Interview Bonanza: Dow, Harcourt, Goodhart, Lawson, Nelson, Chang

Some people, like me, like reading and listening to interviews with economists. It\’s energizing, invigorating, exhilarating. On the suspicion that readers of this blog might have a higher-than-average propensity to share this preference, I commend to your attention an interview project ongoing at Goldsmiths, University of London, run by Ivano Cardinale and Constantinos Repapis. They have posted interviews with six prominent economists who, in different ways, would classify themselves as being out of the mainstream of the profession: Sheila Dow, Geoff Harcourt, Charles Goodhart, Tony Lawson, Julie Nelson, and Ha-Joon Chang. The interviews include nice video and full transcripts. The first three interviews were done in 2016; the last three in 2017. Here are some samples:

Sheila Dow discusses pluralism in economics.

\”Economics took a different turn in the last few decades of the 20th Century so that there’s a much greater focus on models as providing the full argument. People were lulled into a sense of security by what’s called the great moderation, which was a long period of stability, steady growth. Various people were making statements “We’ve got it cracked. No more issues to be addressed,” so the crisis was a huge, huge shock. Even though people were starting to say that risk pricing was going awry in financial markets, nevertheless, there was this confidence… I mean, because that framework is based on a notion of equilibrium and markets being able always to bring situations back to equilibrium, there seemed to be this blind confidence that the same would happen again. Okay, there’s a bit of mispricing, we have to deal with that, but equilibrium will be restored. … 

\”The crisis itself was regarded as a problem of mispricing due to impediments to market forces. So all the solutions now coming from mainstream economics are couched in these terms – how to reconfigure incentives, how to reconfigure constraints on destabilising activity, how to make information more transparent so markets can make decisions better. A lot of the thinking that’s gone into bank regulation has been very constructive but the underlying thought processes are still in line with what went before and the expectation is we can sort this so that it won’t happen again. …

\”What’s required is what I would call a pluralist approach to teaching, which is recognising that there are other ways of addressing economics. This could start at a very simple level of just making it clear that there is an other. … [W]hat I’m talking about is economics but doing economics differently. This is even prior to questions of which is better, which is worse, whether it’s possible to say one is wrong. That’s something else. I’m just talking at the level of the fact that there are different approaches to economics and it seems to me it’s crucial for educating future economists, whether practitioners or academics, that they be aware of the possibilities and be given the equipment to make their own choices about how to approach the subject….

\”One example would be that New Keynesians focus on market imperfections and that provides the justification for intervention. But the implication is that without those imperfections we would be in the perfect general equilibrium world and intervention wouldn’t be required. So, it’s great that they are focusing on limitations of markets and therefore proposing policies which often would be supported by Post-Keynesians. But Post-Keynesians would approach the question very differently; the rationale for intervention, and the starting point in other words would not be an ideal general equilibrium world. This is difficult to talk about because the differences are so profound. A Post-Keynesian would start with a historical understanding of a particular context, not seek a universal solution; understand ways in which the market economy does not ensure full employment (the principle of effective demand is a core principle within the Post-Keynesian approach); look at the role of money; look at the way in which financial markets create instability and through financial instability create economic and monetary instability.\”

Geoffrey Harcourt discusses his views on Keynesian and Post-Keynesian economics.

\”A Keynesian economist means a number of things. Keynes, in particular, put aggregate demand alongside aggregate supply in producing a new theory of the determination of level of employment and activity. And he claimed that Thomas Robert Malthus, whom he called the first of the Cambridge economists, had this idea, but was defeated in his debates with Ricardo, and so the whole concept of aggregate demand vanished for 100 years, and Keynes brought it back when he was thinking about: \”How do I explain these prolonged and terrible levels of unemployment?\” Both in the 20s, and even more so in the 30s. And he developed his new theory around the interplay of aggregate demand and aggregate supply, and resurrected the term that Malthus, amongst others, used, effective demand, where effective demand was the point where aggregate demand and aggregate supply were equalised, in the short period. …

\”[L]ying behind proper Keynesian analysis is the assumption that all important decision makers are doing it in an environment of fundamental uncertainty, so that expectations – both short-term expectations and long-term expectations – have a central role to play. It\’s in the light of people\’s expectations, and then the total outcome of what they do, we see whether expectations are realised or not. If they\’re not, then in Keynes\’s analysis there are a variety of different stories of how the decision makers react to the signals that are given out by the initial non-realisation of expectations. …

\”But as far as positive attributes [of Post-Keynesian economics] are concerned, the way of defining particular functions, like the consumption function, the investment function, putting in how you model exports, how you model the demand for imports, how you model the government\’s behaviour, they are all peculiarly post-Keynesian because they are based on observations rather than on axiomatic assumptions.\”

Charles Goodhart discusses his practice of bringing different ompare different traditions or theories in economic thought as a way to identify and discuss key issues in monetary theory and policy

\”Very rarely is there any single, clear answer in economics, which is actually why I found it so enjoyable to do economics, because at school we were always taught that there was one right answer. Even in subjects such as history, there was the correct answer and then everything else was incorrect. When one came up to university to do economics, one soon discovered that actually there wasn\’t a single answer, and I found that was enormously relieving and it was like being freed from shackles, so that one could think for oneself rather than try and memorise what one was told was the correct answer. …

\”When I specialised at school, I specialised in history. Again, I think that economics is a splendid subject. Not only because there isn’t one correct answer to most of the questions that we get asked, but also because I think it’s a very good mixture of history, of knowing what has happened in the past and how we got where we are at the moment and much more rigorous mathematical analysis. I think that the combination of history and mathematics is a very good, very valid one, and in a sense puts us apart from some of the other social sciences. Now, having said that, I think that the subject from time to time varies too much in one direction. … I think that in recent years it’s been very upsetting for me that history has been downgraded, and indeed that economic history is no longer required as part of the undergraduate economics syllabus, but also that the whole thrust of the subject has gone far too mathematical, with far too little reference and under-appreciation of historical evolution. ….

\”If there had been greater reliance on history, I think there would have been a greater appreciation that a combination of a housing boom and credit expansion was highly dangerous. What happened, to a degree, was that in the US there were wonderful data on housing – all aspects of the housing market – which went back to the early 1950s. For 50 years you had monthly data on housing prices and all that. During these 50 years, if you held a diversified portfolio of houses across all the States in the US, there was only I think one or two quarters where housing prices overall on average fell. There were crises in New England at one stage and then the oil-producing states at another, but if you diversified you seemed to be safe.

\”If you took these 50 years, and ignored history elsewhere, and you ran your econometric analysis and assumed that the future was going to be like the past of those 50 years, it actually came about that you reckoned that a decline in housing prices over the whole of the United States of more than about four or five percent was an almost unimaginable event. It was basically on that premise that people went into, for example, all the sub-prime stuff, because it didn\’t matter if you were lending to poor people or people who are likely to get ill, who were on the fringes of the labour market and so on, because if they couldn’t repay you, for one reason or another, if housing prices didn\’t go down you could foreclose and you would still be safe, because you wouldn\’t lose any money, whereas you could sell.

\”The whole of the sub-prime exercise and the rest of it, which initially was done for the best of intentions, and it was to try and get the disadvantaged of America into the housing market. If you could rely on ever rising housing prices, it would have worked, but you couldn’t and history would have shown you that. So certainly I would want to start by reinstating history to a far greater extent into the syllabus; history not only of one country, because again any country has a sort of particularity. You want to have a history of two or three countries.  …

Tony Lawson argues against the mainstream use of mathematical methods in economics, and instead advocates an ontological approach.

