conversableeconomist

Economic Theory: Limitations and Biases

Arnold Kling tackles the hardy perennial topic \”How Effective is Economic Theory?\” in the Summer 2017 issue of National Affairs. His overall approach is to focus on \”five interlocking subjects in particular: mathematical modeling, homo economicus, objectivity, testing procedures, and the particular status of the sub-discipline of macroeconomics.\” He then compares and contrasts what economists were saying about those subjects in 1966 and 1980, compared with his views on current patterns. For details, read the essay! But here are few excerpts that caught my eye and may give some flavor of his discussion:

\”Economists are not without knowledge. We know that restrictions on trade tend to help narrow interests at the expense of broader prosperity. We know that market prices are important for coordinating specialization and division of labor in a complex economy. We know that the profit incentive promotes the introduction of improved products and processes, and that our high level of well-being results from the cumulative effect of such improvements. We know that government control over prices and production, as in communist countries, leads to inefficiency and corruption. We know that the laws of supply and demand tend to frustrate efforts to make goods more \”affordable\” by subsidizing them or to lower \”costs\” by fixing prices.

\”But policymakers have goals that go far beyond or run counter to such basic principles. They want to steer the economy using fiscal stimulus. They want to shape complex and important markets, including those of health insurance and home mortgages. It is doubtful that the effectiveness of economic theory is equal to such tasks.

\”Most scholarly research in economics is ultimately motivated by the unrealistic goal of providing effective theory to implement such technocratic objectives. But the resulting economic theory cannot be applied with the same confidence as Newtonian physics. Even worse is the fact that economists, unlike physicists, are not clear about the limits of the effectiveness of their theories. In short, when it comes to effective theory, economists promise more than they can deliver. …\”

\”There is a very real possibility that over the next 20 years academic economics will congeal into a discipline, like sociology today, which is definitively shaped by an ideologically driven point of view. Among highly educated people, ideological polarization is increasing. Economists have always had their biases about which sorts of theories seemed reasonable; some of these biases are idiosyncratic, as when one economist is inclined to believe that labor demand responds very little to a change in wage rates and another is inclined to believe that labor demand responds a great deal. But going forward, biases are likely to increasingly be driven by political viewpoints rather than by other considerations.

\”This will be evident in beliefs of economists that are politically consistent but analytically contradictory. For example, it is politically consistent for someone on the left to believe that a rise in the minimum wage would not reduce hiring and also that more immigration would not depress wages. Analytically, however, these are opposite views. The minimum-wage increase will not reduce hiring if one treats labor demand as highly inelastic (so that a small change in hiring will be associated with a given change in wages). Increased immigration will not depress wages if one treats labor demand as highly elastic (so that a large change in hiring will be associated with a given change in wages). I think we are already starting to see economists opt for political consistency at the expense of analytical consistency.

\”This more political profession is very likely to point toward the left. Economists are part of an academic community in which peer pressure and community values push left. It is inevitable that the social life of an academic is going to involve interacting with people from other disciplines who are overwhelmingly on the left. This makes it uncomfortable on campus to espouse the free-market views that one used to hear from conservatives like Milton Friedman. There are signs that the momentum within the profession is toward the left. …

\”Young economists who employ pluralistic methods to study problems are admired rather than marginalized, as they were in 1980. But economists who question the wisdom of interventionist economic policies seem headed toward the fringes of the profession.
In this respect, the barriers to effective theory in economics are different and perhaps more worrisome than was the case in 1980. The contemporary state of economic theory reflects a broader crisis in the social sciences and a deepening cleavage between the college campus and the rest of society.\”

It\’s wise to be skeptical about claims of economists. It\’s also wise to be skeptical about claims of noneconomists. It\’s true that economists are often not clear about the limits on the effectiveness of their theories. In my experience, noneconomists are typically even less clear about limits on the effectiveness of their theories–indeed, noneconomists are often loathe to acknowledge that their theories have any limitations at all.

As I try to piece together my own views on these topics, I\’m reminded of some comments from Herbert Stein, who was an economist in many positions in Washington, DC for more than 50 years (from his 1995 collection of essays, On the Other Hand – Essays on Economics, Economists, and Politics). Here\’s his comment comparing the knowledge of economists and non-economists (p. 78)

\”In the preface to a book of mine called Washington Bedtime Stories, I summed up two main lessons derived from more than fifty years in Washington as a civil servant, researcher, presidential adviser, observer, and commentator:

  • Economists do not know very much. 
  • Other people, including the politicians who make economic policy, know even less about economics than economists do.”

Stein also had some pungent comments on how people are affected by their preexisting political views (p. 248 of the same book):

\”I think that most people—even those who read the editorial and op-ed pages—do not want to encounter opposing views. They want a good expression and confirmation of the views they have, or the views they would have if they thought about the subject. I can see that tendency in myself. I rarely read the columnists I know I am going to disagree with. Life is too short. … Probably almost all readers of magazines with pronounced ideological or partisan slants share those slants. They want to be massaged, not informed.

\”In all my years of writing opinion pieces, I don\’t think I have ever received a letter from a reader who said that I had changed his mind. I get some letters–a few–from readers who say they agree with me. Many of them say not only that they agree with me but that they had had the same thought ten years ago and had written a fifty-page essay about it that they would like my help in getting published. Some write to disagree with me, often violently. But I don\’t remember any saying that I had changed his mind. \”

And here\’s one more shot of Stein (from pp. 1-2 of the same book):

\”An old saying goes that whoever is not a Socialist when young has no heart and whoever is still a Socialist when old has no head. I would say that whoever is not a liberal when young has no heart, whoever is not a conservative when middle-aged has no head, and whoever is still either a liberal or a conservative at age seventy-eight has no sense of humor. Obviously, orthodox certainty on matters about which there can be so little certitude must eventually be seen as only amusing.\” 

For myself, I don\’t have much problem when politicians or actual real-world people choose to read economists with whom they basically agree. Choosing the experts who fit with your predispositions is a very human thing to do, and asking nonspecialists to arbitrate disputes between specialists is difficult. But here\’s the kicker: When you have chosen the experts with whom you basically agree, a basic degree of intellectual consistency means that you need to listen to all that they say–including possibly unwelcome warnings about limitations, problems of implementation, other implications, and so on. So choose your expert, by all means, but then also be predisposed to follow or at least to acknowledge both the welcome and unwelcome parts of what that expert has to say.

conversableeconomist

Notes on "Eternal Vigilance is the Price of Liberty"

Who said: \”Eternal vigilance is the price of liberty?\” Well, it wasn\’t Thomas Jefferson, at least not according to the official Jefferson Library. However, a few years ago a blogger named Anna Berkes at the Jefferson library website took a deep dive to search out the source of the quotation. Berkes found that \”eternal vigilance\” and \”price of liberty\” were used more than 700 times in close proximity in various newspapers and books during the first half of the 19th century.

For this post-Fourth-of-July ramble, I\’ll follow in Berkes\’s footsteps, but add a different kind of detail. Specifically, I\’ll take a look at five notable earlier appearances of this phrase. My focus will is on what specifically were the early users of the quotation suggesting that we liberty-loving people need to be eternally vigilant about?

