Donating to the Conversable Economist

Last summer, ten years after starting this Conversable Economist blog, I finally put up a link for donations. A number of readers have already responded generously, and I appreciate your support more than I can say. Moving forward, my plan is to remind readers of the donation button about twice a year, and the time has come for such a reminder.

This blog serves many purposes for me. It’s an outlet for stuff in my head, so I don’t have to burden family and friends with an overload of economics. It’s a memory aid, so that I can track down things I read 6 or 12 or 18 months ago with relative ease. It’s a commitment device, forcing me to actually read various reports and articles that I might otherwise skim past. But the honest truth is that without a group of faithful readers, none of those motivations would be enough motivation for me to keep the blog going for almost 11 years now.

For readers, my hope is that the blog serves as an example of what economic sociologist Mark Granovetter once called “the strength of weak ties.” His argument was that all of our social networks have “strong ties” and “weak ties,” where strong ties refers to a connections who are also quite likely to be connected with others in our personal network, and weak ties refers connections to those who are mostly not connected with others in our personal network. Granovetter makes the point that when you learn something from one of your strong ties, the same lesson could have (and probably would have) been passed along by another one of your strong ties. But the information and lessons that you learn from weak ties might not have come to you in any other way.

If you are looking for a blog with predictable, partisan, and preferably snarky opinions about the headlines of the day, then the Conversable Economist is not going to be your cup of tea. Instead, much of what I do on this blog is to provide weak ties to articles, subjects, and authors that you are less likely to have run across. I’m sure that some of my personal opinions come across in what I choose to pass along, but I’m neither trying to hide my own opinions nor to push them very hard. My own belief is that the supply of opinionated and partisan opinion-writing on the web has become so large that the value of marginal contributors to that dialog has sunk to near-zero. Instead, I hope that whether you agree with me or not, the facts and connections that I pass along are of some value. I am less invested in persuading readers to agree (although agreement is always nice!) than I am in what John Courtney Murray called “achieving disagreement,” by which he meant disagreement reached with a full and sympathetic understanding of the alternative position, rather than disagreement that occurs from confusion, distrust, and a cussed disposition.

I will keep the Conversable Economist blog freely available to all readers, no matter what. But if you feel moved to make a contribution in support of my efforts and if you have the financial resources to do so, I encourage you to click on the “Donation” button near the upper-right of this page.

The Fed as Borrower of Last Resort?

Economics textbooks teach that one role of central bank during a financial or economic crisis is to act as a short-term “lender of last resort”: that is, when the financial system is in danger of freezing up in a way that can lead to an expanding vicious circle of defaults–as those who can’t get roll-over loans are unable to repay others, who also can’t roll over their loans, and son on–the central bank makes short-term credit available. When the panic passes, the central bank lender-of-last-resort loans get repaid: indeed, because the central bank was the only one willing and ready to make large-scale loans during the crisis, it can even end up making some money from the interest it charges on these loans. Often some firms will end up going broke in the aftermath of the crisis, but the purpose of a lender-of-last-resort policy is not to do a complete or widespread bailout of specific firms. Instead, the goal is to prevent the market as a whole from melting down.

In the last decade or so, the Federal Reserve has transformed how it conducts monetary policy, and recently, part of the new policy seems to involve acting as a borrower of last resort. Kyler Kirk and Russell Wong of the Richmond Fed explain the situation in “The Borrower of Last Resort: What Explains the Rise of ON RRP Facility Usage?” (Economic Brief, December 2021, No. 21-43).

The starting point here is that when the Federal Reserve conducts monetary policy, it seeks to control a specific interest rate called the “federal funds” rate, which can be thought of as a rate at which depository institutions like banks are willing to make very short-term and low-risk overnight loans to each other, often for the purpose of settling up accounts at the end of a business day.

The primary method that the Fed uses for affecting this interest rate is to alter the interest rate that it pays to banks on the reserves that the banks hold at the Fed. But a secondary backup method is to use the ON RRP, which stands for the Fed’s Overnight Reverse Repo facility. For an overview of the ON RRP and how it works, here is a good starting point. But for present purposes, the key is that the ON RRP allows big financial players, like money market mutual funds as well as banks or pension funds, to lend money to the Fed on a very short-term and thus low-risk overnight basis. What’s peculiar is that the amount of Fed borrowing through the ON RRP exploded in size during 2021. Kirk and Wong explain:

