Global Commodity Markets

Modern economic growth is a mixture of physical objects and the ideas that can be embodied in those objects. Wheat makes flour which makes a cake. Sand can be used to make concrete or computer chips. The original basic objects of the world economy are called “commodities.” Broadly speaking, they include fossil fuels, agriculture, and minerals. Many of the concerns about economic growth and environmental sustainability are essentially arguments about economic or environmental aspects of future production of commodities. For an overview of the economic issues, John Baffes and Peter Nagle have edited a four-chapter book on Commodity Markets : Evolution, Challenges and Policies (World Bank, 2022).

Here’s a long-term overview of commodity markets from the first chapter, “The Evolution of Commodity Markets over the Past Century,” by Baffes and Nagle together with Wee Chian Koh.

Economic expansion after World War II (WWII), and more recently the emergence of EMDEs [emerging markets and developing economies] as important players in the global economy, has increased commodity demand, especially for energy commodities and metals and minerals. Even though the world’s population rose from 2 billion in 1920 to 8 billion in 2020, the production of commodities to feed, clothe, and support the rising population has more than kept pace. Expanding production was possible because of technological innovations, the discovery
of new reserves of commodities, and more intensive agricultural production.

On the energy front, crude oil became the most important commodity, replacing coal. Known reserves of crude oil and natural gas have increased substantially even as production has risen. For example, the development of shale technology during the early 2000s enabled producers to exploit deposits that had previously been considered unprofitable; as a result, the United States became once again the largest producer of crude oil. Mineral resource development expanded because of advances in technology and new discoveries.

Metal production has become more efficient as innovations and productivity improvements became widespread in mining, smelting, and refining. Improved fabrication and new alloys have allowed less metal to be used without loss of strength. Despite radical changes in supply and consumption, metals prices, in real terms, have seen cycles around a quite flat trend over the past century. …

Food production has increased faster than population, and most of the world’s consumers have better access to adequate food supplies today than they did a century ago. This improvement is due to technological advances in the 1900s, especially the Green Revolution. In large part because of increasing productivity, prices of agricultural commodities have experienced a downward trend over the past 100 years.

The bottom line here is that large increases in population and GDP have been matched by large increases in commodity products including energy, metals, and agriculture.

However, while the quantity demanded of commodities has risen dramatically, prices of commodities do not show much upward trend–and some show a downward trend. The figure illustrates with two examples from energy, two from agriculture, and two from metals.

The figures of prices also show some large fluctuations in prices over time, in what are sometimes called “commodity cycles.” For countries where the economy is heavily reliant on production or important of one or a few commodities, the effects of these price fluctuations can be severe–and the volume discusses causes and effects of these commodity cycles at some length. But the overall pattern of higher quantities and flat or falling price levels remains.

Some readers may also be interested in “Commodity Prices and Growth in Africa,” by Angus Deaton (Nobel ’15), in the Summer 1999 Journal of Economic Perspectives.

The Bounce in Disposable Personal Income

When the pandemic hit, the general sense was that the US government couldn’t do too much to help, whether the assistance came in the form of stimulus checks, expanded unemployment payments, help to businesses (via the Paycheck Protection Program), tax cuts, and so on. Now we can look back and see the patterns in disposable personal income–that is, income that people have after they have received paid taxes and received government benefits.

The top panel shows total personal disposable income for the economy as a whole, adjusted for inflation, measured in billions of dollars. The bottom panel shows the same data on a per capita basis–that is, adjusted for the size of the US population. The data is monthly. Both figures are from the extraordinarily useful FRED website maintained by the Federal Reserve Bank of St. Louis.

What jumps out from these two figures is how dramatic the rise in personal income was, both right after the pandemic in spring 2020, and then after President Biden’s stimulus package was enacted into law early in 2021. Compare the shifts in real per capita income in 2020 an 2021 to what happened in the previous three recessions, and there’s just nothing remotely like it.

The sharp rises in disposable personal income help to explain why inflation started rising in mid-2021. The level of disposable and spendable personal income was spiking at a time when many parts of the economy (like restaurants, travel, and entertainment) were still shut down or quite constrained in many places, and at a time when supply chains were backed up. A working definition of inflation is “too much money chasing too few goods,” and that’s what happened. However, this impetus for inflation has faded in recent months, which has surely contribute to the rate of inflation sagging downward.

It also helps explain the “Great Resignation,” the pattern in which a number of people of working age dropped out of the workforce, and were not looking for jobs. Again, it will be interesting to see if some of those who left the labor market during the boom in disposable personal income return in the next year or so.

