Month: July 2023

The “merger guidelines” that have been published by the Federal Trade Commission and the US Department of Justice since 1969–with updates happening every 10-15 years–serve an unusual role. They are not federal regulations like, say, rules about what level of pollutants can be emitted from the Environmental Protection Administration. Instead, the merger guidelines seek to spell out the established legal and economic understanding of how to think about whether a merger is permissible. When an antitrust suit goes to trial, it has been common for all parties to agree on the merger guidelines themselves–although of course they are disagreeing on how the guidelines apply to the specific case at hand.

Thus, when President Biden’s antitrust regulators announced that they were withdrawing the earlier merger guidelines with the intention of writing new ones, there’s been a lot of interest over what might happen. I wrote about this, for example, in “Antitrust: Dilatancy Before the Earthquake?” (June 8, 2023). Now, the draft of the merger guidelines for purposes of public comment has been published.

The concern over the new merger guidelines was that Biden’s antitrust authorities were no longer trying to convey a sense of the law as it is, but rather were trying to use new merger guidelines as a way of altering the law. The concern appears to be a real one. For an overview of some issues, see the WSJ article by Jason Furman and Carl Shapiro, both economists with partisan Democratic affiliations, in “How Biden Can Get Antitrust Right: New draft competition guidelines released last week need revision. Not all mergers are bad” (July 27, 2023). They write:

Merger guidelines aren’t enforceable regulations. They have also never attempted to be a legal brief or offered an interpretation of the case law. Instead they have described widely accepted economic principles that the Justice Department and the FTC use to analyze mergers. As a result, the guidelines have commanded widespread respect and bipartisan support. Amazingly, for at least 25 years, when regulators have challenged mergers in court, the merging firms themselves have accepted the framework articulated in the guidelines.The new draft guidelines depart sharply from previous iterations by elevating regulators’ interpretation of case law over widely accepted economic principles. The guidelines have long helped courts use economic reasoning to evaluate government challenges to mergers. They shouldn’t become a debatable legal brief or, worse, a political football. Regulators say the guidelines are out of date and need to be updated to reflect the modern economy. Yet their draft draws heavily on Brown Shoe Co. v. U.S. (1962), a widely criticized Supreme Court case.

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Furman and Shapiro dig down into some specific details of what they like and don’t like about the new guidelines, and I’m sure there will more commentary in the next few months about the details. Here, I want to focus on an overall point about antitrust and mergers: what is the overall policy goal here? The usual answer is to allow mergers that make consumers better off, whether by reducing prices or by providing products of higher quality, and to disallow mergers that would make consumers worse off.

The Brown Shoe case has been an example of how not to do antitrust. The case was about a proposed merger between two shoe companies: Brown Shoe and GR Kinney. The shoe industry was not very concentrated. Brown She made about 4% of all shoes in the US; Kinney made 0.5%. At the retail level, the two companies combined for 2.3% of the shoe stores in the US. The goal of the merger was that the retail outlets of both stores would then be able to sell shoes from both companies.

But the court held that this level of industrial concentration was excessive, which is highly questionable. But the court also held that the merger could lead to greater efficiency that would allow prices for shoes to decline, which could hurt other shoe companies. In Brown Shoe, in other words, the goal of antitrust regulation was not to help consumers with lower prices or improved quality of service; instead, the goal of antitrust was, paradoxically, to limit competition in the name of avoiding harm to competitors.

I’ll note that there is sometimes an argument made that “Brown Shoe has never been overruled by the Supreme Court.” This is technically true, in the sense that no Supreme Court decision has written “we now overrule Brown Shoe.” But a series of court decisions has made Brown Shoe obsolete for a long time. For a case-by-case overview of how this happened, see this short essay by Herbert Hovenkamp, a preeminent scholar of antitrust law (“Did the Supreme Court Fix `Brown Shoe?”ProMarket, May 12, 2023). Hovenkamp writes about the case:

The Supreme Court’s 1962 Brown Shoe decision is sharply at odds with what courts do today in merger cases. Its troublesome doctrine was that antitrust law should be concerned about market concentration without regard to prices. It even indicated approval for the district court’s conclusion that the merger was harmful because it resulted “in lower prices or in higher quality for the same price….” Under that rationale, the principal beneficiaries of merger enforcement are not consumers or labor. The main benefits accrue to firms who are not integrated or are dedicated to older technologies. Today, by contrast, merger policy is heavily focused on mergers that threaten price increases or sometimes reduced innovation. Brown Shoe is indefensible if antitrust is concerned about competitive market performance and innovation.

Some readers will remember Douglas Ginsburg, who President Reagan announced would be nominated for a position on the US Supreme Court back in 1987, but who then withdrew his name from consideration after controversies over having smoked marijuana earlier in life. Although Ginsburg never ended up on the Supreme Court, he continued his career as a federal judge. He has written “Wither the Consumer Welfare Standard?” for the Harvard Journal of Law & Public Policy (Winter 2023, pp. 69-85).

As Ginsburg points out, the idea that consumer welfare should be the goal of antitrust law–via lower prices for existing goods, or provision of new and improved goods–is a relatively new viewpoint, dating back to the 1970s. For example, Ginsburg points out that Robert Pitofsky wrote a book in 1979 warning about the danger of large firms and how they might use their political influence. But in response to the idea that antitrust law should therefore focus on discouraging large firms, Ginsburg offers two main points. One is that if the concern is that big firms will use their political power to injure consumers, then the goal of antitrust remains consumer protection. However, if the concern is the more nebulous idea of how political competition should work in the United Stated, then there are many policy tools other than antitrust that are more direct and appropriate. Ginsburg writes:

Corporate political influence, which is usually used for “rent-seeking,” is a legitimate cause for concern. The result is too often a crony capitalism that distorts resource allocation, unjustly re-wards some and harms others, and is antithetical to the market competition that benefits consumers and the economy. …

In any event, it does not necessarily follow that antitrust enforcement is an appropriate preventative measure for corporate political influence. … There are a number of problems with using merger control to that end. First, and most obviously, it precludes realizing whatever efficiencies are motivating the merger, to the detriment of consumers. Second, size is a rather poor proxy for political influence. Many small firms and, particularly, associations of small firms, have substantial political clout, often besting large firms on the other side of an issue. Consider insurance agents versus insurance companies; automobile dealers versus automobile manufactur-ers; and gasoline retailers versus petroleum companies. These “small dealers and worthy men,” as Justice Peckham called them in 1897, prevail consistently, both in the state and the federal legislatures. Finally, some firms attain size—and perhaps also political influence—simply because they are successful in satisfying consumers.

Ginsburg also goes through a variety of other goals that have been proposed for antitrust law.