  1.  The first time that we know the terms \”eternal vigilance\” and \”price of liberty\” were used in close proximity was by an Irishman named John Philpott Curran in 1790, discussing the rules for electing the Lord-Mayor of London.
  2. The first time we know that the the entire phrase was used together was during in an 1809 discussion of how James Jackson helped fight off the \”Yazoo land grab\” in western Georgia. 
  3. The first use by a US president, in Andrew Jackson\’s Farewell Address in 1837, was about the need to fight off the Bank of the United States.
  4. The first use by someone who would later be a  US president was when James Buchanan applied the phrase to discussing the merits of the presidential veto.
  5. The use of the term in its more modern meaning, as pushing back against encroachments on personal liberty, in the speeches and writings of Frederick Douglass starting in 1848 and continuing to the years after the Civil War. 

Example #1: John Philpott Curran and the rules for electing the Lord-Mayor of Dublin

John Philpott Curran (1750-1817) was a lawyer who is probably best-remembered today as an advocate for freedom in Ireland. At the time of the election of the Lord-Mayor of Dublin in 1790, Philpott gave a speech pointing that while the Lord Mayor had traditionally been elected, a situation had evolved in which Alderman of the city had both become the only ones eligible for the position of Lord Mayor, but also decided among themselves who would hold that position. Thiw quotation is from The speeches of the Right Honourable John Philpot Curran, published in 1865 (July 10, 1790, p. 105, italics added). 

\”The Lord Mayor of this city hath, from time immemorial, been a magistrate, not appointed by the crown, but elected by his fellow citizens; from the history of the early periods of this corporation, and view of its charters and bye-laws, it appears that the Commons had from the earliest periods, participated in the important right of election to that high trust; and it was natural and just that the whole body of citizens, by themselves or their representatives, should have a share in electing those magistrates who were to govern them, as it was their birthright to be ruled only by laws which they had a share in enacting. The Aldermen, however, soon became jealous of this participation, encroached by degrees upon the Commons, and at length succeeded in engrossing to themselves the double privilege of eligibility and of election of being the only body out of which, and by which the Lord Mayor could be chosen. 

Nor is it strange that, in those times, a board consisting of so small a number as twenty-four members, with the advantages of a more united interest, and a longer continuance in office, should have prevailed, even contrary to so evident principles of natural justice and constitutional right, against the unsteady resistance of competitors so much less vigilant, so much more numerous, and, therefore, so much less united. It  is the common fate of the indolent to see their rights become a prey to the active. The condition upon which God hath given liberty to man is eternal vigilance, which condition if he break, servitude is at once the consequence of his crime, and the punishment of his guilt. 

In this state of abasement the Commons remained for a number of years; sometimes supinely acquiescing under their degradation; sometimes, what was worse, exasperating the fury, and alarming the caution of their oppressors, by ineffectual resistance. The slave that struggles, without breaking his chain, provokes the tyrant to double it; and gives him the plea of self-defence for extinguishing what, at first, he only intended to subdue.

Example #2: Thomas Charlton, James Jackson, and the Yazoo Land Fraud
The earliest use of the exact phrase, \”eternal vigilance is the price of liberty,\” dates to an 1809 book called The Life of Major General James Jackson, by Thomas U.P. Charlton. James Jackson was a member of first Continental Congress and was in the US Senate in early 1790s. He became Governor of Georgia, and then later returned to the US Senate. The specific issue here is the \”Yazoo land fraud,\” in which the Georgia legislature–some of whom had been bribed–sold large quantities of land in the western part of the state.  Jackson made a political issue of sale, was elected Governor, and overturned it, also using the opportunity to disgrace a number of his political opponents. Here is the sympathetic and florid passage from Charlton\’s book (pp. 84-87), which is only a portion of the surrounding paragraph (!). Notice that Charlton puts the phrase of interest in quotation marks (and I\’ve put it in italics), which might either mean that the phrase was already well-known to his readers, or else that he is just setting off a phrase of his own invention for ease of reading.

\”In 1793, 1794, and 1795, he [Jackson] was a senator in congress. Recalled by his fellow citizens, who (inflamed almost to madness, and discerning around them, in every quarter, their rights trampled upon by men of highest character) passed resolutions in their primary county meetings demanding his aid at home, he resigned his honorable station, and immediately embarked all the faculties of his mind, all the firmness of his nature, and all the reputation he had acquired, in indefatigable exertions to effect a repeal of the act by which Georgia had sold to companies of speculators millions of acres of her western territory. To recall the memory of her degradation, to assist in extending remembrance of her shame, can give no satisfaction to her sons. The biographer approaches the subject with loathing, impelled to it by the obligations he has assumed. His painful duty will be comparatively light, if he can convince himself that his succinct presentation of the speculation shall have the least effect in fastening upon the minds of the American people the belief, that \”the price of liberty is eternal vigilance\”; and in convincing them that, whilst a just confidence is given to their public servants, they should be watched with eyes that never sleep. A majority of the Georgia legislature had been bribed by promises of shares— some by certificates of shares, for which they were never to pay—others by expectations of slave property. The foulest treason had been perpetrated, under the guise of legislation. Citizens of the most exalted standing from several States, some of them high public functionaries: one a senator from Georgia, whose duty required him to have been at his post in Congress; others judges, generals, revolutionary characters, whose popularity and past services made them more dangerous, and served ultimately to heap degradation upon their heads, had attended at Augusta, in January, 1795, and executed their unhallowed purpose. Georgia had been robbed of her domain—her own law givers corrupted and consenting and an indelible stigma fixed upon her fame, her own children blackening her escutcheon. The full iniquity of this nefarious legislation—if usurpation can be denominated legislation—was exposed by General Jackson in a series of letters addressed to the people under the signature of \”Sicilius.\” At the following session he was a member. The all-absorbing subject, with the petitions, remonstrances, memorials, and other proceedings of the people, was referred to a committee of which he was chairman. Testimony was taken upon oath, which established deep and incontrovertible guilt. The rescinding law was passed. It was drawn and reported by General Jackson, and adopted as it came from his pen. The merits of this latter act— its constitutionality—its consistency with republican principles—its necessity—its justice—have all been freely and ably discussed in our country, in private circles, in pamphlets, in the public gazettes, in the Congress of the Union, in the Supreme Court. The decision of the country, perhaps, has been against the power of the rescinding legislature, so far as innocent purchasers under the fraudulent grants were interested; but, whether constitutional or not, nothing is more certain than that the honest of every section of the United States; all who detest corruption, admire virtue, and regard an honest representation as the bulwark of the public liberties, have considered its action upon the Yazoo speculation as pure, and its motives patriotic. The citizens of Georgia, especially, have held in horror and detestation the authors and abettors of her humiliation; and have consecrated with their best affections the memories of those who were faithful to the State. The Yazoo act repealed, every vestige and memorial of its passage expunged from the public records, and burnt with all the ceremony and circumstance which popular indignation demanded, the popularity of General Jackson became unrivalled.  

Example #3: Andrew Jackson and Opposition to the Bank of the United States

In President Jackson\’s Farewell address on March 4, 1837, he took a few whacks at his old adversaries who favored the founding of a Bank of the United States. He said (italics added):

\”The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States, and the evil consequences which followed may warn us of the danger of departing from the true rule of construction and of permitting temporary circumstances or the hope of better promoting the public welfare to influence in any degree our decisions upon the extent of the authority of the General Government. Let us abide by the Constitution as it is written, or amend it in the constitutional mode if it is found to be defective.