Finally, it also explains some of the economic stress that shows up in public opinion polls and news stories. After the much higher disposable personal income levels of the last two years, the economy has returned to 2019 levels of disposable personal income. That up and down is bound to be unsettling.

I find it hard to be too critical of decisions made in the teeth of the pandemic in early 2020. The level of uncertainty was just so very high. But it also seems to me that what the federal government knows how to do is send out checks–so that’s what it did. Meanwhile, policy questions like how to make more COVID tests available, or how to facilitate the most widespread and rapid distribution of vaccines. or whether to re-open schools in fall 2020 got considerably less attention.

Explaining College Attendance Gaps: Academic Preparation

There are large gaps in college attendance between men and women and across ethnic groups. To what extent might these differences reflect academic preparation of students? Sarah Reber and Ember Smith provide some baseline information on these issues in “College Enrollment Disparities: Understanding the Role of Academic Preparation (January 2023, Center on Children and Families at Brookings). They point out:

In 2022, young men [age 25-29] were nine percentage points less likely to have a bachelor’s degree than young women (35% and 44%). … Disparities in bachelor’s degree attainment by race and ethnicity are large: 68% of Asian or Pacific Islander adults aged 25 to 29 have a bachelor’s degree, compared with 45% of white,
28% of Black, and 25% of Hispanic young adults.

But what do these gaps look like if one takes academic preparation into account. In the figure, the top set of bars shows the likelihood of men and women enrolling in college at all–including two-year and four-year colleges–while the second set of bars shows only the likelihood of enrolling in a four-year college. The “No Controls” shows the overall average for males and females. But notice that when you compare those with similar grade point averages or levels of academic preparation, the gap goes away.

The authors write: “Taken together, the results by gender suggest that most or all gender gaps in college enrollment
are explained by differences in academic preparation. However, … GPA explains essentially all, and math test score
explains none, of the gaps.”

What are the patterns by ethnicity? Again, the top row of bars shows all colleges, and the bottom row shows just four-year colleges. The “No controls” shows the overall averages for each group. The striking pattern is that on average, Asians are more likely to attend college. But if one adjusts for grade point average or for overall academic achievement, blacks become the most likely group to attend college. The final two sets of bars show an adjustment for “socioeconomic status,” which clearly reduces the differences across groups, and then a joint adjustment for socioeconomic status and academic preparation, which looks a lot like the adjustment just for academic adjustment alone.

These types of results are just descriptions of patterns in the data. They are not studies that dig into cause-and-effect relationships or offer policy recommendations. In addition, the grade point average or academic preparation of a high school student is partly about the performance of K-12 schools, but also about differences across families, peer groups, and neighborhoods. But in my reading, this evidence strongly suggests that college attendance gaps across men and women, or across ethnic groups, largely reflect the academic preparation of high school students.

Getting Serious about Carbon Dioxide Removal

Perhaps the simplest way of removing carbon dioxide from the atmosphere is to manage forests in such a way that they soak up more carbon. But there are other ways, like capturing carbon directly from the air and then storing it deep underground, or in the form of mineral deposits. It’s perhaps not widely known that climate change models describing potential paths to reduce the risks of climate change typically assume that carbon dioxide removal will rise dramatically, and that it will be an important part of any ultimate solution. The University of Oxford’s Smith School of Enterprise and the Environment provides an overview of the science, policy, and public opinion in “The State of Carbon Dioxide Removal Report, 2023. The lead contributors are Stephen M Smith, Oliver Geden, Jan C. Minx, and Gregory F. Nemet.

Here’s a chart showing the various approaches to carbon dioxide removal in the first column and the route by which it works in the second column. The third column headed “TRL” stands for “Technology Readiness Level” ranked from theoretically possible at 1 to operationally ready at 9. The last two columns show an estimate of what cost for removing carbon might be if the technology was developed to large scale, and the potential for how much carbon it could remove (measured in gigatons of CO2).

Broadly speaking, these can be summarized into three categories of how the carbon is stored.