\”The mainstream is defined in principle by an emphasis on applying a narrow set of methods, those of mathematical modelling, whatever the context. In accepting this principle its advocates are forced into working with a particular ontology, whether they recognise it or not: to presupposing worlds of isolated atoms. Thereafter they are reduced to focusing on theories, or formulations of theories, that can be transformed into the world of isolated atoms. In essence, human beings have to be turned into atoms. The obvious assumption to use in order to effect this is that we humans are all super-rational; we don\’t make mistakes. Situations are devised wherein, relative to the notion of rationality specified, there is a unique optimum, and the presumption is that any model agents, being rational, would ‘end up’ there.

\”Heterodoxy is something else. Its participants put much more emphasis on at least seeking to be realistic. I do think underpinning most of the different schools within heterodoxy are more realistic ontological presuppositions; these, if not always explicitly made clear are usually close to the surface. Another difference is that even when heterodox economists use mathematical modelling, they’re far more pluralistic about it. They are willing to engage with people who don\’t. They’re willing to say it’s one method amongst others. So, pluralism of method is essential to heterodoxy. …

\”My assessment is that most heterodox groups are each best identified or distinguished through a tradition-specific focus on issues that fairly clearly reflect ontological presuppositions and concerns, and indeed a shared set. Institutionalists, following Veblen, are very interested in both evolutionary change, and things like institutions that bring stability within change. So, in evolutionary economics a focus on process and stability is fundamental. Post-Keynesians are very interested in uncertainty. Uncertainty basically derives from the openness of social reality. So, it’s an ontological presupposition of openness that conditions their focus. Feminists are especially interested, I believe, in relationships. Relations of care, oppression, exploitation, etc. It is an ontological orientation of relationality that is fundamental here. Marxian economists focus on the relational totality in motion that is capitalism. So, ontological categories like relationality, openness, process, totalities are key to identifying the various heterodox traditions.

\”I believe the just noted ontological categories are everywhere relevant, each being fundamental features of all social phenomena. So, I see the separate heterodox traditions each as a division of labour looking at the same basic social reality from a particular perspective. Implicitly at least, they agree more or less on the nature of social reality, and are divisions of labour within the study of it.\”

Julie Nelson is interviewed on the subject of feminist economics, which she once defined as \”work having to do with the economic roles of men of women that has a liberatory bent … and work on the definition and methodology of economics that shows the gender biases there.\”

\”My research during the last couple of years looked at phrases like ‘women are more risk-averse than men’. Philosophy and linguistics tell us that they’re considered to be generic statements about categorical differences, like ‘ducks lay eggs.’ Actually, only a minority of ducks lay eggs–only the mature females! Most ducks don’t lay eggs. So when people hear ‘Women are more risk-averse’, people tend to think of that as categorical–women over here, men over there. In my meta-analysis, I looked back at the statistical data on which this claim was based and the two distributions are almost entirely overlapping. There is at least 80%, sometimes 90 or 96% overlap between the men’s and women’s distributions. There may also be tiny, perhaps statistically significant differences in the means of the distributions, but men and women are really a lot more similar than different. Yet, if you read the titles of certain books or articles, you would be getting a big misperception. …

\”When I teach my students I always ask them to start with a definition of ‘feminist’ and ask them whether a man can be a feminist, etc. So, to me, feminism is not treating women as second-class citizens, as there to help and entertain men. And then more my methodological work has been about the biases that have been built into economics by choosing only the masculine-associated parts of life and techniques and banishing the feminine-associated ones. In my own life, I’m quite comfortable in both economics and feminist camps. I find when I give talks I get interesting labels. When I talk to a group of relatively mainstream economists I’m a wild-eyed radical leftist feminist nutcase. But because I’m an economist, when I talk to a lot of gender and women’s studies groups, and I don’t talk about the evils of global corporate capitalism and I don’t have a certain line that I take on the economy, I’m considered a right-wing apologist for capitalism. And I’m quite comfortable balancing those two. …

\”I think of the feminist analysis as a particular way in … The gender aspect, along with explanations coming from economic power and class, I think, together explain a lot of the power of the mainstream in economics. That is, the mainstream is supported in part because it kind of throws a smokescreen over inequalities which we would rather not look at. For example, in the US, these ridiculous CEO salaries, some people spout a free market sort of thing to justify that. But then also I think there is a psychological dimension to the power of the mainstream. It seems to be more macho, more rigorous, somehow more scientific, and builds this big barrier of math: ‘Well, you don’t understand the policy because you can’t read this journal article’. I think this is rather silly and that the more we reveal that the emperor has no clothes, maybe, the easier it will be to knock down.\”

Ha-Joon Chang discusses the development economics, contrasting the neoclassical view with a productivist view.

\”People have debated about the definition [of development economics] for ages. Now, broadly, there are, I think, two-and-a-half definitions, if I may say so. The first definition is basically conflating economic development with economic growth. So as output per capita grows, there is economic development. This view is adopted by most neoclassical economists, who form the vast majority of the economic profession today. But then there is another definition, which has roots from the classical school and the Marxist school and also what I call the developmentalist tradition, people like Alexander Hamilton, Friedrich List, and the development economists of the 1950s and ‘60s, people like Simon Kuznets, Albert Hirschman and so on. In these alternative traditions, economic development is defined not purely in terms of quantitative growth but qualitative change.

\”This definition is based on the understanding of the economy mainly as something based in the sphere of production. So, for these people, economic development happens only when there is fundamental structural transformation in the productive structure of the economy and also the underlying capabilities that make that productive transformation possible. It’s a much more nuanced and qualitative definition of economic development. For example, Equatorial Guinea, which is actually, at the moment, the richest country in Africa, because of oil, grew from an economy with $350 per capita income in the early ‘90s to a country with something like $22,000 per capita income. The standard neoclassical definition will classify this as economic development but there are people like Albert Hirschman or Friedrich List who would say, ‘No. That’s not development. That’s just quantitative growth.’

\”Then I said two-and-a-half definitions because there has been more recently a variant of the neoclassical definition, which is apparently more progressive, but in the end even less forward-looking than the standard neoclassical definition. This is a definition that more or less equates economic development with poverty reduction. … So it has a progressive element, but, on the other hand, this is a vision of the economy as something that is almost static. You don\’t need structural transformation. You don\’t need growth in productive capabilities. All you need is to generate more income and, more importantly, redistribute it more fairly so that we eliminate abject poverty, which is usually defined as $2 a day. So that is a very narrow defensive kind of definition. …

\”It is not just academic theoretical differences because they give very different policy implications. So if you take what I call the productivist view, the view that economic development is in the transformation of the productive sphere, yes, then you will necessarily recommend economic policies that will encourage the accumulation of new technologies, acquisition of new skills by workers, transformation of the social arrangements to back those. So the most famous policy recommendation in this tradition is the so-called infant industry argument. The argument that governments of economically-backward nations need to provide trade protectionism, subsidies and other supports to young industries so that they can have the space to develop their productive capabilities and eventually catch up with the more advanced producers from abroad.
Now, for this to happen, you would need to provide tariff protection. You might even need to ban the imports of certain foreign products. You might put restrictions on foreign direct investment. You might set up state-owned enterprises in the large capital-intensive sectors with high risk because, typically, in developing countries, there are no large capitalists that can take such risks in the beginning. So you recommend these kinds of policies. 

