Here\’s a figure showing the evolution of labor force participation in the 25-54 age bracket in these four economies. Economists often like to focus on this group because it avoids differences in rates of college attendance (which can strongly influence labor force participation at younger years) and differences in old-age pension systems and retirement patterns (which can strongly influence labor force participation in older years).
Daly writes (ciations omitted):
\”Which raises the question—why aren’t American workers working?
\”The answer is not simple, and numerous factors have been offered to explain the decline in labor force participation. Research by a colleague from the San Francisco Fed and others suggests that some of the drop owes to wealthier families choosing to have only one person engaging in the paid labor market …
\”Another factor behind the decline is ongoing job polarization that favors workers at the high and low ends of the skill distribution but not those in the middle. … Our economy is automating thousands of jobs in the middle-skill range, from call center workers, to paralegals, to grocery checkers.A growing body of research finds that these pressures on middle-skilled jobs leave a big swath of workers on the sidelines, wanting work but not having the skills to keep pace with the ever-changing economy.
\”The final and perhaps most critical issue I want to highlight also relates to skills: We’re not adequately preparing a large fraction of our young people for the jobs of the future. Like in most advanced economies, job creation in the United States is being tilted toward jobs that require a college degree . Even if high school-educated workers can find jobs today, their future job security is in jeopardy. Indeed by 2020, for the first time in our history, more jobs will require a bachelor’s degree than a high school diploma.
\”These statistics contrast with the trends for college completion. Although the share of young people with four-year college degrees is rising, in 2016 only 37% of 25- to 29-year-olds had a college diploma. This falls short of the progress in many of our international competitors, but also means that many of our young people are underprepared for the jobs in our economy.\”
On this last point, my own emphasis would differ from Daly\’s. Yes, steps that aim to increase college attendance over time are often worthwhile. But as she notes, only 37% of American 25-29 year-olds have a college degree. A dramatic rise in this number would take an extraordinary social effort. Among other things, it would require a dramatic expansion in the number of those leaving high school who are willing and ready to benefit from a college degree, together with a vast enrollments across the higher education sector. Even if the share of college graduates could be increased by one-third or one-half–which would be a very dramatic change–a very large share of the population would not have a college degree.
It seems to me important to separate the ideas of \”college\” and \”additional job-related training.\” It\’s true that the secure and decently-paid jobs of the future will typically require additional training past high school. At least in theory, that training could be provided in many ways: on-the-job training, apprenticeships, focused short courses focused certifying competence in a certain area, and so on. For some students, a conventional college degree will be a way to build up these skills. However, there are also a substantial number of students who are unlikely to flourish in a conventional classroom-based college environment, and a substantial number of jobs where a traditional college classroom doesn\’t offer the right preparation. College isn\’t the right job prep for everyone. We need to build up other avenues for US workers to acquire the job-related skills they need, too.
For macroeconomists, Milton Friedman\’s (1968) Presidential Address to the American Economic Association about \”The Role of Monetary Policy\” marks a central event (American Economic Review, March 1968, pp. 1-17). Friedman argued that monetary policy had limits. Actions by a central bank like the Federal Reserve could have short-run effects on an economy–either for better or for worse. But in the long-run, he argued, monetary policy affected only the price level. Variables like unemployment or the real interest rate were determined by market forces, and tended to move toward what Friedman called the \”natural rate\”–which is potentially confusing term for saying that they are determined by forces of supply and demand.
Here, I\’ll give a quick overview of the thrust of Friedman\’s address, a plug for the recent issue of the Journal of Economic Perspectives, which has a lot more, and point out a useful follow-up article that clears up some misconceptions about Friedman\’s 1968 speech.
The Winter 2018 issue of the Journal of Economic Perspectives, where I work as Managing Editor, we published a three-paper symposium on \”Friedman\’s Natural Rate Hypothesis After 50 Years.\” The papers are:
I won\’t try to summarize the papers here, along with the many themes they offer on how Friedman\’s speech influenced the macroeconomics that followed or what aspects of Friedman\’s analysis have held up better than others. But to giver a sense of what\’s a stake, here\’s an overview of Friedman\’s themes from the paper by Mankiw and Reis:
\”Using these themes of the classical long run and the centrality of expectations, Friedman takes on policy questions with a simple bifurcation: what monetary policy cannot do and what monetary policy can do. It is a division that remains useful today (even though, as we discuss later, modern macroeconomists might include different items on each list).
\”Friedman begins with what monetary policy cannot do. He emphasizes that, except in the short run, the central bank cannot peg either interest rates or the unemployment rate. The argument regarding the unemployment rate is that the trade-off described by the Phillips curve is transitory and unemployment must eventually return to its natural rate, and so any attempt by the central bank to achieve otherwise will put inflation into an unstable spiral. The argument regarding interest rates is similar: because we can never know with much precision what the natural rate of interest is, any attempt to peg interest rates will also likely lead to inflation getting out of control. From a modern perspective, it is noteworthy that Friedman does not consider the possibility of feedback rules from unemployment and inflation as ways of setting interest rate policy, which today we call “Taylor rules” (Taylor 1993).
\”When Friedman turns to what monetary policy can do, he says that the “first and most important lesson” is that “monetary policy can prevent money itself from being a major source of economic disturbance” (p. 12). Here we see the profound influence of his work with Anna Schwartz, especially their Monetary History of the United States. From their perspective, history is replete with examples of erroneous central bank actions and their consequences. The severity of the Great Depression is a case in point.
\”It is significant that, while Friedman is often portrayed as an advocate for passive monetary policy, he is not dogmatic on this point. He notes that “monetary policy can contribute to offsetting major disturbances in the economic system arising from other sources” (p. 14). Fiscal policy, in particular, is mentioned as one of these other disturbances. Yet he cautions that this activist role should not be taken too far, in light of our limited ability to recognize shocks and gauge their magnitude in a timely fashion. The final section of Friedman’s presidential address concerns the conduct of monetary policy. He argues that the primary focus should be on something the central bank can control in the long run—that is, a nominal variable … \”
\”[T]here has been widespread and lasting acceptance of the paper’s position that monetary policy can achieve a long-run target for inflation but not a target for the level of output (or for other real variables). For example, in the United States, the Federal Open Market Committee’s (2017) “Statement on Longer-Run Goals and Policy Strategy” included the observations that the “inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation,” and that, in contrast, the “maximum level of employment is largely determined by nonmonetary factors,” so “it would not be appropriate to specify a fixed goal for employment.”
Nelson then lays out seven fallacies. The details are in his paper: here, I just list the fallacies with a few words of his explanations.
