conversableeconomist

Fall 2020 Journal of Economic Perspectives Online

I am now in my 34th year as Managing Editor of the Journal of Economic Perspectives. The JEP is published by the American Economic Association, which decided about a decade ago–to my delight–that the journal would be freely available on-line, from the current issue all the way back to the first issue. You can download it various e-reader formats, too. Here, I\’ll start with the Table of Contents for the just-released Fall 2020 issue, which in the Taylor household is known as issue #134. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the next week or two, as well.

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Symposium: How Much Income and Wealth Inequality? 
\”The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts,\” by \”Emmanuel Saez and Gabriel Zucman
This paper studies inequality in America through the lens of distributional macroeconomic accounts—comprehensive distributions of the aggregate amount of income and wealth recorded in the official macroeconomic accounts of the United States. We use these distributional macroeconomic accounts to quantify the rise of income and wealth concentration since the late 1970s, the change in tax progressivity, and the direct redistributive effects of government intervention in the economy. Between 1978 and 2018, the share of pre-tax income earned by the top 1 percent rose from 10 percent to about 19 percent, and the share of wealth owned by the top 0.1 percent rose from 7 percent to about 18 percent. In 2018, the tax system was regressive at the top-end; the top 400 wealthiest Americans paid a lower average tax rate than the macroeconomic tax rate of 29 percent. We confront our methods and findings with those of other studies, pinpoint the areas where more research is needed, and describe how additional data collection could improve inequality measurement.
Full-Text Access | Supplementary Materials

\”Business Incomes at the Top,\” by Wojciech Kopczuk and Eric Zwick
Business income constitutes a large and increasing share of income and wealth at the top of the distribution. We discuss how tax policy treats and shapes how businesses are organized and how they distribute economic gains to owners, with the focus on closely held and pass-through firms. These considerations influence whether and how labor and capital income is observed in economic data and feed into research controversies regarding the measurement of inequality and the progressivity of the tax code. We discuss the importance of these issues in the United States and highlight that limited evidence from other countries suggests that they are likely to be important elsewhere.
Full-Text Access | Supplementary Materials

\”Growing Income Inequality in the United States and Other Advanced Economies,\” by Florian Hoffmann, David S. Lee and Thomas Lemieux
This paper studies the contribution of both labor and non-labor income in the growth in income inequality in the United States and large European economies. The paper first shows that the capital to labor income ratio disproportionately increased among high-earnings individuals, further contributing to the growth in overall income inequality. That said, the magnitude of this effect is modest, and the predominant driver of the growth in income inequality in recent decades is the growth in labor earnings inequality. Far more important than the distinction between total income and labor income, is the way in which educational factors account for the growth in US labor and capital income inequality. Growing income gaps among different education groups as well as composition effects linked to a growing fraction of highly educated workers have been driving these effects, with a noticeable role of occupational and locational factors for women. Findings for large European economies indicate that inequality has been growing fast in Germany, Italy, and the United Kingdom, though not in France. Capital income and education don\’t play as much as a role in these countries as in the United States.
Full-Text Access | Supplementary Materials

Symposium: Economics and Epidemiology

\”An Economist\’s Guide to Epidemiology Models of Infectious Disease,\” by Christopher Avery, William Bossert, Adam Clark, Glenn Ellison and Sara Fisher Ellison
We describe the structure and use of epidemiology models of disease transmission, with an emphasis on the susceptible/infected/recovered (SIR) model. We discuss high-profile forecasts of cases and deaths that have been based on these models, what went wrong with the early forecasts, and how they have adapted to the current COVID pandemic. We also offer three distinct areas where economists would be well positioned to contribute to or inform this epidemiology literature: modeling heterogeneity of susceptible populations in various dimensions, accommodating endogeneity of the parameters governing disease spread, and helping to understand the importance of political economy issues in disease suppression.
Full-Text Access | Supplementary Materials

\”Epidemiology\’s Time of Need: COVID-19 Calls for Epidemic-Related Economics,\” by Eleanor J. Murray
The COVID-19 pandemic has catapulted scientific conversations and scientific divisions into the public consciousness. Epidemiology and economics have long operated in distinct silos, but the COVID-19 pandemic presents a complex and cross-disciplinary problem that impacts all facets of society. Many economists have recognized this and want to engage in efforts to mitigate and control the pandemic, but others seem more interested in attacking epidemiology than attacking the virus. As an epidemiologist, I call upon economists to join with us in combating COVID-19 and in preventing future pandemics. In this essay, I attempt to provide some insight for economists into how epidemiology works, where it doesn\’t work, and the much-needed answers that economists can help us obtain. I hope this will spur economists towards an epidemic-related economics that can provide a blueprint for a healthy economy and population.
Full-Text Access | Supplementary Materials

Articles

\”A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?\” by Frank J. Fabozzi, Robert J. Shiller and Radu S. Tunaru
The housing sector is the largest spot market in the world without a developed derivative contract to serve the risk management needs of market participants. This paper describes the evolution within a wider economic context of property derivatives in the United States and worldwide. We review various economic arguments presented in the literature to highlight the advantages of these financial instruments to society. The paper also provides a critical perspective on the principal obstacles hindering the development of property derivatives based on real estate prices—especially housing prices—and what can be done to overcome these difficulties. The issues discussed can serve as a guide for designing property derivatives capable of hedging real estate risk that has resurfaced time and time again in financial crises.
Full-Text Access | Supplementary Materials

\”Welfare Analysis Meets Causal Inference,\” by Amy Finkelstein and Nathaniel Hendren
We describe a framework for empirical welfare analysis that uses the causal estimates of a policy\’s impact on net government spending. This framework provides guidance for which causal effects are (and are not) needed for empirical welfare analysis of public policies. The key ingredient is the construction of each policy\’s marginal value of public funds (MVPF). The MVPF is the ratio of beneficiaries\’ willingness to pay for the policy to the net cost to the government. We discuss how the MVPF relates to \”traditional\” welfare analysis tools such as the marginal excess burden and marginal cost of public funds. We show how the MVPF can be used in practice by applying it to several canonical empirical applications from public finance, labor, development, trade, and industrial organization.
Full-Text Access | Supplementary Materials