\”If you took the neoclassical view, then, basically, economic growth happens ultimately as a consequence of people trading. So as people want to buy better things then they are ready to offer higher prices and entrepreneurs will spot the opportunity, produce new things. In that world, you also assume that technologies are freely available, and therefore everyone has equal productive capability. …At most, you would provide some public goods like infrastructure and basic education, but, beyond that, you don\’t really have to do anything other than keeping competition alive by opening your borders, by deregulating businesses. … If you keep the markets open and free, economic development naturally follows.

\”From these two different visions of how the economy works and develops in the long run especially, you’d come up with completely different sets of economic policies. …
I studied economics in the early 1980s in South Korea. Most of our professors were neoclassical economists, although, compared to today’s neoclassical economists, they were much milder. But the reason why I started looking at other approaches was because I just couldn\’t reconcile what I was taught in the classroom with what was happening around me. At the time, South Korea was going through its miracle growth period. The economy was growing at 8, 10, 12% every year, massive social transformation, positive and negative, and huge conflicts. Workers going on strike, students going on demonstration, riot police coming in to bash people. Huge conflict, and then in the classroom, the professors were saying, ‘All changes are marginal. Everything is in equilibrium.’ I couldn\’t take it seriously.\”

More From Your Horseshoe Crab Blood Economics Leader

About a year ago I reported on \”The Economics of Horseshoe Crab Blood, referring to an article by Caren Chesler, \”The Blood of the Horseshoe Crab\” in Popular Mechanics (April 13, 2017). The subtitle of the story reads: \”Horseshoe crab blood is an irreplaceable medical marvel—and so biomedical companies are bleeding 500,000 every year. Can this creature that\’s been around since the dinosaurs be saved?\”

Turns out that the blood of horseshoe crabs has some components that are superb at detecting infection. The blue-colored blood of horseshoe crabs was selling for $14,000 per quart, and the crabs were in danger of being wiped out in certain of their long-time habitats.

Now Sarah Zhang offers an update in \”The Last Days of the Blue-Blood Harvest,\” appearing in The Atlantic (May 9, 2018). The subtitle reads: \”Every year, more than 400,000 crabs are bled for the miraculous medical substance that flows through their bodies—now pharmaceutical companies are finally committing to an alternative that doesn\’t harm animals. Zhang writes:

\”Contemporary humans do not deliberately kill the horseshoe crabs—as did previous centuries of farmers catching them for fertilizer or fishermen using them as bait. Instead, they scrub the crabs clean of barnacles, fold their hinged carapaces, and stick stainless steel needles into a soft, weak spot, in order to draw blood. Horseshoe crab blood runs blue and opaque, like antifreeze mixed with milk. … Horseshoe-crab blood is exquisitely sensitive to toxins from bacteria. It is used to test for contamination during the manufacture of anything that might go inside the human body: every shot, every IV drip, and every implanted medical device. So reliant is the modern biomedical industry on this blood that the disappearance of horseshoe crabs would instantly cripple it.\”

Jeak Ling Ding and her husband and research partner Bow Ho from the National University of Singapore started a quest to find an alternative. After a number of false starts over a couple of decades, they had identified the gene for \”factor C,\” which is the key to detecting infection, and spliced it into \”insect gut cells, turning them into little factories for the molecule. Insects and horseshoes have a shared evolutionary lineage: They’re both arthropods. And these cells worked marvelously.\”

The scientific discovery was in the late 1990s, but the wheels of medical innovation can grind slowly. It took until 2003 for the first test kit to come out. But for a decade, there was only one supplier. Regulators like the Food and Drug administration seemed ambivalent about whether the new technology would be acceptable. Existing companies using horseshoe crab blood had no reason to switch. Pharmaceutical companies were risk-averse, too. It\’s not until the last few years that more suppliers have entered the market, and regulators and drug companies are opening up to the switch.

In one of those ironic turns, medical technology first imperiled the horseshoe crab, but gene-splicing technology may end up saving it. Sometimes the answer to problems created by one technology is an alternative technology.

Some Economic Effects of US Import Restraints

With all the controversies over the US imposing tariffs on steel and aluminum (discussed here and here, for example), it\’s perhaps useful to consider an overview of what import restraints the US economy already has in place, and what effects they have had. Every three or four years, the US International Trade Commission publishes a report called: \”The Economic Effects of Significant U.S. Import Restraints.\” The  Ninth Update came out in September 2017.  The report notes: 

\”[T]he United States is one of the world\’s most open economies. The average U.S. tariff on all goods was 1.5 percent (based on trade-weighted import values) in 2015. As tariffs fall and trade expands, households of all income levels benefit from lower-priced imports. A major part of the growth in global trade is due to the increased use of global supply chains, in which parts of the production process are completed in different countries. …

\”The U.S. International Trade Commission (USITC or Commission) estimates that the net change to total U.S. economic welfare from removing significant U.S. import restraints would be a positive one—an average annual increase of about $3.3 billion during 2015–20.  … Among agricultural products, the restraints that currently restrict trade the most are those applied to sugar. Among manufactured goods, the most restrictive restraints are in the textile and apparel industries and in leather and allied product manufacturing, which includes footwear … The largest effects from the removal of significant import restraints are in the textiles and apparel sector, where consumers would benefit from lower-priced imports and where net U.S. welfare would increase by $2.4 billion. …

\”The report divides all U.S. households into 10 groups, based on their income level, and
estimates the effects of removing significant U.S. import restraints on each group. A typical annual household consumption basket would cost from $54 to $288 less each year if significant import restraints were removed, depending on the household group. Higher income groups benefit more than lower ones in dollar terms because they spend more; as a share of income, all income groups benefit by about the same percentage.

\”When an import restraint is removed, the U.S. price of that import declines. Producers making similar products reduce their prices to compete better, and some may shut down, thus decreasing domestically produced supply and displacing workers. Over the long run, displaced workers will likely move to jobs in other sectors, and business owners will likely invest in other, more profitable sectors. The costs to displaced workers include temporary job loss, possible lower wages in new jobs, and the costs of transitioning from one job to another. The most efficient firms will continue to produce, improving the overall efficiency of the industry, and those firms will likely increase exports. Consumers, including producers who use imports as inputs, gain from the lower prices
on imports and competing U.S.-produced goods. In total, the gains typically outweigh the costs, although some households, sectors, and regions may be harmed.\”

All of this is standard wisdom among economists, and thus refreshing to see it in a government report. But the mission of the report is defined in a way that numerical estimates for the gains from trade may appear lower than they actually are. Here are five reasons why:

1) By law, the mission of this report is that it can only look at restrictions on trade that are not the result of an case involving anti-dumping or a countervailing duty. The report notes: \”As requested in the original letter by the USTR [US Trade Representative], this report considers all U.S. import restraints except those originating from antidumping or countervailing duty investigations, section 337 or 406 investigations, or section 301 actions.\” Thus, the report is required to leave out the recent steel and aluminum tariffs, and many other cases along similar lines.

2) The report is focused on the benefits of removing existing import restraints, and thus doesn\’t really look back on earlier gains. Import barriers around the world have dropped substantially in the last 25 years or so: \”For example, the World Bank calculates that the applied weighted-mean tariff on all products for all countries with data fell from 34.0 percent in 1996 to 2.7 percent in 2010.\” Thus, the US economy has already been experiencing much larger gains from the reduction in trade barriers around the world.