Fallacy 1: “The Role of Monetary Policy” was Friedman’s first public statement of the natural rate hypothesis \”Certainly, Friedman (1968) was his most extended articulation of the ideas (i) that an expansionary monetary policy that tended to raise the inflation rate would not permanently lower the unemployment rate, and (ii) that full employment and price stability were compatible objectives over long periods. But Friedman had outlined the same ideas in his writings and in other public outlets on several earlier occasions in the 1950s and 1960s.\”
Fallacy 2: The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow’s (1960) analysis \”A key article on the Phillips curve that is often juxtaposed with Friedman (1968) is Samuelson and Solow (1960). This paper is often (and correctly, in the present author’s view) characterized as advocating the position that there is a permanent tradeoff between the unemployment rate and inflation in the United States.\”
Fallacy 3: Friedman’s specification of the Phillips curve was based on perfect competition and no nominal rigidities \”Modigliani (1977, p. 4) said of Friedman (1968) that “[i]ts basic message was that, despite appearances, wages were in reality perfectly flexible.” However, Friedman (1977, p. 13) took exception to this interpretation of his 1968 paper. Friedman pointed out that the definition of the natural rate of unemployment that he gave in 1968 had recognized the existence of imperfectly competitive elements in the setting of wages, including those arising from regulation of labor markets. Further support for Friedman’s contention that he had not assumed a perfectly competitive labor market is given by the material in his 1968 paper that noted the slow adjustment of nominal wages to demand and supply pressures. … Consequently, that (1968 Friedman] framework is consistent with prices being endogenous—both responding to, and serving as an impetus for, output movements—and the overall price level not being fully flexible in the short run.\”
Fallacy 4: Friedman’s (1968) account of monetary policy in the Great Depression contradicted the Monetary History’s version \”But the fact of a sharp decline in the monetary base during the prelude to, and early stages of, the 1929-1933 Great Contraction is not in dispute, and it is this decline to which Friedman (1968) was presumably referring.\”
Fallacy 5: Friedman (1968) stated that a monetary expansion will keep the unemployment rate and the real interest rate below their natural rates for two decades \”[T]these statements are inferences from the following passage in Friedman (1968, p. 11): “But how long, you will say, is ‘temporary’? … I can at most venture a personal judgment, based on some examination of the historical evidence, that the initial effects of a higher and unanticipated rate of inflation last for something like two to five years; that this initial effect then begins to be reversed; and that a full adjustment to the new rate of inflation takes about as long for employment as for interest rates, say, a couple of decades.” The passage of Friedman (1968) just quoted does not, in fact, imply that a policy involving a shift to a new inflation rate involves twenty years of one-sided unemployment and real-interestrate gaps. Such prolonged gaps instead fall under the heading of Friedman’s “initial effects” of the monetary policy change—effects that he explicitly associated with a two-to-five-year period, with the gaps receding beyond this period. Friedman described “full adjustment” as comprising decades, but such complete adjustment includes the lingering dynamics beyond the main dynamics associated with the initial two-to-five year period. It is the two-to-five year period that would be associated with the bulk of the nonneutrality of the monetary policy change.\”
Fallacy 6: The zero lower bound on nominal interest rates invalidates the natural rate hypothesis \”A zero-bound situation undoubtedly makes the analysis of monetary policy more difficult. In addition, the central bank in a zero-bound situation has fewer tools that it can deploy to stimulate aggregate demand than it has in other circumstances. But, important as these complications are, neither of them implies that the long-run Phillips curve is not vertical.\”
Fallacy 7: Friedman’s (1968) treatment of an interest-rate peg was refuted by the rational expectations revolution. \”The propositions that the liquidity effect fades over time and that real interest rates cannot be targeted in the long run by the central bank remain widely accepted today. These valid propositions underpinned Friedman’s critique of pegging of nominal interest rates.\”
Since the JEP published this symposium, I\’ve run into some younger economists who have never read Friedman\’s talk and lack even a general familiarity with his argument. For academic economists of whatever vintage, it\’s an easily readable speech worth becoming acquainted with–or revisiting.
There seems to be an ongoing fear in the psyche of Americans that an economy based on intensive government planning will inevitably outstrip a US economy that lacks such a degree of central planning. I first remember encountering this fear with respect to the Soviet Union, which was greatly feared as an economic competitor to the US from the 1930s up through the 1980s. Sometime in the 1970s and 1980s, US fears of agovernment-directed economy transferred over to Japan. And in recent years, those fears seem to have transferred to China.
Back in the 1960s and 1970s, there was a widespread belief among prominent economists that the Soviet Union would overtake the US economy in per capita GDP within 2-3 decades. Such predictions seem deeply implausible now, knowing what we know about breakup of the Soviet Union in the 1990s and its economic course since then. But at the time, the perspective was that the US economy frittered away output on raising personal consumption, while the Soviet economy led to high levels of investment in equipment and technology. Surely, these high levels of investment would gradually cause the Soviet standard of living to pull ahead?
\”But with the fifth edition (1961), although expressing some skepticism of Soviet statistics, he [Samuelson] stated that economists \”seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year,\” though less than West Germany, Japan, Italy and France (5:829). The fifth through the eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, \”the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive\” (13:837). Samuelson and Nordhaus were not alone in their optimistic views about Soviet central planning; other popular textbooks were also generous in their descriptions of economic life under communism prior to the collapse of the Soviet Union.
\”By the next edition, the fourteenth, published during the demise of the Soviet Union, Samuelson and Nordhaus dropped the word \”thrive\” and placed question marks next to the Soviet statistics, adding \”the Soviet data are questioned by many experts\” (14:389). The fifteenth edition (1995) has no chart at all, declaring Soviet Communism \”the failed model\” (15:714–8).\”
My point here is not to single out the Samuelson text. As Skousen notes, this perspective on Soviet growth was common among many economists. In retrospect, there were certainly signs from the 1960s through the 1980s that the Soviet economy was not in fact catching up. Commonsensical observation of how average people were living in the Soviet Union, especially in rural areas, told a different story. And those projections about when the Soviet Union would catch the US in per capita GDP always seemed to remain 2-3 decades off in the future. Nonetheless, standard economics textbooks taught for about three decades that the Soviets were likely to catch up and pull ahead.
But as the risk of being overtaken by an ever-richer Soviet Union came to seem less plausible, the rising threat from Japan took its place. Again, we now think of Japan\’s as suffering a financial meltdown back in the early 1990s, which has now been followed by a quarter-century of slow growth. But as Japanese competitor rose in world markets in the 1970s and 1980s, the view was quite different.
\”After the collapse of Soviet-style communism, the “Japan, Inc.” economic model stood as the world’s only real alternative to Western free-market capitalism. Its leading American supporters—who became known as “revisionists”—argued in the late 1980s and early 1990s that the United States could not compete with Japan’s unique form of state-directed insider capitalism. Unless Washington adopted Japanese-style policies and abandoned free markets in favor of “managed trade,” they said, America would become an economic colony of Japan. …
\”Four figures in particular stand out: political scientist Chalmers Johnson, whose 1982 book MITI and the Japanese Miracle laid much of the intellectual groundwork for later writers; former Reagan administration trade negotiator Clyde Prestowitz, who authored Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It and later founded the Economic Strategy Institute to advance the revisionist viewpoint; former U.S. News & World Report editor James Fallows, whose 1989 article “Containing Japan” in the Atlantic Monthly cast U.S.-Japan relations in Cold War terms; and Dutch journalist Karel van Wolferen, author of The Enigma of Japanese Power. These men influenced many others—including novelist Michael Crichton, whose 1992 jingoistic thriller Rising Sun became a number-one bestseller.
\”The revisionists asserted that, in contrast to the open-market capitalism of the “Anglo-American” model, Japan practiced a unique form of state-directed insider capitalism. Under that model, close relationships among business executives, bankers, and government officials strongly influence economic outcomes. By strategically allocating capital through a tightly controlled banking system, they argued, Japan would drive foreign competitors out of sector after sector, leading eventually to world economic domination.
\”Revisionists also maintained that because Japan was not playing by the normal rules of Western capitalism, it was useless to employ rules-based trade negotiations to open the Japanese market. Instead, they advocated “results-based” or “managed trade” agreements as the only realistic way to reduce the U.S.-Japan trade imbalance. Beyond that, they proposed elements of a Japanese-style industrial policy as a means of improving U.S. economic performance.\”
I was working as a newspaper editorial writer for the San Jose Mercury News in the mid-1980s, in the heart of Silicon Valley, so I heard lots about the Japanese threat. I remember a lot of anguish about Japan\’s \”Fifth Generation Computer Project,\” which was going to assure Japanese dominance of computing, and the a Japanese program to take the lead in high-definition televisions–a program built on analog rather than digital technology. But again, the overall story was that Japan had high levels of investment that it would focus on key technology areas, and thus would surely outstrip the US level. The fears of Japan as an economic colossus turned out to be considerably overblown, too.