\”The severe lessons of experience will, I doubt not, be sufficient to prevent Congress from again chartering such a monopoly, even if the Constitution did not present an insuperable objection to it. But you must remember, my fellow-citizens, that eternal vigilance by the people is the price of liberty, and that you must pay the price if you wish to secure the blessing. It behooves you, therefore, to be watchful in your States as well as in the Federal Government. The power which the moneyed interest can exercise, when concentrated under a single head and with our present system of currency, was sufficiently demonstrated in the struggle made by the Bank of the United States.\”

Example #4: James Buchanan and the Presidential Veto
In 1842, the US Senate was considering a bill that would alter the US Constitution to eliminate the presidential veto: that is, what Congress passes by majority vote becomes law. James Buchanan, who would later become president from 1857-1861, just before the Civil War, gave a speech \”On the Veto Power\” on February 2, 1842. This is from volume 5 of The Works of James Buchanan published from 1908-1911 (p. 130).  Buchanan said (italics added):

\”This veto power was conferred upon the President to arrest unconstitutional, improvident, and hasty legislation. Its intention (if I may use a word not much according to my taste) was purely conservative. To adopt the language of the Federalist, \” it establishes a salutary check upon the legislative body, calculated to guard the community against the effects of faction, precipitancy, or of any impulse unfriendly to the public good, which may happen to influence a majority of that body,\” [Congress.] Throughout the whole book, whenever the occasion offers, a feeling of dread is expressed, lest the legislative power might transcend the limits prescribed to it by the Constitution, and ultimately absorb the other powers of the Government. From first to last, this fear is manifested. We ought never to forget that the representatives of the people are not the people themselves. The practical neglect of this distinction has often led to the overthrow of Republican institutions. Eternal vigilance is the price of liberty; and the people should regard with a jealous eye, not only their Executive, but their legislative servants. The representative body, proceeding from the people, and clothed with their confidence, naturally lulls suspicion to sleep; and, when disposed to betray its trust, can execute its purpose almost before their constituents take the alarm.\” 

Example #5: Frederick Douglass and the Fight against Slavery and Racial Discrimination

Our proverb of interest was something of a favorite for Frederick Douglass. In Wolfgang Mieder\’s 2001 book, No Struggle, No Progress: Frederick Douglass and His Proverbial Struggle for Civil Rights, Mieder lists seven times when Douglass used the term spanning the years from 1848 to 1889, The first time was in an essay in Douglass\’s journal The North Star, on March 17, 1848 (the Library of Congress has a manuscript of the essay here). Douglass wrote (italics added):

\”It is in strict accordance with all philosophical, as well as experimental knowledge, that those who unite with tyrants to oppress the weak and helpless, will sooner or later find the groundwork of their own liberties giving way. \”The price of liberty is eternal vigilance.\” It can only be maintained by a sacred regard for the rights of all men. The people of the North have sought to attain and secure their rights, by a most flagrant infringement of the rights, liberty and happiness of others. They have consented to stand side by side with the tyrant; with their heels on the hearts of fettered millions, leaving them to perish under the weight of what they call \”our glorious Union\”, and in doing so, have given the Southern slaveholder the most effective power to control and govern the North.\” 

Douglass\’s usage made the eternal vigilance a matter of universal civil rights and human rights, not just about rules for electing the Lord Mayor or being opposed to arguably ill-considered legislation. On the 26th anniversary of emancipation on April 16, 1888,  Douglass gave a speech in Washington, DC, now often titled, \”I Denounce the So-Called Emancipation as a Stupendous Fraud.\” He focused on the dire situation of blacks in the South (where he had just returned from a visit),

\”It is well said that \”a people may lose its liberty in a day and not miss it in half a century,\” and that \”the price of liberty is eternal vigilance.\” In my judgment, with my knowledge of what has already taken place in the South, these wise and wide-awake sentiments were never more apt and timely than now. … 

\”I have no taste for the role of an alarmist. If my wishes could be allowed to dictate my speech I would tell you something quite the reverse of what I now intend. I would tell you that everything is lovely with the Negro in the South; I would tell you that the rights of the Negro are respected, and that be has no wrongs to redress; I would tell you that he is honestly paid for his labor; that he is secure in his liberty; that he is tried by a jury of his peers when accused of crime; that he is no longer subject to lynch law; that he has freedom of speech; that the gates of knowledge are open to him; that he goes to the ballot box unmolested; that his vote is duly counted and given its proper weight in determining result; I would tell you that he is making splendid progress in the acquisition of knowledge, wealth and influence; I would tell you that his bitterest enemies have become his warmest friends; that the desire to make him a slave no longer exists anywhere in the South; that the Democratic party is a better friend to him than the Republican party, and that each party is competing with the other to see which can do the most to make his liberty a blessing to himself and to the country and the world. But in telling you all this I should be telling you what is absolutely false, and what you know to be false, and the only thing which would save such a story from being a lie would be its utter inability to deceive.

The first quotation from Douglass in this passage, about how \”a people may lose its liberty in a day,\” is commonly attributed to Montesquieu, but I don\’t know the original source. (And I wouldn\’t dream of putting any faithful reader who has stuck with me this far through another search!)

Some Thoughts

1) I suppose that the economist in me likes the phrase \”eternal vigilance is the price of liberty\” because it is a prominent example of a nonmonetary price. But maybe that reason  doesn\’t resonate with everyone!

2) The word \”vigilance\” is powerful and interesting. Vigilance is about a heightened level of perception and responsibility, about being present not just physically, but also emotionally. For example, a sentry who is responsible for the safety of others may keep vigil, or there are vigils before certain religious events, or people might sit vigil near a with someone who is dying or already dead.

3) \”Vigilance\” leaves open the question of what political tactics are appropriate at a given point in time. Vigilance doesn\’t mean that you react on a hair-trigger, or that you react in a dramatic way–although sometimes those responses may be advisable. Vigilance is about awareness and sensitivity and noticing.

4) The idea that vigilance must be \”eternal\” is pleasing to me, because it suggests a hard-headed view both of political actors and of ordinary people. It suggests both that political actors and social groups will always and inevitably be trying to encroach upon liberty.

5) In a broad sense, this sentiment is not just political in its meaning. Back in 1956, in the previous to a CBS Radio adaptation of his novel Brave New World, Aldous Huxley said (January 27, 1956): 
\”The price of liberty–and even of common humanity–is eternal vigilance.\” I suspect that Frederick Douglass would have agreed, although some of the earlier users of the term might have felt that Huxley was missing the point.

conversableeconomist

Why Not Taxation and Representation?

As a July 4 mental workout, consider an alternative version of history. At the end of the Seven Years War (also known as the French and Indian War) in 1763, Great Britain decides to annex its American colonies into Great Britain, and so it designates seats in the British Parliament for the colonists. In this alternative history, many of those who ended up in the actual course of history as signers of the Declaration of Independence instead become members of the British Parliament. (Honestly, you think Benjamin Franklin would have turned down a chance in 1765 or so to be in the British Parliament?) The battle cry of \”No taxation without representation\” loses its force, because the Americans do have representation. You can then write your own alternative history novel, extrapolating British, American, European, and world history from this point forward.

