Is the US Economy Having an Engels\’ Pause?

Consider a time period of several decades when there is a high level of technological progress, but typical wage levels remain stagnant while profits soar, driving a sharp rise in inequality. In broad-brush terms, this description fits the US economy for the last few decades. But it also fits the economy of the United Kingdom during the first wave of the Industrial Revolution in the first half of the 19th century.

Economic historian Robert C. Allen calls this the \”Engels\’ pause,\” because Friedrich Engels, writing in books like The Condition of the Working Class in England in 1844, described this confluence of economic patterns. Allen laid out the argument about 10 years ago in \”Engels’ pause: Technical change, capital accumulation, and inequality in the British industrial revolution,\” published in Explorations in Economic History (2009, 46: pp. 418–435).

Allen summarizes his argument about the arrival and then the departure of the Engels\’ pause in this way: 

According to the Crafts-Harley estimates of British GDP, output per worker rose by 46% between 1780 and 1840. Over the same period, Feinstein’s real wage index rose by only 12%. It was only a slight exaggeration to say that the average real wage was constant, and it certainly rose much less than output per worker. This was the period, and the circumstances, described by Engels in The Condition of the Working Class. In the next 60 years, however, the situation changed. Between 1840 and 1900, output per worker increased by 90% and the real wage by 123%. This was the ‘modern’ pattern in which labour productivity and wages advance at roughly the same rate, and it emerged in
Britain around the time Engels wrote his famous book.

The key question is: why did the British economy go through this two phase trajectory of development? … Between 1760 and 1800, the real wage grew slowly (0.39% per annum) but so did output per worker (0.26%), capital per worker, and total factor productivity (0.19%). Between 1800 and 1830, the famous inventions of the industrial revolution came on stream and raised aggregate TFP growth to 0.69% per year. This technology shock pushed up growth in output per worker to 0.63% pa but had little impact on capital accumulation or the real wage, which remained constant. This was the heart of Engels’ Pause … In the next 30 years 1830–1860, TFP growth increased to almost one percent per annum, capital per worker began to grow, and the growth in output per worker
rose to 1.12% pa. The real wage finally began to grow (0.86% pa) but still lagged behind output per worker with most of the shortfall in the beginning of the period. From 1860 to 1900, productivity, capital per worker, and output per worker continued  to grow as they had in 1830–1860. In this period, the  real wage grew slightly faster than output per worker (1.61% pa versus 1.03%). The ‘modern’ pattern was established.

In short, technological growth first led to a period where wages did not keep up with economic growth, and then to a period where wages rose faster than economic growth. 

Of course, historical parallels are never perfect. The prominent inventions of the first half of the late 18th and early 19th century–mechanical spinning, coke smelting, iron puddling, the power loom, the railroad, and the application of steam power–did not have an identical interaction with labor markets and workers as the rise of modern technologies like information technology, materials science, genetics research, and others. 
In addition, historical parallels do not dictate what the appropriate policy response should be. 
As one example, the kinds of active labor market policies available to governments in the 21st century (for discussion, see here, here, and here) are quite different from the United Kingdom in the 19th century. The problems of modern middle-income workers in high-income countries are obviously not the same as the problems of UK workers in 1840. 
Also, modern economic historians argue over whether UK wages were really not rising much in the early 1900s, and current economist argue over the extent to which increases technology and variety suggest that the standard of living of typical modern workers is growing by more than their paychecks might suggest. 
But historical parallels are nonetheless interesting. But it\’s interesting that the original Engels\’ pause led to calls for socialism, and that socialism as a broad idea, if not necessarily a well-defined policy program, has re-entered the public discussion today. Historical parallels offer a reminder that when sustained shifts in an economy occur over several decades–a rise in inequality, wages rising more slowly than output, sustained high profit levels–the causes are more likely to involve shifts in economic output and organization driven by underlying factors like technology or demographics, not by factors like selfishness, conspiracies, or malevolence (whose prevalence does not shift as much, and are always with us). Finally, the theory of the Engels\’ pause suggests that underlying economic forces can drive patterns rising inequality, high profits, and stagnant wages can persist for decades, but nonetheless can have a momentum that leads to their eventual reversal, although my crystal ball is not telling me when or  how that will happen. 

Latin America: Missing Firms, Slow Growth, and Inequality

The economies of Latin America have gone through a series of different periods in the half-century or so. There was an \”import substitution\” period back in the 1960s and 1970s, where the idea was that government would direct industrial development in a way that would remove the need for imports from high-income countries. This was followed by the \”lost decade\” of the 1980s, a period of very high inflation, slow growth, and defaults on government debt. The 1990s was sometimes labeled as at time of economic liberalization or the so-called \”Washington consensus.\” Starting around 2000, there was a \”commodity supercycle\” when first a global rise in commodity prices led to faster growth across much of Latin America, but then more recently a drop in commodity prices slowed down that growth.

Many pixels have been spent arguing over these changes. But as these different periods have come and gone, you know what hasn\’t much changed? The region of Latin America has been slowly falling farther behind the high-income countries countries of the world in economic terms, while remaining the region with the most unequal distribution of income. The McKinsey Global Institute lays out these patterns and offers some analysis in \”Latin America’s missing middle: Rebooting inclusive growth\” (May 2019).

Her\’s a figure showing per capita GDP in Latin America since 1960, relative to high income countries. Over that period, the region has been falling behind, not converging. Moreover, the middle income \”benchmark\” countries–which in this figure refers to a weighted average of to China, Indonesia, Malaysia, Philippines, Poland, Russia, South Africa, Thailand, and Turkey–has gone from less than one-third of the Latin American level to above it.

