Year: 2020

\”Sumptuary laws\” typically refers to laws in the Middle Ages that were passed in part to limit conspicuous consumption, and in part to enforce lines of social distinction, so that, say, only the nobility could wear certain fabrics or colors. Melissa Snell offers a quick overview of \”Medieval Sumptuary Laws\” (ThoughtCo.com, March 29, 2019).

The topic was on my mind because of a recent essay by John Tierney in City Journal, who argues that current bans against plastic bags or plastic straws represent a modern version of the sumptuary laws (Winter 2020, \”The Perverse Panic over Plastic: The campaign against disposable bags and other products is harming the planet and the public\”). Tierney writes:

Today’s plastic bans represent a revival of sumptuary laws (from sumptus, Latin for “expense”), which fell out of favor during the Enlightenment after a long and inglorious history dating to ancient Greece, Rome, and China. These restrictions on what people could buy, sell, use, and wear proliferated around the world, particularly after international commerce increased in the late Middle Ages.

Worried by the flood of new consumer goods and by the rising affluence of merchants and artisans, rulers across Europe enacted thousands of sumptuary laws from the thirteenth to the eighteenth centuries. These included exquisitely detailed rules governing dresses, breeches, hose, shoes, jewelry, purses, bags, walking sticks, household furnishings, food, and much more—sometimes covering the whole population, often specific social classes. Gold buttons were verboten in Scotland, and silk was forbidden in Portuguese curtains and tablecloths. In Padua, no man could wear velvet hose, and no one but a cavalier could adorn his horse with pearls. It was illegal at dinner parties in Milan to serve more than two meat courses or offer any kind of sweet confection. No Englishwoman under the rank of countess could wear satin striped with silver or gold, and a German burgher’s wife could wear only one golden ring (and then only if it didn’t have a precious stone).

Religious authorities considered these laws essential to curb “the sin of luxury and of excessive pleasure,” in the words of Fray Hernando de Talavera, the personal confessor to Spain’s Queen Isabella. “Now there is hardly even a poor farmer or craftsman who does not dress in fine wool and even silk,” he wrote, echoing the common complaint that imported luxuries were upsetting the social order and causing everyone to spend beyond their means. In justifying her sumptuary edicts, England’s Queen Elizabeth I lamented that the consumption of imported goods had led to “the impoverishing of the Realme, by dayly bringing into the same of superfluitie of forreine and unnecessarie commodities.”

But like the Americans who go on using plastic bags, the queen’s subjects refused to give up their “unnecessarie commodities.” The sumptuary laws failed to make much impact in England or anywhere else, despite the rulers’ best efforts. Their agents prowled the streets and inspected homes, confiscating taboo luxuries and punishing violators—usually with fines, sometimes with floggings or imprisonment. But the conspicuous consumption continued. If silk was banned, people would find another expensive fabric to flaunt. Rulers had to keep amending their edicts, but they remained one step behind, and often the laws were flouted so widely that the authorities gave up efforts to enforce them.

For historians, the great puzzle of sumptuary laws is why rulers went on issuing them for so many centuries despite their ineffectiveness. … The laws didn’t curb the public’s sinful appetite for luxury or contribute to national prosperity, but they comforted the social elite, protected special interests, enriched the coffers of church and state, and generally expanded the prestige and power of the ruling class. For nobles whose wealth was eclipsed by nouveau-riche merchants, the laws reinforced their social status. The restrictions on imported luxuries shielded local industries from competition. The fines collected for violations provided revenue for the government, which could be shared with religious leaders who supported the laws. Even when a law wasn’t widely enforced, it could be used selectively to punish a political enemy or a commoner who got too uppity.

The laws persisted until the waning of royal sovereignty and church authority, starting in the eighteenth century. As intellectuals promoted new rights for commoners and extolled the economic benefits of free trade, sumptuary laws came to be seen as an embarrassing anachronism. Yet the urge to rule inferiors never goes away.

Those interested in the question on whether bans on plastic bags and plastic straws make economic and environmental sense can start with Tierney\’s article. A couple of my own posts on plastics include:

• \”China Stops Importing Waste Plastic\” (July 12, 2018)
• \”Production, Use, and Fate of All Plastics Ever Made\” (November 29, 2019)
• \”Reusable Grocery Bags Can Kill (Unless Washed) (February 7, 2013)

Here, I want to focus on a different topic: Does it make sense to think of bans on plastic bags in the same category as rules related to wearing gold buttons or silk, or serving two meat courses? As for all topics, a first place to turn is Adam Smith, who mentions sumptuary laws several times in the Wealth of Nations. (As usual, I quote here from the online version freely available at the Library of Economics and Liberty website.)

One mention of sumptuary laws comes up during Smith\’s discussion \”Of the Accumulation of Capital, or of Productive and Unproductive Labour\” in Book II, Chapter III. Smith argues tartly that productivity has been rising in England, and mostly because of the frugality and efforts of individuals, not kings and ministers. Thus, Smith writes (boldface added):

The annual produce of its land and labour is, undoubtedly, much greater at present than it was either at the Restoration or at the Revolution. The capital, therefore, annually employed in cultivating this land, and in maintaining this labour, must likewise be much greater. In the midst of all the exactions of government, this capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times. England, however, as it has never been blessed with a very parsimonious government, so parsimony has at no time been the characteristical virtue of its inhabitants. It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people, and to restrain their expence, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

The arguments over plastic bags do not seem to fit well into this discussion of extravagance and opulence. However, the topic of sumptuary laws also comes up in Smith\’s discussion of \”taxes on consumable commodities\” in Book V, Ch. II. Smith is arguing that that commodities can be classified into \”necessities\” and \”luxuries,\” and further argues that taxes on necessities will lead to a rise in the wages of labor–in modern terms, we would say that taxes on necessities are passed on to employers. However, Smith argues that taxes on luxuries like tobacco and alcohol can be viewed as sumptuary laws that may have a beneficial effect on the poor. Smith writes: 