[O]ther voices have championed different goals for antitrust. All are arguably worthy goals, but ask yourself whether they are best, or even reasonably, achieved by reforming antitrust law or enforcement policy. They include the preservation of jobs that would be rendered redundant if a merger were approved; countering income inequality; preserving small, locally owned businesses … ; protecting the privacy of consumers’ personal data; and safeguarding the environment.

Traditional antitrust decisions focused on consumer welfare can be plenty hard, with room for reasonable differences of opinion. But it’s helpful for it to have a single goal. As a counterexample, imagine if a corporation must follow certain environmental rules, but the company could only be in compliance with those environmental rules if it also preserved jobs, supported greater income equality, reduced its political lobbying, helped consumers, and so on and so on. Or imagine that when the IRS check to see if a company has paid its taxes, it also evaluated whether the company preserved jobs, supported greater income equality, reduced its political lobbying, followed environmental rules, and so on and so on. Now imagine that all government authorities–antitrust, tax, environmental, political giving, and so on–all were taking all of these issues into account, all the time. The result would be a chaotic, politicized, and unaccountable form of government.

It’s not exactly a secret that US incarceration rates climbed dramatically in the 1990s, but have declined since then. For example, John Gramlich wrote at the Pew Foundation website a couple of years ago ” America’s incarceration rate falls to lowest level since 1995” (August 16, 2021).

The rate of incarceration among black Americans has fallen as well. Gramlich had written a year earlier “Black imprisonment rate in the U.S. has fallen by a third since 2006” (May 6, 2020). He wrote: “The nation’s imprisonment rate is at its lowest level in more than two decades. The greatest decline has come among black Americans, whose imprisonment rate has decreased 34% since 2006. There were 1,501 black prisoners for every 100,000 black adults at the end of 2018, according to a new report from the Bureau of Justice Statistics (BJS), the statistical agency of the U.S. Justice Department. That was down sharply from 2,261 black inmates per 100,000 black adults at the end of 2006 …”

Incarceration patterns take some time to shift. When many more prison sentences, and sentences of greater length, are given in the 1980s and 1990s, their effect lasts into the 2000s. In particular, prison sentences are more concentrated among young adult men than other demographic groups. The shift toward lower incarceration rates is thus an intergenerational change. Jason P. Robey, Michael Massoglia, and Michael T. Light describe the change in “A Generational Shift: Race and the Declining Lifetime Risk of Imprisonment” (Demography, published online July 12, 2023). From their abstract:

This study makes three primary contributions to a fuller understanding of the contemporary landscape of incarceration in the United States. First, we assess the scope of decarceration. Between 1999 and 2019, the Black male incarceration
rate dropped by 44%, and notable declines in Black male imprisonment were evident in all 50 states. Second, our life table analysis demonstrates marked declines in the lifetime risks of incarceration. For Black men, the lifetime risk of incarceration declined by nearly half from 1999 to 2019. We estimate that less than 1 in 5 Black men born in 2001 will be imprisoned, compared with 1 in 3 for the 1981 birth cohort. Third, decarceration has shifted the institutional experiences of young adulthood. In 2009, young Black men were much more likely to experience imprisonment than college graduation. Ten years later, this trend had reversed, with Black men more likely to graduate college than go to prison.

Here’s a figure showing the decline in incarceration rates for men since 1999.

Here’s a figure showing their calculations of the risk of a man being imprisoned by age 25, and how it has evolved over the last couple of decades.

My main point here is just to emphasize the amount of change that has occurred. Whatever one’s views on what the incarceration rates should be, it’s useful to start from a sense of what it in fact is.

For those wanting a more in-depth discussion of the bigger questions of incarceration and crime, one useful starting point might be the article by Magnus Lofstrom and Steven Raphael, “Crime, the Criminal Justice System, and Socioeconomic Inequality” in the Spring 2016 issue of the Journal of Economic Perspectives (30:2, 103-26). They emphasize that black Americans experience both crime and the criminal justice system at higher rates. From the abstract of their paper:

Crime rates in the United States have declined to historical lows since the early 1990s. Prison and jail incarceration rates as well as community correctional populations have increased greatly since the mid-1970s. Both of these developments have disproportionately impacted poor and minority communities. In this paper, we document these trends. We then assess whether the crime declines can be attributed to the massive expansion of the US criminal justice system. We argue that the crime rate is certainly lower as a result of this expansion and in the early 1990s was likely a third lower than what it would have been absent changes in sentencing practices in the 1980s. However, there is little evidence that further stiffening of sentences during the 1990s—a period when prison and other correctional populations expanded rapidly—have had an impact. Hence, the growth in criminal justice populations since 1990s has exacerbated socioeconomic inequality in the United States without generating much benefit in terms of lower crime rates.

Robert Solow (Nobel ’87) is known in the economics profession for conceptualizing the broad methods of studying economic growth that are still used today. I also think of him as one of the most gifted expositors of technical economic issues. When attending the annual conferences of the American Economic Association some years back, if I was in doubt as to which of many sessions to attend, I would just pick the one where Solow was presenting or commenting. He’s 98 now. Steven Levitt is perhaps best-known in popular culture as the author of Freakonomics (written with Steven Dubner), a 2005 book which achieved the unlikely status of being a best-seller written about academic research papers in economics. Inside the economics profession, Levitt is known as remarkably creative at coming up with empirical approaches that offer plausible (if sometimes also highly debatable) answers to a wide array of questions.

The Freakonomics best-seller morphed into a blog, additional books by Levitt and Dubner, podcasts, and interviews. Levitt recently interviews Solow, who is one of his graduate school professors, in “Ninety-Eight Years of Economic Wisdom” (June 23, 2023, https://freakonomics.com/podcast/ninety-eight-years-of-economic-wisdom/). You can listen for an hour, or read the transcript. Here are a few of the comments from Solow that especially caught my attention:

What’s the real challenge of a zero-growth economy?

[T]here are, however, a lot of people, in the profession and outside the profession, who think that a modern, industrial, capitalist economy cannot exist without growing. … So, I want to imagine an economy like ours and think about what it would be like if it were stationary, if it were not growing and not shrinking, but just fixed at whatever size we’re talking about. The first thing that would have to be true is that the population is constant. Now, I want to make another assumption, imagine that there’s no innovation going on. There are no new products, no new industries, nothing like that. The economy is just stationary. It just repeats itself. …

I think the important thing to realize is that there is no law of economics, no principles of economics, that say that such an economy could not exist and be healthy. It’s not written anywhere that for a capitalist economy, it’s grow or die. That’s just not true. The one glitch that could occur in this stationary state is that the population wants to increase its wealth by saving, even though the economy is stationary, but we can’t let that saving get into investment because if the saving goes into building new factories, building new buildings, whatever, that moves us out of the stationary state into growth. But there’s an easy solution to that: the government satisfies the public’s wish to accumulate by running a deficit and selling them bonds and using the proceeds not to build new roads, or build new anything, but to put on beautiful fireworks displays, wonderful concerts, maybe annual dramatic festivals like the ancient Athenians. That situation could simply go on forever.

