Year: 2016

Foreign direct investment refers to a situation when a foreign firm invests in an affiliate located in the United States in a substantial enough way that it gains some voice in the management of the enterprise. This is often defined in terms of having ownership of at least 10 percent of the voting stock of the company.  After an inflow of $348 billion in foreign direct investment to the US economy in 2015, the total stock of foreign direct investment in the US economy is $2.9 trillion. Rudy Telles Jr. lays out these facts and other evidence in \”Foreign Direct Investment in the United States: Update to 2013 Report,\” written by  for the Economics and Statistics Administration of the U.S. Department of Commerce (ESA Issue Brief #02-16, June 20, 2016).

Here\’s a figure showing the pattern of FDI into the U.S. economy on a year-to-year basis.

Here are some bullet points from Telles about key patterns (footnotes omitted):

• The United States is the largest recipient of global FDI with an inward FDI stock of $2.9 trillion on a historical-cost basis in 2014. On a current-cost basis, the United States’ FDI stock was more than three times larger than that of the next largest destination country in 2014.
• Investment in the United States remains strong; total stock of FDI in the United States grew at an average annualized rate of 6 percent per year from 2009-2014. … 
•  Advanced economies, led by the United Kingdom, Japan and Germany, hold the largest FDI positions in the United States.
• Majority-owned U.S. affiliates of foreign entities affiliates produced $360.0 billion in goods exports in 2013, and are a catalyst for research and development in America, spending $53.0 billion in R&D and accounting for a record high 16.4 percent of the U.S. total expenditure on R&D by businesses.
• Majority-owned U.S. affiliates of foreign entities employed 6.1 million U.S. workers in 2013, up from 5.8 million in 2011, and generally provide compensation at higher levels than the U.S. average, at nearly $80,000 per U.S. employee in 2013 as compared to average earnings of $60,000 for workers in the economy as a whole.
• The U.S. manufacturing sector continues to benefit greatly from inbound FDI flows, as nearly 70 percent of FDI flows in 2015 and over one-third of jobs at U.S. majority-owned affiliates of foreign entities were in manufacturing in 2013.

I would add that the growth of foreign direct investment fits with other emerging patterns in international trade. For example, companies that use global supply chains will often find it useful to have a substantial ownership share in many of the links of that chain–which means more foreign direct investment. When exporting services, it will often be useful to have a physical presence in the country where the buyers of those services are located, to improve both communication and marketing. Clearly, it is  increasingly unwise to assume that because a good or services is produced in the geographical area of a certain country, it is also being produced by a company that is owned by investors from that same country.

Can China maintain its rapid pace of economic growth in the decades ahead? Jacob Funk Kirkegaard
suggests that one substantial hindrance may be China\’s education system is not keeping up. He lays out the case in \”China’s Surprisingly Poor Educational Track Record,\” which appears as Chapter 3 in
China’s New Economic Frontier: Overcoming Obstacles to Continued Growth, published by the Peterson Institute for International Economics (PIEE Briefing 16-5, September 2016, edited by Sean Miner).

As a starting point, compare countries by per capita GDP and what share of the adult population has at least an upper secondary education. As shown in the figure, the education level of China\’s adult population ranks well below other countries with a roughly similar level of per capita GDP.

China has made dramatic gains in its education level in the last few decades. One standard measure of gains over time is to compare the education level of a younger age group to an older age group, like the average education level of adults age 25-34 with adults age 55-64. The red bars–with China shown in yellow–shows how much the education level of the younger group exceeds that of the older age group. Clearly, China has made substantial gains. But just as clearly, the gains in China\’s education attainment are below those for France, Spain, Brazil, Korea, and others. Moreover, China was starting at a much lower level of educational attainment (the hollow box showing educational attainment for the 55-64 age group is lower for China than for the comparison countries shown here) and so middling gains for China in educational attainment aren\’t helping it to catch up.

Kirkegaard sums up the situation this way:

\”In some ways, China may have been a victim of its own success. The pull effects of its sustained economic boom and rapidly rising wage levels appear to have led too many young people to leave education too early to acquire the skills needed to sustain them (and Chinese economic growth rates) throughout their lifetimes. As Chinese economic expansion shifts toward more skill-intensive growth, those without a secondary education will be less able to find jobs. …  The Chinese government and society appear to have failed to keep enough of the country’s young people in school during the recent decades of economic growth. This is likely to have long-term scarring effects, as public underinvestment in human capital and individual acquisition of needed skills are difficult
to undo. People’s “lower than otherwise would have been the case” skill levels cannot easily be restructured. Skill shortages at the upper secondary level will make it harder for China to move into the production of higher value added goods and services, lead to increased income inequality and geographic wealth diversity, and complicate the transition to a widespread consumption-based economy.\”