Biological storage (on land and in oceans). While annual plants do not retain carbon durably, trees can retain their carbon for decades, centuries or more. Soils and wetlands are a further store of carbon, derived from compounds exuded by roots and dead plant matter. In the oceans, aquatic biomass may sink to the ocean floor and become marine sediment. Carbon can be retained durably in these ecosystems, especially if managed carefully to reduce
Product storage. Many carbon-based products do not constitute durable storage. However, construction materials and biochar (a carbon-rich material produced by heating biomass in an oxygen-limited environment) can store carbon for decades or more. These carbon-based products can be made from conversion of harvested biomass (in the cases of biochar and wood in construction), from concentrated CO2 streams or even from CO2 from ambient air (in the case of aggregates).
Geochemical storage. Concentrated CO2 can be stored in geological formations, using depleted oil and gas fields or saline aquifers, or reactive minerals such as basalt. Geochemical capture leads directly to long-term storage of CO2 in the form of carbonate minerals or bicarbonate in the ocean.

The report emphasizes that it is extraordinarily unlikely that carbon dioxide removal can address atmospheric carbon levels on is own. The notion is that it can supplement other efforts. After all, all approaches that involve reduced use of fossil fuels only reduce the speed at which carbon is being added to the atmosphere, while the effect of carbon dioxide removal is actually to reduce pre-existing levels of carbon to lower levels than they would otherwise reach. The report argues:

Virtually all scenarios that limit warming to 1.5°C or 2°C require “novel” CDR, such as BECCS, biochar, DACCS, and enhanced rock weathering. However, only a tiny fraction (0.002 GtCO2 per year) of current CDR results from novel CDR methods. Closing the CDR gap requires rapid growth of novel CDR. Averaging across scenarios, novel CDR increases by a factor of 30 by 2030 (and up to about 540 in some scenarios) and by a factor of 1,300 (up to about 4,900 in some scenarios) by mid-century. Yet no country so far has pledged to scale novel CDR by 2030 as part of their Nationally Determined Contribution, and few countries have so far published proposals for upscaling novel CDR by 2050.

Indeed, if one looks at present at the amount of carbon dioxide removal, more than 99% is happening with reforestation, and about 0.1% involves the more novel forms of carbon dioxide removal listed in the table.

The other key point is that if at least some of these technologies are to be workable at scale, a lot of innovation and learning-by-doing is going to be needed over a sustained period of time. If countries aren’t starting a wide range of experimental projects in carbon dioxide removal very soon, then the necessary knowledge base won’t exist for large-scale used of carbon dioxide removal 2-3 decades from now. And to repeat myself, the main scenarios for mitigating the risks of climate change all include the assumption that this technology will become developed and workable. Without carbon dioxide removal technologies, the already very difficult task of dealing with rising levels of atmospheric carbon becomes much harder.

Is Globalization Fading?

Chad Bown tackles this question and other trade-related topics in an interview with Janet Bush of the McKinsey Global Institute (January 18, 2023, “Forward Thinking on the complicated and contentious state of global trade with Chad P. Bown“).

If globalization means trade agreements …

If deglobalization means less nondiscriminatory trade policies, most all the major economies of the world are members of the World Trade Organization. And one of the fundamental rules, pillars, of the World Trade Organization is the most-favored-nation, MFN, rule. You’re supposed to apply nondiscriminatory policy, basically the same tariffs toward everyone. Well, that is now changing.

We saw that really beginning to change in 2018, 2019, in the context of the US–China trade war, where those two countries went from having tariffs toward each other that were the nondiscriminatory types that they applied toward trading partners in the rest of the world. US toward China was about 3 percent. China toward the US was about 8 percent. Well, nowadays those countries are applying tariffs on the order of 20, 21 percent toward each other. Toward everyone else they’re still in the 3 to 8 percent range, so still relatively low. But they’re very much applying discriminatory trade policies, tariffs, toward one another.

With the conflict, Russia’s invasion of Ukraine, we have seen not only financial sanctions but a number of countries, the United States, EU, UK, Canada, the G-7, applying much higher tariffs against Russia. Discriminating, essentially breaking one of the central tenets of the WTO system—now, for good reason, obviously. But if that is what we mean by deglobalization, meaning no longer applying nondiscriminatory policies toward each other, trying to shape economic activity for noneconomic reasons, say, I do think some of that is going on. At the end of all of that, we still may have just as much trade as we had before, just as much cross-border movement of goods and services, but the patterns of that may look fundamentally different than the way it was before all this new stuff started happening over the last four or five years.