It is otherwise with taxes upon what I call luxuries, even upon those of the poor. The rise in the price of the taxed commodities will not necessarily occasion any rise in the wages of labour. A tax upon tobacco, for example, though a luxury of the poor as well as of the rich, will not raise wages. …  The different taxes which in Great Britain have in the course of the present century been imposed upon spirituous liquors are not supposed to have had any effect upon the wages of labour. …

The high price of such commodities does not necessarily diminish the ability of the inferior ranks of people to bring up families. Upon the sober and industrious poor, taxes upon such commodities act as sumptuary laws, and dispose them either to moderate, or to refrain altogether from the use of superfluities which they can no longer easily afford. Their ability to bring up families, in consequence of this forced frugality, instead of being diminished, is frequently, perhaps, increased by the tax. It is the sober and industrious poor who generally bring up the most numerous families, and who principally supply the demand for useful labour. 

This meaning of sumptuary laws is a little closer to the plastic bag application. In modern language, overuse of tobacco and alcohol have negative social consequences, and thus discouraging their use is appropriate. The argument made for bans on plastic bags is that they have negative social consequences, too.  But ultimately, it\’s hard for me to view rules about plastic bags and straws (whether one favors or opposes such proposals) as attempts to control what Smith would call the \”luxuries\” of the poor, or as an attempt to reinforce class distinctions.

My own sense is that environmental concerns about plastic in the environment have a sound basis, but that plastic grocery bags and plastic straws are a visible but insignificant part of that overall problem. Moreover, it has become apparent that a substantial share of efforts that claimed to recycle plastics in the past actually involved exporting them to China and other Asian destinations; in retrospect, putting that waste plastic into landfills might well have been a preferable environmental choice. 

The monthly US unemployment rate has been 4.0% or lower since March 2018. The idea that the US could sustain a level of unemployment this low was unexpected by mainstream economic forecasters.

For example, back in December 2012 when the unemployment rate was 7.9%, the Federal Reserve announced: \”In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent …\” The implication was that when the unemployment rate fell to 6.5%, that would be near the lowest level and it would be about time for the Fed to think about raising interest rates. But the unemployment rate fell below 6.5% by April 2014, and the Fed wasn\’t ready to start raising rates. It wasn\’t until December 2015 when the unemployment rate had fallen to 5.0% that the Fed started nudging interest rates upward.

Again, the implication in late 2015 and into 2016 was that when the unemployment rate hit 5%, it had fallen about as far as it was going to go. Here are a couple of illustrative figures from the 2020 Economic Report of the President, produced by the White House Council of Economic Advisers. The first figure shows the predictions from late 2016, from the Fed and the Congressional Budget Office, about that the decline in the unemployment rate was going to level out. But the unemployment rate just kept falling.

This figure shows the Fed\’s prediction in late 2016 for the rise in the total number of jobs in the US economy. The prediction was that the rise in jobs would level out, but the total number of jobs just kept rising.

Of course, Trumpophiles will credit this change to Trump administration policies, while the Trumpophobic will emphasize that the momentum toward lower unemployment rates and more jobs seems to have continued more-or-less uninterrupted from the pre-Trump years. Here, I want to sidestep the question of credit, and focus more tightly on what is actually going on behind these numbers.

An unemployed person can leave unemployment in two ways: either by getting a job, or by leavint the labor force so that they are no longer looking for a job. Similarly, person can enter unemployment in two way: either by losing a job and looking for a new one, or by re-entering the labor force and deciding to start looking for a job but not finding one right away. So, is the unemployment rate low because lower numbers of people are transitioning in, or because higher number are transitioning out, or some of both?  Marianna Kudlyak and Mitchell G. Ochse look at how the patterns of these transitions have evolved over time in \”Why Is Unemployment Currently So Low?\” (Economic Letter, Federal Reserve Bank of San Francisco, March 2, 2020).

Here\’s one of their figures showing transitions out of unemployment (using averages over three-month periods). By historical standards, these transitions from unemployment to jobs, or unemployment to out of the labor force, do not look very different. Indeed, the rate at which the unemployed are shifting to employment is lower now than it was before the Great Depression or back in the 1990s. In other words, the very low unemployment rate doesn\’t seem to be occurring because the unemployed are leaving unemployment at higher rates than in the past. 

This figure shows transitions into unemployment. The red line shows that transitions from out-of-the-labor force to unemployment were high right after the Great Recession, but are now at low levels. The blue line shows, similarly, that transitions from employment to unemployment were high during the Great Recession, but are now at low levels.

What are the underlying reasons why transitions into unemployment may be lower now than in the past? Kudlyak and Ochse don\’t analyze this issue explicitly, but they highlight two possibilities: an aging workforce and better job matches. The intuition is that an aging workforce (along with a lower rate of start-up firms) means that people are more likely to remain in a current job, and only to move if they have the new job already lined up. The argument for better job matches is that employers have developed better tools for evaluating whether employees are a good fit–in terms of skills, personality, cognitive ability, and more–and so those who get hired into a job will on average stay longer. In other words, when the Fed and the CBO were incorrect in their forecasts of where the unemployment rate was headed, these factors were the ones they had not not taken into account.

President Lyndon Johnson declared \”war on poverty\” during his State of the Union address on January 8, 1964. But the official poverty rate has remained disturbingly high. Here are figures showing the total number of people below the US poverty line and the poverty rate from the US Census Bureau:

Notice that the number of Americans below the poverty line falls sharply in the 1960s. But since about 1970, the number of people below the poverty line has generally trended upward with the growth of population, and the poverty rate hasn\’t moved much. 

