The Office of Financial Research, within the US Department of the Treasury, was created by the Wall Street Reform and Consumer Protection Act of 2010 (commonly known as the Dodd-Frank act), to provide analysis and data for the Financial Stability Oversight Council, another creation of the same law. It\’s Financial Stability Report 2017discusses some \”key vulnerabilities\” of the financial system.
Cybersecurity Incidents. \”Cybersecurity incidents rank near the top of our threat assessment because of the potential for disruption of operational and financial networks, and the damage such disruptions could cause to financial stability and to the broader economy. Cyber incidents can affect financial stability if defenses fail.\”
Resolution Risks at Systemically Important Financial Institutions. The term \”resolution risk\” refers to what process will begin if a big financial institution becomes insolvent. The regulators are still struggling to address some possible issues. \”The treatment of derivatives held by a failing financial firm continues to present a conundrum for policymakers seeking to balance contagion and run risks against moral hazard concerns. Tools for orderly resolution of failing systemic nonbank financial firms remain less developed than for banks, despite the material impact of some nonbank failures in the past and the growing importance of nonbanks, particularly central counterparties (CCPs), in the financial system.\”
A Single Bank Deals with all Treasury Securities. The Treasury market will soon be more dependent on a single bank for the settlement of Treasury securities and related repos. A service disruption, such as an operational risk incident or even the bank’s failure, could impair the liquidity and functioning of these markets because some customers will need time to move their operations elsewhere. It could also disrupt other markets that rely on Treasuries for pricing and funding. The 2007-09 financial crisis showed the damage that can be done if activity in short-term funding markets is constrained. Dealers in Treasury securities use clearing banks to settle Treasury cash transactions. Since the 1990s, these services have been provided by two clearing banks, JPMorgan Chase & Co. and Bank of New York Mellon Corp. (BNY Mellon). With JP Morgan Chase’s announcement in July 2016 that it intends to cease provision of government securities settlement services to broker-dealer clients, this business will be concentrated in a single bank. A disruption in BNY Mellon’s Treasury settlement could have broad implications for the Treasury market. It could disrupt trading in Treasuries. If settlement services were interrupted for an extended period, risks could spread further to markets that rely on the Treasury market for hedging and pricing.\”
Fragmentation of Stock Markets. In 1996, almost all stock trading happened on the main exchanges of the NYSE or Nasdaq. Now, NYSE and Nasdaq each run a number of separate exchanges, and there are 50 off-exchange stock markets. This fragmentation raises possibilities of playing one market against another, or of liquidity failing in one market with effects cascading across other markets.
\”Interest payments on at least $10 trillion in credit obligations and more than $150 trillion in the notional value of derivatives contracts were linked to U.S. dollar LIBOR at the end of 2013. But LIBOR is unsustainable across a number of currencies. It is based on a survey of a shrinking pool of market participants and reflects transactions in a shrinking market. Most LIBOR survey submissions are based on judgment rather than actual trades, and the rate tracks unsecured transactions, which represent a small share of banks’ wholesale funding.\”
A transition is underway to a new benchmark rate, the Secured Overnight Financing Rate (SOFR), which will be generated by the Federal Reserve Bank of New York. But shifting over tens of trillions of dollars in transactions from one benchmark rate to another may bring some bumps.
Risks if Low Interest Rates and Volatility Increase Risk-Taking. \”The OFR has highlighted in each of our annual reports the risk that low volatility and persistently low interest rates may promote excessive risk-taking and create vulnerabilities. … The increase in already-elevated asset prices and the decrease in risk premiums may leave some markets vulnerable to a large correction. Such corrections can trigger financial instability when important holders or intermediaries of the assets employ high degrees of leverage or rely on short-term loans to finance long-term assets. … Equity valuations are high by historical standards. The cyclically adjusted price-to-earnings ratio of the S&P 500 is at its 97th percentile relative to the last 130 years. … Real estate is another area of concern. U.S. house prices are elevated relative to median household incomes and estimated national rents, although these ratios are well below the levels observed just before the financial crisis. … Valuations are also elevated in bond markets. … Duration — the sensitivity of bond prices to interest rate moves — has steadily increased since the crisis.\”
Other concerns are mentioned as well, but just to be clear, the 2017 report is in no way alarmist or predicting doom. Instead, the lesson is that it\’s a lot better to deal with vulnerabilities at times when the financial system is not under stress or in crisis.
Here\’s a figure showing the share of returns and the share of income taxes paid. For example, the top 1% of income tax returns in 2014 accounted for 20.6% of all income, but 39.5% of all income tax. The top 50% of all tax returns accounted for 88.7% of all income and 97.3% of all income tax. Which in turn implies that the bottom half of all tax returns accounted for 11.3% of all income and 2.7% of all income tax.
Here\’s a figure focused on the very upper end of this distribution. About 137 million tax returns were filed in 2014. Thus, the top 1% of those returns refers to the top 1.37 million tax returns; 0.1%, the top 137,000 returns; 0.01%, the top 13,700 returns; and 0.001%, the top 1,370 returns. The bars for the top 1% show the same numbers as in the figure above. But the top 0.001% accounts for 2.1% of all income and 3.6% of all income taxes.
What are the income levels for these different groups? The top 10% kicks in at about $130,000; the top 1% is at $460,000.
At the extreme upper end, the top 0.001% of tax returns reported income of nearly $60 million in 2014.
Finally, here\’s some information on the average income tax rates paid by those in the highest brackets. A few points are worth noting here: 1) This is an average tax rate, not a marginal tax bracket–so these people are paying much higher tax rates on the marginal dollar; 2) Average taxes on those with very high incomes rose in 2012; and 3) The very highest income levels of 0.01% and 0.001% have slightly lower average tax rates, probably because these very high levels of income are likely to take the form of long-term capital gains that are taxed at a lower rate than regular income.