It seems to me that China has now taken the place of Russia and Japan, and many of the terms used by Lindsey and Lukas to describe attitudes toward Japan fit quite well in cuirrent arguments about of China. Thus, it\’s become fairly common to hear claims that China practices \”state-directed insider capitalism,\” that China has \”close relationships among business executives, bankers, and government officials,\” that China practices \”strategically allocating capital through a tightly controlled banking system,\” and that China is \” not playing by the normal rules of Western capitalism.\” Just as with Japan, the argument is now made that the only way to address US-China trade is with “results-based” or “managed trade” agreements,
Of course, the fact that these very similar arguments and predictions turned out to be incorrect with the Soviet Union and with Japan doesn\’t prove they will be incorrect with regard to China. But it should raise some questions.
It\’s worth remembering that according to the World Bank, per capita GDP in the United States is $57,600 in 2016, which compares with $38,900 in Japan, $8,748 in the Russian Federation, and $8,123 in China.
Kenneth Rogoff recently wrote an op-ed on the topic, \”Will China Really Supplant US Economic Hegemony?\” He points out that for a country with an extremely large workforce, like China, the rise of robotics may be especially disruptive. He adds:
\”But China’s rapid growth has been driven mostly by technology catch-up and investment. … China’s gains still come largely from adoption of Western technology, and in some cases, appropriation of intellectual property. … In the economy of the twenty-first century, other factors, including rule of law, as well as access to energy, arable land, and clean water may also become increasingly important. China is following its own path and may yet prove that centralized systems can push development further and faster than anyone had imagined, far beyond simply being a growing middle-income country. But China’s global dominance is hardly the predetermined certainty that so many experts seem to assume.\”
The US economy has its full share of challenges and difficulties, many of which have been chronicled on the blog repeatedly in the last few years. But the fear that the US economy will soon be overtaken by a country using a recipe consisting of state-directed high investment levels and unfair trading practices has not worked in the past. Perhaps the energies of US eocnomic policymakers should be less focused on worries about outside threats, and more focused on how to strengthen US productivity and competitiveness.
I told my teenage son that the economics of Wakanda, the home country of the \”Black Panther\” in the recent movie, raised some interesting questions. He looked at me for a long moment and then explained very slowly: \”Dad, it\’s not a documentary.\” Duly noted. No superhero movie is a documentary, and pretty much by definition, even asking for plausibility from a superhero movie is asking too much. But undaunted, I continue to assert that the economy of Wakanda raises some interesting questions. For some overviews, see:
For the 8-10 people on Planet Earth not yet familiar with the premise, Wakanda sits on top of the world\’s only supply of a rare mineral called \”vibranium,\” which absorbs vibrations, including sound, kinetic motion, and also gives off the magic \”radioactivity\” which in superhero movies then creates whatver other human strengths or plant and animals that seem useful for the plot. Wakanda has used this mineral as the basis for building what is portrayed in the movie as a very technologically advanced and sophisticated economy. However, a quick glance around the world economy suggests that countries endowed with valuable natural resources don\’t always show broad-based economic success or participatory forms of governance (think Venezuela, Angola, or Saudi Arabia).
There\’s a substantial research literature on the \”the resource curse question\” of why natural resources have so often been accompanied by a lack of growth. For an overview, see Anthony J. Venables, 2016. \”Using Natural Resources for Development: Why Has It Proven So Difficult?\”Journal of Economic Perspectives (Winter 2016, 30:1, pp. 161-84). When a country is in a situation in which the export of a key natural resource looms large, it often leads to a situation of economic and political economy. Moreover, a country with very large exports in one area is likely to have an economy that is not well-diversified, and thus become vulnerable to price shocks concerning that resource.
How does Wakanda escape these traps? Well, it isn\’t obvious that it escapes all of them. Political power in Wakanda is concentrated in a hereditary monarchy, with arguments over succession decided by ritual combat. However, the comic books also suggest that Wakanda sells enough vibranium on world markets to raise money for a large national investment in science and technology. Thus, Wakanda manages to become a combination technology-warrior state, in which the leaders seem to be generally beneficent.
In the real world, countries that have managed to overcome the resource curse to at least some extent, like Norway, Indonesia, Botswana, and others, often have a government focus on spreading the benefits of their mineral exports across the population. In turn, widespread buying power in the economy helps other industries to develop. A \”social fund\” is often set up to fund human capital and financial investment, and to assure that the benefits of mineral exports will be spread out over time.
The level of inequality in Wakanda the \”Black Panther\” movie is not clear. In the old comic books, the Black Panther is described as the richest person in the world, thanks to effective ownership of the mineral wealth, while some people of Wakanda are portrayed as living in traditional huts. The movie portrayal of household life in Wakanda and the full distribution of income is not clear (\”Dad, it\’s not a documentary!\”) but in various montage scenes of daily life, it does not appear that everyone is living in modern luxury.
As a scientist-warrior state with an unlimited supply of cheap vibranium, Wakanda has managed to develop many upstream uses of vibranium, with a variety of applications to transportation, health, and weapons. In the real world, developing upstream uses of domestic resources is often tricky. It works, sometimes; for example, Botswana has managed to have more diamond-cutting and sales done in Botswana, rather than elsewhere. But it is hard for the economy of a small country to stretch all the way from traditional economic practices all the way up to the highest techology, with all the steps in-between. As the Economist notes: \”Countries often find it easier to move diagonally, rather than vertically, graduating into products that belong to different value chains but require similar mixes of labour, capital and knowhow.\”
Wakanda has a high level of prosperity while being almost entirely cut off from the outside world. This seems to me an ongoing dream of politicians from communities countries: how can my jurisdiction become well-off by trading with itself. In this view, trade and investment by outsiders almost always ends up being exploitative, and best minimized or avoided. However, rhere are not any countries that have managed to accomplish this combination of economic development and splendid isolation in the real world.
The underlying issue here is that Wakanda is portrayed as being well-off because of its combination of vibranium and science. But in the real world, economic development typically involves a number of complementary ingredients. For example, vibranium had to be discovered, mined, and refined. There had to be process for discovering its scientific properties, and then engineered these properties into products. An obvious question (for economists, at least) was who had the incentive to do the innovation, the trial-and-error learning, and the investments in human and physical capital to make all this happen? In the real world, all of this happens against a backdrop of incentives, competition, property rights, financial contracts, and on The movie doesn\’t give us a back-story here. (\”Dad, it\’s not a documentary.\”) But technologically leading economies typically don\’t emerge through the actions of a beneficent hereditary monarch.
For an economist, an obvious question is whether the people of Wakanda might be better off with greater openness to the world. From a pure economic point of view, it seems clear that Wakanda could benefit from a greater opening to international trade. At Wakanda\’s stage of technological development, it wouldn\’t even be necessary to sell vibranium. Instead, it could sell services that made use of vibranium like construction and public works, health care, and the like, while still keeping control of the underlying resource.
But economics isn\’t everything. Wakanda also clearly places a high value on its traditional culture, which can be a two-edges sword. For many people much of the time, traditional culture can be a source of purpose and meaning; but for many of the same people at least some of the time, traditional culture can also feel like a trap and a limitation. I learned from reading Subrick\’s paper about recent developments in the back story. He writes:
\”Although the Black Panther has retained political legitimacy throughout the centuries, in the new millennium Wakandans have begun to question the validity of their government. The Black Panther’s support depends on his ability to provide the most basic of public goods—security from outside invasion and domestic turmoil. In the story arc “A Nation Under Our Feet” Ta-Nehisi Coates and Brian Stelfreeze describe a Wakanda on the verge of civil war. The combination of the never-ending attempts by outsiders to steal vibranium, recent internal challenges to his rule, and political intrigue, not to mention a terrorist organization poisoning the minds of the people, have raised the question of whether a monarchy and freedom are compatible. Government by a monarch in the age of democracy creates tensions within society. Furthermore, high levels of income inequality exacerbate these societal pressures. In Wakanda, traditional ways of life exist in the presence of the world’s most sophisticated technologies. Citizens live in huts that are located next to the factories. A disenfranchised and relative poor citizenry are beginning to demand massive social change.\”
To put it another way, the concerns of social scientists about the resource curse, inequality, openness to international trade, and lack of democracy are actually becoming, in their own way, part of the plot.