\”The Persistent Effects of Initial Labor Market Conditions for Young Adults and Their Sources,\” by Till von Wachter
Unlucky young workers entering the labor market in recessions suffer a range of medium- to long-term consequences. This paper summarizes the findings of the growing empirical literature on this subject and uses it to assess economic models of career development. The literature finds large initial effects on earnings, labor supply, and wages that tend to fade after ten to fifteen years in the labor market, and that are accompanied by changes in occupation, job mobility, and employer characteristics. Adverse initial labor market entry also has persistent effects on a range of social outcomes, including timing and completed fertility, marriage and divorce, criminal activities, attitudes, and risky alcohol consumption. There is also evidence that early exposure to depressed labor market lowers health and raises mortality in middle age, patterns accompanied by a reopening of earnings gaps.
Full-Text Access | Supplementary Materials

\”Retrospectives: Regulating Banks versus Managing Liquidity: Jeremy Bentham and Henry Thornton in 1802,\” by John Berdell and Thomas Mondschean
At nearly the same moment, Jeremy Bentham and Henry Thornton adopted diametrically opposed approaches to stabilizing the financial system. Henry Thornton eloquently defended the Bank of England\’s actions as the lender of last resort and saw its discretionary management of liquidity as the key stabilizer of the credit system. In contrast, Jeremy Bentham advocated the imposition of strict bank regulations and examinations, without which, he predicted, Britain would soon experience a systemic crisis—which he called \”universal bankruptcy.\” There are strong parallels but also dramatic differences with our recent attempts to reduce systemic risk within financial systems. The Basel III bank regulatory framework effectively intertwines Bentham\’s and Thornton\’s diametrically opposed approaches to stabilizing banks. Yet Bentham\’s and Thornton\’s concerns regarding the stability of the wider financial system remain alive today due to financial innovation and the politics of responding to financial crises.
Full-Text Access | Supplementary Materials

\”Recommendations for Further Reading,\” by Timothy Taylor
Full-Text Access | Supplementary Materials

conversableeconomist

The Dam Removal Problem

One of the many highlights of my fatherhood experience was when one of my children was assigned a paper on the Hoover Dam. This meant that for a couple of weeks I could ask during family dinnertime conversations: \”How is the dam paper going? Is the dam first draft ready yet? What are you learning from your dam school project?\” Years later, my children still wince about the experience. Well, the dam topic is back again. 

Researchers at Resources for the Future have been looking at the issue of old and outdated dams. The National Inventory of Dams (NID) from the US Army Corps of Engineers counts 91,500 dams in the United States with an average age of 57 years. Some of the dams continue to serve useful purposes: carbon-free power generation, flood protection, drinking water supply, irrigation, creating bodies of water for recreation, and so on. But many others are both no longer useful and  \”high-hazard,\” meaning that there is risk to human life if/when they fail. For these dams, removal will often be a better option. Margaret A. Walls and Vincent Gonzales provide a readable overview of the work in \”Dismantling Dams Can Help Address US Infrastructure Problems\” (Resources, October 2020). For more details, their longer report is \”Dams and Dam Removals in the United States\” (RFF Report 20-12, October 2020).

The National Inventory of Dams tries to include all dams in the US that meet \”at least one of the following criteria:

  1. High hazard potential classification – loss of human life is likely if the dam fails,
  2. Significant hazard potential classification – no probable loss of human life but can cause economic loss, environmental damage, disruption of lifeline facilities, or impact other concerns,
  3. Equal or exceed 25 feet in height and exceed 15 acre-feet in storage,
  4. Equal or exceed 50 acre-feet storage and exceed 6 feet in height.

These are the relatively big dams. A fuller count of smaller dams from a couple of decades ago suggests that there might be 2.5 million dams in the US as a whole. 

The Stanford National Performance of Dams Program also provides useful background information. As their 2018 report on \”Dam Failures in the U.S.\” points out, there was a major surge in dam-building after World War II, which has then slowed to nearly a halt in the last couple of decades. 

The Walls and Gonzales report digs into the data from the National Inventory of Dams and reports: 

[A] hazard rating is a classification that conveys the consequences should the dam fail or be operated improperly and release water. It is highly dependent on the location of the dam—that is, whether it is located near heavily populated areas—and the size of the reservoir. Seventeen percent of dams in the NID have a high hazard rating, 12 percent are rated as a significant hazard, 65 percent are considered a low hazard, and 5 percent have an undetermined hazard rating. Of the high-hazard dams, private entities own the largest share, at 43 percent. Comparing this with private ownership of dams as a whole, however, which is 62 percent, private entities appear to have fewer of the high-hazard dams than do other owner types. Local governments, for example, own 20 percent of all dams but 29 percent of high-hazard dams, and the federal government owns only 4 percent of all dams but 9 percent of high-hazard dams.

As they point out, removing dams can both reduce the risks of a collapse, and also offer other potential benefits: 

Removing an obsolete or deteriorating dam can often be a better option than repairing it. In many cases, removal is less costly than repair, and if the dam no longer provides services of sufficient value, spending money on repairs makes little sense.