Aaron Steelman interviews Erik Hurst in Econ Focus, published by the Federal Reserve Bank of Richmond (First Quarter 2016, pp. 22-26). The brief overview preceding the actual interview describes some of the subjects covered:

\”Hurst has used regional data in a series of papers to look at other macroeconomic phenomena that would be hard to examine using national data alone. He also has done important work on household financial behavior — including consumption and time use over people\’s life cycles — and on labor markets. Business startups have been another interest of his: Much has been written about the importance of entrepreneurship to the U.S. economy, but what, he has asked, actually motivates people to open their own businesses? In addition, in a recent paper, he and co-authors have attempted to quantify how much the decline in barriers to employment of women and minorities has contributed to economic growth. Among his current research interests is explaining the decline in labor force participation among prime working age males.\”

Here are a few of Hurst\’s comments from the interview that caught my eye:

On who the entrepreneurs really are …

\”Most small businesses are plumbers and dry cleaners and local shopkeepers and house painters. These are great and important occupations, but empirically essentially none of them grow. They start small and stay small well into their life cycle. A plumber often starts out by himself and then hires just one or two people. And when you ask them if they want to be big over time, they say no. That\’s not their ambition. This is important because a lot of our models assume businesses want to grow. Thinking most small businesses are like Google is not even close to being accurate. They are a tiny fraction.

\”My work with Ben Pugsley has been emphasizing the importance of nonpecuniary benefits to small-business formation. Because when you ask small-business people what their favorite part of their job is, it\’s not making a lot of money. They do earn an income and they\’re very happy with it, but they get even more satisfaction from being their own boss and having flexibility and all of those other nonpecuniary benefits that come with being the median entrepreneur in the United States.\”

Wages may be flexible at the local/regional level, even if they appear stickier using national-level data. 

The facts are real wages moved very strongly with employment across regions. Nevada was hit very hard by the recession, for example, while Texas was hit much less hard. Wage growth, both nominal and real, was about 5 percent higher in Texas than it was in Nevada during the Great Recession. So if you\’re going to just correlate employment movements and wage movements, both real and nominal, at the local level, you see a pretty strong reduced form correlation.In the aggregate time series, you don\’t. Wages hardly moved at all despite employment falling pretty sharply. So there are some differences in the correlations between wages and employment at the local level and the aggregate level during this recession … When people say the reason we haven\’t seen real robust wage growth in the recovery is because wages were so sticky in the beginning period, I just don\’t think that holds water with the flexibility of wages that we see at the local level.\”

The Great Recession is over–for skilled labor.

\”There is a structural problem for prime-age, lower-skilled workers in the economy. If you take a look at people with a four-year college degree, you can barely see the effects of the recession any longer. There’s been no lasting effect on their employment rate. Almost all of the effect is concentrated among people with less than four-year college degrees.\”

Do the agglomeration benefits of urban areas come from production or from consumption?

\”Many urban models historically assumed that agglomeration benefits usually came from the firm side. Someone might want to be close to the center city, for instance, because most firms are located in the center city. So the spillover for the household was the commuting time to where the firms were, and the firms chose to locate near each other because of agglomeration benefits.

\”I have always been interested in it from another angle. When we all come together as individuals, we may create agglomeration forces that produce positive or negative consumption amenities. Thinking about it this way, when a lot of high-income people live together, maybe there are better schools because of peer effects or higher taxes. Or maybe there are more restaurants because restaurants are generally a luxury good. Or maybe there’s less crime because there is an inverse relationships between neighborhood income and crime, which empirically seems to hold. So, while we value proximity to firms, that’s not the only thing we value. How important are these consumption amenities? And more importantly, how do these consumption amenities evolve over time …\”

The interview also discuss the findings of several paper that appeared in the Journal of Economic Perspectives, where I work as Managing Editor, and which together give a sense of the breadth and depth of Hurst\’s work. (All papers in JEP, from the current issue back to the first issue in 1987, are freely available online compliments of the publisher, the American Economic Association.\”

In the Summer 2008 issue of JEP, Hurst co-authored a paper with Jonathan Guryan and Melissa Kearney on the subject, \”Parental Education and Parental Time with Children.\” Here\’s a comment from Hurst about this work in the interview:

\”[I]f you look at the income gradient of how we spend our time, the richer you are, the less home production you do. But the richer you are, the more childcare you do. So that income gradient between home production and childcare has opposite signs, which tells me it’s not exactly the same good. Whether that’s coming from the utility you get from being with your kids or whether it’s from investing in their human capital, that’s hard to say. We know people from high-income families go to school more, go to the doctor more, and spend more time with their families. So how much of it is investment, how much of it is home production, how much is leisure, I don’t know.