A few words of warning are appropriate before over-interpreting the figures here. These figures and percentages apply only to federal income tax. They do not cover the federal payroll taxes that fund Social Security and Medicare, nor do they cover state and local taxes like sales, property, and income taxes. Thus, the figures do not show overall tax burden. The higher burden of income taxes on those with high income levels, as a share of their incomes, can be thought of as counterbalancing how other major taxes like sales tax and payroll taxes weigh more heavily on those with lower incomes, as a share of their incomes.
It\’s conceptual possible, if not always practically convenient, to separate tax policy into two main pieces. One issue is the tax cut vs. tax hike debate–that is, whether the total amount being collected should be higher or lower. The other issue is whether the tax code should be adjusted in some way to alter its incentives and disincentives. As one example, the 1986 Tax Reform Act was more-or-less neutral in the amount of revenue it collected, but it altered the incentives of the tax code by combining lower marginal tax rates with a reduction in the availability of various deductions, credits, and exemptions.
In thinking about the current tax bill, first consider the question of how US tax and spending compares with to historical levels. Here\’s a figure from the Congressional Budget Office report, \”An Update to the Budget and Economic Outlook: 2017 to 2027\” (June 2017). A little-remarked fact about the present state of the federal budget is that the level of federal spending is almost exactly at its 50-year average of 20.3%, while the level of total federal taxes is pretty much right on its historical federal average of 17.4%. Thus, the budget deficit at present is also very close to its long-run average of 2.9% of GDP. When looking at a government\’s debt burden over time, the most useful quick metric is the ratio of total accumulated debt/GDP. Here\’s a CBO figure from March 2017 showing this metric for the US economy over time–and projections for the next couple of decades. The common pattern over time is that the debt/GDP ratio rises sharply during wartime, and around times of extreme economic stress like the Great Depression of the 1930s and the more recent Great Recession.
But the Great Recession ended back in June 2009, and the US unemployment rate has been 5% or lower for more than two years, since September 2015. Moreover, the long-term projections from CBO suggest that existing government programs are going to exert very large pressures for higher government debt in the next couple of decades, as the boomer generation retires and health care costs continue to rise. When (and not if) the next recession arrives, it will be a good time to run larger deficits again. But the case for a tax cut to stimulate the US economy that reported a 4.1% unemployment rate in October 2017 is weak.
What about the effects of the tax bill on economic incentives? I sometimes use the analogy that economies carrying a tax burden are similar to a hiker carrying gear for a back-country excursion. If the hiker has a well-fitted and well-padded backpack, with the weight nicely distributed, it\’s a lot easier to hike all day. If you took the exact same camping gear and randomly attached it to hiker around their body–some on the feet, the heaviest weight on the right arm and nothing on the left arm–that same amount of weight becomes very difficult to carry. Thus, the question of tax reform is not whether the burden should be higher or lower, but rather how best to distribute a given amount of weight.
There are of course lots of estimates of how the tax bill will affect incentives, but the estimates of the Joint Committee on Taxation are especially worthy of notice. Because Republicans control Congress, that party also controls the Joint Committee on Taxation. However, many staff members of the JCT soldier on from one administration to the next, showing both some willingness to be flexible as their political guidance changes, but also showing some stubbornness in insisting on a certain level of consistency and logic in their estimates. Thus, economists who tend to align with the Democratic party like Larry Summers, Jason Furman, and Paul Krugman have all been willing to cite the JCT estimates as a reasonable basis for discussion (although I\’m sure they also disagree with these estimates in various ways).
We estimate that this proposal would increase the level of output (as measured by Gross Domestic Product) by about 0.8 percent on average over the 10- year budget window. That increase in income would increase revenues, relative to the conventional estimate of a loss of $1,414 billion … by $458 billion over that period. This budget effect would be partially offset by an increase in interest payments on the Federal debt of about $50 billion over the budget period. We expect that both an increase in GDP and resulting additional revenues would continue in the second decade after enactment, although at a lower level, as many of the provisions that are expected to increase GDP within the budget window expire before the second decade.
Thus, this estimate incorporates a moderate version of the Republican believe that the tax cut will boost growth, but even after adding such an effect, taxes are estimated to be about $1 trillion lower over 10 years. What about more specific changes to the individual income tax? The JCT report summarizes the main changes in this way:
\”The bill changes individual income tax rates, lowering the top individual income tax rate from 39.6 percent to 38.5 percent, creating an additional individual income tax rate bracket, and lowering statutory tax rates for most tax rate brackets, while changing the measure used to adjust the brackets for inflation from the present law consumer price index (“CPI-U”) to the chained consumer price index (“chained CPI”). The chained CPI grows more slowly than the CPI-U, thus resulting in people over time moving into higher rate brackets at a faster rate under the bill than under present law. The bill also reduces individual shared responsibility payments for failure to obtain qualified health insurance coverage enacted as part of the affordable care act to zero. At the same time, the proposal eliminates a number of deductions and credits from their individual taxable income while increasing others. The biggest changes include eliminating personal exemptions while increasing the standard deduction, and increasing the maximum amount of the child tax credit while increasing the income range over which individuals may claim it.\”
Thus, while the bill does reduce taxes at high income levels, that doesn\’t seem to me the main thrust of the bill. The cost of the dramatic rise in the standard deduction and to a lesser extent in the child tax credit is very high. To me, one of the most interesting dimensions of this change is that with a much higher standard deduction, many fewer taxpayers would find it worthwhile to itemize deductions. Thus, if or when proposals resurface a few years from now to reduce popular deductions like the one for home mortgage interest or state and local taxes, many fewer people will be using those deductions, and the political calculus around them may shift.
