Year: 2019

The story of William Lee and his knitting machine pops up now and again. For example, the 2019 World Development Report from the World Bank has a mention near the start of Chapter 1: \”In 1589, Queen Elizabeth I of England was alarmed when clergyman William Lee applied for a royal patent for a knitting machine: `Consider thou what the invention would do to my poor subjects,\’ she pointed out. `It would assuredly bring them to ruin by depriving them of employment.\’”As someone who is inherently dubious about direct quotations from conversations held in 1589, I went to the footnote, which sent me to Richard Alexander McKinley, ed. 1958. The City of Leicester. Vol. 4 of A History of the County of Leicester.  But I was unable to find the quotation in the online version of this volume.

The William Lee story is also told as the start of Chapter 7 of the 2012 book Why Nations Fail, by Daron Acemoglu and James Robinson. But the citation there is to a website for Calverton Village, where Lee grew up back in the 16th century. The webpage includes sentences like, \”Those of you who live in the 20th century are aware of the bare facts of my life.\”  As someone who is inherently suspicious of first-person internet essays written by people who lived in the 16th century, I continued to hunt for something closer to an original source.

Each year the Environmental Protection Agency produces an Inventory of U.S. Greenhouse Gas Emissions and Sinks. The draft version of the report for 1990-2017 was published in February 2019. 

Here\’s a figure showing gross emissions of greenhouse gases in the US. Emissions that are not carbon dioxide have been converted to its \”equivalent.\”

Several themes jump out from the figure. One is that the overwhelming share of emissions are plain old carbon dioxide, rather than methane or other gases. Another is that the total emissions have been dropping in the last few years, and are more-or-less back to 1990 levels, which one can interpret either through the lens of \”could be worse\” or \”should be better,\” as you are so inclined.

Given the predominance of carbon dioxide emissions, let\’s dig into those a little deeper. Most of the carbon dioxide emissions come from burning fossil fuels. This table shows the breakdown into a few main sectors.

Total US emissions of greenhouse gases in 2017 were 6472 million metric tons of carbon dioxide-equivalent.  Thus, transportation and the electric power sector combined account for more than half of all emissions. It seems to me both appropriate to focus on reducing emissions in those sectors, but also to remember that, combined, they are only about half of the problem. Emissions from industrial, residential, and commercial activities are also pretty significant.

Moreover, methane emissions landfill, leakages in natural gas systems, and the digestive tracts of livestock make up the equivalent of 449 million metric tons of carbon dioxide emissions in 2017. Agricultural soil management released nitrogen oxides that are the equivalent of 266 million metric tons of carbon dioxide in 2017, roughly equivalent to fossil fuel-related carbon emissions from the residential or the commercial sector. Hydrofluorocarbons that are being used to to replace ozone-depleting substances account for another 152 million metric tons of CO2-equivalent emissions.

Early in 2018, President Trump began instituting a series of tariffs on international trade. As he tweeted in March 2018: \”When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!\”

Last week, the US Department of Commerce announced the US trade figures for year-end 2018. After a year of President Trump\’s tariffs, the US trade deficit is larger in 2018 than it was in 2017. The bilateral US trade deficit with China is up, too. The government report notes:

For 2018, the goods and services deficit was $621.0 billion, up $68.8 billion from $552.3 billion in 2017. Exports were $2,500.0 billion in 2018, up $148.9 billion from 2017. Imports were $3,121.0 billion, up $217.7 billion from 2017. The 2018 increase in the goods and services deficit reflected an increase in the goods deficit of $83.8 billion, or 10.4 percent, to $891.3 billion and an increase in the services surplus of $15.0 billion, or 5.9 percent, to $270.2 billion. As a percentage of U.S. gross domestic product, the goods and services deficit was 3.0 percent in 2018, up from 2.8 percent in 2017. … The deficit with China increased $43.6 billion to $419.2 billion in 2018. Exports decreased $9.6 billion to $120.3 billion and imports increased $34.0 billion to $539.5 billion.

Thus, a fairly common situation arises. A politicians claims that a certain Problem has a certain Solution. But when the politician is elected and the Solution is tried, the Problem is either the same or worse. It is rare for any politician in this situation to reconsider their Solution. Instead, the usual approaches are to argue that an even bigger and longer dose of the Solution is needed, or that the Solution was somehow sabotaged by poor implementation and political opposition.  

Daylight savings time starts this weekend. Here\’s a post from two years ago on its intellectual origins.
___________

The idea that adjusting the time of day can result in energy savings traces back to a whimsical essay written by Benjamin Franklin back in 1784. Franklin claims in the essay that while living in Paris and attending parties every night, he is habitually going to bed \”three or four hours after midnight,\” and rising at noon. However, he is astonished to find one morning that the sun is rising and casting light at 6:00 am. He claims as his own personal discovery that while the ancients knew when the sun rose–after all, the time is in the almanac!–they did not know that the sun \”gave light as soon as he rose. This is what I claim as my discovery. If the ancients knew it, it might have been long since forgotten; for it certainly was unknown to the moderns, at least to the Parisians …\” Franklin suggests that if everyone rose with the sun and went to bed with the sun during the summertime, there would be a vast savings of candle wax. The saved candle-wax could then be used during the shorter days of winter.

For the economists among us, there is a charm in how Franklin jibes at the \”lovers of economy,\” and writes in what seems to me a jesting fashion: \”I was pleased to see this general concern for economy, for I love economy exceedingly.\” Here\’s Franklin\’s letter:

To THE AUTHORS of
The Journal of Paris
1784

MESSIEURS,

You often entertain us with accounts of new discoveries. Permit me to communicate to the public, through your paper, one that has lately been made by myself, and which I conceive may be of great utility.