Inequality in the Latin American region has remained high as well throughout this time period. This figure shows that if you look at the share of income received by the bottom 50%, or by the bottom 90%, it\’s lower in Latin America than in any other region.

How can these dual problems of slow productivity growth and high levels of inequality be addressed? the MGI report argues that the underlying problem is a business climate in Latin America which appears to be strangling medium-sized and larger firms. As a result, a large share of the population is trapped in small, low-productivity, informal employment, with no prospect for change. The report notes:

The business landscape in Latin America is polarized. The region has some powerful companies, including some with very high productivity that have successfully expanded from their strong local base to become global companies or “multilatinas”—regional powerhouses operating across Latin America. They include AB InBev, America Movil, Arcor, Bimbo, CEMEX, Embraer, FEMSA, Techint Group, among others. By comparison with large firms in other regions, such companies are fewer in number and less diversified beyond energy, materials, and utilities. At the same time, Latin America has a long tail of small, often informal companies that collectively provide large-scale employment, but whose low productivity and stagnant growth hold back the economy.
Missing is a cohort of vibrant midsize companies that could bring dynamism and competitive pressure to expand the number of productive and well-paying jobs in Latin America, much as these firms do in many high-performing emerging regions. …

The causes of this firm distribution and dynamics are rooted in common legacies of import substitution that favored a few private licenses or large state-run firms in many sectors. Other reasons are differing ways in which state companies were privatized and, especially in Brazil’s case, tax and compliance-heavy regulation that favors either large scale or informality. Unequal access to finance, weak infrastructure, and high input costs also squeeze the middle. The result is a weak level of innovation and specialization needed for future growth. … Much of Latin America’s labor force is trapped in a long tail of small, unproductive, and
often informal firms …

The MGI report suggests how a focus on digital technologies might help, making it \”easier for companies to open businesses, register property, and file taxes over the internet, reducing the cost of red tape. Digital can facilitate more efficient markets from land and jobs to local services. Digital platforms make it possible for small and midsize companies to become `micromultinationals\’ able to compete with much larger competitors by offering their goods and services through online marketplaces regionally or globally.\”

That\’s not a bad suggestion, but my sense is that Latin America\’s failure to provide a business climate that fosters middle-sized and larger firms runs deeper.  For example, an earlier post on  \”Mexico Misallocated\” (January 24, 2019) describes how many government rules about companies and employment are based on the size of the firm. Taken together, these rules in combination have led to a bias in favor of new firms, but against the growth of existing firms. Moreover, the existing laws and regulations in Mexico have led to a common pattern of high-productivity firms exiting markets, while low-productivity firms enter them.

Throughout the world, the success stories of economic development have been led by the growth of private-sector firms of medium- and large-scale. The governments and people of Latin America need to think more deeply about public policy is hindering the growth of such firms.

Universal Basic Income–Combined With What Else?

The idea of  a \”universal basic income\” has some immediate attraction. If we can land an astronaut on the moon, etc., etc. But along with other slogans like a guaranteed government job or single payer health insurance, the devil is in the details.

Three recent essays offer a useful overview of the choices and tradeoffs. Melissa S. Kearney and Magne Mogstad have written \”Universal Basic Income (UBI) as a Policy Response to Current Challenges\” for the Aspen Institute Economic Strategy Group (August 23, 2019). Also, the most recent issue of the Annual Review of Economics, published in August 2019, has a three-paper symposium on the universal basic income.

For those who don\’t have access to the Annual Review of Economics, the first paper is freely available here, the second paper is available as an NBER working paper here, and the third paper is freely available here.

An underlying theme of these discussions is that it is essentially meaningless to discuss the idea of a universal basic income in isolation. Whether you are talking about cost, or effects on distribution of income, or effects on work incentives, it matters considerably whether the universal basic income is views as an addition to any existing income transfer programs, or as a replacement for at least some of those programs.

For example, consider the question of cost.  Hoynes and Rothstein explain this way:

A universal payment of $12,000 per year to each adult U.S. resident over age 18 would cost roughly $3 trillion per year. This is about 75 percent of current total federal expenditures, including all on- and off-budget items, in 2017. (If those over 65 were excluded, the cost would fall by about one-fifth.) Thus, implementing this UBI without cuts to other programs would require nearly doubling federal tax revenue; even eliminating all existing transfer programs – about half of federal expenditures – would make only a dent in the cost. …

A truly universal UBI would be enormously expensive. The kinds of UBIs often discussed would cost nearly double current total spending on the “big three” programs (Social Security, Medicare, and Medicaid). Moreover, each of these programs would likely be necessary even if a UBI were in place, as each addresses needs that would not be well served by a uniform cash transfer. Expenditures on other existing programs sum up to only a small fraction of the cost of a meaningful UBI. This suggests that a full-scale UBI would require substantial increases in government revenue. The impacts of whatever taxes are imposed to generate this revenue are likely of first-order importance in evaluating the impact of a UBI.

This insight helps to explain why no high-income country has actually adopted a \”universal\” basic income, and why most proposals for a \”universal\” basic income aren\’t really a simple universal payment. Instead, such proposals often include various phaseouts of the payments as other income rises, or rules that some of the money must be spent on purchasing health insurance, and so on and so forth.

On the issue of how a universal basic income would affect the distribution of income, the answer again depends on the extent to which is might replace other programs. The United States, like many other countries, uses \”tagging\” in its transfer programs, which means that transfer payments are often linked to some characteristic other than income. For example, payments may be linked to age (like Social Security), or to disability, or to whether or how many children are in a household (like Medicaid, the earned income tax credit, food stamps, and others).