\”The Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth. It would reinvest these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment in America. … Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base.\”
For comparison, here\’s the JCT description of the corporate tax changes in the Senate version of the tax reform plan:
\”In addition, the bill lowers the corporate income tax rate from 35 percent to 20 percent beginning in 2019; and, it increases the rate of bonus depreciation to 100 percent while extending it for five years, from 2018 through 2022. The bill also repeals or limits deductions for a number of business expenses, the largest of which is a 30 percent limit on interest deductibility. Finally, the bill makes significant changes to the taxation of both foreign and domestically controlled multinational entities. It would allow domestic corporations to receive a dividend from their foreign subsidiaries without incurring United States tax on the income. It also creates a new minimum tax for certain related party transactions in order to reduce the erosion of the United States corporate income tax base. In a further effort to reduce base erosion, it equalizes the tax treatment of specified high return income from foreign sales whether they are earned through a foreign corporation or a domestic corporation.\”
There are clear differences between the plans, of course. The Obama administration was talking about cutting the corporate tax rate to 28%, not 20%. In addition, the Obama plan emphasized that changes to corporate taxes should be revenue-neutral. But on other other side, the Obama proposal is a white paper, not actual legislation, which means that it had not been put through the Congressional meat-grinder where seemingly every legislator is demanding a sweet tidbit of their own devising in exchange for supporting the bill.
Assuming this tax bill moves forward and becomes law in essentially its current form, one of the most interesting aspects to keep track of will be its effect on investment. There is a widespread fear that ongoing low levels of investment are slowing US economic growth, both in the short-run and the long-term. A common solution proposed by Democratic-leaning economists has been to support a high level of infrastructure spending, and before President Trump was elected, it was common to hear arguments pointing out that if an infrastructure investment could be financed at today\’s low interest rates, and if that infrastructure investment brought a long-term payoff, it would be economically sensible to undertake the project even if it increased short-run budget deficits. In effect, the current Republican tax bill repurposes that argument into a claim that if certain tax changes call forth sufficient private sector investment, then it is worth increased budget deficits as well.
This already overlong blog post isn\’t the place to try to sort through the merits of public-sector and private-sector investment, and whether the kind of politically-driven infrastructure spending on roads and bridges that typically bubbles up through Congress is the most productive way to build a strong base for the US economy in the 21st century. I think it might be even more useful to consider an infrastructure agenda applying to energy resources and to data networks, and for hardening this infrastructure against physical- and cyber-attack. But focusing just on the Republican tax plan, the additional budget deficits seem certain to be very high and the promised investment benefits seem relatively small and uncertain.
Discussions of how advances in technology, trade, and other factors lead to disruption of jobs often seems to begin with an implicit claim that it was all better in the past, when the assumption seems to be that most workers had well-paid, secure, and life-long jobs. Of course, we all know that this story isn\’t quite right. After all, about one-half of US workers were in agriculture in 1870, down to one-third by early in the 20th century, and less than 3% since the mid-1980s. About one-third of all US nonagricultural workers were in manufacturing in 1950, and that has now dropped to about 10%. These sorts of shifts suggest that job disruption and shifts in occupation have been a major force in the US economy throughout its history.
\”It has recently become an article of faith that workers in advanced industrial nations face almost unprecedented levels of labor-market disruption and insecurity. … When we actually examine the last 165 years of American history, statistics show that the U.S. labor market is not experiencing particularly high levels of job churn (defined as the sum of the absolute values of jobs added in growing occupations and jobs lost in declining occupations). In fact, it’s the exact opposite: Levels of occupational churn in the United States are now at historic lows. The levels of churn in the last 20 years—a period of the dot-com crash, the financial crisis of 2007 to 2008, the subsequent Great Recession, and the emergence of new technologies that are purported to be more powerfully disruptive than anything in the past—have been just 38 percent of the levels from 1950 to 2000, and 42 percent of the levels from 1850 to 2000. …
\”Indeed, if we could go back in time and ask someone in 1900 about the pace of technological change, they would likely tell a similar story about its acceleration, citing the proliferation of amazing innovations (e.g., cars, electric lighting, the telephone, the record player). But notwithstanding iconic innovations such as electricity, the internal combustion engine, the computer, and the Internet, change is almost always more gradual than many think. Indeed, as historian Robert Friedel notes, “even the technological order seems more characterized by stability and stasis than is often recognized.” And as discussed below, that is likely to be the case regarding technology-induced labor market change.\”
The paper is packed with examples of American jobs that have boomed and then diminished over time. The number of workers on railroads boomed in the late 19th century, but fell throughout the 20th century. \”Seventy years ago, tens of thousands of young men and boys worked in bowling alleys as pinsetters, setting up the pins after the bowlers had knocked them down.\” More than 110,000 people were employed as elevator operators in 1950. The number of motion picture projectionists fell from almost 25,000 in 1970 to about 3,000 today. The number of automobile mechanics peaked at over 1.8 million in 2000, but had fallen by over 300,000 to about 1.5 million by 2010–mainly because improvements in auto quality made a lot of mechanics obsolete. \”For example, while 180,000 Americans were employed as travel agents at the turn of the millennium, with the emergence of Internet-based travel booking, just over 90,000 were employed in 2015. Likewise, there are 57 percent fewer telephone operators, 41 percent fewer data-entry clerks, and 3 percent fewer postal-mail carriers than there were in 2000, even though the volume of information transactions has grown, all because of digital automation and substitution.\”
The review isn\’t exhaustive: for example, the paper doesn\’t mention that in the late 1940s, AT&T employed more than 350,000 switchboard operators, or that the number of telephone operators who provided phone numbers and connected calls used to be in the tens of thousands just a few decades ago.