Now I come to the rub that I don’t think most people think about: this non-growing economy has, as I said, no new industries, no new products, nothing like that. That can’t be good for social mobility. What I’m afraid of is that in such an economy, the same good jobs and high status occupations would repeat themselves year after year. And the people who have those jobs would groom their children to follow in their footsteps. And that kind of society would tend to be a hereditary oligarchy. And that’s not good. So if I were trying to bring about — for the sake of warding off climate change, for the sake of preserving the environment — a non-growth economy, what I would be thinking about is how you provide for social mobility, how you provide for the children of relatively poor parents to become relatively better off while some of the children of relatively well-off parents fall in the income distribution. That’s the hard part. There’s nothing in my background to make me a specialist in how to do that, but I can see that it would be a really serious problem. 

On a lesson from growing up during the Great Depression:

I was 6 years old in 1930 and I was 16-years-old in 1940. So I grew up during the whole of the Depression. Now, we were not an impoverished family. My father always had work, although he had to take jobs he didn’t like. On the other hand, from listening to my parents’ conversation, it was clear to me that the general feeling of not knowing where the next dollar is coming from, the general feeling of insecurity was the dominant thing in their conversation. That’s mostly what they talked about. One of their friends was a high school teacher of math, Mr. Ginsburg. Before the Depression, they all pitied Lou Ginsburg because he didn’t earn very much money. By the 1930s, they envied him because he had a safe and secure job. So one of the things I got out of being a Depression child was the importance of economic security. And it has made a difference because I’ve always balked at notions about the efficiency of the labor market, which amount to imposing uncertainty on workers. I think any understanding of the labor market has to take account of the fact that people really care — it’s really important to them to have a feeling of safety, of security. I still think that. It doesn’t fit so easily into standard economics textbooks, but it’s one of the things I learned from growing up in the Depression.

How Solow chose economics as an undergraduate major, upon returning from the Army after World War II:

I turned 18 in 1942 and I went back to Harvard College to start my junior year. I started at age 16. So there I am in September, maybe early October, 1942, sitting in a course on the psychology of personality. It wasn’t a bad course. I was taking it because my advisor, whom I respected a lot, told me to take it. So I’m taking this course and, like the good little boy that I am, I’m busy taking notes. And all of a sudden it hit me: I can’t sit here three days a week, taking notes on the psychology of personality, when probably the most important event of my lifetime is taking place 3,000 miles away in Europe. I just can’t do that. So, I waited till the class ended, still busily taking notes. I packed up my ballpoint pen and my notebook, and I walked out the door. I walked one block to Harvard Square. I paid my nickel and got into the subway. Got out at Park Street, where I knew there was an Army recruiting office, and I joined the Army. I thought it was much more important to beat Hitler than to take notes in courses.

So three years later, we’ve beaten Hitler, and in 1945, I’ve got to tell Harvard College I’m going to be back in September as a junior to finish up. So I called the college office on a telephone and they said the thing to do is to get a transcript of your freshman and sophomore year, and take it to the headquarters of your major department. So I said to my wife, “I don’t have a major department. I’ve just been screwing around taking courses, mostly in the social sciences,” And I said to her, “You majored in economics, didn’t you?” And she said, “Yes I did.” I said, “Was it interesting?” And she said, “Yes, it was.” I said, “Oh, what the hell? Let’s give it a try.”

Throughout the COVID pandemic, there have been controversies over whether certain deaths were really because of COVID, or were due to other causes. After all, there’s a meaningful distinction between “dying because of COVID” and “dying with COVID.” There are other cases of deaths that occurred during the pandemic and because of the pandemic, but from causes like people whose chronic health conditions were not managed as well during the pandemic–perhaps because they were separated from their usual health care practitioners and from family and friends.

One way to sidestep many these questions of categorization and classification is to just look at the total “excess deaths” in the US–that is, the number of deaths above the usual statistical prediction. The Centers for Disease Control publishes these figures, and here’s the most recent data.

The blue bars show actual reported deaths each week. The yellow curved line shows the pattern of deaths expected based on past experience, and the red line shows when the pattern of deaths is significantly higher than expected. The red plus signs show weeks when the number of deaths was significantly higher than expected–that is, above the red line.

It’s useful to note here that the pattern of deaths is somewhat seasonal, tending to rise each winter. There are also times in the past that reported excess deaths like the flu outbreak in early 2018 shown in the far right of the figure.

The COVID pandemic is obvious in the figure. There was one previous time, early in 2022, when it looked for a few weeks as if the level of excess deaths might have fallen back to zero, but it didn’t last. However, the number of excess deaths has now been below zero since mid-January 2023. (As the CDC warns, the bars showing deaths for the past few weeks are underestimated, because it takes some time for deaths to be fully reported to the national database.)

Yes, the “excess deaths” measure will mix together those who died 100% of COVID, those for whom COVID exacerbated a pre-existing condition, and those who died during the pandemic because of conditions created by the pandemic, but not because they contracted the novel coronavirus. The epidemiologists and public health authorities will be sorting out these categories in research yet to come. Of course, we’ll have to see what happens this fall and winter. But for now, the bottom line seems to be that excess deaths have gone to zero for the last six months and the COVID pandemic is over in the United States.

Fifteen years ago in 2008, Cass Sunstein and Richard Thaler published a best-seller called Nudge: Improving Decisions about Health, Wealth, and Happiness. The idea built on research in behavioral economics over the previous few decades which had shown that people’s decision-making is often subject to biases or limitations that cause them to make choices, which, on later reflection, they would prefer not to have made. The idea of “nudge” policies–sometimes called “liberal paternalism”– is to change the way certain decisions are presented and framed in a way that can counterbalance the pre-existing biases and limitations, but while still leaving individuals the choice to continue making the same decisions if they wish to do so.

If “nudge” policies work as intended, many individuals will be pleased that they were nudged, because it helped them to make the decision that they actually wanted to make. For example, people might be later on feel pretty good about nudges that encouraged them to quit smoking, or save more money, or eat a healthier diet.

However, a couple of active researchers in behavioral economics are now expressing some doubts about the role of “nudges” in public policy. Nick Chater and George Loewenstein have written “The i-frame and the s-frame: How focusing on individual-level solutions has led behavioral public policy astray” (Behavioral and Brain Sciences, published online September 5, 2022, still forthcoming in a future issue). They write:

An influential line of thinking in behavioral science, to which the two authors have long subscribed, is that many of society’s most pressing problems can be addressed cheaply and effectively at the level of the individual, without modifying the system in which the individual operates. We now believe this was a mistake, along with, we suspect, many colleagues in both the academic and policy communities.