Tourism intrigues me in economic terms, because it\’s a larger industry than many people realize. It\’s also treated as an export industry, in the sense that if a German tourist comes to the US, the spending is essentially in economic terms an export of \”services\” produce in the US and consumed by a non-American–even though the actual consumption happened within the geographical US. At a broader human level, tourism interests me because face-to-face direct interactions with people from other places, whether as host or as visitor, can shape how people from around the world view each other.
\”Global tourism has experienced steady growth for over six decades, culminating in an estimated 1.2 billion arrivals in 2016; a figure which is forecast to rise to 1.8 billion by 2030, with international tourist arrivals in emerging economy destinations projected to grow at double the rate of that in advanced tourism economies. Global expenditures on travel more than doubled between 2000 and 2016, rising from USD 495 billion to USD 1.2 trillion and accounting for 7% of global exports in goods and services. In OECD countries, tourism accounts for, on average, 4.2% of GDP, 6.9% of employment, and 21.7% of service exports.\”
What are some of the megatrends that will affect patterns of international tourism moving forward? There is an expansion of the global middle class: \”\”At the end of 2016, there were approximately 3.2 billion people considered to be in the global middle classes around the world. Annually, about 150 million people are joining this demographic group, with the majority of these (an estimated 88%), residing in Asia … \” The share of elderly in global population is rising: \”The United Nations (UN) has projected that by 2050, nearly all regions of the world will have almost a quarter of their population aged 60 and older …\”
Taken together, these patterns suggest much larger tourist flows from Asia to the rest of the world. They also suggest a possible emphasis on tourism involving the elderly. In some cases, this may take the form of a rise in multigenerational tourism. In others, it may just mean an emphasis on \”accessible\” tourism, which has an emphasis on having transportation connections and eventual destinations that work well for the elderly.
\”Another niche segment that is likely to experience significant growth in the coming years is that of medical tourism. As the cost of medical insurance and procedures, whether for health or cosmetic purposes, continue to increase in developed economies, emerging economies will become attractive options. As the quality of medical practitioners and infrastructure improves and the costs remain low, relative to those in source markets, tourists will be more likely to consider travelling abroad for wellness purposes and/or to combine a medical procedure with a short break …\”
And yet another involves the evolving travel patterns of \”Millenials\”:
Millenials currently account for about 20% of international travel, spending an estimated USD 203 billion around the world. By 2040, they will range in age from 45-60 … Data indicates that Millenials take more trips annually than other generations–at four or more per year. However, trips tend to be shorter in duration compared to other demographic groups. Furthermore, they are more likely to pick travel experiences that they consider to be \”authentic\”–preferring to head off the beaten track and \”live like a local\” …
A variety of other evolutions are likely to matter, as well. Internet connectedness is changing how people can plan and shop for vacations–but also making it more important to have methods for evaluating whether what you see on the web is trustworthy. There are even some predictions that the rise of virtual reality tourism will at some point tend to reduce the actual need to travel. Maybe that tradeoff will happen someday. But my guess is that for the short- and middle-term, virtual reality may turn out to be one of the most effective tools for making people want to take a trip.
For some additional commentary on the tourism industry in the US and at the global level, see:
The competition for most misunderstood economic statistic is hard-fought, but there is a clear winner: the trade deficit. No other number is interpreted so differently by professional economists and the general public. Common reactions to the U.S. trade deficit range from belligerence to dejectedness: It is thought that America’s trade deficit exists either because of the skullduggery and unfair trade practices of countries that shut out U.S. products, or because American companies are failing to compete against their global competitors. In either case, the preferred solution is often to get tough in trade negotiations for the sake of protecting U.S. jobs. But, according to most economists, cutting across partisan and ideological lines, such mainstream beliefs about cause, effect, and solution are wrong. Even more bothersome, these popular beliefs are wrong not simply because the evidence is against them—although it is—but because they reflect fundamental misunderstandings of what the trade deficit is and how it interacts with the rest of the economy.
For economists, that article didn\’t didn\’t offer any new lessons. It was just one more effort by to explain the intuition behind the economics of trade deficits–as taught in standard intro econ classes–to the general reader. The history of such explanations runs deep; indeed, back to Adam Smith and earlier. Apparently, the subject is difficult to exposit and economists aren\’t very good at doing so.
It seems to be widely believed that a trade deficit shows the level of unfairness of import competition, and moreover that a trade deficit shows economic weakness, while a trade surplus shows economic strength. (For a vivid example, see the \”Remarks by President Trump at Signing of a Presidential Memorandum Targeting China’s Economic Aggression\” last week.) But even a casual look at actual US trade balances in recent decades shows the implausibility of such beliefs. Here\’s a figure of US trade imbalances (as measured by the current account balance) since 1970, measured as a share of GDP.
In the 1970s, trade deficits were close to zero. But this did not mean when most people believed that international competition was fair: instead, it\’s a time when foreign competitors from Japan and elsewhere were savaging US industries like cars and steel. It\’s also not a time when the US looks especially strong, with a period of \”stagflation\” combining high unemployment and inflation, as well as a slowdown in productivity growth.
In the 1980s, trade deficits first boomed, and then diminished. But the mid-1980s was not a time of US economic weakness: instead, these were years of hearty economic growth after the recession of the early 1980s. The recession of 1990-91 is actually when the trade deficit declined. Moreover, no one seriously claims that US trading partners suddenly became much less fair for a few years in the mid-1980s, before then suddenly becoming much more fair by the early 1990s–which means that unfairness of trade isn\’t what causes the US trade deficit to change.
Through the 1990s, this is a period when the US trade deficit becomes large, but at the same time, the US economy grows rapidly. Also, this is not a time a higher trade deficit can be linked to barriers to trade increased: instead, this is the decade when barriers to trade are reduced by the North American Free and by the completion of the \”Uruguay round\” of international trade talks leading to the creation of the World Trade Organization in 1995.
Since 2000, the trade deficit first falls when the economy is growing in the early 2000s, and then the steep recession of 2007-2009 is accompanied by a sharp decline in the trade deficit. If the trade deficit is a measure of unfair trade (which it isn\’t!), the US should presumably be congratulating the rest of the world for how it dramatically improved its trade fairness since about 2006.
It is blindingly apparent from the most casual acquaintance with the actual trade balance statistics that trade deficits are often not associated with periods of weak economic performance, that declines in trade deficits are not associated with strong economic performance, and that fluctuations in foreign trade barriers are a deeply implausible explanation for changes in the trade balance.
One can walk through the same exercise with trade balances of other countries, as well. For example, here is China\’s trade balance since its reforms started in the late 1970s, from the World Bank website.
China\’s trade surplus as a share of GDP was low, mostly near-zero and sometimes in deficit, from the early 1980s up to around 2000. Of course, China\’s economy was booming during these decades, which suggests that its small trade surpluses during this time were not a primary driver of its growth. Also, if a trade balance measures openness to trade (and it doesn\’t), then one would need to conclude that China was more open to US imports in the 1980s and 1990s than later, after it joined the World Trade Organization and reduced trade barriers in 2001. Further, one would need to believe that China had a dramatic spike in trade unfairness around 2007, followed by a dramatic return to trade fairness just after that. Of course, none of these interpretations about China\’s trade balance and its level of openness to foreign trade can pass the laugh test.
If trade balances are not about economic strength or about trade barriers of other countries, what are they about? Let\’s go back to basics. A trade deficit means that a nation is importing more than it is exporting. To put it another way, other countries are earning US dollars by selling into the US market, and a share of these US dollars are not getting spent on US-produced goods and services. (After all, if all the US dollars earned by those abroad selling into US markets were spent on US-exported goods and services, no trade imbalance would exist.) Instead, the value of the US trade deficit represents a flow of financial capital that is invested into the US as investment capital. Thus, a trade deficit necessarily and always means an inflow of international capital, while a trade surplus necessarily and always means an outflow of international capital.