3) The report doesn\’t include a quantitative estimate of benefits from reducing import barriers in service industries, which are increasingly important in the overall picture of US trade.  

\”Although this report does not quantitatively estimate the effects of liberalizing U.S. restraints on services imports, it does summarize key impediments to services trade in the United States for a range of services sectors, including architecture and engineering services, legal services, telecommunications, commercial banking, insurance, retail distribution, and air and maritime transport. … [T]he United States maintains fewer or less-intense restrictions for trade in these services than other countries in the database. However, U.S. scores for air transport, maritime transport, and insurance services exceed their respective sector average scores for all countries, suggesting that the United States maintains additional or more-intense restrictions for trade in these

4) In a world economy where global supply chains are increasingly prominent, products will often cross international borders a number of times. As a result, costs of customs and border procedures that don\’t seem especially large can add up. Reducing these costs is sometimes called the \”trade facilitation\” agenda. This ITC report devotes a chapter to Special Topic: Effects of Tariffs and of
Customs and Border Procedures on Global Supply Chains.\” 

For an illustration, here\’s a sample of a supply chain for a microprocessor, which includes five border crossings and input from multiple countries. If one included the product in which the microprocessor is implanted, the supply chain would be even more complex. 
As the ITC report notes: \”[S]since the 1970s, the use of foreign inputs in production has increased from about 15 percent of gross export value to between 25 and 30 percent. In recent years, more than half of global manufacturing imports, and 70 percent of services imports, are used as intermediate inputs in the production of other goods. Given this increased use of GSCs [global supply chains], the inefficiencies experienced between each stage of the supply chain have become increasingly important.\”

Here\’s a list of some hurdles a shipment faces when entering or exiting a

  • Preparing and submitting documents;
  • Customs and pre-shipment inspections;
  • Transit clearance, transportation delays, and congestion at the border;
  • Payment of fees, such as duties and other taxes;
  • Certification, which verifies the trader has fulfilled requirements such as technical, sanitary, and phytosanitary standards or import and export licenses;
  • Customs classification procedures;
  • Customs valuation procedures, which occur when administering countries use nonstandard methods of assessing the value of the shipment; and
  • Theft, bribes, and other forms of corruption.

Again, none of these may be especially large in themselves, but taken together, when multiplied over a number of border crossings, the accumulate to something larger. Many of the recently proposed trade agreements are less about reducing tariffs, and more about addressing these processes and issues.

5) US industries are disrupted all the time by factors that don\’t much involve trade. For example, consider the textile and apparel industry, where the $2.4 billion in welfare gains is the single biggest source of gains discussed in this report. If one could sign a deal which said that the US consumers would pay more for clothing to assure that textile workers all keep their jobs, it wouldn\’t sound like the worst deal in the world. Except that even without trade, the textile industry wouldn\’t be standing still. The report discusses two big changes that affect textile and apparel, as well as lot of other industries: automation and innovation. Thus, here is the estimate of what would happen to the US textile industry with no change at all in the import restraints. 

\”Significant investment in automation in the U.S. textile and apparel industry, particularly in yarn, thread, and fabric production, has depressed U.S. employment despite increases in domestic shipments. In coming years, increased capital investment in automation should contribute to a further expected decline of 3.7 percent, on average, in employment in the textile and apparel industry during 2015–20. The most significant decline is projected in the textile products (5.9 percent) and textile mills sectors (5.7 percent). At the same time, U.S. textile and apparel exports are expected to increase 2.8 percent, with U.S. apparel exports increasing by 10 percent as a result of growing demand for higher-quality, specialized, or “Made in the USA” apparel. … 

\”The U.S. textile mill producers are increasingly focused on the production of technical fabrics (also known as “performance textiles”) and smart fabrics used in the automotive, construction, healthcare, sportswear, and agriculture industries, as well as in protective applications. According to the U.S. Department of Commerce, the value of U.S. technical fabric production is expected to increase by 4 percent annually on average during 2015–17 due to strong global demand. The technical and smart
fabric sectors are less price sensitive than imports of lower-cost commodity fabrics because technical and smart fabrics are produced through advanced manufacturing processes, after significant research and development, and therefore are not materially affected by the removal of import restraints. Further, one of the largest consumers of U.S.-produced technical textiles is the U.S. military, which by law must purchase its textiles from U.S. producers.\”

US producers and their workers face all sorts of challenges, including domestic competitors, shifts in consumer preferences, new technologies, investment of the right size and type, evolving skills and training needed by worker, government taxes and regulations, and whether management can handle these challenges. Foreign trade matters, too, of course. But if we competed hard in tackling the rest of these issues, my suspicion is that foreign trade would look a lot less threatening.

Welfare Reform: Legacy and Next Steps

Back in 1996, President Bill Clinton signed into law the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), commonly known as \”welfare reform.\”  The Winter 2018 issue of Pathways, published by the Stanford Center on Poverty & Inequality, offers nine short and readable essays by social scientists and a few politicians on what happened, and what should happen next. Although the welfare reform legislation gets much of the attention, a number of the authors point out that it was part of a group of legislative changes carried out at roughly the same time and intended to encourage work, including a rise in the Earned Income Tax Credit. Here are some tidbits:

Welfare reform led to a substantial and long-lasting drop in the number of welfare recipients

Robert A. Moffitt and Stephanie Garlow write:

\”The welfare rolls indeed plummeted under the influence of welfare reform. If anything, some of the early studies underestimated the causal effect of welfare reform itself (as against the effects of economic expansion). Did it increase employment? Although there remains some ambiguity on the relative importance of the EITC and welfare reform in accounting for changes in employment, it is clear that welfare reform played an important role. In the initial years after reform, many more women joined the labor force than even the reform’s most ardent supporters had hoped. Did it reduce poverty? There are two sides to the answer to this question. It would appear that, while welfare reform assisted families with incomes close to the poverty threshold, it did less to help families in deep or extreme poverty. Under the current welfare regime, many single mothers are struggling to support their families without income or cash benefits. Even women who are willing to work often cannot find good-paying, steady employment.\”

Here\’s one figure showing the change in welfare recipients after 1996. The following figure shows that after the welfare reform, the work rate of never-married mothers converged with the work rate of single women who had never had children.

Welfare reform was part of an overall a shift toward greater public support for the working poor, but less support for the non-working poor

The broader public often isn\’t much in favor of support for the nonworking poor. Without arguing the point one way or another, I\’ll just note that children in such families have a rough time. H. Luke Shaefer and Kathryn Edin have been looking at US families with very little cash income, although they may receive assistance in noncash forms like Medicaid and food stamps. They write:

\”The amount of federal dollars flowing to poor families grew as a result of the changes made to social welfare policy during the 1990s, but not uniformly so. More aid is now available to working poor families via refundable tax credits and expanded eligibility for the Supplemental Nutrition Assistance Program (SNAP). But the amount of assistance for non-working families has decreased, and what remains has shifted away from cash and toward in-kind benefits.\”

This figure shows the number of household with children receiving food stamps that report no other cash income at all.

This figure shows the number of children living in households with less than $2/day per person in cash income.