Their conceptual argument comes in two main parts. One is that while behavioral interventions often have some positive effect, the size of the effect is often small. They mention many papers on this theme, but as an illustration, consider the findings of Stefano DellaVigna and Elizabeth Linos “RCTs to Scale: Comprehensive Evidence From Two Nudge Units” (Econometrica, 2022, 90:1, pp. 81-116). They worked with data from two “nudge units”–that is, organizations that work with a wide range of US government agencies on nudge policies. One was a consulting firm called BIT North America, the other was the Office of Evaluation Sciences (OES), which is part of the US Government Services Administration. Here’s how DellaVigna and Linos describe their project:

In this paper, we present the results of a unique collaboration with two major “Nudge Units”: BIT North America, which conducts projects with multiple U.S. local governments, and OES, which collaborates with multiple U.S. Federal agencies. Both units kept a comprehensive record of all trials from inception in 2015. As of July 2019, they conducted a total of 165 trials testing 347 nudge treatments and affecting almost 37 million participants. In a remarkable case of administrative transparency, each trial had a trial report, including in many cases a pre-analysis plan. The two units worked with us to retrieve the results of all trials, 87 percent of which have not been documented in working papers or academic publications. This evidence differs from a traditional meta-analysis in two ways: (i) the large majority of these findings have not previously appeared in academic journals; (ii) we document the entirety of trials run by these units, with no scope for selective publication.

How did these programs work out? Chater and Loewenstein refer to behavioral nudges as “i-frame” interventions, meaning that they seek to change outcomes via a focus on individuals. Here’s their summary of the findings from DellaVigna and Linos:

I-frame interventions alone are likely to be insufficient to deal with the myriad problems facing humanity. Indeed, disappointingly often they yield small or null results. DellaVigna and Linos (2022) analyze all the trials run by two large U.S. Nudge Units: 126 RCTs covering 23 million people. Whereas the average impact of nudges reported in academic journals is large – at 8.7% – their analysis yielded a mean impact of just 1.4%. Why the difference? They conclude that selective publication in academic journals explains about 70% of the discrepancy. DellaVigna and Linos also surveyed nudge practitioners and academics, to predict the effect sizes their evaluation would uncover. Practitioners were far more pessimistic, and realistic, than academics, presumably because of their direct experience with nudge interventions.

In short, nudges based on research studies in behavioral economics have an positive effect, but in the real world, the average effect is pretty close to zero.

But as long as the nudge policies are cheap and the effects are at least mildly positive, why not do them? The second main part of the Chater-Loewenstein argument applies the behavioral economic concept of how a question is framed to energy behind public policy choices. They argue that behavioral economics creates an “i-frame,” with the emphasis on nudging individuals to make better choices. Once the problem and solution is framed in that way, it is harder for “s-frame” policies that focus on systemic changes to be adopted, or even considered.

In theory, there is no contradiction between, say, an i-frame policy of discouraging smoking by with warning labels and images on cigarette packages and also having s-frame policies like taxes on cigarettes and bans on smoking in workplaces and restaurants. But the authors cite research evidence that, for example, when people and policy-makers first consider a “nudge” i-frame policy toward using carbon-free energy, they are then less likely to support an s-frame carbon tax. Farmers who have taken steps to adapt to climate change can then be less likely to support government steps to reduce climate change. Indeed, Chater and Loewenstein argue that there is a pattern in which companies try to channel policy discussions toward i-frame interventions, and behavioral economists and government agencies line up to evaluate the potential nudges. For example, food companies that make unhealthy products often emphasize how individuals should eat in moderation. Energy companies like BP promote the idea of each individual considering their own carbon footprint, which emphasizes what individuals can do rather than government policy steps.

Chater and Loewenstein illustrate their argument with examples from various policy areas, including climate change, obesity, retirement savings, and pollution from plastic waste. They suggest that behavioral economists should refocus their attention, away from individual nudges and toward systematic tax and regulatory changes. They write: “We argue that the most important way in which behavioral scientists can contributed to public policy is by employing their skills to develop and implement value-creating system-level change.”

For a recent research working paper along these lines, I was interested in “Judging Nudging: Understanding the Welfare Effects of Nudges Versus Taxes,” by John A. List, Matthias Rodemeier, Sutanuka Roy, Gregory K. Sun (Becker-Friedman Institute Working Paper, May 15, 2023). The authors look at policies in three areas where both nudges and either taxes or subsidies have been used: cigarettes, influenza vaccinations, and household energy. They summarize: “While nudges are effective in changing behavior in all three markets, they are not necessarily the most efficient policy. We find that nudges are more efficient in the market for cigarettes, while taxes are more efficient in the energy market. For influenza vaccinations, optimal subsidies likely outperform nudges. … Combining nudges and taxes does not always provide quantitatively significant improvements to implementing one policy tool alone.”

For any society, productivity growth is the difference between living in a zero-sum polity, where gains for some can only come as a result of costs for others, and a positive-sum policy, where social arguments can be about the distribution of gains rather than the imposition of losses. I sometimes say that no matter what your economic issues are, it’s a lot easier to achieve them in a positive-sum world.

Martin Neil Baily has spent a career studying productivity growth. He offers an overview of how this area of research has evolved along with his own insights in “Lessons from a Career in Productivity Research: Some Answers, A Glimpse of the Future, and Much Left to Learn” (International Productivity Monitor, Spring 2023, pp. 120-149).

Here are a few figures to illustrate some of the background. The US economy since World War II has gone through four periods of labor productivity growth, as shown in the figure. A key insight here is that additional capital per worker can be measured in economic statistics, and “labor composition” can be approximated by factors like years of school completed and labor force experience. But the remaining productivity growth (the blue bars) is calculated as a “residual”–that is, the leftover part of GDP growth that cannot be attributed to changes in capital and labor is called “productivity.” In an old phrase (I think it traces back to Moses Abramowitz), productivity for economists is “a measure of our ignorance.”

The higher productivity growth from 1995-2004 is typically attributed to an acceleration of productivity in the manufacturing of computers and electronics products, which includes semiconductors. But the question of why productivity growth dropped so sharply in the early 1970s, and why it has not rebounded more in the last couple of decades, remain open questions. Is it becoming harder to achieve technological gains? Are economic statistics not properly capturing those gains? These are active areas of study.

In thinking about the productivity, it’s important to remember that it’s an annual change. Thus, the gap between the good and the bad periods of US productivity is about 1.0-1.5% per year, each year. Over a decade, the higher productivity would mean that GDP was 10-15% higher.