In an economy without any international trade, the domestic savings of the economy has to equal domestic investment–because domestic savings is what provides the finance for domestic investment. But if an economy is open to trade, then a trade deficit means that there is an inflow of capital from abroad: specifically, an inflow of capital equal to the trade deficit itself.
Thus, the US economy is a low-saving, high consumption economy. Indeed, the US economy consumes more than it produces, which it can do by importing more than it exports and running trade deficits. The US economy also has a situation where domestic investment can be larger than domestic savings, because the US trade deficit means that there is a net inflow of foreign capital. Here\’s a figure from Lawrence\’s paper to illustrate the point. Notice that the inflow of foreign capital, shown by the trade deficit, is what allows domestic investment to exceed domestic saving.
Economist might disagree in their interpretation of the circumstances in which patterns of trade deficits/capital inflows or trade surpluses/capital outflows are beneficial or harmful. But the connection between a trade deficit and an inflow of foreign capital (or between a trade surplus and an outflow of financial capital) is not a \”theory\” over which economists disagree. It\’s just a basic understanding of what these terms mean.
Now let\’s turn to Lawrence\’s list of misconceptions:
MISCONCEPTION 1: TRADE DEFICITS ARE BAD
Trade deficits necessarily mean capital inflows. If the capital inflows from abroad are wisely invested, a trade deficit can be beneficial. For example, South Korea had large trade deficits and inflows of international capital when it was building up its industrial base, and so did the United States in the 19th century. In the 1990s, when the US had large trade deficits and inflows of international capital but was also making very large investments in information technology, there was at least an argument to be made that this pattern wasn\’t overly harmful to the US economy at that time. The problem arises when sustained trade deficits are accompanied by capital inflows that are not invested in a way that encourages long-run investment and growth.
I sometimes try to make this point with a parable about the meaning of trade imbalances between Robinson Crusoe and Friday, as I laid out in \”Trade Imbalances: A Parable for Teachers\” (July 18, 2012).
As noted above, it is silly to try to explain movements in trade balances with abrupt changes in trade policy. Instead, the movements in trade balances are easily explained by macroeconomic factors like consumption and saving.
MISCONCEPTION 3: TRADE DEFICITS ALWAYS LEAD TO JOB LOSS AND SLOWER GROWTH
This is clearly untrue, based on US experience with larger trade deficits and vigorous economic growth in the 1980s, 1990s, and early 2000s.
MISCONCEPTION 4: TRADE PERFORMANCE IS THE MOST IMPORTANT REASON FOR THE LONG-RUN DECLINE IN US EMPLOYMENT IN MANUFACTURING
Lawrence writes: \”It is noteworthy that the share of US employment in manufacturing began declining in the 1960s, long before the economy was heavily exposed to trade, and that the declines in the share of manufacturing employment in industrial countries with large surpluses in manufacturing trade, such as Germany, Italy, and Japan, has been similar to the declines in the share of manufacturing employment in the United States and other countries with trade deficits. This evidence suggests that most of the declining share of employment in US manufacturing reflects factors other than the trade deficit. The share of manufacturing employment in all major industrial countries, including those with large trade surpluses, has declined since the early 1970s. The primary reason for these declining shares has been rapid productivity growth coupled with demand that is relatively unresponsive to lower goods prices and higher incomes … \”
In other words, manufacturing workers keep getting more efficient, so it takes fewer of them to make the same level of output. However, as incomes rise, the quantity demanded of manufacturing goods isn\’t rising as much–and so fewer manufacturing workers are needed, in the US and everywhere.
MISCONCEPTION 5: BILATERAL TRADE BETWEEN COUNTRIES SHOULD BE BALANCED
It\’s just silly to argue that trade should be balanced on a bilateral basis, between any two countries. Even in a world with only three countries, it\’s easy to imagine a situation in which each country has a surplus with one of the other countries and a deficit with the other. No two of these countries would have balanced trade with each other, but all three would have balanced trade overall.
But the bigger point is that there\’s no reason that countries should be seeking an overall balance of trade, either. Some growing economies will want to welcome inflows of international capital, which means that they will have trade deficits. Some more mature economies, like Germany and Japan, will generate more in domestic saving than they can find a way to productively invest, and so they will run trade surpluses and have net outflows of financial capital.
There are subtle and debateable issues about trade policy. But thinking that the size of trade deficits measure the level of unfairness in trade is just wrong-headed. If you think that trade surpluses mean economic strength, tell it to Japan, which has been experiencing a combination of trade surpluses and miserably sluggish economic growth since the early 1990s. Even if the US had no trade deficit, many of its companies and industries would still need to face tough international (and domestic) competition.
As economists of all political beliefs will point out, the only way to ensure a lower trade deficit is to have an economy with either higher domestic saving or less domestic investment–and because less investment isn\’t typically a great idea for long-run growth, higher domestic saving is the preferred policy tool. If you understand that point, you can at least start to grapple with what a trade deficit actually means.
Many employers provide parking to employees who commute to work, which can be viewed as an untaxed fringe benefit of their jobs. The value of this benefit depends on where the parking is located. If the employer is in a uncongested suburban or rural area, where parking is generally free for everyone, then the value of this fringe benefit is low. But if the employer is in the part of an urban area with traffic congestion and where parking usually has a monetary price, then the value of this benefit can be higher.
\”Because employer-provided and employer-paid parking is excluded from an employee’s income, the parking tax benefit accounts for an estimated $7.3 billion in lost federal and state income and payroll tax revenues every year. … While the vast majority of Americans drive to work, most do not gain from the commuter parking benefit. The reason is that parking is so abundant in many places—especially in suburban and rural areas—that it essentially has no value as defined by the Internal Revenue Service. As a result, only about one-third of commuters benefit from this policy. In fact, most Americans are net losers from the commuter subsidies, as they must endure higher taxes or reduced government services—as well as increased congestion—to subsidize parking for a minority of commuters. … The parking tax benefit disproportionately assists commuters who work in dense employment centers, such as downtowns, where parking is most valuable.\”
To IRS has tried to tax the value of employee parking a few times over the decades with minimal success. However, the US government did enact a policy to offer a counter-subsidy by making it possible pay for transit and carpooling out of pretax income. (And yes, this means the official policy is both not to tax the benefit of free parking, thus encouraging people to drive to work, and also not to tax the value of transit passes, thus encouraging people not to drive to work.) But the transit benefit is relatively small-scale in size.
\”In an effort to counteract the effects of the commuter parking benefit, America also subsidizes people not to drive to work through the “commuter transit benefit”—a $1.3 billion program that enables workers to receive transit passes or vanpool services from their employers tax-free. The transit tax benefit encourages Americans to use public transportation by making the cost of transit passes or vanpooling payable from pre-tax income. ,,, The main impediment to the effectiveness of the transit benefit, however, is that few workers receive it. Only 7 percent of the American workforce has access to subsidized commuter transit benefits, and only 2 percent of the US workforce uses them. Most employers— particularly smaller firms—do not offer employer-based transit benefits programs. Like the parking tax benefit, the transit tax benefit disproportionately aids those with higher incomes who work for large employers in dense downtown districts. Workers in the top 10 percent by income are seven times more likely to have access to subsidized transit benefits than those in the bottom 10 percent of the income range.\”
The tax exemption for the value of employer-provided commuter parking has real effects. It means more cars on the road during peak commute times, and higher traffic congestion. The additional pollutants in the air have health costs. And there is an opportunity cost of using scarce space in urban areas–whether on streets, surface lots, or ramps–for parking cars.
The report suggests a range of policy options, and without endorsing or opposing them here, let me put them out there as useful ideas for shaking up one\’s thoughts.