Removing a dam can have many environmental benefits. Dam removal restores a river’s natural function, improving water quality and conditions for aquatic habitat by increasing flows and reducing water temperatures, and provides passage to and from the ocean for anadromous fish species such as salmon. … 

The removals have ranged from very small dams, such as the 81 dams removed from the Cleveland National Forest in Southern California, to large dams with removal costs in the tens of millions of dollars, such as the 106-foot-tall San Clemente Dam in California and the Elwha and Glines Canyon Dams in Washington. On the East Coast, removals of dams such as the Edwards Dam on the Kennebec River in Maine and the Embrey Dam on Virginia’s Rappahannock River have benefited oceangoing species such as American shad, alewife, blueback herring, and American eel (a catadromous species that lives in freshwater and returns to the ocean to breed).

Dam removal also can create new river recreation opportunities by providing unimpeded boat passage and restoring whitewater conditions. The removal of three dams on the Cuyahoga River in Ohio was motivated by concerns over water quality, but removing the dams actually spurred growth in the local outdoor recreation economy by producing Class 5 rapids in downtown Cuyahoga Falls. The final dam slated to come down on the Cuyahoga River, the 60-foot-tall Gorge Dam, is expected to reveal a buried 200-foot natural waterfall.

The removal of certain kinds of dams can improve river safety. Low-head (or “run-of-the-river”) dams, which lie across the width of a river or stream and typically form only a minimal reservoir, create underwater circulating hydraulics that have caused hundreds of drowning deaths. After six deaths in one summer at low-head dams in Iowa, the state launched the Water Trails and Low-head Dam Mitigation Program, which focuses on removing and reengineering low-head dams around the state while providing canoe and kayak trails to enhance river recreation.

Despite these success stories, as of January 2020, only an estimated 1,700 dams have been removed in the United States. Numbers are on the rise—nearly half of the removals have taken place in the last ten years—but are low relative to the total number of dams. Moreover, a mere five states account for half of all removals: Pennsylvania (343), California (173), Wisconsin (141), Michigan (94), and Ohio (82).

There are lots of reasons for why outdated and high-hazard dams aren\’t removed. There\’s an up-front cost. Those who would benefit from the dam removal may not even know that they would do so. The regulators who in theory are overseeing the dams are stretched thin. Margaret Walls discusses these issues and how they have been overcome in various states in \”Aligning Dam Removal and Dam Safety: Comparing Policies and Institutions across States\” (RFF Report 20-13, October 2020). 

Older, outdated, and high-hazard dams are situation where the most useful infrastructure spending can involve removal, not rebuilding.  

conversableeconomist

Max Weber: "He Who Lets Himself in for Politics … Contracts with Diabolical Powers"

As Election Day approaches, I find myself mulling over some comments from the century-old essay by Max Weber on \”Politics as a Vocation\” (1919, available various places on the web, like here). Weber discussed the connection from good intentions to ultimate results in politics, and offers some warnings that politics is not a morality play where good intentions always lead to good results, or vice versa.  For example, he writes: 

[T]he world is governed by demons and that he who lets himself in for politics, that is, for power and force as means, contracts with diabolical powers and for his action it is not true that good can follow only from good and evil only from evil, but that often the opposite is true. Anyone who fails to see this is, indeed, a political infant.

More broadly, Weber argues that there are broadly speaking two types of rules for ethical conduct: an \”ethic of ultimate ends\” and an \”ethic of responsibility.\” These both have a role to play, and exist in tension with each other. But Weber seems to emphasize that even when focused on ultimate ends like justice or fairness, one still has some responsibility to take account of the likely and foreseeable results of given actions. Weber writes: 
[A]ll ethically oriented conduct may be guided by one of two fundamentally differing and irreconcilably opposed maxims: conduct can be oriented to an \’ethic of ultimate ends\’ or to an \’ethic of responsibility.\’ This is not to say that an ethic of ultimate ends is identical with irresponsibility, or that an ethic of responsibility is identical with unprincipled opportunism. Naturally nobody says that. However, there is an abysmal contrast between conduct that follows the maxim of an ethic of ultimate ends–that is, in religious terms, \’The Christian does rightly and leaves the results with the Lord\’–and conduct that follows the maxim of an ethic of responsibility, in which case one has to give an account of the foreseeable results of one\’s action.
For context, here\’s a fuller quotation from the \”the world is governed by demons …\” passage. 

My colleague, Mr. F. W. Forster, whom personally I highly esteem for his undoubted sincerity, but whom I reject unreservedly as a politician, believes it is possible to get around this difficulty by the simple thesis: \’from good comes only good; but from evil only evil follows.\’ In that case this whole complex of questions would not exist. But it is rather astonishing that such a thesis could come to light two thousand five hundred years after the Upanishads. Not only the whole course of world history, but every frank examination of everyday experience points to the very opposite. The development of religions all over the world is determined by the fact that the opposite is true. The age-old problem of theodicy consists of the very question of how it is that a power which is said to be at once omnipotent and kind could have created such an irrational world of undeserved suffering, unpunished injustice, and hopeless stupidity. Either this power is not omnipotent or not kind, or, entirely different principles of compensation and reward govern our life–principles we may interpret metaphysically, or even principles that forever escape our comprehension This problem–the experience of the irrationality of the world–has been the driving force of all religious evolution. The Indian doctrine of karma, Persian dualism, the doctrine of original sin, predestination and the deus absconditus, all these have grown out of this experience. Also the early Christians knew full well the world is governed by demons and that he who lets himself in for politics, that is, for power and force as means, contracts with diabolical powers and for his action it is not true that good can follow only from good and evil only from evil, but that often the opposite is true. Anyone who fails to see this is, indeed, a political infant.