The idea is that the ON RRP facility gives participants in the short-term funding market the risk-free overnight option of lending to the Fed at the guaranteed ON RRP rate. Thus, other lending rates — like the fed funds rate — will be above the ON RRP rate. … In the original design, ON RRP was a backstop, as market participants should lend to banks or others (via federal funds, repo, wholesale deposits, commercial papers, etc.) before lending to the Fed. This was the case during the early stage of the pandemic: The daily usage of ON RRP averaged $8.7 billion from March 2020 to March 2021. However, ON RRP usage steadily increased after March 2021 and reached an unprecedented $1.6 trillion in September 2021. This hints at an excess supply of nonbank savings that is not intermediated by banks or absorbed by Treasuries, which has ultimately flowed into the ON RRP facility. The Fed becoming the borrower-of-last-resort has prompted concerns about how the U.S. banking system is functioning during the pandemic. 

In case that blob of text was a bit much to read, let me hit the high points one more time. The ON RRP was intended as a backup for short-term overnight lending. But from March 2021 to September 2021, this backup expanded in size from $8.7 billion to $1.6 trillion. Any shift from a few billion to more than a trillion is a huge deal. Apparently, there is $1.6 trillion or so in funds that large-scale market participants want to lend short-term, overnight, and the Fed is the only party in the market willing to be the borrower–the borrower of last resort, if you will.

Here are a couple of factors going on behind the scenes. Start by considering money market mutual funds. These funds are required to hold only highly liquid short-term assets, so that they can readily finance any withdrawals. When the pandemic hit the economy in March 2020, more investors wanted the safety and flexibility of holding assets in a money market mutual fund, so as you can see from the figure below, the holdings of such funds went up by well over $1 trillion. These additional assets were largely held in US Treasuries, as shown by the upward jump in the green area of the figure. But starting in April 2021 and since then, the holdings of money market mutual funds have shifted. Instead of holding US Treasuries, money market funds are now holding well over $1 trillion in the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility.

What’s behind this dramatic rise and fall in US Treasuries? The story behind the scenes is that when the pandemic recession hit, the US Treasury felt that it needed to have more liquid assets on hand, in case of a banking or financial panic. But then starting in spring 2021, the Treasury began to reduce its holdings of these assets. As Kirk and Wong explain:

In particular, the Treasury has been draining reserve balances in the Treasury General Account (TGA), which is the reserve account maintained by the Treasury to make and receive payments in the banking system. The Treasury has been reducing this account with the Fed by issuing fewer T-bills, effectively releasing these reserves into the banking system. Pre-COVID, the TGA maintained a moderate balance that averaged $290 billion in 2019 and varied with financial conditions and government spending. However, due to uncertainty around the COVID-19 pandemic and the magnitude of the fiscal response, the Treasury increased the TGA balance from approximately $380 billion in mid-March 2020 to an unprecedented $1.6 trillion by June 2020. This rapid increase was primarily facilitated by an expansion in T-bills outstanding from $2.56 trillion in March 2020 to over $5 trillion in June 2020. The Treasury maintained the elevated TGA balance and T-bill supply through February 2021 before normalizing via a reduction in T-bill supply. TGA normalization decreased the TGA from over $1.6 trillion in February 2021 to less than $100 billion by October 2021, primarily through T-bill supply falling from $5 trillion to $3.7 trillion. This effectively reduced the supply of risk-free short-term assets by $1.3 trillion …

So roughly speaking, the US Treasury dramatically increased its holdings of short-term Treasury bills at the start of the pandemic. As market investors moved into money market funds, the money market fund held more of this short-term debt. But then the Treasury decided to hold less short-term T-bill debt, and while market investors still wanted a very safe place to stash their liquid reserves overnight–and they turned to the Federal Reserve ON RRP account. So far, this arrangement seems to be working OK. But as far as I know, no one anticipated that the Fed would become both a lender of last resort in financial crises and also a borrower of last resort as the economy recovered.

For more on this chain of events, I’m just seeing on January 11 this take from Gara Afonso, Lorie Logan, Antoine Martin, William Riordan, and Patricia Zobel of the New York Fed.

What Americans Like about their Health Care

The OECD has just published Health at a Glance 2021, a compendium of health care statistics across the (mostly) high-income countries that make up its membership. Some of the graphs confirm standard reactions to the US health care system: that is, it costs much more than other countries, but the health outcomes for Americans are often no better or worse than in countries that spend less on health care. That said, I was also struck in skimming through the report by several graphs which suggest that, by international standards, Americans have some reasons to like their health care system.

First, here are a few of the standard comparisons. These first two figures show national health care spending as a share of GDP and on a per capita basis. On both measures, the US spends far more than other countries on health care.

