Year: 2017

The way to have a higher sustainable catch of fish, long-term, is to have a lower catch of fish, short-term. This insight isn\’t all that paradoxical or surprising. Fisheries are a standard example for economists of what can go wrong when property rights are not clear. If the level of fishing is low, then the resource can replenish itself naturally, and specific rules or property rights are not needed. But when the level of fishing becomes high enough that the resource cannot replenish itself, each individual fishing-boat retains an incentive to keep going out there and getting what it can–after all, if one boat doesn\’t, another boat will. The predictable results is that the fishery becomes depleted.

Ragnar Arnason, Mimako Kobayashi, and Charlotte de Fontaubert discuss the situation in The Sunken Billions Revisited: Progress and Challenges in Global Marine Fisheries, published by the World Bank (February 2017).

As they point out, the last quarter-century or so has seen dramatically more effort to catch fish, with the actual catch stagnant or declining. They write of a \”long-term decline in fish stocks, stagnant or even slightly declining catches since the early 1990s, and an increase in the level of fishing by a factor of as much as four. The productivity of global fisheries decreased tremendously, as evidenced by the fact that catches did not increase nearly as rapidly as the global level of effort (apparent in a doubling of the size of the global fleet and a tripling of the number of fishers).\”

Here\’s a figure summarizing the extent to which fisheries around the world are underfished, fully fished, or overfished.

The report is largely a discussion of a model of global fisheries and what it would take to rebuild them. The authors write:

Edmund Phelps won the Nobel Prize back in 2006 for work that \”[d]eepened our understanding of the relation between short-run and long-run effects of macroeconomic policy.\” But for the last 10-15 years, he has focused on articulating a broader philosophy and economics of capitalism. His thinking in this area is expressed in his 2014 book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change.

But for those looking for a combination of summary of some main themes of the book along with additional thoughts, Phelps has also just written an article, \”The Dynamism of Nations:Toward a Theory of Indigenous Innovation Edmund Phelps,\” in Capitalism and Society (2017, 2: 1, Article #3).

My own gloss on Phelps\’s argument would go something like this: When standard economics (going back to Schumpeter) considers economic growth, it often follows a cookbook approach in which science creates ideas, engineers apply ideas, and then a business supplied with appropriately skilled workers makes and them. In this vision, most workers are cogs in this machine, motivated solely by their wages and their prospects for consumption of goods and services.

Phelps pushes back against what I\’m calling the standard perspective in a number ways. He places less emphasis on the role of science and new discovery for innovation, but correspondingly more emphasis on \”business knowledge\” or \”commercial knowledge\” in creating innovations about what to produce and how to produce it. He argues for the importance of having large swaths of the workforce actively involving themselves in this process of business discovery and innovation. He argues on economic grounds that this broader involvement is important for innovation, and on philosophical grounds that many people find a deeper life satisfaction from involvement in creativity and a career.
Finally, he argues that societies provide a more or less hospitable climate to this broader involvement in innovation, in the balance that is struck in any society between the value placed on creativity, innovation, and disruption, and the value placed on material well-being, predictability, and security. He argues that American society has become in a broad sense less hospitable to innovation, at least in most of the industries outside information technology.

Obviously, it\’s hard to summarize an argument of this breadth in a compact way. But here are a few comments from the article to give a sense of his argument.

On the importance of innovations that are not a direct result of scientific breakthroughs, but rather of business knowledge:

\”An encyclopedia of major innovations must be full of new products and methods not triggered by – or even linked to – any particular scientific advance: Fire, wheel, writing, paper, the Egyptians’ steam power, Gutenberg’s printing press, Whitney’s cotton gin, Waltham’s interchangeable parts, Deere’s moldboard plow, Lille’s chlorination of drinking water, Singer’s sewing machine, Pasteur’s persuading surgeons to wash their hands, Edison’s lightbulb and phonograph, Nightingale’s hospital reorganization to contain disease, the Lumière brothers’ commercial films, Marconi’s radio, Sarnoff ’s radio network, Birdseye’s frozen foods, Farnsworth’s television, IBM’s computer (aimed at businesses), Malcolm McLean’s 1956 containerization, Nat Taylor’s 1957 multiplex cinema, Ted Turner’s 24-hour news program, Howard Schultz’s Starbucks, Marc Andreessen’s web browser, etc. Fracking, the latest of the big innovations, depended on the expertise that engineers gained from experience, not some exogenous advance of science. Of course, the total impact of the millions of unrecognized innovations might well exceed that of the many thousands of well-recognized ones such as those just mentioned. 

\”We can see how Schumpeter went wrong. Science is not the sole source of all knowledge. While advancing science may be expanding potential knowledge of production possibilities, science does not tell us whether there will be a market for any of the new possibilities; business knowledge is indispensable here. And while the level of general scientific knowledge in the world may well have contributed to innovations achieved in modern economies, the outpouring of new products and methods from the 1820s to the 1960s in some countries may not have resulted from scientific discoveries more than from myriad business discoveries – discoveries made in the tests and try-outs of new business ideas. It is not established that scientific knowledge, S, grew faster than business, or commercial, knowledge, C, or that growth of the former is more effective in bringing economic advance than growth of the latter. (Furthermore, the cumulative level of business knowledge – industry expertise and related know-how – is surely more voluminous.)\”

Here\’s Phelps on the importance of a large number of people with creativity and ingenuity for the process of innovation, and the importance of social support for what Phelps calls \”dynamism\” rather than for \”corporatism\” or \”solidarity.

