Oregon has just become the first to enact a statewide rent control law. Governor Kate Brown said: \”This legislation will provide some immediate relief to Oregonians struggling to keep up with rising rents and a tight rental market.\” That statement is of course literally incorrect, because the Oregonians struggling with rising rents are in exactly the same position now as they were before the passage of the law. The new bill limits future increases in rents for existing renters to 7%, plus inflation, so it is clearly not a rigid limit. It will be interesting to see of that limit on future increases gets ratcheted back in the future.
The city grants landlords and tenants some freedom to negotiate a starting rent, and then caps subsequent rent increases according to agency decree or prescribed formula. This process, called vacancy decontrol, ranges from restrained in New York City and Washington, D.C., to completely unrestricted in California.
There is automatic lease renewal for existing tenants, and landlords usually require “just cause” to evict a tenant. In practice, this means that landlords must prove to a rent board or court that tenants are being evicted for one of a predetermined list of reasons. This prevents landlords from turning over tenants at will and locking in new base rents in response to market shifts.
New buildings are exempt from rent control unless the landlord opts in. Policymakers fear discouraging new supply, so the rules control only existing buildings and commit to not extending controls further.
There are a series of landlord hardship provisions, where landlords may petition to pass certain operating expenses on to tenants in order to cover costs with reasonable profit.
Here\’s a table from Asquith showing how cities compare on these dimensions. As far as I can tell on first acquaintance, Oregon\’s new rent control plan fits right into this general model:
The effects of this kind of moderately flexible rent control are surely less disruptive to housing markets than it would be to have a pure cap on existing rents, the government setting rents for new tenants and new construction, and so on. But supporters of rent control often seem to imply that the such programs are nothing but a way of stopping landlords from exploiting renters. It\’s of course more complex.
The bottom lines from such research are what you might expect. Those who have rent-controlled apartments are more likely to remain there, even when they get jobs that require a longer commute. Landlords try to evade rent control rules, which some success, through methods like converting rental properties to condo ownership and being aggressive about evictions wherever possible. When rent control is in place, both the quantity and quality of rental housing tends to be lower than it would otherwise be. Current renters pay less out of pocket, but future renters have a harder time finding a place and neighborhoods with a higher proportion of renters tend to become run-down. As Asquith writes:
\”These measures were largely intended to be temporary, but like many so-called temporary regimes, rent control is the answer to an emergency situation that never seems to end. One reason for rent control’s persistence is that it redistributes benefits from future tenants to present ones. … rent control is here to stay. The current beneficiaries are well-organized, numerous, and know what they stand to lose from its repeal. The return of rent control to the scholarly agenda is thus propitiously timed to caution policymakers and a frustrated public that while soaring rent burdens are indeed approaching crisis levels in some places, rent control is a policy that has yet to deliver on its promise: affordable rents for all, not just for the few lucky enough to score a controlled apartment.\”
Overdose deaths have increased by more than 1,000 percent since 1980, with each of the past 28 years surpassing the last. With over 70,000 fatal overdoses in 2017 alone — an average of 192 deaths per day — drugs now kill more people than HIV/AIDS at the height of the epidemic in 1995.
When the AIDS epidemic peaked in 1995, it was (appropriately) a major center of public focus and discussion. For example, the best-selling book by Randy Shilts, And the Band Played On: Politics, People, and the AIDS Epidemic, had been published in 1987. Kushner\’s Angels in America had premiered on Broadway four years earlier in 1991, winning a Pulitzer and a Tony. While I\’ve read some insightful writing on America\’s opioid crisis, it does not seem to have led to the same intensity of discussion.
Schnell illustrates some key patterns with this figure. The blue bars show the pattern of opioid prescriptions since 2000. Notice that the sharp rise in prescriptions is also tracked by the red line showing a rise in overdose deaths from commonly prescribed opioids. Then when the level of prescribed opoids levels out around 2010, overdose deaths from heroin start rising quickly, then followed by deaths from synthetic opioids like fentanyl a few years later.
Of course, this rise in deaths is an understatement of the costs of the opioid crisis. Addition has lots of costs other than early death.
As I\’ve argued in the past, the opioid crisis is a problem that was created by the US health care industry. There isn\’t any particular reason in terms of underlying health why opioid prescriptions roughly quadrupled from 2000-2010, and since then have dropped by a quarter. But it seemed like a good idea at the time, and now tens of thousands of people are dying every year.
The rise in overdose deaths from heroin and fentanyl shouldn\’t obscure that deaths from prescription opioids–over overprescribed by the health care industry and then passed along or re-sold–remain part of the problem. Schnell writes:
Non-medical use of prescription opioids remains the second most common type of federally illicit drug use, second only to marijuana, and is over 12 times more common than heroin use (SAMHSA, 2018). And while overdose deaths involving prescription opioids leveled off in 2016, they remain at four-and-a-half times their level from 2000 and account for at least 40 percent of all opioid-related mortality.
Some steps seem to have moderate but real effects. For example, when an average doctor is told that a patient overdosed from their prescription, that doctor cuts back on prescribing opioids by about 10%. Some states have mandatory \”prescription drug monitoring programs.\” which make it harder for someone to take one prescription for an opioid and have it filled at several different pharmacies.
Schnell writes: \”Any single policy in unlikely to be sufficient to address the current crisis. Policies aimed at reducing prescriptions should be paired with broad access to treatment for those with problematic opioid use. And policies must be designed so as to not prevent providers from using opioids as a tool to help manage their patients’ pain.\” All fair enough, btut the rising body count calls for dramatically more, and it\’s not clear what would work.The health care industry dramatically raised its opioid prescriptions, and in doing do has opened Pandora\’s box.
A dynamic and healthy economy will always be undergoing a process of churn: new companies and new jobs starting, but also existing companies and jobs ending. Thus, it\’s been troubling to see articles about \”The Decline in US Entrepreneurship\” (August 4, 2014), a lower rate of business startups, and a decline in how much new firms are offering in terms of job gains.
The Kauffman Foundation does regular surveys of US entrepreneurship. Robert Fairlie, Sameeksha Desai, and A.J. Herrmann wrote up the 2017 National Report on Early Stage Entrepreneuship (February 2019). The report offers some reasons for modest encouragement, but in the end seems overly optimistic to me.
On the positive side, the survey uses data from the nationally representative Current Population Survey conducted by the Census Bureau to calculate the \”rate of new entrepreneurs.\” Specifically: \”The rate of new entrepreneurs captures the percentage of the adult, non-business owner population that starts a business each month. This indicator captures all new business owners, including those who own incorporated or unincorporated businesses, and those who are employers or non-employers.\”
As the report notes: \”The rate of new entrepreneurs in 2017 was 0.33 percent, which reflects that 330 out of every 100,000 adults became new entrepreneurs in an average month.\”
The Census data also lets the authors break down this data in various ways: for example, the rate of new entrepreneurs is about twice as high for immigrants:
Overall, the Kauffman report is optimistic about early-stage entrepreneurship in 2017. But some of the results of the survey, as well as data from the Business Dynamics Statistics produced by the Census Bureau offer some reason for concern.
For example, when one breaks down the rate of new entrepreneurs in more detail, it turns out that those with less than a high school education have a rising rate of starting firms–unlike any other educational group.
In addition: \”Older adults also represent a growing segment of the entrepreneurial population: adults between the ages of 55 and 64 made up 26 percent of new entrepreneurs in 2017, a significant increase over the 19.1 percent they represented in 2007.\” Conversely, these figures suggest that a smaller share of new companies are being started by highly educated workers in their peak earning years.
At least to me, this pattern suggests the possibility that a larger share of new companies are aimed at providing income and independence for their owners, but may be less likely to grow and generate substantial numbers of jobs. Indeed, the Kauffman report also includes this figure, showing that the jobs per 1,000 people from early startups has been declining over time.
The Business Dynamics Statistics is constructed from what is called the Longitudinal Business Database. In turn, this data uses Census data and links the records on individual companies over time. To keep the records of individual companies confidential, the data can only be accessed by qualified researchers through a network of Census Bureau Research Data Centers. However, the website does have a nice data tool for making quick-and-easy graphs of some overall patterns in this data, as well as sector-level and state-level patterns.
Here\’s an example of a figure showing \”Establishment birth rates\” (black line) and \”Establishment exit rate\” (blue line). For example, back in the 1980s it was fairly common for the number of new establishments to be about 15 percent of the total number of firms; now, it\’s about 10%. Both rates of entry and exit have been declining over time, suggesting that new firms are having a harder time getting started and established firms are having an easier time staying in place.
As another example, here a figure for the economy as a whole from the BDS database on the \”job creation rate\” (black line), \”job destruction rate\” (blue line), and \”job creation rate from establishment births\” (orange line). The gap between the job creation rate and the job destruction rate is the overall level of net new jobs for the economy in a year. Fortunately, job creation is above job destruction in most years, except in recessions. But even in years when the US economy is going well, its churning, changing, evolving job market is commonly in a situation where the 13-15% of existing jobs are destroyed, and a slightly higher share of new jobs are being created.
In thinking about US entrepreneurship, the standard concern is that the churning of job market seems to be declining over time. The orange line shows that job creation by new establishments has been declining, too, similar to the finding from the Kauffman data.
A dynamic churning economy is a mixture of benefits for firms and their workers on the rise and costs for firms and their workers who are on the downside. But from an overall perspective, it also represents a shift in resources away from firms producing goods and services that not enough people want to buy, or goods and service that aren\’t being produced at a competitive levels of price and quality. Instead, those resources of workers and capital investment are moving to firms producing the goods and services with the desired mix of price and quality that people do want to purchase. I have argued from time to time that the government could play a larger role in facilitating, or at least not blocking, this process of dynamic movement–especially by assisting workers in transition. But overall, this dynamic process of economic reallocation has been one of the strengths of the US economy, and it is troublesome to see signs that it may be diminishing.
It seems as if there\’s always a majority against the way things are. In a world full of problems and issues, how could it be otherwise? It\’s why politicians are always calling for \”change,\” which strikes me as a slogan that is appealing and concealing in equal measure. Because the real-world problem that arises is when those who are united in their opposition to the way things, and united in favor of \”change,\” need to offer an actual alternative of their own.
When advocating for change, problems and policies are the target. But if you advocate an actual policy, with inevitable costs and tradeoffs, then you become the target.
Consider the mess that has resulted from Brexit — that is, the June 2016 vote in the United Kingdom to leave the European Union. There was (at least at the time) a majority in the UK in favor of leaving the EU. However, there is also apparently a majority against the \”hard exit\” option of crashing out of the EU without a replacement trade agreement in place. And there is a strong majority against Prime Minister Theresa May\’s actual concrete plan for a substitute trade agreement. Sure, there are a variety of other proposals for substitute trade agreement bubbling around. But the EU must also sign on to any substitute agreement. and the EU has an incentive to make it hard and disruptive for any of its members to exit, So it seems plausible to me that there would be a majority against any plausible substitute for May\’s proposal, too.
Easy to be opposed. Easy to advocate \”change.\” But what should the UK do when there is a majority against any achievable policy?
When Democrats controlled the Presidency and Congress in 2010, they managed to wedge through the Patient Protection and Affordable Care Act of 2010. Of course, this new reality immediately became the new target. When Republicans controlled the Presidency and Congress in 2017 and 2018 were unified in expressing their opposition to the 2010 law, but unable to cobble together a bare majority that would wedge through an alternative plan. Meanwhile, most prominent Democrats seem to believe that the flaws of the 2010 legislation are quite sweeping, and thus require enacting a new and substantial set of changes. But when it comes to like whether private health insurance should be shut down in favor of a single-payer government plan like \”Medicare for All,\” my guess is that the Democratic coalition in favor of \”change\” would splinter, too.
Many of the arguments about \”socialism\” have a similar dynamic: it\’s easy to be opposed to the present, but harder to defend concrete alternatives. The political columnist George Will wrote about this dynamic a few weeks back in the Washington Post (available here without a paywall). Will writes:
\”Time was, socialism meant thorough collectivism: state ownership of the means of production (including arable land), distribution, and exchange. When this did not go swimmingly where it was first tried, Lenin said (in 1922) that socialism meant government ownership of the economy’s “commanding heights” — big entities. After many subsequent dilutions, today’s watery conceptions of socialism amount to this: Almost everyone will be nice to almost everyone, using money taken from a few. This means having government distribute, according to its conception of equity, the wealth produced by capitalism. This conception is shaped by muscular factions: the elderly, government employees unions, the steel industry, the sugar growers, and so on and on and on. Some wealth is distributed to the poor; most goes to the “neglected” middle class. Some neglect: The political class talks of little else.\”
The modern attraction of \”socialism\” is typically not that the advocate has a soft spot for Soviet-style or Venezuelan-style economic governance, or even that the advocate knows much about the actual trade-offs and choices of \”socialist\” countries like those of northern Europe. Instead, it\’s a watery notion of \”socialism\” as meaning \”nice.\” This usage has a long tradition. As Will points out:
In his volume in the Oxford History of the United States (The Republic for Which It Stands) covering 1865–1896, Stanford’s Richard White says that John Bates Clark, the leading economist of that era, said “true socialism” is “economic republicanism,” which meant more cooperation and less individualism. Others saw socialism as “a system of social ethics.” All was vagueness.
This lack of clarity becomes a problem when advocates of socialism stop targeting the undoubted ills of society and instead propose actual changes of their own–thus making themselves the target for others. Agreeing on a critique, on opposing, on change, is easy. Agreeing on alternatives is hard. Will quotes an old political proverb: \”Two American socialists equals three factions.\”
It\’s useful to point out social problems. But when those problems are long-standing and fairly well-known, pointing them out again and again offers little additional benefit. In my mind, calling for \”change\” is not very meaningful without saying what change is actually desired. Indeed, when someone points out a problem, I don\’t even know whether they are doing so in a constructive or a destructive spirit until I have some sense of their preferred alternatives. Calls for \”change\” can be intoxicating. But it feels to me that we have a tendency to lionize those who are uncompromising in their criticisms, in a way that makes it harder for those who are trying to work through costs and tradeoffs to enunciate a policy with practical gains.
\”In this context, this paper will look at the relationship between the evolution of GNH and the evolution of GDP and other macroeconomic indicators. … Using the case of Bhutan, this paper will examine the relationship between GDP growth and happiness (or well-being), using subjective well-being measures such as surveys of nationally-representative samples of the population (such as the GNH Surveys). That is, we will examine whether GDP growth is a useful proxy for and conduit to happiness, and whether happiness-driven policies can help raise economic growth rates.\”
At present, the working definition of Gross National Happiness in Bhutan involves four \”pillars:\” Sustainable and Equitable Social and Economic Development, Preservation and Promotion of Culture Conservation of the Environment, and Good Governance. These in turn divided into nine \”domains,\” which are then divided into 33 \”indicators,\” which are measured by 124 variables, each with their own weights. For a rough sense, here are the nine \”domains\” and what they are meant to cover.
Although the idea of Gross National Happiness has often been invoked in Bhutan since the 1970s, attempts to measure it with 124 indicators are more recent, and in fact have only been done in directly are in 2008, 2010, and 2015. The authors explain: \”To measure GNH, a profile is created for each person showing in which of 33 grouped indicators (formed from the abovementioned 124 indicator variables) the person has achieved sufficiency. As noted by the Gross National Happiness Commission (2015), not all people need to be sufficient in each of the 124 variables to be happy. Accordingly, in tabulating the Survey results the Commission divides Bhutanese into four groups depending on their degree of happiness, using three cutoffs: 50%, 66% and 77%.\”
Thus, a comparison between growth of per capita GDP in Bhutan and the Gross National Happiness Index for these three years looks like this.
From 1980 to 2017, Bhutan\’s per capita GDP rose by a factor of 6, thanks in part to the development of its energy sector and to expanding trade ties with India. But given the data, it doesn\’t seem possible to say if Gross National Happiness has also risen sixfold.
There are also survey measures of happiness, in which people are asked to rank their own level of happiness: for example, in the World Happiness Repot 2018, \”the happiness ranking of Bhutan fell from 84th (2013–15) in the world to 97th (2015–17) out of 156 countries.\”
So what are we to make of Bhutan\’s Gross National Happiness?
1) It is bog standard economics that GDP was never intended to measure happiness, nor to measure broader social welfare. Any intro econ textbook makes the point. A well-known comment from \”Robert Kennedy on Shortcomings of GDP in 1968\” (January 30, 2012) make the point more poetically. But for those who need a reminder that social welfare is based on a wide variety of outcomes, not just GDP, I suppose a reminder about Gross National Happiness might be useful.
2) Bhutan\’s measurement of 124 weighted indicator variables, and their distribution through the population, is probably about as good a way of measuring Gross National Happiness as any other, and better than some. But it\’s also pretty arbitrary in its own way.
3) The interesting question about GDP and social welfare isn\’t whether they are identical, but whether they tend to rise together in a broad sense. For example, countries with higher per capita income also tend to have more education and health care, better housing and nutrition, more participatory governance, and a variety of other good things. .A few years ago I wrote about \”GDP and Social Welfare in the Long Run\” (April 6, 2015), or see \”Why GDP Growth is Good\” (October 11, 2012).
4) \”Happiness\” is of course a tricky subject, which is why it\’s the stuff of literature and love. After a lot of consideration, Daniel Kahneman has argued that \”people don\’t want to be happy.\” Instead, they want to have a satisfactory narrative that they can tell themselves about how their life is unfolding. If incomes, education, and life expectancy rise over, say, 40-50 years but on a scale of 1-10 people don\’t express greater \”happiness\” with their live, does that really mean they would be equally happy with lower incomes, education and life expectancy–especially if other countries in the world were continuing to make gains on these dimensions? There is an ongoing argument over whether those who have higher income express more happiness because they get to consume more, or because they feel good about comparing themselves who are worse off. It\’s easy to say that \”money doesn\’t bring happiness,\” and there\’s some truth in the claim. But for most of us, if we lived in a country with lower income levels and could watch the rest of the world through the internet and television, it would bug us at least a little, now and then.
It seems to me easy enough to make the case that looking at Gross National Happiness as is better than an exclusive focus on doing nothing but boosting short-term GDP. But outside the fictional mustachio-twirling econo-villains of anti-capitalist comic books, no one actually believes in an exclusive focus on GDP. For me as an outsider, it\’s hard to see how Gross National Happiness has made Bhutan\’s development strategy different. After all, lots of countries at all income levels emphasize lots of goals other than short-term GDP. And the government of Bhutan pays considerable attention to GDP, as the authors note, \”While there is importance given to GNH in Bhutan, governmental organizations (especially commerce related ones) focus keen attention on GDP and how it measures trade, commerce and the economic prosperity of the country. In addition, the IMF has provided a great deal of technical assistance to Bhutan to help improve its national accounts …\”
My own favorite comment on the connection from GDP to social welfare is from a 1986 essay by Robert Solow (\”James Meade at Eighty,\” Economic Journal, December 1986, pp. 986-988), where he wrote: \”If you have to be obsessed by something, maximizing real National Income is not a bad choice.\” At least to me, the clear implication is that it\’s perhaps better not to be obsessed by one number, and instead to cultivate a broader and multidimensional perspective. If you want to refer to that mix of statistics as Gross National Happiness, no harm is done. But yes, if you need to pick one number out of all the rest (and again, you don\’t!), real per capita GDP isn\’t a bad choice. To put it another way, a high or rising GDP certainly doesn\’t assure a high level of social welfare, but it makes it easier to accomplish those goals than a low and falling GDP.
The big selling points for a universal basic income are simplicity and work incentives. The simplicity arises because with a universal basic income, there are no qualifications to satisfy or forms to fill out. People just receive it, regardless of factors like income levels or whether they have a job. There are not bureaucratic costs of determining eligibility, and no stigma of applying for such benefits or in receiving them.
The gains for work incentives arise because many programs aimed at helping the poor have a built-in feature that as you earn more on the job, you receive less in government assistance. From one standpoint, this seems logical and fair. But economists have been quick to point out that if someone loses a dollar of government benefits every time they gain a dollar from working, the implicit tax rate is 100%. When there are a number of different programs aimed at the working poor, all phasing out on their own individual schedules as income rises, the result can be that low-income people face very high implicit tax rates–even in some situations close to 100%. But a universal basic income does not decline or phase out as someone earns more income.
\”[T]he amount of basic income was 560 euros per month. This corresponded to the monthly net amount of the basic unemployment allowance and the labour market subsidy provided by Kela (the Social Insurance Institution of Finland). Two thousand persons aged 25–58 years who received an unemployment benefit from Kela in November 2016 were selected for the actual experiment. They were selected through random sampling without any regional or other emphasis. … Despite its deficiencies, the Finnish experiment is exceptional from an international perspective in that participation in the experiment was compulsory and it was designed as a randomised field experiment.\”
The effects on employment during the first year of the experiment (that is in 2017) turn out to be essentially nonexistent
Of the persons who in November 2016 received an unemployment benefit from Kela, 57 per cent had no earnings or income from self-employment in 2017. The figures also reveal that the average income of those who had been in employment was only around 9,920 euros. … [T]he experiment did not have any effect on employment status during the first year of the experiment. The number of annual days in employment for the group that received a basic income is on average about half a day higher than for the control group. Overall, receipt of any positive earnings or income from self-employment, either from the open labour market or the subsidised labour market, is about one percentage point more common in the treatment group. However, resulting earnings and incomes from self-employment turned out to be 21 euros smaller.
In other results based on phone surveys, those who received the universal basic income expressed greater confident in their own future, and they expressed a belief that it would be easier to accept a future job offer. It will be interesting to see if these attitudes lead to actually higher employment as the 2018 data becomes available .
It\’s important to note that like all practical experiments, the Finnish experiment was not a completely pure universal basic income. For example, the experiment targeted the long-term unemployed, not the working poor as a group, and those receiving the benefit still dealt with the government for other support programs, like housing assistance. In adidtion, the experiment would need to be considered in the context of Finland\’s overall labor market. So the results are preliminary in a number of ways. But it\’s hard to spin them as encouraging.
For a pragmatic discussion of how a true universal basic income–that is, a payment to everyone that does not phase out regardless of income–might work in a US context, interested readers might start with Universal Basic Income: A Thought Experiment\” (July 29, 2014). If one took all the money from US (nonhealth) antipoverty programs, as well as a number of tax breaks that tend to benefit the middle-and upper-class, one could fund a universal basic income for the US of about $5800 per year.
China has a remarkably high savings rate in a typical year–and sometimes its higher than that. In fact, the main reason for China\’s high trade surpluses is that with such a high savings rate, China doesn\’t consume either a lot of imports or domestically produced goods. A reason that China can invest so much, year after year, is that the investment is financed by high savings rates. A standard recommendation for China\’s economy for at least the last 15 years or so is to \”rebalance\” toward being an economy driven by domestic consumption, not by investment.
Here\’s a comparison of national savings around the world in 2017. The US had national savings of 18.9% of GDP. The savings rate for the world as a whole was 26.4%. China was saving 45.8% of GDP, easily more than double the US level. And China\’s national savings rate is actually down a bit from when it peaked at 52% of GDP back in 2008.
To get a sense of what these high rates of saving imply for the mixture of consumption and investment in aneconomy, consider this figure. The horizontal axis shows a country\’s level of consumption; the vertical axis shows its level of fixed capital investment. China is way in the upper left, with low consumption and high investment,. The authors write: \”With GDP per capita in PPP terms being similar to Brazil’s, consumption per capita in China is only comparable to Nigeria. If Chinese households consumed comparably to Brazilian households, their consumption levels would be more than double.\” One sometimes hears saying applied to China: \”Country rich, people poor.\” The high savings rate is why it can feel that way.
Government in China has not run especially large budget deficits or budget surpluses, so the mixture of household and corporate saving is what drives China\’s high savings rate. Corporate savings in China were quite high in the early 2000s, but as a percent of GDP are now pretty much in line with global averages. China\’s high savings rate thus traces to its household sector. The authors write:
\”Household savings in China have been trending up since the early 1990s and peaked at 25 percent in 2010 and moderated slightly in recent years. Globally, household savings have been falling (from 14 percent of GDP in 1980 to about 7 percent today). The diverging trend has led to an increasing gap between China and the rest of the world. At 23 percent of GDP, today China’s household savings are 15 percentage points higher than the global average and constitute the main drivers of higher national savings in China.\”
Why do China\’s households save so much? Some of the likely factors include:
Low birthrates and the one-child policy meant less need to spend on children, but less ability to rely on children in retirement–and thus an incentive for more saving. This can explain perhaps half of the rise in China\’s household savings rate in recent decades.
As China\’s economy shifted from state-owned to privately owned firms in the 1990s, the safety net got a lot thinner. The authors write:
For example, the health care coverage of urban workers declined by 17 percentage points between 1990 and 2000. Furthermore, the average replacement rate for urban workers (pension benefits in percent of wages) dropped sharply from close to 80 percent to below 50 percent (He at al., 2017). Nationwide, individuals have been paying increasingly larger shares of healthcare expenditures out of pocket, rising from 20 percent in 1978 to a peak of 60 percent in 2000. In addition, households also began paying more for education out of their own pocket, rising from 2 percent in 1990 to 13 percent in 2001.
Up until just a few years ago, the options for making financial investments were fairly limited. Interest rates were controlled, and many people didn\’t have access to a wide range of other financial instruments. So if you wanted to accumulate a certain level of wealth by retirement, and your financial options paid only low interest rates, you had to save a lot.
Where is China\’s high savings rate headed? Countries across east Asia have seen their household saving rate rise in a way similar to China, but then decline fairly rapidly. The authors write:
East Asian economies experienced a rapid decline in household savings after the peak. Japan’s household savings rate peaked in 1974 at about 25 percent and has fallen to almost zero. In Korea, household savings peaked in the early 1990s at 27 percent, and are at about 15 percent today. Similarly, household savings in Taiwan POC also fell rapidly after peaking in 1993 at about 30 percent, although they stabilized a decade later at about 20 percent. Household savings in these countries or areas peaked at income levels similar to China’s, suggesting that the stage of development plays an important role in savings dynamics. In addition, microdata suggest that the decline in aggregate household savings in those countries or areas was driven by lower savings rates across all income deciles, although the drop was much more pronounced for low-income households, likely reflecting the improvement in social safety nets. With the aging population and strengthening of the social safety net, China is likely to follow the regional trend.
As China\’s population ages, household savings rates will decline and public pressures for more spending on pensions and health care will rise. Thus, the movement to lower savings rates could be reinforced if China\’s government shifted its pattern of spending from investment-heavy to more consumption-heavy. Here\’s a figure showing public investment as a share of GDP across a number of countries.
And here\’s a figure showing government spending on consumption-related areas like health, education, social assistance, and pensions. The red diamond shows average levels of spending in these areas as a share of GDP for OECD countries. The yellow diamonds show the average for emerging markets around the world. The blue bars show China. .
In a low-saving, low-investment economy like the US, it\’s a little hard to conceive that its possible for savings and investment rates to be too high for a country\’s economic health. But that\’s where China has been, and shifting away from established patterns is rarely simple.
But those with medium-term memories will remember that a scandal erupted around LIBOR in 2010. But you may not know that as a result, LIBOR is probably going to disappear in the next few years to be replaced by SOFR. Since several hundred trillion dollars of financial contracts will be different as a result, it\’s useful to have at least some sense of what the change means
LIBOR stands for the London Interbank Offered Rate. It\’s a benchmark interest rate, which means that when LIBOR goes up or down, the payments owed in a few hundred trillion dollars of contracts go up or down, too. The problem is that LIBOR has been calculates as a survey response to hypothetical question. Romero explains:
LIBOR is based on how much banks pay to borrow from one another. Each day, a panel of 20 international banks responds to the question, \”At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?\” The highest and lowest responses are excluded, and the remaining responses are averaged. Not every bank responds for every currency; 11 banks report for the franc, while 16 banks report for the dollar and the pound. For each of the five currencies, LIBOR is published for seven different maturities, ranging from overnight to 12 months. In total, 35 rates are published every applicable London business day.
About 95 percent of the outstanding contracts based on LIBOR are for derivatives. (See chart below.) It\’s also used as a reference for other securities and for variable rate loans, such as private student loans and adjustable-rate mortgages (ARMs). In 2012, the Cleveland Fed calculated that about 80 percent of subprime ARMs were indexed to LIBOR, as well as about 45 percent of prime ARMs. Prior to the financial crisis, essentially all subprime ARMs were linked to LIBOR.
What happened in the LIBOR scandal was that some too-smart traders at Barclay\’s, JP Morgan Chase, and Citigroup figured out that if just a few of the people answering the LIBOR survey would slant their responses just a bit, this benchmark interest rate could be manipulated a tiny bit higher or lower. And any trader who knows where the benchmark is headed–even if the movement is a tiny one–is well-positioned to consistently make a lot of money. Romero writes:
As regulators investigated … [b]eginning at least in 2003, banks had been submitting LIBOR reports that would benefit their trading positions. Rate submitters and traders at different banks and brokerages also conspired with each other to manipulate LIBOR, promising each other steaks, Champagne, and Ferraris (among other perks). Internal emails and instant messages revealed the scheme. As one trader wrote, \”Sorry to be a pain but just to remind you the importance of a low fixing for us today.\” Another wondered \”if it suits you guys on hiking up 1bp on the 6mth Libor in JPY [one basis point on the six- month LIBOR in Japanese yen] … it will help our position tremendously.\” At least 11 financial institutions faced fines and criminal charges from multiple international agencies, including the Commodity Futures Trading Commission (CFTC) and the Justice Department in the United States. Separately, in 2014 the FDIC sued 16 global banks for manipulating LIBOR, alleging that their actions had caused \”substantial losses\” for nearly 40 banks that went bankrupt during the financial crisis.
Although LIBOR has continued under stricter management, it seems clear that it was a bad idea to have a benchmark interest rate determined by answers to a survey. Instead, the challenge was to choose an interest rate for very safe borrowing–remember, LIBOR was banks borrowing from each other for very short terms, including overnight–but determined in a market that had lots of liquidity and volume.
Bottom line: It recommends using the SOFR as the preferred benchmark interest rate, which stands for Secured Overnight Financing Rate. It refers to the cost of borrowing which is extremely safe, because the borrowing is only overnight, and there are Treasury securities used as collateral for rthe borrowing. The SOFR rate is based on a market with about $800 billion in daily transactions, and this kind of overnight borrowing doesn\’t just include banks, but covers a wider range of financial institutions. The New York Fed publishes the SOFR rate every morning at 8 eastern time.
But perhaps the best reason for using SOFR is that an agreed-upon benchmark interest rate is needed, and LIBOR is going away. As Romero reports, banks have been trying to duck out of answering the LIBOR survey for a few years now, and have continued to participate only because of threats from regulators. After all, with hundreds of trillions of financial contracts using LIBOR, it was important for the stability of global financial markets that the reference rate didn\’t become volatile or vanish altogether. But by around 2021, the financial regulators are ready to let LIBOR die. New financial contracts are often now being written with SOFR, instead.
For most of us, the shift from LIBOR to SOFR doesn\’t affect our daily lives. But when you are discussing a risk-free interest rate, or a benchmark interest rate for a contract or mortgage with adjustable rates, you are soon going to stop hearing about LIBOR. For practical purposes, just remember that SOFR serves the same benchmark interest rate function.
From \”A Policy Agenda to Develop Human Capital for the Modern Economy,\” by Austan Goolsbee, Glenn Hubbard, and Amy Ganz:
The United States should make a bold and dedicated commitment to increasing the skills and productivity of its workforce by leveraging the potential of the community college sector. We propose a federal grant program to provide new funding to community colleges, contingent on institutional outcomes in degree completion rates and labor market outcomes. We believe a program of a similar scale to the 19th century Morrill Land Grant Program, which dramatically expanded access to higher education for working-class Americans, is needed to ensure our workforce meets the demands of the modern economy. …
In 1910, fewer than 10% of Americans had a high school degree. By 1935, nearly 40% of the population had earned their degrees. This inflection point came from substantial new investments in the nation’s education resources. We aim to achieve increases of a similar magnitude …by 2030:
Close the completion gap between two-year college students aged 18 to 24 and their peers at four-year institutions by increasing the average completion/transfer rate among 18- to 24-year-olds at community colleges from 37.5% to 60% by 2030.3 This would result in 3.6 million additional 18- to 24-year-olds with college degrees in 2030.
Increase the share of Americans aged 25 to 64 with a college degree or other high-quality credential from 46.9% to 65% by 2030, which reflects the expected share of jobs requiring advanced skills by that year. This goal would require 28 million additional workers to earn first-time degrees or high-quality credentials by 2030. …
We estimate an annual investment of $22 billion.
2) A Boost for Apprenticeships
From \”Scaling Apprenticeship to Increase Human Capital,\” by Robert I. Lerman
[T]he United States has lagged far behind other developed countries—countries like Germany and Switzerland, but also Australia, Canada, and England—in creating apprenticeships. In these countries, apprentices constitute about 2.5-3.0% of the labor force, or about 10 times the U.S. rate. Increasing the availability of apprenticeships would increase youth employment and wages, improve workers’ transitions from school to careers, upgrade those skills that employers most value, broaden access to rewarding careers, increase economic productivity, and contribute to positive returns for employers and workers. …
The experiences of Australia, Canada, and England demonstrate that scaling apprenticeship is quite possible, even outside countries with a strong tradition of apprenticeship. While none of these countries have the strong apprenticeship tradition seen in countries like Austria, Germany, or Switzerland, they have nonetheless grown significant programs. In fact, if apprenticeships as a share of the U.S. labor force reached the levels already achieved in Australia, Canada, and England (on average), the United States would attain over 4 million apprenticeships, about 9 times the current number of registered apprenticeships in the civilian sector. …
Overall, the federal government has devoted less than $30 million (per year) to the Office of Apprenticeship (OA) to supervise, market, regulate, and publicize the system. Many states have only one employee working under their OA. Were the United States to spend what Britain spends annually on apprenticeship, adjusting for differences in the size and composition of the labor force, it would provide at least $9 billion per year for apprenticeship. In fact, the British government spends as much on advertising its apprenticeship programs as the entire U.S. budget for apprenticeship. …
Today, funding for the “academic only” approach to skill development in the United States dwarfs the very limited amounts available to market and support apprenticeship. Yet apprenticeship programs yield far higher and more immediate gains in earnings than do community or career college programs and cost students and the government far less.
3) Sharing the Costs of Higher Minimum Wages with a Tax Credit
From \”The Higher Wages Tax Credit,\” by David Neumark
In recent years, there has been a torrent of state and local minimum wage increases. For example, as of the end of 2017, 30 states (including the District of Columbia) had minimum wages above the $7.25 federal minimum wage, with an average difference of 26%. At the state and local level, California, New York, Seattle, and the District of Columbia have or will soon have a $15 minimum wage; other localities may follow. Finally, a change in the national political alignment could result in a $15 national minimum. …
While the effects of minimum wage increases are contested, it is impossible to dismiss the sizeable body of evidence that suggests minimum wage hikes reduce employment among the least skilled (including recent research that addresses criticisms of earlier evidence). In addition, it is uncontested that higher minimum wages do not target low-income families very well, in part because of the large number of teenagers earning the minimum wage, and in part because poverty is more strongly related to whether or not one works and how many hours one works, rather than low wages ….
I propose a Higher Wages Tax Credit (HWTC) to partially offset the costs imposed by minimum wage increases on firms that employ low-skilled labor. Following a minimum wage increase, the HWTC would provide a tax credit of 50% of the difference between the prior minimum wage and the new minimum wage, for each hour of labor employed; the credit would phase out at wages higher than the minimum wage, and as wage inflation erodes the real cost of higher nominal minimum wages. The HWTC would reduce the incentive for employers to substitute away from low-skilled workers in the face of minimum wage increases, thus mitigating the potential adverse effects of minimum wage increases while simultaneously preserving and possibly enhancing some of the benefits of minimum wage hikes.
4) Minimum Zoning to Ease Movement to Higher-Cost, Higher-Wage Locations
From \”How Minimum Zoning Mandates Can Improve Housing Markets and Expand Opportunity,\” by Joshua D. Gottlieb
Dramatic differences in income, productivity, and housing costs within the United States make geographic mobility important for spreading prosperity. But Americans’ ability to move to places like San Francisco, Boston, and New York in search of economic opportunities is limited by severe restrictions on new housing supply in these productive places.State-level Minimum Zoning Mandates (MZMs) allowing landowners to build at a state-guaranteed minimum density, even in municipalities resistant to development, would be an effective means of encouraging denser housing development. These MZMs would improve housing affordability, spread economic opportunity more broadly, and limit the environmental impact of new development. …
I propose that state governments adopt Minimum Zoning Mandates (MZMs). These MZMs would be explicit zoning codes that provide a baseline minimum density that land owners, such as developers, can invoke when municipal zoning and permitting processes prevent useful development.
The MZMs should provide all land owners with a meaningful right to build housing up to a certain density significantly beyond single-family houses. Medium-density rowhouses and small apartment buildings should be allowed in every location where any sort of development is allowed. This is the type of density that is associated with some of America’s most-loved neighborhoods: Greenwich Village and other parts of Lower Manhattan, Boston’s North End and South End, the Mission in San Francisco, Lincoln Park in Chicago, and much of historic Philadelphia. It meshes well with existing single-family homes, as we see in places like Cambridge, Massachusetts. MZMs need not enable high-rise condo towers that would change the character of leafy, low-density neighborhoods. Even medium-density zoning rules could generate interesting new neighborhoods and resolve the housing shortages in productive cities.
_____________________________ Full Table of Contents
Part I: Developing Human Capital for the Modern, Global Economy
\”A Policy Agenda to Develop Human Capital for the Modern Economy,\” by Glenn Hubbard, Austan Goolsbee, and Amy Ganz \”What Works in Career and Technical Education (CTE)? A Review of Evidence and Suggested Policy Directions,\” by Ann Huff Stevens \”Scaling Apprenticeship to Increase Human Capital,\” by Robert I. Lerman \”The Challenges of Leveraging Online Education for Economically Vulnerable Mid-Career Americans,\” by Joshua Goodman
Part II: Increasing Prime-Age Labor Force Participation
\”A Policymaker’s Guide to Labor Force Participation,\” Keith Hennessey and Bruce Reed \”Restoring Economic Opportunity for `The People Left Behind\’: Employment Strategies for Rural America.\” by James P. Ziliak \”Policies to Reintegrate Former Inmates Into the Labor Force,\” by Manudeep Bhuller, Gordon B. Dahl, and Katrine V. Løken
Part III: Promoting Private Sector Wage Growth and Job Creation
\”Economic Strategy for Higher Wages and Expanded Labor Participation,\” Jason Furman and Phillip Swagel \”The Link Between Wages and Productivity Is Strong,\” by Michael R. Strain \”Creating Economic Opportunity for More Americans Through Productivity Growth,\” by Chad Syverson \”The Higher Wages Tax Credit,\” by David Neumark \”How Minimum Zoning Mandates Can Improve Housing Markets and Expand Opportunity.\” bny Joshua D. Gottlieb
MAGNUS LAUPA • NEW YORK TIMES Outside an H&M store in Stockholm, the Swedish capital. The country is capitalist, but Scandinavian capitalism is different from that in the United States.
It is a truth universally acknowledged that arguing about the definitions of terms like “capitalism” and “socialism” is a waste of time. So I will simply assert that the world has many flavors of capitalism — U.S./British, Japanese, Scandinavian, German, French/Italian/Southern European and others.
I’ve known some genuine socialists who favor outright government ownership and control of the means of production, which necessarily means government making all the decisions about what is produced, where it is produced, how it is priced, who gets hired and how much workers get paid.
But most people who talk a socialist game, when asked for real-world examples, tend to sidestep the more extreme (and less attractive) possibilities and point to European countries — in particular, to Northern European countries like Sweden, Denmark, Norway and sometimes Finland.
The genuine socialists I know view these countries as sellouts to capitalism. The Scandinavians themselves are quick to deny that they are socialists, too. For example, the prime minister of Denmark gave a talk at Harvard in 2015 and said:
“I know that some people in the U.S. associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy. … The Nordic model is an expanded welfare state which provides a high level of security for its citizens, but it is also a successful market economy with much freedom to pursue your dreams and live your life as you wish.”
If we want to avoid quibbling over the s-word and instead just refer to a Scandinavian style of capitalism, what are some of its key elements?
The question is tricky, because the Scandinavian style of capitalism has gone through several stages in the last 50 years or so. In a 1997 article, the prominent Swedish economist Assar Lindbeck described how in the decades after World War II Sweden had a growing economy, generous public services, full employment and a fairly equal distribution of income. But this was followed by slower growth in the 1970s and a collapse of full employment and rise of inequality by the early 1990s.
In Lindbeck’s words, the Swedish model looked “less idyllic” by the early 1990s. Problems include “disincentive effects, problems of moral hazard and cheating with taxes and benefits, deficiencies in competition … as well as inflexible relative wages … [and] the ever higher ambitions of politicians to expand various government programs, and the gradually rising ambitions of union officials to compress the distribution of wages as well as to expand the powers of unions.”
In short, the Swedes themselves didn’t think the Scandinavian model of capitalism was working all that well in the 1980s and early 1990s, and they carried out a hardheaded redesign.
For example, there was a broad recognition that as a small, market-oriented economy open to international trade, Sweden needed healthy companies and skilled workers, so top tax rates were rolled back. Many government benefit programs were redesigned and rolled back. A ceiling was put on public spending. Sweden’s ratio of national debt to GDP fell from 80 percent in 1995 to 41 percent in 2017.
The U.S. system of capitalism relies on financial incentives to encourage work. In the Scandinavian model of capitalism, high taxes reduce the financial incentive to work but pay for social services that encourage work.
Henrik Jacobsen Kleven described this trade-off in a 2014 article. He calculated that “in the Scandinavian countries … an average worker entering employment will be able to increase consumption by only 20 percent of earned income due to the combined effect of higher taxes and lower transfers. By contrast, the average worker in the United States gets to keep 63 percent of earnings when accounting for the full effect of the tax and welfare system.”
But Kleven also points out that the higher Scandinavian taxes finance government policies that make it easier for many people to work — in particular “provision of child care, preschool, and elderly care.” He writes: “Even though these programs are typically universal (and therefore available to both working and nonworking families), they effectively subsidize labor supply by lowering the prices of goods that are complementary to working. … [T]he Scandinavian countries … spend more on such [labor] participation subsidies … than any other country. …”
The resulting higher tax burden is substantial. The total tax burden in the Scandinavian countries is almost half of GDP, while the combined spending of all U.S. levels of government is about 38 percent of GDP.
Some in the U.S. claim a Scandinavian level of social protection could be financed by taxing corporations and the rich. The Scandinavians recognized the unreality of that hope back in the 1990s. An October 2018 report from the Council of Economic Advisers (CEA) noted:
“The Nordic countries themselves recognized the economic harm of high tax rates in terms of creating and retaining businesses and motivating work effort, which is why their marginal tax rates on personal and corporate income have fallen 20 or 30 points, or more, from their peaks in the 1970s and 1980s.”
In addition, the Scandinavian countries impose a value-added tax of 24 or 25 percent on purchases. (A VAT functions like a sales tax, although it is collected from producers rather than at the point of sale.) The CEA report notes that, as a result, taxation of households in the Scandinavian economies is overall less progressive than in the U.S.
The Scandinavian model of capitalism has more equal economic outcomes. But for advocates for a higher U.S. minimum wage, it’s perhaps worth noting that the Scandinavian countries do not have minimum wage laws. However, rates of unionization are typically 70-90 percent of the workforce in Norway, Denmark and Sweden, as opposed to about 11 percent of the U.S. workforce. Negotiating pressure from these unions is a powerful reason for the greater equality of wages and benefits for labor.
Last fall, New York Times columnist Paul Krugman illustrated the greater economic equality in Scandinavian countries by citing estimates of income levels for people at different points in the income distribution. This comparison looks at income after taxes are paid and transfer payments are received.
Below about the 30th percentile of the income distribution, income levels are higher in Nordic countries. This shows both the greater equality of wages and greater government support for economic equality in those countries. (For perspective, the 30th percentile of the U.S. income distribution is roughly $32,000 per year.)
A low-income person at the 10-20th income percentile in Denmark or Finland has an income about 20 percent higher than an American’s at that place in the U.S. income distribution. But among middle-income people in the 55th-60th percentile of the income distribution, incomes in Denmark and Finland are 20 percent below those of the similar person in the U.S. income distribution. Overall, average income levels are about 20 percent higher in the United States.
(Health care benefits provided through government programs are not included in the estimates cited by Krugman. The omission is interesting to consider. U.S. health care spending per person is much higher than in other countries. Thus, including it would make U.S. income levels look much higher — and would probably close much of the income gap at lower levels of income.)
In my experience, a number of the features of the Scandinavian system of capitalism come as a surprise to Americans. Here are some additional examples:
• In the early 1990s, Sweden set up its equivalent of the K-12 school system so that parents have vouchers that can be used at public, private and for-profit schools.
• College tuition in the Nordic countries is free to the student. However, college graduates in these countries don’t earn substantially higher wages. As a result, Americans are more likely to attend college, even needing to pay for it.
• The Scandinavian countries have national programs of health insurance coverage, but with substantial co-payments. For example, data from the Organization for Economic Cooperation and Development (OECD) suggest that out-of-pocket health care spending is only a little lower in Norway than in the United States.
• Although the Scandinavian countries have greater government regulation of labor markets than the U.S., they tend to have lower levels of regulation for product markets and companies.
• Sweden’s social security system is based on mandatory contributions to individual accounts, with people having a wide range of several hundred possible investment options for their accounts, or a default fund mostly invested in stocks.
Whether these various aspects of the Scandinavian model appeal, or not, it’s worth remembering what works in one country may not transplant easily.
After all, the combined population of Sweden (10 million) Denmark (5.8 million) and Norway (5.3 million) is roughly comparable to that of the greater New York City metropolitan area, and rather less diverse. The Nordic countries have intimate economic and regulatory ties with the much larger European Union. However, Sweden, Norway and Denmark have kept their own currencies and don’t use the euro.
It seems inaccurate to me to label the Scandinavian model of capitalism as “socialism,” but arguing over definitions of imprecise and emotionally charged terms is a waste of breath. What does bother me is when the “socialist” label becomes a substitute for actually studying the details of how different varieties of capitalism have functioned and malfunctioned, with an eye to what concrete lessons can be learned.
Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College. He blogs at http://conversableeconomist.blogspot.com.
Note: Regular readers of this blog may recognize this op-ed as a tightened-up version of the blog post from last year, \”The Scandinavian Style of Capitalism\” (November 5, 2018). There are additional links, quotations, and detail in that post.