But despite this high level of health care spending, basic measures of US health outcomes are not especially good. There are lots of examples, but here are a few. The first graph shows that US life expectancy is not especially good by international standards: indeed, the growth in US life expectancy since 1970 isn’t all that good, either. The second graph show US rankings on infant mortality: just beating out China, but not quite as good as Russia. The third graph looks at mortality from what the OECD classifies as “preventable” conditions and “treatable” conditions. For example, lung cancer is classified as “preventable” through reductions in smoking, while breast and colorectal cancers are classified as “treatable.” By either measure, US mortality rates are disturbingly high.

Given these high costs and sub-average outcomes, what do Americans have to be pleased about in their health care system? A few examples caught my eye. One is how people rate their own health. It turns out that by international standards, a low proportion of Americans rate their health as “bad” or “very bad,” while a high percentage rate it as “good” or “very good.” (Although the second figure also shows that the gap between how Americans in the top income group and bottom income group rate their own health is substantial.)

Americans tend to feel satisfied with the quality of health care available in their area–at least more so than people in Sweden, the United Kingdom, or Japan.

It also turns out that when it comes to out-of-pocket health care costs, the US does reasonably well in these international comparisons: for example, the share of household consumption going to out-of-pocket health care spending in the US is the same as in Canada, only a bit higher than in the United Kingdom, and lower than in Sweden, Denmark, or Norway.

This final group of comparisons showing some ways in which Americans like their health and their health care system are not intended to suggest that the US health care system broadly understood (that is, understood to include public health efforts that happen outside the health care system itself) doesn’t need some meaningful reforms to reduce costs and to improve access and health outcomes. But it does perhaps help to explain why meaningful reform has been hard to achieve.

Putting a Value on Sweat Equity

For a company with shareholders, it’s straightforward to calculate the market value of the firm: just add up the cost of buying all the stock. For a company that is privately owned, calculating the market value is a lot harder. For a bare minimum value, one could add up the value of any physical or intellectual property assets the company owns. But many small private firms are worth a lot more than this minimum value. This additional value lies in the relationships that the company has built over time with supplier, customers, and the community. This extra value is sometimes called “sweat equity,” because it’s the value derived from the efforts of the owner.

Jeff Horwich of the Minneapolis Federal Reserve provides a nice overview of some recent efforts to measure sweat equity in “From crêpes to Cargill: Hot on the trail of sweat equity: Fed economists pursue ever-better estimates of the invisible value beneath much of the U.S. economy” (January 3, 2022). Horwich is summarizing and putting in context a recent research paper by Anmol Bhandari and Ellen R. McGrattan “Sweat Equity in U.S. Private Business” which was published in the May 2021 issue of the Quarterly Journal of Economics (136: 2, pp. 727-781), but is freely available as a Minneapolis Fed “staff report.” The abstract of that research paper states:

We develop a theory of sweat equity—the value of business owners’ time and expenses to build customer bases, client lists, and other intangible assets. We … estimate a value for sweat equity in the private business sector equal to 1.2 times U.S. GDP, which is about the same magnitude as the value of fixed assets in use in these businesses. For a typical owner, 26 percent of the sweat equity is transferable through inheritance or sale. 

Horwich provides this background:

Private entities account for more than 60 percent of U.S. business income. Small businesses employ more than 60 million people—nearly four in 10 American workers. … The category of private companies includes some big names. With 155,000 employees around the world, family-owned Cargill is a notable example in the Minneapolis Fed’s district. However, 98 percent of private businesses in the United States have fewer than 20 employees; 96 percent have fewer than 10. …

The equity value of a public company is established by the research and daily decisions of millions of stock market investors: It is the value of all company shares outstanding. For private companies, however—a category that includes sole proprietorships, partnerships, S-corporations, and private C-corporations—we have limited public data and no market to work out what they add up to. … These invisible assets briefly appear when a private company is sold. Public records of the transaction provide a snapshot of the value of its various assets, as declared by the seller. Bhandari and McGrattan access data from the IRS and third-party-compiled records to determine that, for the median transaction, intangible components of equity comprise 64 percent of the price … Bhandari and McGrattan derive what they call a “proof-of-concept” estimate for the sweat equity of all U.S. private businesses: approximately 1.2 times U.S. GDP. This would amount to almost $28 trillion in late 2021.

Bhandari and McGrattan go beyond just looking at sales of private firms and also dig into income-tax data. The compensation that a business owner receives will be a return on both the physical assets and the sweat equity of the firm.