The tradeoffs between economies of scale and a wider distribution of global suppliers

Companies, their job is to reduce costs and provide goods and services to consumers for as low a price as possible. And if governments reduce trade barriers and make it seem as though trade relations with trading partners are secure, reduce uncertainty, then it makes sense for companies to make big investments and build supply chains to try to reduce those costs. What we have seen happen is you do, at the end of the day, have certain types of goods where you do have really geographically concentrated sources of supply. …

Another one that we have seen is the semiconductor story, and high-end semiconductors in particular. For the United States, globally, the main [sources] of high-end semiconductors, the fastest, fanciest chips, are essentially Taiwan and South Korea. Companies like TSMC and Samsung produce the vast majority of high-end semiconductors. For the United States, those are not countries or entities of concern. Those are places that are friends, allies.

And yet it doesn’t make a lot of sense in a new world where we have not just geopolitical shocks and concerns, but you’ve got pandemics and you’ve got climate-induced shocks. Whether that’s incredible storms, floods, droughts, it really doesn’t make sense to have incredibly geographically concentrated sources of supply, even though those may be incredibly economically efficient and may be the result of very good economic policies, which led firms to achieve economies of scale and build out really impressive supply chains. … Additional geographic diversification could ultimately be beneficial.

Now, it may end up being more costly. There are massive economies of scale of having all of that production locally sourced there in Taiwan or in South Korea. And provided nothing ever goes wrong, then great. But the concern is, we now live in a world where we’re more likely to be exposed to things that could go wrong, and we have to plan for that accordingly. And we have to convince the companies to do more for their supply chains, and some of that likely needs to come about through policy.

American Doubts about Health Care

It’s not surprising that some Americans would have increased doubt about the US health care system since early 2020 and the arrival of the COVID pandemic. Of course, the pandemic was not caused by the US health care system, but with over one million deaths attributed to COVID so far, the health care system was not likely to escape a share of the blame. But that said, what is most striking about the attitudes of Americans toward the US health care system is not their more recent doubts, but rather the steadiness of their doubts during the last two decades, according to results from just-released Gallup polling (January 19, 2023).

For example, this measure suggests that only about one-third of Americans think the US health care system has minor or no problems–and that percentage hasn’t varied much in the last 20 years. Consider for a moment all the changes in the US healthcare system in the last 20 years, including the passage and enacting of the Patient Protection and Affordable Health Care Act of 2010. In these longer term pattern of satisfaction with the overall US health care system, none of these changes seem to have had a major positive or negative effect on how Americans see health care.

Similarly, while about 60% of Americans are consistently satisfied with the cost of their own health care, only about 20-25% are satisfied with the total cost of health care for the country.

Perhaps the most interesting pattern in these survey results is that while about 60-65% of the over-55 age group view US health care quality as “excellent” or “good,” while the the satisfaction of younger health care groups with the quality of US health care seems has been diminishing for the last decade or so. Unless the opinions of younger Americans about US health care undergo a substantial shift, the pressures to “do something” about the quality of US healthcare seem likely to rise.

US Unionization Rate Hits All-time Low

There has been a ripple of articles across US news sources in the last year or so suggesting a possible resurgence in US labor unions membership, including stories about union membership drives at some Starbucks stores, at an Amazon warehouse, and among graduate students at some universities. But for an overall picture, here are the most recent annual numbers on US union membership from the US Bureau of Labor Statistics (January 19, 2023):

The union membership rate—the percent of wage and salary workers who were members of unions— was 10.1 percent in 2022, down from 10.3 percent in 2021, the U.S. Bureau of Labor Statistics reported today. The number of wage and salary workers belonging to unions, at 14.3 million in 2022, increased by 273,000, or 1.9 percent, from 2021. However, the total number of wage and salary workers grew by 5.3 million (mostly among nonunion workers), or 3.9 percent. This disproportionately large increase in the number of total wage and salary employment compared with the increase in the number of union members led to a decrease in the union membership rate. The 2022 unionization rate (10.1 percent) is the lowest on record. In 1983, the first year where comparable union data are available, the union membership rate was 20.1 percent and there were 17.7 million union workers.

Here are a few additional facts about US labor union membership from the BLS:

  • The union membership rate of public-sector workers (33.1 percent) continued to be more than five
    times higher than the rate of private-sector workers (6.0 percent). …
  • The highest unionization rates were among workers in protective service occupations (34.6 percent)
    and in education, training, and library occupations (33.7 percent). …
  • In 2022, 7.1 million employees in the public sector belonged to unions, about the same as in the privatesector (7.2 million)….
  • Industries with high unionization rates included utilities (19.6 percent), motion pictures and sound recording industries (17.3 percent), and transportation and warehousing (14.5 percent). Low unionization rates occurred in insurance (1.2 percent), finance (1.3 percent), professional and technical services (1.3 percent), and food services and drinking places (1.4 percent).
  • Among occupational groups, the highest unionization rates in 2022 were in protective service occupations (34.6 percent) and in education, training, and library occupations (33.7 percent). Unionization rates were lowest in sales and related occupations (3.0 percent); computer and mathematical occupations (3.3 percent); food preparation and serving related occupations (3.6 percent); and management occupations (3.8 percent). …
  • Among major race and ethnicity groups, Black workers continued to have a higher union membership rate in 2022 (11.6 percent) than White workers (10.0 percent), Asian workers (8.3 percent), and Hispanic workers (8.8 percent).