\”The modern capitalist system offers the latitude to innovate, the capacity to do so and, above all, the desire. For high dynamism, a nation – its families, communities and public offices – must give individuals and their companies the latitude and support they need if they are to attempt and to achieve innovation. There is little leeway for innovation if society is unwilling to put up with the “creative destruction” – even the mild disruption or inconvenience – that may accompany it. And there is wide latitude for the innovator where mayors and other public officials are eager to facilitate start-ups and help them with their development. Patent trolls and a climate of litigation pose daunting hazards for start-ups aiming to innovate. Corporatism comes in here: A dogma of a corporatist society is “solidarity.” It calls for providing “social protection” of the myriad interest groups in the economy. So the government might defend the workers or investors in industries by regulating entry with the purpose of barring outsiders with new ideas. In some industries, companies may operate a cartel that removes incentives to innovate in order to gain market share. Solidarity also requires the gains of enterprises, whether from a change of market conditions or a successful innovation, to be shared with so-called stakeholders. So any enterprise contemplating an attempt at innovation would expect that a substantial profit would be largely turned over to the community or to the state. …

At the heart of a nation’s system for high dynamism are people with the desire or occasional urge to innovate. Some may have motivations found among entrepreneurs, such as a need to succeed or to strike it rich. Some others, however, may want to make a difference or show they can go their own way. Some are driven by a curiosity to see whether their insights prove right. Still others are motivated by a desire to give something to their community or society. (Obviously the latter attitudes or traits are not the work-and-save mentality of mercantile capitalism.) I would add that, although a person’s desire to innovate may be inborn to a degree, it can be boosted by supportive attitudes of parents and teachers; and it can be repressed by unwelcoming or hostile attitudes toward creativity or novelty. Furthermore, businesspeople will have more desire to innovate in a nation that admires such ventures and provides workforces that will be engaged in the project and want to contribute. These same desires can also be inhibited by repressive attitudes in families and communities. The empirical effects of attitudes and traits on the dynamism of nations have been the subject of much recent research. The paper I presented at the 2006 Conference of the Center on Capitalism and Society in Venice tested the statistical significance of several attitudes reported in the World Values Surveys, and it presented estimates of the efficacy of these attitudes. Economies exhibit better performance in nations in which more people regard work as important to them, want to have some initiative at work, seek jobs that are interesting, express acceptance of competition, and prefer “new ideas” to old ones. These results, which do not address innovation in particular, at least leave open the possibility that innovation is affected by these attitudes. A subsequent study by Gylfi Zoega also using WVS data found that the possession of a good “work ethic”, initiative, and trust of others raises job satisfaction; and these attitudes also affect a nation’s unemployment and labor force participation. Finally, in a study with Raicho Bojilov in 2012, I found that job satisfaction is higher – very likely because innovation is stronger or more widespread – in nations where more people think it is fair to pay more to the more productive, agree that the direction of firms is best left to the owners and feel that new ideas may be worth developing and testing. …

As one might anticipate from the tone and tenor of this argument, Phelps criticizes an excess of regulations often passed in the name of social protection for hindering creativity. But he saves some of his strongest language for what he calls \”private sector decadence\” and \”corporatism.\”

Some of the most serious faults of the once-dynamic economies lie in the private sector. A degree of corruption has seeped into some private institutions. The institution known as corporate governance is suspect. Most attempts at innovation are long-term projects shrouded in mystery, yet CEOs lean toward short-termism, aiming to maximize their bonuses and golden parachute by extracting every last gain in efficiency. This short-termism reduces the supply of innovation – the innovatorship, risk-capital, and venturesome end-users that innovation requires. CEOs in established companies make as few attempts at innovation as possible – explaining that there have been no “opportunities” to innovate. Financial people want to be paid on the basis of current profits, with little to no claw-back. The pressure is on corporations to meet quarterly earnings targets so as not to jeopardize hoped-for capital gains on the stock. A characteristic of established and even accomplished corporations is that they are unable to go beyond a careful concern for efficiency, which demonstrates to the corporate board and shareowners their zeal. … 

In all the discussion of reform, however, it is supposed that it is the “economy” that needs fixing – that the spirit of the modern economy and the values that inspire it remain strong: America remains at heart a nation of pioneers and innovators, Europe the home of mythic explorers and profound discoverers. But the “spirit” is a key part of an economy – the heart of it. The corruption of government and of corporations is not simply the ineluctable consequence of self-interest. People’s self-interests depend on their values. The transmutation of the state and the corporate sector is a result of a resurgence of the traditional values that we call corporatist values, which counter the influence of modern ones. At precisely this level of values, the rise of corporatism has transformed the functioning of the once-modern economies. …

The corporatism that was resurgent at the turn of the century – the doctrine of Ferdinand Tönnies, George Valois and Benito Mussolini, to name a few – disapproved of disorder, especially the topsy-turvy disorder that came with innovations and adaptations. Corporatism disapproved of those with the ambition to get rich, calling them “money-grubbers,” and hated the “new money” that displaced established wealth. It disapproved of competition, preferring instead the concerted action of society as a whole through the government. Most fundamentally, corporatism was an attack on individualism, calling for a state that would bring harmony and nationalism in place of the individual’s autonomy to take initiative and to innovate.  In the corporatist state, everyone is to go on working, accumulating wealth and managing companies – and all that is seen to be for the good of the social body. But no one is permitted to hire the nation’s labor and borrow its wealth to embark on a venture aimed at adventure, discovery and personal growth! What matters is society’s power to achieve material gains – public consumption, private consumption and leisure. Thus the rebirth of corporatism was a reaction against the modernism that was the root source of the spirit of the modern economy.