The importance of sweat equity raises a number of issues. First, sweat equity pretty much by definition involves the time of the business owner in one way or another. Thus, it may be that the key parameters in encouraging small businesses involve this investment of business owner time. For example, it may be that the key to how taxes or subsidies for small firms affect the firm is through how they affect the incentives of owners to invest hours. It may also be that any financial disincentives for small firms are no more important than the cost in time of following government rules and regulations.

Another issue is that sweat equity may be quite personal to the current business owner. Thus, even if a current owner is making a good living from a business, a potential buyer of the firm must worry that they can only buy the physical assets of the firm, and only a part of the detailed connections, knowledge, loyalties and reputation of the firm. An ongoing project for Bhandari and McGrattan is to study what factors can make sweat equity easier or harder to transfer to a buyer of the firm.

How Should Low Interest Rates Alter Our View of Fiscal Policy?

Olivier Blanchard has a new book coming out, titled Fiscal Policy Under Low Interest Rates.  Because it’s the 21st century, a full draft of the book is available at the MIT Press website and you can leave comments and reactions there. The “review period” for comments ends on January 18–which is to say that Blanchard will start doing his final revision of the draft at that time. But the plan is for the draft itself remain online until the final version of the book is published later in 2022.

For a flavor of what’s in the book, Blanchard has written a short essay: “Why low interest rates force us to revisit the scope and role of fiscal policy: 45 takeaways” (Peterson Institute for International Economics, December 21, 2021). As the title implies, it’s a list of 45 takeaways from the book. Here’s a selection:

1. Safe real interest rates have declined steadily since the mid-1980s. The decline is due neither to the global financial crisis nor to the COVID-19 crisis. It has been common to all advanced economies. …

5. The decline in rates must be traced to deep low-frequency factors, shifts in saving, investment, risk and market risk aversion, liquidity, and preference for liquidity. Many suspects have been identified. None has been convicted. Going through the list, few of them, however, seem likely to quickly turn around. One cannot and should not be sure, but secular stagnation appears likely to last. …

10. As neutral rates have declined over the last 30 years, they have, on the way down … [become] lower than growth rates (r*<g) … 

11. The fact that r<g has important implications for debt dynamics. Put simply, it gives countries more fiscal space. They can run (some) primary deficits and keep their debt ratios (the ratio of debt to GDP) constant, or even decrease them. …

17. Public investment spending, to the extent that it generates future increases in fiscal revenues, can be partly financed by debt without threatening debt sustainability, something that any rule should reflect. Too often, the application of simple rules has led to inefficient cuts in public investment.

18. This does not imply, however, that all public investment should be financed by debt. Even if the investment generates large social returns, if it does not generate sufficient fiscal revenues, directly in the form of fees or indirectly from higher revenues from higher future output, it may still potentially threaten debt sustainability. …

32. In discussing optimal fiscal policy, it is useful to start with two extreme views. The first can be called the “pure public finance” view. It implicitly assumes that monetary policy can maintain output at potential and focuses on the role of debt in smoothing taxes in the face of variations in spending or in affecting the welfare of current versus future generations.

33. The second view assumes implicitly that monetary policy is not or cannot be used and that the main task of fiscal policy is thus macro stabilization. This view is known as the “functional finance” view, so baptized by Abba Lerner. In this case, fiscal policy must compensate for variations in private demand in order to maintain output at potential. If private demand is chronically low, then governments must run sustained deficits. …

45. A case of too much? To boost the US recovery from the initial COVID-19 shocks, the Biden administration embarked in 2021 on a major fiscal expansion. The strategy (again, if indeed it was a strategy) was for fiscal policy to increase demand and thus increase the neutral rate, and for monetary policy to delay the adjustment of the policy rate to the neutral rate, and in the process generate temporary inflation. Inflation has turned out to be much higher than expected. Was the fiscal expansion too strong? Was the strategy a mistake?

How Personal Experience Leaves a Mark

Everyone knows there was a Great Depression. The information is readily available. But those who lived through the Great Depression tended to show lasting patterns of behavior–like high rates of saving and low participation in stock markets. Experiencing an event directly is different from knowing about it in other ways. It turns out that these “experience effects” are widespread: for example, related to economic events like experience of high inflation or unemployment. In the next few years, we are likely to find out that there are lasting experience effects from the COVID pandemic, too.

Ulrike Malmendier lays out some of the theory and evidence in her 2020 JEEA-FBBVA Lecture to the European Economic Association, now published as “Exposure, Experience, and Expertise: Why Personal Histories Matter in Economics” (Journal of European Economic Association, December 2021, 19(6), pp. 2857–2894; also available as NBER Working Paper 29336, October 2021). From the abstract:

Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune
the brain structure to those past experiences (“use-dependent brain”).