This option of representation for colonial America in Parliament was fairly well-known at the time: for example, it is discussed by Adam Smith in The Wealth of Nations, published in 1776, and was advocated by some opposition politicians in the British Parliament. The question of why it did not occur is also tackled directly by Sebastian Galiana and Gustavo Torrens in \”Why Not Taxation and Representation?A Note on the American Revolution\” (SSRN working paper, last updated June 2017).  They ask:

\”To solve the puzzle posed by the American Revolution, we must answer two crucial questions. First, why did the North American colonies rebel? Second, why didn\’t the British authorities and the Americans elites reach a peaceful agreement for sharing the economic burden of defending the colonies in exchange for more political power for the American colonies? For example, why didn\’t the British agree to have American representation in the British Parliament and thus quickly placate the revolt? After all, the motto of the revolution was no taxation without representation, suggesting Americans would have been willing to accept taxation if the British Parliament would have granted them political representation and/or greater political autonomy.\”

Galiana and Torrens summarize earlier research in colonial history that substantiates the following points:

\”1. The American colonies were prosperous. They were richer and had a more equal income distribution than Great Britain and other European nations. …
2. British mercantilist policies and other economic regulations were not that burdensome for the colonies and membership in the British Empireís trade system was probably quite beneÖcial for the colonies. …
3. The American colonies had relatively inclusive institutions. …
4. The British Empire had shown its willingness to defend the American colonies and the colonies had shown their willingness to be part of the Empire, especially during the Seven Years War. …
5. The amount that Great Britain was spending on the colonies was considerable, and the colonies did not generate sufficient revenue to make them an advantageous undertaking….
6. The American colonies paid little in taxes and the British Parliament had been ineffective in increasing their tax burden. …
7. Although France and other British rivals provided military support, rebellion was nonetheless very costly for the colonies. …
8. Rebellion was a very risky and dangerous enterprise for the American elites. …\”

Given this background, why did the American Revolution come to pass. Some of the reason, of course, is that the American colonists included a relatively high proportion of ornery tax-hating, liberty-lovers. But political matters on both shifting in the mid-1760s. 

The political coalitions in Britain were shifting, and the new powers wanted tighter control over the American colonies. Britain wanted funds to pay off the debts from the Seven Years War, and it seemed fair that the American should shoulder the burden. The American colonists kept pushing west, which made Britain fear that there would be additional costs of defense. Economic growth in the American colonies had established a group of wealthy and powerful colonial merchants, but after about 1745m British companies had been extending their direct operations into the colonies, which threatened to cut into the economic and political power of the colonial merchants.
But from a British point of view, the other main concern was that giving political representation to Americans challenged the political coalition that held power in the 1760s. Galiani and Torrens write: 

\”After the Seven Years War, the core of the dominant political coalition in Great Britain was composed of the landed gentry, whose power rested on a political system based on land ownership. The leader of the coalition, Prime Minister Lord North, had the support of the king. His cabinet was composed of Bedfordite ministers and, when dealing with serious issues, Lord North could always count on the support of Parliament, which was dominated by landed gentry. The coalition also enjoyed the support of the High Anglican Church. The members of this coalition were all loyal to a political system based on land ownership, and they considered the members of the general public to be unfit to participate in politics and objected to the idea of making any concessions to the American colonies. … The landed gentry, who controlled the incumbent government, feared that making concessions to the American colonies would intensify the pressure for democratic reforms, thus jeopardizing their economic and political position.\”

To me, the story of Great Britain when confronted with its American colonies is a little like the metaphor of the dog that chased a car every day–but then didn\’t know what do after actually catching it. The Britain of its time was chasing global economic power. The British were willing to bear high costs to defend and build the growing American empire. But when the British found itself faced with the reality of an American colonies rapidly growing in economic strength, population, and land, it didn\’t know how to react. Both holding on and letting go seemed equally impractical, and the US Revolutionary War imposing high costs on both sides was the result.

Readers interested in some further discussion of economics and colonial times, while also looking to escape from the obligatory family picnic and occupy the time before the July 4 fireworks display, might also want to check some earlier posts:

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Carlton Hayes: Nationalism as a Religion

With the July 4 holiday near at hand, it\’s a time to reflect on love of country in all its forms, including variations on patriotism and nationalism. Earlier today I offered some thoughts from George Orwell on these topics. The once-prominent historian Carlton Hayes reflected on the topic of \”Nationalism as a Religion\” in a provocative 1926 essay, writing in the shadow cast by of World War I. He wrote:

“My country, right or wrong, my country!” Thus responds the faithful nationalist to the magisterial call of his religion, and thereby he intends nothing dubious or immoral. He is merely making a subtle distinction between governmental officials who may go wrong and a nation which, from the inherent nature of things, must ever be right. It would sound pedantic for him to say, “my nation, indicatively right or subjunctively wrong (contrary to fact), my nation!” Indeed, to the national state are now popularly ascribed infallibility and impeccability. We moderns are prepared to grant that all our fellow countrymen may individually err in conduct and judgement, but we are loath to admit that our nation as a whole can make mistakes. We are willing to assail the policies and even the characters of some of our politicians, but we are stopped by the faith that is in us from doubting the Providential guidance of our national state. This is the final mark of the religious nature of modern nationalism.

\”The most impressive fact about the present age is the universality of the religious aspects of nationalism. Not only in the United States does the religious sense of the whole people find expression in nationalism, but also, in slightly different form but perhaps to an even greater degree, in France, England, Italy, Germany, Belgium, Holland, Russia, the Scandinavian and Baltic countries, Poland, Hungary, Czechoslovakia, Spain, Portugal, Ireland, the Balkans, Greece, and the Latin-American republics. Nor does the religion of nationalism thrive only on traditionally Christian soil; it now flourishes in Japan, Turkey, Egypt, India, Korea, and is rearing its altars in China. Nationalism has a large number of particularly quarrelsome sects, but as a whole it is the latest and nearest approach to a world-religion. …

\”I would not have anyone gather from what I have said that I condemn nationalism because it is an expression of man\’s “religious sense.” I am too convinced a believer in the inherently religious character of man to make light of religion; and to condemn nationalism because it depends on religious emotion would seem to me as futile as to condemn vegetation because it thrives on sunlight. I would suggest, however, that there are many, many ways in which man may express his religious sense, and that religious emotion, like any other instinctive emotion, is always susceptible and often needful of conscious direction and control. Some forms of religion are superior to others, and when we recognise the religious nature of modern nationalism we have still to ask ourselves whether it is the form or religion most conducive to human betterment.

\”Most great religious systems of the past have been unifying, rather than disintegrating, forces in the history of the human race. … Modern nationalism, while evolving customs and ceremonies which externally are very reminiscent of rites and practices of Christianity, has developed quite a different spirit, and set itself quite a different goal. Despite the universality of the general concept of nationalism, its cult is based on a tribal idea and is, therefore, in its practical manifestations, peculiar to circumscribed areas and to persons of the same language. The good at which it aims is a good for one\’s own nation only, not for all mankind. The desires which it inspires in an Englishman or a German or a Japanese are not the same as the desires which it inspires in a Frenchman, a Pole, or an American. …

\”Nationalism as a religion inculcates neither charity nor justice; it is proud, not humble; and it signally fails to universalise human aims. It repudiates the revolutionary message of St. Paul and proclaims anew the primitive doctrine that there shall be Jew and Greek, only that now there shall be Jew and Greek more quintessentially than ever. Nationalism\’s kingdom is frankly of this world, and its attainment involves tribal selfishness and vainglory, a particularly ignorant and tyrannical intolerance, – and war.\”

conversableeconomist

George Orwell: Patriotism vs. Nationalism

What\’s the difference between patriotism and nationalism? Here\’s some of what George Orwell had to say about the distinction in his 1945 essay, \”Notes on Nationalism.\”

\”Nationalism is not to be confused with patriotism. Both words are normally used in so vague a way that any definition is liable to be challenged, but one must draw a distinction between them, since two different and even opposing ideas are involved. By ‘patriotism’ I mean devotion to a particular place and a particular way of life, which one believes to be the best in the world but has no wish to force on other people. Patriotism is of its nature defensive, both militarily and culturally. Nationalism, on the other hand, is inseparable from the desire for power. The abiding purpose of every nationalist is to secure more power and more prestige, not for himself but for the nation or other unit in which he has chosen to sink his own individuality.