By now, corporatism is pervasive in all the nations of the West. Corporatism is behind the metastasis of vested interests, clientelism and cronyism that has brought a welter of regulations, grants, loans, guarantees, deductions, carve-outs, and evergreen patents mainly to serve vested interests, political clients, and cronies. In recent decades, large banks, large companies, and large government agencies formed a nexus to pump up home mortgage debt in America and to create unchecked sovereign debt and unfunded entitlements in several nations in Europe. America has joined Europe in having a parallel economy that draws its nourishment from the ideas of political elites, whatever their motives, rather than from new commercial ideas. All this has combined to choke off much innovation.

Corporatist thinking is behind various developments in the private sector. With the rise of stakeholders, anyone deciding to start an innovative company would have to expect that its property rights would be diluted as it copes with an array of figures – its own workforce, interest groups, advocates, and community representatives – who ardently believe they have a legitimate “stake” in the company’s results. Many employees feel they have the right to hold on to their jobs – no matter that many others would do the job for far less money – so long as they add something to profit or the company makes a profit from other divisions that can cover the loss.

As a reader of Phelps\’s essay (and the earlier book), there are plenty of places where I feel some urge to push back against his argument.  But it also seems to me that he is trying to enunciate something important. As he notes, standard economics has not produced a fully persuasive answer as to why productivity growth slowed across high-income countries in the early 1970s, or  why male labor force participation started a steady decline at about the same time. There are also plenty of times and places where governments in certain countries liberalized certain laws or opened an industry to competition, but the resulting changes were paltry or nonexistent. The fact base and logical linkages here can feel nebulous and elusive. But in a broad sense, it seems plausible to me that a society can offer a broader climate that is more or less supportive of innovation and change, and in turn, that this climate that this can have deeper effects on growth, work satisfaction, and the efficacy of economic policy.

Jacob Udell and Glenn Yago provide a readable overview of the topic in \”Still Digging Out: The Economics of a Palestinian Future,\” which appears in the most recent issue of the Milken Institute Review (Second Quarter 2017, 19:2, pp. 78-85). For additional background, the World Bank has published the \”Economic Monitoring Report to the Ad Hoc Liaison Committee\” (May 4, 2017), and the IMF gas has published \”West Bank and Gaza: Report to the Ad Hoc Liason Committee\” (April 10, 2017). Here, I\’ll draw on all three report.

Udell and Yago describe the problems of the economy of the West Bank and Gaza in some detail. Here\’s a trimmed-down  version of a table from their article (I\’m showing three-year intervals, rather than every year).

For example, Udell and Yago write:

\”Though the labor force participation rate is currently at its highest since 2000 (at an unimpressive 46 percent), it has been accompanied by an overall spike in unemployment — implying that the net entry of job seekers into the market exceeds the ability of the economy to create employment. Meanwhile, the Palestinian Authority has also become the employer of last resort, with 23 percent of the workforce on its rolls. The wave of youth entering the labor market in the past decade, coupled with the frictional and structural unemployment of the adult population and almost nonexistent job growth, has left youth unemployment at alarming levels. Since 2001, for instance, unemployment among males aged 15–24, which seems to function as a leading indicator of civil unrest, has averaged 35 to 40 percent and reached 43 percent in 2014.\”

\”Since 2005, real average wages have decreased by some 10 percent, while unemployment remains at around one-quarter of the labor force, and average GDP growth lags behind population growth by 2.6 percent per year.\”

\”And while considerable sums flow into the territories from overseas Palestinians, there are no “diaspora bonds” or other vehicles to facilitate investment by Palestinian ex-pats (whose wealth estimates by the World Bank have varied from $40 billion to $80 billion). One mark of a lack of confidence in the economy: Palestinian investment abroad in 2015 was $5.9 billion — $1.3 billion more than foreign investment in Palestine.\”

Along similar lines, the World Bank report notes:

\”Currently, only 40 percent of those aged between 15 and 29 are active in the labor market, reflecting high pessimism regarding employment prospects. Despite a low participation rate, unemployment amongst this category reached 27 percent in 2016 in the West Bank and a staggering 56 percent in Gaza. … In the medium term, real GDP growth is projected to hover around 3.3 percent. This growth level implies a stagnation in real per capita income and an increase in unemployment. Moreover, downside risks remain significant. As mentioned earlier, the [government budget] financing gap for 2017 is unprecedented in terms of its size, and risks significant economic and social consequences if it is not closed through additional finance or policy measures.\”

\”For such a small economy, achieving a sustainable growth path depends to a large extent on its capacity to compete in regional and global markets and increase its exports of goods and services. The Palestinian economy, however, has been losing this capacity as a result of a poor business climate mainly driven by externally-imposed restrictions on trade and access to resources in addition to the lack of political stability. In fact, the structure of the economy has substantially deteriorated since the 1990’s. For instance, the manufacturing sector, which is usually one of the key drivers of export-led growth, has largely stagnated and its share in GDP has dropped from 19 percent in 1994 to 11 percent in 2015. The share of the agriculture sector has also declined from 12 to 4 percent over the same period. In relative terms, most growth occurred in public sector services over the past two decades. Private investment levels, averaging about 15 percent of GDP in recent years, have been low and concentrated in low productivity activities less affected by political risk. Palestinian exports are focused largely on low value added products and services and their share in the economy has been low and stagnant at 17-18 percent. The substantial amounts of financial assistance from the international community received over the last two decades have so far helped mitigate the impact of the restrictions on growth, but aid has significantly declined in recent years (from 32 percent of GDP in 2008 to about 6 percent of GDP in 2016) and cannot continue to substitute for a poor business environment.\”