(For those not familiar with the term, the Upanishads are an ancient Sanskrit text, written from about 800 BC to 200 BC, that laid out some of the central principles of Hinduism.)
And here a fuller quotation for the ethic of ultimate ends and ethic of responsibility passage: 

We must be clear about the fact that all ethically oriented conduct may be guided by one of two fundamentally differing and irreconcilably opposed maxims: conduct can be oriented to an \’ethic of ultimate ends\’ or to an \’ethic of responsibility.\’ This is not to say that an ethic of ultimate ends is identical with irresponsibility, or that an ethic of responsibility is identical with unprincipled opportunism. Naturally nobody says that. However, there is an abysmal contrast between conduct that follows the maxim of an ethic of ultimate ends–that is, in religious terms, \’The Christian does rightly and leaves the results with the Lord\’–and conduct that follows the maxim of an ethic of responsibility, in which case one has to give an account of the foreseeable results of one\’s action. You may demonstrate to a convinced syndicalist, believing in an ethic of ultimate ends, that his action will result in increasing the opportunities of reaction, in increasing the oppression of his class, and obstructing its ascent–and you will not make the slightest impression upon him. If an action of good intent leads to bad results, then, in the actor\’s eyes, not he but the world, or the stupidity of other men, or God\’s will who made them thus, is responsible for the evil. However a man who believes in an ethic of responsibility takes account of precisely the average deficiencies of people; as Fichte has correctly said, he does not even have the right to presuppose their goodness and perfection. He does not feel in a position to burden others with the results of his own actions so far as he was able to foresee them; he will say: these results are ascribed to my action. The believer in an ethic of ultimate ends feels \’responsible\’ only for seeing to it that the flame of pure intentions is not quenched: for example, the flame of protesting against the injustice of the social order.

conversableeconomist

Bertrand Russell: Thoughts on Politics, Passion, and Skepticism

In Bertrand Russell\’s essay “On the Value of Scepticism” (from in his 1958 book The Will to Doubt), he suggests that when opinions are expresses with great passion, including political opinion, it is often because the rational grounds for those opinions are limited.  Russell wrote: 

When there are rational grounds for an opinion, people are content to set them forth and wait for them to operate. In such cases, people do not hold their opinions with passion; they hold them calmly, and set forth their reasons quietly. The opinions that are held with passion are always those for which no good ground exists; indeed the passion is the measure of the holder\’s lack of rational conviction. Opinions in politics and religion are almost always held passionately.

Russell also offered an interesting working definition of skepticism in a world where may topics have a small-ish experts who have considered the issue at length, and then the rest of us. 

There are matters about which those who have investigated them are agreed; the dates of eclipses may serve as an illustration. There are other matters about which experts are not agreed. Even when the experts all agree, they may well be mistaken. Einstein\’s view as to the magnitude of the deflection of light by gravitation would have been rejected by all experts not many years ago, yet it proved to be right. Nevertheless the opinion of experts, when it is unanimous, must be accepted by non-experts as more likely to be right than the opposite opinion. The scepticism that I advocate amounts only to this: (1) that when the experts are agreed, the opposite opinion cannot be held to be certain; (2) that when they are not agreed, no opinion can be regarded as certain by a non-expert; and (3) that when they all hold that no sufficient grounds for a positive opinion exist, the ordinary man would do well to suspend his judgment.

conversableeconomist

Is Political Polarization a Rise in Tribalism?

What if our political differences are not first-and-foremost about different policies or priorities, but instead are about increased feelings of attachment to a political tribe? Jonathan Rauch put forward this thesis in \”Rethinking Polarization\” (National Affairs, Fall 2019):

Assuredly, Democrats and Republicans are much more purely left-wing and right-wing, respectively, than they were 50 years ago. Certainly, Republicans are more hostile to government than are Democrats. Ideologically, the parties stand on opposite shores. But they still are far from internally coherent in any philosophical sense. Democrats are divided between market-oriented technocrats and self-declared democratic socialists. Republicans are in the grip of a populist takeover that defies the relatively libertarian, internationalist orthodoxy of their heretofore dominant Reaganite wing. Are the Democrats center-left or socialist? Both. Are the Republicans populist or libertarian? Again, both. We are not seeing a hardening of coherent ideological difference. We are seeing a hardening of incoherent ideological difference.

And that is really the essence of what feels like a growing division in our country. In 2017, Pew\’s polling found that blacks\’ political attitudes have not diverged significantly from whites\’ since 1994, or women\’s from men\’s, or college graduates\’ from non-college graduates\’. Even across lines of age and religious observance, political attitudes have diverged only modestly. But the attitudinal gap between Democrats and Republicans has risen from 15 percentage points in 1994 to a whopping 36 points in 2017. In other words, the growing, and now gaping, divide in Americans\’ political values is specifically partisan. And the growth in partisanship does not reflect a clear or clean ideological divide. First and foremost, the increase in partisanship reflects, well, an increase in partisanship.

Here we reach an interesting, if somewhat surreal, question. What if, to some significant extent, the increase in partisanship is not really about anything? To put the point in a less metaphysical way, what if tribalism as such, not ideological disagreement, is behind much or even most of the rise of polarization? What if emotional identification with a partisan team is driving ideology, more than the other way around? To understand and assess this peculiar proposition, we need to expand our toolkit beyond classical political science and into social and cognitive psychology. …

It\’s not so much that we like our own party as that we detest the other. In fact, Eric Groenendyk, of the University of Memphis, finds evidence that people hate the other party partially because they are disappointed in their own party. \”[T]hey appear to be rationalizing continued identification with their party in the face of this ambivalence by reporting even more negative feelings toward the other party,\” he writes. \”In other words, they seem to be engaging in the \’lesser of two evils\’ identity defense.\” By protecting their sense of belonging, intense partisan animosity performs what Groenendyk has called emotional rescue. The fevered view of President Obama proffered by people like Dinesh D\’Souza may have been absurd, but it did serve the purpose of making every Republican leader look better by comparison. If Donald Trump is the devil incarnate, then you had better support whatever mediocre Democrat is on offer.

In any case, an implication of negative partisanship is that partisans are not so much rallying for a cause or party they believe in as banding together to fight a collective enemy — psychologically and politically a very different kind of proposition, as we see when we look at the literature on what tribalism does to the brain.