Children in low-income families are better off since 1996 

Janet Currie writes:

\”[W]elfare reform involved more than just PRWORA. Indeed, there have been many changes to safety net programs since PRWORA, including expansions of Medicaid and the Earned Income Tax Credit (EITC). In this article, we pose the following question: Has the overall set of changes to the safety net since PRWORA improved outcomes for children? To answer that question, we look at several measures of child well-being—mortality rates, teen pregnancy, drug use, and high school graduation rates—and find that across all these measures, poor children are much better off today. …

\”It is difficult to disentangle the effects of welfare reform from the economic and other changes that have occurred since the 1990s, and we will not endeavor to do so here. However, we will provide a brief overview of some of the most significant policy changes that were intended to address children’s well-being. 

\”First, starting in the late 1980s and continuing through the 1990s, Medicaid was expanded to cover all poor children and many children in lower-income working families, rather than only covering the children of welfare recipients. In addition, the creation of the State Children’s Health Insurance Program (SCHIP) in 1997 expanded public health insurance for poor pregnant women and children. … Second, Congress expanded the EITC in 1993, with the goal of eliminating poverty for those who work full-time. In the same year, Congress added more money for the Food Stamp Program (now called the Supplemental Nutrition Assistance Program), which has continued to expand over time. … Finally, in response to growing evidence about the importance of preschool environments, many states developed or expanded their public child care and preschool programs, and such programs now serve more children than Head Start. Of course, many of these programs are effectively modeled on Head Start, and both Head Start and state preschool programs have been shown to improve the short- and long-term outcomes of poor children.\” 

Welfare reform had no clear effect on long-term rates of marriage or single-parent families

Daniel T. Lichter writes:

\”Across an array of indicators, there is little demonstrable evidence of large or significant effects of the 1996 welfare reform legislation on marriage and family formation. Since its enactment 20 years ago, we haven’t seen a return to marriage, a reduction in out-of-wedlock pregnancies, or a strengthening of two-parent families.\”

Final thoughts

The issue starts with a useful interview with Bruce Reed, who was the head of President Clinton\’s Domestic Policy Council in 1996, and Newt Gingrich, who was Speaker of the House of Representatives at the time. Perhaps unsurprisingly, they both believe the 1996 legislation was a good idea, but perhaps more surprising, they both argue that a new round of welfare reform would be appropriate to address the issues that remain and have emerged. 
Reed says: 

\”The experts all told us it couldn’t work. They said people wouldn’t go to work or look for work. They said employers wouldn’t hire them or keep them. They said welfare offices couldn’t help people find work. I think the experts were proven wrong by the people on welfare who left for work.\”

Gingrich says: 

\”You shouldn’t see the 1996 act as the last dance. Let’s say it only worked for three-quarters of people who were on welfare. That’s a pretty good victory. … Now we need a new welfare reform bill for the one-fourth who weren’t met by the last bill.\”

Index Funds vs. Hedge Funds: Buffett\’s Bet, 10 Years Later

Warren Buffett is of course as the golden-touch investor who is chairman and CEO of Berkshire Hathaway. Each year he writes a letter to his shareholders, and along with an update on just what the firm did the previous year, he often discusses some broader point. In the last couple of years, Buffett\’s annual letter has harked back to a revealing bet he made 10 years in December 2007.

Just to set the stage, December 2007 is the leading edge of what would become the Great Recession in 2008 and 2009. But even those who were concerned about the economy at that time were not predicting that the stock market would fall by half over the next 18 months or so. But it is in December 2007 that Buffett made a bet that the average of the stock market over the following 10 years would outperform the hedge funds that were using fancy investment strategies–and charging high fees. Here\’s how Buffett tells the story in his 2016 letter:

\”In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. …

\”Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?

\”What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.

\”I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where his mouth was. He has been both straight-forward with me and meticulous in supplying all the data that both he and I have needed to monitor the bet.

\”For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager. Each fund-of-funds, of course, operated with a layer of fees that sat above the fees charged by the hedge funds in which it had invested. In this doubling-up arrangement, the larger fees were levied by the underlying hedge funds; each of the fund-of-funds imposed an additional fee for its presumed skills in selecting hedge-fund managers. …\”

For the record, the winner of the bet would donate all gains to charity–in Buffett\’s case, Girls Inc. of Omaha. As he described in the 2017 letter (dated February 24, 2018), Buffett made the bet \”to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be.\” He writes:

\”Addressing this question is of enormous importance. American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays?

\”Protégé Partners, my counterparty to the bet, picked five “funds-of-funds” that it expected to overperform the S&P 500. That was not a small sample. Those five funds-of-funds in turn owned interests in more than 200 hedge funds.

\”Essentially, Protégé, an advisory firm that knew its way around Wall Street, selected five investment experts who, in turn, employed several hundred other investment experts, each managing his or her own hedge fund. This assemblage was an elite crew, loaded with brains, adrenaline and confidence.

\”The managers of the five funds-of-funds possessed a further advantage: They could – and did – rearrange their portfolios of hedge funds during the ten years, investing with new “stars” while exiting their positions in hedge funds whose managers had lost their touch.

\”Every actor on Protégé’s side was highly incentivized: Both the fund-of-funds managers and the hedge-fund managers they selected significantly shared in gains, even those achieved simply because the market generally moves upwards. (In 100% of the 43 ten-year periods since we took control of Berkshire, years with gains by the S&P 500 exceeded loss years.)

\”Those performance incentives, it should be emphasized, were frosting on a huge and tasty cake: Even if the funds lost money for their investors during the decade, their managers could grow very rich. That would occur because fixed fees averaging a staggering 21⁄2% of assets or so were paid every year by the fund-of-funds’ investors, with part of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the underlying hedge funds.\”

Here is a table showing the results. The hedge funds did better in 2008, but every year after that, they fell further behind. Buffett writes: 

\”The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund. Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch. If a poll of investment “experts” had been asked late in 2007 for a forecast of long-term common-stock returns, their guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade.\”

Over the 10 years, the total gain for the S&P index fund as 125.8%. For the five funds made up of hedge funds, the gains ranged from 2.4% to 87.7%. 
Lessons? Outguessing the market is hard, and most money manager don\’t succeed in doing it. Buffett writes: 

\”Performance comes, performance goes. Fees never falter. … A final lesson from our bet: Stick with big, “easy” decisions and eschew activity. During the ten-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would prove advantageous. In the process of investing, they studied 10-Ks, interviewed managements, read trade journals and conferred with Wall Street analysts.\”

Marx on Economics: "Its True Ideal is the Ascetic but Rapacious Skinflint and the Ascetic but Productive Slave"

Tomorrow, May 5, will be the 200th anniversary of the birth of Karl Marx. Here\’s a characteristic little taste of his writing I ran across the other day. It\’s from Economic and Philosophical Manuscripts, which were a set of essays written in 1844, not necessarily intended for publication themselves, but an early attempt at sorting through ideas and themes later developed in in Capital. This is from the Third Manuscript on \”Private Property and Labor.\” Marx wrote (what follows was all part of one paragraph, and I\’ve inserted the paragraph breaks for ease of blog-post reading):

\”Political economy, this science of wealth, is therefore at the same time the science of denial, of starvation, of saving, and it actually goes so far as to save man the need for fresh air or physical exercise. This science of the marvels of industry is at the same time the science of asceticism, and its true ideal is the ascetic but rapacious skinflint and the ascetic but productive slave. 