Similarly, the IMF report notes that the structure of the Palestinian economy has been shifting away from agriculture and manufacturing:

\”For example, agriculture and manufacturing together accounted for almost 33 percent of GDP in 1995, but their share had almost halved to 17 percent in 2015. At the same time, other sectors that might compensate as an economy develops (e.g., services) did not gain ground. While trade is one exception, the large structural trade deficit weighs negatively on the capacity of industry to create jobs.\”

\”The Palestinian territories rank as the second largest source of international migrants in relation to its population in the world, after Syria. The magnitude and importance of remittance inflows to Palestine are undeniable. According to World Bank estimates, remittance inflows to the Palestinian territories were USD2.2 billion in 2015. This estimate does not include compensation of Palestinian employees working in Israel, which, according to the PMA [Palestine Monetary Authority], are an additional the USD1.2 billion. Remittance inflows are also significant when considered relative to the size of the economy and other important financial flows. Inward remittances are about 17 percent of GDP, making the Palestinian territories one of the top 20 most remittance-dependent countries in the world. If compensation of Palestinian workers in Israel is included, the inward remittance flows rise to 26 percent of GDP. Further, inward remittances are twice as large as exports and comparable to aid including transfers to non-governmental organizations. Remittances exceed Foreign Direct Investment by a factor of 10 to 15.\”

Udell and Yago describe the interdependence of the economy of the West Bank and Gaza with that of Israel:

\”The Palestinian territories’ trade deficit is also a product of dependence on Israel and a lack of diversification of its trade partners. Israel is the biggest market by far for Palestinian goods, accounting for some 85 percent of Palestinian exports, which highlights the lack of Palestinian business development in the markets of Europe and the rest of the Middle East. Israel is also the territories’ major supplier, accounting for 60 percent of total imports.\”

What are some potential areas on which economic growth in the West Bank and Gaza might build? One possibility is to seek to build ties of trade and migrant workers with Arab countries across the Middle East. Another is to emphasize better conditions for businesses to operate in the West Bank and Gaza. For example,the World Bank report notes at one point, \”[I]t is vital for the PA to address institutional reform to ensure that energy suppliers are paid for their service – which is critical for both energy imports and investment in generation.\” That advice hits at a deeper problem for any business thinking about operating in the area.

Udell and Yago offer some scenarios and economic possibilities for the West Bank and Gaza that at least have a positive upside. They write:

Like Israel, Palestine lacks natural resources. But it does have a wealthy diaspora, a cultural commitment to education, and strong entrepreneurial and trading traditions vital to a modern, skills-based economy. Palestine could also capitalize on the good will and proximity of the Arab world; if it built efficient capital markets in a politically stable setting, Palestine could become a financial and commercial-services hub for the Arab East. It could also take advantage of historically low interest rates and the ability to leverage bilateral and multilateral guarantees to develop infrastructure in water, alternative energy, environmental protection, tourism, transportation and communications.

Consider, too, that the area has favorable conditions for developing high-value agriculture and agricultural technologies — fruits, vegetables, animals and high-value growing practices. Technology transfers from Israel, a country that has figured out how to grow food and fiber in unlikely places (in an environment similar to those found in Palestinian areas), could sharply improve Palestinian agricultural productivity. Currently, the average agricultural yield in the Palestinian Authority is just half of that in Jordan and 43 percent of that in Israel. The information and communications technologies sector, which has been a bright spot over the past decade, can continue to develop as a key driver of economic growth. … Arab states, along with the United States and Europe, could also offer preferential trade and tariff agreements to kick-start employment and production in special economic zones, as they have done in Jordan and Egypt over the past decade. …

Tourism agreements between Israel and Palestine that make it convenient to visit both Israel and Arab sites in single trips could also play an important role in driving economic development. Tourism, especially high-value-added tourism, is, after all, a labor-intensive industry with great potential for absorbing the large and rapidly growing numbers of unemployed Palestinians. …

Water. A handful of specific river basin projects would have an immediate impact on living standards in Palestinian cities and villages, as well as provide water for higher productivity agriculture and industry.

Energy. Natural gas production, electricity cogeneration and alternative fuels production (solar, biomass renewables) would reduce the need to spend scarce foreign exchange on imports and in some cases have the potential to be highly profitable. These projects would also generate stable, predictable revenues that could be used to leverage added private fund-raising.

Trade, tourism and transportation. Here, we would include regional inter-urban rail, port and, eventually, air facilities, as well as destination tourism at religious, archeological and recreational sites. It could be time to revisit the RAND Corporation’s attempt in the Arc Project to plan infrastructure to support commercial and residential development in an increasingly urbanized country — and offer viable alternatives to continuing life in refugee camps.

Housing construction and finance. The expansion of markets for mortgages would stimulate homeownership and urban revitalization, as well as invigorate focus on green buildings and sustainable housing in this fragile semi-arid environment.

As these hundreds of new regulations began to take effect, and to interact with each other and the real world, there was inevitably going to be a need for follow-up legislation. A Republican-backed bill called the Financial CHOICE Act passed through the House Financial Services Committee earlier this week. A group of faculty members at the New York University Stern School of Business and the School of Law have combined to publish an e-book called Regulating Wall Street: CHOICE Act vs. Dodd-Frank, which offers a bunch of readable short essays on these topics.