\”I have always advocated that you should have four uses of time — market work, home production, taking care of kids, and leisure — and then treat kids as somewhere between leisure and home production.\”

In the Spring 2016 issue of JEP, Hurst co-authored a paper with Kerwin Kofi Charles and Matthew J. Notowidigdo on the subject \”The Masking of the Decline in Manufacturing Employment by the Housing Bubble.\” Here\’s Hurst describing the paper:

\”The way I usually describe the paper, which I wrote with Kerwin Charles and Matt Notowidigdo, is to take two regions, Detroit and Las Vegas. Las Vegas has very little manufacturing relative to Detroit. Detroit didn’t have a big housing boom but Las Vegas did. … When you look at this early 2000s period, if you focus only on Detroit, you see employment rates going down, particularly among prime-age workers. It looks like there was a structural decline in employment well before the recession ever started. When you look at Las Vegas during the boom, the employment rate was well above long-run local averages. Normally, most people in their 20s and 30s work, but some of them don’t. During this period in Las Vegas, among lower-skilled workers in their 20s and 30s, nearly everybody was working. So when you put aggregate statistics together, when you sum together Detroit and Las Vegas, it looks like employment rates were relatively constant over this time period. But one was really low compared to historical levels, and one was really high relative to historical levels.

\”In this paper, we show that the decline in manufacturing that occurred during this period nationally — when you add in the Detroits, the Worcesters, and the Youngstowns — was masked by the aggregate housing boom in places like Las Vegas, Phoenix, south Florida, and some places in California that were growing well above average. Now one of these was temporary and one isn’t. The housing boom we know busted and then employment in Las Vegas plummeted. If you look at 2010 or 2011, the employment rate in Las Vegas is roughly the same as it was in 2000, meaning it increased and went back to trend, where the old manufacturing centers just continued declining relative to their 2000 level. You have a very temporary boom-bust cycle overlaid with a structural decline, and what you get is kind of a hockey stick pattern for the aggregate.

\”So for macroeconomists looking at the Great Recession, this is important for understanding why the employment rate hasn’t bounced back to its 2007 level. It shouldn’t have because 2007 wasn’t a steady state. In terms of policy implications, this means that monetary policy arguably is not an especially effective tool for strengthening the labor market. Instead, I believe you need to focus on retraining workers or investing in skills in some form. You might also want to look at disability and some other government programs that might act as a drag on unemployment.\”

Union membership varies wildly across high-income countries. In addition, there is a phenomenon of \”collective bargaining coverage,\” often not familiar to American readers, which measures the share of workers who are covered by collective bargaining agreement, even though they are not union members. In the US, union density is almost the same as collective bargaining coverage. But in France, only 7.7% of workers are actual union members while 98% of workers are covered by collective bargaining agreements. Here are some facts on these patterns across high-income countries from the OECD publication called Economic Policy Reforms 2016: Going for Growth.

As a starter, here are figures showing the variation in the share of workers who are covered by a collective bargaining agreement (Panel A) and the share actually belonging to a union (Panel B). Just glancing at the figure should offer two lessons: 1) There\’s a lot of variation across countries; 2) Many of the coverage rate percentages are substantially higher than the union membership percentages; that is, in a lot of countries a large share of workers will find that their compensation is determined by collective bargaining, even though they are not a union member.

Here are some specific examples of the differences between union density and collective bargaining coverage, drawing from the OECD data:

For those who need a dose of economics with their end-of-summer Labor Day family cookout (and really, don\’t we all need that?), here\’s a sampling of some previous posts.

1) Origins of Labor Day (September 7, 2015)

The first Labor Day march and celebration almost didn\’t happen, for lack of a band. Also, was Maguire or McGuire the one who had the idea for such a holiday?

2) Update on US Unions (October 8, 2015)

About 30% of the US workforce belonged to a union back in the early 1950s, compared to barely more than 10% today. Union workers do earn more, but at least in part, this is because their employers how to compete with a mixture of higher-priced labor, fewer jobs, and more capital investment . Are there alternative institutions that might help represent the modern needs of US workers?

3) The Gig Economy and Alternative Jobs

All of the job growth is in \”alternative\” jobs (April 11, 2016), which are in some sense temporary or on-call jobs without the expectation of a lasting attachment to a an employer. The US government is planning an updated survey of how many in the \”gig economy\” (February 16, 2016), because the current studies use different definitions and get different answers. There may be a need for new rules for workers in the gig economy (December 9, 2015).

4) Income Inequality

Here\’s an update on the income share being received by the top 1% in the US economy (July 6, 2016). Here\’s my argument as to why stock options are a primary reason for the growth of compensation and income inequality at the top of the income distribution (March 25, 2016).  One occasionally hears the argument that greater inequality may lead to slower economic growth, but I\’m skeptical  (May 29, 2015).

