Author: conversableeconomist

The recovery of the U.S. economy since the end of the Great Recession in June 2009 has been sluggish and weak–and still much better than in most high-income countries. Here a figure from the 2014 Economic Report of the President, released earlier this week.

The figure shows Real GDP per Working Age Population. Real GDP means that it is measuring national economic output adjusted for inflation. By looking at \”working age population,\” it is adjusting for size of population but not (in a direct way) for level of unemployment. The horizontal axis measures quarters that have passed since the start of the recession. The vertical axis set the measure of output for each country equal to 100 at that time, so that you can easily compare the patterns across countries since that time. A few lessons jump out at me.

1) The U.S. and Germany are the only two of the 12 countries shown that have recovered back to the level of output/working-age population from before the Great Recession.

2) It\’s natural for Americans to focus on the problems of the U.S. economy, but by comparison, the U.S. economy is looking pretty good. The euro crisis isn\’t in the headlines right now, and I sometimes read that the crisis is past us. But look at the output/population level in Greece or in Italy, still sinking. The euro-area unemployment rate is up around 12%, and is at 25% in Spain and Greece. Germany, thanks to flexibility of its labor market institutions and benefits from the euro zone, has been doing well, too.

3) Ukraine was added to this graph at what I suspect was the last minute. You can see the shock that hit Ukraine\’s economy back in 2008, and how slow it has been to recover.

4) International comparisons are always a bit tricky. After all, the U.S. has been less affected by the euro crisis than countries of the European Union. Nonetheless, the basic fact is that the U.S. economy is leading the way in this comparison group, which suggests that U.S. economic policy in the aftermath of the Great Recession did something right. To put it another way, critics of the U.S. fiscal and monetary policies in the aftermath of the Great Recession need to explain why, if the policies were so bad, the outcome has been comparatively so good.

The basic student experience in many schools is quite similar to what it was a half-century ago. Te school day is divided into periods, each period is a subject, each subject has a teacher, and it all happens in a building that has been there for decades. Nowadays there\’s some additional technology mixed in. But perhaps, for at least some schools, a bigger shake-up is called for? Caroline Hoxby offers some thoughts in \”The Global Achievement Gap,\” published in the journal Defining Ideas from the Hoover Institution. In  my own reading, her essay suggests to me three potentially useful ways of shaking up public schools.

1) More extensive use of information technology.

Hoxby\’s example here is the \”Rocketship\” schools that operate in Santa Clara, California–that is, in the middle of Silicon Valley. She writes:

The Rocketship schools are hybrid schools that serve students who are largely poor and Hispanic or black. They attain some of the highest scores for students from such backgrounds among California schools. Their students spend part of each day in a \”learning lab\” in which they work on computers. The schools also use computer-based technology for curricular enrichment, diagnosis, and tracking progress. (Although the Rocketship schools are charter schools and largely admit students via lottery, they have not yet been evaluated using lottery-based methods. Thus, some of their high performance may be due to motivated or able students\’ self-selecting into them. However, what really interests us here is their financial model.)

The Rocketship schools have current per-pupil expenditures equal to 79 percent of that of traditional public schools in their county: $7,492 for Rocketship and $9,463 for the other schools. How do they manage this? First, their ratio of pupils to classroom teachers is 30.5 while the traditional public schools\’ is 21.6. Thus, Rocketship schools need only two teachers for every three teachers whom the traditional public schools need. According to their accounts, this entire reduction is attained by means of computers being used for mundane instruction and practice of skills. Second, Rocketship schools spend a much lower share of their budget on the wages and salaries of non-teachers: 12.7 percent as opposed to 32.6 percent. This is largely because they have approximately one non-teaching staff member for every three such people at traditional public schools. The schools’ explanation is that they have less need for administrators and support staff because technology performs many of the tracking and paperwork tasks that such people perform in traditional public schools.