Consider the proposal that is sometimes made for taking all the funds now spent on income transfers, and instead using that money for cash payments in the form of a universal basic income. (In \”Universal Basic Income: A Thought Experiment\” (July 29, 2014), I discuss one proposal along these lines for the US.)  As Hoynes and Rothstein explain, even if you cannibalized all spending on Social Security, Medicare, Medicaid, and every other program that involves government transfers, it wouldn\’t be enough to support a universal basic income of $12,000 per person. But set aside the cost arguments and instead focus on how the redistribution of income would be affected by moving away from a \”tagging\” system.

Hoynes and Rothstein do various calculations of how a universal basic income that replaces other government programs would affect who receives the funds. It shouldn\’t be any surprise that if you stop targeting the elderly, the disabled, and families with children, then households with those characteristics will get less. In contrast, households that are nonelderly, nondisabled, and with no children get tent to get more. They write:

This implies that were we to eliminate current income support programs and apply the funds towards a pure UBI, there would be a relative redistribution from low-earners to zero earners, but the first-order effects would be a massive distribution up the earnings distribution, along with a redistribution from the elderly and disabled towards those who are neither, primarily but not exclusively those without children.

As Kearney and Mogstad write: \”The complexity of existing redistribution problems is a real issue, but the complexity is in large part based on seeking to address specific needs for specific groups: health care, housing, food, energy costs, and so on.\” For those attracted by the simplicity of just paying a flat cash amount to everyone, not linking benefits to family status or type of service, it\’s important to think seriously about what this shift away from tagging would be giving up.

Another main set of arguments about a universal basic income involves its interaction with labor markets. There are several arguments here that do not necessarily dovetail very well with each other. For example, some supporters of a universal basic income suggest that it will be needed in the future after the robot apocalypse makes most of human labor obsolete. When this actually happens, I\’m ready to revisit this argument. But at present, the unemployment rate has been 4% or less for more tha a year and there are plenty of previous warnings about technological change would lead to permanent mass unemployment (here are examples from 1927, 1964, and 1982) that did not come to pass.

A gentler version of this argument is that a universal basic income would be a way of helping low-wage or low-income workers. But if helping a specific group of low-wage, low-income workers is the goal, then a \”universal\” payment is a peculiar way of accomplishing it. Instead, it would seem like an expansion of support for low-wage workers, perhaps designed in a way that is linked to work and provides an additional incentive to work, would make more sense.

Would a universal basic income discourage work? The direct evidence on this point remains thin. There have been studies of a few programs that make universal payments to certain groups, like the Alaska Permanent Fund (based on oil revenues from Alaska) or the Eastern Cherokee Native American tribe payments from gaming revenues, but the size of these payments is too small to be a stand-alone income. There have been experiments with something close to a universal basic income in Finland and Ontario, but these experiments were cancelled after a couple of years. There is some evidence from lottery winners, or from increases in disability insurance payments.

 Kearney and Mogstad provide an overview of the available evidence and argue that both economic theory and the existing evidence suggest that a true universal basic income–that is, an income received without any linkage to other income received, will tend to reduce work. In contrast, programs like wage subsidies, job training, or job subsidies seem likely to increase work. They write (citations omitted):

Studies of transfers that are more comparable in size to the types of UBI payments being proposed imply more negative labor supply effects. For example, a study of lottery winners find that, with an average annual prize of $26,000, each $100 in additional earnings reduced labor market earning by $11. A more recent study of lottery winners in Sweden also provides evidence of reduced earnings in response to winning a lottery prize. This study finds that winning a lottery prize leads to an immediate and persistent reduction in earnings. In addition, the effects of any guaranteed income program are likely to most strongly affect those marginally attached to the labor force. On this point, the lessons from expanded access to disability insurance payments is potentially instructive. Economists have found that the marginal beneficiary of a disability insurance award would have been almost 30 percentage points more likely to work had they not received benefits.

An intriguing thought that emerges from several of these papers is that the arguments for a universal basic income may be stronger for low-income countries. As Ghatak and Maniquet emphasize, most low income countries share several characteristics. A larger share of the population is close to subsistence, compared to high-income countries. As a result, a universal payment can help to raise a larger share of population out of poverty, and at a relatively low cost. In addition, the governments of low-income countries often have a hard time implementing detailed tax and welfare policies; for example, such governments may not be able to observe income levels or hours worked very accurately. Thus, linking government payments to income, as well as to disability, number of children, and even age may be more difficult. As they write, \”UBI might be more appropriate in developing countries, especially those in which UBI could help circumvent the imperfections of government institutions in charge of helping the poor.\”

Of the papers I\’ve mentioned here, Ghatak and Maniquet is the only one with a hefty share of math, and thus is likely to be a hard read for the unintiated. However, Banerjee, Niehaus, and Suri dig into the issues of a universal basic income for lower-income countries in more detail. They point out that while we don\’t have good evidence on pure universal basic income programs in low-income countries (although experiments are underway in some countries), we do  have a lot of evidence on programs in low-income countries that pay cash to recipients under various conditions. They write (citations omitted):

With the most current available data as of 2018, the World Bank identified 552M people living in the developing world who receive some form of cash transfer from their government. While none of these schemes were (to our knowledge) labelled as UBI, they all shared the common and crucial feature that recipients were given the freedom to do what they want with their money. Many transfers (particularly in South and Central America) were paid out conditional on certain conditions being met, but many others (particularly in Africa) were not. And in some cases – pensions, for example – these transfers have a structure (size, frequency, and duration) quite similar to UBI payments, though they are not universal.