I was the other evening in a grand company, where the new lamp of Messrs. Quinquet and Lange was introduced, and much admired for its splendour; but a general inquiry was made, whether the oil it consumed was not in proportion to the light it afforded, in which case there would be no saving in the use of it. No one present could satisfy us in that point, which all agreed ought to be known, it being a very desirable thing to lessen, if possible, the expense of lighting our apartments, when every other article of family expense was so much augmented.

I was pleased to see this general concern for economy, for I love economy exceedingly.

I went home, and to bed, three or four hours after midnight, with my head full of the subject. An accidental sudden noise waked me about six in the morning, when I was surprised to find my room filled with light; and I imagined at first, that a number of those lamps had been brought into it; but, rubbing my eyes, I perceived the light came in at the windows. I got up and looked out to see what might be the occasion of it, when I saw the sun just rising above the horizon, from whence he poured his rays plentifully into my chamber, my domestic having negligently omitted, the preceding evening, to close the shutters.

I looked at my watch, which goes very well, and found that it was but six o\’clock; and still thinking it something extraordinary that the sun should rise so early, I looked into the almanac, where I found it to be the hour given for his rising on that day. I looked forward, too, and found he was to rise still earlier every day till towards the end of June; and that at no time in the year he retarded his rising so long as till eight o\’clock. Your readers, who with me have never seen any signs of sunshine before noon, and seldom regard the astronomical part of the almanac, will be as much astonished as I was, when they hear of his rising so early; and especially when I assure them, that he gives light as soon as he rises. I am convinced of this. I am certain of my fact. One cannot be more certain of any fact. I saw it with my own eyes. And, having repeated this observation the three following mornings, I found always precisely the same result.

Yet it so happens, that when I speak of this discovery to others, I can easily perceive by their countenances, though they forbear expressing it in words, that they do not quite believe me. One, indeed, who is a learned natural philosopher, has assured me that I must certainly be mistaken as to the circumstance of the light coming into my room; for it being well known, as he says, that there could be no light abroad at that hour, it follows that none could enter from without; and that of consequence, my windows being accidentally left open, instead of letting in the light, had only served to let out the darkness; and he used many ingenious arguments to show me how I might, by that means, have been deceived. I owned that he puzzled me a little, but he did not satisfy me; and the subsequent observations I made, as above mentioned, confirmed me in my first opinion.

This event has given rise in my mind to several serious and important reflections. I considered that, if I had not been awakened so early in the morning, I should have slept six hours longer by the light of the sun, and in exchange have lived six hours the following night by candle-light; and, the latter being a much more expensive light than the former, my love of economy induced me to muster up what little arithmetic I was master of, and to make some calculations, which I shall give you, after observing that utility is, in my opinion the test of value in matters of invention, and that a discovery which can be applied to no use, or is not good for something, is good for nothing.

I took for the basis of my calculation the supposition that there are one hundred thousand families in Paris, and that these families consume in the night half a pound of bougies, or candles, per hour. I think this is a moderate allowance, taking one family with another; for though I believe some consume less, I know that many consume a great deal more. Then estimating seven hours per day as the medium quantity between the time of the sun\’s rising and ours, he rising during the six following months from six to eight hours before noon, and there being seven hours of course per night in which we burn candles, the account will stand thus;–

In the six months between the 20th of March and the 20th of September, there are
Nights 183
Hours of each night in which we burn candles 7
Multiplication gives for the total number of hours 1,281
These 1,281 hours multiplied by 100,000, the number of inhabitants, give 128,100,000
One hundred twenty-eight millions and one hundred thousand hours, spent at Paris by candle-light, which, at half a pound of wax and tallow per hour, gives the weight of 64,050,000
Sixty-four millions and fifty thousand of pounds, which, estimating the whole at-the medium price of thirty sols the pound, makes the sum of ninety-six millions and seventy-five thousand livres tournois 96,075,000

An immense sum! that the city of Paris might save every year, by the economy of using sunshine instead of candles. If it should be said, that people are apt to be obstinately attached to old customs, and that it will be difficult to induce them to rise before noon, consequently my discovery can be of little use; I answer, Nil desperandum. I believe all who have common sense, as soon as they have learnt from this paper that it is daylight when the sun rises, will contrive to rise with him; and, to compel the rest, I would propose the following regulations; First. Let a tax be laid of a louis per window, on every window that is provided with shutters to keep out the light of the sun.

Second. Let the same salutary operation of police be made use of, to prevent our burning candles, that inclined us last winter to be more economical in burning wood; that is, let guards be placed in the shops of the wax and tallow chandlers, and no family be permitted to be supplied with more than one pound of candles per week.

Third. Let guards also be posted to stop all the coaches, &c. that would pass the streets after sunset, except those of physicians, surgeons, and midwives.

Fourth. Every morning, as soon as the sun rises, let all the bells in every church be set ringing; and if that is not sufficient?, let cannon be fired in every street, to wake the sluggards effectually, and make them open their eyes to see their true interest.
All the difficulty will be in the first two or three days; after which the reformation will be as natural and easy as the present irregularity; for, ce n\’est que le premier pas qui coûte. Oblige a man to rise at four in the morning, and it is more than probable he will go willingly to bed at eight in the evening; and, having had eight hours sleep, he will rise more willingly at four in the morning following. But this sum of ninety-six millions and seventy-five thousand livres is not the whole of what may be saved by my economical project. You may observe, that I have calculated upon only one half of the year, and much may be saved in the other, though the days are shorter. Besides, the immense stock of wax and tallow left unconsumed during the summer, will probably make candles much cheaper for the ensuing winter, and continue them cheaper as long as the proposed reformation shall be supported.