But of course, a pile of examples isn\’t always fully persuasive; as the social scientists like to say, the plural of \”anecdotes\” is not \”data.\” But it\’s worth remembering that even in periods when the US economy is pretty much universally acknowledged to have been running on high, like the 1960s, there was considerable turnover in job categories and occupations. They write:
\”For example, in the 1950s and 1960s, many occupations grew extremely fast, even after controlling for employed worker growth. For example, in the 1960s, 885,000 janitors were added as offices expanded, 700,000 nursing aides as health-care consumption increased, and 600,000 secondary-school teachers as today’s baby boomers started to enter high school. At the same time, many occupations either declined outright or grew much more slowly than overall labor-force growth. For example, office-machine operators (except computers) fell by over 400,000; office clerks fell by 1.8 million; material moving workers fell 1.5 million; and other production workers fell by 1.9 million workers, as manufacturers increased automation.\”
Is there some way to get a systematic handle on the amount of occupational change in the US economy over time. As you might expect, the available data is limited as one goes back in time, but there is the Census. Thus, Atkinson and Wu suggest a number of measures of occupational change. For example:
\”The first measures change in each occupation relative to overall occupational change. With this method, even if an occupation doesn’t lose jobs, if it didn’t grow as fast as the overall labor market, the delta between that growth and overall labor force growth would be calculated as churn. In other words, if a particular occupation grew 4 percent in a decade but the overall number of jobs grew 10 percent, the rate of change would be negative 6 percent. Likewise, if employment in an occupation grew 15 percent in a decade, but the overall number of jobs grew 10 percent, the rate of change would be 5 percent. Absolute values were taken of negative numbers, and the sum of employment change was calculated for all occupations. This was then divided by the number of jobs at the beginning of the decade to measure the rate of churn. …
\”The findings are clear: Rather than increasing, the rate of occupational churn in the last few decades is the lowest in American history, at least since 1850. Under method one, using the occupational categories of 1950, occupational churn peaked at over 50 percent in the decades between 1850 to 1870. (See figure 7.) But it was still above 25 percent for the decades from 1920 to 1980. In contrast, it fell to around 20 percent in the 1980s and 1990s, to just 14 percent in the 2000s, and 6 percent in the first half of the 2010s.\”
This specific measure is surely rough-and-ready, and so the authors offer some other approaches along these general lines. The same lesson keeps coming up. The dramatic shifts in agricultural jobs from the 19th century into the 20th century, the rise and fall of manufacturing jobs, and many other shifts in technology and trade have been causing the US economy to have a high level of occupational shifts for a long time. Since the start of the 20th century, the level of occupational shifts has actually been relatively low.
This analysis cuts against conventional wisdom. But it does fit in a broad sense with some other evidence: for example, the evidence that Americans are moving less, or that job losses are a share of total US employment (which are always happening in the movement and churn of the US economy) are on a downward trend. Here\’s one more figure from Atkinson and Wu:
There are lots of reports out there about how technology will affect the jobs of the future, ranging from the sensible to the weirdly apocalyptic. A good sensible example is the recent report from McKinsey on \”What the future of work will mean for jobs, skills, and wages\” (December 2017). There\’s lots of useful and thought-provoking analysis on what jobs will change, in what ways, in what countries. But one bottom line of the analysis is an estimate that overall, \”Our scenarios suggest that by 2030, 75 million to 375 million workers (3 to 14 percent of the global workforce) will need to switch occupational categories.\” The numbers are big. But that degree of occupational change over the next dozen or so years is not at all unprecedented.
Between September 2010 and January 2012, a total of 2,282 families (including over 5,000 children) were enrolled into the study from emergency shelters across twelve communities nationwide and were randomly assigned to one of four interventions: 1) subsidy-only – defined as a permanent housing subsidy with no supportive services attached, typically delivered in the form of a Housing Choice Voucher (HCV); 2) project-based transitional housing – defined as temporary housing for up to 24 months with an intensive package of supportive services offered on-site; 3) community-based rapid re-housing – defined as temporary rental assistance, potentially renewable for up to 18 months with limited, housing-focused services; or 4) usual care – defined as any housing or services that a family accesses in the absence of immediate referral to the other interventions. Families were followed for three years following random assignment, with extensive surveys of families conducted at baseline and again approximately 20 and 37 months after random assignment.
The results are discussed in a symposium of 15 short commentaries appearing in Cityscapes (2017, 19:3), a journal published online by the US Department of Housing and Urban Development. Here are some comments from the introduction to the symposium written by Anne Fletcher and Michelle Wood, \”Next Steps for the Family Options Study.\”
\”Family homelessness is dynamic, with families moving in and out of homeless assistance programs every day. Throughout the year in 2015, nearly 155,000 families with children, representing more than 500,000 adults and children, accessed the homeless assistance system (Solari et al., 2016). Over the years, divergent theories about the cause(s) of family homelessness have led to the rise of different types of interventions designed to address the problem. One theory holds that, whatever other challenges a family may face, homelessness is purely an economic problem—housing costs surpass the incomes of poor families—and housing assistance alone can resolve it. Another theory posits that, whereas housing assistance is indeed crucial, family homelessness is the result of other challenges (such as child welfare engagement, mental health or substance abuse challenges, or unemployment), which must be addressed in order to end families’ homelessness. In addition to these two broad theories on the causes of homelessness, evidence that at least some families experiencing homelessness will eventually secure housing without assistance has led to two schools of thought on appropriate policy, with some arguing that the need for access to assistance is permanent, and others arguing that it need be only temporary. …
\”The results of the Family Options Study offer striking evidence of the power of offering a long-term rent subsidy to a homeless family in shelter, substantially increasing housing stability and yielding benefits across a number of important domains, including reductions in residential moves, child separations, adult psychological distress, experiences of intimate partner violence, food insecurity, and school mobility among children, although those benefits were accompanied by reductions in work effort. These findings provide support for the notion that family homelessness is largely an economic issue, and that, by solving the economic issue, families experience additional benefits that extend beyond housing stability. Equally notable is the fact that these significant benefits that accrued to the families offered a long-term rent subsidy were achieved at a comparable cost to other interventions tested, which offered few positive outcomes for families in any domain. …
\”The study findings suggest that families who experience homelessness can successfully use and retain housing vouchers, and that by doing so families experience significant benefits in a number of important domains. Importantly, the study also demonstrates a compelling set of positive outcomes that directly benefit the children in families offered a long-term rent subsidy, including reductions in child separations (observed at 20 months); psychological distress of the family head (observed at both time points); economic stress (observed at both time points); intimate partner violence (observed at both time points); school mobility (observed at both time points); behavior problems and sleep problems of children (observed at 37 months); and food insecurity (observed at both time points). … The striking impacts … provide support for the view that, for most families, homelessness is a housing affordability problem that can be remedied with long-term housing subsidies without specialized services.\”
Some caveats are in order. This study is focused on homeless families with children, not on homelessness affecting single adults. I am not aware of a specific cost-benefit study of these results, comparing how much the long-term rent subsidies cost, compared both with the level of public services typically used by families in homelessness and the additional benefits of this approach. But the evidence certainly suggests that it would make sense to transfer some of the current resources being used to assist homeless families into straightforward rent subsidies.