It\’s mildly amusing to watch responses to these patterns from across the political spectrum. For example, liberals often are quick to embrace the basic interpretation of these figures–that poverty remains an enormous and unsolved social problem–but don\’t much like the implication that US programs to reduce poverty have been pretty ineffective over the decades. On the other side, conservatives are quicker to embrace the implication that US anti-poverty programs haven\’t worked well, but are less comfortable with accepting the idea that poverty remains as big a social problem as it was 50 years ago.

Of course, one can also argue that the official measure of poverty is misleading for various well-known reasons. For example, the official poverty measure is based on before-tax income received, and thus does not take into account how the poor might benefit from non-cash programs like Medicaid or food stamps, or from poverty benefits that involve reducing taxes or providing refundable tax credits. Another issues is that the official poverty lines (which vary according to number of people in a household) are increased each year according to the level of inflation as measured by the Consumer Price Index–but is that the most appropriate adjustment? Another more subtle issue is whether poverty should be measured across a \”family,\” which refers to people who are related by marriage or parent-child status, or or whether it should be measured across a \”household,\” which includes all of those living together at a certain address.

Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore recalculate what the official poverty rates would look like with an alternative set of adjustments for these factors in \”Evaluating the Success of President Johnson’s War on Poverty: Revisiting the Historical Record Using a Full-Income Poverty Measure\”  (December 2019, IZA DP No. 12855). Here\’s how the patterns change:

The top line is the official poverty line, with an adjustment for what is called the \”equivalence scale,\” which refers to how much the poverty line should be adjusted based on the number of people in a household. The authors write: \”For our equivalence scale, we adjust poverty thresholds based on the square root of the number of people in the household. For example, the poverty threshold for a 4-person household is twice that for a 1-person household.\” As they point out, this equivalence scale is fairly standard for a lot of work on poverty lines across different countries. Using a single equivalence scale doesn\’t make a big difference, but holds this factor constant for the calculations that follow.

Using the household as the unit of measure, rather than the family, takes into account how families live together and share resources, and thus reduces the poverty rate as shown. Looking at after-tax income, not before-tax income, reduces the poverty rate further as shown by the orange line. Accounting for non-cash, non-health insurance benefits like food stamps reduces the poverty rate further as shown by the green line. Adding health insurance benefits like Medicaid, together with all the other changes, reduces the poverty rate as shown by the orange line.

An additional step is to think about the appropriate level of inflation to use over time. The official poverty rate uses the Consumer Price Index. But one interesting fact about the CPI is that after it is calculated, it is never revised–not even when the US Bureau of Labor Statistics later makes changes in the technical formulas used to adjust the CPI. Because various contracts and laws depend on the CPI, this lack of adjustment makes some sense. But if you want to know how the poverty rate should have been adjusted over time, it makes sense to use the most current methods for calculating inflation. One prominent measure of buying power that is adjusted over time is called the Personal Consumption Expenditures price index. There is also a Consumer Price Index \”Research Series\” that uses modern methods to calculate what the CPI would have been in the past. The authors write:

Compared to 1963 thresholds, in 2017 the CPI-U used by the Official Poverty Measure generates a threshold that is 8.0 times as high in nominal dollars to hold the real value of the thresholds constant. To the degree that this is an overstatement of inflation, it will effectively raise the real level of these poverty thresholds and exaggerate the share of people in poverty in 2017 relative to 1963. In contrast, all of the other measures of inflation shown result in smaller changes in nominal thresholds. In particular, the PCE—which we use for the Full-income Poverty Measure—generates nominal thresholds in 2017 that are 22 percent below the thresholds using the Official Poverty Measure’s CPI-U, whereas using the Meyer-Sullivan adjusted CPI-U-RS would generate thresholds that are 46 percent below that using the CPI-U.

Adding this different measure of inflation, the preferred \”full-income poverty rate\” for these authors looks like this:

Clearly, one\’s beliefs about whether the \”War on Poverty\” was a success depends the extent to which these kinds of changes seem reasonable to you.  It\’s also worth remembering that attempts to measure the number of people in poverty using consumption data, rather than income data, also show a dramatic fall in the poverty rate.

Of course, while it might seem that evidence suggesting that that US poverty level is actually far below the official rate is good news (to the extent that it is true), nothing is simple in a politically polarized world. Conservatives would have to accept that a number of government programs have had a dramatic effect in successfully reducing poverty rates. Liberals would have to accept that poverty is now a much smaller problem than several decades ago.

A deeper problem here is that \”poverty\” is a judgement that always applies in the context of a specific place and time. US poverty isn\’t the same as what it means to be in poverty in Brazil or Nigeria or India. US poverty in 2020 isn\’t the same as what meant to be in \”poverty\” in the US in 1964 or in 1920 or in 1820. Burkhauser, Corinth, Elwell, and Larrimore suggest this conclusion (citations and footnotes omitted):

President Johnson’s War on Poverty—based on economic standards when he declared that war—is largely over and a success. … Nonetheless, societal views on poverty evolve over time. In 1971, Robert Lampman observed that “by present-day American standards most of the several billion people who have ever lived, and most of the three billion people alive today, were or are poor”. He also suggested that the goal of eliminating poverty based on these initial standards “should be achieved before 1980, at which time the next generation will have to set new economic and societal goals, perhaps including a new distributional goal for themselves”… Nevertheless, the dramatic reduction in poverty by 2017 based on President Johnson’s standards suggests that policymakers might consider setting new poverty thresholds that reflect modern-day expectations for what it means to be impoverished.

For a sense of what poverty meant back practical terms in the late 1950 and early 1960s–in terms of malnutrition, poor health, and lack of education–a readable starting is Michael Harrington\’s 1962 book: The Other America: Poverty in the United States. My own sense is that what one might call \”consumption poverty\” has dramatically decreased in the last 50-60 years, both because of government programs like Medicaid and food stamps and also because of how technologies from the microwave to the smartphone have become widespread even among those with lower incomes.  However, what one might call \”opportunity poverty\”–those who reach their late teens and early 20s with considerably less preparation to take participate in what 21st century America has to offer–remains a severe and ongoing issue.  