5) Unemployment is Bottoming Out, So What\’s Next? (January 26, 2016)

The US unemployment rate has been 5% or lower since October 2015. It\’s unlikely to fall a lot further. So are we beginning to see the next steps in a healthy labor market, like wage increases and a rise in labor market participation rates?

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I\’m going to pass along some thoughts about teaching this week.

With the 2016 election season in full force, here\’s a timeless thought from Max Weber in his 1918 lecture, \”Science as a Vocation\” (available various place on the web, like here and here).

“The primary task of a useful teacher is to teach his students to recognize \’inconvenient\’ facts–I mean facts that are inconvenient for their party opinions. And for every party opinion there are facts that are extremely inconvenient, for my own opinion no less than for others. I believe the teacher accomplishes more than a mere intellectual task if he compels his audience to accustom itself to the existence of such facts. I would be so immodest as even to apply the expression \’moral achievement,\’ though perhaps this may sound too grandiose for something that should go without saying.”

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I\’m going to pass along some thoughts about teaching this week.

It sometimes seems to me that too much of education is about asking students whether they understand or don\’t understand, or whether they agree or disagree, both of which can be useful steps, but neither of which pushes a student to interrogate their own understanding more closely. Here\’s a comment from Harry Berger, a professor of literature and art history, that captures some of my concern on this point:

“The first and most important move every young citizen of the interpretive community should make is to perform the pledge of allegiance to interpretation, and I don’t think it’s a bad idea for students to learn a little piety with the move. So I urge all teachers everywhere to insist that their students begin every day by murmuring in unison, and with expression, dutifully and even prayerfully, the two parts of the primal invocation that will prepare all American children to question both church and state:

Let there be at least one unacceptable interpretation of any text.
Let there be at least two acceptable interpretations of any text.

This little pair of exhortations seems innocuous, but taken together and perused more closely they open up a space between dogmatism and indeterminacy; they establish textual boundaries that can be policed.”

The quotation is from from Berger\’s 2005 book Situated utterances: texts, bodies, and cultural representations (Fordham University Press, p. 494).

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I\’m going to pass along some thoughts about teaching this week.

In the last year or two, many campuses and classroom have seen arguments that seemed to pit robust debate against \”safe spaces.\” I liked what Roxane Gay, a professor of English at Purdue University, had to say on this subject in a piece written for the New York Times last fall called “The Seduction of Safety, on Campus and Beyond” (November 13, 2015).

I like the definitiveness of Gay\’s statements that students will be challenged but won\’t be tormented, and the emphasis that a good class is built on trust.

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I\’m going to pass along some thoughts about teaching this week.

Like every teacher, I suppose, I\’ve had more than one talk with a student who said: \”I understand it all just fine in my mind, or when you say it or I read the textbook, but when I try to write it down, I just can\’t seem to say what I mean.\” One semester I had heard this line often enough that I posted on my door this rejoinder from Montaigne\’s essay \”On the Education of Children, written around 1579-1580.

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I\’m going to pass along some thoughts about teaching this week. Let\’s start with some characteristically realistic (or even cynical?) comments from Adam Smith in the Wealth of Nations, from his discussion \”Of the Expense of Institutions for the Education of Youth\” (Book V, Ch. 1, Part III, Art. II).

Smith argues that when teachers don\’t have incentives to work on their teaching, then teachers will either \”neglect it altogether, or … perform it in as careless and slovenly a manner as that authority will permit.\” Moveover, if all the teachers come together in a college or university, they will support each other in their disdain for teaching: \”In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.\” Smith further argues that all the discipline at colleges and universities is aimed at students, not teachers, and includes this comment: \”Where the masters, however, really perform their duty, there are no examples, I believe, that the greater part of the students ever neglect theirs. No discipline is ever requisite to force attendance upon lectures which are really worth the attending, as is well known wherever any such lectures are given.\”

Here are the extended passages from which these snippets are drawn:

\”In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it. It is the interest of every many to live as much as his ease as he can; and if his emoluments are to be precisely the same, whether he does, or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way, from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.

\”If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself persons who either are, or ought to be teachers; they are likely to make a common cause, to be all very indulgent to one another, and every may to consent that his neighbour may neglect his duty, provided he himself is allowed to neglect his own. In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching. …

\”The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or more properly speaking, for the ease of the masters. Its object is, in all cases, to maintain the authority of the master, and whether he neglects or performs his duty, to oblige the students in all cases to behave to him as if he performed it with the greatest diligence and ability. It seems to presume perfect wisdom and virtue in the one order, and the greatest weakness and folly in the other. Where the masters, however, really perform their duty, there are no examples, I believe, that the greater part of the students ever neglect theirs. No discipline is ever requisite to force attendance upon lectures which are really worth the attending, as is well known wherever any such lectures are given.\”