Malmendier provides a range of evidence on this theme, including a study of economic behavior of those who experienced the Great Depression. Here, I’ll just give a sample of that evidence from various studies in the narrow category of those who have had experiences of high inflation. Estimates of overall inflation in the US economy are easily available and well-publicized. But people’s own estimates of inflation are biased up or down from the official number by the changes in the prices of goods and services that they personally have purchased in the last year or so.

For example, older Americans who experienced and lived through the high US inflation rates of the 1970s are more likely to expect higher inflation than somewhat younger adults who did not–although the two groups have had identical macroeconomic experiences for the last several decades. In turn, these expectations about inflation affect current behavior, like the choice between a fixed-rate or adjustable-rate mortgage, or whether it is important to own a home at all as a hedge against inflation. Similar results arise if one looks at immigrants to the United States who had different personal experiences of inflation in their countries of origin.

There is a common pattern that women tend to expect higher rates of inflation than men. It turns out that this pattern can be largely explained by women having more direct exposure to changing prices in grocery stores.

The influence of experience on expectations even holds true for members of the Federal Reserve Board of Governors, who make explicit forecasts of inflation and also vote on monetary policy. The research finds: “In other words, personal past experiences induce FOMC
members to make worse [inflation] forecasts than they would if they were simply following the suggestions of their staff.” In turn, these experience-biased predictions about inflation are then linked to how Fed governors vote on monetary policy.

Of course, inflation is not the only way in which an especially salient early experience can affect attitudes for the long run. An effective mentoring program, for example, seeks to create a long-run effect. Getting to know someone of different religion, race/ethnicity, nationality early in life–say, by sharing an activity or a dorm room– can have a lasting effect on attitudes.

What about the pandemic? Malmendier writes: “Did living through the pandemic alter us in the longer run, beyond the explanatory power of changed financial and other personal circumstances and beyond the arrival of new information? The growing research on experience effects implies that the answer is yes—that there will be long-term changes in beliefs and behavior even “ceteris paribus”, even if we were actually back to a world pre–COVID-19.”

She offers a vivid example of John Barry, who is author of the 2004 book The Great Influenza: The Story of the Deadliest Pandemic in History, which focuses on the 1918 Spanish flu pandemic and became a best-seller in 2020. If anyone would have been ready for a new pandemic, surely it would be someone like Barry? Malmendier writes:

In the context of the COVID-19 pandemic, the infectious disease researcher John Barry from Tulane University, whose book about the 1918 Spanish Influenza pandemic had reemerged as a best seller in 2020, described this notion when asked about his experience of living through the COVID-19 pandemic and whether he had expected to witness a pandemic like this when he wrote the book. His answer was: “Yes and no. I think anybody who understands anything about infectious disease recognized that we were going to, sooner or later, face something like this; …. But, intellectually understanding it, is one thing, and having it hit you is something quite different. So, I am like everyone else in that sense” … In other words, even Barry was shaken and “hit” by this pandemic experience, and no scientific knowledge (“information”) could prepare him. He felt “like everyone else” despite knowing the science of respiratory disease epidemics, knowing the likelihood of their emergence, and knowing the effects on humanity. Intellectually understanding—having the information—is one thing. “Having it hit you is something quite different”, even for highly trained, well informed professionals.

It will be a few years before we have the data to answer questions about long-lived effects of the pandemic. But there are a range of possibilities for how it may affect the behavior of those who lived through it: desire to work remotely vs. in-person; the attractiveness of being in a downtown urban center; attending live performances; consulting health care providers in-person or online; receiving education or training in-person or online; future attitudes about vaccinations; expectations that the government will sent checks to households and/or firms when similar situations arise in the future; and so on and so on. In the future, those who lived through the pandemic in different conditions (say, different occupations or living situations) may have permanently different reactions to some of these issues. In a decade or two, those of us who have lived through the pandemic are likely to have permanently different attitudes about at least some of these issues compared with younger folks who heard or read about the panic, but didn’t live it.

When New Immigrants First Go to an American Supermarket


Writer and Poet Roya Hakakian arrived in the United States from Iran in 1985. Her most recent book is A Beginner’s Guide to America: For the Immigrant and the Curious (2021). The most recent issue of Capitalism and Society publishes a short excerpt from the book titled “When New Immigrants First Go to an American Supermarket.” Here, I’ll give an excerpt of that excerpt.