For some recent posts on unionization and possibilities for other types of organized voice for labor, see:

Is Digitization a Viable Path to Development?

I’ve been seeing a number of reports recently about digitization as a pathway to development in low- and middle-income countries. Just to be clear, “development” is a big word for economists. It doesn’t just mean that there are some business opportunities available, or some productivity gains here and there. It suggests a process involving an overall rise in the standard of living, including not just a rise in income levels, but more broadly, a general expansion the opportunities for realization of human potential in improved health, education, leisure, and autonomy as well.

In the US and other high-income countries, there’s a widespread concern that digitization may be feeding some undesirable patterns, like replacing human jobs with software and robots. Is there reason to think these concerns may be less important, or more, in developing countries. I’ll first mention the reports I have in mind, and then offer a few thoughts about the underlying theme.

As an example from Asia, Era Dabla-Norris, Tidiane Kinda, Kaustubh Chahande, Hua Chai, Yadian Chen, Alessia de Stefani, Yosuke Kido, Fan Qi, and Alexandre Sollaci have written “Accelerating Innovation and Digitalization in Asia to Boost Productivity “(International Monetary Fund, January 2023). From their abstract:

For many Asian countries, the COVID-19 crisis opened deep economic scars, which has led to intensifying pre-pandemic weaknesses—most notably, declining productivity growth. While no panacea will reverse productivity losses, digitalization and innovation can provide a way out. Digitalization can mitigate scarring during downturns—for example, by facilitating virtual education, remote work, and contactless sales—while improving productivity and innovation during expansions. Moreover, firms and industries that harness digital technologies are able to unlock productivity gains at all times. As digital adoption accelerated during the pandemic, countries can capitalize on both technological and organizational innovations associated with digitalization to alleviate scarring effects. …

Despite these successes, Asia still faces important divides that prevent it from fully reaping the benefits of innovation-led growth. Innovation and access to cutting-edge technologies is increasingly concentrated in a handful of firms, and there is scope to increase the quality of innovation. Within countries, diffusion of innovation from high-performing firms to other firms is limited, including due to constraints in access to finance, management capabilities, and skill gaps in information and communications technologies. Digital gaps and unequal access to digital technologies prevent a sizeable share of firms and workers from reaping the full rewards of participating in the new economy and reaching their full potential.

For an example from Latin America, the UN Economic Commission for Latin America and the Caribbean, known as ECLAC, has published “A digital path for sustainable development in Latin America and the Caribbean” (November 2022).

Today, more than ever before, improvements in inclusion, equality and productivity are associated with the accumulation of new capacities in the area of digital technologies. As noted in the previous chapter, in a world in which technological progress has accelerated sharply, there is less room for competition based solely on static comparative advantages, such as abundant natural resources or low-skilled labour. To boost economic development, resources need to be reallocated toward innovation- and knowledge-intensive activities; and economies need to diversify into sectors in which both domestic and external demand are growing rapidly.

It is undeniable that the digital transformation entails major disruptions that could promote greater inclusion and equality and also foster diversification of the production structure and sustainable productivity growth. Digitalization is affecting all sectors of the economy and society, adding value along the production chain; but the magnitude of the change will depend, largely, on enabling factors such as skills and infrastructure. These technologies have expanded possibilities for advancing towards progressive and inclusive structural change. However, it is also true that the corresponding opportunities are not open to all countries or sectors alike. In fact, rapid digital transformation can become an additional source of social and productive segregation, both within and between countries, if the infrastructure and basic capacities needed to use the technologies appropriately and effectively are not in place. Moreover, success in harnessing the digital revolution depends increasingly on how economies, production sectors, institutions and societies position themselves to absorb and adapt to these changes.