The lower US productivity growth is actually a phenomenon across high-income countries. The productivity levels in this figure are “smoothed” to emphasize long-run patterns rather than chunks of time. But what’s striking is that for the EU, Japan, and the UK, productivity gains have essentially fallen to zero percent.

A substantial portion of Baily’s research has involved looking at productivity levels by industry and by company. Here are some main takeaways:

First, the studies found that there were large differences in the levels of productivity across countries in the same industry. … Second, a high level of competitive intensity forces firms to achieve the level of productivity of the best performers in their industry, or close to it. And if companies compete against the most productive companies world-wide, they move closer to that best-practice productivity level. Third, certain types of regulation, as well as trade and investment restrictions, can prevent an industry in a country from achieving best-practice productivity. Fourth, operating at large scale often provided a productivity advantage. And fifth, promoting high productivity is not a simple thing. The drivers of productivity or the barriers to productivity varied by industry and country. …

[T]he productivity studies found in most cases that the way factories or offices or retail facilities were operated were much more important to productivity than differences in the capital stock. Organizational or managerial capital was very important. And there were even examples where high levels of investment
had contributed almost nothing to productivity. The study of Korea, for
example, found that government development policies had, in some industries, encouraged overinvestment where machinery was underutilized. Another example came from Germany where union restrictions on shiftwork meant that companies had to invest in extra capital to produce a given level of output and capital utilization was low compared to the United States.

A further lesson that emerges from this research is that diffusion of productive methods across firms seems to have slowed. As Baily writes: “The distribution of productivity levels within industries has become wider. That is to say, the gap between the low-productivity establishments and the high-productivity establishments has increased.” To put it another way, the overall slower productivity growth is perhaps not the result of the technological leaders failing to make gains, but rather the result of other firms not keeping up in the kinds of organizational and managerial changes that spur productivity.

Looking ahead, a primary question is when or whether higher productivity will return. One theory is that productivity gains have gotten harder over time. But when one looks at scientific breakthroughs–say, in genetics, materials science, computing power, and others–it’s not obvious that the resulting economic growth should be rising more slowly.

Of course, the current hot topic is artificial intelligence. Baily points out that the new AI tools are both developing very quickly and being adopted very quickly. Baily points to the emerging evidence on how these tools might affect productivity. I’ve discussed much of this same evidence in “The New AI Techologies: How Large a Productivity Gain?” (May 22, 2023), “Biggest Economic Applications of Generative AI: McKinsey” (June 29, 2023), and “Technology and Job Categories in Decline” (July 14, 2022).

Baily mentions a couple of points worth emphasizing here. First, a common pattern in recent decades has been that improvements in information technology often tended to replace previously middle-class jobs and add to inequality. Back in the 1990s, there used to be a lot of middle managers whose job was essentially to collect information (say, about all the people doing sales in a certain territory) and then pass it along to upper management. But with information technology, those middle management jobs could largely be automated on to a computer “dashboard.” However, some of the evidence for the new AI tools is that they provide bigger benefits to the less-skilled, and thus they could potentially be a force for greater equality. As Baily writes: “Many people find it hard to write coherent emails or to do mathematics. As a result, they are forced to take manual jobs with low wages. The new technologies can potentially help them to be more productive. There are signs from some of the case study evidence cited above that generative AI can help those with weaker skills become substantially more productive.”

The other issues is that Baily, like most economists, has some tendency to separate questions of productivity and distribution. The ideas is to encourage and to accept the greater gains from rising productivity, and then to use a share of those gains helping those in need. Baily writes: “Rather than focus on the dangers of new
technologies it would be better to figure out how to take advantage of them, mitigate the adverse impacts and use these breakthroughs to improve the economic future broadly.”

We all have a feeling now and then that it would be nice–and less threatening–if the pace of change would just slow down. But the idea that government regulators have a good sense of how to shape the future of AI seems implausible to me. Imagine a similar set of government regulators in, say, 1985, trying to decide on how to regulate the shape of the internet. Special interests seeking to block change, or direct it to their own gain, are likely to be more powerful than shadowy and unknown future benefits across society as a whole. In a global economy, those who hold back will be overtaken by those who move ahead.

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A new journal is being launched, Health Affairs Scholar, described at the website as “a new fully open access, peer-reviewed journal dedicated to global health policy and emerging health services research.” I wish them success!

For non-researchers like me, one interesting part of the journal is the “Commentary” section. At the start of the first issue, the core members of the editorial group get the ball rolling with their essay, “Ten health policy challenges for the next 10 years,” by Kathryn A Phillips, Deborah A Marshall, Loren Adler, Jose Figueroa, Simon F Haeder, Rita Hamad, Inmaculada Hernandez, Corrina Moucheraud, and Sayeh Nikpay (July 2023) Like all such lists, this one is thought-provoking both for what it emphasizes, and for what it doesn’t. Let’s start with their list of 10 challenges: they have more to say about each challenge, with citations to the literature, in the essay.

Thinking beyond the insurance card: How do systemic barriers affect access to care and what we can do about it?

Despite reaching an all-time low uninsurance rate in 2022, a growing realization has started to set in across the United States that handing out insurance cards does not serve as the final step in the goal of increasing the health of all Americans. Indeed, enrolling individuals into health coverage is only meaningful if they can access the medical care they need, and if they can do so in a timely manner. …

New health care over-the-counter products: What will be required to meet consumer needs?

The market for over-the-counter (OTC) health products continues to expand dramatically. This increase is not only for products that have been on the market for decades, such as nutritional supplements, but also for new categories of products, such as online eye exams and prescription glasses, direct-to-consumer genetic and other types of screening tests such as those for COVID-19 infection, and online pharmacies. These trends are changing the relationship between consumers and health care in significant ways … A prime example of the advantages—and challenges—of the move to OTC health products is the recent US Food and Drug Administration (FDA) approval of the marketing of OTC hearing aids. There is a huge unmet need for affordable and accessible hearing device products as statistics show that the majority of individuals who would benefit from hearing aids do not use them …

Safety-net programs: Why do we make it so hard for families to receive social safety-net benefits?

It is increasingly recognized that social factors like poverty and housing are key determinants of health. Yet, the United States dedicates a smaller percentage of its Gross Domestic Product (GDP) to social spending on families than the average Organization for Economic Co-operation and Development (OECD) country (0.6% vs. 2.1% in 2019). … Another major understudied component of this problem is that it is challenging for economically disadvantaged families to access the benefits for which they are eligible….

Ensuring access to care for patients with limited ability to pay: What are the unintended impacts of poorly targeted support for the health care safety net?