About visiting a US grocery story, Hakakian writes:

In one particular aisle, you find cans of beef, chicken, and fish priced much lower than others you had seen in previous aisles. Pleased with your find, you pile them into your cart. Then you hesitate when you see a picture of a dog or a cat on each can. You remember the feral cats and emaciated dogs that used to roam your streets. They were sometimes hunted, sometimes banned for being unclean, and always unloved. It is not until you see leashes, rubber bones, and miniature sweaters in a large bin in the same aisle, all 40 percent off, that you realize the unthinkable is true: Americans feed proper food to their pets here, and even dress them. To think that you were about to stock your cabinets with animal feed! What would your former countrymen say if they got wind of this? You can hear the wisecracks: He went all the way to America to eat dog food! It will be years until you learn that pets are venerated in this country, at times even as much as, if not more than, children. For now, you gingerly put the cans back and hurry into the next aisle.

There you will be mystified once more. On shelf after shelf, you will find enough boxes to declare a republic of cereal. All your life, you had known cereal to have only one shape, color, and flavor, at the most two. It came in a smaller box than the ones before you, with only a few words written on each. As if the supersized boxes were not enough, the many sentences make you feel there is something far more respectable than mere cereal inside. In the face of all the variety, you wonder if you really knew cereal before. Do not let this imposing lineup crowd your vision and get in the way of seeing what transcends mere cereal. While so much variety rightly strikes you as frivolous, you must remember it is the presence of variety that matters. Simply put, the past was a black-and-white picture, and America, Technicolor. Cereal is proof that you have left the universe of Manichaean options, where you usually had to consider between bad and mediocre. (The quality of good had plummeted, since it was always all that was available.) You are in the land of choice, where you must think and select according to your own taste. Open the floodgates of inhibition.

I was also intrigued by Hakakian description of being surrounded by a nation of fund-raisers for small causes:

You used to give a coin or two to the poor of your city, or drop a banknote in the collection box at your place of worship, or help a neighbor or a friend with a loan. But these were a few small exercises at best. Here, people give regularly. Squirrels collect acorns, and Americans raise money. It is as natural as any instinct for them. Children offer lemonade on sidewalks to raise money for the kittens at the animal shelter. Girl Scouts go door-to-door selling cookies so other aspiring girls can become Scouts too, and do the same. Mothers organize bake sales to help pay for a new neighborhood playground. Teens give to the GoFundMe campaign of a filmmaker working on a documentary about the endangered aardvarks of Angola. Even Santa, the nation’s gift giver in chief, appears at the threshold of major department stores every December, ringing a bell at the side of a siren-red donation bucket. Overworked cashiers will not scan your items before listlessly asking if you would like to donate a dollar to the fight against something or other. Once a year, arsonists take a day off so firefighters can stand at intersections holding up their rubber boots, charming drivers into pitching in a few dollars. At the registers of greasy gas stations, two things are always guaranteed: the noxious smell of fuel and the cardboard quarter receptacle for St. Jude Children’s Research Hospital. In some movie theaters, films cannot start unless the ushers have walked aisle to aisle passing the empty popcorn container to collect money for whatever the star in the public service announcement
urged the viewers to donate to. Entertainers hold telethons to raise money for this disease or that. Rock bands compose songs for disaster victims and give them their proceeds. Radio broadcasts are interrupted so the hosts can make appeals for a donation, which the local attorney or dermatologist matches. Runners run, bikers bike, and comics crack jokes, all to help raise money for the needy. Politicians bombard their supporters with emails, asking them to give five, ten, twenty, or more dollars toward making a better tomorrow, when, in addition to a higher minimum wage and universal healthcare, there will also surely be more emails asking you to donate again. Corporations have charitable arms. Dignitaries ask for money to build homes for the destitute. In television commercials, celebrities, holding doe-eyed babies in their arms, urge viewers to adopt a child on another continent through a monthly contribution. Anything is possible in America, even raising a baby by subscription.

When Americans do not raise money, they raise necessities. They have book drives, blood drives, food drives, turkey drives, even car drives. If they cannot solicit you in person, they send you letters. Heaps of envelopes arrive in America’s mailboxes every week asking the
citizens to donate to one organization or another. Fundraising is a behemoth as vast as any industry. … You may be naturalized already, but unless you begin writing checks for people you have never met, living in places you would never visit, you are not a real American.

No nation so rich has ever asked for more money. They do not need the order or the permission of some authority to tell them what to raise and for what cause. They take matters into their own hands and wage campaigns to save the pandas, protect the bees, or reverse beach erosion. What is at the heart of all this fundraising is the same thing that is at the heart of all other perfectly American things—an irrepressible self.