\”Its moral ideal is the worker who puts a part of his wages into savings, and it has even discovered a servile art which can dignify this charming little notion and present a sentimental version of it on the stage. It is therefore – for all its worldly and debauched appearance – a truly moral science, the most moral science of all. Self-denial, the denial of life and of all human needs, is its principal doctrine. 

\”The less you eat, drink, buy books, go to the theatre, go dancing, go drinking, think, love, theorize, sing, paint, fence, etc., the more you save and the greater will become that treasure which neither moths nor maggots can consume – your capital. The less you are, the less you give expression to your life, the more you have, the greater is your alienated life and the more you store up of your estranged life. 

\”Everything which the political economist takes from you in terms of life and humanity, he restores to you in the form of money and wealth, and everything which you are unable to do, your money can do for you: it can eat, drink, go dancing, go to the theatre, it can appropriate art, learning, historical curiosities, political power, it can travel, it is capable of doing all those thing for you; it can buy everything: it is genuine wealth, genuine ability. But for all that, it only likes to create itself, to buy itself, for after all everything else is its servant. And when I have the master I have the servant, and I have no need of his servant. 

\”So all passions and all activity are lost in greed. The worker is only permitted to have enough for him to live, and he is only permitted to live in order to have.\”

The quotation has the tone of prophetic certainty that is so enticing in Marx. You can almost hear someone preaching at you from behind a lectern, voice rising and falling, waving their arms and pointing for emphasis. You want to punch your fist up in the air while reading it.

For any economist, the specific ideas here are ostentatiously incorrect. For example that \”the true ideal is the ascetic but rapacious skinflint and the ascetic but productive slave\” is profoundly wrong. Capitalism is not built on misers and workaholics, and the US economy is not built on asceticism and self-denial (!). Instead, economics is about the interactions that arise when people in their role as consumers are searching around to buy the products they prefer, when people in their role as workers are thinking about how to acquire skills and contribute to production, when people in their role as managers and entrepreneurs are thinking about how to produce and innovate, and yes, when people in their role as savers and investors direct the flow of capital to provide security for their families and eventual retirement for themselves.

Moreover, economists tend to argue that we all wear many hats: not just consumer, worker, and saver, but also spouse, parent, child, community member, church member, cultural participant, book club member, hobbyist, vacationer, and many others. As to  Marx\’s list of activities that are economic forces are supposedly discouraging–\”eat, drink, buy books, go to the theatre, go dancing, go drinking, think, love, theorize, sing, paint, fence\”–explicit economic activity certainly interacts with these activities, but it does not exercise despotic rule in limiting them.

Marx is openly disbelieving that political economy can be detoxified in this way. He views  descriptions of buying and selling as a cover story for oppression; moreover, it\’s a kind of oppression that takes over participants, separating people from their true selves.  He wrote elsewhere that the division of labor itself–that is, the idea of people having jobs–is a form of enslavement. In the passage above, money becomes the master, with people as the servants.

Again, these Marxist views seem to me categorically wrong as a description of the subject of economics.

But as a description of how people can feel in a world of choices and scarcity, Marx seems to me to be touching on some deeper truths, even if his tone feels off-kilter to me: he is using drums and trumpet blasts to play a theme that would play better on string instruments in a minor key. Marx\’s words echo with the insight that many people do indeed live through weeks, months, and longer when their job feels like a burden that they cannot put down. Many people wish that they could spend their time in other ways. Many people would like to have more consumption in various forms. Many people worry about having enough money in the bank to cover an emergency, or enough for retirement.  These economic pressures and worries and fears can shape what kind of people we are and how we act, sometimes in unpleasant ways.

But when Marx\’s viewpoint focuses only on the burdens and pressures of economic life, it has little to say about more positive aspects. Yes, it\’s fun to \”eat, drink, buy books, go to the theatre, go dancing, go drinking, think, love, theorize, sing, paint, fence, etc.\” as Marx writes. But it\’s also rewarding to do a good day\’s work, to have camaraderie at work, to build up skills and a higher level of responsibility, to save up some money, to support one\’s family, to support a local business, to buy gifts for friend or a treat for oneself, and generally to have some sense of responsibility and ownership an dcontrol over one\’s economic life.

Of course, it would be silly to get dewy-eyed while romanticizing some potentially positive aspects of economic life. But frankly, it\’s also silly when Marx describes economic interactions as if they were a Gothic horror story. Contra Marx, our economies worries are don\’t arise because money is our master and jobs are enslavement. Instead, it\’s all just tradeoffs, just reality, just various aspects of the human condition.

We should all know enough history to have an idea of what \”masters\” and \”enslavement\” really mean, and working at US job in 2018 doesn\’t qualify.  For those of us living in the United States 200 years after Marx was born, it\’s worth keeping the perspective that the economic stresses in our lives are first-world problems.

Spring 2018 Journal of Economic Perspectives is Online

I was hired back in 1986 to be the Managing Editor for a new academic economics journal, at the time unnamed, but which soon launched as the Journal of Economic Perspectives. The JEP is published by the American Economic Association, which back in 2011 decided–to my delight–that it would be freely available on-line, from the current issue back to the first issue. Here, I\’ll start with Table of Contents for the just-released Spring 2018 issue, which in the Taylor household is known as issue #124. Below that are abstracts and direct links for all of the papers. I will blog more specifically about some of the papers in the next week or two, as well.

Symposium: Does the US Really Gain From Trade?

\”The US Gains from Trade: Valuation Using the Demand for Foreign Factor Services,\” by Arnaud Costinot and Andrés Rodríguez-Clare
About eight cents out of every dollar spent in the United States is spent on imports. What if, because of a wall or some other extreme policy intervention, imports were to remain on the other side of the US border? How much would US consumers be willing to pay to prevent this hypothetical policy change from taking place? The answer to this question represents the welfare cost from autarky or, equivalently, the welfare gains from trade. In this article, we discuss how to evaluate these gains using estimates of the demand for foreign factor services.
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\”Alternative Sources of the Gains from International Trade: Variety, Creative Destruction, and Markups,\” by Robert C. Feenstra
The modern theory of international trade identifies several additional sources of the gains from international trade beyond the gains from traditional comparative advantage. These are the gains from importing new product varieties; the gains from \”creative destruction\” as the relatively most productive firms expand their output by exporting while the less-productive firms exit; and the gains from competition between firms in different countries, which can lead to reduced markups. Estimates of these various gains are provided for the United States and other countries.
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\”New Perspectives on the Decline of US Manufacturing Employment,\” by Teresa C. Fort, Justin R. Pierce and Peter K. Schott
We use relatively unexplored dimensions of US microdata to examine how US manufacturing employment has evolved across industries, firms, establishments, and regions. These data provide support for both trade- and technology-based explanations of the overall decline of employment over this period, while also highlighting the difficulties of estimating an overall contribution for each mechanism. Toward that end, we discuss how more careful analysis of these trends might yield sharper insights.
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\”What Do Trade Agreements Really Do?\” by Dani Rodrik
Economists have a tendency to associate \”free trade agreements\” all too closely with \”free trade.\” They may be unaware of some of the new (and often problematic) beyond-the-border features of current trade agreements. As trade agreements have evolved and gone beyond import tariffs and quotas into regulatory rules and harmonization—intellectual property, health and safety rules, labor standards, investment measures, investor-state dispute settlement procedures, and others—they have become harder to fit into received economic theory. It is possible that rather than neutralizing the protectionists, trade agreements may empower a different set of rent-seeking interests and politically well-connected firms—international banks, pharmaceutical companies, and multinational firms. Trade agreements could still result in freer, mutually beneficial trade, through exchange of market access. They could result in the global upgrading of regulations and standards, for labor, say, or the environment. But they could also produce purely redistributive outcomes under the guise of \”freer trade.\” As trade agreements become less about tariffs and nontariff barriers at the border and more about domestic rules and regulations, economists might do well to worry more about the latter possibility.
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Symposium: Risk in Economics and Psychology