Social patterns like this don\’t really have a \”solution,\” but Rauch suggests that one approach is \”civic bridge-building,\” by which he means broader participation in all the groups that to some extent cut across partisan lines–and thus in indirect ways break down lines of tribal partisanship. It seems to me not purely a coincidence (although of course a number of factors are at work) that 2020 is a time both when many activities of civic bridge-building have been on hold by the pandemic and partisan political tensions are running high.

 

conversableeconomist

Henry Adams: "Politics … Had Always Been the Systematic Organization of Hatreds"

The great historian Henry Adams had a US President as a grandfather and also as a great-grandfather: John Quincy Adams and John Adams. His 1907 autobiography, The Education of Henry Adams is written from an outside perspective, as if his older self was a separate person watching his younger self grow up.  Some of Adams\’s description of the political climate in which he grew up as a boy in the 1840s had some resonance for me as the 2020 election season draws to an end: 

The atmosphere of education in which he lived was colonial, revolutionary, almost Cromwellian, as though he were steeped, from his greatest grandmother\’s birth, in the odor of political crime. Resistance to something was the law of New England nature; the boy looked out on the world with the instinct of resistance; for numberless generations his predecessors had viewed the world chiefly as a thing to be reformed, filled with evil forces to be abolished, and they saw no reason to suppose that they had wholly succeeded in the abolition; the duty was unchanged. That duty implied not only resistance to evil, but hatred of it. Boys naturally look on all force as an enemy, and generally find it so, but the New Englander, whether boy or man, in his long struggle with a stingy or hostile universe, had learned also to love the pleasure of hating; his joys were few.

Politics, as a practice, whatever its professions, had always been the systematic organization of hatreds, and Massachusetts politics had been as harsh as the climate.

Of course, this comment raises the question of whether politics needs to be a systematic organization of hatreds, and if not, how people can help themselves to be both politically active, fervent, and committed while in no way fostering or giving in to hatred of their opponents.

conversableeconomist

Reflections on Editing from the Podhoretz Clan, Father and Son

The Journal of Economic Perspectives, where I have worked as Managing Editor since 1986, is in many ways quite different from Commentary magazine. JEP is sponsored by the American Economic Association and aimed primarily at an audience of academic economists and their students, along with a wider circle of interested policy-makers and journalists. Commentary was sponsored by the American Jewish Committee for its first 60 years, although it has now been a free-standing journal for the last 15 years.  The current editor describes its purpose as \”defense of the West and its institutions, defense of Israel, serving as a bulwark against anti-Semitism, and reflecting in its pages the cultural legacy of the West …\” 
Commentary is now commemorating its 75th anniversary. Norman Podhoretz was the editor from 1960 to 1994, and his son John has been the editor since 2009. The two of them sat down for a conversation which is published in the November 2020 issue.  If you want details of Commentary\’s history or memorable stories about what was like editing Daniel Patrick Moynihan or Jeane Kirkpatrick, or what it was like jousting with the American Jewish Committee for editorial independence, check out the interview as a whole. As a hands-on editor myself, I found myself interested in their comments on what it means to edit. Here\’s a selection:

JOHN: People don’t really understand what editors do, which is completely understandable. I don’t know what a stereo technician does when he opens up a stereo to fix it. Editing is in part a technical process. You commission an article, you get the article back, and it’s rare that an article doesn’t need some form of massaging, grammatical or thematic. It’s missing points, or it elides them, or it doesn’t have good transitions. So, like a mechanic, you try to repair it. … Why do you think some people are good at all this and some people aren’t? Is it a skill that can be learned?

NORMAN: Good editors, really good editors, are very rare, in fact even rarer than good writers. It’s a special kind of talent because it takes two qualities that rarely go together in the same person. On the one hand, great arrogance, and on the other hand, great selflessness. The arrogance lies in the fact that you, the editor, thinks he knows better than the author, who is usually a specialist, on how to say what it is he wants to say. The humility or selflessness, which is very important, is that you are willing to lend your talents to someone else’s work without getting any credit for it. …

JOHN: The most self-confident, intellectually self-confident writers in my experience have very little problem with being edited. When editing triggers a defensive or hostile response, it’s because the writer himself is insecure and believes that he is coming under attack or criticism. …

JOHN: Line editing is the act of going through an article sentence by sentence or paragraph by paragraph and improving the article that way—even to the point of reorganizing the piece if necessary because the argument is flipped around or points are made that would be better made later, whatever.

NORMAN: I always described it as putting the manuscript under a microscope. And that’s where the defects would reveal themselves. But the other aspect of editing is ideas. A good editor can be a good editor even without technical skills, but good because he or she has some sense of what’s going on out there, what’s relevant, what’s interesting. Not so much to the audience, but to himself, and taking himself as the audience, what would I like to read about and what would I like to hear. And that’s different. ..

NORMAN: That’s why heavy editing was necessary. Without it, it would have been impossible to maintain that combination of, what shall I say, authority, sophistication, and accessibility. It won’t happen if you just sit back and publish what is sent to you. It really has to be created.

For the (perhaps vanishingly small number of) readers of this blog who would like some additional thoughts about editing, here you go:   

conversableeconomist

Some 12-Grader Education Inequalities by Race

One of the most concerning US racial inequalities is the one embodied in K-12 academic preparation, which often sets the stage for additional education, jobs, income levels, the neighborhood where you live, and more. The National Assessment of Educational Progress is often referred to as the \”Nation\’s Report Card.\” It\’s a nationally representative test. The results for 12th graders who graduated in 2019 are now available. 

On the math side, the median score (that is, half scored higher and half scored lower) was 150. The 25th percentile score was 125, and the 75th percentile score was 150. Here\’s the breakdown by race/ethnicity. 