All countries, regardless of their specific health payment approach, must consider how patients can equitably access care. Even countries with publicly funded systems have gaps in access. For example, although the United Kingdom has the world’s largest government-run and -funded health care system, a recent survey found that and one in eight adults paid for private insurance because waits were too long. These issues are particularly acute in the United States, with its complex mix of private and public insurance programs. …

Are structural inequities hampering hospitals’ ability to address social determinants of health?

Hospitals and health systems have the potential to play a significant role in addressing health inequities in the communities they serve. … Emerging evidence, however, raises substantial concern that structural inequities may hamper the ability of safety-net hospitals, which disproportionately serve low-income and racially/ethnically minoritized populations, to address their patients’ and communities’ social needs. These inequities are, in part, driven by structurally discriminant factors at the core of our current hospital financing system. Our current hospital reimbursement system effectively assigns a lower dollar amount for the care of low-income, Black, and Latino people, given their disproportionate enrollment in insurance plans like Medicaid, which reimburse hospitals less. …

With mergers of insurers and pharmacy chains and growth of online generic retailers, can community pharmacies survive?

Pharmacies play a crucial role in the provision of medications and patient-centered medication management services, as demonstrated in the COVID-19 pandemic. Pharmacy accessibility is indispensable for equity in health care access, as pharmacies can reach individuals who do not interact with other health care providers. Pharmacy access is jeopardized by the increasing trend in pharmacy closures observed in the past few years. …

The private equity “takeover” of health care: What does it mean?

Private equity investment into health care accelerated rapidly over the last decade and shows no signs of slowing down. Private equity firms now play a meaningful role across the health care industry, from hospitals and nursing homes to physician practices and dental clinics to biotechnology, medical devices, and information technology. This infusion of capital offers the potential for investments that may improve patient care and generate economies of scale, but private equity’s focus on short-term profits and efficiency also raises concerns about patient harms and higher costs. Numerous news stories have identified examples of fraudulent activity, overtreatment, aggressive billing practices, and widespread use of noncompete and nondisclosure agreements associated with private equity–owned facilities and medical groups. Also, recent empirical evidence suggests that private equity acquisitions of medical practices lead to higher prices and, perhaps more concerningly, that their acquisitions of nursing homes tend to increase mortality rates. …

The road ahead for health policies on genomic testing and precision medicine: Much accomplished but what remains to be addressed? …

[G]enomic testing and the general field of “precision medicine”—which uses information about a person’s genome and advanced computing tools for data aggregation to precisely target prevention, diagnosis, and treatment—have made great advances. Genomic testing is routinely used in a range of clinical scenarios, including cancer risk screening for BRCA1/2, noninvasive prenatal testing for fetal anomalies, and genomic sequencing of tumors to target effective treatments and to diagnose rare diseases in newborns. Yet, much more health policy research is needed, both on existing uses of genomics and those that are emerging.  …

“Nothing about us without us”: How can patient engagement contribute to meaningful health policy research?

Several global initiatives have emerged to recognize the value of patient-centered care. … Health care delivery and health policy change that does not actively engage patients is no longer acceptable. With the ongoing challenges facing health care systems, patient engagement in health policy research to inform health policy changes will become increasingly important to the delivery of effective and financially sustainable health care to an aging population with complex chronic care needs. …

Building a truly global perspective: How can researchers contribute?

Recent phenomena have made apparent the interconnectedness of our global community; what happens in one country touches us all, whether the spread of COVID-19 infection and of technologies to combat it, or crises from wars to climate change and their humanitarian consequences. … However, the public health and health policy literature has long been dominated by authors and perspectives from high-income countries: over 80% of the world’s population lives in low- and middle-income countries (LMICs), yet authors from LMICs are underrepresented in the scientific literature, particularly in meaningful authorship roles. …

I especially appreciate the concreteness of this list. It sometimes feels to me as if health policy disputes are phrased in terms of “spend more” or “spend less,” without consideration of specifics. For example, thinking about to improve people’s practical and actual access to health care in ways that go beyond the starting point of health insurance coverage, like what people know about how to obtain information and care, or whether they can get to a pharmacy, seems important to me. The issue of over-the-counter health care is in the news right now because of the FDA has for the first time approved an over-the-counter birth control pill. But there has been a dramatic rise in what’s available over-the-counter, and our aging society would benefit if hearing aids were more widely available and used.

A list like this is also an expression of encouragement to researchers. Thus, including items like genomic treatments, patient engagement, and health care provision in low- and middle-income countries are both important in themselves, and also a sign of topics that the journal presumably seeks to publish.

But with encouragement duly given, my own personal list of health policy challenges would include (at least) two items not listed here. One is the set of issues arising from online provision of health care, which exploded in size during the pandemic, now seems to be getting scaled back. Even more patients are probably getting their online health care advice from a Google search or ChatGPT or an advocacy website. The issues arising from dramatically expanded access to health care information of highly varying degrees of quality–and how players in the system from health care providers to for-profit companies to government interact with that information–are only growing in size.

The other set of issues is cost control. The list from the editors of the new journal is heavy on issues of access, systemic barriers, structural inequality, limited ability to pay, pharmacies closing down, Medicaid not paying enough, health care needs in other countries, and so on. But it’s just a fact that US health care spending is nearly one-fifth of the entire US economy. There have been studies for years suggesting that as much as 25% of US health care spending doesn’t provide any therapeutic benefit. The incentives to produce new health care technologies that cost a lot and will be covered by insurance are substantial; the incentives to develop new technologies and practices that reduce costs by a few percent each year, if you can get health care providers to adopt the, are minimal. Finding ways to hold down costs related to some of the biggest health care issues–like encouraging patients with chronic conditions to stick to their meds and diet, or addressing the opioid epidemic, or helping the elderly to age at home where possible–will require policies outside the conventional health care delivery system. If the US health care bill was a lot lower, then expanding access would be a lot easier. As it is, US health care spending is a main driver of the projections for federal budget deficits in the years ahead.

Where the list of 10 health care policy challenges mentions cost-cutting or efficiency– say, the role of private equity or health care mergers–it’s skeptical of their benefits. I’m skeptical, too. But finding some cost-cutting measures that could be broadly supported seems like a worthy policy challenge.

William Kearney interview Ben Bernanke (Nobel ’22) in “Real Policymaking Involves a Lot of Other Things Besides Pure Technical Analysis” (Issues in Science and Technology, Summer 2023). The discussion moves from one big subject to another, but here are a few points that caught my eye. The questions are mine: the answers are Bernanke.

Should the Federal Reserve become involved in issues like climate change and economic inequality?

[T]he really big steps that are needed to avert climate change—such as developing new energy technologies and retrofitting old buildings and creating new infrastructure for electric vehicles—all those things are the province of the private sector or more likely the government. And by government, I mean broadly, like Congress. I think the Fed properly should focus most of its attention on its mandate, on the objectives given to it by Congress, which are full employment and price stability.