For some earlier discussions of homelessness on this blog, see
For a deeply skeptical take on the future of rail-based mass transit, I recommend \”The Coming Transit Apocalypse,\” by Randal O’Toole (Cato Institute #824, October 24, 2017). He writes (footnotes omitted):
With annual subsidies of $50 billion covering 76 percent of its costs, public transit may be the most heavily subsidized consumer-based industry in the country. Since 1970, the industry has received well over $1 trillion (adjusted for inflation) in subsidies, yet the number of transit trips taken by the average urban resident has declined from about 50 per year in 1970 to 39 per year today. Total transit ridership, not just per capita, is declining today, having seen a 4.4 percent drop nationwide from 2014 to 2016 and a 3.0 percent drop in the first seven months of 2017 versus the same months of 2016. …
Four trends that are likely to become even more pronounced in the future place the entire industry in jeopardy: low energy prices; growing maintenance backlogs, especially for rail transit systems; unfunded pension and health care obligations; and ride-hailing services. The last is the most serious threat, as some predict that within five years those ride-hailing services will begin using driverless cars, which will reduce their fares to rates competitive with transit, but with far more convenient service. This makes it likely that outside of a few very dense areas, such as New York City, transit will be extinct by the year 2030, leaving behind a huge burden of debt and unfunded obligations to former transit employees. …
\”After adjusting for inflation, transit agencies have spent more than $1.6 trillion on operations and improvements since 1970, while collecting less than $500 billion in fares. Per passenger mile, transit is the nation’s most expensive and most heavily subsidized form of travel. In 2015, transit agencies spent an average of $1.14 per passenger mile, while Amtrak costs averaged nearly 60 cents, driving averaged about 26 cents, and flying averaged about 16 cents per passenger mile. Of those costs, transit subsidies averaged 87 cents per passenger mile, compared with about 30 cents for Amtrak and less than 2 cents for flying and driving.\”
O\’Toole also mentions the more general problem that over time, jobs and housing have become more spread out across cities and suburbs, which makes it harder for mass transit to function. Indeed, one useful question to ask of any mass transit system is whether people can get just about everywhere they need to go, with relatively little need for a car or a lot of taxi or Uber rides, or whether the transit system mainly helps people from the suburbs get in and out of the city some of the time–while driving the rest of the time.
Some degree of subsidy for mass transit would be all right, if it paid for reductions in pollution and traffic congestion. But even the relatively large subsidies aren\’t coming close to covering the costs for mass transit. Rail-based mass-transit needs ongoing repairs and maintenance, along with a major rebuilding every 30 years or so. Moreover, a number of transit systems are racking up large unfunded liabilities for future pension and health care payments. When push comes to shove, it often seems politically easier to open a new station or make flashy and visible improvements, rather than doing the nuts and bolts of physical maintenance and updating, or funding future costs to retirees. Here\’s some detail from O\’Toole:
\”In 2010, the Federal Transit Administration (FTA) estimated that the nation’s transit industry had a maintenance backlog of $77.7 billion ($87 billion in 2016 dollars). The agency added that the backlog was growing because transit agencies weren’t spending enough on maintenance to keep their systems in their current conditions, much less to reduce the repair backlog. In 2015, the Department of Transportation estimated that the backlog had indeed grown to $89.8 billion ($95 billion in 2016 dollars), which was probably a conservative estimate. To eliminate the backlog in 20 years, the department calculated, 100 percent of funds now being spent on improvements would have to be shifted to maintenance …
\”Rail infrastructure has an expected life of about 30 years and must be thoroughly rebuilt or rehabilitated at the end of that time or risk suffering numerous delays, accidents, and other problems. … The original lines of the Washington Metrorail system turned 30 in 2006. Soon after that, riders began experiencing episodes of smoke in the tunnels, forcing the agency to stop and evacuate the trains. By 2013, such incidents were happening twice a month, and the agency had discovered they were caused by water in leaky tunnels short-circuiting fiberglass insulators in the third-rail power system, causing them to catch fire. In 2009, a train collision that killed nine people was blamed on poorly maintained signaling systems. As early as 2002, the Washington Metropolitan Area Transit Authority (WMATA) warned that the agency would need to spend more than $12 billion on maintenance in the next few years to prevent such problems. The system “stands at the precipice of a fiscal and service crisis,” the agency predicted. But neither the federal government, which had paid for most of the costs of building the system, nor local governments, which paid for most of the costs of operating it, stepped up to pay for maintenance. Today, WMATA’s general manager says the system has “$25 billion of unfunded capital needs. …
\”Boston’s Massachusetts Bay Transportation Authority and Sacramento’s Regional Transit District both have unfunded obligations that are more than double their operating budgets. The Maryland Transit Administration, New York’s Metropolitan Transportation Authority, Portland’s Tri-Met, and the Washington Metropolitan Area Transportation Authority all have unfunded obligations larger than their annual operating budgets. The Southeast Pennsylvania Transportation Authority (SEPTA) and Rochester Regional Transit Service (RTS) both have unfunded health care obligations that are nearly as large as their operating budgets and, when pension obligations are added, are likely to be larger. Most of these agencies also have large debts and/or maintenance backlogs.