Each year, the legendary investor Warren Buffett writes a letter the Berkshire Hathaway shareholders, which offers both a detailed overview of company performance and a sprinkling of thoughts about investments and business. The most recent letter about company performance in 2019, which came out a week ago, Buffett offers some thoughts about independence in members of a corporate board of directors: 

Over the years, board “independence” has become a new area of emphasis. One key point relating to this topic, though, is almost invariably overlooked: Director compensation has now soared to a level that inevitably makes pay a subconscious factor affecting the behavior of many non-wealthy members. Think, for a moment, of the director earning $250,000-300,000 for board meetings consuming a pleasant couple of days six or so times a year. Frequently, the possession of one such directorship bestows on its holder three to four times the annual median income of U.S. households. (I missed much of this gravy train: As a director of Portland Gas Light in the early 1960s, I received $100 annually for my service. To earn this princely sum, I commuted to Maine four times a year.) 

And job security now? It’s fabulous. Board members may get politely ignored, but they seldom get fired. Instead, generous age limits – usually 70 or higher – act as the standard method for the genteel ejection of directors. 

Is it any wonder that a non-wealthy director (“NWD”) now hopes – or even yearns – to be asked to join a second board, thereby vaulting into the $500,000-600,000 class? To achieve this goal, the NWD will need help. The CEO of a company searching for board members will almost certainly check with the NWD’s current CEO as to whether NWD is a “good” director. “Good,” of course, is a code word. If the NWD has seriously challenged his/her present CEO’s compensation or acquisition dreams, his or her candidacy will silently die. When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home. 

Despite the illogic of it all, the director for whom fees are important – indeed, craved – is almost universally classified as “independent” while many directors possessing fortunes very substantially linked to the welfare of the corporation are deemed lacking in independence. Not long ago, I looked at the proxy material of a large American company and found that eight directors had never purchased a share of the company’s stock using their own money. (They, of course, had received grants of stock as a supplement to their generous cash compensation.) This particular company had long been a laggard, but the directors were doing wonderfully. 

Paid-with-my-own-money ownership, of course, does not create wisdom or ensure business smarts. Nevertheless, I feel better when directors of our portfolio companies have had the experience of purchasing shares with their savings, rather than simply having been the recipients of grants.

************

Here, a pause is due: I’d like you to know that almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbors and were fine citizens. I’ve enjoyed their company. Among the group are some men and women that I would not have met except for our mutual board service and who have become close friends. 

Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game. 

They, in turn, would never have asked me for help in removing a tooth, decorating their home or improving their golf swing. Moreover, if I were ever scheduled to appear on Dancing With the Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.

Sometimes an argument by an academic economist helps to trigger a process that saves 700,000 lives. This is the story of what\’s called an \”advance market commitment\”–a contractual agreement by governments, international organizations and nonprofits to purchase a certain amount of a vaccination or drug, if and when that drug is developed. An advance market commitment launched in 2009 helped lead to the development and distribution of a  pneumococcal vaccine for low-income countries, which in turn led to the development of three vaccines that have been used to immunize 150 million children , saving an estimated 700,000 lives.

Michael Kremer, Jonathan D. Levin, and Christopher M. Snyder tell the story in \”Advance Market Commitments: Insights from Theory and Experience\” (February 2020, NBER Working Paper 26775). This is a more polished follow-up to a working paper presented at a session of the Allied Social Science Associations (ASSA) meetings in January.

Kremer, in particular, as been pushing the idea of advance market commitments for several decades. For example, back in the Fall 2002 issue of the Journal of Economic Perspectives (where I work as Managing Editor), he wrote an article about \”Pharmaceuticals and the Developing World\” (pp. 67-90). He pointed out that a number of diseases had their primary effect in low-income countries and that drug companies in high-income countries had a limited incentive to focus on these diseases. Kremer wrote:

However, the most severe distortions in developing country pharmaceutical markets probably involve dynamic issues. Pharmaceutical firms are reluctant to invest in R&D on the diseases that primarily affect developing countries not only because the poverty of the potential users reduces their willingness to pay, but also because the potential revenue from product sales is far smaller than the sum of customers’ potential willingness to pay due to the lack of intellectual property protection and the tendency for governments to force prices down after firms have sunk their research and development costs. … 

Programs to encourage R&D can take two broad forms. “Push” programs subsidize research inputs—for example, through grants to researchers or R&D tax credits. “Pull” programs reward research outputs, for example, by committing in advance to purchase a specified amount of a desired product at a specified price. Both approaches have important roles, but current policy underutilizes pull programs. …

[U]nder pull programs, the public pays nothing unless a viable product is developed. Pull programs give researchers incentives to self-select projects with a reasonable chance of yielding a viable product and to focus on developing a marketable product. Under pull programs, governments do not need to “pick winners” among R&D proposals—they simply need to decide what success would be worth to society and offer a corresponding reward. Moreover, appropriately designed pull programs can help ensure that if new products are developed, they will reach those who need them. One kind of pull program is a purchase commitment in which sponsors would commit to purchase a specified number of doses at a specified price if a vaccine meeting certain specifications were developed. … An example of a purchase commitment would be for developed countries or private foundations to commit to purchase malaria vaccine at $5 per immunized person and to make it available to developing countries either free or for a modest copayment.

A working group under the auspices of the Center for Global Development, chaired by Ruth Levine, Michael Kremer, Alice Albright,  thought in more concrete terms about how to design advanced market commitments so that they would be enforceable contracts, and published its report in 2005.