My overall take is that although Dodd-Frank had some useful steps, it was most usefully interpreted as a cry by Democrats for \”more regulation.\” Conversely, the Financial CHOICE act is essentially pushback by Republicans for \”less regulation.\” Dodd-Frank is full of problems and missed opportunities, but the Financial CHOICE act, even if it is turns out to be amended in sensible ways, would leave behind additional problems while managing miss many of the same opportunities. US financial reform legislation doesn\’t offer much inspiration for ability of US legislators to see the bigger picture.

The \”Introduction\” by Thomas Cooley gives a useful overall perspective on the NYU volume:

The Dodd-Frank Act was not a fully formed set of rules or even a coherent new regulatory architecture for the United States. Rather it was an attempt to create some common mechanisms forcommunication and collaboration within the existing regulatory system through a newly created multi-agency organization—the Financial Stability Oversight Council (FSOC)—and a roadmap for rulemaking to address the obvious flaws in the system. It outlined a path for addressing the flaws in the existing regulatory architecture. The scope of Dodd-Frank is vast, covering everything from consumer financial protection to executive compensation in the financial sector, to the origins of “conflict minerals.” It outlined 390 rulemaking requirements, of which roughly 80% have been met. The resulting increase in regulatory complexity, compliance costs for financial institutions and coordination costs for the regulators has, not surprisingly, led to a backlash against the excesses of the Dodd-Frank regulations. …

Our early assessments of Dodd-Frank found much to criticize in the legislation, but we viewed it as an important step in the direction of making the financial system less risky. It was important because it correctly identified the overarching threat to financial stability and the root cause of the 2008 crisis as the accumulation of systemic risk—risk of collapse because of the interconnected financial risks— in the financial system. An objective of Dodd-Frank was to identify sources of systemic risk, identify systemically risky institutions, establish ways of monitoring systemic risk in the financial system, limit excessive risk-taking by financial institutions, and provide a roadmap for resolving insolvent institutions. To achieve these goals, Dodd-Frank created the FSOC to monitor systemic risk and identify “systemically important financial institutions” (SIFIs). …

With nearly seven years of additional perspective, the weaknesses are clearer. Dodd-Frank missed a golden opportunity to simplify and rationalize the very balkanized U.S. regulatory architecture, where responsibility is spread across many institutions, some with overlapping authority. Dodd-Frank did not sufficiently address the issue of the capital adequacy of financial institutions. Its proposals for the orderly liquidation of insolvent institutions were questionable. The proposed Volcker Rule was complicated and difficult to implement, and it became clear that proprietary trading and investing activities were not at the root of the financial crisis. Dodd-Frank did not address the problems of the Government-Sponsored Enterprises (GSEs) or housing finance. It did not address the problem of pricing government guarantees (deposit insurance, lender of last resort access, too-big-to-fail guarantees). It limited the lender of last resort (LOLR) authority of the Fed, constraining its ability to respond in a crisis. The result of the regulatory reform process that Dodd-Frank initiated, to date, has been a vastly more complicated regulatory structure that many doubt is adequate to forestall the next crisis and that some blame for the demise of many small community banks (institutions that are not viewed as part of the systemic problem) and a decline in bank lending.

The CHOICE Act begins with a premise that we endorse: Financial institutions that are well capitalized relative to their risk exposure pose less risk to the financial system and make the possibility of a systemic crisis much smaller. It is widely agreed that the financial system was undercapitalized prior to 2008. But Dodd-Frank did not directly address the idea of ensuring financial stability directly through capital requirements, or at least it did not do it very well.  The CHOICE Act offers a very enticing prospect: Financial institutions that are “well managed and well capitalized—those with a simple leverage ratio of greater than 10%” would be offered an “off-ramp” from the Dodd-Frank regulations.

social science which I could use my mathematics.\”  He went to the University of Chicago for a PhD in economics, and spent most of his professional career at Johns Hopkins University. A substantial number of students learned their introductory econometrics from Christ\’s textbook, Econometric Models and Methods, first published in 1966. Here\’s an obituary from Johns Hopkins, and here\’s one from the Baltimore Sun.

Back in Spring 1990, Christ wrote a nice biographical essay for The American Economist called \”A Philosophy of Life\” (pp. 33-39, available through JSTOR, and the source of the quotation above).  He gives a sense of academia as it used to be:

\”On the Lake Michigan beach in Michigan, where I spent summers as a child, and still do now, was an elderly gentleman in swim trunks, known to the children as Mr. Knight. I was quite surprised on entering graduate school at Chicago to find him, fully clothed, teaching economics. He had great skepticism of anyone who appeared to know all the answers. He told his classes, \”As soon as a person gets a theory, he\’s lost. …

\”I owe a great debt as well to Leonid Hurwicz, who was not even on my committee. I had presented my paper at the famous Cowles seminar (where only \”clarifying questions\” were allowed until the discussion period arrived, and where \”clarifying questions\” from Arrow, Hurwicz, and Modigliani began to fly as soon as the seminar began). I thought I was finished with my thesis, until Hurwicz invited me to come down to the University of Illinois (where he had just moved) because he had some suggestions for me. I stayed in his World War II prefab hut with him and his family for two days while he went over my thesis with a fine-tooth comb. When I left I was very depressed. But soon I realized that he had done me an enormous favor, and that my thesis was much improved as a result.\”

And here\’s a comment about what econometrics can teach and what economists can know:

\”I used to believe that it was possible to build and estimate an econometric model that would represent an invariant law of economic behavior, valid for many places and for long periods of time. I no longer believe this, because I have yet to see an econometric model that continues to describe new data with no change in its parameters. Instead, I believe that economic reality is so complex that the best we can expect of an econometric model is that it may approximately represent the relations among its variables for a limited place and time. Such an approximation may be very useful, and may permit us to make forecasts for short periods into the future. But until we have much more knowledge about human biology and its relation to economic, social, and political behavior I think we will not achieve econometric models that are invariant over wide reaches of space and time.