For interested readers, here’s the full Table of Contents for this most recent issue of Capitalism and Society, with abstract and links to papers.

Recent Research on Income Distribution: An Overview of the Field
By Gerald Auten
The distribution of income in the United States has long been of interest to economists. Using data on tax returns, Piketty and Saez (2003) concluded that top income shares had more than doubled since 1980. This paper helped trigger broader public concerns about rising inequality and stagnating incomes for lower- and middle-class households. But this paper was criticized by academics for using a narrow definition of income that failed to account for the dramatic growth of Social Security, Medicare, and other transfer programs and for ignoring the effects of declining marriage rates and smaller household size. More recent work by Piketty, Saez, and Zucman (2018) addressed some of these issues using a broader income measure based on national income but still found dramatic increases in top income shares. Their new analysis has also been criticized for overstating top income shares due to certain assumptions used to allocate income not reported on tax returns. This paper examines these issues in measuring the distribution of income, compares the analysis and results of recent studies, and presents a more nuanced view of income inequality over time. While there is always uncertainty about distributional analysis, the best available evidence suggests that top income shares are lower and have increased less than some have claimed and that real incomes have increased over time for all income groups, though not necessarily for every household. Click here to read the paper.

Markets and Regulation in the Age of Big Tech
By Kaushik Basu, Aviv Caspi, and Robert Hockett
The digital revolution, along with the growth of the companies known collectively as Big Tech, is transforming the global economy and giving rise to novel policy challenges. This paper analyzes the microeconomic foundations of this change, particularly how the natures of competition and oligopolistic equilibria are changing as a result of the large returns to scale and the global connectivity made possible by these new technologies. We then discuss how these changes fit into the existing regulatory landscape and argue that, for certain kinds of large digital-platform firms, existing antitrust laws may not be adequate. We conclude by considering more radical reform, such as requiring certain platform firms to be organized as nonprofits or public utilities.
Click here to read the paper.

The Pursuit of Coherence in Mainstream Macroeconomic Methodology
By Sheila Dow
The coherence of mainstream macroeconomics is threatened by inconsistency between the core theoretical model and the empirically grounded models used for policy advice. The field has evolved in response to policy demands in the wake of the 2008 financial crisis. But this evolution has been constrained by the emphasis of the core theoretical approach on a particular representation of microfoundations. Yet the notion of internal consistency by which this microfoundations project is justified is challenged by a broader philosophical notion of consistency. The long-running expression of opposition in mainstream macroeconomics between logical and empirical coherence (or between rigor and realism) accordingly requires further examination of how real economic systems are understood and how knowledge about them is to be built and assessed. If mainstream macroeconomics is to continue to deviate from the core model by virtue of open-system ontology, then in order to ensure coherence, the characteristics of that system need to be articulated, and their implications for methodology worked out.​​ Click here to read the paper.

On the Economics of Economic Knowledge
By Dominique Foray
In this paper, we argue for building a research agenda to analyze economic knowledge as an
economic good and explore the socioeconomic institutions that can be relied upon to produce, distribute, and use economic knowledge in an efficient manner. In our opinion, the benefits of such an approach, as well as the value of its future contributions to the understanding of the foundations of the economic dynamic, are obvious. Click here to read the paper.

When New Immigrants First Go to an American Supermarket
By Roya Hakakian
When newly arrived immigrants first glance into an American supermarket, shock may well be their first reaction. So writes Roya Hakakian, author and poet, in her new book A Beginner’s
Guide to America for the Immigrant and the Curious (2021), which walks the reader through the immigrants’ first moments on American soil to the final ceremony of hard-earned
naturalization. In those early days after the immigrant first arrives, the tiniest details can
register at great magnitudes, from the head-spinning varieties of cereal to highway signs.
According to Hakakian, these are the things that make the newly arrived so keenly aware of
the contrasts between their lives before and after immigration. She draws a portrait that
showcases America as a land of abundance, while unpacking the meanings behind the plenty.
Click here to read the paper.