One option would be for Congress (or a state government) to pass a \”parking cash-out\” law which would require companies to determine the market price of their employee parking benefits. Then all employers would offer that benefit as a payment to all employees. Those employees who choose to keep driving and parking would simply pay for the parking directly. They would be no worse off in financial terms–but they would be far more aware of the costs of the parking benefit. Those who find an alternative way to get to work could just treat the parking-related payment as additional income. And the tax authorities would then find it straightforward to tax the parking-related income payments. As the authors wrote:
\”Other jurisdictions have adopted or considered “parking cashout”— a policy that requires businesses that offer free parking to their employees to give non-driving workers a cash payment of equivalent value. Parking cash-out can benefit employers by reducing the number of parking spaces they must rent to provide to their employees.\”
If that approach is politically impossible, a local option is for cities to raise their own taxes on commuter parking:
\”Cities generally assess parking taxes on commercial lots and garages (with some exceptions, see below), and assess the tax either at a flat rate or as a percentage of the parking charge. In large cities, parking taxes range from New York’s 18.4 percent to 20 percent in Chicago and Philadelphia to 25 percent in San Francisco and 37.5 percent in Pittsburgh. These rates of taxation may seem high, but they are insufficient to cancel out the tax incentive for commuter parking for many workers. In 2015, the combined average marginal tax rate for federal income tax, the employee share of federal payroll tax, and state income tax was 35.1 percent. The commuter parking benefit exempts workers from paying this tax on the value of employer-provided parking. To fully counteract that subsidy, municipalities would need to tax employee parking at a rate of roughly 54 percent—well above even the highest parking taxes assessed in American cities. Most parking taxes fail to counteract the effect of tax-free treatment of employer-provided parking in another way as well: they apply only to commercial parking facilities, not to the “free” parking offered by employers at their facilities. Several cities around the world have implemented taxes that apply to parking spaces regardless of whether they are provided for free or at a cost.\”
For previous posts on the economics of parking, see:
One hundred years ago, the leading British economics journal (edited by John Maynard Keynes) published an article and a response from two women authors: Eleanor Rathbone and Millicent Fawcett. Despite writing in the Economic Journal, neither had professional training in economics. But they were clearly recognized as experts with opinions that economists hear.
Eleanor Rathbone (1872-1946) graduated from Somerville College at Oxford in 1893. In 1909 she was elected to the Liverpool city council; in 1929, she was elected to Parliament. Much of her focus was on government support for needy children, and over time she authored a number of article and books on the topic, as well as advocating in her political roles. Millicent Garrett Fawcett (1847–1929) is known by those who study the history of economic thought as the author of a Political Economy for Beginners book that went through 10 editions over 41 years. She led the largest UK suffragist organization, and played a role the founding of Newnham College, Cambridge.
Rathbone led off with her article, \”The Remuneration of Women\’s Services\” (Economic Journal, March 1917, 27: 105, pp. 55-68). She argued that although women had been accepted into many jobs during World War I, the situation was not sustainable. She offered reasons why women and men were not equal in the workplace. But her particular focus, as in much of her life, was on who would pay for the costs of raising children. In her view, men needed to be paid more because many of them were providing for families. She was quick to note that this method of providing for families didn\’t always work very well–given different pay, different number of children, and men who didn\’t pass along much of their income to their families. She argued that if the government provided greater support for children (again, this was her long-standing cause), then equality of pay for women would be more likely to work well, because the \”men need to support a family\” argument would no longer hold. Here are some samples of her argument:
\”In industry, the outbreak of the war [that is, World War I]found the women workers confined almost entirely, except in a few occupations traditionally their own, to the lowest, most ill-paid, and unskilled occupations. The barriers that kept them out of the skilled trades were for the most part unrecognised by law, but they were almost completely effective, being built up partly of tradition, partly of trade union regulations, but mainly of the sex exclusiveness in which employers and employed made common cause. Against these barriers the \”women\’s movement\” had beaten itself for half a century in vain, but within two years the necessities of the war have broken them down–by no means completely, but to such an extent that it is plain that if re-erected they will have to be based frankly upon the desire of the male to protect himself from competition, and no longer upon the alleged incapacity of the female to compete. …
\”The women themselves, ill-organised and voteless, with the sentiment in favour of the returning soldiers not only strong against them but strong among them, could not by themselves put up much of a fight. But they are likely to have two powerful allies: first, in the employers, who, having tasted the advantages of a great reserve of cheap, docile, and very effective labour are obviously not going to let themselves be deprived of it without a struggle; and secondly, in the growing public sense of the necessity on national grounds of making the most of our economic resources. …
\”This difficulty may be most shortly put in the form of a question: \”Is fair competition between men workers and women workers possible, bearing in mind the customary difference in the wage level of the two sexes and the causes of that customary difference? In other words, is it possible for women with men, without undercutting their standards undermining their standards of life? \” The reply offered by feminists to this question prompt and unhesitating, and is practically a denial of the difficulty. Women, they say, must, of course, be freely in all occupations. But they must not undercut. They must demand and receive equal wages for equal work. This is the claim put forward by practically all women, except, of course, when they are themselves employing women. I have not yet met the feminist whose principles compel her to pay her waitress the wages that would be demanded by a butler. …
\”There are in the eyes of most employers certain standing disadvantages of women\’s labour which have to be reckoned with. There is the fact that the law will not allow him to work her at night nor for overtime, except under rigid restrictions; that her liability to sickness (in most trades) is rather greater; that he cannot put her to lift heavy weights or to do odd jobs; that he cannot comfortably swear at her if she is stupid; that, in short, she is a woman, and most employers, being male, have a \”club \” instinct which makes them feel more at ease with an undiluted male staff. Above all, there is the overwhelming disadvantage, if the occupation is a skilled one, that she is liable to \”go off and get married just as she is beginning to be of some use.\” Of course, there are advantages which to a certain extent counterbalance these disadvantages from the employer\’s point of view. There is the greater docility of women; their greater willingness to be kept at routine work; their lesser liability to absence on drinking bouts, to strikes, and to other disturbances of the economic routine. But obviously most of these \”advantages \” are likely to be regarded by the employer rather as reasons why he can safely exploit women than as reasons why he should equitably pay them as much as men. …
\”After all, perhaps the most important function which any State has to perform–more important even than guarding against its enemies–is to secure its own periodic renewal by providing for the rearing of fresh generations. … During the last forty-six years the State has taken directly upon itself the cost of the school education of its young, and it is gradually in a hesitating and half-hearted way taking over the cost of some of the minor provisions necessary for child-nurture, such as midwifery (paid for through the maternity benefit), medical attendance (through child-welfare centres, medical school inspectors, &c.). But the great bulk of the main cost of its renewal it still pays for, as it has always done, by the indirect and extraordinarily clumsy method of financing the male parent and trusting to him somehow to see the thing through. It does not even finance him directly, but leaves it to what it is fond of calling \”blind economic forces \” to bring it about that the wages of men shall be sufficient for the purposes of bringing up families. The \”blind forces\” accomplish this task, as might be expected, in a very defective and blundering way, with a good deal of waste in some places and a much worse skimping in others, but upon the whole they do accomplish it …
\”The wages of women workers are not based on the assumption that \”they have families to keep,\” and in so far as these wages are determined by the standard of life of the workers it is a standard based on the cost of individual subsistence, and not on the cost of family subsistence. … For, after all, the majority of women workers are birds of passage in their trades. Marriage and the bearing rearing of children are their permanent occupations. …
\”It is outside the scope of the present article to consider what should be the basis, the scale, and the machinery of any system by which the State should take upon itself the prime cost of rearing future generations. It might be done through a continuance of something resembling the present system of separation allowances, which provides for the upkeep of individual homes. The allowance might be on a flat rate-so much for the woman and so much for each child; or it might be dependent to some extent on the amount of the allotment made by the man from his pay. Or, again, our system of elementary schools might be developed into day boarding-schools, where children were fed and clad as well as taught, and could enjoy organised play. In the upper and middle classes, practically every parent who can afford it either commits his children to such schools or sends them altogether away from home.\”