For the great benefit of this discovery, thus freely communicated and bestowed by me on the public, I demand neither place, pension, exclusive privilege, nor any other reward whatever. I expect only to have the honour of it. And yet I know there are little, envious minds, who will, as usual, deny me this and say, that my invention was known to the ancients, and perhaps they may bring passages out of the old books in proof of it. I will not dispute with these people, that the ancients knew not the sun would rise at certain hours; they possibly had, as we have, almanacs that predicted it; but it does not follow thence, that they knew he gave light as soon as he rose. This is what I claim as my discovery. If the ancients knew it, it might have been long since forgotten; for it certainly was unknown to the moderns, at least to the Parisians, which to prove, I need use but one plain simple argument. They are as well instructed judicious, and prudent a people as exist anywhere in the world all professing, like myself, to be lovers of economy; and,from the many heavy taxes required from them by the necessitities of the state, have surely an abundant reason to be economical. I say it is impossible that so sensible a people, under such circumstances, should have lived so long by the smoky, unwholesome, and enormously expensive light of candles, if they had really known, that they might have had as much pure light of the sun for nothing. I am, &c.

A SUBSCRIBER

P.S. The concept of Daylight Savings Time is sometimes attributed to George Hudson, a New Zealand etymologist, who proposed the concept in an 1895 meeting, as reported in the Transactions and Proceedings of the Royal Society of New Zealand 1868-1961, and  then followed up with a fuller discussion in an 1898 paper in the same publication outlet.  Franklin\’s earlier discussion was already known at the time; for example, a critical discussant in the 1895 meeting \”said that the only practical part of Mr. Hudson\’s paper had long since been anticipated by Benjamin Franklin.\” However, Hudson certainly deserves credit for working out details in a more systematic way than Franklin\’s more whimsical letter.

P.P.S. For those not yet sated on this subject, here\’s a post on \”The Economics of Daylight Savings Time\” (March 31, 2016).

With the shift to Daylight Savings Time taking place this weekend, it seemed appropriate to rerun this post from a three years ago on the subject:

Where I live in Minnesota, the short days of December have less than 9 hours of daylight, with sunrise around 7:50 am and sunset around 4:40 pm. In contrast, the long days of June have about 15 1/2 hours of daylight, with sunrise around 5:30 am and sunset around 9:00 pm. But of course, those summer times for sunrise and sunset use Daylight Savings Time. If we didn\’t spring the clocks forward in March, the summertime in Minnesota would feature a 4:30 am sunrise and an 8:00 sundown.

If I was a stronger and more flexible person, there would be no need for Daylight Savings Time. I would just rise with the summertime sun at 4:30 and take advantage of those extra daytime hours. But I don\’t synchronize my day to the sunlight. Instead, like most people, I have daily schedules that involve getting up at roughly same time most days. For me, this is the strongest case for Daylight Savings Time: it shifts an hour of daylight that would otherwise occur when I\’m asleep to a time of day at a time of year when I can enjoy it. For those who live closer to the equator, where the seasonal variation in length of day is less, I presume that Daylight Savings Time matters less. But for those of us in northern climates, long summer evenings are a nice counterbalance to those dismal winter days when you drive to work before sunrise and drive home from work after sunset.

However, discussions about the merits of Daylight Savings Time aren\’t usually focused on sweet summertime evenings. For example, the US Department of Transportation website lists three practical reasons for Daylight Savings time and the longer summer evenings: saves energy, reduces traffic deaths, and reduces crime. Austin C. Smith reviews the evidence on these claims before presenting his own research in \”Spring Forward at Your Own Risk: Daylight Saving Time and Fatal Vehicle Crashes,\” which appears in the April 2016 issue of the American Economic Journal: Applied Economics 8:2, 65–91). (The AEJ: Applied isn\’t freely available on-line, but many readers will have access through library subscriptions. Full disclosure: This journal is published by the American Economic Association, which also publishes the Journal of Economic Perspectives where I work as Managing Editor.)

It\’s long been argued that  Daylight Savings Time provides modest but real energy savings, but Smith cites some recent evidence that leans the other way. A standard method in empirical economics in recent years is to look for \”natural experiments,\” which are situations where Daylight Saving Time was or was not imposed in a way that offers a chance for some comparisons. Thus, Smith writes:

\”Kellogg and Wolff (2008) use a natural experiment in Australia where DST was extended in some states to accommodate the Sydney Olympics. They find that while DST reduce energy demand in the evening, it increases demand in the morning with no significant net effect. Kotchen and Grant (2011) make use of a quasi-experiment in Indiana where some Southern Indiana counties did not practice DST until 2006. Their work suggests that DST could actually increase residential energy use, as increased heating and cooling use more than offset the savings from reduced lighting use.\”

(For those who would like specific citations for these papers:

• Kellogg, Ryan, and Hendrik Wolff. 2008. “Daylight time and energy: Evidence from an Australian experiment.” Journal of Environmental Economics and Management 56 (3): 207–20. 
• Kotchen, Matthew J., and Laura E. Grant. 2011. “Does daylight saving time save energy? Evidence from a natural experiment in Indiana.” Review of Economics and Statistics 93 (4): 1172–85.) 

Smith\’s main focus is on how Daylight Savings Time affects traffic fatalities.  Smith looks at the data on all US vehicle crashes that involve a fatality from 2002-2011. He uses two main comparisons: 1) he looks at days around the shift from Standard Time to DST each year, looking for a \”discontinuity\” or a jump in the rate of fatalities when the change happens; and 2) he compares dates that were covered by DST in some years but not in other years–because the exact date of the shift varies from year to year. He argues that sleep disruption in the spring transition to DST imposes significant costs:

\”DST impacts practicing populations through two primary mechanisms. First, it creates a short-term disruption in sleeping patterns following the spring transition. Using the American Time Use Survey, Barnes and Wagner (2009) find that Americans sleep 40 minutes less on the night of the spring transition, but they do not sleep a significant amount more on the night of the fall transition despite the extra hour. Second, DST creates darker mornings and lighter evenings than would be observed under Standard Time. … In both specifications I find a 5–6.5 percent increase in fatal crashes immediately following the spring transition. Conversely, I find no impact following the fall transition when no significant shock to sleep quantity occurs. …This suggests that the spring transition into DST is responsible for over 30 deaths annually …The total costs of DST due to sleep deprivation could be orders of magnitude larger when worker productivity is considered …\” 

In passing, Smith also mentions a recent studies about effects of Daylight Savings Time on crime. The December 2015 issue of the Review of Economics and Statistics includes \”Under the Cover of Darkness: How Ambient Light Influences Criminal Activity,\” by Jennifer L. Doleac
and Nicholas J. Sanders (97: 5, pp. 1093-1103). They find that cases of robbery drop by 7% in the weeks right after Daylight Savings Time begins.

Since 1970, the Brookings Institution has been publishing the Brookings Papers on Economic Activity twice a year. The papers are invited and policy-relevant, and although they often contain a dose of statistical and theoretical analysis, some effort is made to keep the main themes readable to the patient generalist reader. It is fairly common that themes from BPEA articles become the conventional economic wisdom for a few years after publication.

For those who are interested,  here\’s a quick sketch of the six papers just released for the Spring 2019 issue.

\”On falling neutral real rates, fiscal policy, and the risk of secular stagnation,\” by Lukasz Rachel and Lawrence H. Summers

\”[N]eutral real interest rates would have declined by far more than what has been observed in the industrial world and would in all likelihood be significantly negative but for offsetting fiscal policies over the last generation. Their findings support the idea that mature industrial economies are prone to secular stagnation, underscoring the urgent need for governments to find new sustainable ways of promoting investment and long-term strategies to rekindle private demand.\”

\”A forensic examination of China’s national accounts,\” by Wei Chen, Xilu Chen, Chang-Tai Hsieh, and Zheng (Michael) Song  

\”[N]ew research from a team of economists investigating China’s GDP accounting framework and the data the national account is built on has found that the true growth rate of Chinese GDP has been overstated by almost 2 percentage points annually from 2008 to 2016. Incentives at the local level to report growth have skewed statistics and officials at the national level have failed to rectify this over-reporting.\”

\”On the economics of a carbon tax for the United States,\” by Gilbert E. Metcalf

\”The ever-rising accumulation of greenhouse gases in the Earth’s atmosphere—the most prominent of which is carbon dioxide—is costing the US. The damage from a one-degree Celsius increase in temperature is estimated to equal about 1.2 percent of GDP. Gilbert Metcalf argues that a carbon tax would help reduce US emissions and offers examples from the British Columbian carbon tax to show that a well-designed carbon tax can actually boost jobs and GDP, while reducing carbon emissions.\”

\”Okun revisited: Who benefits most from a strong economy?\” by Stephanie Aaronson, Mary C. Daly, William Wascher, and David W. Wilcox

\”In 1973, economist Arthur Okun asked whether a `high-pressure economy\’ could contribute to the upward mobility of U.S. workers. Over forty years later, Brookings’ Stephanie Aaronson and the Federal Reserve’s Mary Daly, William Wascher, and David Wilcox revisit his central question to ask who the U.S. economy is benefiting today. In particular, how is it benefitting less advantaged and marginalized groups, such as African-Americans, Hispanics, and women?\”

\”Fiscal space and the aftermath of financial crises: How it matters and why,\” by Christina D. Romer and David H. Romer

\”Based on data from 30 OECD countries since 1980, their research finds that the debt ratio does not matter simply because of its impact on current market access or because it is a proxy for market access, but also because of its impact on policymaker choices. Countries with lower debt-to-GDP ratios responded to financial distress with much more expansionary fiscal policy than countries that face a crisis with higher debt.\”

\”A unified approach to measuring u∗,\” by Richard K. Crump, Stefano Eusepi, Marc Giannoni, and Aysegul Sahin

\”The unemployment rate in the United States peaked at 10% in October 2009. Since then, it has declined gradually, reaching below 4% for the first time in almost twenty years— igniting a debate about how sustainable these low levels are and how monetary policy should respond. Much of this debate centers around determining the natural rate of unemployment, u*t, or the unemployment rate at which inflation is stable. Bridging two popular measurement approaches, new research … found that the natural rate of unemployment in the United States stood at 4.1% as of the third quarter of 2018.\”

When it comes to urban mass transit, economists often find themselves arguing that,  the ratio of benefits to costs in most is far better for buses than for rail-based system–unless there is a densely populated urban core where nearly-full trains can run a very frequent intervals. Matthew Turner explains why in \”Local Transportation Policy and Economic Opportunity,\” written for the Hamilton Project  at the Brookings Institution (January 31, 2019).

The main theme of the paper is to think about the current status of U.S. highways, public transit buses, and urban rail cars, and offer some policy suggestions. I\’ll mention a few of those thoughts in a moment, but here\’s what Turner has to say about the opinions of economists on light rail and subways (citations omitted):

Economists have long argued against subways and light rail except as a last resort. This argument follows from the high cost of building fixed-rail urban transport. The following example will illustrate this logic. In 2015 the city of Providence, Rhode Island, considered a short, light rail line. Construction of the track and purchase of the rail cars was forecast at about $100 million in all. The system was projected to carry about 2,600 riders per day. The city intended to finance the project with bonds that would pay 3.5 percent interest. 

For the sake of illustration, suppose the city only paid interest on the cost of the system, and never paid down the principal. In this case, interest on the bonds would be $3.5 million per year. Now suppose that the system achieved its projected ridership and carried 2,600 riders per day for each of the approximately 250 workdays each year. In that case the system would carry about 650,000 people per year. Dividing the annual bond payments by the number of annual riders works out to about $5.40 per rider in interest—and this is before paying to operate the train or maintain the system. If the operating and maintenance costs of this system were the same as for Rhode Island’s bus system, then those costs would be about $5 per rider. (The annual budget of Rhode Island’s bus network is about $100 million and it carries about 20 million passengers per year.) Thus, the proposed system would likely have cost about $10 per rider. With a fare of $2 or $3, most of this cost would have come out of general revenue.

These calculations make clear why economists so often argue against light rail and subway construction projects. They are so expensive that ridership can only begin to cover construction and maintenance costs if the systems operate at close to their physical capacity most of the time; that is, if there are enough riders to fill up the cars when they run on two- to three-minute headways for many hours per day. Since most proposed projects do not meet this standard, economists generally argue against them. Buses can usually move the projected numbers of riders at a fraction of the cost.

My metro area of Minneapolis/St. Paul has been slowly building some light rail lines. When I drive by them, I do a mental comparison to the costs of building dedicated lanes for buses, and shudder a bit. But as Turner points out, the general pattern of urban mass transit in recent decades has tended to be away from buses and in the direction of rail.

The number of urban buses and their average age hasn\’t changed much in the last couple of decades. But the figure on the left shows that the number of passenger trips on urban buses has been falling, and the figure on the right shows average trips per buss have been declining for the last few years and urban buses typically run at about 20% of capacity.

The story for urban rail looks different. The size of the urban rail fleet has been rising. The left-hand figure shows the rise in trips taken by passenger rail. The right-hand side shows that average trips per rail car has been rising, but also that urban rail transit on average runs at less than 20% of capacity.

There are different ways to look at these patterns. One is to just accept that urban mass transit will typically run at 20% of capacity, which means it will run at a financial loss, and provide subsidies as needed. Another approach, which works better with buses, is to review the routes every few years, and do some combination of cutting less-used routes, boosting more-used routes, and experimenting with some altered routes. Personally, I sometimes imagine an alternative future where the money that has gone into light rail systems instead went into better bus stops, including networks networks of small bus terminals where people can easily switch between buses, as well as to subsidizing more frequent bus service, but I fear that ship has sailed in many cities.

What about the urban roads? Turner focuses on US highways, not on all roads and bridges, but offers a couple of thoughts that caught my eye. One is that the quality of urban highways–basically, the number of potholes–seems to be improving over time.

The other thought is to emphasize an old lesson about urban traffic congestion, which is that most congestion is limited to specific time windows. When new road construction untangles a \”hot spot\” where intertwining lanes of traffic get tangled ever day, it can be useful in reducing congestion. But in general, building more lanes for auto traffic tends to bring more people to the highways during those time windows, with little effect on congestion. It doesn\’t pass a cost-benefit economic sense to (say) double the number of highway lanes, but then to make full use of those lanes only a few hours a day for five days out of the week. So the question becomes how to spread out the flow of traffic over more hours. Turner writes (citations omitted)::

At its maximum capacity, an interstate highway lane can carry about 2,200 vehicles per hour. Even if we restrict attention to the period from 5:00 am to midnight, this means that each interstate ighway lane can carry about 37,000 vehicles per day. By comparison, urban interstates near the end of our sample period reach AADT [average annual daily travel] levels of about 13,000. Even this high level is less than 40 percent of the daily maximum capacity of these lanes during waking hours. …

As severe as highway traffic congestion may be, it is not strictly a problem of highway capacity: Daily rates of travel are well below the physical capacity of the interstate. Highway congestion is a problem of having sufficient capacity at peak times. Nearly all interstate highways have surplus, unused capacity at off-peak hours. Obviously, capacity at midnight is not a perfect substitute for capacity at 6:00 p.m. However, capacity at 7:00 p.m. is not so different from capacity at 6:00 p.m., and capacity at 8:00 p.m. is not so different from capacity at 7:00 p.m. Together with the fact that travel speed on a congested highway is highly sensitive to the number of drivers using the road, this means that policies to spread travel out over the day, even slightly, can have large effects on
congestion. Thus, policies to exploit slack, off-peak capacity deserve serious attention.

One possible answer for spreading out the traffic to off-peak times is a congestion charge (discussed here and here. for example). Another might be to encourage a number of employers to vary their regular hours, sliding them forward or back in the day. Another might be to enact rules that keep most big trucks off the urban roads during the most congested crunch time. 

Comparing the recession of 2001 and the recession of 2007-2009 reminded economists of an old lesson: A crash of asset prices in the stock market or housing can be a nasty hit for an economy, but when problems arise where many debts aren\’t going to be repaid in full or on time, the shock to the financial system and the economy can be much worse. For example, one study of the Great Recession found that about one-quarter or one-third of the decline in output was because of the fall in housing prices, while about two-thirds or three-quarters of the decline was related to how problems related to excessive debt worked their way through the financial system 

The theme here is that debt isn\’t necessarily a problem in itself. But when (not if) a bad economic shock hits, then high levels of debt can amplify a moderate economic problem into a severe one.  Robert S. Kaplan explores the issue of \”Corporate Debt as a Potential Amplifier in a Slowdown\” (March 05, 2019). Kaplan is from the Federal Reserve Bank of Dallas, and he\’s one of those from the regional Federal Reserve Banks who rotates back and forth between being a voting member and an alternate on the Federal Open Market Committee–the committee that decides whether interest rates will be rising or falling. Here are some points he makes: 

Nonfinancial corporate debt as a share of GDP is up. It\’s higher than it was at the three previous peaks–each of which preceded a recession. That is, this isn\’t just a matter of banks lending back and forth to each other, or to other financial institutions. 

How are companies borrowing? One method is by issuing bonds. the figure shows that the total corporate bonds outstanding is way up in the last 10 years, now at about $5.7 trillion.  In particular, bonds rated BBB are way up–the rating that is the lowest possible for a bond to still be treated as \”investment grade\” rather than \”high-yield.\” 

Corporations are also taking out more loans. However, many of these loans are called \”leveraged loans.\” A group of banks get together and arrange a loan to a company–often a company with fairly high risks that would prefer not to issue bonds Then the banks combine these leveraged loans into a CLO, a \”collateralized loan obligation.\” 

There\’s nothing new about combining a bunch of loans into a financial security, which can then be purchased by a wide variety of investors like pension funds, private equity funds, and others. The twist comes when the CLO is broken into \”tranches.\” As an example, say that a CLO is broken into 100 pieces and sold to investors.  However, the deal arranged in advance is that if the pool of loans as a whole suffers losses of up to, say, 10%, all of these losses are carried one group of investors. If the losses exceed 10%, this first group of investors is wiped out, and if losses rise to 15%, then these losses are borne by a second group of investors. When this second group is wiped out, then losses from 15-20% are borne by a third group of investors, and so on. Looking at this from the top of the pyramid, there are a group of investors who will keep getting payments from the CLO as scheduled until losses of 40% or even more are experienced. 

If you have invested in a CLO knowing that are on the hook for the first 10% of losses, then that is quite a risky financial security. But if you have invested in a CLO knowing that someone else will bear the first 40% of losses, then your CLO investment is actually rated AAA, based on the likelihood that your money is quite safe. 

In this way, it\’s possible for financial institutions to start off with a bunch of fairly risky floating-rate loans to companies, combine them, tranche them, and end up with a situation where 60% or so of the total value of the debt is AAA-rated. This is what happened in the lead-up to the Great Recession with subprime mortgages: combine into what were called \”collateralized debt obligations,\” tranched and sold. But problems arose for the banking and financial sector when it looked as if a certain amount of lending that had been AAA-rated appeared to be running a substantial risk of default. 

The other financial issue to which we all became attuned back in 2008 is \”rollover risk.\” Say that a company has borrowed money for a fairly short period, perhaps days or months, with the idea that when the debt comes due, it will just borrow more money to repay the first debt. Again, there\’s nothing fundamentally wrong with taking a strong of short-term loans, rather than one longer-term loan. But it does create rollover risk: What if when a firm go to borrow the latest round of money, its financial situation looks worse (perhaps because of some other negative economic shock), and so it becomes impossible for the firm to borrow (or perhaps to borrow only at a prohibitive interest rate).  The firm then cannot repay its earlier loans, and may need to default. The collateralized loan obligations that included loans from that firm start handing out losses. The ratings for bond issued by the firm decline, and all that BBB-rated borrowing just barely into the \”investment grade\” category starts falling into the \”high-yield\” and high risk category. 

Here\’s Kaplan (footnotes omitted): 

Leveraged loans are loans made to highly indebted companies and are typically originated by commercial banks and then syndicated to nonbank investors, including special-purpose vehicles such as collateralized loan obligations (CLOs), private equity funds and other stand-alone entities. The size of the syndicated leveraged loan market, which is primarily made up of nonfinancial corporate borrowers, has increased from $0.6 trillion at the end of 2008 to $1.2 trillion at year-end 2018. Much of this increase has occurred to fund corporate acquisitions and private-equity-backed transactions.

In addition to the syndicated leveraged loan market, there is also a direct lending market for leveraged loans in the U.S. This market primarily involves nonbank financial firms—such as asset managers, private equity funds, business development corporations (BDCs), hedge funds, insurance companies and pension funds—lending directly to smaller, mid-market companies. While it is difficult to obtain precise information on the size of this market, Standard and Poor’s (S&P) estimates that the amount of outstanding leveraged loans in the U.S. direct lending market has grown significantly over the past several years and now likely exceeds several hundred billion dollars. …

The U.S. CLO market has grown from roughly $300 billion at the end of 2008 to $615 billion at the end of 2018. However, it is important to recognize that CLO loan-credit quality today is estimated to be somewhat weaker than 10 years ago.

S&P estimates that in 2018, CLOs and loan mutual funds purchased approximately 60 percent and 20 percent, respectively, of syndicated leveraged loan volumes. It is estimated that less than 10 percent of new issuance was purchased by banks in the U.S. The remaining volumes were purchased by insurance companies, finance companies and others. Because CLOs are today the largest buyer of these syndicated leveraged loans, disruptions to CLO creation could increase the likelihood that leveraged loans remain on bank balance sheets, which could, in turn, limit the ability of affected banks to extend credit during periods of stress.

The US corporate debt situation is by no means foreordained to turn into a disaster. But by tightening up on regulation of banks, much of the action in US corrporate borrowing has been shifting into bond markets, the leveraged loan market, and collateralized loan obligations. There are plenty of echoes here of what made a bad economic situation so much worse in 2008, and plenty of reasons for financial regulators to watch carefully as this pot boils.For some earlier comments on these themes, see: 

• \”Corporate Debt and Leveraged Loans: Financial Snags Ahead?\” (September 21, 2018)
• \”The Dramatic Expansion of Corporate Bonds\” (June 21, 2018)

The American buffalo population declined gradually through much of the 19th century; for example, they were almost entirely gone from the area east of the Mississippi River by the 1830s. But the near-extinction of the buffalo happened in a rush of about a decade, with a decline from 10-15 million in the early 1870s to only a few hundred by the late 1880s. Economic research from a few years ago suggests that the driving force was an 1872 innovation in tanning technology which happened in Europe, and an associated strong demand in Europe for buffalo hides. The 19th century buffalo herds were endangered by many factors, but it was pressure from globalization that drove them to near-extinction.

The US population and workforce is aging. The median age of Americans–that is, half are above this age and half are below–was 28.1 years back in 1970, 32.9 years in 1990, and now is up to about 38 years. If one looks only at the US workforce, the median age rose from  38.3 years in 1996 to 42.0 years by 2016.  By 2035, the Census Bureau projects that the number of over-65 Americans will exceed the number of under-18 Americans for the first time in US history.

As as society ages, it needs to redraw the common expectations of when work will end and retirement will begin. Of course, from an individual perspective, retirement age isn\’t a one-size-fits-all choice. But from an overall social perspective,  Robert L. Clark and John B. Shoven write:

The retirement crisis is in no small measure caused by trying to do the impossible. What we mean by this is that it is nearly impossible to finance 30-year retirements with 40-year careers. Yet with today’s average retirement ages (62 for women and 64 for men), we are trying to do just that. If a 64-/62-year-old couple retired today, the survivor of the couple would have about a 40 percent chance of living an additional 30 years. This division of adult life between work and retirement is at the heart of the financial problems of Social Security and state and local pension plans, and it threatens the adequacy of retirement resources for millions of Americans. 

The Brookings Institution and the Kellogg School of Business hosted a conference on these issues in late January. Here, I\’ll draw on three discussion papers written for that conference:

• \”Working longer policies: Framing the issues,\” by Martin Neil Baily and Benjamin H. Harris (January 31, 2019)
• \”Enhancing work incentives for older workers: Social Security and Medicare proposals to reduce work disincentives,\” by Robert L. Clark and John B. Shoven (January 31, 2019)
• \”Proposals to keep older people in the labor force,\” by Alicia H. Munnell and Abigail N. Walters (January 31, 2019)

Some of the adjustment in which longer life expectancies are accompanied by rising labor force participation is already underway. For example, the graph shows the share of those 55 and older who remain in the workforce. Back in the 1950s, about 42-43% of over-55s were in the labor force. By the early 1990s, the proportion had dipped below 30%. It then started rising again–although the upward momentum stalled, at least for now, around the Great Recession.

From the Baily and Harris paper, here\’s a figure showing labor force participation for older age groups: 55-59, 60-64, 65-69, 70-74, and 75+. Overall labor force participation is rising for each of these groups.

Indeed, many people continue to work after starting to claim Social Security. Here\’s a figure from the Baily-Harris paper:

Again, a later retirement age isn\’t for everyone, of course. But it\’s worth reconsidering the economic incentives that affect people\’s decision to keep working, and whether a few more years of accumulating assets and postponing Social Security payments, might be a good choice. After all, as Baily and Harris note: \”In July 2018, the Social Security Administration reported that the average monthly benefit paid to retired workers was $1,415 per recipient, a rate of $16,980 a year. This is often insufficient to allow a worker to maintain in retirement the same standard of standard of living enjoyed during their working years. Even if there are two people in a household collecting benefits at this rate, $2,830 a month amounts to a still-modest $33,960 a year. Payments for Medicare coverage and out-of-pocket health costs must be paid for out of this total.\”

The three papers between them have several suggestions that would tend to have the effect of encouraging those who are on the margin to push back retirement a little, while still leaving open the option of earlier retirement. 

1) Reframe the message from Social Security. Baily and Harris suggest that one basic step might be just to reframe the message that people receive from Social Security. They write:

When a worker first signs on at the Social Security Administration and discusses their choices for collecting benefits, the framing they are given is about their “full retirement” age. This is 66, rising to 67. Many people take away from this conversation the fact that they should start collecting benefits at the full retirement age, even though they may be much better off to wait until age 70. Waiting increases the level of benefits by about 8 percent for each year until age 70. The message given to older people should be that their maximum benefit comes at age 70 and, though they can collect earlier, this comes at a price in lower benefits for life, and perhaps lower benefits for their spouse.

Munnell and Walters push this theme a little harder by arguing that from a practical and  historical perspective: \”A strong case can be made that age 70 is the nation’s real retirement age.18 It is the age that maintains the same ratio of retirement to working years as in 1940, the age at which Social Security provides solid replacement rates, and the age at which most people are assured of retirement security …\”

Consider their table below. Start back in 1940, when the retirement age was 65. Think about the average years remaining of life expectancy at that time. Because of expanding life expectancies, by the year 2000 a retirement age of 70 years would imply the same expected number of retirement years; by 2020 it would be a retirement age of 71 years, and rising. Thus, a retirement age of 70 now actually means slightly more years of expected retirement than a retirement age of 65 did back in 1940. Similarly, if one looks at the ratio of years of expected retirement to working years, that ratio will also rise over time with life expectancy. The second column shows that if one retires at 69 in 2020, the ratio of retirement years to working years is the same as for a person retiring at age 65 back in 1940.

Notice that this particular proposal is all about making public announcements and managing expectations. It\’s just letting people know, in a clear way, that the current retirement system is set up for them to retire at 70, and that retiring earlier comes with costs in terms of Social Security benefits and long-term financial security.

2) Restructure Social Security and Medicare to reduce work disincentives. The current structure of Social Security and Medicare has some features that look like disincentives to work. The overall idea is that when you hit a certain age like 65 or 70, but you decide to keep working, you should be be able to stop paying into Social Security and Medicare. At that point, you can be considered \”paid-up.\” In addition, you should be able to enroll in Medicare even if you are still working, so your employer don\’t have to buy health insurance for older individuals. And if you start getting Social Security payments, those payments should not be scaled back or penalized in any way if you continue working. Clark and Shoven offer a set of three policies along those lines:

With this in mind, we advocate three policies that could be adopted to make working longer more financially attractive. They are (1) eliminating the Social Security earnings test, (2) establishing a paid-up category for the Social Security payroll tax, and (3) also establishing a paid-up category for the Medicare payroll tax and simultaneously switching Medicare from secondary to primary payer status. We think the most obvious of our policy proposals is eliminating the earnings test. It is widely misunderstood and produces no long-run revenue for Social Security. It discourages work, not because of what it actually is but because it appears to be a major tax on work for those between the ERA [Early Retirement Age] and the FRA [Full Retirement Age]. Both the paid-up idea and the MPP [Medicare as a primary payer] idea have major appeal. 

We estimate if both our second and third proposals were adopted, the net wage would go up by about 40 percent for workers over age 65. This is exactly the age group that is most responsive to wages. In fact, with the higher wages and the resulting additional labor supply, IRS revenues would increase to substantially offset the cost of these programs to Social Security and Medicare. We think the reasonable range for the IRS offset is between 44 and 116 percent of the cost of these new policies. This means, at a minimum, that the offset is significant. With two reasonable assumptions—a labor supply elasticity of 3.0, and a tax rate of 22 percent—the IRS would collect more than enough revenue to completely offset the cost of the initiatives to Social Security and Medicare. Some of these policies, such as the earnings test, were initially implemented during the Great Depression with the explicit goal of encouraging people to retire. We think it is time to turn this thinking on its head and come up with policies to encourage people to work longer.

3) Training older workers to update their digital skills. The symposium authors disagree on whether this kind training is likely to pay off. Baily and Harris describe the mildly optimistic view for at least trying some pilot programs in this way:

Munnell and Walters are skeptical of the potential value of training for older workers, and they are not alone in their skepticism. They point out that the United States spends almost nothing on worker training and that evaluations of worker training programs are often negative. In what may be a triumph of hope over experience, we respectfully disagree, and we think it is worth trying to provide greater training opportunities for older workers using new teaching technologies. One of the reasons companies give for choosing younger workers is that older workers lack proficiency with digital technologies. This is an area where online instruction can make a difference. With guidance from instructors, older workers can improve their capabilities with the programs necessary for both white- and blue-collar jobs. Given what is at stake, it would be worthwhile to establish pilot programs to test whether older workers are willing to take courses and to see whether their employment outcomes are improved as a result.

4) Re-create a Mandatory Retirement Age at 70.  The argument against a mandatory retirement age is that it is a form of age discrimination, and was outlawed (although with a number of exceptions) by amendments passed in 1986 to the Age Discrimination in Employment Act of 1967. But there are also arguments for a mandatory retirement age at age 70: mainly, if employers thinking about hiring someone who is 60 or 65 need to worry that it will be very hard to fire this person without a lawsuite, and in addition that they may be responsible for high health care costs, employers will lean against hiring such workers. Munnell and Walters write:

One tool could be the restoration of some form of mandatory retirement at age 70 (which is substantially higher than mandatory retirement ages in the past), indexed to the age at which Social Security provides the maximum benefit. While employers can dismiss older workers who can no longer do their job, the process is unpleasant and employers worry about age discrimination lawsuits. But employers cannot legally dismiss older workers whose health insurance premiums have risen too high or who have come down with very expensive medical problems. Mandatory retirement would limit the employer’s exposure to the problem of compensation outpacing productivity that typically emerges as workers age. This limit could be key as, given the decline in career employment, hiring decisions have become more important. Putting a lid on tenure could make hiring workers in their 50s and early 60s more attractive, especially for low- and averagewage workers with employers that offer health insurance. …

A default retirement age would have benefits for both retirement planning and workforce management. On the employee side, it would provide a more formal process to enable workers to plan to work longer, begin partial retirement, or enter into full retirement at age 70. On the employer side, a default retirement age would give employers a way to separate from an employee whose compensation outpaces his or her productivity, increasing the attractiveness of hiring older workers.

5) Provide information to employers and the public about the benefits of older workers.  Munnell and Walters write:

Older workers today are healthier, better educated, and more computer savvy than in the past and, in terms of these basic characteristics, look very much like younger workers. In addition, they bring more to the job in terms of skills, experience, and professional contacts. Finally, they are more likely to remain with their employer longer, and longer tenure enhances productivity and increases profitability for the employer. All of these benefits more than offset any remaining cost differentials between older and younger workers.

They offer a number of interesting details and figures along these lines. This figure offers some comparisons between those in the 30-35 and 55-60 age group. If you are an employer hoping to hire someone who will contribute immediately and reliably, and then stay with your company for the long run, the differences between these groups in health, college degree, and use of a computer at home are not large. Of course, job experience is likely to be much greater for the older group. 

As another example, here\’s a study of the number of severe errors  (measured by the cost) made on a Mercedes-Benz assembly line. At least in this study, older workers were much less likely to have severe screw-ups.

Some economic choices can be made frequently, for small stakes, like where to order a pizza. There are plenty of chances for consumers to learn from experience and for producers to have incentives for for efficiency and experimentation. But other economic choices get made only once in a lifetime. The chance to learn from personal experience is close-to-nonexistent. The transition from work to retirement is that kind of choice. It will be heavily shaped by the design of retirement programs, as well as by the norms and common beliefs of employers and workers. But in a time period when life expectancies are rising, then the design of those retirement programs, as well as the common beliefs of employers and the public about retirement, can become out of synch with reality. Time to consider how some adjustments might happen.