\”So long as it is applied merely to the more notorious and identifiable nationalist movements in Germany, Japan, and other countries, all this is obvious enough. Confronted with a phenomenon like Nazism, which we can observe from the outside, nearly all of us would say much the same things about it. But here I must repeat what I said above, that I am only using the word ‘nationalism’ for lack of a better. Nationalism, in the extended sense in which I am using the word, includes such movements and tendencies as Communism, political Catholicism, Zionism, Antisemitism, Trotskyism and Pacifism. It does not necessarily mean loyalty to a government or a country, still less to one\’s own country, and it is not even strictly necessary that the units in which it deals should actually exist. To name a few obvious examples, Jewry, Islam, Christendom, the Proletariat and the White Race are all of them objects of passionate nationalistic feeling: but their existence can be seriously questioned, and there is no definition of any one of them that would be universally accepted.

\”It is also worth emphasising once again that nationalist feeling can be purely negative. … When one grasps the implications of this, the nature of what I mean by nationalism becomes a good deal clearer. A nationalist is one who thinks solely, or mainly, in terms of competitive prestige. He may be a positive or a negative nationalist — that is, he may use his mental energy either in boosting or in denigrating — but at any rate his thoughts always turn on victories, defeats, triumphs and humiliations. He sees history, especially contemporary history, as the endless rise and decline of great power units, and every event that happens seems to him a demonstration that his own side is on the upgrade and some hated rival is on the downgrade. But finally, it is important not to confuse nationalism with mere worship of success. The nationalist does not go on the principle of simply ganging up with the strongest side. On the contrary, having picked his side, he persuades himself that it is the strongest, and is able to stick to his belief even when the facts are overwhelmingly against him. Nationalism is power-hunger tempered by self-deception. Every nationalist is capable of the most flagrant dishonesty, but he is also — since he is conscious of serving something bigger than himself — unshakeably certain of being in the right. …

\”It can be plausibly argued, for instance — it is even possibly true — that patriotism is an inoculation against nationalism …\” 

conversableeconomist

Melting Pot, Salad Bowl, Chocolate Fondue

Here\’s my attempt to resolve all the issues of shared American identity in under 1,000 words. It was published back in 2013 as an opinion piece in the (Minnesota) Star Tribune newspaper.

\”Analogies for America: Beyond the Melting Pot\”
Timothy Taylor

Melting pot or salad bowl? For decades now, these two contestants have been slugging it out in the contest for most appropriate metaphor for how the cultures and ethnicities of America fit together. But my preference is to think of America as chocolate fondue.

The popularization of “the melting pot” metaphor is usually traced to a soppy, sentimental and very popular play of that name by an immigrant named Israel Zangwill that opened in Washington in 1908. The melting pot metaphor is a way of expressing “E pluribus unum” — “Out of many, one” — the already old saying adopted in 1782 for the Great Seal of the United States (and which you can see on the back of the $1 bill). “E pluribus unum” has also been imprinted on U.S. coins since the 18th century.

The traditional criticism about the melting pot was that what is special about American culture isn’t its homogeneity, but rather its ability to absorb the elements of many cultures, then pass them around to everyone. For example, as John F. Kennedy wrote in his 1958 book, “A Nation of Immigrants”: “One writer has suggested that a ‘typical American menu’ might include some of the following dishes: ‘Irish stew, chop suey, goulash, chile con carne, ravioli, knockwurst mit sauerkraut, Yorkshire pudding, Welsh rarebit, borscht, gefilte fish, Spanish omelette, caviar, mayonnaise, antipasto, baumkuchen, English muffins, gruyère cheese, Danish pastry, Canadian bacon, hot tamales, wienerschnitzel, petit fours, spumoni, bouillabaisse, mate, scones, Turkish coffee, minestrone, filet mignon.’ ”

In our multicultural and individualist age, the common complaint is that the metaphor says that Americans should surrender our cultural and ethnic identities. This critique strikes me as overwrought. Yes, the culture of the country where you live is constraining. But what’s distinctive about modern America is the looseness of these constraints, and the array of available choices.

However, it does bother me that the melting pot metaphor is a relic of a bygone time, when melting different metals together was a common for many industrial workers. It also bothers me that melting different metals together produces a desired outcome only if you adhere to a formula. Bronze is copper and tin. Brass is copper and zinc. If you just dump different metals into a melting pot, what comes out is likely to be flawed and brittle, not strong or useful. When supporters of the melting pot metaphor start talking, it often turns out that they have a clear mental formula for what it means to be American — and it isn’t always my formula.

The notion of America as a salad bowl seems to have been popularized by the eminent historian Carl Degler. His book “Out of Our Past: The Forces that Shaped Modern America” was a commonly used textbook from the 1950s up through the 1980s. In the 1959 edition, he wrote: “[S]ome habits from the old country were not discarded; in those instances the children of immigrants even into the third and fourth generations retained their differences. In view of such failure to melt and fuse, the metaphor of the melting pot is unfortunate and misleading. A more accurate analogy would be a salad bowl, for, although the salad is an entity, the lettuce can still be distinguished from the chicory, the tomatoes from the cabbage.”

While the salad bowl metaphor has a healthy, crunchy “eat your vegetables” ring to it, it seems awkward to me as well. After all, who is the pale and crunchy iceberg lettuce? Who is arugula? Who are the artificial bacon bits? Who are anchovies? Salad ingredients are not all created equal.

Salad is always falling apart, and you can almost never get all of the ingredients, in just the right proportions, into your mouth at the same time. Imagine the oversized modern salad bar, with multiple kinds of lettuces and vegetables, but also seeds and nuts, tuna salad, slices of chicken or ham, bean salad, hard-boiled eggs, crackers and popcorn, along with choice of soup and dessert. It misses what is cohesive and distinctive about America to see the country as a long buffet of ingredients, which we all choose to exclude or include according to our transient appetites of day.

My own suggestion is that America is chocolate fondue. Our different cultural and ethnic backgrounds are the strawberries, pineapple, and cherries, the graham crackers and cookies, the pound cake and brownies, the rice crispy treats and marshmallows, the popcorn and the peppermint sticks. Then we are dipped in America. We swim in America. We are coated in America. Because Americans can and do come from all ethnicities and races, we all look like Americans.

Of course, chocolate doesn’t always deliver on its promise. It can become grainy, rancid, burnt and bitter. Some people have no taste for chocolate, or are even allergic to it. America has often not lived up to its promises and ideals. But when I think consider all the human beings who have ever lived, in all the different places and times around the world, I feel profoundly fortunate to be living in modern America.

There’s an old story about when heavyweight boxing champion Joe Louis decided to enlist in the U.S. Army in 1942. A friend of his objected, and said: “It’s a white man’s Army, Joe, not a black man’s Army.” But Joe Louis had observed the Nazi propaganda machine close up, as the result of his two epic fights against the German Max Schmeling (who was not a Nazi, but whom the Nazis attempted to exploit). So Louis told his friend: “Lots of things wrong with America, but Hitler ain’t going to fix them.”