As an example from Africa, UNCTAD has published its “Economic Development in Africa 2022” report under the name, “Rethinking the Foundations of Export Diversification in Africa: The Catalytic Role of Business and Financial Services” (July 2022). As the title implies, the report emphasized the need for many economies across Africa to shift away from their dependence on being commodity exporters to the rest of the world, and instead to develop trade within the countries of Africa, facilitated by the emergence of a digitally-based services sector.

[T]he most relevant variable to promote intra-African bilateral diversification with regard to exporters is a larger share of services value added. By providing business services and market knowledge, information and communications technology (ICT) services facilitate tapping into new markets with new or existing products. Further, transport and distribution services are important across value chains to store and sell products. Access to financial services and research and development are essential to innovation of new products and the continuous improvement of products to survive in markets. Business services can be employed to overcome structural constraints through marketing and consulting to position products on the market. …

One of the key services sectors that is central to the growth and development of all economic sectors, including the services sector, is ICT. On one hand, through its embedded technology component, ICT directly affects the quality (complexity) of products and facilitates product differentiation and customization, with positive impacts on the variety of firms’ outputs. On the other hand, its embedded digital platforms and applications are increasingly having a positive impact on information asymmetries and greater market access for both large and small firms. Jointly, these effects translate into improved efficiency at different stages of the value chains – and most importantly – reduced costs and enhanced productivity and competitiveness of firms across sectors. … Moreover, ICT is necessary to facilitate valuable networks to enable mentoring, skills development and information sharing,
which are key to the growth and development of the services sector (Manyika and Roxburgh, 2011). …

[O]nly 10 per cent of the African population have access to the Internet (International Trade Centre, 2020), suggesting fundamental limitations in the utilization of associated ICT services in improving the quality and diversity of products by most African firms, notwithstanding ICT sector growth. … While the world has in recent
decades experienced a boom in technology, the use of advanced technologies in the economy remains a challenge for many African countries. Many localities in Africa do not have access to stable Internet connections, in addition to multiple power shortages. Instability in Internet connections slows down services and makes technologies in trade in services less efficient. While digitalization is driving trade in high knowledge-intensive services, Africa remains the least digitalized continent on the planet.

Of course, these reports (and others) can cite roughly a jillion examples of where digitization has provided or could plausibly provide economic gains. But as social scientists like to say, the plural of “anecdote” is not “data.” What are some of the issues in connecting digitization and development?

As all of these reports emphasize, access to digital services is highly incomplete in many parts of many developing countries. Sometimes the problem is that people lack a device to access the internet; sometime the problem is that internet service itself is unavailable, spotty, or costly. Sometime the problem is an underlying issue of unreliable electricity service.

As these reports further emphasize, people with higher levels of education and skills will be better-positioned to be involved with digital services, both as providers and as users.

The process of development is necessarily a process of disruption. In what might be called the “old” model of economic development, a standard pattern was that a country would first focus on manufacturing industries that made heavy use of low-wage labor, and then gradually build up skills and move up the value-added manufacturing chain. But in an era of industrial robots, it’s not clear that low-wage manufacturing can be a widespread path to development any more, and the process of how digitization might potentially drive widespread growth is less clear. There are places (the example of Bangalore in India is well-known) where digitally connected workers export services to the rest of the global economy. But it is not clear whether these examples can serve as a widespread model across the lowest-income areas of Asia, Africa, and Latin America. Is there an equivalent of low-wage but globally tradeable services jobs that can work for many regions within many of these countries, in the way that low-wage manufacturing used to do? What other new industries might be able to develop in these countries to provide digitally based jobs?

An alternative model might be for digitizing economies to rely less on export sales outside the region, and more on growth from within the region: for example, trade within and across the nations of Africa or Latin America. The enormous internal market of the United States, or the internal market that has been created by the European Union, suggest some potential in this approach. But trade across countries requires both physical transportation infrastructure and also the “invisible infrastructure” involving legalities and regulations about goods and services moving across areas and borders.

Some readers will be familiar with the old childhood story of “stone soup.” A traveler shows up at a village, promising to make soup from water and a stone. The kettle is set to boiling, and while watching the stone cook, the traveler starts musing about how stone soup is always just a little better if it has some vegetables, and potatoes, and meat, and spices. The villagers are so entranced by the charismatic visitor and the idea of stone soup that they bring all these items and add them to the soup pot–and then are amazed at how tasty stone soup can be. Digitization isn’t a stone. It offers real gains. But focusing on digitization as the key ingredient runs some risk of de-emphasizing all the other ingredients–education and skills, infrastructure, ability to start new businesses, ability to trade across borders–that are necessary for digitization to work well for development.