As the chart shows, average math scores are up for some groups. But the gap between white and black scores is just a bit larger in 2019 than in 2005.  Remember, an entire cohort of K-12 student who were just entering school about 2005 have now graduated. The gaps that were apparent in 2005 persist. 

For reading scores, the median was a score of 288, with the 25th percentile at 258 and the 75th percentile at 315. The data for reading is not presented in the same way as for math (!), but it\’s possible to go through some tables and create a similar graph for 12th grade reading scores by race/ethnicity.

Again,  average reading scores are up for some groups. But the gap between white and black scores is just larger in 2019 than in 2005; indeed, a different figure going back to 1992 shows that the white/black gap in scores in 2019 is the largest during this time. 

There is of course a considerable body of research that seeks to explore and explain these gaps. A common finding in this research is that there are strong correlations between levels of parental income and education and student achievement.  Here are a couple of examples that crossed my desk.

Kenneth A. Shores, Ha Eun Kim, and Mela Still, \”Categorical Inequality in Black and White: Linking Disproportionality across Multiple Educational Outcomes\” (American Educational Research Journal, October 2020, 57:5, pp. 2089–2131). From the abstract: \”We characterize the extent to which Black-White gaps for multiple educational outcomes are linked across school districts in the United States. Gaps in disciplinary action, grade-level retention, classification into special education and Gifted and Talented, and Advanced Placement course-taking are large in magnitude and correlated. Racial differences in family income and parent education are strikingly consistent predictors of these gaps, and districts with large gaps in one outcome are likely to have large gaps in another. Socioeconomic and segregation variables explain 1.7 to 3.5 times more variance for achievement relative to non-achievement outcomes.\” 

Sean F. Reardon,  Ericka Weathers,  Erin Fahle, Heewon Jang, and Demetra Kalogrides have written 
\”Is Separate Still Unequal? New Evidence on School Segregation and Racial Academic Achievement Gaps\” (Stanford Center for Education Policy Analysis, September 2019).  From the abstract: \”In this paper we estimate the effects of current-day school segregation on racial achievement gaps. We use 8 years of data from all public school districts in the U.S. We find that racial school segregation is strongly associated with the magnitude of achievement gaps in 3rd grade, and with the rate at which gaps grow from third to eighth grade. The association of racial segregation with achievement gaps is completely accounted for by racial differences in school poverty: racial segregation appears to be harmful because it concentrates minority students in high-poverty schools, which are, on average, less effective than lower-poverty schools. Finally, we conduct exploratory analyses to examine potential mechanisms through which differential enrollment in high-poverty schools leads to inequality. We find that the effects of school poverty do not appear to be explained by differences in the set of measurable teacher or school characteristics available to us.\”

This post isn\’t the place to try to solve America\’s K-12 education issues, which are of long standing. But I\’ll add a few thoughts. 

1) It\’s not a good thing to have large and persistent gaps in educational performance across groups. It perpetuates previous inequalities. Moreover, a country that does a better job of building its human capital will also be a country with higher levels of growth and wealth.
2) There are surely places in the vast K-12 system where additional funding would help. But by international standards, the US K-12 education system is not performing especially well. However, the per-student spending is pretty much what would be expected by international standards, given the US level of per capita GDP.
3) There\’s a line of research which suggests that what students often need is to build up the personal skills and resources that they need to be successful at school. Christopher L. Quarles,  Ceren Budak and Paul Resnick make this argument about community college students in \”The shape of educational inequality\” (Science Advances,  July 15, 2020,)
4) Many of our social arguments about education these days seem to revolve around  issues like about admissions criteria for selective colleges: Harvard, Yale, Michigan, Texas, Berkeley and others. But the problem of racial inequality in the US education system is not that all the problems are pretty much fixed, except for fairness of admissions at some top universities.  Indeed, the prominence given to these arguments about admissions patterns at selective universities sometimes seems to me like a way of avoiding racial inequalities that have now persisted for multiple generations of families.  
conversableeconomist

Return of the Tontine?

I first learned about tontine contracts as a child reading from Agatha Christie mysteries, like 4.50 From Paddington and The Pale Horse. A \”tontine\” is a financial contract where a certain sum of money is set aside and invested for the benefit of a group of people–but if some of those people die, their share of the funds pass to the survivors. If the group is relatively small and the members of group are known to alll, it\’s an excellent set-up for a murder mystery. 

But a tontine-style contract might also has some genuine practical advantages in retirement planning. J. Mark Iwry, Claire Haldeman, William G. Gale, and David C. John tell the story in \”Retirement Tontines: Using a Classical Finance Mechanism as an Alternative Source of Retirement Income\” (Brookings Institution, October 2020). 

For those, like me, who tend to associate tontines with fictional plot-lines, it\’s perhaps useful to point out that for several centuries they were useful financial products–not for small groups who would then try to murder each other, but for larger groups who did not know each other. Here\’s a working definition of a tontine: \”[T]ontine is an investment scheme in which so called shareholders create a common investment pool and derive some form of profit or benefit (usually financial) while they are alive. After the death of the shareholder his/her share gets split between the surviving shareholders in the pool and is not subject to inheritance rights. Tontine investment comes to an end when the number of surviving shareholders in the pool reaches a previously agreed on, small number.\”

The idea of a tontine contract goes back to a 1653 proposal from Lorenzo de Tonti, a 17th century Italian financier, who was advising the French government on how to borrow money. His notion was for the government to sell shares in a fund. The fund was to be divided by age groups, with each age group receiving a different rate of interest. As people in a certain age group died, their payments would be reallocated to the surviving members of that age group. However, the first government to enact something like Tonti\’s proposal was Holland in 1670, and France did not try a tontine contract until 1689, five years after Tonti\’s death. 