In that spirit, I’d say lots of things are wrong with America, but often, the best answers for what’s wrong with America are a bigger dose of what’s right with America. On the Fourth of July, I choose to sit with family and friends, and to savor the textures and sweetness of our shared American experience.

————

Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at ­Macalester College in St. Paul. He blogs at http://conversableeconomist.blogspot.com.

conversableeconomist

From What Direction is the Next Recession Coming?

If you were learning about the causes of post-World War II US recessions 20 years ago, the standard chain of events went like this: As the economy goes into an upswing, wage and price inflation starts to rise. The Federal Reserve recognizes that rising inflation isn\’t a sign of healthy growth, and raises interest rates. In often-used phrase, it\’s the job of the Federal Reserve to order that \”the punch bowl removed just when the party was really warming up.\” The higher interest rates dampen inflation, but also lead to recession. The clear implication from this earlier line of thought is that recessions don\’t occur just because a recovery has gone on for a long time: instead, recessions are caused when the Fed decides to dampen inflation. For example, here\’s eminent economist Rudiger Dornbusch (and co-author of one of the preeminent macroeconomics textbooks of the time) writing back in 1997:

\”No postwar recovery has died in bed of old age–the Federal Reserve has murdered every one of them. The typical pattern is that a few years into a recovery, as unemployment drops and the labor and product markets tighten, wage and price inflation picks up, the wage-price spiral gets moving, and soon the Fed steps in to douse wage demands with a good old-fashioned recession. And the whole cycle starts all over again.\”

But the last few recessions haven\’t really followed this narrative. Sure, you can see just a little belch of inflation circa 2007, but the Great Recession was at its root a financial crises tracing back to financialization of mortgage securities and a boom-and-bust in housing prices. Similarly, you can see a little burp of inflation back around 2000, but the recession of 2000-2001 was about the end of the dot-com boom, with a drop in the stock market and an accompanying fall in real investment. Even going back to the 1990-91 recession, there is again a small hop in inflation beforehand, that recession was also related to a boom-and-bust in certain regional housing markets and linked to the widespread failures across the saving-and-loan industry.

In short, the old story of recessions caused by fighting back against a rise in inflation seems outdated. Instead, a number of recent recessions seem to be more fundamentally caused by financial crises. A similar point can be made about other recessions around the world: for example, the recessions in the east Asian financial crisis of 1997-98 or the recession across the euro area in 2011-12 were driven by interactions between exchange rates, international capital movements, and the financial sector, not by fighting off inflation.  I found myself mulling over this shift while reading the 87th Annual Report of the Bank of International Settlements s (released June 25, 2017).

As the report spends a couple of chapters discussing, the current and near-term prospects for the global economy are the best they have been for at least a decade. For example, the US unemployment rate had fallen to  4.3% in May, and has now been 5% or lower since September 2015. Thus, the report looks to the middle-term risks:

\”The Report evaluates four risks – geopolitical ones aside – that could undermine the sustainability of the upswing. First, a significant rise in inflation could choke the expansion by forcing central banks to tighten policy more than expected. This typical postwar scenario moved into focus last year, even in the absence of any evidence of a resurgence of inflation. Second, and less appreciated, serious financial stress could materialise as financial cycles mature if their contraction phase were to turn into a more serious bust. This is what happened most spectacularly with the Great Financial Crisis (GFC). Third, short of serious financial stress, consumption might weaken under the weight of debt, and investment might fail to take over as the main growth engine. There is evidence that consumption-led growth is less durable, not least because it fails to generate sufficient increases in productive capital. Finally, a rise in protectionism could challenge the open global economic order. History shows that trade tensions can sap the global economy’s strength.\” 

But inflation in the US and other high-income countries has been so quiet for the last 25 years that it has puzzled economists, including Fed Chair Janet Yellen.  The BIS report notes (references to chapters and graphs omitted):

\”[A] substantial and lasting flare-up of inflation does not seem likely. The link between economic slack and price inflation has proved rather elusive for quite some time now. To be sure, the corresponding link between labour market slack and wage inflation appears to be more reliable. Even so, there is evidence that its strength has declined over time, consistent with the loss of labour’s “pricing” power captured by labour market indicators. And, in turn, the link between increases in unit labour costs and price inflation has been surprisingly weak. The deeper reasons for these developments are not well understood. One possibility is that they reflect central banks’ greater inflation-fighting credibility. Another is that they mainly mirror more secular disinflationary pressures associated with globalisation and the entry of low-cost producers into the global trading system, not least China and former communist countries. Alongside technological pressures, these developments have arguably sapped both the bargaining power of labour and the pricing power of firms, making the wage-price spirals of the past less likely. These arguments suggest that, while an inflation spurt cannot be excluded, it may not be the main factor threatening the expansion, at least in the near term. Judging from what is priced in financial assets, also financial market participants appear to hold this view.\”

Given the good news of weak inflation, it seems plausible that the next recession will arise out during the next financial crisis. At least right now, such a crisis seems most likely to arise outside of the US and European economies. Instead, there are some troubling signs of excessive debt and financial strain in some emerging market economies, as well as in Canada. The BIS report notes:

\”The main cause of the next recession will perhaps resemble more closely that of the latest one – a financial cycle bust. In fact, the recessions in the early 1990s in a number of advanced economies, without approaching the depth and breadth of the latest one, had already begun to exhibit similar features: they had been preceded by outsize increases in credit and property prices, which collapsed once monetary policy started to tighten, leading to financial and banking strains. And for EMEs [emerging market economies], financial crises linked to financial cycle busts have been quite prominent, often triggered or amplified by the loss of external funding; recall, for instance, the Asian crisis some 20 years ago. …

\”Admittedly, such risks are not apparent in the countries at the core of the GFC [global financial crisis], where domestic financial booms collapsed, such as the United States, the United Kingdom or Spain. … Rather, the classical signs of financial cycle risks are apparent in several countries largely spared by the GFC, which saw financial expansions gather pace in its aftermath. …

\”Financial cycles have been a key determinant of macroeconomic dynamics and financial stability. Peaks in the financial cycle have tended to signal subsequent periods of banking or financial stress. From this perspective, ongoing or prospective financial cycle downturns in some EMEs and smaller advanced economies pose a risk to the outlook. Such risks can be assessed through early warning indicators of financial distress. One such indicator is the credit-to-GDP gap, defined as the deviation of the private non-financial sector credit-to-GDP ratio from its long-term trend. Another is the debt service ratio (DSR), ie the same sector’s principal and interest payments in relation to income, measured as deviation from the historical average. These indicators have often successfully captured financial overheating and signalled banking distress over medium-term horizons in the past. … 

\”Standard metrics, such as credit-to-GDP gaps, signal financial stability risks in a number of EMEs, including China and other parts of emerging Asia. Gaps are also elevated in some advanced economies, such as Canada, where problems at a large mortgage lender and the credit rating downgrade of six of the country’s major banks highlighted risks related to rising consumer debt and high property valuations. … Financial cycles in this group are at different stages. In some cases, such as China, the booms are continuing and maturing; in others, such as Brazil, they have already turned to bust and recessions have occurred, although without ushering in a full-blown financial crisis.\” 

An interrelated problem here is that a lot of the borrowing in the world happens with financial instruments that involve US dollars. When an economy outside the US has large US-dollar denominated debts (whether these debts are private or public sector), that economy is vulnerable to a shift in exchange rates that make it harder to repay such debts, or to a change in financial conditions that makes it harder or more costly to roll over the US-dollar denominated debt.  The BIS writes:

\”EMEs face an additional challenge: the comparatively large amount of FX [foreign exchange] debt, mainly in US dollars. Dollar debt has typically played a critical role in EME financial crises in the past, either as a trigger, such as when gross dollar-denominated capital flows reversed, or as an amplifier. The conjunction of a domestic currency depreciation and higher US dollar interest rates can be poisonous in the presence of large currency mismatches. From 2009 to end-2016, US dollar credit to non-banks located outside the United States – a bellwether BIS indicator of global liquidity – soared by around 50% to some $10.5 trillion; for those in EMEs alone, it more than doubled, to $3.6 trillion. …

\”The patterns highlighted above suggest that global US dollar funding markets are likely to be a key pressure point during any future market stress episode. Non-US entities’ US dollar funding needs remain large, posing potentially sizeable rollover risks. They are also concentrated on a rather limited number of major banks. Interconnectedness is another important factor, as dollar funds are sourced from a variety of bank and non-bank counterparties to support both outright US dollar lending and various types of market-based dollar intermediation. In this context, counterparties such as MMMFs [money market mutual funds], insurance companies and large corporates interact with banks in a range of markets, including those for repos and FX swaps. In addition, many of the same banks provide services to entities such as CCPs [central counterparties], which – under stress – can be a source of large liquidity demands.\”

Of course, pointing to some potential economic danger signs a few years off in the future is not a forecast that another crisis will actually occur. My point is that when we worry about potential causes of the next recession and changes in central bank policy, including Federal Reserve policy, we should be paying a lot less attention to risks of inflation–which seems to be in a coma, if not actually dead and buried–and a lot more attention to risks of financial overheating as they arise around the world.

conversableeconomist

Over $200,000 in Income: What Income Taxes Paid?

It always takes a couple of years for the Internal Revenue Service to publish detailed tax statistics. In the Summer 2017 Statistics of Income Bulletin, Justin Bryan provides and overview of \”High-Income Tax Returns for Tax Year 2014.\”

\”For Tax Year 2014, there were almost 6.3 million individual income tax returns with an expanded income of $200,000 or more, accounting for 4.2 percent of all returns filed for the year. Of these, 9,692 returns had no worldwide income tax liability. This was a 24.2-percent decline from the number of returns with no worldwide income tax liability for 2013, and the fifth decrease in a row since reaching an all-time high of 19,551 returns in 2009. This article presents detailed data for high-income returns for 2014 and summary data for the period 1977 to 2013.\” 

The report has lots of detail on patterns in these tax returns. Here, I\’ll focus on two points: the actual income taxes paid by different groups, and what\’s going on with those who have over $200,000 in income, but don\’t owe anything in income taxes. 

This graph provides some evidence on income taxes paid by various groups (that is, payroll taxes, property taxes, and other taxes are not included here). The four sets of bars represent four income groups: under $50,000, $50,000 to $100,000, $100,000-$200,000, and $200,000 and up. For each income group, the bars show the share of people in this group paying a certain share of their income in taxes, grouped into six categories. Of the group with $200,000 or more in income, 0.2% paid 0 percent or less in income taxes; 2.6% paid more than zero but less than 10 percent; 9.6% paid more than 10% but under 15 percent; 38.1% paid between 15-20%; 28.5% paid 20-25%; and 21.1% paid 25 percent or more of income in the form of income taxes. 
High-income, zero tax returns have often been about 0.1-0.2% of all tax returns, with the higher values falling in recession years. However, this value spiked up during the Great Recession, and only by 2014 had it fallen back in to the usual historical range. 

What\’s happening with this group? Bryan breaks down what provisions of the tax code that have the biggest effect in reducing the taxes owed for this group, and reports:

\”It is possible for certain itemized deductions and certain exclusions from income to lead to nontaxability by themselves, but high-income returns are more often nontaxable for a combination of reasons, none of which alone would result in nontaxability. … Of the 9,692 returns without any worldwide income tax and expanded incomes of $200,000 or more, the most important item in eliminating tax, on 54.7 percent of returns, was the exclusion for interest income on State and local Government bonds … The next three categories that most frequently had the largest primary effect on taxes were: 1) the medical and dental expense deduction (15.6 percent or 1,509 returns); 2) the charitable contributions deduction (8.5 percent or 819 returns); and 3) the foreign-earned income exclusion (6.6 percent or 638 returns). The item that was most frequently the secondary effect in reducing regular tax liability on high expanded-income returns with no worldwide income tax was the deduction for taxes paid (24.4 percent or 2,365 returns). The next three categories that most frequently had the largest secondary effect in eliminating taxes were: 1) the charitable contributions deduction (12.7 percent or 1,229 returns); 2) capital gains taxed at 0 percent (12.2 percent or 1,183 returns); and 3) the medical and dental expense deduction (11.3 percent or 1,094 returns).\”

The small number of those who have high incomes but no income tax don\’t bother me much. It\’s a big country. A few rich people will put all their wealth into tax-free bonds. Some will have a few years of making very large charitable contributions, or very high medical expenses. Some will have earned much of their income in another country, and so pay income taxes there. When you hear about high-income people who don\’t pay income tax, it\’s pretty much always a situation with exceptional circumstances, and certainly not a general rule.

conversableeconomist

Higher Local Minimum Wages: Updating Results from Seattle

The city of Seattle raised its minimum wage to $11/hour for many employers April 1, 2015, and then to $13/hour minimum wage in January 2016, with ongoing rises up to $18/hour in years to come. The Seattle Minimum Wage Study Team, based at the University of Washington, is making an ongoing effort to study the effects of this rise in the minimum wage as it happens.

 Last August I noted their study of the effects of the first nine months of the minimum wage in 2015 (\”Higher Local Minimum Wages: Early Results from Seattle,\” August 8, 2016). Now the group has published on its website a follow-up study that includes data for the first nine months of 2016–that is, it includes the period just after Seattle\’s minimum wage rose from $11/hour to $13/hour. The most recent study is \”Minimum Wage Increases, Wages, and Low-Income Employment: Evidence from Seattle,\” by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, and Hilary Wething (June 2017; it\’s also available as NBER Working Paper #23532).Here\’s their central finding: 

\”Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19. A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs. …
Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.\”

The finding is getting a fair amount of attention, because the researchers have some especially interesting data. A lot of minimum wage studies have data on total earnings–which is collected for Social Security and tax purposes–but not on hours worked. However, the state of Washington collects data both on hours and earnings. The authors note: 

\”The analyses use data from the State of Washington Employment Security Department (ESD), collected quarterly from all employers in the state. Washington is one of only 4 states that collects hours worked, in addition to earnings, in these data. These unique data allow us to identify jobs that pay low wages and workers who earn low wages. Prior studies without hours data have had to define `low wage jobs\’ imperfectly (e.g. by focusing on the food service industry or teenage workers).\”