Another benefit of integrating information technology is that it allows 

\”One might wonder how it is possible that US public schools could, within their current budgets, pay teachers in a manner that is so competitive with private sector rewards. The main explanation is that although high value-added teachers are currently underpaid, low value-added teachers who have high seniority, master\’s degrees, and other paper credentials are systemically overpaid relative to their alternative jobs. They have no incentive to leave teaching, therefore. They also have no incentive to improve their value-added. Low value-added teachers absorb so much of the total compensation budget that little is left for high value-added starting teachers, who are not only underpaid if they do teach but who tend to leave teaching as a result.\” 

For economists, why people vote has  long been a puzzle. After all, why go to the time and trouble of turning up at the polls for any big election, when the probability that your vote will decide the election is essentially zero? In Chapter 20 my Principles of Economics textbook on \”Public Choice\” (which I commend to the attention of college teachers out there), I sum up the argument this way: 

\”In a 1957 work, An Economic Theory of Democracy, the economist Anthony Downs stated the problem this way: “It seems probable that for a great many citizens in a democracy, rational behavior excludes any investment whatever in political information per se. No matter how significant a difference between parties is revealed to the rational citizen by his free information, or how uncertain he is about which party to support, he realizes that his vote has almost no chance of influencing the outcome. . . . He will not even utilize all the free information available, since assimilating it takes time.” In his classic 1948 novel Walden II, the psychologist B. F. Skinner puts the issue even more succinctly via one of his characters, who states: “The chance that one man’s vote will decide the issue in a national election . . . is less than the chance that he will be killed on his way to the polls.”

Indeed, one of the arguments for compulsory voting  is that otherwise, not enough people will bother. The arguments for why people vote quickly seem to invoke social motivations: that is, people vote because they feel part of a broader society, and participating in that society seems like a social norm that is worthwhile to them. But finding a way to confirm this feeling, rather than to assert its existence, and to measure its intensity has been elusive. 

Stefano DellaVigna, John A. List, Ulrike Malmendier, and Gautam Rao offer a deeply interesting experiment along these lines in \”Voting to Tell Others,\” which is available as NBER Working Paper #19832 (January 2014), but they have also written a nice readable overview for the Vox website here. Along with what the study has to say about voting, it also offers an interesting and hands-on method for  doing social science.

The authors mix together two sorts of data. One set of data they create themselves by interviewing people in some Chicago suburbs about whether they voted. However, some of the people received a flyer on their doorknob in advance. Some of the flyers said that a someone would come to do a five-minute survey. Other flyers said that it would be a five-minute survey \”on your voter participation in the 2010 Congressional election.\” Some of the flyers also promised to pay $10 for participating in the survey, and some said that the survey would take 10 rather than 5 minutes. Thus, the first set of data is how many people come to the door with and without the flyers, with longer and shorter times, with a promise of monetary payment and without. But the second big source of data is that the researchers had already accessed the voting rolls, so they actually already knew whether people had voted. Thus, they could compare the answers people gave, and whether people were more likely to respond to the survey, according to whether they had actually voted.

With this study design in in place, they draw several conclusions:

Finding 1: Voters do not feel pride from saying they voted, but non-voters do feel shame …  In fact, voting households are slightly less likely to answer the door and do the survey when they are informed about the turnout question. However, non-voters sort out significantly, decreasing their survey participation by 20%. … We find that the effect of reducing payment by $10 is comparable to the sorting response of non-voters to the election flyer. In other words, non-voters appear to dislike being asked whether they voted as much as they dislike being paid $10 less for completing the survey. … 

Finding 2: Non-voters lie and claim they voted half the time, while voters tell the truth … We find that voters tell the truth and say they voted 90% of the time, while non-voters lie and claim to have voted 46% of the time.

This kind of research clearly doesn\’t fit the stereotype of the economist sitting in an office, downloading electronic data to a spreadsheet. Instead, these researchers hired \”many\” undergraduate students to distribute the flyers, and 50 people to carry out the surveys, thus accumulating a dataset of over 13,000 households. Because of the pre-planned and random variation across the different households, with and without flyers before the survey, and with different information on the flyers, there is compelling reason to believe that they are capturing something real about how people think about voting.