What have we learned from the evaluation of these schemes? …

First, evaluations generally have not found the negative impacts that many feared. Reviewing evidence on “temptation goods,” Evans and Popova (2017) find that transfers had on average reduced expenditure on temptation goods by 0.18 standard deviations. In other words, far from blowing their transfers on alcohol and tobacco, recipients appear to drink and smoke less. This finding in no way diminishes the seriousness of substance abuse as an issue for the poor, but it does suggest that lack of money may be a cause of substance abuse rather than a constraint on it. Turning to “dependency” …  Banerjee et al. (2017b) find no systematic evidence that transfers discourage work.

Second, evaluations have found a great diversity of positive impacts. To give some sense, a partial list of outcomes affected in a positive way in one study or another … includes income, assets, savings, borrowing, total expenditure, food expenditure, dietary diversity, school attendance, test scores, cognitive development, use of health facilities, labor force participation, child labor migration, domestic violence, women’s empowerment, marriage, fertility, and use of contraception, among others. …

This variety implies that recipients value the flexibility that cash transfers provide: they reveal a preference for many different things. It also implies that a UBI is unlikely to appeal to a technocrat seeking cost-effective ways to increase any particular, narrow outcome.

In addition, they point out that a universal basic income may help economic growth in low-income countries by making it possible for low-income people to deal with the day-to-day risks they face and to make modest investments in small-scale entrepreneurship. And a universal benefit might build political support for a rudimentary social safety net in countries that do not yet have one.

On the other side, even if it is harder for a low-income country to run a precisely targeted income transfer program, imperfect targeting can still be useful. Rema Hanna and Benjamin A. Olken make this case in \”Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries,\” in the Fall 2018 issue of the Journal of Economic Perspectives. They point out that a number of emerging-market countries make transfer payments conditional on behaviors, like whether children attend school or doctor visits, or else on observable characteristics like whether a home has a dirt floor, or a certain kind of roof or appliances. In some places, a \”universal\” payment requires taking enough time to register for the program or to undertake some work effort that those with higher income see no benefit from applying. In a few places, transfer payments are given to a community, which then must have a formal and open process for distributing those payments among the members of the community. They argue that a truly universal program, with payments going to people of all income levels, is less effective at addressing inequality than a program with imperfect targeting of benefit payments.

Here\’s a final comparison between universal basic income in high-income and low-income countries that struck as interesting, from the Banerjee, Niehaus, and Suri paper. They point out that one of the arguments for a universal basic income in low-income countries is that employment in such countries is often sporadic, with many people working a variety of part-time gigs rather than a single steady job, which is part of what makes it hard for the government in a low-income country to adjust benefits in response to income and work status. But of course, there is also concern that a greater share of workers in high-income countries are ending up in the \”gig economy\”  with a series of part-time jobs, which in turn makes it more challenging for high-income countries to set up programs where transfer programs will make sporadic payments in the gaps between sporadic jobs. Banerjee, Niehaus, and Suri write:  

\”[D]eveloping countries already look like one possible future for the developed ones: few people hold stable full-time jobs, many work a variety of part-time gigs instead, and as a result, public policy has never been based on an assumption of universal full-time employment. Perhaps in this there is something the rich countries can learn from the poor.\”

China and India Build Internal Supply Chains

One of the key questions in the escalating US trade disputes with China and other countries is how much the economy of other countries depends on trade. The answer helps to determine how much leverage the US has in trade disputes. Thus, it\’s interesting to note that starting about a decade ago, both India and China started reducing their dependence on exports as a source of growth, while doing more to build internal supply chains and relying more on domestic products.

A group of authors from McKinsey Global Institute published \”Asia’s futureis now\” in July 2019, including Oliver Tonby, Jonathan Woetzel, Wonsik Choi, Jeongmin Seong, and Patti Wang. Here\’a a figure showing how the reliance of China and India on exports has been falling.

The authors also note:

As consumption rises, more of what gets made in these countries is now sold locally instead of being exported to the West. Over the decade from 2007 to 2017, China almost tripled its production of labor-intensive goods, from US$3.1 trillion to US$8.8 trillion. At the same time, the share of gross output China exports has dramatically decreased, from 15.5 percent to 8.3 percent. India has similarly been exporting a smaller share of its output over time (Exhibit 2). This implies that more goods are being consumed domestically rather than exported. Furthermore, as the region’s emerging economies develop new industrial capabilities and begin making more sophisticated products, they are becoming less reliant on foreign imports of both intermediate inputs and final goods. The previous era of globalization was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labor costs—and often their supply chains ran through Asia. Now labor arbitrage is on the wane. Only 18 percent of today’s goods trade now involves exports from low-wage countries to high-wage countries—a far smaller share than most people assume and one that is declining in many industries. ….

Asian consumers have long had a strong preference for foreign luxury goods and brands. But things are changing. The post-90’s generation is starting to lose this bias against domestic brands; in fact, they are starting to choose them over foreign brands more often. …

Wages in China have risen substantially in the last couple of decades. As a result, the rising manufacturing hubs in Asia are now in places like Vietnam and Indonesia. In addition, many of the international economic ties are within Asian countries, rather than being between China and the United States. 

Historically China was known as the “factory to the world.” But while low-cost labor was its original competitive advantage, the wage gap between China and the rest of Asia is closing. In 1996, wages in Japan were 46 times higher than in China; by 2016, they were only four times higher. China is moving up the value chain, and as it transitions, other locations around Asia are stepping into some of its former niches. Vietnam, in particular, has become a hub of labor-intensive manufacturing for export. The country has attracted a flood of greenfield investment into cities such as Hai Phong. In addition to Hai Phong (Vietnam), Ho Chi Minh City (Vietnam), Bekasi (Indonesia), and Xi’an (China) are rising makers of electronics. As new places assume new roles in industry value chains, a new set of cities begins to benefit from the influx of capital. Investment in factories leads to new roads, new jobs, and urbanization. Much of the capital flowing into Vietnam comes from South Korea and Japan. These new manufacturing hubs speak not only to the rise of emerging Asian countries but also to a region that is more connected and co-invested.