________________________

Symposium: Recent Ideas in Econometrics\”The State of Applied Econometrics: Causality and Policy Evaluation,\” by Susan Athey and Guido W. Imbens

Beggar-my-neighbor is a simple card game which according to reference in the Oxford English Dictionary dates back at least to the early 1700s. In 1776, Adam Smith applied the expression to trade policy. The often-quoted short passage from Book IV, Chapter III of the The Wealth of Nations reads.

\”[N]ations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.\”

Here\’s some of the broader argument surrounding Smith\’s particular comment. A key underlying theme for Smith is that attempts to limit trade are, pretty much by definition, attempts to limit competition. As a result, such attempts favor the producers (Smith calls them \”monopolists\”) who have less need to face competition, but impose costs on consumers of goods. Smith also discusses that the economic strength of a neighboring nation may be \”dangerous in war and politics,\” but beneficial economically because it offers more opportunity for trade. Finally, Smith points out that dire warnings of the dangers of international trade were prominent, then as now, but when you look across countries, the places more open to international trade typically tend to be better-off, not worse-off. Smith wrote:

\”Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established … But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both.

By advantage or gain, I understand not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants. … 

It is a losing trade, it is said, which a workman carries on with the alehouse; and the trade which a manufacturing nation would naturally carry on with a wine country may be considered as a trade of the same nature. I answer, that the trade with the alehouse is not necessarily a losing trade. In its own nature it is just as advantageous as any other, though perhaps somewhat more liable to be abused. The employment of a brewer, and even that of a retailer of fermented liquors, are as necessary divisions of labour as any other. It will generally be more advantageous for a workman to buy of the brewer the quantity he has occasion for, than to brew it himself, and if he is a poor workman, it will generally be more advantageous for him to buy it, by little and little, of the retailer than a large quantity of the brewer. He may no doubt buy too much of either, as he may of any other dealers in his neighbourhood, of the butcher, if he is a glutton, or of the draper, if he affects to be a beau among his companions. It is advantageous to the great body of workmen, notwithstanding, that all these trades should be free, though this freedom may be abused in all of them, and is more likely to be so, perhaps, in some than in others. Though individuals, besides, may sometimes ruin their fortunes by an excessive consumption of fermented liquors, there seems to be no risk that a nation should do so.  …

By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity. … 

That it was the spirit of monopoly which originally both invented and propagated this doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. Hence in Great Britain, and in most other European countries, the extraordinary duties upon almost all goods imported by alien merchants. Hence the high duties and prohibitions upon all those foreign manufactures which can come into competition with our own. Hence, too, the extraordinary restraints upon the importation of almost all sorts of goods from those countries with which the balance of trade is supposed to be disadvantageous; that is, from those against whom national animosity happens to be most violently inflamed.

The wealth of a neighbouring nation, however, though dangerous in war and politics, is certainly advantageous in trade. In a state of hostility it may enable our enemies to maintain fleets and armies superior to our own; but in a state of peace and commerce it must likewise enable them to exchange with us to a greater value, and to afford a better market, either for the immediate produce of our own industry, or for whatever is purchased with that produce. As a rich man is likely to be a better customer to the industrious people in his neighbourhood than a poor, so is likewise a rich nation. A rich man, indeed, who is himself a manufacturer, is a very dangerous neighbour to all those who deal in the same way. All the rest of the neighbourhood, however, by far the greatest number, profit by the good market which his expence affords them. They even profit by his underselling the poorer workmen who deal in the same way with him. The manufacturers of a rich nation, in the same manner, may no doubt be very dangerous rivals to those of their neighbours. This very competition, however, is advantageous to the great body of the people, who profit greatly besides by the good market which the great expence of such a nation affords them in every other way. Private people who want to make a fortune never think of retiring to the remote and poor provinces of the country, but resort either to the capital, or to some of the great commercial towns. They know that where little wealth circulates there is little to be got, but that where a great deal is in motion, some share of it may fall to them. The same maxims which would in this manner direct the common sense of one, or ten, or twenty individuals, should regulate the judgment of one, or ten, or twenty millions, and should make a whole nation regard the riches of its neighbours as a probable cause and occasion for itself to acquire riches. A nation that would enrich itself by foreign trade is certainly most likely to do so when its neighbours are all rich, industrious, and commercial nations. 

It is in consequence of these maxims that the commerce between France and England has in both countries been subjected to so many discouragements and restraints. If those two countries, however, were to consider their real interest, without either mercantile jealousy or national animosity, the commerce of France might be more advantageous to Great Britain than that of any other country, and for the same reason that of Great Britain to France. France is the nearest neighbour to Great Britain. In the trade between the southern coast of England and the northern and north-western coasts of France, the returns might be expected, in the same manner as in the inland trade, four, five, or six times in the year. The capital, therefore, employed in this trade could in each of the two countries keep in motion four, five, or six times the quantity of industry, and afford employment and subsistence to four, five, or six times the number of people, which an equal capital could do in the greater part of the other branches of foreign trade. …
But the very same circumstances which would have rendered an open and free commerce between the two countries so advantageous to both, have occasioned the principal obstructions to that commerce. Being neighbours, they are necessarily enemies, and the wealth and power of each becomes, upon that account, more formidable to the other; and what would increase the advantage of national friendship serves only to inflame the violence of national animosity. They are both rich and industrious nations; and the merchants and manufacturers of each dread the competition of the skill and activity of those of the other. Mercantile jealousy is excited, and both inflames, and is itself inflamed, by the violence of national animosity: And the traders of both countries have announced, with all the passionate confidence of interested falsehood, the certain ruin of each, in consequence of that unfavourable balance of trade, which, they pretend, would be the infallible effect of an unrestrained commerce with the other.