Some Economics for Martin Luther King Jr. Day

On November 2, 1983, President Ronald Reagan signed a law establishing a federal holiday for the birthday of Martin Luther King Jr., to be celebrated each year on the third Monday in January. As the legislation that passed Congress said: “[S]uch holiday should serve as a time for Americans to reflect on the principles of racial equality and nonviolent social change espoused by Martin Luther King, Jr..” Of course, the case for racial equality stands fundamentally upon principles of justice, with economics playing only a supporting role. But here are a few economics-related thoughts for the day clipped from posts in the previous year at this blog, with more detail and commentary at the links.

1) “The Black-White Wealth Ratio Since 1870″ (October 14, 2022)

 Ellora Derenoncourt, Chi Hyun Kim. Moritz Kuhn, and Moritz Schularick have done a deep dive into historical record to develop some estimates in ” Wealth of Two Nations: The U.S. Racial Wealth Gap, 1860-2020″ (Federal Reserve Bank of Minneapolis, Opportunity & Inclusive Growth Institute Working Paper 59, June 10, 2022). Back in 1860, the average white person had more than 50 times the wealth of the average black person on a per capita basis, but now the multiple is more like six times. The white-to-black ratio levels out from 1900 up to about 1930, during a time of legalized discrimination and segregation for black Americans. There is some move toward greater equality of wealth after World War II, and an additional move after the passage of the Civil Rights Act of 1964. But there has been a move toward greater inequality since about 1980, which seems mainly due to the fact that those who already had the resources to own housing or to have stock market investments have done especially well since then, while those who did not already own such assets had no way to benefit from the capital gains that have occurred.

2) “Some Economics of Blockbusting” (July 12, 2022)

Blockbusting was made illegal in 1968. For a couple of decades before that, it worked like this: A real estate company would pick out a predominantly white neighborhood in a city. It would start advertising through the neighborhood that it was “changing,” to use a gentle term, or it would be more explicit that blacks were buying houses in the neighborhood. Some of the white residents would sell their houses and relocate. The real estate firm would sell these houses to blacks, often at a considerable mark-up. White residents in these neighborhoods were apparently unwilling or unable to sell to blacks directly, and thus accepted a lower prices for their houses. The process unspooled from there, with the real estate firm increasingly able to play on white bigotry to buy houses cheaply and then to play on limited real estate options for blacks to sell to them at higher prices. Katherine Bennett, Daniel Hartley, and Jonathan Rose provide some background in “How common was blockbusting in the postwar U.S.?” (Chicago Fed Letter, Federal Reserve Bank of Chicago, July 2022). They find some evidence of the practice in 950 census tracts across 39 cities.

3) “The Evolution of Labor Force Participation by Race” (February 7, 2022)

Back in the early 1970s, labor force participation rates were quite similar for white, black, and Hispanic populations. Labor force participation then rose for all three groups in the 1970s, 1980s, and 1990s, in large part because of the mass entry of women to the (paid) labor force. However, the rise in labor force participation for whites and Hispanics was faster than the rise for blacks. Roughly around 2000, the labor force participation rate for all three groups started declining. However, the decline was slowest for the Hispanic population. In the lead-up to the pandemic, labor force participation was highest for the Hispanic population, but had roughly equalized for the white, black, and Asian population.

4) “Slavery and Economic Development in Brazil” (April 12, 2022)

Roughly half of all the slaves who made the trans-Atlantic passage from Africa to the New World from the 1500s to the 1800s disembarked in Brazil, where slavery was not abolished until 1888. How did slavery affect the economic development of Brazil? Nuno Palma, Andrea Papadia, Thales Pereira, and Leonardo Weller discuss the evidence and research, with occasional contrasts to the US experience of slavery, in “Slavery and Development in Nineteenth Century Brazil” (Capitalism: A Journal of History and Economics, Summer 2021, 2:2, pp. 372-426, subscription or library access needed). As the authors discuss at some length, Brazilian cotton farms that depended on slave labor competed with farms that relied on free labor. The Brazilian coffee industry did not grow to global prominence in the 1880s and 1890s until the period in which slavery was diminishing, and when most of the coffee plantation workers were recent European immigrants rather than slaves. In general, the regions of Brazil where slavery was greatest were slowest to mature economically, as was also true in the United States. The presence of slavery tended to discourage free labor–which after all, preferred not to find itself competing with slave labor. Areas of Brazil with more slavery also tended to a lower investment in education and human capital.

