncompete contract in which they agreed that when they stopped working for Jimmy John\’s they would not work for “any business which derives more than 10% of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches,” if that new employer was located within three
miles of any of the 2,000 Jimmy John\’s restaurants anywhere in the country.

The Office of Economic Policy at the U.S. Department of the Treasury has published a useful overview of these issues in its March 2016 report: \”Non-compete Contracts: Economic Effects and Policy Implications.\”

Non-compete agreements are contracts between workers and firms that delay employees’ ability to work for competing firms. Employers use these agreements for a variety of reasons: they can protect trade secrets, reduce labor turnover, impose costs on competing firms, and improve employer leverage in future negotiations with workers. However, many of these benefits come at the expense of workers and the broader economy. Recent research suggests that a considerable number of American workers (18 percent of all workers, or nearly 30 million people) are covered by non-compete agreements. The prevalence of such agreements raises important questions about how they affect worker welfare, job mobility, business dynamics, and economic growth more generally. This report presents insights from economic theory and evidence on the economic effects of non-compete agreements. It goes on to discuss policy implications, starting a discussion about how such agreements could be used in a way that balances the interests of firms with those of workers and society as a whole.

It\’s obvious why employers like noncompetes. What\’s less clear is whether noncompete contracts serve a broader social interest. As the US Treasury report explains, the standard argument for noncompetes sounds like this:

fThe conventional picture of a workplace characterized by non-compete agreements is one that features trade secrets, including sophisticated technical information and business practices that firms have a strong interest in protecting. By preventing a worker from taking such secrets to a firm’s competitors, the non-compete essentially solves a “hold-up” problem: ex ante, both worker and firm have an interest in sharing vital information, as this raises the worker’s productivity. But ex post, the worker has an incentive to threaten the firm with divulgence of the information, raising his or her compensation by some amount equal to or less than the firm’s valuation of the information. Predicting this state of affairs, the firm is unwilling to share the information in the first place unless it has some legal recourse like a non-compete contract.

Moreover, a noncompete can be a way for firms to seek out employees who intend to remain with the firm for a time. When the firm that knows its workers will not be decamping for the competitor down the street, it finds it easier to share trade secrets and company methods across all workers in the firm, and to provide training in these methods as needed.

Of course, it\’s hard to see how these justifications apply to those working as drivers for Jimmy John\’s. Indeed, the report offers an array of suggestive evidence that noncompete agreements often don\’t have a lot to do with trade secrets and training. The study cites a variety of evidence along these lines.  For example:

• Non-competes are common among workers who report lower rates of trade secret possession: 15 percent of workers without a four-year college degree are subject to non-competes, and 14 percent of workers earning less than $40,000 have non-competes. This is true even though workers without four-year degrees are half as likely to possess trade secrets as those with four-year degrees, and workers earning less than $40,000 possess trade secrets at less than half the rate of their higher-earning counterparts.
• Available evidence suggests that workers with a low initial desire to switch jobs are not more likely to match with employers who require non-competes.
• In some cases, non-competes prevent workers from finding new employment even after being fired without cause; in such cases, it is difficult to believe that non-competes yield social benefits.

Noncompete contracts often include provisions that are not enforceable under state law: for example, state law in California makes noncompete contracts (with a few limited exceptions) essentially unenforceable, but 19% of California workers sign such agreements. Noncompete contracts are often presented to workers as part of the paperwork that they need to sign when showing up for their first day on the job, which doesn\’t suggest that they are part of a negotiation between employer and prospective employee about access to trade secrets and future training. There\’s even some evidence (which at this stage I would characterize as \”real, but weak\”) that signing a noncompete causes less future job mobility and even lower future wages on average.

There\’s also an interesting big-picture story looming here. Histories of the development of Silicon Valley in its early years have often talked about the extremely fluid employment culture. The legends say that an engineer could have a tiff with the boss one morning, walk out the front door of the company and across the street to a competing firm, be hired, and be working for the other firm that same day after lunch. The point is that while California companies might have preferred to have noncompete contracts, these were not enforceable in California. As a result, engineers to come work in California, and the flow of workers between companies encouraged the flow of ideas and innovation, while also encouraging companies to offer high compensation and an attractive work environment.

However, the US Treasury report is quite mild-mannered in drawing policy conclusions, my own reading of the evidence is that noncompete contracts are often overused. The law of labor contracts is largely determined at a state level (whether by legislation or by case law), so if I was in state government, I would be thinking seriously about writing laws that place limits on noncompete contracts.  Some states, following the example of California, might prefer the clean sweep approach and come close to outlawing contracts with only a few exceptions. (Of course, rules about stealing trade secrets would still apply.) Other states might prefer more incremental reforms.