Millicent Fawcett\’s rejoinder \”Equal Pay for Equal Work,\” was published 100 years ago this month. (Economic Journal, March 1918 28:109, pp. 1-6). Fawcett refers to Rathbone\’s \”interesting article,\” which seems like the prelude to a robust British disagreement. Fawcett sidesteps the arguments about the role of the state in supporting children. Instead, she insists on equal pay for equal work. Her case is partly a matter of fairness; indeed, she cites examples that the inexperienced and untrained women who entered the workforce during World War I were in some prominent cases much more productive than the experienced and trained men they replaced. But in addition, she argues that if women are paid less than men, there will always be a harsh conflict between male workers who will be correct to fear being undercut by lower-wage female workers. Fawcett begins with a story:
\”John Jones earned good wages from a firm of outfitters by braiding military tunics. He fell ill and was allowed by the firm to continue his work in his own home. He taught his wife his trade, and as his illness became gradually more severe she did more and more of the work until presently she did it all. But as long as he lived it was taken to the firm as his work and paid for accordingly. When, however, it became quite clear, John Jones being dead and buried, that it could not be his work, Mrs. John Jones was obliged to own that it was hers, and the price paid for it by the firm was immediately reduced to two-thirds of the amount paid when it was supposed to be her husband\’s. …
\”[T]he tremendously depressing effect on women\’s wages of the pre-war trade union rules, combined with social use and wont, which kept women out of nearly all the skilled industries. This policy obviously cut off a great volume of the demand for women\’s labour which would exist if these barriers could be broken down. It it quite true to say that, although the doctrine of demand and supply has fallen of late years into unpopularity, it is nevertheless a fact that if demand for a particular class of labour is either destroyed or very much restricted, \”a downward pull \” on wages is called into existence for the whole class. … The unskilled trades open to them would be overcrowded, and competition among the workers might well force down wages to less than subsistence level. It had done so in the case of large masses of women before the war. … [T]he Committee of the Queen\’s Work for Women Fund, started at the beginning of the war, reported that \”many working women are normally in receipt of wages below subsistence level.\” The evil effects of such a state of things can hardly be exaggerated. It means physical degeneracy, not for one sex only, premature old age for women, impossibility of organising women\’s labour, the stamping out of any intelligent effort to acquire industrial training and a high degree of industrial efficiency. …
\”I may quote Sir William Beardmore, the well-known engineer, and President in 1916 of the Iron and Steel Institute. In his presidential address he spoke of the difficulty met with by employers in induLcing workmen to utilise to the best advantage improved methods of manufacture evolved by experimental research; he said: \”Early in the war it was found at Parkhead forge that the output from the respective machines was not so great as what the machines were designed for, and one of the workers was induced to do his best to obtain the most out of a machine. He very greatly increased his output, notwithstanding his predilection for trade union restrictions. When it was found that the demands of the Government for a greatly accelerated production of shells required the employment of girls in the projectile factory, owing to the scarcity of skilled workers, these girls in all cases produced more than double that by thoroughly trained mechanics–members of trade unions–working the same machines under the same conditions. In the turning of the shell body the actual output by girls, with the same machines and working under the same conditions and for an equal number of hours, was quite double that by trained mechanics. In the boring of shells the output also was quite double, and in the curving, waving, and finishing of shell cases quite 120 per cent. more than that of experienced mechanics \” (Manchester Guardian, May 16th, 1916). Here, therefore, you have a case in which women\’s work excelled men\’s work in productiveness by two to one or more. I always take care when I am speaking to women on this subject to warn them not to run away with the idea that either physically or mentally they excel men. What these figures do show is some part of the extent to which the whole atmosphere in which industry was carried on in this country before the war led to the deliberate restriction of output by the male workers. …
\”If, for instance, owing to a lower degree of physical strength it was found necessary to employ three women to do the work ordinarily done by two men, then the wages for the three women could reasonably be adjusted to balance this disadvantage. War experience, however, has stiffened the conviction of many feminists that a large proportion of supposed feminine disadvantages exist more in imagination than in reality. That a woman in the textile trade was paid at a lower rate than a man for the same work has, for instance, been accounted for, time out of mind, by saying that a woman was incapable of \”tuning\” or \”setting\” her machine. Very few of those who used this formula took the trouble to explain that women were never given the opportunity of learning how to tune or set a machine. It was looked upon as a law of nature that a man could set a machine and that a woman could not. …
\”I do not claim in all cases identical wages for men and women. If the men are worth more let them receive more, or if the women are worth more (as they were in the Parkhead forge) let them receive more. The one chance of women being received into industry by the men already employed as comrades and fellow-workers, not as enemies and blacklegs, is in their standing for the principle, equal pay for equal work, or, as it is sometimes expressed, equal pay for equal results. …
\”The advocates of the principle of equal pay for equal work have an encouraging precedent in the successful stand which women doctors have made from the outset that they would not undersell the men in the profession. Whether as physicians or surgeons they have been quite determined on this point. Medical women working for the War Office since 1914 did not secure this position without a struggle, but I understand that the controversy is now settled in a satisfactory manner.
I will not try to break down these diverging views in any detail. But I am struck that a number of the issues that are touched upon here continue to resonate.
There is an ongoing dispute over the extent to which the remaining male/female wage gap arises because a greater number of women have careers that are either interrupted, or in which they cannot put in long hours to get fully established, because of parenting responsibilities (for example, see here and here).
The US economy is also struggling with an issue described by Fawcett in which groups try to set up rules that limit workers from competing with them, although in the modern US economy these issues arise less often in the context of unions, which are now quite small in size, and more in the context of rules about occupational licensing.
Economists are often queasy about the idea that preferences can be measured by surveys. It\’s easy for someone to say that they value organic fruits and vegetables, for example, but when they go to the grocery, how do they actually spend their money?
However, in some contexts, prices are not readily available. A common example is an oil spill, like the BP Deepwater Horizon Oil Spill in the Gulf of Mexico in 2010, or the Exxon Valdez oil spill in Alaska back in 1989. We know that such spills cause economic costs to those who use the waters directly, like the tourism and fishing industries. But is there some additional cost for \”non-use\” value? Can I put a personal value on protecting the environment in a place where I have not visited, and am not likely to visit? There are various ways to measure these kinds of environmental damages. For example, one can include the costs of clean-up and remediation. But another method is to try to design a survey instrument that would get people to reveal the value that they place on this environmental damage, which is called a \”contingent valuation\” survey.
The challenge for a contingent valuation study is that it would obviously be foolish just to walk up to people and ask: \”What\’s your estimate of the dollar value of the damage from the BP oil spill?\” If the answers are going to be plausible, they need some factual background and some context. Also, they need to suggest, albeit hypothetically, that the person answering the survey would need to pay something directly toward the cost. As Bishop et al. write:
\”The study interviewed a large random sample of American adults who were told about (i) the state of the Gulf before the 2010 accident; (ii) what caused the accident; (iii) injuries to Gulf natural resources due to the spill; (iv) a proposed program for preventing a similar accident in the future; and (v) how much their household would pay in extra taxes if the program were implemented. The program can be seen as insurance, at a specified cost, that is completely effective against a specific set of future, spill-related injuries, with respondents told that another spill will take place in the next 15 years. They were then asked to vote for or against the program, which would impose a one-time tax on their household. Each respondent was randomly assigned to one of five different tax amounts: $15, $65, $135, $265, and $435 …\”
Developing and testing the survey instrument took several years. The survey was administered to a nationally-representative random sample of household by 150 trained interviewers. There were 3,646 respondents. They write: \”Our results confirm that the survey findings are consistent with economic decisions and would support investing at least $17.2 billion to prevent such injuries in the future to the Gulf of Mexico’s natural resources.\”
One interesting permutation of the survey is that it was produced in two forms: a \”smaller set of injuries\” and a \”larger set of injuries\” version.