 This helps to explain why, when the US puts economic pressure on trade with China, it affects US trade with China, but not necessarily China\’s trade with other countries of Asia or patterns of US trade with the Asian region as a whole.

US Multinationals Bring Foreign Earnings Back Home

The Tax Cuts and Jobs Act of 2017 largely eliminated taxes on US multinational corporations when they bring profits earned in other countries back to the use. As a result, there has been a dramatic rise in the dividends that U.S. parent companies received from their their foreign affiliates. Sarah A. Atkinson and Jessica McCloskey of the US Census Bureau offer some striking illustrations of this change, alnog with other data on international flows of investment in and out of the US economy,  in \”Direct Investment Positions for 2018: Country and Industry Detail,\” published in the August 2019 Survey of Current Business

For example, here\’s a look at \”outward direct investment\” of US multinationals abroad. In any given year, the amount of outward direct investment can change for several reasons, but one key issue is whether earnings from other countries are reinvested abroad, or whether they are returned to the US. As the figure shows, US multinationals have been reinvesting about $300 billion per year in foreign earnings in other countries. In 2018, they instead brought almost $300 billion back to the US economy.

Chart 4. Change in the Outward Direct Investment Position by Component, 2009–2018. Line Chart.

Atkinson and Jessica McCloskey explain:

Reinvestment of earnings—the difference between the U.S. parents’ share of their foreign affiliates’ current-period earnings and dividends paid by the foreign affiliates to their U.S. parents—shifted to net inflows of $251.9 billion in 2018 from net outflows of $306.5 billion in 2017. The shift was largely due to the repatriation of accumulated prior earnings by U.S. multinationals from their foreign affiliates, largely in response to the TCJA [Tax Cuts and Jobs Act]. Current-period earnings of foreign affiliates of U.S. MNEs [multinational enterprises] can either be repatriated to the parent company in the United States in the form of dividends or reinvested in foreign affiliates. Dividends can be paid from either current-period earnings or prior-period earnings that had been reinvested. When dividends exceed current-period earnings, reinvested earnings (calculated as a residual) are negative, indicating a withdrawal of equity assets. In 2018, reinvestment of earnings of −$251.9 billion reflected the difference between direct investment earnings of $524.6 billion and dividends of $776.5 billion …\” 

The figure below shows the pattern described in the previous text: that is, in 2018 total earnings of US multinationals on their foreign investments was $524.6 billion. However, total dividends paid to US corporate parents was $776.5 billion. Thus, the overall reduction in the stock of US foreign investment abroad was a drop of $251.9 billion.
Chart 5. Components of Outward Direct Investment Earnings, 1987–2018. Line Chart.

The authors also point out the countries from which these repayments to US corporate parents are arriving. They add:

Almost one-half of the dividends were from affiliates in Bermuda and the Netherlands, and the next largest share of dividends was from affiliates in Ireland. The largest increases in dividends by industry of U.S. parent were in the chemicals manufacturing, computers and electronic products manufacturing, and information industries. 

Of course, the actual physical location of US multinationals abroad is not mainly in Bermuda, Netherlands, and Ireland. Instead, these locations are where US multinationals have been holding large quantities of assets in an effort to reduce cases. For example, here\’s a discussion of the \”Double Irish Dutch Sandwich\” method for moving profits across international borders to reduce corporate taxes, and here\’s a broader discussion of \”How US Multinationals Shifting Income to Foreign Countries Reduces Measured GDP.\”

As US multinationals bring home profits earned abroad, it will be interesting to track the results. Is some of the money paid out to shareholders? Will it be invested in new corporate projects, or will it be held as a liquid asset? Will this repatriation of profits affect stock market prices? 

Satellite Data Economics, Night Lights, and More

Many readers of this blog will have seen this versions of this satellite image many times, but it never fails to astonish me. The dark area outlined in red is North Korea. The rest of the peninsula below, illuminated, is South Korea.

I can quote you various statistics about how the economy of North Korea is estimated at something between $32 billion and $50 billion, with corresponding per capita income of either $1,238 or $1,700. Conversely, South Korea\’s GDP is $1,619 billion, with a per capita GDP of $31,362. But at least for me, the contrast between darkness and light provides its own gut-level understanding of how people experience big differences in economic growth.

Jiaxiong Yao provides this image and a discussion of the relationship between economic growth and night lights in \”Illuminating Economic Growth: Satellite images of the earth at night reveal the pace of economic growth and much more,\” in  the September 2019 issue of Finance & Development.

Here\’s a less well-known but equally striking comparison. The upper image is Asia in 1992: you can see the outline of India on the left, China is in the middle, and to the right there is the dark/light contrast of the Korean peninsula, with Japan at the extreme right. The bottom image is the same frame of countries in 2013. The economic development of India and China is clear–and that image is from six years ago.

Yao points out that while night lights are broadly associated with economic development, the relationship isn\’t linear, and isn\’t the same everywhere.

The relationship between night lights and economic development, however, is not always straightforward. In my study with Johns Hopkins University’s Yingyao Hu, we compare night lights with GDP, the official and most commonly used measure of an economy’s performance. We find that rich countries are indeed brighter than less developed countries, but there is no lack of exceptions. On a per capita basis, Nordic countries have almost always been the brightest spots on Earth. On the other hand, Japan, despite being a rich country, looks scarcely brighter than Syria did before the Arab Spring, most likely because of its energy conservation habits and high population density.