I think inequality is a similar issue in its complexity. The Fed is paying more attention to inequality and is monitoring unemployment rates across different groups. For example, during the pandemic the Fed appeared to put more weight on employment because of the benefits that has for people who are lower-income workers. But again, the Fed really only has one instrument—namely, financial conditions being tighter or easier and then promoting or slowing economic growth—and it can’t use that one instrument to achieve many different objectives at the same time. It can’t ease policy for one group and tighten policy for another group. It has to have the same policy for everyone in the country.

This is not to deny that inequality and climate change are first-order, very important issues politically and socially, but the Federal Reserve is just one agency, and it should focus primarily on the goals that Congress sets forth for it and the tools it has to achieve those goals.

What are the main factors driving changes in how the Federal Reserve conducts policy in the last 15 years or so?

[A]fter the 2008 crisis, we needed new tools to stimulate the economy; and new players in the financial system meant our lending strategy had to evolve. Very low inflation and a low underlying interest rate structure, starting around 2004, left the Fed with relatively limited space to cut rates to deal with economic slowdowns. When I was Fed chair, we cut the federal funds rate almost to zero in late 2008 amid the financial crisis—but the severe recession continued through 2009 and it was a slow recovery after that. So we needed new ways to stimulate the economy, which led to two principal tools. The first was quantitative easing [in which the Fed buys bonds and other financial assets to keep longer-term interest rates low, thereby stimulating the economy]; the second was forward guidance [to signal the likely direction of future monetary policy], which always existed to some extent at the Fed but became a much more central part of its toolkit.

The second change has to do with the fact that the financial system has changed since the Fed was created. Originally, banks and trust companies provided most of the credit in the economy. Since then, the financial system has evolved to include lots of other kinds of institutions to the point where banks provide less than half of all the credit that goes to Americans. The Fed was set up to provide liquidity and be a lender of last resort only to banks. And so the global financial crisis was a watershed moment because the crisis was most severe in the non-bank financial sector—what’s called shadow banks, including investment banks, various kinds of mortgage companies, and so on. The Fed had to develop a whole new set of tools to be a lender to other kinds of financial companies.

What is the overlap between being an academic researcher and being chair of the Federal Reserve?

On the one hand, my background as an academic provided me with a lot of knowledge and a lot of information that was helpful. When your research illuminates certain relationships or behavior of the economy, that helps you think about policy. And it helps to know history because it shows how others handled, or didn’t handle, previous crises.  On the other hand, academic analysis by its very nature tends to strip problems down into their simplest components. It tries to study relatively simple or straightforward examples of various phenomena. Real policymaking involves a lot of other things besides pure technical analysis. It involves politics. It involves working with colleagues. It involves dealing with enormous amounts of uncertainty. It involves dealing with imperfect data and models, so there are elements of judgment and interpersonal negotiations that are really not part of what academia prepares you for necessarily. … It was also very important to understand issues like communication and cooperation, working with central banks from other countries, working with Congress, working with the president. All those things had to be learned basically on the job—and that’s why being a Federal Reserve chair is a very difficult job.

When China’s Belt and Road Initiative was announced a decade ago in 2013, it had an appealing intuition behind it. China would help to finance the building of land and sea infrastructure links across Asia and Africa. It seemed plausible to believe that, on average, infrastructure spending in that rapidly growing part of the world economy would have a reasonable payoff.

But as I looked into it further, the economics looked more dicey. As it turned out, many of the projects that China was financing had been proposed to other banks and development agencies, but had been turned down. Thus, China was in effect becoming the subprime lender to infrastructure projects in that part of the world. China’s motives for these projects clearly had a substantial political dimension. For example, the loans that China was providing to other countries were often paying for Chinese construction firms to do much of the work. China’s lenders often seemed more concerned with expanding the Chinese political footprint than with issues like how these large-scale projects affected local workers and the environment in the borrowing countries.

I laid out some of the issues over the last few years in “China’s Belt and Road Initiative: Grand or Grandiose?” (September 10, 2018), ”China’s Belt and Road Initiative: The Perils of Being a Subprime Global Lender” (July 30, 2019),  ”China’s Belt and Road Initiative: Could It All Come Crashing Down?” (November 18, 2019), and “China’s Belt and Road Initiative Collides with Pandemic Realities” (December 9, 2020).

When countries took out big loans from state-owned Chinese banks to build these infrastructure projects, it was all smiles and rainbows. But as we reach the stage where loans are due for repayment, there’s a lot less cheeriness. China has recognized that the international reputation of the Belt and Road Initiative is on the line: Is it a win-win arrangement for financing infrastructure, or a cover for a Chinese political power grab? China has been actively bailing out Belt and Road borrowers. Sebastian Horn, Bradley C. Parks, Carmen M. Reinhart, and Christoph Trebesch provide the evidence in “China as an International Lender of Last Resort” (AIDDATA: A Research Lab at William & Mary, Working Paper 124, March 2023.”

From the abstract:

This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. … In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China’s Belt and Road Initiative.

In the past, when countries experienced a debt crisis, international agencies like the IMF would take a leading role in negotiating a resolution. It was recognized that if debt burdens just drove the national economies of the borrowers further into recession, then the lenders weren’t going to be repaid much. However, if a negotiation could lead to a situation where some of the debt could be forgiven and restructured, along with a dose of economic reform from the borrowers, then both the borrowers and lenders could end up better off.

Some of the bigger recipients of bailouts include Argentina (!), Belarus, Mongolia ,
Suriname, and Sri Lanka, Pakistan, Egypt, and Turkey. The authors write (citations omitted):

We therefore find that China has emerged as a key lender of last resort for a growing number of developing countries. However, its role in the international financial system is less central, by far, than that of the established global lenders of last resort. China’s bailouts are small compared to the IMF’s global lending portfolio and dwarfed by the sweeping international USD liquidity support extended by the U.S. Federal Reserve (Fed) since 2007, primarily to advanced economies. We also find that Beijing has targeted a limited set of potential recipients, as almost all Chinese rescue loans have gone to low- and middle-income BRI [Belt and Road Initiative] countries with significant debts outstanding to Chinese banks.

In sum, China has developed a system of “Bailouts on the Belt and Road” that helps recipient countries to avoid default, and continue servicing their BRI debts, at least in the short run. China’s role as an international crisis manager can therefore be compared to that of the US Treasury during previous Latin American debt crises or to a regional financial institution like the European Stability Mechanism, which helped to avert, delay, or resolve defaults by highly indebted borrowers, rather than to a global financial backstop with “deep pockets” …

A challenge that arises here is that Belt and Road borrowers may also have borrowed heavily from countries outside of China as well (as in the case of Argentina). When a debt crisis for such a country comes to a head, there will be calls for the IMF to step in and facilitate negotiations. But negotiating debt relief with a range of financial institutions including China’s state-owned banks will not be easy. China tends to view the IMF and other international agencies as controlled by US and European interests (and it’s not obviously wrong to do so).