The key difficulty in any minimum wage study lies in choosing a comparison group. For example, one approach might be just to compare Seattle before the minimum wage increase and after. But this \”time series\” approach has largely fallen out of favor, because so many different factors might be affecting Seattle\’s labor market at any given time, and it\’s hard to sort out the minimum wage effects from other factors. 
Thus, the study takes an alternative approach and selects several comparison groups. For example, one comparison is between Seattle and the rest King County that surrounds Seattle. Another comparison is to three other counties that surround King County, but do not actually border Seattle. Yet another comparison is carried out by doing a statistical comparison of how Seattle varied in the past compared to other counties across the state and building up to a \”synthetic\” comparison group by weights those other counties according to how much they have been coordinated with Seattle. All of these comparisons try to look at areas that have similar economic influences to Seattle, and thus would have similar ups and downs, except for the change in Seattle\’s minimum wage laws. None of these approaches is perfect by itself, of course. But looking at a group of potential comparisons, and thinking about the strengths and weaknesses of each comparison, gives a reasonable range of outcomes. 
Every economic study comes hedged about with warnings and issues, which the authors take care to enumerate. Here are a few of them: 
1) The estimate of how much a higher minimum wage reduced hours and jobs in this study is fairly high, compared to other minimum wage studies. Why might this be so? The authors point out that Seattle had already started from the nation’s highest state minimum wage at $11/hour, and then raised it substantially higher. Their previous study, looking only at the minimum wage increase to $11/hour in 2015, found much smaller effects. Thus, one way to interpret these findings is that moderate raises in the minimum wage up to about $11/hour have smaller effects on hours worked, but pushing substantially higher will have a noticeably negative effect. 
2) Obviously, this is a study of Seattle, where the unemployment rate is a rock-bottom 3.1%. The effects of a minimum wage are likely to be different in a place where the unemployment rate is substantially higher. 
3) An issue for a city-level minimum-wage law is that it\’s fairly easy for a number of employers to focus their hiring outside the city, thus avoiding the law. The study can look for signs of this effect: for example, if this kind of shifting is a big deal, it will probably be happening to a greater extent from Seattle to the areas of King County around the city, rather than shifting to the counties that are further away or to the \”synthetic\” comparison group.  But it\’s hard to analyze such shifts. In addition, a state-level or federal-level rise in the minimum wage law would not be as susceptible to such shifts. 
4) There are a number of other tricky issues like the fact that the state-level data doesn\’t cover earnings in the \”informal\” off-the-books sector of the economy. 
As other cities experiment with higher minimum wages, other studies will arrive. As I\’ve said before, I\’m happy to let the empirical patterns tell me what to believe. Based on this evidence, jacking up what is already a very high city-level minimum wage to even higher levels is bad for the total earnings of low-wage workers in that city. 
conversableeconomist

The Challenge of Electrifying Africa

\\Electricity is the bloodstream of modern economies: powering lights, cooking, heating/cooling, motors, information technology,  and more. Conversely, the lack of electrification across countries of sub-Saharan Africa is an anchor holding back their economic future. Simone Tagliapietra lays out some of the issues in \”Electrifying Africa: how to make Europe’s contribution count,\” written as a Bruegel Policy Contribution (Issue #17, June 2017). He writes: 

\”Less than a third of the sub-Saharan population has access to electricity, and around 600,000 premature deaths are caused each year by household air pollution resulting from the use of polluting fuels for cooking and lighting. Solving the issue is a fundamental prerequisite for unleashing sub-Saharan Africa’s economic potential. Given the magnitude of the challenge, only a joint effort involving sub-Saharan African countries and international public and private parties would pave the way to a solution. ….
\”Electrification rates in sub-Saharan African countries average 35 percent … The situation is even starker in rural areas, where the average electrification rate in sub-Saharan Africa stands at 16 percent … Furthermore, the number of people living without electricity in sub-Saharan Africa is rising, as ongoing electrification efforts are outpaced by rapid population growth. … In sub-Saharan Africa, average electricity consumption per capita is 201 kilowatt-hours (kWh) per year, compared to 4,200 kWh in South Africa and 1,500 kWh in North African countries. The situation is even worse in rural areas of sub-Saharan Africa with access to electricity, where electricity consumption per capita remains even below 100 kWh per year.\”

For comparison, per capital electricity consumption in high-income countries around the world is about 9,000 kWh. Here\’s a heat map showing the share of population with access to electricity around the world.

Perhaps just as disturbing as the lack of electricity across many areas of Africa is that even the seemingly aggressive plans in place–essentially, to triple electricity capacity by 2030–would lead to less than half of what is needed to provide provide full access to Africa\’s population at that time (leaving aside the question of what quantity will be available on a per capita basis). Tagliapietra writes:  

\”The jump in capacity [forecast for 2030] is projected to be based mainly on hydropower (35 percent of total  capacity in 2030) and gas (27 percent), plus oil (16 percent), coal (10 percent), solar photovoltaic (6 percent), geothermal (2 percent), biomass (2 percent) and wind (2 percent). Such a development lacks ambition, both quantitatively and qualitatively. From the quantitative perspective, reaching a level of total electrical capacity of 167 gigawatts (GW) by 2030 would not be sufficient to ensure access to electricity to all people in sub-Saharan Africa. The electrical capacity of sub-Saharan Africa would need to be expanded up to 400GW by 2030 in order to guarantee energy access to all.\”

Of course, there are arguments about how this expansion of electrical capacity should happen. There are on-grid methods like expanding hydropower, which does not emit greenhouse gases, but if done at large scale implies large dams that pose their own environmental and social challenges There are proposals for widespread use of off-grid or mini-grid sources, from renewables to diesel generators. I\’m open to all kinds of proposals, as long as the plausible addition to electrical capacity is genuinely large–a multiple of existing levels.  

The current electricity utilities across Africa are not financially sustainable,and aren\’t up for this job. \”Sub-Saharan African electricity utilities are currently simply not financially sustainable. The seminal study by Trimble et al (2016) showed that across sub-Saharan Africa only the utilities in the Seychelles and Uganda fully cover their operational and capital expenditures. All other sub-Saharan African utilities run in quasi-fiscal deficit (ie defined as the difference between the actual revenue collected and the revenue required to fully recover the operating costs of production and capital depreciation), and thus need to be subsidised by the state.\”
So the focus has been on outside sources of finance. The amounts involves are not earthshaking in a global context. \”Enerdata (2017) estimates that from 2015 to 2030, sub-Saharan Africa will need around $500 billion in investment just to scale-up electricity generation. An equal amount of investment will be needed to scale-up electricity transmission and distribution lines. About $1 trillion by 2030 (or about $70 billion per year) will thus be needed to expand sub-Saharan Africa’s electricity sector in order to ensure universal access to electricity by 2030.\”
Where might that $70 billion per year come from? One source of funds could easily be a reallocatino within a number of countries in sub-Saharan Africa. At Tagliapietra points out, \”Sub-Saharan African countries spend about US$ 25 billion each year in energy. This substantial amount of budgetary resource is mainly used to subsidise inefficient and wasteful electricity utilities and, in certain cases, to subsidise old forms of energy, such as kerosene. Redirecting these resources into productive energy investments would be a vital step in reshaping sub-Saharan Africa’s energy systems.\”
In recent years, about one-third of the addition to Africa\’s electrical capacity has come from Chinese-based firms.  The US government launched a  Power Africa initiative, working with a number of intenational agencies, back in 2013. Congress approved financial support for the program unanimously in February 2016, based on a combination of a worthy goal and the opportunities for US exporters to provide goods and services in support of African electrification. A chunk of Tagliapietra\’s article is about how Europe might create a parallel initiative.  Of course, a mass-scale expansion of electricity is an issue where financial resources are necessary, but not sufficient. Political leadership within nations of Africa will  need to play a central role, too. 
Those interested in issues relating to the countries of sub-Saharan African might also want to check out these relatively recent posts: