conversableeconomist

Working Later in Life

When President Franklin Roosevelt signed the Social Security act into law in 1935, with the goal of providing old-age benefits to those over age 65,  average life expectancy in the United States was about 62 years: that is, the average person wouldn\’t live long enough to qualify for the program. Now, US life expectancy is about 79 years, and the average age of retirement is 60. It\’s no wonder programs to support the elderly are so politically powerful, nor that they have experienced rising costs. 
It\’s far from clear that all retirees want to retire as soon as they do. Sometimes people near the end of their working lives are caught in macroeconomic turmoil, like the Great Recession or the pandemic recession, and they end up losing out on a few years when they might have preferred to be remain attached to the workforce, earning some additional income. In other cases, older workers would be open to part-time or more flexible work arrangements, but when these don\’t seem to be available to them, they end up retiring instead. In still other cases, potential older workers get the message that employers are looking for someone younger.
In addition, as many people go to school longer, marry and have children at older ages, and keep good health until older ages, it seems plausible that working to older ages may become more common, too. There are more and more jobs that involve offering a service or doing digital work that are not physically taxing. 
In thinking about this report, it\’s perhaps a useful starting point to remember that we are not debating whether populations around the world and the potential working-age population will continue to age. Those changes are happening. The historical experience in the US is that many workplaces had a relatively larger number of younger workers in lower-level jobs, led by a relatively smaller number of older workers in high-level jobs. That pattern seems likely to shift to a more genuinely multigenerational workplace, with people of all ages at all levels.  The question is how to react: for individuals thinking about their life plans, for employers thinking about hiring and retention policies, and for countries thinking about solvency for their old-age support programs and economic growth more broadly.  With this vision in mind, the OECD has published Promoting an Age-Inclusive Workforce: Living, Learning and Earning Longer. 
Here are a few thoughts based on that report: 
The ratio of working-age population to total population is headed for decline in many countries, including the US. This pattern means that a smaller share of working-age people are going to be supporting a larger share of those outside their working age, like the elderly and children. The OECD calculates that in the United States, a rise in working age of four years, spread over the period from 2015-2050, would keep the ratio of working-age population to total population from falling. Indeed, since about 2000, labor force participation among those over 65 has been edging upward. 
Employers who are aware of this demographic shift to aging might want to keep some patterns in mind. One is that older workers tend to stay with a firm longer, and thus reduce costs of hiring and retention: \”Worker turnover is lower for older workers than for prime-age and for younger workers and the presence of older workers makes fewer young colleagues leave as well. … Employee turnover is 4% lower at a firm that has a 10% higher share of older workers than the average firm.\” 
Another is that older workers often have better skills when it comes to teamwork: \”Teamwork is among
the most frequently used skills at work, in particular in Anglo-Saxon countries … Networked
ways of working foster collaboration between co-workers from disparate parts of the organisation, both in terms of content and geographical location. Effectively, this sets up undefined work groups next to the traditional team structure, so-called “hidden teams”. Older workers that exhibit good moderation skills based on their long-standing experience play a vital role here. Yet, older workers may not be getting the credit they deserve for improving team performance …\” 

A multigenerational workforce may understand the market better: \”Moreover, an age-diverse workforce may lead to better business-to-consumer and business-to-business relationships, as representing the age groups of the firm’s clients in the own workforce makes it easier to know what customers need. In fact, human resource professionals stress that enhanced customer service is one of the key benefits of age-diverse teams.\”

There are likely to be complementarities between younger and older workers: \”Research on these kinds of co-worker complementarities between workers of different ages has been scarce, even though human resource professionals and workers themselves name knowledge sharing and having different perspectives the key benefits of age-diverse teams … A key takeaway is that workers are more productive when they work with others who are of a different age, thanks to the complementarities between them.\”

A firm that is serious about facing the looming reality of a multigenerational workforce would need to make various changes. For example, it might think about how whether its recruiting for new workers is explicitly or implicitly aimed at the young, or if, for example, it is also appealing to \”returners\” who have been out of the workforce and are now rejoining it. It might think about phased retirement plans for older workers. 

Currently, however, few employers have policies in place that support a multigenerational workforce. This applies in all policy dimensions: from supporting mobilisation and management of a multigenerational workforce to making jobs attractive at all life stages and keeping skills up-to-date for a long and productive career. According to the AARP Global Employer Survey 2020, in no policy area have more than 6% of employers implemented policies that are targeted at supporting a multigenerational workforce, such as unbiased recruiting processes and return-to-work or phased retirement programmes … 

Employers often talk about the need for continual retraining of workers, but they do not take advantage of how a multigenerational workforce may help with that process. The obvious example is when older employers mentor younger ones. But a less obvious example is that in a technology-driven world, younger employees may often be able to offer \”reverse mentoring\” to those who are older (citations omitted from quotation): 

Reverse mentoring, is inherently related to coaching and mentoring, and is of growing in prominence. Where mentoring and coaching open up learning opportunities for junior employees, reverse mentoring revolves around the transfer of knowledge and competences from junior employees to more senior ones. In the United States, a range of large organisations have implemented reverse mentoring including, e.g. General Motors, Unilever, Deloitte & Touche, Procter & Gamble, and IBM. Various stakeholders have discussed the advantages of this practice within the context of multigenerational teams. Reverse mentoring contributes to knowledge transmission between junior and senior employees, resulting in intergenerational learning. The many examples of this practice across a wide range of enterprises shows that companies recognise the importance and effectiveness of this approach. … According to the OECD’s PIAAC data on adult skills, younger individuals score higher on average than older individuals on technological dexterity. In this context, reverse mentoring is a means for skills transfer between generations or different experiences. However, academics argue that the use of reverse mentoring can, and should, go beyond learning about technology; reverse mentoring can also be a means to learn about current issues related to diversity, and breakdown age-stereotypes. Higher levels of understanding, and better coordination of work processes all lead to higher commitment levels amongst employees, which benefits organisations.

Finally, one sometimes hears the complaint that older workers need to get out of the workforce so that younger workers can have their opportunity. There may be some situations where this hold true, but in a broad sense, there doesn\’t seem to be evidence for a social tradeoff that countries with fewer elderly people working see a pattern of benefits for younger workers. The OECD report notes: 

A conventional wisdom is that demand for labour is fixed so that older and younger workers compete for jobs. This is often referred to as the lump-of-labour argument. 30% of respondents to the 2015 ISSP survey said that employed people aged 60 or older take jobs away from the young. … Such perceptions are nurtured by short-term crisis situations in which companies need to reduce or at least not expand their workforce while workers seek to remain in their jobs as the future seems uncertain. … In general, the wisdom of the young and the old being substitutes rather than complements is a fallacy. The empirical literature that specifically analyses for many different countries the relationship between
younger workers’ employment and that of older workers does not find a crowding-out effect (OECD, 2013[14]). One indicator is the positive correlation between the employment rates of older and younger workers among OECD countries … The reason is simple; younger and older workers differ in skills and experience, the closest substitute for an older worker is another older worker rather than a younger worker.  …  As a consequence, past policies to promote early retirement in the hope of lifting youth employment in OECD countries have proven ineffective.

Of course, governments also have a role to play, in thinking about  how the rules for programs like Social Security or Medicare may discourage work. But my sense is that a lot of resistance to the idea of a multigenerational workforce is based in attitudes that reflect the demographics that used to be, not the demographics to come. 

conversableeconomist

The Coase Theorem: A Process of Becoming

Steven Medema know more about the history of the Coase theorem than many of us know about our spouses. So whether you are distantly or intimately familiar with the idea, you are likely to pick up some insights in his article, \”The Coase Theorem at Sixty\” (Journal of Economic Literature, 2020, 58:4, pp. 1045-1128, subscription required).

In the 1960 article by Ronald Coase, \”The Problem of Social Cost,\” the Coase \”theorem\” was not actually a theorem, nor does it seem to be the main point of the entirely verbal essay.  Coase was working on various questions of regulatory economics, which might be summarized as the question of the appropriate government reaction in situations where market don\’t perform well. For example, it had been recognized since the 1920s and the work of A.C. Pigou that some economics activities might involve \”externalities,\” where social costs were imposed on others who were not part of the market transaction. Pollution is an obvious example. The common policy prescription was that the government should estimate the value of this additional social cost, and then impose a \”Pigovian tax\” so that the firm producing the externality would face the actual social cost of its action–in effect, it would no longer be able to dump its pollution garbage into the environment for free. 

Coase approached the problem of social cost from a different angle. Medema writes: 

The article makes three basic points. First, externalities are reciprocal in nature. Yes, A’s actions impose costs on B, but to restrain A in favor of B imposes costs on A. The economic problem, Coase emphasized, is to avoid the more serious harm. … Second, if the pricing system works costlessly and rights are assigned over the relevant resources, agents will negotiate a solution that maximizes the value of output, and this outcome will be reached irrespective of to which party those rights are assigned—the idea that came to be known as the Coase theorem. … In the frictionless world of welfare economics circa 1960, the negotiation result shows that Pigouvian remedies are completely unnecessary for an efficient resolution of externality problems. Third, in the real world of positive transaction costs, all coordination mechanisms—markets, firms, and government—are costly and imperfect, meaning that there is no route to the optimum. The best that we can do is to choose among imperfect alternatives …  Comparative institutional analysis, then, becomes the method of choice, and the goal, from an economic perspective, is to select the coordination mechanism that maximizes the value of output for the problem under consideration.

Here\’s how I tried to convey the Coase \”theorem\” insight in an article I wrote last summer about \”Are Property Rights a Solution to Pollution? (PERC Reports, Summer 2020). In my words: 

In one famous example, Coase discussed the hypothetical situation of a railroad running beside a farmer’s field. Sparks from the train would sometimes start fires in the crops. How should this external cost—a kind of pollution “externality”—be addressed?

For non-economists, an obvious answer is for the government to pass a law. For example, the government might require that the railroad company install spark arrestors on the smokestacks of its locomotives, use a different blend of fuel or a new engine, leave a buffer zone beside the field, or relocate the rails altogether. Alternatively, the government might declare that the farmer should build a fence to protect the field, install a sprinkler system, change crops, leave a buffer zone, or perhaps even relocate the farm.

Rather than viewing anti-pollution efforts in terms of how governments should choose which rule to impose, Coase took an altogether different approach. He pointed out that the problem could be rephrased in terms of property rights—in other words, who has what rights? For example, the government could say that the railroad company had a right to emit sparks, in which case the farmer would have to figure out the most cost-effective way of protecting the fields. Alternatively, the government could say that the farmer had a property right not to have sparks land among his crops, in which case the railroad would have to figure out an answer—which might include installing spark arrestors or other technology to prevent fires from occurring, or even just paying the farmer to put up with the annoyance.

In Coase’s approach, the question of how to respond to problems of pollution such as unwelcome railroad sparks did not need to be delegated to a government vote or board of experts. Nor did the problem of pollution, in Coase’s view, need to be solved by regulators imposing a Pigouvian tax to account for the “externality” imposed. After all, governments or any outside groups will inevitably possess much less detailed and hands-on information about the range of possible options—and how those options might be tweaked or combined—than railroads and farmers. Moreover, any choice of specific government regulations will be affected by politics and lobbying. Instead, Coase argued that once property rights were clearly defined, then one party or the other would have an incentive to seek out the most cost-effective way of reducing this form of “pollution.”

Coase\’s work often pushed back against a common assumption (common both then and now), that direct government actions and mandates are the appropriate answers to problems with markets. He emphasized that governments often lacked both detailed knowledge of how to resolve issues with markets, and also that government acting under political pressure might lack the incentive to resolve such problems appropriately. Instead, the role of government could be to set up a system in which the economic actors themselves would use their detailed private information to reach a better decision.  

In other classic examples, Coase argued in the 1950s that when it came to allocating spectrum rights, it was better for the government to auction those rights rather than to allocate them by an administrative decision-making process. Such auctions would cause private actors to reveal their true preferences, rather than just deploy their lobbyists. In another paper, Coase argued that although economists often invoke lighthouses as an example of where markets can\’t work well, as a historical fact many lighthouses were built by the private sector once the government gave them the right to collect tolls.   

It\’s perhaps useful to note that Coase is certainly not claiming that real-world markets are perfect, and that private negotiations will resolve any issues. His prescriptions often involve the active intervention of government: for example, in setting the rules over whether railroads or farmers are responsible for dealing with sparks, or setting up auctions for spectrum rights, or giving lighthouse builders a right to charge tolls. Coase is arguing against \”blackboard economics,\” as he later called it, where market problems and government solutions are sketched out in a classroom like a solved problem. Instead, Coase favored of a comparative institutional economics, where the specific details of situations take on a central role and thus it becomes important to think about details of information and incentives is possessed by the actual parties involved. 

Coase did not refer to his result as a theorem: instead, this label was bestowed by George Stigler a few years later. Medema writes: \”[T]he Coase theorem is neither prediction nor testable hypothesis nor descriptor nor policy prescription. It is, and can be nothing more than, a benchmark—a generator of predictive, testable, descriptive, and policy insights.\”

Medema describes in detail the unfolding of the Coase result over time, as the issues of potential problems, involved parties, information, and incentives have been explored in many contexts–including contexts outside of economics. Here, I\’ll close with Medema\’s overall summary of this process. 

The Coase theorem is, by any number of measures, one of the most curious results in the history of economic ideas. Its development has been shrouded in misremembrances, political controversies, and all manner of personal and communal confusions and serves as an exemplar of the messy process by which new ideas become scientific knowledge. There is no unique statement of the Coase theorem; there are literally dozens of different statements of it, many of which are inconsistent with others and appear to mark significant departures from what Coase had argued in 1960. …

The theorem has never been given a generally accepted formal proof; yet it has been the subject of scores of attempts  to “disprove” it in a stream of analysis and debate that continues to this day. It has been labeled a “tautology” and the “Say’s law of welfare economics” (Calabresi 1968, pp. 68, 73), an “illuminating falsehood” (Cooter 1982, p. 28), and even a “religious precept” (Posin 1993, p. 810). Halpin (2007, p. 339) calls the theorem “theoretically degenerate … and ideologically charged.” Usher (1998, p. 3) bundles these various charges together, claiming that the theorem is ”tautological, incoherent, or wrong,” with the specific verdict resting upon to which version of the theorem one subscribes.  … 

The nature of the theorem’s underlying assumptions is often said to make its domain of direct applicability nil; yet, it has been invoked, criticized, and applied to legal-economic policy issues in thousands of journal articles and books in economics and law … as well as in journals spanning fields from philosophy (Hale 2008) to literature (Minda 2001) to biology (Frech 1973a). Indeed, the Coase theorem may be the only economic concept the use of which is more extensive outside of economics than within it.

conversableeconomist

Some Thoughts on US Wealth Patterns

When I first started paying attention to national-level economic statistics in the late 1970s and early 1980s, it was commonly taught that the ratio of national wealth to GDP was more-or-less a constant over time. This made some intuitive sense. After all, the value of real estate wealth will be worth what people are willing to pay for it, and it makes some sense that this should grow over time with  people\’s incomes. The value of stock market wealth in US companies will reflect future expected profits in the corporate sector, and again, will be growing over time with the economy. But this longstanding pattern fractured in the 1990s. 

Here\’s a figure showing the wealth-to-GDP ratio for the US economy (generated using the ever-helpful FRED website maintained by the Federal Reserve Bank of St. Louis). 

As you can see, the ratio was relatively close to being constant at about 3.6 for the period from the 1950s into the early 1990.The patterns of the figure in recent decades are fairly obvious. The run-up in wealth in the 1990s represents the stock market taking off. The run-up in the early 2000s is the real estate market taking off. After a big fall in both during the Great Recession of 2007-2009, both have rebounded. By mid-2020, the ratio was up to about 5, near an all-time high.

What has changed this ratio? Why are the US real estate and the stock market market worth so much more, relative to GDP, than they had been for decades? One plausible reason has to do with the generally lower levels of interest rates since the 1990s (for discussions, see here or here). At an intuitive level, lower interest rates mean that people can afford to spend more on houses–so housing wealth goes up. A similar logic applies to the stock market, when interest rates are very low, the potential future returns from companies look that much better, and investors are willing to pay more for them. 

This explanation also implies that those who have seen big increases in their wealth over the last few decades–for me, that would be higher housing equity and a rising balance from the stock market investments in my retirement account–are growing wealthier only in part from a willingness to make those monthly mortgage payments and contributions to the retirement account. A substantial portion of the gain in wealth is from those shifts in interest rates. 

How is the distribution of wealth evolving? Here, the underlying data come from the Distributional Financial Accounts calculated by researchers at the Federal Reserve, which is only available since 1989–the tail end of the period when the wealth/GDP ratio was fairly stable. The top figure shows the share of wealth going to the top 1%; the second figure shows the share of wealth from the 90th-99th percentile; the third figure shows the share of wealth for the 50th-90th percentile; and the bottom figure shows the share of wealth for the bottom 50%. 

What patterns emerge here? 

Even as the wealth-to-GDP ratio has been rising, not all groups of the wealth distribution have benefited in the same way. Lest I be accused of burying the lede here, the big story with US wealth is the growth in wealth/GDP ratio and the growing share of that wealth held by the top 1%. The share of wealth going to the top 1% shows occasional setbacks, like when the stock market fell in 2001 or in the aftermath of the Great Recession, but overall, the share of wealth going to this group has risen from about 24% of the total back in 1990 to above 30% of the total more recently. One thinks here of some of fortunes that have been made by Microsoft, Google, Facebook, Apple, along with Berkshire Hathaway–all benefiting from the overall run-up in the stock market prices of these companies.
The pattern for to the 90th-99th percentile looks rather different. It was a little over 37% of the total in 1990 and is a little over 38% of the total now. What seems to be happening here is that the wealth of this group benefitted less from the 1990s run-up of the stock market than did the top 1%–so the share of total wealth for this group declined during that time. However, the wealth of this group also suffered less from the stock market decline of 2001, and from the aftereffects of the Great Recession. So after three decades of down and up and down, it\’s overall share hasn\’t changed by much. 
The pattern for the 50th-90th percentile is where the big shift happens. This group had about 36% of total wealth in 1990, and still had about that same share in the early 2000s. But since then, its share has dropped down to about 29% of total wealth. In ownership of real estate or financial assets, this group is benefitting considerably less from the run-up in wealth/GDP than the top 1%. This group is often what is called the \”middle class\” in a US context. 
The bottom 50% has relatively little wealth, which isn\’t a surprise. After all, lots of  fairly middle-class people under the age of 35-40 don\’t have much total wealth, in part because what they are in debt to buy a house, and there hasn\’t been enough time for their housing equity and retirement accounts to build up. The poor don\’t have much wealth, either. Thus, it\’s not a big surprise that back in the 1990s the total share of the wealth distribution for this group was around 3.5-4.0% of the total. But since the 2000s, the wealth gains of this group didn\’t keep up–indeed, one suspects that this group includes a number of people who borrowed heavily to buy a house in the early 2000s and then, after real estate prices fell, ended up having borrowed more than the property was worth. 
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What Distinguishes Austrian Economics?

What is Austria economics? Christopher J. Coyne and Peter J. Boettke offer a brisk and readable 57-page introduction in The Essential Austrian Economics (2020, Fraser Institute). It is the most recent entry in an \”Essential Scholars\” series that now includes similar books–that is, intro-level discussions by well-qualified academic experts–on F.A. Hayek, Adam Smith, Milton Friedman, John Locke, Joseph Schumpeter, and Robert Nozick. 

As a starting point, who have been the leading thinkers in Austrian economics over time? Coyne and Boettke write: 
The origin of the Austrian School of economics is the publication of Carl Menger’s Principles of Economics in 1871. … He also was engaging the German Historical School, which was the dominant source of economic thinking throughout the German-speaking world. The German Historical School held that economic science is incapable of producing universal principles that apply across time and geographic space. Because of this, they held that the best that economists can do is to engage in the historical study of particular circumstances, with the hope of identifying some particular patterns that are specific to the context being studied. 
In contrast to this view, Menger argued that universal economic laws apply across contexts, and he did so using marginal utility analysis as a foundation. Those in the German Historical School took issue with the claims by Menger and his colleagues—Eugen Böhm-Bawerk and Friedrich Wieser—about the possibility of universal theory and labeled them the “Austrian School” because of their academic positions at the University of Vienna. The label stuck. …

Subsequent generations of Austrian scholars built on the works of Menger, Böhm-Bawerk, and Wieser. Following World War I, Ludwig von Mises and F.A. Hayek assumed the intellectual leadership of the Austrian School. … Since the 1930s, no economists from any Austrian university have become leading figures in the Austrian School of economics. Following the awarding of the Nobel Prize to Hayek in 1974, there was a revival of interest in the ideas of the Austrian School. The major figures in this revival were Israel Kirzner, Murray Rothbard, and Ludwig Lachmann.

What are the key elements of Austrian economics that distinguish it from other schools of economics? One theme emphasized in the discussion is \”the concept of `methodological individualism,\’ which holds that people, with their unique purposes and plans, are the beginning of all economics analysis. … Menger stressed that the evaluations of the desired ends, as well as the determination of the best means to achieve those ends, are uniquely subjective to the individual chooser.\” 
This emphasis on subjectivism, rooted in preferences and individual experiences, is then combined with an insight that people often do not know what they will do or try until it actually happens. Acting as a consumer, will I buy a package of microwaveable chicken masala at the grocery? I don\’t know until I see it. I certainly don\’t know if I will buy it repeatedly in the future. I am not capable of reducing my subjectivism to a rule that will be followed. Acting as a worker, people don\’t know in advance what jobs they will want to try, or what job they will prefer to stick with over time. They try different options and see what they subjectively prefer. Even those who manage companies don\’t know their plans fully in advance. They don\’t know if certain production methods will work until they try them out. They don\’t know if tweaks or changes to those production methods will work until they try them out. They don\’t know if revised or new products will appeal to consumers, until they try them out. 
As Coyne and Boettke write: \”Moreover, this series of choices is open-ended, which means that through time people are learning what ends to pursue and the most effective ways to achieve those ends. As a result, Austrian economists place an emphasis on understanding the process of discovery and
learning that takes place through time.\”

This perspective on the economy suggests that government economic planners will face some substantial problems, because the information they need to plan the economy–what will be produced, how it will be produced, what workers should be doing what jobs, what kinds of capital investment would be most useful–is literally not available. That information only becomes discovered through a process of trial-and-error. Moreover, the needed information is not static, but evolves over time. In describing Hayek\’s work critique of socialist economic planning, Coyne and Boettke note: 

Even if some stable equilibrium were obtained, it would be fleeting as conditions changed. It is only by allowing decentralized people to participate in an ongoing process of discovery that the knowledge necessary to make rational economic decisions emerges. These numerous discoveries lead to the emergence of knowledge regarding not only what goods and services are desired by consumers, but also the most effective techniques to produce these outputs in a cost-minimizing manner. The problems inherent with market socialism, according to Hayek, were not a matter of placing smarter people in charge or in developing new computational techniques to gather more information. Instead, the issue was that the economic knowledge necessary for coordination is dispersed, tacit, and emergent. This means that the knowledge used by people to coordinate their economic affairs cannot exist outside the context within which they are embedded. The market socialism model left no space for the very activity that generated the knowledge that was necessary for planners to accomplish their stated ends of advanced material production. 

Coyne and Boettke add: 

The emphasis on the division of knowledge and the market process as a means of discovering and using this knowledge is the crux of the Austrian criticism of both comprehensive and piecemeal government intervention into a freely operating market. Government’s inability to obtain the knowledge necessary to plan or regulate the price system is the fundamental economic criticism of intervention into the market order. We emphasize the term “economics” to highlight that this is not an ideological argument in favour of markets, but rather a subtle argument in technical economics about the type of knowledge, and the source of that knowledge, necessary to use scarce resources in a way that improves human welfare.

The essay digs into some other implications of Austrian thinking. For example, this emphasis on the economy as emerging from subjective decisions in an experimental process leads naturally to an emphasis on time in economic decision-making, and the role of interest rates as a price that emerges on time. It leads to a belief that government inventions in these tradeoffs over time can produce undesired future outcomes, including recessions.The emphasis on specific uses in the present and  how those uses can change in the future leads to some alternative ways of thinking about capital, not as a \”homogenous blog\” but as a specific and contextual set of choices. During the pandemic, for example, we have seen a conversion of housing capital and home internet service into the uses previously served by business capital and commercial real estate. Coyne and Boettke write: 

[S]tandard economic theory treats capital as a homogeneous blob that can be used interchangeably and does not require any kind of careful planning or coordination through time. If capital goods were indeed homogeneous, they could be used interchangeably to produce whatever final products consumers desire. From this perspective, capital is analogous to a ball of Play-Doh®. The same capital can be shaped into whatever output is desired by the designer. And if mistakes are made, capital resources can be reallocated quickly and with minimal cost by quickly reshaping the ball of Play-Doh®. Scholars working in the Austrian tradition, in contrast, emphasize that capital is not homogeneous. All capital is not the same and cannot be used interchangeably. A pair of pliers is not the same thing as a pickup truck. Each capital good can be used to achieve different purposes. A pair of pliers could not tow a trailer and a pickup truck cannot be used to twist a piece of wire. Based on their unique physical characteristics, it is more accurate to think of capital as LEGO®s rather than a ball of homogeneous Play-Doh®. In order to achieve the desired production plan of building a set of LEGO®s, specific unique pieces must be combined in a certain temporal order. If a mistake is made along the way, it is costly because individual LEGO® pieces need to be carefully removed and specific pieces need to be inserted to correct for the error to achieve the desired production plan. This is the situation that characterizes a complex, advanced economy.

The Austrians view market outcomes as a \”spontaneous order\”–that is, an outcome that is both orderly and not designed in advance. In somewhat the same way as language evolves, the spontaneous order of the economy shifts over time based on interacting decisions of individuals in ways that are often unexpected until they actually emerge.

I should acknowledge that readers of a certain temperament may find themselves writhing with discomfort at this discussion. What do the Austrians have to say about situations where market don\’t work well? Where\’s the discussion of poverty and inequality? Of externalities and the environment? Of public goods, schools and infrastructure? Of antitrust and anticompetitive behavior? This short volume doesn\’t mention these kinds of issues, nor how Austrians would address them. 
But it does emphasize that a \” foundational principle of Austrian economics is the adoption of the means-ends framework. This entails taking ends as given and focusing on whether the means proposed to achieve the desired ends are suitable.\” In other words, economics as a subject doesn\’t specify a set of goals for public policy. Economics is a way of analyzing the extent to which proposed policies are likely to meet the goals. 
In this spirit, an Austrian approach to thinking about policies to help the poor or protect the environment does not question the merits of these goals. Instead, the Austrian approach suggests pausing for a moment and considering the assumptions underlying the recommendation. Do the policy proposals treat the economy as a kind of supercomputer–that is, just plug in some new inputs, and the economy will use preset programs to reach a predictable conclusion?  Is the policy assuming that the problem is static and unchanging? (It\’s not.) Is it assuming that it knows the details of how economic actors will respond the the policy? (The economic actors themselves don\’t know.) Is the policy leaving room for innovation and evolution? When thinking about the economy in an Austrian frame of mind, thoughts about teh design of economic policies may shift as well. 
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Prime-Age Males Not in the Labor Force: Some Patterns

Being \”in the labor force,\” in the economics jargon, refers either to having a job or being unemployed and looking for work. Conversely, being \”out of the labor force\” means both not having a job and not looking for work. In the US economy, it used to be that almost all \”prime-age\” men in the 25-54 age group were in the labor force, but the share out of the labor force has been rising for decades. Here\’s the data from the Bureau of Labor Statistics. 

Why are prime-age men more likely to be out of the labor force? Notice that the shift has been happening for more than a half-century, so one either needs a big-picture explanation that applies over this entire time period or a series of short-run explanations that all happen to be running in the same direction.  Donna S. Rothstein of the US Bureau of Labor Statistics provides an overview of the arguments along with some new evidence in \”Male prime-age nonworkers: evidence from the NLSY97\” (Monthly Labor Review, December 2020). Here is her rapid-fire overview of some of the recent research seeking explanations for the decline (footnotes with citations omitted here, but available at the link). 

Several recent studies document and try to explain the decline in labor force participation of prime-age men over time. In a 2017 study, for example, Alan B. Krueger finds that health conditions, disability, and the rise of opioid prescriptions may be important contributing factors. In another 2017 study, John Coglianese suggests that much of the decline in prime-age men’s labor force participation is due to the increase of “in-and-outs”—that is, men who temporarily leave the labor force between jobs. He credits the rise in this phenomenon to the increase in young men living with parents and to a wealth effect from married or cohabiting men’s partner’s growth in earnings. Mark Aguiar et al. posit that more recent declines in the labor supply of young men are due to the advancement of video game technology. In a series of studies, David H. Autor et al. argue that the pain of more recent trade shocks is often locally concentrated, causing a decline in manufacturing employment in those local areas, which particularly affects those with lower levels of education. Katharine G. Abraham and Melissa S. Kearney provide an extensive review of the literature on the decline in employment over time and evaluate which factors they believe are most important for the decline from 1996 to 2016. They posit that factors associated with labor demand, primarily related to trade and automation, are the most responsible for the decline over this period. Labor supply factors related to disability caseloads and compensation (Social Security Disability Insurance and the U.S. Department of Veterans Affairs disability compensation program), the real value of the minimum wage, and the rise in incarceration and the growth in the number of people with prison records also had an impact. Ariel J. Binder and John Bound point out that declining labor force participation rates are more pronounced among prime-age men who are less educated. They argue that feedback between labor demand, marriage markets, and the increase in men living with parents or other relatives plays a role in declining labor force participation rates of prime-aged men with less than a college education. Jay Stewart provides descriptive statistics of male nonworkers and their sources of financial support. He uses the National Longitudinal Survey of Youth 1979 (NLSY79) to look at work behavior from 1987 to 1997 and finds that a small fraction of men account for the majority of person-years spent not working. Using data from the CPS, Stewart finds that a substantial proportion of nonworkers live with family members and receive financial support from those members.

The Binder-Bound paper she mentions was published in the Spring 2019 of the Journal of Economic Perspectives, where I work as Managing Editor, as part of a three-paper symposium.

Rothstein offers some new evidence by looking at data from the National Longitudinal Survey of Youth, which tracks people over time. In particular, this survey started interviewing people in 1997 who had been born between 1980 and 1984. This allows Rothstein to focus on the experiences of men who were in the 30-34 age group in 2015 and who were out of the labor force.  Some of the most common patterns are that earlier life experiences are correlated with being out of the labor force as an adult: 

[W]orkers and nonworkers differed early in their lives, in terms of family and neighborhood resources, delinquency, experiences from ages 12 to 18, and expectations about their futures. On the whole, nonworkers appear to come from less advantaged backgrounds than workers. Nonworkers were more likely to have a mother with less than a high school diploma, compared with their working peers (31.0 percent versus 16.9 percent). Nonworkers were also less likely to live with both of their biological parents at the time of the 1997 (Round 1) interview, and they were more likely to have a mother who was age 18 or younger when they were born. Compared with workers, nonworkers were much more likely to report that they had been shot at or had seen someone shot at with a gun when they were between the ages of 12 and 18 (26.9 percent versus 12.5 percent). Nonworkers were also much more likely to have been arrested at some point when they were age 18 or younger (41.2 percent versus 26.9 percent), and they were more likely to have used marijuana by age 19 (63.1 percent versus 54.3 percent). Nonworkers were less likely to have graduated from high school by age 20, compared with their working peers (50.4 percent versus 78.1 percent). …

Nonworkers tend to have grown up in less advantaged neighborhoods than those of their working peers For example, 24.6 percent of nonworkers grew up in a neighborhood with a poverty rate of between 20 and 40 percent, compared with 13.5 percent of nonworkers. In addition, 7.5 percent of nonworkers grew up in a neighborhood with a poverty rate of 40 percent or more (often referred to as concentrated poverty), compared with 2.7 percent of workers. Compared with workers, nonworkers grew up in neighborhoods with a higher percentage of minorities and a lower percentage of people with a bachelor’s degree or more. Male employment was also lower in nonworkers’ childhood neighborhoods, compared with workers’ childhood neighborhoods. For example, 13.4 percent of nonworkers grew up in a neighborhood with very low male employment (less than 50 percent), compared with 5.8 percent of workers.

Men who are out of the labor force tend to have lower skills. They are much less likely to be married and  more likely to be living with their parents. They are more likely to  have been incarcerated. Compared to men in the labor force, they spend more time watching television and less time on a computer: \”Regarding time use in a typical week, men who did not work in the prior year were more likely than those who worked to watch at least 21 hours of television per week (23.7 percent versus 9.6 percent), and nonworking men were less likely than working men to spend 10 or more hours on the computer (30.1 percent versus 58.6 percent).\”
The patterns described here are entangled: for example, the neighborhoods and families where people grow up affect their future education level, health, and future family patterns. The result is a growing number of prime-age men–roughly one in eight in this age group for the nation as a whole–who have ended up separated from workforce. Many of the prime-age men who were out of the labor force in 2015 had also been out in previous years. \”The … vast majority of men who did not work in the year prior to the 2015–16 interview also did not work in earlier years. For example, 79.3 percent did not work in the second year before the interview, 64.7 percent did not work in the third year before the interview, and 61.2 percent did not work in the fourth year before the interview. More than half (56.4 percent) did not work in the 4 years before the 2015–16 interview.\”
Work is of course much more than a paycheck. As the poet Marge Piercy put it, work is \”to be of use.\”
conversableeconomist

China’s Belt and Road Initiative Collides with Pandemic Realities

One of China’s signature economic economic and foreign policy initiatives in the last few years has been the Belt and Road Initiative. The idea was that China would lend money to national or local governments in other countries transportation or infrastructure projects, especially in Africa and Asia but also in Australia and Latin America. Chinese firms would often be hired to do much of the design and construction work, and China might maintain some ownership share of the project. The borrowing jurisdictions would then receive both immediate economic benefits from the construction effort itself and then longer-run benefits from being connected to an improved transportation infrastructure.

In theory, this plan could benefit all parties. In practice, there have been reasons for concern. I laid out some of the issues in \”China\’s Belt and Road Initiative: Grand or Grandiose?\” (September 10, 2018), \”China\’s Belt and Road Initiative: The Perils of Being a Subprime Global Lender\” (July 30, 2019), and \”China\’s Belt and Road Initiative: Could It All Come Crashing Down?\” (November 18, 2019). The basic concern was that a sizeable share of China’s lending was for high-cost, low-benefit projects that had been turned down by other international lenders. While Chinese construction companies and elites in borrowing countries were benefiting in the short-term, a rising number of questions and concerns were being expressed in borrowing nations about the growing debt burden, environmental costs, and treatment of local workers. In addition, borrowing countries have noticed that China’s infrastructure investment often seems to include a Chinese military or security component.

And then the global pandemic recession hit in 2020. China had less to lend, and borrowers were finding it harder to repay. Many projects of the Belt and Road Initiative faced an acid test. The Financial Times recently published this chart, showing overseas lending by the China Development Bank and the Export-Import Bank of China (two major official overseas lenders) compared with the World Bank.  The data is based on estimates from the Global Development Policy Center at Boston University.

A group of researchers at the Overseas Development Institute, an international think-tank founded in 1960, focused on economic development issues, also offers a recent update in their report  \”Pulse 1: Covid-19 and economic crisis – China’s recovery and international response,\” by Beatrice Tanjangco, Yue Cao, Rebecca Nadin, Linda Calabrese and Olena Borodyna (November 2020). They note that total Chinese investments abroad were already declining before the pandemic. They write:

Chinese investments in Africa and Latin America, in contrast, had been slowing even before the pandemic, after peaking in 2015–2016, due to a mixture of international criticism and Beijing’s desire to improve the quality of its projects and lending. Data on lending from the China-Africa Research Initiative and The Dialogue show loans to African countries falling from a peak of $29.4 billion in 2016 to $8.9 billion in 2018, while loans to Latin American countries also slowed, from $21.5 billion in 2015 to $1.1 billion in 2019.

The ODI team notes that Belt and Road Initiative remains a priority for China: indeed, it argues the Belt and Road initiative in some specific areas have continued to rise, despite the overall decline in China’s overseas investment. But there are clearly signs of stress. As the ODI report notes (EPC is an acronym standing for engineering, procurement, and construction):

As low- and middle-income countries face mounting debt problems due to Covid-19, China’s attention in the short term will be on dealing with debt renegotiations …  Surging debt, moreover, may also accelerate the shift in the type of overseas project we are seeing from China. The old ‘EPC + Chinese finance’ model,  whereby the interests of Chinese companies and local elites take precedence over the good  of the borrowing country, which bears a disproportionate amount of the project failure risk, will become even more unsustainable amid countries’ reduced capacity to take on debt and risk.

China has agreed to participate in the Debt Service Suspension Initiative (DSSI) overseen by the G20 group of countries. but exactly how it will work is not yet clear. Other countries and the IMF are of course not eager to bail out China’s loans. There is also talk of refocusing the Belt and Road Initiative (BRI) away from infrastructure in general. The ODI report notes:

The potential rebranding of China’s engagement with low- and middle-income countries around ‘high-quality’ BRI, with a focus on green energy, ICT [information and communications technology] and digital infrastructure. The renewed push on ICT and digital infrastructure comes as no surprise, as China started investing in these sectors in African countries as early as 2006. However, a recent increase in focus on science, innovation and technology as a driver of growth is expected to spur exponential growth, both domestically and along the BRI, in e-commerce, cloud computing, digital finance (fintech), communications infrastructure, smart cities, industrial internet, medical technology and digital supply chains. It will be important for developing countries to understand the long-term development, security and financial risks and opportunities involved.

The pushback against China’s Belt and Road Initiative in many countries is very real. A Bloomberg report from a few days ago notes some news from Australia: \”The laws passed by Parliament on Tuesday will give the foreign minister the ability to stop new and previously signed agreements between overseas governments and Australia’s eight states and territories, and with bodies such as local authorities and universities.\” In some ways, China is relearning a lesson that many lenders in high-income countries figured out a few decades ago: A lender’s popularity is likely to be highest when a loan is announced and work has just started. But the lender’s popularity will then steadily decline as issues on the ground become apparent and repayments on the loan become due.

conversableeconomist

Recessions and Energy Efficiency

 At least to me, it\’s not immediately obvious how a recession might affect energy efficiency–which can be defined as the amount of energy needed to produce a given amount of output. A overall rise in energy efficiency is a consistent pattern over over time: for example, here\’s a figure showing US energy consumption divided by real GDP over the last 70 years or so. 

There are a variety of reasons for this long-run pattern. Developed economies over time tend to grow more slowly in energy-intensive industries like manufacturing and more quickly in service industries. As an environmental protection measure, governments often push for energy efficiency standards for everything from cars to buildings to appliances and electrical equipment. Companies that use a lot of energy have direct incentives to find ways to produce with less. In the US, the greater growth of population in warmer-weather states has also tended to reduce the growth of energy demand. 

But what happens in a recession? Both economic output and energy use are likely to drop, but which one is likely to drop more–and thus how will energy efficiency be affected?  The International Energy Agency has published its Energy Efficiency 2020 report (December 2020, free registration required). (The IEA is an autonomous Paris-based intergovernmental organization, somewhat similar to the OECD, which publishes a steady stream of energy-related reports.) The IEA has been warning for the last couple of years that from a global perspective, gains in energy efficiency have been declining, and the recession seems likely to worsen this situation. 

Overall, the IEA expects global primary energy demand in 2020 to decrease by 5.3% from 2019. With global GDP falling by 4.6%, primary energy intensity improvement is projected to increase by only 0.8%, the lowest rate since just after the last global economic crisis in 2010 … roughly half the rates, corrected for weather, for 2019 (1.6%) and 2018 (1.5%). This is well below the level needed to achieve global climate and sustainability goals. … It is especially worrying because energy efficiency delivers more than 40% of the reduction in energy-related greenhouse gas emissions over the next 20 years in the IEA’s Sustainable Development Scenario … This is well below the average annual improvement of more than 3% which would be consistent with meeting international climate and sustainability goals.

Here\’s some global data from the last couple of decades. As you can see, gains in energy efficiency fell during previous global recession, and remained low for a year (in 2010) after the economic recovery had started. 

The IES report also has some interesting comments on how the pandemic recession is scrambling previous patterns of energy demand and shifts in energy efficiency. In the buildings sector, for example: 

The buildings sector is witnessing a partial shift in energy demand from commercial to residential buildings, as social distancing and teleworking reduce use of commercial buildings and increase activities that use energy in the home. In the first half of 2020, electricity use in residential buildings in some countries grew by 20% to 30% while falling by around 10% in commercial buildings. In commercial buildings, essential services are accounting for a larger share of energy use. These services are often more energy-intensive, so the energy intensity of commercial buildings is likely to increase. For example, food sales outlets, which have largely continued to operate during the pandemic, are more than twice as energy-intensive as the average office in the United States, where many offices have been largely unoccupied during the crisis.

As shops and offices re-open, commercial buildings could become more energy intensive if occupants expect higher ventilation rates to reduce the risk of Covid-19 transmission. Around 30% of a building’s energy is dissipated in ventilation and exfiltration. This would only increase with higher ventilation rates. …

The transportation sector is seeing a shift across modes: 

Long-distance transport is witnessing dramatic falls in activity across all modes, with commercial aviation likely to be 60% lower in 2020 and rail demand 30% lower. The difference between these drops suggests that, at least domestically, some switching from planes to trains and cars is taking place. Shifts from aviation to rail would reduce energy intensity whereas a shift to road vehicles may increase energy intensity. In cities, people are moving away from public transport, which is down 50% in some countries, to private cars and active modes of transport such as walking, cycling or using other non-motorised vehicles.

A bright spot for energy efficiency is that many households are updating their appliances during the pandemic, and newer appliances tend to be more energy-efficient than those they replace: 

A bright spot for technical efficiency gains is the appliances sub-sector. Data through the end of the third quarter of 2020 indicate that the Covid-19 crisis has increased households’ interest in new appliance purchases, with at least some appliances replacing older, inefficient models. Since the pandemic began, online shopping search indices were up by 20% to 40% for many appliance types worldwide, indicating that sales of appliances could be higher than usual. If these trends are confirmed, they would increase the technical efficiency of the global appliances stock.

But overall, the financial stresses of a pandemic recession are not a good time for investments in greater energy-efficiency–which may also be a reason why slower gains energy efficiency may persist even after a recession. 

Investments in new energy-efficient buildings, equipment and vehicles are expected to decline in 2020, as economic growth falls by an estimated 4.6% and income uncertainty affects consumer and business decision making. Sales of new cars are expected to fall by more than 10% from 2019, keeping the overall vehicle stock older and less efficient, although the share of electric vehicles in new car sales is anticipated to grow to 3.2%, up from 2.5% in 2019.

Bottom line: If you are assuming that ongoing steady growth in energy efficiency will play a big role in meeting future environmental goals related to using fossil fuels, both standard air pollution goals and issue of carbon emissions, you should have already been worried by the trend to smaller annual gains in energy efficiency before the pandemic recession–and even more concerned now. 

conversableeconomist

Lessons about Copyright from the History of Italian Operas

When studying the effects of copyright, one would ideally like to compare settings with and without it. In a modern context, one can look for effects of various changes or extensions in copyright, but it\’s harder to make comparisons with what creative markets would be like if there was no copyright at all. However, Michela Giorcelli and Petra Moser offer a thought-provoking historical example in \”Copyrights and Creativity: Evidence from Italian Opera in the Napoleonic Age\” (Journal of Political Economy, November 2020,  128:11, pp. 4163-4210).  
Here\’s a quick overview of the historical context: 

In 1796, Napoléon began his Italian campaign by invading the Kingdom of Sardinia at Ceva. Although he was unable to subdue Sardinia at the time, two other states, Lombardy and Venetia, were annexed and formed the Cisalpine Republic, which adopted French laws. In 1801, the Republic adopted France’s copyright laws of 1793, granting composers exclusive rights for the duration of their lives, plus 10 years for their heirs (Legge 19 Fiorile anno IX repubblicano, Art. 1–2; Repubblica Cisalpina 1801). In 1804, France replaced its system of feudal laws and aristocratic privilege with the code civil, a codified system of civic laws. The code left copyrights intact where they already existed but did not introduce them in states without copyright laws. As a result, only Lombardy and Venetia offered copyrights until the 1820s (Foà 2001b, 64), while all other Italian states that came under French rule after 1804 had no copyrights, even though they shared the same exposure to French rule, as well as the same language and culture. The empirical analysis examines rich new data on 2,598 operas that composers created across eight Italian states between 1770 and 1900.

In other words, this is a setting where a certain type of performing art is extremely popular, where we have good historical records on performances at the time and since then, and where there was a clear-cut break between nearby regions where some had copyright and some did not. What do they observe? 
Giorcelli and Moser find that in the years before the copyright law takes effect in Lombardy and Venetia, the Italian states look pretty similar both in terms of supply of new operas and also in demand for operas (as measured by factors like theater seats taking population and income into account). Before copyright, the average number of new operas in Lombardy and Venetia rose from 1.4 per year to 3.6 per year–a rise of 157%. 
One effect of copyright that was quickly noticed by composers is that instead of just being paid once for creating the opera, they could receive a stream of payments over time if the opera was popular enough to be performed more widely and repeatedly. When the authors look at measures of the quality of operas, like what was being performed at the Metropolitan Opera in New York in the 20th and 21st century or what recordings of operas are being sold on Amazon even today, they find that the increased quantity of operas was accompanied by higher quality, as well. 
Moreover, the rise in composition of operas was not primarily due to opera composers moving to the areas with copyright, although some of this did occur: instead, the same composers were producing more and better operas.  As other Italian states adopted copyright from 1826 to 1840, they also experienced a rise in quantity and quality of operas produced. 
One last finding is that \”there were no benefits from copyright extensions beyond the life of the
original creator.\” It\’s important to remember that the broad social purpose of copyright and patent law is not to create \”intellectual property\” for the creator. Instead, the broad social goal as stated in the so-called \”Patents and Copyrights Clause\” of the US Constitution is \”[t]o promote the Progress of Science and useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.\” In other words, giving rights to the author for a limited time is the tool, but the actual social goal is progress in science and art. The issue that arises here in both science and art is that new creations are often built on older ones. If an earlier creator is given too much power, or for too long a time, later progress of science and useful arts can be hindered rather than helped. In our modern economy, corporate ownership of intellectual property means that there will always be political pressure to extend and strengthen copyright and patent law to cover creations that are still bringing in royalties. It\’s important to remember that while such expansions of intellectual property undoubtedly benefit those who hold the copyrights and patents, they may hinder the creation of new innovations.

For some previous posts on copyright, see: 

conversableeconomist

Why Some of the Shift to Telecommuting Will Stick

It seems to me that the tone of the discussion surrounding the pandemic-induced shift telecommuting has been changing. Last spring and early summer, a lot of the discussion was about about how well it was working, how much time it was saving, how much employees preferred it, and so on. But then the discussions tend to express more concerns. In the words of a recent Wall Street Journal article, \”Companies Start to Think Remote Work Isn’t So Great After All Projects take longer. Collaboration is harder. And training new workers is a struggle. ‘This is not going to be sustainable.’\” Bloomberg reported on the results from a study done on teleworkers by researchers at the Harvard Business School:  \”The Pandemic Workday Is 48 Minutes Longer and Has More Meetings. A study of 3.1 million workers around the world found an uptick in emailing, too.\”

What factors will determine whether the shift to telecommuting sticks? Jose Maria Barrero, Nicholas Bloom, and Steven J. Davis present some results from a series of nationally representative surveys of US workers done from May to October 2020, in \”Why Working From Home Will Stick\” (December 2020, University of Chicago Becker Friedman Institute Working Paper 2020-174). The authors argue that teleworking will remain substantially higher after the pandemic: they estimate a rise from about 5% of work-days were supplied from home before the pandemic, and it will be something like 22% even after the pandemic is done. Based on the survey data, they suggest five reasons why some of the shift to working from home will persist:

First, reduced stigma. A large majority of respondents report perceptions about working from home have improved since the start of the pandemic among people they know. With fewer people viewing working from home as “shirking from home,” workers and their employers will be more willing to engage in it.

Second, … COVID-19 compelled firms to experiment with a new production mode – working from home – and led them to acquire information that leads some of them to stick with the new mode after the forcing event ends.

Third, our survey reveals that the average worker has invested over 13 hours and about $660 dollars in equipment and infrastructure at home to facilitate working from home. We estimate these investments amount to 1.2 percent of GDP. In addition, firms have made sizable investments in back-end information technologies and equipment to support working from home. Thus, after the pandemic, workers and firms will be positioned to work from home at lower marginal costs due to recent investments in tangible and intangible capital.

Fourth, about 70 percent of our survey respondents express a reluctance to return to some pre-pandemic activities even when a vaccine for COVID-19 becomes widely available, for example riding subways and crowded elevators, or dining indoors at restaurants. …

Fifth, … the massive expansion in working from home has boosted the market for working from equipment, software and technologies, spurring a burst of research that supports working from home, in particular, and remote interactivity, more broadly.

Here are a few reactions: 

1) More work-days happening from home would be bad news for dense urban areas. The authors write: \”We estimate that 4 the post-pandemic shift to working from home (relative to the pre-pandemic situation) will lower post-COVID worker expenditures on meals, entertainment, and shopping in central business districts by 5 to 10 percent of taxable sales.\” 
2) The workers who are well-positioned to benefit from working form home often tend to have higher incomes and workplace status. Workers in retail or manufacturing or many other other jobs don\’t have a work-from-home option. For new workers getting hired, on-the-job learning and professional connections are almost certainly harder to create when you\’re one more face in a checkerboard of continual online meetings. In that sense, the additional perk of sometimes working from home is likely to create a separation between a more favored class of  workers that has access to this option and other workers who do not. 
3) There\’s a conflict in what workers and employers saying about productivity during the pandemic. In this survey data, workers typically report being more productive from home. But employers often report that productivity is lower when people are working at home (for example, see \”What Jobs are Being Done at Home During the Covid-19 Crisis? Evidence from Firm-Level Surveys,\” by Alexander W. Bartik, Zoe B. Cullen, Edward L. Glaeser, Michael Luca & Christopher T. Stanton, NBER Working paper #27422 , June 2020). One possible reason for this gap is that many of those working from home are happy to be doing it, and they are overestimating their productivity. Another possible reason is that workerks tend to focus on their productivity in doing specific day-to-day tasks, but employers are also looking at activities like the benefits of training or brainstorming that may be facilitated by more informal face-to-face interactions. 

4) Finally, there\’s a lot of research on the \”economics of density,\” which tends to find that workers who are grouped together have higher productivity. After all, there\’s a reason why cities and downtown areas with concentrated employment came into existence in the first place, and why they have been the engines of economic growth over time. The after-effects of the pandemic will test this connection. If those who work closely in a physical sense continue to have higher pay and productivity, then those who work from home are likely to gain flexibility but suffer some career slowdowns, because they aren\’t where the action is. Perhaps employers and firms have now learned how to gain the benefits of physical closeness via web-based conference calls. Or maybe not. 

For an overview of these arguments about the economics of density, the Summer 2020 issue of the Journal of Economic Perspectives has a useful Symposium on the Productivity Advantages of Cities: 

For a previous post on this topic from last spring, see \”Will Telecommuting Stick?\” (May 26, 2020).

conversableeconomist

COVID Comparisons Across Countries and US States: A Graphing Tool from the FT

 The Financial Times has a useful graphing tool that allows you to compare rates of COVID-19 new cases or deaths, either across countries or across US states. Here are a couple of charts with international comparisons that I made yesterday. Feel free to make your own, and to contemplate them.

This graph show rates of COVID-19 deaths per 100,000 population, based on a seven-day rolling average to smooth the line. On the far right of the diagram, the blue line at the top is the European Union. The purple line just below that is the United Kingdom. The green line below that is Sweden. The pink line is the United States.

As with most statistics, one can view the glass as half-full or half-empty. The pink line showing US COVID-19 death rates has not so far spike as high as the EU rate. But if one looks back over the summer, the US death rate line was substantially above the EU line. 

Perhaps the higher US death rate over the summer will mean a lower death rate this fall? Maybe. But the numbers of new COVID-19 cases gives reason for concern. This graph shows rates of new COVID-19 cases per 100,000 population, again using a seven-day rolling average to smooth the line. The blue EU line for new cases started rising in August and September, and then spiked to well above the US level in September and October, before peaking in early November. The pink US line for new cases started spiking in October, and at least for the moment it seems to have peaked a little later and higher than the EU level–which may presage a  higher US death rate in the weeks to come. The green line showing Sweden\’s COVID-19 cases was at EU levels last summer, but is now peaking. The United Kingdom seems to be doing a little better than the EU as a whole. The blue line at the bottom showing Canada has done the best of the countries show, but has also seen a substantial recent rise. 

 

There\’s a tendency to read these graphs as if they are a judgement on public health authorities, or on the willingness of the public to follow public health advice. This view isn\’t wrong, but it\’s also incomplete.  The specifics of the virus and how it interacts with the season and with local human environments gets a say of its own, too.