\”Modeling Risk Aversion in Economics,\” by Ted O\’Donoghue and Jason Somerville
To capture the risk-aversion intuition, the standard approach in economics has been to utilize the model of expected utility, in which risk aversion derives from diminishing marginal utility for wealth (or diminishing marginal utility for aggregate consumption). The expected utility model for risk aversion has been used to derive many important insights. But over the years, economists and psychologists have identified various problematic issues with expected utility as a descriptive model of choice. In this article, we urge economists to take seriously the research agenda of developing and assessing different ways to model risk aversion. We proceed in three main steps. First, we highlight that the basic intuition of risk aversion that drives many results in economics is not intimately tied to expected utility. Second, we describe a few alternative models that can also capture the basic intuition of risk aversion. Finally, we discuss that, while expected utility and the alternative models might all capture the basic intuition of risk aversion, the alternative models can generate additional, more nuanced implications not shared with expected utility, that in some cases seem to be borne out by data. We emphasize that these alternative models also are not perfect, and further research is needed to identify even better approaches.
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\”On the Relationship between Cognitive Ability and Risk Preference,\” by Thomas Dohmen, Armin Falk, David Huffman and Uwe Sunde
This paper will focus on the relationship between cognitive ability and decision-making under risk and uncertainty. Taken as a whole, this research indicates that cognitive ability is associated with risk-taking behavior in various contexts and life domains, including incentivized choices between lotteries in controlled environments, behavior in nonexperimental settings, and self-reported tendency to take risks. One pattern that emerges frequently in these studies is that cognitive ability tends to be positively correlated with avoidance of harmful risky situations, but it tends to be negatively correlated with risk aversion in advantageous situations. We conclude by discussing perspectives for future research, in particular the scope for the development of richer sets of elicitation instruments and measurement across a wider range of concepts.
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\”Are Risk Preferences Stable?\” by Hannah Schildberg-Hörisch
It is ultimately an empirical question whether risk preferences are stable over time. The evidence comes from diverse strands of literature, covering the stability of risk preferences in panel data over shorter periods of time, life-cycle dynamics in risk preferences, the possibly long-lasting effects of exogenous shocks on risk preferences as well as temporary variations in risk preferences. Individual risk preferences appear to be persistent and moderately stable over time, but their degree of stability is too low to be reconciled with the assumption of perfect stability in neoclassical economic theory. We offer an alternative conceptual framework for preference stability that builds on research regarding the stability of personality traits in psychology. The definition of stability used in psychology implies high levels of rank-order stability across individuals and not that the individual will maintain the same level of a trait over time. Preference parameters are considered as distributions with a mean that is significantly but less than perfectly stable, plus some systematic variance. This framework accommodates evidence on systematic changes in risk preferences over the life cycle, due to exogenous shocks such as economic crises or natural catastrophes, and due to temporary changes in self-control resources, emotions, or stress. We note that research on the stability of (risk) preferences is conceptually at the heart of microeconomics and systematic changes in risk preferences have vital real-world consequences.
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\”Risk Preference: A View from Psychology,\” by Rui Mata, Renato Frey, David Richter, Jürgen Schupp and Ralph Hertwig
Psychology offers conceptual and analytic tools that can advance the discussion on the nature of risk preference and its measurement in the behavioral sciences. We discuss the revealed and stated preference measurement traditions, which have coexisted in both psychology and economics in the study of risk preferences, and explore issues of temporal stability, convergent validity, and predictive validity with regard to measurement of risk preferences. As for temporal stability, do risk preference as a psychological trait show a degree of stability over time that approximates what has been established for other major traits, such as intelligence, or, alternatively, are they more similar in stability to transitory psychological states, such as emotional states? Convergent validity refers to the degree to which different measures of a psychological construct capture a common underlying characteristic or trait. Do measures of risk preference all capture a unitary psychological trait that is indicative of risky behavior across various domains, or do they capture various traits that independently contribute to risky behavior in specific areas of life, such as financial, health, and recreational domains? Predictive validity refers to the extent to which a psychological trait has power in forecasting behavior. Intelligence and major personality traits have been shown to predict important life outcomes, such as academic and professional achievement, which suggests there could be studies of the short- and long-term outcomes of risk preference—something lacking in current psychological (and economic) research. We discuss the current empirical knowledge on risk preferences in light of these considerations.
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Articles and Features

\”Space, the Final Economic Frontier,\” by Matthew Weinzierl
After decades of centralized control of economic activity in space, NASA and US policymakers have begun to cede the direction of human activities in space to commercial companies. NASA garnered more than 0.7 percent of GDP in the mid-1960s, but is only around 0.1 percent of GDP today. Meanwhile, space has become big business, with $300 billion in annual revenue. The shift from public to private priorities in space is especially significant because a widely shared goal among commercial space\’s leaders is the achievement of a large-scale, largely self-sufficient, developed space economy. Jeff Bezos, has stated that the mission of his firm Blue Origin is \”millions of people living and working in space.\” Elon Musk, founder of SpaceX, has laid out plans to build a city of a million people on Mars within the next century. Both Neil deGrasse Tyson and Peter Diamandis have been given credit for stating that Earth\’s first trillionaire will be an asteroid-miner. Such visions are clearly not going to become reality in the near future. But detailed roadmaps to them are being produced and recent progress in the required technologies has been dramatic. If such space-economy visions are even partially realized, the implications for society will be enormous. Though economists should treat the prospect of a developed space economy with healthy skepticism, it would be irresponsible to treat it as science fiction. In this article, I provide an analytical framework—based on classic economic analysis of the role of government in market economies—for understanding and managing the development of the space economy.
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\”Dave Donaldson: Winner of the 2017 Clark Medal,\” by Daron Acemoglu
The 2017 John Bates Clark Medal of the American Economic Association was awarded to Dave Donaldson for his path-breaking contributions in international trade. Donaldson’s work sheds light on some of the central questions of international economics, ranging from the economic and welfare implications of market integration within a country to testing the core empirical predictions of models of international trade based on comparative advantage. In these areas, empirical work faces the challenge of taking into account the broader equilibrium implications of changes in policies or economic conditions—that is, the possibility that bilateral relations between two regions or countries will affect others via trade diversion or their effects on equilibrium prices. Donaldson’s work has managed to address these challenges by combining careful theory with detailed and creative empirical work. Indeed, this research strategy has turned Dave into a leader in the revival of empirical work in international trade.
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\”Retrospectives: Adam Smith\’s Discovery of Trade Gravity,\” by Bruce Elmslie
The gravity equation is a current workhorse of empirical trade theory. It is generally acknowledged that this theory, which relates the extent of trade between countries to their respective sizes, distances, and relative trade barriers, was first developed by Jan Tinbergen in 1962. Acceptance of the gravity model as part of the discipline\’s core was limited by its scant theoretical foundation for the first 40 years of its existence. This paper finds that a theory of trade gravity was first developed by Adam Smith in The Wealth of Nations. Moreover, it is shown that Smith\’s statement of a proportional relation between economic size and distance came about as an application of his general theory of differential capital productivity in different economic sectors, and his elaboration of a theory of the gains from trade originated by David Hume. It is further shown that Smith had an explanation of the size of border affects in trade volumes, and a gravity theory of trade restrictions.
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\”Recommendations for Further Reading,\” by Timothy Taylor
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\”Do You Use JEP Articles in Your Classroom? One More Chance to Share!\” 
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The Stockholm Congestion Charge

Economists have long argued that it\’s very hard to build your way out of traffic congestion–regardless of whether the building means adding lanes to roads or adding mass transit. The fundamental issue is that many of the people commuting to work have three adjustments they can make: some of them can adjust the time they choose to travel; some of them can adjust the route they travel; and some of them can adjust the method of their travel (single car vs. carpool, car vs. mass transit, and the like).