What about mass transit as a way of helping mobility for the poor? Of course, this argument only works if the transit system is sufficiently widespread and reliable. But moreover, O\’Toole argues:
\”Census data reveal that a higher percentage of people who earn more than $75,000 a year take transit than any other income class. To the extent people believe that low-income people can benefit from transportation assistance, such assistance should be in the form of vouchers (similar to food stamps) that can be used with any transportation provider, from a ride-hailing service to an airline.\”
What does O\’Toole\’s recommend?
\”[T]ransit agencies should begin to prepare for an orderly phase-out of publicly funded transit services as affordable, shared driverless cars become available in the next decade. This means the industry should stop building new rail lines; replace most existing rail lines with buses as they wear out; pay down debts and unfunded obligations; and target any further subsidies to low-income people rather than continue a futile crusade to attract higher-income people out of their cars.\”
Even I, gloomster though I am, am not as gloomy about mass transit as O\’Toole. But the neglect of physical maintenance, the lack of planning and funds for needed large-scale updating, and the accumulation of unfunded liabilities are real problems. I\’m also a much bigger fan of buses than rail for most cities (remembering that buses can run both on dedicated lanes and also on regular streets). Also, I\’m not as confident as O\’Toole that driverless cars are right around the corner. But a different technological possibility that is very near is a network of ride-sharing vans, perhaps with a capacity of about 10 people each, whose routes would be continually updated, coordinated and optimized. For a study of the possibilities of such a system in the context of New York City, see the article by Javier Alonso-Mora, Samitha Samaranayake, Alex Wallar, Emilio Frazzoli, and Daniela Rus, \”On-demand high-capacity ride-sharing via dynamic trip-vehicle assignment,\”Proceedings of the National Academy of Sciences (2017, 114 (3) 462-467; published ahead of print January 3, 2017).
Back in the late 1990s there was a mini-argument about whether something should be done about the run-up in the stock market. As a reminder, the Dow Jones Industrial Average was at about 4,000 in spring 1995, but reached 11,700 by January 2000. On one side, there was an argument that financial regulators or the central bank should do something to slow down or limit the rise. On the other side, the standard argument at the time (with which I agreed) was that: 1) giving government the power to decide an \”appropriate\” level for the stock-market seemed unwise for several reasons; 2) acting to choke off the stock market raised a danger of creating a near-term recession; 3) even if/when the bubble burst, the effects of a stock market collapse on the real economy would be muted. Indeed, the 2001 recession was fairly shallow and only eight months long, and while unemployment continued to rise for a time after the recession had ended, the monthly rate peaked at 6.3%.
This earlier experience represented how many economists mostly thought about the relationship between asset prices and the economy at the turn of the 20th century. Sure, there was a connection from asset prices to the economy, and asset prices could display bubbles that inflated and burst. But a common feeling was that policymakers who were thinking about macroeconomic policy shouldn\’t become too distracted by the fizzing and popping of asset markets or housing prices, and should instead focus on the real economy of output and unemployment rates.
There is of course a two-way interaction here: asset prices respond to changes in the real economy, and the real economy responds to changes in asset prices. But there\’s a lot of work to be done in spelling out these connections.
Assets prices fluctuate a lot, and more than real activity. Here\’s a figure from the report showing the average patterns of output, stock market prices, and housing prices for a group of 18 countries over the period from 1973-2011. The \”zero\” on the horizontal axis is when a recession started, so the figure shows the average patterns before and after the start of the recession. Notice that in a typical recession, the level of output falls by about 4%, but the average stock market decline (which usually starts before the actual recession) sees some quarters where the decline from the previous year is more like 30%. Housing prices typically fall in recessions, too. The question of why asset prices should move so much, given that these patterns have been common across a large number of countries and thus seem reasonably predictable, is not clear.
The interactions between these movements in asset prices and actual decisions by consumers and firms is not clearly understood, either. The writers note:
\”[I]nvestment and consumption respond differently to asset prices from what standard models would suggest, with a larger role for “non-price factors” in driving agents’ behaviour and macroeconomic aggregates. Firm investment reacts less strongly to asset prices than predicted by models while household consumption reacts more vigorously to changes in asset prices, especially house prices, than consumption-smoothing models would suggest. In addition, the links between asset prices and macroeconomic outcomes appear to vary across countries depending on financial, institutional and legal structures. Research also questions the strength of the direct impact of interest rate changes on activity and highlights its dependence on the state of the economy and the financial sector, and institutional arrangements. Recent studies emphasize the importance of uncertainty (measured among others by the volatility of asset prices) in explaining macroeconomic outcomes.\”
Just to complicate matters one step further, the Great Recession also brought the widespread further complicated by the use of unconventional monetary policies like quantitative easing and even negative policy interest rates, as well as by international dimensions of policy like how movements of interest rates across countries can lead to fluctuations in exchange rates and even a risk of international debt crises.
\”Many current policy questions focus on macrofinancial linkages. These include the implications of UMPs [unconventional monetary policies] for the real economy and financial markets, including overall financial stability. A better assessment of the role played by monetary policy during a liquidity trap and the implications of UMPs on activity are of essential interest. In addition, the role of the exchange rate as a monetary policy target (possibly in addition to the inflation rate) needs further investigation, especially for the design of policies in small open economies and EMEs [emerging market economies].\”
Is the rise in economic inequality around the world during the last few decades mainly a matter of economic forces that have affected wages, or a matter of political forces that reduced the extent of redistribution? What are the long-term patterns across the world in income redistribution? Does more redistribution happen in the more unequal countries?