\”To test for sensitivity to the scope of the injury, respondents were randomly assigned to different versions of the questionnaire, describing different sets of injuries and different tax amounts for the prevention program. The smaller set of injuries described the number of miles of oiled marshes, of dead birds, and of lost recreation trips that were known to have occurred early in the assessment process. The larger set included the injuries in the smaller set plus injuries to bottlenose dolphins, deep-water corals, snails, young fish, and young sea turtles that became known as later injury studies were completed …\”
Here\’s a sample of the survey results. The top panel looks at those who had the survey with the smaller set of injuries. It shows a range of how much taking steps to avoid the damage would personally (hypothetically) cost the person taking the survey. You can see that a majority were willing to pay $15, but the willingness to pay to prevent the oil spill declined as the cost went up. The willingness to pay was higher for the larger set of injuries, but at least my eye, not a whole lot larger.
It should be self-evident why the contingent evaluation approach is controversial. Does the careful and extensive process of constructing and carrying out the survey lead to more accurate results? Or does it in some ways shape or predetermine the results? The authors seem to take some comfort in the fact that their estimate of $17.2 billion is roughly the same as the value of the Consent Decree signed in April 2016, which called for $20.8 billion in total payments. But is it possible that the survey design was tilted toward getting an answer similar to what was likely to emerge from the legal process? And if the legal process is getting about the same result, then the contingent valuation survey method is perhaps a useful exercise–but not really necessary, either.
I\’ll leave it to the reader to consider more deeply. For those interested in digging deeper into the contingent valuation debates, some useful starting points might be:
The Fall 2012 issue of the Journal of Economic Perspectives had three-paper symposium on contingent valuation with a range of views:
H. Spencer Banzhaf has just published \”Constructing Markets: Environmental Economics and the Contingent Valuation Controversy,\” which appears in the Annual Supplement 2017 issue of the History of Political Economy (pp. 213-239). He provides a thoughtful overview of the origins and use of contingent valuation methods from the early 1960s (\”estimated the economic value of outdoor recreation in the Maine woods\”) up to the Exxon Valdez spill in 1989.
Harro Maas and Andrej Svorenčík tell the story of how Exxon organized a group of researchers in opposition to contingent valuation methods in the aftermath of the 1989 oil spill in \”`Fraught with Controversy\’: Organizing Expertise against Contingent Valuation,\” appearing in the History of Political Economy earlier in 2017 (49:2, pp. 315-345).
There\’s a lot of talk about the opioid crisis, but I\’m not confident that most people have internalized just how awful it is. To set the stage, here are a couple of figures from the 2018 Economic Report of the President.
The dramatic rise in overdose deaths, from about 7000-8000 per year in the late 1990s to more than 40,000 in 2016, is of course just one reflection of social problem that includes much more than deaths.
However, the nature of the opioid crisis is shifting. The rise in overdose deaths from 2000 up to about 2010 was mainly due to prescription drugs. The more recent rise is overdose deaths is due to heroin and synthetic opioids like fentanyl.
It seems clear that the roots of the current opioid crisis are in prescribing behavior: to be blunt about it, US health care professionals made the decisions that created this situation. The Centers for Disease Control and Prevention notes on its website: \”Sales of prescription opioids in the U.S. nearly quadrupled from 1999 to 2014, but there has not been an overall change in the amount of pain Americans report. During this time period, prescription opioid overdose deaths increased similarly.\”
The CDC also offers a striking chart showing differences in opioid prescriptions across states. Again from the website: \”In 2012, health care providers in the highest-prescribing state wrote almost 3 times as many opioid prescriptions per person as those in the lowest prescribing state. Health issues that cause people pain do not vary much from place to place, and do not explain this variability in prescribing.\” But although the roots of the opioid crisis come from this rise in prescriptions, the problem of opioid abuse itself is more complex. What seems to have happened in many cases is that as opioids were prescribed so freely that there was a good supply for friends, family, and to sell. Here\’s one more chart from the CDC, this one showing where those who abuse opioids get their drugs. Three of the categories are: given by a friend or relative for free; stolen from a friend or relative; and bought from a friend or relative. For example, a study published in JAMA Surgery in November 2017 found that among patients who were prescribed opioids for pain relief after surgery, 67-92% ended up not using their full rescription.
This narrative of how the medical profession fueled the opioid crises has gotten some pushback from doctors. For example, Nabarun Dasgupta, Leo Beletsky, and Daniel Ciccarone wrote (The Opioid Crisis: No Easy Fix to Its Social and Economic Determinants\” in the February 2018 issue of the American Journal of Public Health (pp. 182-186). After briskly acknowledging the evidence, the paper veers into the importance of \”the urgency of integrating clinical care with efforts to improve patients’ structural environment. Training health care providers in “structural competency” is promising, as we scale up partnerships that begin to address upstream structural factors such as economic opportunity, social cohesion, racial disadvantage, and life satisfaction. These do not typically figure into the mandate of health care but are fundamental to public health .As with previous drug crises and the HIV epidemic, root causes are social and structural and are intertwined with genetic, behavioral, and individual factors. It is our duty to lend credence to these root causes and to advocate social change.\”
Frankly, that kind of essay seems to me to me an attempt the fact that the health care profession made extraordinarily poor decisions. We had root causes back in 1999. We have root causes now. It isn\’t the root causes that brought the opioid crisis down on us.
In turn, millions of unused pills end up being scavenged from medicine chests, sold or given away by patients themselves, accumulated by dealers and then sold to new users for about $1 per milligram. As more prescribed pills are diverted, opportunities arise for nonpatients to obtain them, abuse them, get addicted to them and die. According to SAMHSA, among people who misused prescription pain relievers in 2013 and 2014, about half said that they obtained those pain relievers from a friend or relative, while only 22 percent said they received the drugs from their doctor. The rest either stole or bought pills from someone they knew, bought from a dealer or “doctor-shopped” (i.e., obtained multiple prescriptions from multiple doctors). So diversion is a serious problem, and most people who abuse or become addicted to opioid pain relievers are not the unwitting pain patients to whom they were prescribed.
But her argument is that even though it was true 5-10 years ago that three-quarters of the heroin addicts showing up at treatment centers said they had got their start using presciption opioids, more recent evidence is that addicts are starting with heroin and fentanyl directly. Ultimately, Satel writes:
What we need is a demand-side policy. Interventions that seek to reduce the desire to use drugs, be they painkillers or illicit opioids, deserve vastly more political will and federal funding than they have received. Two of the most necessary steps, in my view, are making better use of anti-addiction medications and building a better addiction treatment infrastructure.
This specific recommendation makes practical sense, and it sure beats a ritual invocation of \”root causes,\” but I confess it still rubs me the wrong way. We didn\’t have these demand-side interventions back in 1999, either, but the number of drug overdoses was much lower. Sure, the nature of the opioid crisis has shifted in recent years. But prescription opioids are still being prescribed at triple the level of 1999. And given that the medical profession lit the flame of the current opioid crisis, it seems evasive to seek a reduced level of blame by pointing out that the wildfire has now spread to other opioids. .
For a list of possible policy steps, one starting point is the President\’s Commission on Combating Drug Addiction and the Opioid Crisis, which published its report in November 2017. The 56 recommendations make heavy use of terms like \”collaborate,\” \”model statutes,\” \”accountability,\” \”model training program,\” \”best practices,\” \”a data-sharing hub,\” \”community-based stakeholders,\” \”expressly target Drug Trafficking Organizations,\” \”national outreach plan,\” \”incorporate quality measures,\” \”the adoption of process, outcome, and prognostic measures of treatment services,\”\” prioritize addiction treatment knowledge across all health disciplines.\” \”telemedicine,\” \”utilizing comprehensive family centered approaches,\” \”a comprehensive review of existing research programs,\” \”a fast-track review process for any new evidence-based technology,\” etc. etc. There are probably some good suggestions embedded here, like fossils sunk deeply into a hillside. Hope someone can disinter them.
![Source of Opioid Pain Reliever Most Recently Used by Frequency of Past-Year Nonmedical Use[a]](https://i0.wp.com/www.cdc.gov/drugoverdose/images/data/source-and-frequency-graph.png?resize=400%2C300&ssl=1)