When substantial traffic congestion occurs, it pushes a substantial number of commuters to travel a little earlier or later, to find alternative routes, and to travel in different ways. But then, when extra lanes of highway or mass transit investments are made, some of those who had shifted their commuting patterns will shift back again. Congestion may decline a little as a result of the building process, but the decline is often much less than desired or hoped.

Several major cities around the world have concluded that if they really want to address congestion, they need to do it with prices. F or example, London imposed a congestion charge in 2003, as described by Jonathan Leape in the \”The London Congestion Charge,\” in the Fall 2006 issue of the Journal of Economic Perspectives (20: 4, pp 157-176). In the 1990s, the average speed of a trip across London was actually slower than it has been at the start of the 20th century. \”Even in the larger area of inner London,\” Leape wrote,  \”drivers in 1998 spent almost 30 percent of their time stationary during peak periods and more than half their time traveling at speeds of less than 10 mph.\”  Basically, the idea is to draw a circle around the city. Those who enter the circle during commute times pay a toll, with the money mostly going to more regular and updated mass transit service. Charges are tallied by technology that reads license plates.

In 2006, Stockholm was the second major city in Europe to start congestion charge program, so the program has now completed its first decade. A congestion charge was also imposed in the Swedish city of Gothenburg.  There, the system runs on a combination of license-plate recognition technology and electronic tags in vehicles.

Björn Hårsman and John Quigley describe the political process that led a referendum approving the Stockholm congestion charge in \”Political and Public Acceptability of Congestion Pricing: Ideology and Self-Interest in Sweden\” (Access, Spring 2011). Maria Börjesson and Ida Kristoffersson provide an overview in \”The Swedish Congestion Charges: Ten Years On – And effects of increasing charging levels,\” published by the Centre for Transport Studies in Stockholm (CTR Working Paper 2017:2).  In
They write:

\”When the charges were introduced in Stockholm 2006, the reduction of traffic across the cordon stabilized at approximately 20%. In Gothenburg, the reduction in traffic volume across the cordon during charged hours stabilized at approximately 12%. Travel times reduced significantly in both cities, but in Stockholm, travel time reductions occurred in a much larger part of the network than in Gothenburg. In Stockholm, the congestion was much more widespread in a larger part of the network prior to the charges, mainly because of the blocking of intersections upstream of the bottlenecks. Substantial travel time reductions were, therefore, achieved in the suburbs far from the toll cordon.The adaptation mechanisms observed in Stockholm and Gothenburg are remarkably similar: commuters diverted to public transport and discretionary travellers adapted in other ways. This result is supported by a model-based study (Börjesson et al., 2014) showing that the traffic effects and adaptations costs are surprisingly stable across different types of traffic systems.\”

Of course, people look for loopholes in the rules. Sweden subsidizes company cars, in part with the idea that if people have access to a shared car, they might have less need to buy an car (or a second car) their own.  But with a company car, the firm usually pays the congestion charge, not the employee, and the employee doesn\’t pay tax on the value of this fringe benefits. A number of employers provide free parking as well, which in an inner city is another untaxed subsidy for commuters. The authors write (citations omitted):

\”In this paper, we define a company car as a passenger car owned by a legal person that is not used as a taxi. According to the Gothenburg travel survey, 8% of the citizens of Gothenburg have always access to a company car for private trips. According to a travel survey conducted in the Stockholm County in 2015, 10% of the citizens of Stockholm have access to a company car for private trips. According to 2014 registered data, company cars make up 34% of all passenger cars in Stockholm, 26% in Gothenburg and 23% in the rest of Sweden. Compared to the taxation of private cars, company cars are heavily subsidized, in particular alternative fuel vehicles. The subsidies are particularly high for commuters because the benefit of free parking at work is not taxed.\”

A few other points seem worth making in this quick summary.

1) In political terms, the common pattern seems to be that congestion charges are politically controversial, and are not passed into law by large margins and popular acclamation. But when they have been in place a few years, and the benefits of less traffic on the roads and improved mass transit become visible, there doesn\’t seem to be any substantial pressure to eliminate them, either.

2) The congestion charge isn\’t the only interesting aspect of transportation policy in Stockholm. It\’s also a city which over recent decades shifted from government ownership to private contracting. For some discussion, see \”A Bid forBetter TransitImproving service with contracted operations,\” a September 2017 report from the TransitCenter foundation.

\”Over a period of two decades, the Stockholm region shifted from government-operated transit, in which a government agency employs government employees to operate government-owned rolling stock (the standard operating model in the US), to a contracting model. Today, Stockholm contracts nearly all aspects of its public transit services, including buses, ferries, subways, commuter trains, and trams. Under this system, the region delegates most route-planning responsibilities to its bus contractors, offering a financial incentive to increase ridership.\”

3) The benefits of reduced traffic congestion aren\’t just about less time on the road. Another meaningful gain is less air pollution in cities. In a recent research paper, Emilia Simeonova Janet Currie Peter Nilsson and Reed Walker look at the Stockholm congestion charge from a different angle in \”Congestion Pricing, Air Pollution, and Children\’s Health\” (NBER Working Paper #24410, March 2018). From their abstract: \”This study examines the effects of implementing a congestion tax in central Stockholm on both ambient air pollution and the population health of local children. We demonstrate that the tax reduced ambient air pollution by 5 to 15 percent, and that this reduction in air pollution was associated with a significant decrease in the rate of acute asthma attacks among young children.\”

4) Finally, there\’s a question of what this all means for the United States. In the United States, charging more for traffic at peak-load times has usually been limited to specific highway lanes, or sometimes to charging more for bridge tolls or mass transit at peak time. (Although charging extra for mass transit at peak times can bring in more money, it clearly works against inducing people out of their cars.). Although no US city has put a ring around the most dense part of the inner city and taken the full congestion charge plunge  along with London, Stockholm, Singapore, and a few others, there are current conversations about whether such a charge might be instituted for the island of Manhattan

But it seems to me that such charges are likely to come, sooner or later. Consider the implications of this figure from the 2018 Economic Report of the President. US roads haven\’t expanded much, but miles traveled on those roads is on a long-term upward trend. Traffic congestion  is one result, and if we want an actual answer, congestion pricing is the way. 
More Driving on the Same Roads

For a couple of previous posts on this theme, see:

\”The Pricing Answer to Traffic Congestion\” (July 17, 2017)
\”Insights on Infrastructure\” (March 11, 2016)