There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavourable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour and against their neighbours, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it. …

Some years back I was giving some talks in South Africa, and found myself in a back-and-forth with a group of sharp and thoughtful students about whether the US was better off if other countries of the world, like South Africa, were poor or rich. The sense of many of the students was that the US wanted other countries to remain poor, so that the US could import goods produced by low-cost labor. I argued that for all the back-and-forth of US policy over time, the main thrust of policies like leading the way in the GATT and the WTO was an underlying belief that the US economy benefited when other countries were better off. Channeling Adam Smith, I found myself asking the group: \”If you want to be economically successful, would you prefer to live in a rich neighborhood or a poor one?\” I doubt that I changed anyone\’s mind, but at least the question led to a pause in the conversation, in which I could almost hear ideas being recalibrated and reframed.

Jason Furman was an economic policy insider through all eight years of the Obama administration, with \”oughly the first half of them as Deputy Director of the National Economic Council and the second half of them as Chairman of the Council of Economic Advisers.\” In the Arnold C. Harberger Distinguished Lecture on Economic Development at the UCLA Burkle Center for International Relations, Furman reflects on \”The Role of Economists in Economic Policymaking\” (April 27, 2017).

Furman has a pleasantly wry and discursive tone, with lots of anecdotes that mix together stories of success and failure. At least for readers like me, it\’s a tone that carries far more appeal and persuasive power than feverish oratory set to the sound of trumpets. For example, here are some of Furman\’s thoughts on the four things that economists have to offer when the answer to a policy question is not known.

The first is just describing the data. Describing the data does not tell you what caused what. It does not tell you what is the right policy or what is the wrong policy. But it can help you at least figure out what questions you should be asking, what areas you should be looking at to solve those questions, and what you can do about them. The data can be complicated. The government released two different measures of economic growth in the fourth quarter of 2016, one was 1.0 percent and one as 2.1 percent. The government also released two different measures of job growth in March 2017, 98,000 jobs and 472,000 jobs. Moreover, for the first quarter of this year the data tells a divergent story—with strong employment growth and strong “soft data”, like surveys of confidence, but much weaker GDP growth and weaker “hard data”, like actual sales numbers. I have spent a lot of time on these issues and developed a number of rules of thumb, almost all of which can be summarized by saying that you should look at a wide range of data, ideally smoothed over a longer period of time—without placing too much weight on any given indicator … Data description can be more sophisticated than just looking at single numbers or even trends. Sometimes it helps to decompose a number into its components to identify what is driving it, at least in an arithmetic sense. 

The second set of techniques we use is economic theory. Economic theory can sometimes give you a very helpful answer to a question. One of the biggest insights in economics is that some items are more valuable to one person than to another person, and if those two people trade things, they can both be better off. These are the basic motivations for a market economy and the basis of the argument for expanding international trade. … Let me give you one: the example of the allocation of electromagnetic spectrum …  Spectrum is a scarce resource and in many cases the rights to use it were allocated decades ago. Today, much of the best spectrum is reserved for the exclusive use of television broadcasters while users of smartphones and tablets often face frustrating and economically costly delays in accessing data because of crammed airwaves. In the Los Angeles area, for example, there were more than 25 broadcast stations, some of them with only a handful of viewers, most of whom could watch the shows on cable, online or through other means. A station with only a few thousand viewers might be worth $5 million, but at the same time may own a license for spectrum that a mobile broadband provider would be willing to buy for $50 million. We proposed to deal with this by setting up an incentive auction. Anyone who is a television broadcaster who wants to sell their spectrum can do so, and anyone who is a mobile broadband provider or anything else and wants to buy that spectrum can do so. The auction is entirely voluntary—a station will only sell if it is better off with cash than with spectrum, a mobile broadband provider will only buy if it (and presumably its consumers) benefit more from the spectrum than the cash they pay, and taxpayers get a cut of the difference in the bids to reflect the government’s role in organizing the process, including repackaging the spectrum into contiguous blocks to make it more valuable. Economic theory was enough to motivate and support this proposal—which ultimately resulted in $5 billion for taxpayers as well as profits for television broadcasters, mobile broadband providers, and benefits for their consumers. … In the last two decades, one of the fastest growing areas of economics has been “behavioral economics,” which relaxes the standard assumption that people are fully rational, and instead pays close attention to the ways people can be myopic, make decisions that depend on framing, and have limited attention spans or ability to incorporate information. One of the big successes of labor economics has been getting policy to focus less on the rate of return to savings and more on making it easier and more automatic to save. 