Versions of tontine-based contracts were widely used for centuries, and were a basis for US life insurance markets in the late 1800s. As Iwry, Haldeman, Gale, and John point out (footnotes omitted): 

Capital investment tontines were popular revenue-raising schemes in Europe from the 17th to the 19th century, helping governments and monarchies raise money for public works and wars. They even made inroads into the United States, as Alexander Hamilton proposed a capital investment tontine to pay off Revolutionary War debt. Although the federal government declined to pursue this option, many communities in the Colonial Era used tontines to finance local investments, and a capital investment tontine financed the construction of the original home of the New York Stock Exchange in the Tontine Coffeehouse. Tontines enabled governments to pay lower interest rates than they had to offer on other types of investment because surviving investors received not only the promised interest rate but also mortality credits, in exchange for giving up the right to pass their investment interest on to their heirs.

The life-insurance style tontine came to prominence in the U. S. in the late 1800s. Under these arrangements, policy holders paid premiums during a term (typically 20 years). If the policy holder died during the term, their beneficiaries would receive a payout. Policy holders who survived the term were entitled to a life annuity or equivalent lump-sum payout funded by the remaining pooled premiums from their deceased counterparts after insurance payouts to their beneficiaries as well as premiums from those whose policy had lapsed for failure to make a required premium payment at any point. This product drove the broad uptake of life insurance in the U.S. in the late 1800s and proved to be an effective vehicle for accumulating retirement savings before the advent of Social Security or private pensions. By 1900, two thirds of life insurance policies in the U.S. were tontine-style products, accounting for 7% of national wealth.

The popularity of life-insurance-style tontines, which essentially left large amounts of capital in the hands of insurers for decades, combined with a lack of regulation and oversight, made these policies ripe for corruption. The 1905 Armstrong Commission investigation in New York uncovered substantial embezzlement and misuse of funds, as well as unduly draconian triggers for lapse or forfeiture of the policy, leading New York lawmakers to effectively outlaw life insurance tontines as they then existed. This essentially ended the use of tontine-style products nationwide, since New York had regulatory authority over 95% of the national insurance market.

But the fact that tontine-style products were poorly regulated in 1905 doesn\’t mean that the idea itself is without merit. The Iwry, Haldeman, Gale, and John team point out that it\’s possible to design a \”natural\” or \”constant-payout\” tontine contract: instead of the most extreme murder-mystery version of a tontine, where all the payout goes to a lone survivor, the investment would be structured so that it pays out a certain amount every year (at least after a certain age). The total amount in the fund would decrease over time, as these payouts occurred, but as some members of the fund died, their payments would be redistributed to survivors. 

This kind of tontines contract is one possible answer to key difficulty of retirement planning is to address the danger of outliving your assets (at least for all of us who don\’t have a pension plan that will guarantee our payments for life). One of the best-known solution is to use some of your assets to purchase an annuity, which will then make payments from some predetermined age for the rest of your life.  

Perhaps the key difference between an annuity and a tontine is that when you buy an annuity contract, you are counting on the firm that sold you the contract to be able to pay off on its promises in the future. There is a thicket of rules and regulations applying to firms that sell annuities, all designed to make sure the firm will pay off in the future, but also all imposing costs on the transaction. In contrast, the amount of money put into a tontine is fixed. If the investments from the tontine went very poorly, the payments from the tontine would automatically drop. A tontine doesn\’t offer a guarantee of how much will be paid, like certain kinds of annuities (or a defined benefit pension). But precisely because it doesn\’t offer a guarantee, it can be regulated in much different and less costly ways, and for that reason it could offer both a lifetime stream of income and higher returns than many annuities. 

Iwry, Haldeman, Gale, and John write:

While commercial annuities guarantee a specified income for life, tontine pooling offers more expected income with less but still meaningful protection at what should be a lower cost. They would not require the charges insurers need to impose or the reserves they need to maintain to cover their annuity payment guarantees and insurance against systematic longevity risk. Tontines would also require less and less costly regulation. …

[T]he U.S. is lagging the rest of the world in tontine-like arrangements. European Union member states permit tontines, usually as a supplement to government-paid or occupational benefits. The pension for former employees of SwissAir is structured as a tontine. In Sweden, the national pension system redistributes the accrued pension wealth of the deceased among all survivors of the same age cohort. In Japan, some workers pay into a tontine-like annuity from their 50s until retirement, when they begin receiving payouts to supplement their national pensions; when they die most of what they have contributed is reallocated among the other policy holders. Tontine-style funds are explicitly legal in the UK. Canada paved the way for tontine-style products when its 2019 budget proposed legislation to permit them under the name Variable Payment Life Annuities. In South Africa, a tontine style investment designed to improve retirement security for poor workers has begun enrolling participants.

In short, a lot of the regulatory details have already been worked out, and tontine-style contracts are working in other places. The US could steal a page from the Canadian public relations playbook and refer to these contracts as Variable Payment Life Annuities, and then proceed. 

conversableeconomist

The Need for Large Firms in Developing Countries

The US economy had about 6 million firms in 2017 (the most recent data). About 20,000 of those firms employed more than 500 people, and those 20,000 firms (about one-third of 1 percent of the total) accounted for 53% of all US employment by firms. Another 90,000 firms employed between 100 and 499 workers, and those 90,000 firms (about 1.5% of the total) accounted for another 14% of all US employment by firms. The job totals here don\’t take into account employment by the public sector and by nonprofits. But the point I\’m making is that an important social function of firms is to coordinate production in a way that provides a bridge between workers and suppliers on one hand and the desires of customers on the other hand. In high-income economies, large firms coordinating the efforts of hundreds of workers play a major role in this activity. 
But many lower-income countries have only very small numbers of larger firms, which is one of the factor hindering their development. A group of World Bank researchers–Andrea Ciani, Marie Caitriona Hyland, Nona Karalashvili, Jennifer L. Keller, Alexandros Ragoussis, and Trang Thu Tran–address this topic in \”Making It Big: Why Developing Countries Need More Large Firms\” (September 2020). 
The available evidence on firm size, employment, and productivity in low- and middle-income countries is sometimes sketchy, so the report pulls together data, studies, and comparisons from a range of sources. The evidence strongly suggests benefits from large firms:

This report shows that large firms are different than other firms in low- and middle-income countries. They are significantly more likely to innovate, export, and offer training and are more likely to adopt international standards of quality. Their particularities are closely associated with productivity advantages—that is, their ability to lower the costs of production through economies of scale and scope but also to invest in quality and reach demand. Across low- and middle-income countries with available business census data, nearly 6 out of 10 large enterprises are also the most productive in their country and sector.