Another pattern is that emerging market economies which are in the process of dramatically expanding power grids and transportation networks also look much brighter to satellites. However, high-income economies are mainly doing their growth through technology and innovation, which has less effect on light emissions. \”In fact, night lights grow only about half as fast as GDP in advanced economies.\”

Night lights can also be used to estimate GDP in places where collection of economic statistics has broken down. 

There is probably nowhere on Earth where good economic data are scarcer than in countries afflicted by conflict—yet these economies are among the places we need to track and understand the most. Statistics agencies in these countries may have long stopped functioning properly, but satellites are still witnessing economic activity. It turns out that we can use night lights to reestimate the GDP of a conflict-stricken country, based on its similarities with other countries at various stages of development. When we do so, we find that the night-light-based GDP measure often points to faster economic deterioration during conflict than the official data show, but this measure also suggests a stronger bounce-back after the conflict ends.

For more analytical detail on connections from night lights to GDP, a useful starting point is the IMF Working Paper by Yingyao Hu and Jiaxiong, \”Illuminating Economic Growth\” (April 9, 2019)

It\’s also worth noting that satellite data shows a lot more than just night lights–indeed, more than just the visible spectrum. Thus, economists and other researchers are making increasing use of this data to look at a range of other issues including pollution, forest cover/deforestation, roofs/buildings in studies of urban development, cars/traffic. I offer a quick overview of this work, with some additional images, in \”Economics and Satellite Data\” (November 10, 2016). For a readable broader discussion of satellite data and how it can be used, see Dave Donaldson and Adam Storeygard, \”The View from Above: Applications of Satellite Data in Economics,\” in the Fall 2016 issue of the Journal of Economic Perspectives (30:4, 171-98).

Nonrenewable Resources: The Pattern of Higher Extraction, Falling Prices

Here\’s an economic puzzle about nonrenewable resources, including energy resources but also minerals. One might expect that the least expensive locations for these resources would be exploited first. Thus, one might expect production costs for such resources to rise over time. If demand for such resources is also rising over time, intuition suggests that this combination should tend to raise prices for nonrenewables.

But this intuition is apparently wrong. Output of nonrenewable resources has risen substantially over the long-run, but prices have fallen.  Sean Howard, Gregor Schwerhoff and Martin Stuermer of the Federal Reserve Bank of Dallas discuss possible reasons in \”Solving a Puzzle: More Nonrenewable Resources Without Higher Prices\” (August 27, 2019). To set the stage, here is a chart where the red line shows combined extraction of 65 nonrenewable resources from 1700 to the present, and the blue line shows an index of the overall change in prices.

Chart 1: Extraction of Nonereweable REsources Increases While Real Prices Do Not Rise
Their proposed explanation is built on how new technologies for extracting nonrenewable resources interact with a common geological pattern. . They agree that when extracting nonrenewable resources, the least-expensive will tend to go first. However, it is a common geological pattern that there is relatively little of any resource that are easy to extract at low cost. As one moves to nonrenewable resources that can only be extracted at higher cost, there tend to be a greater quantity of these resources.

Because of this geological pattern, each new technology that comes along for reducing the cost of extracting nonrenewable resources tends to open up possibilities for accessing a greater quantity of such resources. They write:

L.H. Ahrens and his fundamental law of geochemistry states that greater quantities of a resource are locked in more troublesome lower grades, which in turn implies that a new technology’s higher development costs may be mitigated by the ever-greater supply of the resource it opens.

A practical example of this is the shale oil revolution in 2014. Although the development of hydraulic fracturing technology was most likely costlier than the development of earlier conventional methods, there is more unconventional oil. The International Energy Agency estimates there are 1.5 trillion barrels of crude oil in conventional or high-grade deposits and 4.5 trillion barrels in unconventional or low-grade deposits, including natural gas liquids. Although the technology required to extract unconventional oil is more expensive to develop, there is much more of the resource of this grade to

The result of this interplay between extraction technology and geology is an equilibrium of an increasing abundance of economically extractable nonrenewable resources at nonincreasing prices.

Of course, this insight is only part of thinking more broadly about the economics of nonrenewable resources. A past pattern of rising quantities of nonrenewable resources combined with stable-to-falling prices offers no guarantee that the pattern will persist into the future, or that it will persist for individual resources as opposed to overall averages. But while there are no guarantees, it also suggests a reason why this pattern could possibly persist for decades to come. 

Shifting Visions of the Good Job

I first published this essay back in August 2015. But it seemed worth revisiting on this Labor Day Holiday.

 As the unemployment rate has dropped to 5.5% and less in recent months, the arguments over jobs have shifted from the lack of available jobs to the qualities of the jobs that are available. It\’s interesting to me how our social ideas of what constitutes a \”good job\” have a tendency to shift over time. Joel Mokyr, Chris Vickers, and Nicolas L. Ziebarth illuminate some of these issues in \”The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different?\” which appears in the Summer 2015 issue of the Journal of Economic Perspectives. All articles from JEP going back to the first issue in 1987 are freely available on-line compliments of the American Economic Association. (Full disclosure: I\’ve worked as Managing Editor of the JEP since 1986.)