For example, the report notes that some states require that workers receive a \”consideration\”–that is, something of value in addition to their regular job pay–in exchange for signing the noncompete. Certain kinds of training that involves trade secrets might be one kind of answer. Another would be to require that severance pay be linked to the noncompete. As the report notes:

Some firms already provide severance payments to workers with non-competes. For instance, a worker who quits may receive 50 percent of her previous salary in exchange for abiding by the terms of the non-compete. This limits the harm to workers while ensuring that firms retain the ability to protect their interests with non-competes. Importantly, by requiring that firms incur a cost when requesting a non-compete, this policy preserves the most socially valuable non-compete agreements and discourages the least valuable, for which firms would not be willing to pay.

As another example, states could require that noncompete contracts cannot delay someone taking a job with a competitor for more than a certain period: for example, Oregon recently passed a law limiting noncompetes to 18 months. Or states could pass laws that noncompete contracts won\’t apply to anyone in a job paying less than $15-$20 per hour, or that they won\’t apply to workers in certain industries. Or states could pass a law that firms can only put language in a contract which is enforceable under the law of the state, to avoid the California-style scenario where 19% of workers are signing contracts that they often do not know are unenforceable.

The presumption in a market-oriented economy should be that workers are free to switch between jobs when they wish to do so. Employers who want to keep employees have many tools to do so, including paying bonuses related to length of time on the job. Noncompete contracts may occasionally make sense, but they should be a great deal more rare than they currently are.

Hat tips: For some other commentary on the US Treasury noncompete report, see the post by Nick Bunker at the Washington Center for Equitable Growth website, and the article by Justin Fox at the Bloomberg View website.

U.S. tax returns and taxes owed for 2015 are due today, April 18. To commemorate, I offer some connections to five posts about taxes from the last few years. Click on the links if you\’d like additional discussion and sources for of any of these topics.

1) Should Individual Income Tax Returns be Public Information? (March 30, 2015)

\”My guess is that if you asked Americans if their income taxes should be public information, the answers would mostly run the spectrum from \”absolutely not\” to \”hell, no.\” But the idea that tax returns should be confidential and not subject to disclosure was not a specific part of US law until 1976. At earlier periods of US history, tax returns were sometimes published in newspapers or posted in public places. Today, Sweden, Finland, Iceland and Norway have at least some disclosure of tax returns–and since 2001 in Norway, you can obtain information on income and taxes paid through public records available online.\”

2) Could government just fill out preliminary and placeholder tax returns for everyone?

For most people, the US government already has access to your income earned at work, through records from your employer, and it has access to the pathetic little slice of interest you are earning on your bank account. Your age, and the ages of your family members, advance predictably from year to year. For those who don\’t itemize deductions on their tax returns, which is about 70% of all tax returns, this is all the information needed to fill out your taxes. So why doesn\’t the US government fill in this information, calculate taxes owed or refund to be received, and send it to you? You could just accept what they sent, or you could file as usual and make any needed corrections. I discuss how this is done in Denmark, where about 80% of taxpayers accept the accuracy of the form the government sends them, and I also discuss the hurdles faced by proposals to do this in the United States, in \”When Government Pre-Fills Income Tax Returns\” (April 15, 2014).

3) What is the average share of income paid in federal taxes by people from different income groups? 

However much and in whatever direction your knee-jerk reflexes twitch when the subject of income distribution arises, it\’s useful to start with a grounding of \”Facts on the US Income Distribution, Before and After Taxes\” (November 14, 2014). The Congressional Budget Office lays out many of the key facts in a November 2014 report: \”The Distribution of Household Income and Federal Taxes, 2011.\”  As one example among several discussed at the post and in the report, here\’s the path of average taxes paid as a share of income over time that includes all federal taxes: that is, federal income taxes, payroll taxes, corporate income taxes (attributed back to individuals). and excise taxes. The division here is top 1%, 81st-99th percentile, middle three quintiles (that is, middle three-fifths), and bottom quintile. Again, these are average tax rates. Thus, a person at the very top of the income distribution might well be paying a tax rate on the marginal dollar of market income received of 40% or more, but the average tax rate for that same person over all income received could well by the 29% shown for 2011 in the figure.

4) The top marginal income tax rates used to be a lot higher, but what share of taxpayers actually faced those high rates,, and much revenue did those higher rates actually collect?

Compare \”Top Marginal Tax Rates: 1958 vs. 2009\” (March 16, 2012), which is based on a short report by Daniel Baneman and Jim Nunns,\”Income Tax Paid at Each Tax Rate, 1958-2009,\” published by the Tax Policy Center. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. What share of taxpayer returns paid these high rates? Across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates.

How much revenue was raised by the highest marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It\’s interesting to note that the share of income tax revenue collected by those in the top brackets for 2009–that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.

5) Did you know \”How Milton Friedman Helped to Invent Tax Withholding\” (April 12, 2014)?

The great economist Milton Friedman–known for his pro-market, limited government views–helped to invent government withholding of income tax. It happened early in his career, when he was working for the U.S. government during World War II, and the top priority was to raise government revenues to support the war effort. Of course, the IRS opposed the idea at the time as impractical.