Of course, one may raise concerns that the 2010 Congressional elections in in Illinois were a special case in some way, and the result might not generalize elsewhere. Those who raise such objections now have a template for the follow-up research they should to address those concerns.

It\’s hard for me to care much about the details of the proposed fiscal year 2015 budget just released by the White House, because no one else seems to care much, either. Indeed, the focus on short-term budget issues is causing us to lose focus on the fact that U.S. government borrowing is on an unsustainable long-run path.

Under the Congressional Budget Act of 1974, the President is required to submit a budget to Congress by the first Monday in February. This year\’s proposed budget arrived the first Tuesday in March. President Obama\’s Office of Management has now missed the legally mandated timeline four of the last five years. This delay might seem to make it harder for Congress to meet its own legislatively required deadlines, except that the chair of the Senate Budget Committee, Patty Murray, has already announced that the Senate won\’t take up a budget this year–and indeed, the Senate hasn\’t passed a budget at all in four of the last five years. Murray says that the Senate will rely on the spending limits over the next two years that were in the bipartisan deal enacted by Congress and signed into law by President Obama. However, the Obama budget proposes breaking those same spending limits.

Rather than agonizing over fine-print details of budget proposals, I\’m more likely to head for the \”Historical Tables of the U.S. Budget,\” a highly useful resource for looking at long-run trends, and for the \”Analytical Perspectives\” volume of the budget, which breaks down issues like tax expenditures, infrastructure spending, and others.  But unlike in years past, these volumes apparently weren\’t ready to be released with the rest of the already-late budget earlier this week, and are supposed to be published next week.

All of this just illustrates a theme that is already apparent to anyone who watched politics: the process for producing a federal budget is broken. Alan J. Auerbach and William G. Gale offer a reminder of why this matters in \”Forgotten but Not Gone: The Long-Term Fiscal Imbalance.\” To set the stage for their discussion, here are two figures from a report last month from the Congressional Budget Office. The first shows budget deficits as a percentage of GDP over time. The second shows the accumulated federal debt owed to the public as a share of GDP over time.

Notice that budget deficits have fallen sharply in the last few years, as one would hope and expect given that the actual recession ended in June 2009. However, the deficits have not yet fallen back to the average for the last 40 years. In addition, the accumulated level of federal debt, while lower as a share of GDP than the peak reached when World War II was fought with borrowed money, is already higher than at any other point in U.S. economic history. Here are some comments from Auerbach and Gale:

First, ignoring projections for the future, the current debt-GDP ratio is far higher than at any time in U.S. history except for a brief period around World War II. The painful budget deals  in 1990 and 1993 occurred when the debt-GDP ratio was more than 20 percent of GDP lower  than it is now. …

Second, while we clearly face no imminent budget crisis, the 10-year budget outlook
remains tenuous and is worse than it was last year, primarily due to changes in economic conditions … There is no “smoking gun” in the 10-year projections, “just” a continuing imbalance  between spending and taxes. . . .  Notably, there is no suggestion in the projections that the debt-GDP ratio will fall. In the  past, when the U.S. has run up big debts, typically in wartime, the debt-GDP ratio has  subsequently been cut in half over a period about 10-15 years. Under current projections, the debt-GDP ratio will rise, not fall; the only question is how fast. …

Third, the fiscal problems worsen after the next 10 years. Results over the longer term
depend very much on one’s choice of forecasts, in particular regarding the growth in health care spending. Nevertheless, under the most optimistic of the health care spending scenarios we  employ, the debt-GDP ratio will rise to 100 percent in 2032 and 200 percent by 2054 and then continue to increase after that. All told, to keep the 2040 debt-GDP ratio at its current level, 72  percent, in 2040, would require immediate and permanent policy adjustments – reductions in  spending or increases in taxes – of 1.9 percent of GDP under current policy. To keep the ratio at  its current level through 2089 would require immediate and permanent adjustments of about 3.5  percent of GDP.