Kremer, Levin, and Snyder summarize what happened next:

In 2007, five countries and the Gates Foundation pledged $1.5 billion toward a pilot AMC targeting a pneumococcal conjugate vaccine (PCV). The World Health Organization (WHO) estimated pneumococcus killed more than 700,000 children under five in developing countries annually at that time (WHO 2007). A PCV covering disease strains prevalent in developed countries already existed, and PCVs covering the strains in developing countries were in late-stage clinical trials; so this was a technologically close target.

In 2009, the AMC launched under the supervision of GAVI (formerly the Global Alliance for Vaccines and Immunizations). The design called for firms to compete for ten-year supply contracts capping price at $3.50 per dose. A firm committing to supply 𝑋𝑋 million annual doses (𝑋𝑋/200 of the projected 200 million annual need) would secure an 𝑋𝑋/200 share of the $1.5 billion AMC fund, paid out as a per-dose subsidy for initial purchases. The AMC covered the 73 countries below an income threshold for GAVI eligibility. Country co-payments were set according to standard GAVI rules.

There is a long-standing philosophical dispute over what should be called a \”right,\” which often breaks down into a discussion of \”negative\” and \”positive\” rights. The US Bill of Rights offers a number of examples of \”negative rights,\” which are typically phrased in terms of what is not allowed. For example, the First Amendment begins with \”Congress shall make no law …\” before referring to freedom of religion, speech, the  press, assembly, and petitioning for redress of grievances. In this view, a \”right\” is something that cannot be taken away from you.

On the other side, the UN Declaration of Human Rights includes a number of \”positive\” rights, in which a common phrasing is that \”everyone has a right to …\” For example, Article 19 says: \”Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.\” Other articles hold that everyone has a right to \”the economic, social and cultural rights indispensable for his dignity and the free development of his personality\” (Article 22), \”the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment …. to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection\” (Article 23), \”the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay\” (Article 24), \”the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control\” (Article 25). Many of these \”positive\” rights suggest that there is a duty or responsibility from government or society to provide certain goods, without specifying how this is to be done.

Of course, the line between \”negative\” and \”positive\” rights can be blurry in specific situations. But there does seem to me a meaningful distinction here. Moreover, I tend to agree with a long-ago comment by EB White, when the UN Declaration of Human Rights was under discussion, that referring to all human desires as human \”rights\” can lead to unwanted outcomes. As White wrote in 1953:

There is, I believe, a very real and discernible danger, to a country like ours, in an international covenant that equates human rights with human desires, and that attempts to satisfy, in a single document, governments and philosophies that are essentially irreconcilable. I do not think it safe or wise to confuse, or combine, the principle of freedom of religion or the principle of freedom of the press with any economic goal whatsoever, because of the likelihood that in guaranteeing the goal, you abandon the principle. This has happened over and over again. … If you were to pack croquet balls and eggs in a single container, and take them travelling, you would probably end your journey with some broken eggs. I believe that if you put a free press into the same bill with a full belly, you will likely end the journey with a controlled press.

But let us slide sideways out of the questions of philosophy, and instead phrase the question in terms of practicality. My experience is that many of those who want to wrap various policy goals in the language of \”rights\” is that they believe this designation will serve as a useful aspirational push for society to achieve these goals. Is that in fact true?

Robin Burgess, Michael Greenstone, Nicholas Ryan, and Anant Sudarshan offer a counterexample in \”The Consequences of Treating Electricity as a Right,\” in the Winter 2020 issue of the Journal of Economic Perspectives. They are discussing the broader provision of electricity in developing countries like India. they write:

How can treating electricity as a right undermine the aim of universal access to reliable electricity? We argue that there are four steps. In step 1, because electricity is seen as a right, subsidies, theft, and nonpayment are widely tolerated. Bills that do not cover costs, unpaid bills, and illegal grid connections become an accepted part of the system. In step 2, electricity utilities—also known as distribution companies—lose money with each unit of electricity sold and in total lose large sums of money. Though governments provide support, at some point, budget constraints start to bind. In step 3, distribution companies have no option but to ration supply by limiting access and restricting hours of supply. In effect, distribution companies try to sell less of their product. In step 4, power supply is no longer governed by market forces. The link between payment and supply has been severed: those evading payment receive the same quality of supply as those who pay in full. …

The consequences for electricity consumers, both rich and poor, are severe. There is only one electricity grid, and it becomes impossible to offer a higher quantity or quality of supply to those consumers who are willing and sometimes even desperate to pay for it. Socially beneficial transactions are therefore prevented from occurring. This interaction of the social norm that electricity is a right and the technological constraint of a common grid for all parties makes it impossible to ration service to person by person, and firm by firm, making the consequences of treating electricity as a right more severe than for other private goods. Though private alternatives to grid electricity exist, like diesel generators and solar panels, these substitutes are inferior to grid electricity in terms of price and load (Burgess et al. 2019). In fact, the only reason these substitutes are competitive at all is that the quality of the service the grid provides is so poor. 

\”Left- number bias\” refers to when people focus on the left-hand number–and thus, why so many prices in stores take the form of $X and 99 cents, rather than rounding up that extra penny. Avner Strulov-Shlain offers some additional evidence on this well-known phenomenon and then draws out some lesser-known implications in \”More than a Penny\’s Worth: Left-Digit Bias and Firm Pricing\” (December 2019, Chicago Booth Research Paper No. 19-22).  The Chicago Booth Review offers a short readable overview here.

Strulov-Shlain estimated demand curves for products. However, in the model he uses, raising price by a certain amount (say, by a penny or a dime) are allowed to have a bigger effect when it changes the left-hand dollar value than when it doesn\’t change the left-hand dollar value. He writes: 

The last two US recessions were both linked to financial markets: that is, the dot-com boom-and-bust of the late 1990s leading up to the recession of 2001, and how the housing market boom-and-bust worked its way through the financial system in the lead-upto the Great Recession from 20017-2009. One could that that financial markets actually led the say into the last three US recessions, depending on how one views the meltdown of the US savings and loan industry in the lead-up to the 1990-91 recession. Thus, when looking around for how the next recession might arise, it\’s natural to scan financial markets, and corporate bonds keep coming up as a potentially worrisome area.