Can Free Trade Be Part of Green, Resilient, and Inclusive Development?
By Mari Pangestu and Enrique Aldaz-Carroll
Trade has been a means to development by generating jobs, spurring economic growth, and reducing poverty. However, the gains from trade have shown to be less than equally distributed, hurting at times some localities and segments of countries’ populations. The COVID-19 pandemic has also shown that global value chains (GVCs) are susceptible to serious disruptions. The climate crisis has raised attention on carbon emissions from the transportation of merchandise exports and imports. If trade is to remain a driving force for growth, job creation, and poverty reduction and part of countries’ effort to set a new path towards green, resilient and inclusive development, understanding how the gains from trade are distributed and how the impacts of trade can be better managed is of critical importance. This paper reviews the evidence bearing on these concerns and considers policy responses that could enable trade, and particularly GVCs, to contribute more to a green, resilient, and inclusive recovery for developing countries. What is needed is the combination of old policies like trade facilitation, business environment, and skills with new and green policies including a new treatment of carbon, emphasis on diversification, social-protection measures, and improvements in the international trade order. Click here to read the paper.

The Quest for Economic Freedom in India
By Shruti Rajagopalan
This paper studies the 1991 reforms, as the beginning of the transition towards a market
economy from the socialist policies in the first four decades of the Indian republic. Tracking
the major reforms in the three decades since 1991, I argue that economic control and statist
policies are the norm and that reforms enhancing economic freedom are the outliers. After an excellent start by the Rao-Singh team in 1991, and a gaining of momentum during the Vajpayee government (1999-2004), India’s liberalization and reform process has slowed down
considerably in the last decade. The slowdown in the reform process, ad hoc regulation, as well as disastrous policies like demonetization, have become the new trend in Indian economic policy. Simultaneously, India’s high rates of growth post-liberalization have also slowed down, especially in the last five years, a trend that was visible before the pandemic. The reason is that Indian policymakers pursued socialism for the first four decades after independence and never fully committed to the pursuit of economic freedom after the initial set of reforms in the 1990s and early 2000s. The main lesson from the history of India’s reforms is that the problem is systemic and structural and requires a deeper commitment to markets to fix its upside-down state-market relationship. Click here to read the paper.

An Equilibrium Model of Corporate Environmental and Social Governance
By Richard Robb, Vinay Viswanathan, and Martin Sattell
We develop a formal model to study the consequences for firms of adopting environmental and social governance (ESG) constraints. In the presence of information asymmetries, we find that a firm may reduce earnings variability by binding itself to ESG rules, thereby lowering the interest rates that creditors charge and raising expected profits. The gains are likely to be far greater when ESG constraints not only reassure creditors but also limit the ability of self-serving managers to work against the interests of shareholders. For most parameter values, though, we find that adherence to ESG lowers returns and increases risk. The predictions of our model contrast with those of two influential studies by Morgan Stanley. In the first, Morgan Stanley (2015) claims that ESG systematically raises investors’ returns. In the more recent, it claims that ESG reduces investors’ downside risk (Morgan Stanley 2019). We summarize our earlier critique (Robb and Sattell 2016) showing that the results of the first Morgan Stanley study cannot be replicated, and we go on to show that the results of the second study arise from two errors: (1) Morgan Stanley uses the default benchmark (S&P 500 Total Return Index) supplied by Morningstar Direct rather than the benchmark appropriate to each fund, and (2) the conclusions drawn from median returns are an artifact of microfunds, many with less than $10 million under management. Upon correcting these errors, we arrive at the opposite conclusion, one consistent with the literature: ESG investors sacrifice a small amount of return for any amount of risk. A great deal remains to be done to determine whether ESG is effective or ineffective in addressing social concerns. Our contribution here is to propose a versatile, tractable model that can start to address vital questions in a more rigorous framework than we find in the literature. In particular, we show how ESG might raise social welfare by multiples of the private costs and how our model can quantify the trade-off. Click here to read the paper.

Three Myths about US Economic Inequality and Social Mobility
By Xi Song, Michael S. Lachanski, and Thomas S. Coleman
Income inequality has increased dramatically in the United States since the 1970s. However, we argue in this paper that many common perceptions about causes and consequences of rising inequality are misleading or even false. Using first-hand empirical analyses and meta- analyses of previously published work, we present and demystify three key facts about the rise in US inequality that have been given too little attention in recent debates. First, inequality has risen throughout the distribution. Post-tax and transfer income levels have grown in the middle and bottom of the distribution, not the top alone – the top 1% does not take all. Second, the trend in intergenerational social mobility has remained largely stable over the last four decades. The relative gap in mobility opportunities between children from poor and rich families has barely changed – the “Great Gatsby curve,” which predicts a general negative relationship between income inequality and intergenerational mobility, does not apply to the US. Third, changes in the return to human capital caused by shifts in the supply and demand for educated and skilled labor have played a crucial role in the rise in income inequality since the 1970s – rising corporate concentration and employer market power (monopsony) do not appear to be a key culprit. Click here to read the paper.