In 1939, Poland was invaded on both sides: by Germany from the west and by the Soviet Union from the East. Germany controlled Poland during much of World War II, but with Germany’s defeat, the Soviet Union stepped in and established control of both its politics and economy. Although Soviet control was shaken at various times, including by the Solidarity labor movement in the 1980s, Poland does not recover its full autonomy until the 1990s. Thus, Poland experienced about five decades of a primarily planned economy, now followed by three decades of a primarily market-oriented economy.

What does this natural experiment show? It’s worth remembering that the promise of government economic control, then and now, is that it will ultimately make people better off. By the 1980s, after five decades of a planned economy, that promise had clearly failed in Poland. But after three decades of market orientation. in February, the UK opposition leader Keir Starmer caused a stir by noting that on trends estimated by the World Bank, Poland was on a pace to surpass the United Kingdom in per capita income by 2030.

For an overview of the Polish economic experience, a useful starting point is The Road to Socialism and Back: An Economic History of Poland, 1939–2019, by Peter J. Boettke, Konstantin Zhukov, Matthew Mitchell (June 2023, published by the Fraser Institute. Here, I’ll first share some graphs that give away the plot of what has happened.

Here’s a picture of trends in per capita GDP. The dashed blue line projects the trend in per capita GDP from 1970 up through 1992. The darker dashed line shows the trend since 1992–more than double where it was projected to be.

Here’s a graph comparing unemployment rates in Poland to some other nearby countries and to the average of OECD countries.

Other measures of well-being have improved dramatically as well. For example, here’s life expectancy at birth. The gray dashed line show the trajectory that Poland was on. The rest of the figure shows Poland catching up to the OECD average.

But doesn’t the transition to a market orientation generate much more inequality? Back in the 1990s, the answer was probably “yes.” But income is now more equal in Poland than the OECD average.

When it comes to poverty down to “social expenditures”–pensions, disability, and support for the poor–Poland’s spending (as a share of GDP) is similar to the OECD and roughly twice as high as it was during the planned economy era (and remember, per capita GDP was much lower at that time, too).

I’m of course not trying to pretend that Poland is without its problems or that it has become a heaven on earth. But looking at the broader picture, the standard of living of the Polish people was barely creeping upward during the time of the planned economy, and now has made dramatic gains.

The report from Boettke, Zhukov, and Mitchell goes through considerably more detail over the decades: the nationalization of Poland’s economy after World War II how the planned economy functioned, the pushback on planning at various times from different sectors, the rise of Solidarity in the 1980s, the “shock therapy” reforms of the 1990s, and ongoing issues like improving the current education and health systems in Poland. Here, I’ll just mention a few points that jumped out at me.

1) In some ways, the essence of the planned economy was a claim that if the market economy was allowed to do what it wanted, people would ultimately end up worse off. If consumers were allowed free rein, the argument went, they would fail to save and instead would spend on frivolities. Thus, for the economy to grow, consumers needed to be pressured or required to save, and then the government would direct these savings to investment in what it viewed as the important industries for development like coal, steel, and electricity.

With government planners making the economic decisions, Poland’s heavy industries did expand, but were perpetually inefficient. In addition, decades of de-emphasizing what consumers wanted took their toll. By the 1980s, the waiting list for house was 15-30 years. “In the early 1970s, for every 100 telephone subscribers
in Poland, there were another 34 people waiting for service. By the 1980s, there were 57 Poles waiting for service for every 100 subscribers.” Transactions for consumer goods often involved trading vodka, chocolate, or even toothpaste, or getting in line at a certain hour day after day, hoping to be allowed to purchase an appliance.

2) Not only did the government’s version of growth override what consumers wanted, it was deeply concerned that workers wouldn’t try hard enough. Thus, in the late 1940s and into the 1950s, the required work-week rose from 40 to 46 hours, and “social parasites” who didn’t work hard enough could be sentenced to two years of compulsory labor at any location the government designated.

3) The push for industrialization didn’t only ignore what consumers wanted, it also also ignored environmental concerns. Here’s one example of the results:

The socialist record of pollution was notorious and industrial pollution in Poland was especially bad. A 1991 article in the Washington Post described Warsaw’s tap water this way: “It spurts yellowish-brown from the tap, laced with heavy metals, coalmine salts and organic carcinogens. It stains the sink, tastes soapy and smells like a wet sock that has been fished out of a heavily chlorinated swimming pool” (Harden, 1991). The same article reported that Warsaw tap water had double the World Health Organization’s limits on chloroform concentration; a quarter of Poland’s big industrial plants had either no waste-water treatment or used treatment devices with insufficient capacity; 57 percent of the Vistula river was classified as unfit for any purpose and the average concentration of mercury was nine times greater than the Polish norm for safe drinking water (Harden,
1991).

4) In the 1990s, Poland followed what was called the “shock therapy” approach to transitioning away from the planned economy. There was a considerable controversy over time over whether it was better to do such transitions quickly or more slowly. Remember, the transition involves many steps: market-determined prices, wages, interest rates, and exchange rates; shifting firms to private ownership opening to trade with countries outside the former Soviet bloc; implementing a tax code; and much more. The immediate disruption in Poland was extreme: for example, inflation hits 250% one year.

But even as the previously favored heavy industries took a big hit as their government support was withdrawn, other industries that had been disfavored like food processing, passenger cars, home appliances, and consumer tech expanded dramatically. Looking back, it seems hard to make the case that if Poland had torn off the planned economy band-aids more slowly, the outcomes would have been substantially better.

5) A word of warning for the unwary: A substantial part of the discussion in the report is a review of the theoretical arguments for why planned economy socialism doesn’t work well. Personally, I’m always happy for a ramble through Marx and Hayek, Kornai and Mancur Olsen, and so on and so on. But shockingly enough, my tastes are not universal.

For those who believe that a combination of markets, flexible prices, and private property can and should play a prominent and useful role in societies, the experience of Poland will only tend to reinforce earlier beliefs. But of course, many are also dubious about markets. In my experience, this group is quick to admit that the Soviet style of planned economy did not work well. But they often cling to the idea that a different and better version of a planned economy would work better–often citing various European economies as a model. In my own view, there are lots of flavors of capitalism: American, Canadian, British, Japanese, German, northern European, southern European, and others. I’m open to a number of arguments about what the different versions of capitalism might learn from each other. But all of these countries primarily build their standard of living not on government planning, but on the dynamics of market economy.