S. Celik, G. Demirtaş and M. Isaksson  look at this topic from a global perspective in “Corporate Bond Markets in a Time of Unconventional Monetary Policy” (OECD Capital Market Series, February 2020). Here\’s some background.

Between 2008-2018 global corporate bond issuance averaged USD 1.7 trillion per year, compared to an annual average of USD 864 billion during the years leading up to the financial crisis. As a result, the global outstanding debt in the form of corporate bonds issued by non-financial companies reached almost USD 13 trillion at the end of 2018. This is twice the amount in real terms that was outstanding in 2008. The United States remains the largest market for corporate bonds. But non-financial companies from most other economies, including Japan, the United Kingdom, France and Korea, have all increased their use of corporate bonds as a means of borrowing. On a global scale, the most significant shift has been the rapid growth of the Chinese corporate bond market. The People’s Republic of China (China) has moved from a negligible level of issuance prior to the 2008 crisis to a record issuance amount of USD 590 billion in 2016, ranking second highest in the world. 

Much of this rise in corporate debt was desired by policy-makers and beneficial to the world economy. After all, when central banks reduce interest rates, the hope is to stimulate borrowing that will raise aggregate demand in the economy. When policy-makers pass regulations to limit the risks taken by banks, they are in effect pushing some of that borrowing out of the banking sector and into bond markets–where the risks will be carried by private investors.

But when borrowing rises sharply, there are also natural questions to ask. Is the overall level of risk associated with these loans rising or falling? Are the borrowers actually planning to repay, or are they planning to take out more loans in the future–thus raising the possibility of \”roll-over risk\” if it becomes harder for them borrow in the future? Or to make these questions concrete, think about how the coronavirus news affects the risks of the bonds already issued in the enormous surge of borrowing by Chinese corporations.

Even before coronavirus, it looked as if the riskiness of corporate bonds as an overall category was on the rise. Corporate bonds are either \”investment grade,\” in which case they get a credit rating from bond agencies, or \”non-investment grade.\” In the \”investment grade\” bonds, the OECD report points out:

Our more detailed analysis of the composition of the investment grade category reveals a marked continuous increase in BBB rated bonds, which is the rating just above non-investment grade. While BBB rated bonds made up about 30% of all investment grade bonds issued in 2008 they accounted for almost 54% in 2018. This relative increase in lower rated investment grade bonds has come at the expense of a decrease in AA and AAA rated bonds. … This prolonged decline in bond quality points to the risk that a future downturn may result in higher default rates than in previous credit cycles.

Another way of looking at risk is to look at the \”covenant protection,\” which refers to the legal language in the bond contracts and how much power it gives to those who purchased the bonds if repayment isn\’t made on time. These protections have been weakening, too.

Compared to the pre-2008 period there has been a marked decrease in the use of key covenants for non-investment grade bonds. … While lower levels of covenant protection may allow companies to escape default for a longer time, the expectation of a company’s default and achievable recovery rates may still affect investor portfolios negatively. Moreover, historical data shows that low quality covenants have a significant negative effect on recovery rates.

Yet another way of looking at risk in corporate bonds is to look at how much the companies need to repay in the relatively near-term of the next few years.

As of December 2018, companies in advanced economies need to pay or refinance USD 2.9 trillion within 3 years and their counterparts in emerging economies USD 1.3 trillion. At the 1-, 2- and 3-year horizons, advanced and emerging market companies have the highest corporate bond repayments since 2000. Notably, for emerging market companies, the amount due within the next 3 years has reached a record of 47% of the total outstanding amount; almost double the percentage in 2008.

The OECD report has lots more detail about specific categories of corporate bonds and their risks. Here, I\’ll just add that from a macroeconomic perspective, the issue here isn\’t the safety or riskiness of specific corporate bonds, or even the corporate bond sector as a whole. The issue is that corporate debt is a magnifier in both good and bad economic times. If the world economy receives a a sufficiently large negative shock, corporations with more debt–and more risky debt–are going to find themselves in a more fragile financial position. As a result, they will be more likely to cut back on investing in expanding production through new plant and equipment, research and development, and hiring additional workers.

For China\’s economy, one way in which disruptions from the coronavirus are going to percolate through to the rest of the economy is through China\’s corporate bond market. For the US economy, at least some monetary and banking policymakers are already doing some advance thinking about how to react if the US corporate bond market comes under stress.

For some previous posts and link to reports and commenters worried about corporate debt, see:

• \”U.S. Corporate Debt: Warning Signs?\” (March 6, 2019)
• \”U.S. Corporate Debt and Leveraged Loans: Financial Snags Ahead?\” (September 21, 2018)
• \”The Dramatic Expansion of Corporate Bonds\” (June 21, 2018)
• \”Financial Risks: Views from the Office of Financial Research\” (January 29, 2016)

Americans spent $5.8 billion on pet care services in 2017, according to recent estimates from economists at the US Bureau of the Census. To be clear: \”The pet care services industry (NAICS code 812910) includes services such as grooming, boarding, training and pet sitting. It does not include veterinary services, boarding horses, transporting pets, pet food or other pet supplies.\”

My first thought on seeing the pet care services article was to be reminded, yet again, of the enormous size and richness of the US economy. My second thought was about costs of US national elections.

According to the OpenSecrets website run by the Center for Responsive Politics, total spending for federal elections in 2016–including the presidential campaign, as well as races for the House and Senate–was $4.6 billion. One suspects that with billionaires Michael Bloomberg and Tom Steyer tossing around money will raise the total election campaign spending for 2020. (Bloomberg has reported put $464 million into his campaign so far, and Steyer has put $267 million into his campaign.) But even so, Americans will probably spend roughly the same on pet care services in 2020 than the total amount spent on all campaigns for the presidency and Congress.