(1) In every country supplying adequate data, government budgets have shifted resources progressively, from the rich to the poor, within the last hundred years. Before World War I, very little was redistributed through government, mainly because government was so small, due in turn to poverty, lack of state capacity, and lack of mass suffrage.
(2) For all that has been written about a shift of political sentiments and government policy away from progressivity since the late 1970s, no such trend is clear yet, pending research on more countries. A slow sustained rise in progressivity shows up in data from the United States, Argentina, and Uruguay. Among democratic welfare states, the closest thing to a demonstrable reversal against Robin Hood is the slight retreat in Sweden since the 1980s. Globally, the most dramatic swing since the late 1970s has been Chile’s record-setting return toward progressivity after the regressivity of Pinochet.
(3) Adding the effects of rising public education subsidies on the later equalization of adult earning power strongly suggests that a fuller, longer-run measure of fiscal incidence would reveal a history of still greater shift toward progressivity. This revision has its greatest impact in Japan, Korea, and Taiwan, which have excelled in raising lower ranks’ earning power through primary and secondary education, but have offered little in direct transfers to the poor.
(4) Finding that redistribution of government budgets has continued to march slowly toward progressivity carries a strong implication for our interpretation of the rise in income inequality since the 1970s, so firmly established by the World Top Incomes Project and by Thomas Piketty (2014). That rise may owe nothing to a net shift in government redistribution toward the rich, despite the lowering of top tax rates. If so, it is all the more important to explore what non-fiscal forces have widened gaps in market incomes around the world.
(5) The stability or slow advance in net fiscal progressivity since the late 1970s has not matched the rise in overall social transfers, because less-progressive public pension benefits have risen as a share of transfers, and of GDP, in most countries. That is, social insurance policy has betrayed a mission drift away from investing in children and working-age adults, and toward accepting rising pension bills. This mission drift toward the elderly implies a missed opportunity for pro-growth leveling of income.
Let me add few points from the main text of the paper that seemed worth reemphasizing. Here\’s a figure showing the extent inequality before redistribution (shown on the horizontal axis) and after redistribution (shown on the vertical axis). The upward-sloping line shows what would happen if redistribution was zero; thus the fact that all countries are below the line shows that inequality is lower after tax and spending policy than before.
For example, you can see in the upper right that Honduras, Colombia, and Brazil all started with similar levels of inequality, but Brazil did more to redistribute income. Indeed, many of the \”green box\” Latin American countries have relatively high levels of inequality to start, and do relatively little about it. At the lower left, countries like Korea and Japan started of with relatively low levels of inequality, and also did relatively little to reduce inequality (that is, the points are close to the upward-sloping line). The \”black dot\” countries of western Europe started with middling levels of inequality, and did a lot of redistribution. The US starts with a somewhat above-average level of inequality, and makes a below-average effort to reduce it.
A shortcoming of this figure is that it focuses on data from a single recent year. Thus, it doesn\’t look at the role of education in reducing inequality over time. Lindert discusses this point at some length. He writes:
\”Many studies of fiscal redistribution have already quantified a same-year effect of public subsidies to education, yet none has treated the larger deferred effects. The studies of the United States, Sweden, and Latin America do include a same-year effect, as if the benefits of taxpayers’ paying for your (say) fifth-grade education accrue to your parents this year and not to you, the student, any time in the future. Convention has thus equated public education with babysitting. As convenient as this convention may be, it misses most of what public education spending does to the different income ranks. …
Public spending on education affects the inequality of later pre-fisc earnings, and the progressivity of government’s contribution to reducing that inequality, through two channels. One is that a rise in inequality of adults’ accumulated schooling should directly widen the inequality of their earnings. The other is that a rise in their average schooling should bid down skilled-wage premiums, again reducing the inequality of earnings or of income. While it is not easy to trace these inequalities in education subsidies and in final earnings, this strong link should be pursued, given that the international literature on social rates of return to schooling shows consistently high average rates.\”
Lindert lays out a range of categories for the relationship between education and inequality over time. In particular, he emphasizes looking at the ratio of spending per pupil on tertiary education vs. spending per pupil on preschool and primary education. In countries with universal education, like most high-income countries, this ratio is relatively low. In countries of Latin America that have historically tended to fund college education for the well-to-do, and not much primary education for everyone else, this ratio looks pretty high.
Finally, Lindert fingers an uncomfortable culprit that is likely to exert pressure over time for less progressive social spending: that is, the aging of populations around the world. He writes:
\”The only clear threat to progressive social spending comes from demography and politics. All populations are aging faster than careers are lengthening, thus raising the share of adult life spent in retirement. In addition, and perhaps in response, policy has shifted toward helping the elderly and keeping them out of poverty. This does not necessarily threaten the progressivity in government treatment of the elderly themselves, but it definitely threatens to erode progressive social spending on children and adults under 65, hurting both progressivity and economic growth. The dangerous shift in priorities can be described either as a shift from investing in people for the long run to insuring them for the short run, or, in Martin Ravallion’s (2013) terminology, a shift from promotion to protection. …
\”What trend can we foresee in this political mission drift toward favoring the elderly? The elderly share of the adult population will continue to rise. This demographic fact of life has a clear implication for providing for old age: As the share of elderly rises, their annual benefits past the age of 65 should not rise as fast as the average annual incomes of those of working age.
\”This clear warning … does not mean pensions have to drop in real purchasing power. Pensions should still keep ahead of the cost of living – it’s just that they cannot grow as fast as earned incomes per person of working age, which historically grow at about 1.8 percent a year, adjusting for inflation. … Thus as long as consumption per elderly person keep in step with wage and salary rates, population aging threatens to raise the share of GDP devoted to subsidizing the elderly. To avoid paying for this with an upward march in tax rates, or with cutbacks in public spending on more productive – and progressive — investments in the young, society needs to trim the relative generosity of annual pension subsidies.\”
There are many possible takeaways from this analysis, but here are a few of mine: 1) The growth of economic inequality around the world is mainly about economic factors, not a political retreat from redistribution. 2) In the longer-term, addressing the underlying forces that generate inequality–in particular, unnecessarily high inequality of educational opportunity and achievement–is a powerful force. 3) Helping the elderly more is going to be increasingly popular for politicians, but a tradeoff is that it becomes harder to make social investments that will pay off in the long term.