The third set of techniques we use is empirical work, trying to understand the causes and effects of different economic phenomena. I want to give you an example of a mistake I was involved in because I did not think hard about causation. At the end of 2008, I was working with Congress on legislation to raise the tax on tobacco products in order to pay for an expansion of the Children’s Health Insurance Program (CHIP). The main proposal was to raise the tax on a pack of cigarettes from $0.39 per pack to $1.01 per pack. But we also needed to set tax rates on a wide range of other tobacco products including roll-your-own tobacco, pipe tobacco, small cigars, large cigars, and more. Amidst everything that was going on at the end of 2008 with the Great Recession I did not pay enough attention to this issue, even though I once sat through what felt like an endless meeting on the topic. What came out of that meeting was a proposal to raise the tax rate on roll-your-own tobacco by more than $20 a pound while leaving the tax rate on pipe tobacco largely unchanged. What followed was a huge decline in the sale of roll-your-own tobacco and a huge increase in the sale of pipe tobacco … It turns out that roll-your-own tobacco and pipe tobacco are highly substitutable—not because people have shifted to smoking pipes, but because you can still put pipe tobacco in a piece of paper, roll it up, and smoke it. This is not just a minor, technical observation. It turns out to be highly consequential for public health. I have estimated that the 2009 tobacco tax increase will reduce the number of premature deaths due to smoking by between 15,000 and 70,000 for each cohort. But it would have reduced them even more if we had harmonized the tax rate on different tobacco products, as we did in a subsequent proposal. In fact, economists in the Treasury Department estimated that the reduction in tobacco consumption under a harmonization proposal would be nearly two and a half times the size it would be under an increase in the cigarette tax alone that raises comparable revenue. 

 

Fourth, we sometimes combine empirical description, theory, and causation to build models that allow us to simulate the impact of different policies. For example, such simulations can tell you how a tax cut will be distributed or affect the economy, how much a particular health plan will cost per person covered, or how much carbon emissions will change as a result of different policy approaches. While any model is limited and imperfect, models can be especially useful in quantifying plausible tradeoffs in designing a policy and communicating the impact of policies to policymakers.

It\’s interesting to me that of these four approaches, Furman lists basic description of data and basic theoretical insights first, ahead of the more complex modelling approaches. Here are a few more words from Furman:

In the Obama Administration I worked on everything from helping to prevent a second Great Depression to restructuring the post office—although I confess that we were only successful on one of these. Many of the topics I worked on are standard fare for economics, like the minimum wage, international trade, or environmental regulation. Others might be topics you do not associate with economists, like criminal justice reform, immigration, and sanctions. And on none of these did economists fully get their way which, ceteris paribus, is a good thing …

After the election many people expressed frustration that facts and analysis did not matter anymore. Paul Krugman cited the statistic that the three major networks spent a cumulative total of 32 minutes covering policy issues in the 2016 election. … I certainly share the sentiment that facts and analysis play too small a role not just in campaigns but in governing. And I think there is a role for many types of communication and persuasion. For myself, I am not someone who could give a rousing speech at a rally so I will stick to my comparative advantage. And I do believe that the right response to the lack of sufficient weight for facts and analysis is to embrace more facts and analysis.

For those who are interested in the Council of Economic Advisers and the role of academic economists in policy-making, here are a few more links: 

Here\’s a figure showing seven waves of corporate mergers in the US since the 1851, according to the Institute for Mergers, Acquisitions & Alliances (a not-for-profit think tank that does research and workshops, and runs an educational certificate program, with main offices in New York, Vienna, Zurich, and Ho Chi Minh City). As the figure shows, the first three waves of merges have substantial periods of time between them. The most recent four waves are all since 1985.

Looking more closely at recent years, here is some additional information on these patterns. In this figure, the blue bars (and the left-hand axis) show the number of announced deals in each year, while the red line (and right axis) show the total value of the deals. For example, the number of deals rose from 2011 to 2014, but not all that sharply, while the value of the deals jumped considerably. I

In both this figure, and the one above, the \”wave\” of mergers in the 1980s doesn\’t look to me so much like a separate wave, but rather just a time of transition to the higher levels of mergers that would follow. In addition, from a longer historical perspective, it looks more as if the US economy has entered  period since the 1990s when mergers are generally at high levels–although sometimes higher than others.

For another perspectives, here is the number and value of mergers and acquisitions on a worldwide basis since 1985, which again shows either three \”waves\” or just a generally higher level of mergers since the late 1990s, depending on how you interpret it.

Of course, patterns like these don\’t prove anything by themselves, and I try not to be someone who over-extrapolates. But I\’ll just say that these merger and acquisition patterns are certainly consistent with a vision of the US and the global economy in which large companies seem relatively more focused on spending their funds and their managerial time on financial maneuvers that allow them to reduce their exposure to market pressures (either by combining with direct competitors or combining with firms along the supply chain), and thus relatively less focused on seeking to improve their competitive position by internal investments in capital, skills, and innovation.

As final exams draw near at many colleges and universities (at least for those on a semester schedule), it seems appropriate to pass along this old story as told by Nicholas Murray Butler, President of Columbia University, at the 143rd Annual banquet of the Chamber of Commerce of the State of New York., 1911 (pp. 43-55), and available through the magic of the HathiTrust Digital Library

\”I cannot help recalling an admirable story which is told of ROBERT SOUTHEY, once Poet Laureate of England. SOUTHEY was boasting to a Quaker friend of how exceedingly well be occupied his time, how he organized it, how he permitted no moment to escape; how every instant was used; how he studied Portuguese while he shaved, and higher mathematics in his bath.

\”And then the Quaker said to him softly: `But when, friend, dost thee think? 

\”My impression is that we need now some time to think, in order that reflection and study of principle, and grasp upon realities, may take the place of perpetual discussion and exposition, partly of what is, partly of what never was, partly of what never can be.\”