As another comparison, the US corporations that spend most heavily on advertising in 2018 are Comcast ($6.12 billion), AT&T ($5.36 billion), Amazon ($4.47 billion), Procter & Gamble ($4.3 billion. It\’s very likely in the 2020 that perhaps 5-7 large companies will each individually have an advertising budget above the total spent by all presidential candidates (in 2016, $1.4 billion), and the top 1-2 corporate spending budgets will exceed the total spent on all campaigns for the presidency and Congress combined.

On one side, the total amounts spent on national election campaigns do seem large. But give the power that politicians wield over the $4.6 trillion federal budget, not to mention over the passage of domestic regulations and foreign policy, all in the context of a US GDP of $22 trillion in 2020, the amounts spent on campaigning don\’t seem vastly out of line.

From this perspective, what\’s remarkable is not how much the US spends on elections, but how little. This isn\’t a new observation: back in 2003, the Journal of Economic Perspectives ran an article called \”Why Is There so Little Money in U.S. Politics?\” by Stephen Ansolabehere, John M. de Figueiredo and James M. Snyder Jr. They argued that the evidence does not support a view of campaign contributions as an investment by special interests expecting a return; instead, campaign contributions are better viewed as a form of consumption spending, in which contributors enjoy a sense of connectedness and participation.

Ultimately, it\’s not the total amount of spending on campaigns that annoys or concerns me. It\’s that the ads are banal, uncreative, information-free, not gently but obviously full of spin. In addition, the campaigns see fit to hit you with the same ads over and over again. By Election Day, it is hard for me to avoid a feeling that the advertising agencies for the candidates–and by extension the candidates themselves–feel disdain or contempt for the electorate.

My other concern is that while people obsess over total campaign spending, which mostly happens out in the open through live candidate events and media advertising, the totally different category of lobbying expenses fly under the radar. The OpenSecrets website also collects data on lobbying expenses; in 2019, for example, over 11,000 registered lobbyists spent $3.5 billion. My suspicion is that this total is an underestimate, because a lot of what might reasonably be called lobbying is not registered and recorded. But we know that lobbying happens every year, whether there is an election or not. How this lobbying is directed is murky, and what it accomplishes in adjusting the fine print of legislation or nipping certain proposals in the bud is opaque. Here\’s a figure from OpenSecrets:

It\’s easy enough to explain why China\’s economic development has gotten more attention than that of India. China\’s growth rate has been faster. China\’s effect on international trade has created more a shock for the rest of the global economy. In geopolitical terms, China looks more like a rival. Also, China\’s basic story-line of trying to liberalize a centrally-planned economy while keeping a communist government is fairly easy to tell.

But whatever the plausible reasons why China\’s economy has gotten more attention than India, it seems clear to me that India\’s economic developments have gotten far too little attention. A symposium in the Winter 2020 issue of the Journal of Economic Perspectives offers some insights:

• \”Dynamism with Incommensurate Development: The Distinctive Indian Model,\” by Rohit Lamba and Arvind Subramanian
• \”Why Does the Indian State Both Fail and Succeed?\” by Devesh Kapur
• \”The Great Indian Demonetization,\” by Amartya Lahiri

I\’ll also mention an article on \”Caste and the Indian Economy,\” by Kaivan Munshi, which appears in the December 2019 issue of the Journal of Economic Literature, a sibling journal of the JEP (that, is both are published by the American Economic Association).

Lamba and Subramanian point out that over the 38 years from 1980 (when India started making some pro-business reforms), India is one of only nine countries in world to have averaged an annual growth rate of 4.5%, with no decadal average falling below 2.9% annual growth. (The nine, listed in order of annual growth rates during this time with highest first, are Botswana, Singapore, Korea, Taiwan, Malta, Hong Kong, Thailand, India, and Malaysia.) Of course, one can tweak these cutoffs in various ways, but no matter how you slice it, India\’s growth rate over the last four decades has been remarkable. Moreover, India\’s population is likely to exceed China\’s in the near future.

But India\’s path to rapid growth has been notably different than many other countries. India is ethnically fractionalized, especially when the caste system is taken into account.In addition, India path to development has been \”precocious,\” as Lamba and Subramanian put it, in two ways.

One involves the \”modernization hypothesis\” that economic development and democracy evolve together over time.  In India, universal suffrage arrived all at once when India became independent in 1948. For a sense of how dramatic this difference is, the graph below shows per capita GDP on the horizontal axis and degree of democracy on the vertical axis. The lines show the path of countries over time. Clearly, India defies the modernization hypothesis by having full democracy before development. China defies the modernization hypothesis in the other direction, by having develoment without democracy.

The other precocious factor for India is that economic development in most countries involves a movement from agriculture to manufacturing to services. However, India has largely skipped the stage of low-wage manufacturing, and moved directly toward a services-based economy. One underlying factor is India\’s \”license raj\”–the interlocking combinations of rules about starting a business, labor laws, and land use that have made it hard for manufacturing firms to become established. A related factor is that in global markets, India\’s attempts at low-wage manufacturing over the decades were outcompeted by Korea, Thailand, China–and now by the rise of robots.

The good side of this \”precocious servicification\” is that that high-income economies are primarily services and services are a rising part of international trade. The bad side is that this services economy works much better for the relatively well-educated in urban areas, and offers less opportunity for others–thus leading to greater inequality.