One theme that I found especially intriguing in the Mokyr, Vickers, and Ziebarth argument is how some of our social attitudes about what constitutes a \”good job\” have nearly gone full circle in the last couple of centuries. Back at the time of the Industrial Revolution in the late 18th and into the 19th century, it was common to hear arguments that the shift from farms, artisans, and home production into factories involved a reduction in the quality of work. But in recent decades, a shift away from factories and back toward decentralized production is sometimes viewed as a decline in the quality of work, too. Here are some examples:

For example, one concern from the time of the original Industrial Revolution was that factory work required scheduling their time in ways that removed flexibility. Mokyr, Vickers, and Ziebarth (citations omitted) note: \”Workers who were “considerably dissatisfied, because they could not go in and out as they pleased” had to be habituated into the factory system, by means of fines, locked gates, and other penalties. The preindustrial domestic system, by contrast, allowed a much greater degree of flexibility.\”

Another type of flexibility in the time before the Industrial Revolution is that people often had the flexibility to combine their work life with their home life, and the separation of the two was thought be worrisome: \”Part of the loss of control in moving to factory work involved the physical separation of home from place of work. While today people worry about the exact opposite phenomenon with the lines between spheres of home and work blurring, this disjunction was originally a cause of great anxiety, along with the separation of place-of-work from place-of-leisure. Preindustrial societies had “no clearly defined periods of leisure as such, but economic activities, like hunting or market-going, obviously have their recreational aspects, as do singing or telling stories at work.”

Of course, some common modern concerns about the quality of jobs is that many jobs lack regular hours. Many workers may face irregular hours, or no assurance of a minimum number of hours they can work. Moreover, many jobs now worry that work life is intruding back into home life, because we are hooked to our jobs by our computers and phones. Mokyr, Vickers, and Ziebarth write:

\”Even if ongoing technological developments do not spell the end of work, they will surely push certain characteristics of future jobs back toward pre-factory patterns. These changes involve greater flexibility in when and where work takes place. Part and parcel of this increase in flexibility is the breakdown of the separation between work and home life. The main way in which flexibility seems to be manifesting itself is not through additional self-employment, but instead through the rise of contract firms who serve as matchmakers, in a phenomenon often driven by technology. For example, Autor (2001) notes that there was a decline in independent contractors, independent consultants, and freelancers as a portion of the labor force from 1995 to 1999—peak years for expansion of information technology industries—though there was a large increase in the fraction of workers employed by contract firms. The Census Bureau’s counts “nonemployer businesses,” which includes, for example, people with full-time employment reported in the Current Population Survey but who also received outside consulting income. The number of nonemployer businesses has grown from 17.6 million in 2002 to 22.7 million in 2012. In what is sometimes called the “sharing economy,” firms like Uber and AirBnB have altered industries like cab driving and hotel management by inserting the possibility of flexible employment that is coordinated and managed through centralized online mechanisms. …

[C]ertain kinds of flexibility have become more prevalent since 2008, particularly flexibility with regard to time and place during the day, making it possible for workers to attend to personal or family needs. On the other side, flexibility can be a backdoor for employers to extract more effort from employees with an expectation that they always be accessible. … Also, flexibility can often mean variable pay. The use of temp and contract workers in the “on-demand” economy (also known as contingent labor or “precarious workers”) has also meant that these workers may experience a great deal of uncertainty as to how many hours they will work and when they will be called by the employers. Almost 50 percent of part-time workers receive only one week of advance notice on their schedule.\”

Another a fairly common theme of economists writing back in the 18th and 19th centuries ranging from Adam Smith to Karl Marx was that the new factor jobs treated people as if they were cogs in a machine.

\”Adam Smith (1776, p. 385) cautioned against the moral effects of this process, as when he wrote: “The man whose whole life is spent in performing a few simple operations . . . generally becomes as stupid and ignorant as it is possible for a human creature to become.” Karl Marx, more well-known than Smith as a critic of industrialization, argued that the capitalist system alienates individuals from others and themselves. … For Marx and others, it was not just that new factory jobs were dirty and dangerous. Jeffersonian encomiums aside, the pastoral life of small shop owners or yeoman farmers had not entailed particularly clean and safe work either. Instead the point was that this new work was in a deeper way unfit for humans and the process of covert coercion that forced people into these jobs and disciplined them while on the job was debasing.\”

Now, of course, there is widespread concern about a lack of factory jobs for low- and middle-skilled workers. Rather than worrying about these jobs being debasing or unfit for humans, we worry that there aren\’t enough of them.

I guess one reaction to this evolution of attitudes about \”good jobs\” is just to point out that workers and employers are both heterogenous groups. Some workers put a greater emphasis on flexibility of hours, while others might prefer regularity. Some workers prefer a straightforward job that they can leave behind at the end of the day; others prefer a job that is full of improvisation, learning on the fly, crises, and deadlines. To some extent, the labor market lets employers and workers match up as they desire. There\’s certainly no reason to assume that a \”good job\” should be a one-size-fits-all definition.

A second reaction is that there is clearly a kind of rosy-eyed nostalgia at work about the qualities of jobs of the past. Many of us tend to focus on a relatively small number of past jobs, not the jobs that most people did most of the time. In addition, we focus on a few characteristics of those jobs, not the way the jobs were actually experienced by workers of that time.

But yet another reaction is that the qualities of available jobs aren\’t just a matter of negotiation between workers and employers, and they aren\’t an historical inevitability. The qualities of the range of jobs in an economy are afffected by a range of institutions and factors like the human capital that workers bring to jobs, the extent of on-the-job training, how easy it is for someone with a series or employers or irregular hours to set up health insurance or a retirement account, rules about workplace safety, rules that impose costs on laying off or firing workers (which inevitably makes firms reluctant to hire more regular employees), the extent and type of union representation, rules about wages and overtime, and much more. I do worry that career-type jobs offering the possibility of longer-term connectedness between a worker and an employer seem harder to come by. In a career-type job, both the worker and employer place some value on the expected continuance of their relationship over time, and act and invest resources accordingly.