One of the ongoing puzzles of the US economy in recent decades is why inflation has stayed so low. Even outgoing Fed Chair Janet Yellen has highlighted this puzzle. The \”Amazon effect\” may be part of the answer: basically, the Amazon effect is that a higher level of competitive pressure from the rising level of on-line retail sales is holding back price increases that might otherwise have occurred.
Here\’s a figure illustrating the potential force of the Amazon effect, put together by Kevin L. Kliesen at the St. Louis Fed. As the captions above the blue line show, e-commerce was 2.8% of retail sales, but has now risen to 10.4%. The blue line itself shows the price level for those items purchased via e-commerce, using 2009 as a base year. For example, from 2000 to 2009 this price index rose from a little above 90 to 100, implying an inflation rate for these goods of about 1% per year. But since 2009, the price index for goods purchased via e-commerce has actually been declining by about 1% per year.
It\’s interesting to consider the possibility that the falling prices for e-commerce retail may not be a pure deflation of prices. It might also reflect cost savings delivered because buying through increasing automated warehouses is becoming more cost-efficient, compared with standard wholesale and retail product chains.
For those who want details on this price index, it\’s the is the price deflator for “Electronic Shopping/Mail-Order Houses” produced by the US Bureau of Economic Analysis. It\’s in Table 7U. Chain-Type Price Indexes for BEA Retail and Food Services Sales, available here.
Of course, a 1% annual price decline on 10% of retail sales cannot, by itself, explain why overall inflation for the entire economy has remained so low. But if you allow for the possibility that e-commerce prices can also place pressure on bricks-and-mortar retailers to limit their own price increases, the Amazon effect could be a meaningful part of an overall explanation.
Thanksgiving is a day for a traditional menu, and I take a holiday by reprinting this annual column on the origins of the day:
The first presidential proclamation of Thanksgiving as a national holiday was issued by George Washington on October 3, 1789. But it was a one-time event. Individual states (especially those in New England) continued to issue Thanksgiving proclamations on various days in the decades to come. But it wasn\’t until 1863 when a magazine editor named Sarah Josepha Hale, after 15 years of letter-writing, prompted Abraham Lincoln in 1863 to designate the last Thursday in November as a national holiday–a pattern which then continued into the future.
An original and thus hard-to-read version of George Washington\’s Thanksgiving proclamation can be viewed through the Library of Congress website. The economist in me was intrigued to notice that some of the causes for giving of thanks included \”the means we have of acquiring and diffusing useful knowledge … the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.\”
Also, the original Thankgiving proclamation was not without some controversy and dissent in the House of Representatives, as an example of unwanted and inappropriate federal government interventionism. As reported by the Papers of George Washington website at the University of Virginia.
The House was not unanimous in its determination to give thanks. Aedanus Burke of South Carolina objected that he “did not like this mimicking of European customs, where they made a mere mockery of thanksgivings.” Thomas Tudor Tucker “thought the House had no business to interfere in a matter which did not concern them. Why should the President direct the people to do what, perhaps, they have no mind to do? They may not be inclined to return thanks for a Constitution until they have experienced that it promotes their safety and happiness. We do not yet know but they may have reason to be dissatisfied with the effects it has already produced; but whether this be so or not, it is a business with which Congress have nothing to do; it is a religious matter, and, as such, is proscribed to us. If a day of thanksgiving must take place, let it be done by the authority of the several States.”
By the President of the United States of America. a Proclamation.
Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”
Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.
and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.
Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.
Go: Washington
Sarah Josepha Hale was editor of a magazine first called Ladies\’ Magazine and later called Ladies\’ Book from 1828 to 1877. It was among the most widely-known and influential magazines for women of its time. Hale wrote to Abraham Lincoln on September 28, 1863, suggesting that he set a national date for a Thankgiving holiday. From the Library of Congress, here\’s a PDF file of the Hale\’s actual letter to Lincoln, along with a typed transcript for 21st-century eyes. Here are a few sentences from Hale\’s letter to Lincoln:
\”You may have observed that, for some years past, there has been an increasing interest felt in our land to have the Thanksgiving held on the same day, in all the States; it now needs National recognition and authoritive fixation, only, to become permanently, an American custom and institution. … For the last fifteen years I have set forth this idea in the \”Lady\’s Book\”, and placed the papers before the Governors of all the States and Territories — also I have sent these to our Ministers abroad, and our Missionaries to the heathen — and commanders in the Navy. From the recipients I have received, uniformly the most kind approval. … But I find there are obstacles not possible to be overcome without legislative aid — that each State should, by statute, make it obligatory on the Governor to appoint the last Thursday of November, annually, as Thanksgiving Day; — or, as this way would require years to be realized, it has ocurred to me that a proclamation from the President of the United States would be the best, surest and most fitting method of National appointment. I have written to my friend, Hon. Wm. H. Seward, and requested him to confer with President Lincoln on this subject …\”
William Seward was Lincoln\’s Secretary of State. In a remarkable example of rapid government decision-making, Lincoln responded to Hale\’s September 28 letter by issuing a proclamation on October 3. It seems likely that Seward actually wrote the proclamation, and then Lincoln signed off. Here\’s the text of Lincoln\’s Thanksgiving proclamation, which characteristically mixed themes of thankfulness, mercy, and penitence:
Washington, D.C. October 3, 1863 By the President of the United States of America. A Proclamation.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.
By the President: Abraham Lincoln William H. Seward, Secretary of State