These distinct features of large firms translate into improved outcomes not only for their owners but also for their workers and for smaller enterprises in their value chains. Workers in large firms report, on average, 22 percent higher hourly wages in household and labor surveys from 32 low- and middle-income countries—a premium that rises considerably in lower-income contexts. That is partly because large firms attract better workers. But this is not the only reason: accounting for worker characteristics and nonpecuniary benefits, the large-firm wage premium remains close to 15 percent. Besides higher wages—which are strongly associated with higher productivity—large firms more frequently offer formal jobs, secure jobs, and nonpecuniary benefits such as health insurance that are fundamental for welfare in low- and middle-income countries. 

Using various measures, the authors argue that there is a pattern of a \”truncated top\” in the distribution of firm sizes in low- and middle-income countries. 

Smaller and lower-income markets tend to host smaller firms. But even in relative terms, there are too few larger firms in these countries relative to the size of the economy and the number of smaller firms—there is a “missing top.” In 2016, for example, for every 100 medium-size firms, more than 20 large firms were operating in the nonagricultural sector in the United States, as opposed to less than 9 in Indonesia—a lower-middle-income country with roughly the same population. A closer study of the firm-size distribution in country pairs suggests that what is missing are the larger of large firms—that is, those with 300+ employees—as well as the more productive and outward-oriented firms. … The evidence suggests that larger firms employing more than 300 workers are systematically underrepresented in the lower-income countries under observation. In Ethiopia, for example, large firms have a 7-percentage-point lower share of employment than what is predicted by the optimal distribution, while in Indonesia, the gap is 4.6 percentage points, corresponding to a rough estimate of 230,000 missing jobs in manufacturing. 

Why are there fewer large firms than expected, and how might low- and middle-income countries generate more large firms? As the report points out, there are basically four ways in which a large firm forms: \”foreign firms creating new affiliates, other large firms spinning off new ventures, governments, and entrepreneurs.\”

Given that the lack of large firms is the problem in the first place, spin-offs from existing large firms is not likely to address the problem. Having governments of low- and middle-income countries start large firms hasn\’t usually worked well. 

To fill the “missing top,” governments have often resorted to the creation of state-owned enterprises (SOEs). These firms rarely deliver the benefits one might expect from their scale. First, it has proven difficult to establish governance sufficiently independent of the state to operate in a commercial manner. SOEs often pursue a mix of social and commercial objectives, which are used to justify regulatory protection from competition. It is also difficult for governments to manage the conflict of interest that arises between exposing SOEs to competition, on the one hand, and the risk of job losses and changes in product offerings that come with this exposure, on the other. As a result, SOEs in lower-income economies rarely emulate the productivity and dynamism of privately owned firms: they are three times less likely to be the most productive firm in their country and sector.

The remaining options are to have foreign firms start a larger company, or to have domestic entrepreneurs build one. But many low-income countries have set up rules and regulations that make it hard for larger firms to operate. For example, there are often a set of taxes, regulations, and rules about employment and wages that only apply to firms larger than certain employment size–often set around 100 workers or in countries even less. Foreign firms are often blocked. There are often a variety of rules aimed at protecting small incumbent firms from competition, making it hard for larger firms to get a foothold. My own sense is that governments in low- and middle-income countries often tend to view large firms as an alternative power structure and (not without reason) as a threat to their own political power. For a detailed explanation of how this dynamic plays out in Mexico, a useful starting point is my post on \”Mexico Misallocated\” (January 24, 2019).

To put it another way, larger firms have some natural advantages in productivity, at least in certain contexts, but in many low- and middle-income countries, the sum total of government actions counterbalances and offsets that advantage. Thus, the World Bank researcher suggest that policies to encourage larger firms (and remember, we\’re only talking here about firms with 100 or few hundred employees, not giant global multinationals) mostly involve existing governments getting out of the way: 

In low-income countries, governments can achieve that objective with simple policy reorientations, such as breaking oligopolies, removing unnecessary restrictions to international trade and investment, and putting in place strong competition frameworks to prevent the abuse of market power. Opening markets to competition benefits entrants of all sizes. In practice, however, regulation is often designed for the benefit of large incumbents using statutory monopolies and oligopolies, preferential access to natural resources and government contracts, or barriers to foreign competitors that rarely enter at small scale in new markets. The entry of more large firms to compete with incumbents would aim to disperse power by any one firm. There is a long way to go in this regard: regulatory protection of incumbents in lower-middle-income countries is more than 60 percent greater, on average, than the level observed in high-income countries.

Beyond the entry point, operational costs associated with a range of government policies can greatly influence investors’ decisions to establish new, large firms. Large firms in low- and middle-income countries are significantly more likely than small firms to report customs operations, the court system, workforce skills, transportation, and telecommunications infrastructure as constraining their operations. Bread-and-butter reforms that aim to improve market regulation, trade processes, and tax regimes and to protect intellectual property rights stand to make a difference in that respect, even when these long-term reforms do not have large-firm creation as the objective.

The need for expanding employment into jobs with decent pay is a huge topic for many low- and middle-income countries of the world–from India and south Asia to sub-Saharan Africa, from China to the countries of the Middle East. That policy goal is not likely to be achievable without a surge in large firms in these countries.