India faces a range of other issues as well. Environmental problems in India are severe: when it comes to air pollution for example, \”22 of the top 30 most polluted cities in the world are in India.\” The role of women in India\’s economy and society is in some ways moving backward: \”Female labor force participation in India has been declining from about 35 percent in 1990 to about 28 percent in 2015. For perspective, the female labor force participation rate in Indonesia in 2015 was almost 50 percent; in China, it was above 60 percent. In addition, the gap between India’s labor force participation rate and the rate of countries with similar per capita GDP is widening, not narrowing. … India’s sex ratio at birth increased from 1,060 boys born for every 1,000 girls in 1970 to 1,106 in 2014, widening its gap from the biological norm of 1,050.\”

The capabilities of India\’s government are shaped by these underlying background factors. Devesh Kapur writes in JEP:

India’s state performs poorly in basic public services such as providing primary education, public health, water, sanitation, and environmental quality. While it is politically effective in managing one of the world’s largest armed forces, it is less effective in managing public service bureaucracies. The research literature on India has many discussions of programs that fail to deliver meaningful outcomes, or that are victims of weak implementation and rent-seeking behavior of politicians and bureaucrats, or that are vitiated by discrimination against certain social groups …

But on the other side, the Indian state has a strong record in successfully managing complex tasks and on a massive scale. It has repeatedly conducted elections for hundreds of millions of voters—nearly 900 million in the 2019 general elections—without national disputes. In this decade, it has scaled up large programs such as Aadhaar, the world’s largest biometric ID program (which crossed one billion people enrolled within seven years of its launch). Most recently, it has implemented the integrated Goods and Services Tax (GST), one of the most ambitious tax reforms anywhere in recent times. India ranks low on its ability to enforce contracts, but its homicide rate has dropped markedly from 5.1 in 1990 to 3.2 (per 100,000) in 2016 … 

[T[he Indian state has delivered better in certain situations and settings: specifically, on macroeconomic rather than microeconomic outcomes; where delivery is episodic with inbuilt exit, rather than where delivery and accountability are quotidian and more reliant on state capacity at local levels; and on those goods and services where societal norms and values concerning hierarchy and status matter less, rather than in settings where these norms and values—such as caste and patriarchy—are resilient.

Kapur traces these issues back to the ethnic fractionalization, social cleavages and caste system in India, combined with India\’s early adoption of democracy. Moroever, India is a country with a low tax/GDP ratio and a relatively small number of taxpayers. He also points out that most government positions in India require a difficult civil-service examination, and by international standards India\’s government does not appear overstaffed. A pattern has evolved that India\’s government is relatively effective on big picture projects like electrification, but much less effective on local issues that are related to social expectations about caste and gender: for example, reforms related to education, or the welfare of children and women.  In countries as different as the United States and China, about 60% of all government employees are at the local level; in India, it\’s less than 20%.

India continues to have issues with caste differences, as explored in the article by Kaivan Munshi. he writes: 

Caste continues to play an important role in the Indian economy. Networks organized at the level of the caste or jati provide insurance, jobs, and credit for their members in an economy where market institutions are inefficient. Affirmative action for large groups of historically disadvantaged castes in higher education and India’s representative democracy has, if anything, made caste more salient in society and in the public discourse. Newly available evidence with nationally representative data indicates that there has been convergence in education, income, occupations, and consumption across caste groups over time. … The available evidence indicates that caste discrimination, at least in urban labor markets, is statistical, that is, based on differences in socioeconomic characteristics between upper and lower castes. … Given the strong intergenerational persistence in human capital, the key variable driving convergence, it will be many generations before income and consumption are equalized across caste groups.

The caste-based economic networks that currently serve many functions will also disappear once markets begin to function efficiently. These networks continue to be active in the globalizing Indian economy because information and commitment problems are exacerbated during a period of economic change. In the long run, however, the markets will settle into place and the caste networks will lose their purpose. This has certainly been the experience in many developed countries. In the United States, for example, ethnic networks based on a European country (region) of origin supported their members through the nineteenth century into the middle of the twentieth century. Ultimately, however, these networks no longer served a useful role and today, outside of a few pockets, European ethnic identity in the United States is largely symbolic. We might expect caste to similarly lose its salience as India develops into a modern market economy, and there is some evidence that this process may have already begun.

 Amartya Lahiri takes up yet another issue: \”On November 8, 2016, India demonetized 86 percent of its currency in circulation.\” Specifically, India declared that people needed to turn in their large-denomination bills at banks, and that the existing bills would be worthless moving forward. They would then be replaced with new currency. The policy had several goals, like making it impossible for organized crime to hide its accumulated gains in the form of cash, and bringing people into the banking system and the digital economy. But Lahiri argues that these larger goals were not much affected by the change. Instead, the main effect of the demonetization was causing short-term hardship and higher unemployment in the areas where the demonetization led to temporary cash shortages. I had not known that India had carried out similar demonetizations of large-denomination currency in 1946 and 1978–with, Lahiri argues, much the same minimal-to-negative effects.

India\’s record of sustained and strong economic growth appears to be in some danger from the \”twin balance sheet challenge.\”  As Lamba and Subramanian put it:

The sustainability of growth—which in late 2019 has cratered to a near standstill— will be determined by structural factors salient amongst which is the “twin balance sheet challenge” initiated by the toxic legacy of the credit boom of the 2000s. Recently, the rot of stressed loans has spread from the public sector banks to the nonbank financial sector, and on the real side, from infrastructure companies to most notably the real estate sector with the latter threatening middle class savings. This contagion owes both to overall weak economic growth and slow progress in cleaning up bank and corporate balance sheets. A failure to resolve this challenge could mean a reprisal of the Japanese experience of nearly two decades of lost growth, but at a much lower level of per capita income. India’s development experience could end up being a transition from socialism without entry to capitalism without exit because weak regulatory capacity and lack of social buy-in will have impeded the necessary creative destruction.

Thus, India\’s economy finds itself at a pivotal moment, facing both the short-run challenges of the twin balance sheet problem, the longer run economic problems of appropriate reforms to create an environment in which India\’s businesses can function and grow, the challenges of building transportation, energy, and communications infrastructure., and the social policy challenges of improving education and health care. Challenges never come singly.