Marge Piercy on Why Work Matters

I sometimes struggle, when teaching about unemployment, to explain just why work matters. It\’s straightforward enough to note that elevated unemployment leads to loss of economic output, lower tax payments, and greater need for government welfare benefits. I can refer to evidence on how unemployment is connected to social ills like bankruptcy, divorce, depression, and even suicide. But this listing of consequences, while a necessary part of teaching the economics of unemployment, doesn\’t quite touch the human heart of the issue. The poet Marge Piercy, in her 1973 poem \”To be of use,\” gives a more concise and powerful sense of why useful work matters so much.

\”To be of use\”

The people I love the best
jump into work head first
without dallying in the shallows
and swim off with sure strokes almost out of sight.
They seem to become natives of that element,
the black sleek heads of seals
bouncing like half submerged balls.

I love people who harness themselves, an ox to a heavy cart,
who pull like water buffalo, with massive patience,
who strain in the mud and the muck to move things forward,
who do what has to be done, again and again.

I want to be with people who submerge
in the task, who go into the fields to harvest
and work in a row and pass the bags along,
who stand in the line and haul in their places,
who are not parlor generals and field deserters
but move in a common rhythm
when the food must come in or the fire be put out.

The work of the world is common as mud.
Botched, it smears the hands, crumbles to dust.
But the thing worth doing well done
has a shape that satisfies, clean and evident.
Greek amphoras for wine or oil,
Hopi vases that held corn, are put in museums
but you know they were made to be used.
The pitcher cries for water to carry
and a person for work that is real.

Marge Piercy (1973)

Note: I published this poem in a blog post back in 2013, but it felt as if sufficient time had passed to mention it again on this Labor Day Holiday.

Taming the Demon of Work

As a meditation for Labor Day, I offer the story of the Benedictine monks of the Monastery of Christ in the Desert in northern New Mexico. They had a booming dot-com start-up in the late 1990s as digital scribes–and then they shut it down because it was interfering with their main purpose in life.
Jonathan Malesic tells the story in \”Taming the Demon: How Desert Monks Put Work in Its Place\” (Commonweal, February 2, 2019). Malesic starts the story this way:

In a remote canyon in northern New Mexico in the mid-1990s, Benedictine monks of the Monastery of Christ in the Desert spent their mornings at a dozen Gateway computers in a room with a dirt floor, creating the internet. A crucifix hung on the wall right above a whiteboard where they sketched out webpages. The monks were doing a digital-age version of work that Benedictines have done for more than a thousand years. They were scribes.

The monks gave their web-design service the hokey dotcom-era name scriptorium@christdesert and targeted the vast Catholic market of parishes and dioceses; they even hoped to land a contract with the Vatican. The scriptorium produced pages that approximated the look of medieval illuminated manuscripts (and must have taken forever to upload on the single, primitive cellphone that served as their modem). Because their product was electronic, the monks’ remote location was no obstacle to the work, though their phone bill ran to over a thousand dollars a month. The project aimed to profit both the bottom line and the HTML scribes’ spiritual lives. Abbot Philip Lawrence, who led Christ in the Desert from 1976 until his retirement this past December, told the Associated Press at the time, “What we’re doing now is more creative, and that’s good for the monks. If you’re doing something that’s creative, it brings out a whole different aspect of the soul.”

The scriptorium was a hit. It got a boost from national news stories and soon had an abundance of orders—including one from the Holy See. In 1996, Brother Mary-Aquinas Woodworth, a systems analyst in his secular life who started up the scriptorium after he became a monk, predicted it would quadruple the monastery’s revenue. He pitched a Catholic internet service to the U.S. bishops, naming AOL, then a ubiquitous provider of dial-up service, as “the model, the competitor” to his vision. (The bishops passed on his proposal.) As the scriptorium’s reputation grew, Brother Mary-Aquinas began hatching plans to open an office in Santa Fe but was willing to look to bigger cities—including New York and Los Angeles—if he couldn’t get the space he needed in New Mexico. He dreamed of hiring up to two hundred people. At one point, traffic to the monks’ website was so great, it caused the whole state’s internet service to crash.

But then, in 1998, the scriptorium closed up shop. Monks adhering to Benedict’s rule can’t pull eighteen-hour shifts to fill orders. They can’t respond to clients’ emails while they’re praying the Liturgy of the Hours, studying, or eating—the activities that make up most of their day. Abbot Philip told me in an email that the project ended because he couldn’t justify the labor the scriptorium demanded. … In her history of the monastery, Brothers of the Desert, Mari Graña writes, “There were so many orders for design services that what at first seemed the perfect answer for work that would not interfere with the contemplative life, soon began to take over that life.”

Malesic, who describes himself as \”an exhausted ex-academic at midlife,\” goes to visit the monks and to contemplate what he calls \”the ceaseless, obsessive American work ethic.\” The monks are still fighting it, too. They work from 8:45 am to 12:40 pm each day. \”They get over work so they can get on with something much more important to them.\” The monks have to match their consumption to their income, just like everyone else. But their choices about how to spend time and what to consume are different. Apparently, \”St. Benedict himself acknowledged that the monastic community would include members with marketable skills. If it’s going to survive, it ought to. But he had a stern warning for his monks: an artisan who `becomes puffed up by his skillfulness in his craft, and feels he is conferring something on the monastery\’ should be ordered to cease his work until he’s able to do it with humility.\”

The story has much more detail of interest.

When my wife was getting an MBA, it was common to hear advice about career choices along the lines of \”find your bliss\” or \”if you love what you do, you\’ll never work a day in your life.\” I sometimes have periods of several consecutive hours, or even an entire day, when I love what I do. But I also love some non-work parts of my life, and get much of my personal sense of value from those other parts. I would make a lousy monk. But they offer a useful thought experiment for reflecting on one\’s choices about work-life balance.