5) Sadie T. M. Alexander: Black Women and a `Taste of Freedom in the Economic World,’” by Nina Banks

The Fall 2022 issue of the Journal of Economic Perspectives included an article about some of economic work of Sadie T.M. Alexander, the first African-American to receive a PhD in economics. This essay discusses Sadie T. M. Alexander’s analysis of Black women and work based on her 1930s speeches and writings. A proponent of women’s gainful employment and economic independence, Alexander’s views on the benefits of industrial employment for women and family life stood in stark contrast to White social welfare reformers who discouraged maternal employment in favor of households with male breadwinners. Alexander criticized the unequal treatment of Black and White women under protective labor law, particularly with respect to domestic servants’ exclusion from New Deal minimum wage and maximum hour protections.

6) The Spring 2022 issue of the Journal of Economic Perspectives included a three-paper “Symposium on the Economics of Slavery.”

American Enslavement and the Recovery of Black Economic History,” by Trevon D. Logan

From the abstract: This paper reconsiders the evidence needed to answer pressing questions of economic history and racial inequality, the Third Phase of research on American Enslavement and its Aftermath. First, I briefly summarize how economists have sought to understand slavery as an institution. Second, using my family’s narrative as a lens, I show how answers to questions from economic history and economic theory can be answered by expanding our evidentiary base and methodological approaches. In the process, I highlight some areas of what these “traditional” economic perspectives miss. Finally, I briefly provide some examples from other fields—such as recent work by historians—that have sought to provide texture on some of the key dimensions of slavery and racial inequality that have been under-studied by economists.

“The Cumulative Costs of Racism and the Bill for Black Reparations,” by William Darity Jr., A. Kirsten Mullen and Marvin Slaughter

Two major procedures for establishing the monetary value of a plan for reparations for Black American descendants of US slavery are considered in this paper: 1) Enumeration of atrocities and assignment of a dollar value to each as a prelude to adding up the total, and 2) Identification of a summary measure that captures the dollar amount of the cumulative, intergenerational effects of anti-Black atrocities. Under the first approach, the itemization strategy, we assess wage costs to the enslaved of bondage; financial gains to the perpetrators of slavery; damages to Black victims of post-Civil War white massacres and lynchings; losses from discrimination in the provision of the home buying supports from the Federal Housing Administration and the G.I. Bill; and income penalties due to racial discrimination in employment. Under the second approach, the global indicator strategy, we calculate the present value of providing 40 acres of land to freed slaves in 1865 and the current wealth gap between Black and White Americans. We conclude that the latter standard, the racial wealth gap, provides the best gauge for the size of the bill for Black reparations.

“Slavery and the Rise of the Nineteenth-Century American Economy,” by Gavin Wright

The essay considers the claim that slavery played a leading role in the acceleration of US economic growth in the nineteenth century. Although popular among pro-slavery apologists, the proposition fails under rigorous historical scrutiny. The slave South discouraged immigration, underinvested in transportation infrastructure, and failed to educate the majority of its population. It is not even clear that the region produced more cotton than it would have under a counterfactual alternative settlement by free family farmers, on the free-state pattern. The grain of truth in recently popular narratives is that many northerners and business interests were complicit in the crime of slavery: routinely engaging in transactions with slaveholders, even promoting activities that facilitated slavery and the domestic slave trade. Complicity complicates simple historical moralism, but it is quite different from the notion that the prosperity of the nation as a whole derived from slavery in any fundamental way.

The 2023 Request for Donations: Conversable Economist Blog

Thanks to all of you who visit this blog, whether regularly or occasionally. About 18 months ago, ten years after starting this Conversable Economist blog, I finally put up a link for donations. (I have my skills, but asking for donations is not one of them.) My plan is to remind readers of the donation button about once a year, and the time has come for such a reminder.

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 your 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.

But these kinds of explanations for the blog run a risk of making the effort seem more systematic than it actually is. On the bulletin board outside my office, one of the quotations is a remark from Gabriel García Márquez that perhaps captures my approach more accurately. He said: “On another occasion a sociologist from Austin, Texas, came to see me because he’d grown dissatisfied with his methods, found them arid, insufficient. So he asked me what my own method was. I told him I didn’t have a method. All I do is read a lot, think a lot, and rewrite constantly. It’s not a scientific thing.”

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 60 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 12 years now.

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, this is my once-a-year you to click on the “Donation” button near the upper-right of this page.

A number of readers have already donated generously in late 2022, even before I managed to post this reminder, and I appreciate your support more than I can say.