As Auerbach and Gale point out, none of the short-term arguments over raising the debt ceiling or spending caps in the next couple of years map out any route toward these kinds of changes. Of course, projecting the future is always full of uncertainty. You can read their paper for an in-depth discussion of underlying assumptions. But uncertainty should imply planning, rather than inaction. As Auerbach and Gale write:

\”The debt-GDP ratio has already doubled, to more  than 70 percent. The future is already here. There are benefits to getting the deficit under  control – including economic growth and fiscal flexibility – regardless of whether the long-term  problem turns out to be as bad as mainstream projections suggest. … [P]urely as a matter of arithmetic, the longer we wait, the larger and more
disruptive the eventual policy solutions will need to be … Policy makers certainly may not want to reduce spending or raise taxes during a weak period for the economy, but that is different from not planning ahead.\” 

For past blog posts on the economic costs of large budget deficits, see here and here.

With the Russian invasion of Ukraine and the prospect of a combustible great powers confrontation, the natural reaction of any economist is: \”So what\’s up with Ukraine\’s economy, anyway?\” Let other people look at maps; I look at economic statistics.

Ukraine has a population of 46 million, roughly the same as South Korea, South Africa, Spain, or Colombia. Its economy in 2012 was $176 billion (measured in current US dollars), which is a little larger than New Zealand or Vietnam, but a little smaller than Romania or the Czech Republic.  Thus, per capita GDP in Ukraine was about $3800 in 2012, which is roughly similar to Indonesia, El Salvador, and Albania, in what the World Bank categorizes as the \”lower middle income\” part of the income distribution.

The CIA World Factbook summarizes Ukraine\’s economic situation in recent years like this: \”Ukraine\’s dependence on Russia for energy supplies and the lack of significant structural reform have made the Ukrainian economy vulnerable to external shocks. Ukraine depends on imports to meet about three-fourths of its annual oil and natural gas requirements and 100% of its nuclear fuel needs. After a two-week dispute that saw gas supplies cutoff to Europe, Ukraine agreed to 10-year gas supply and transit contracts with Russia in January 2009 that brought gas prices to \”world\” levels. The strict terms of the contracts have further hobbled Ukraine\’s cash-strapped state gas company, Naftohaz. Outside institutions – particularly the IMF – have encouraged Ukraine to quicken the pace and scope of reforms to foster economic growth. … Ukraine\’s economy was buoyant despite political turmoil between the prime minister and president until mid-2008. The economy contracted nearly 15% in 2009, among the worst economic performances in the world. In April 2010, Ukraine negotiated a price discount on Russian gas imports in exchange for extending Russia\’s lease on its naval base in Crimea.\”

From a broader macroeconomic perspective, the key problem for Ukraine\’s economy is that it has been running very large trade deficits. In addition, Ukraine\’s economy is highly interconnected with other countries: exports and imports both run at about 50-60% of GDP.  Because Ukraine\’s trade deficits are large, Ukraine depends on large inflows of capital from other countries, and thus has high and unsustainable levels of debt service to pay. A potential answer here is to devalue the currency, and there was a 40% devaluation back in 2008. But when so much of what a country buys and sells is in world markets, a large devaluation of your currency is wildly unpopular–in effect, it makes the cost of all exports fall and the cost of all imports rise.

Let\’s take a stroll through these facts, using graphs generated from the World Development Indicators website run by the World Bank. As a starting point, here\’s are exports and imports as a share of GDP in Ukraine. Notice that Ukraine\’s level of trade is high, with exports and imports both exceeding half of GDP. Notice also that a big trade deficit (red line above the blue line) opened up around 2008, and again in 2012.

Here\’s a graph just focusing on Ukraine\’s current account balance since 2004. The trade deficit was  almost 8% of GDP back in 2008, and larger in 2012.

An economy with a large trade deficit depend on equally large inflows of foreign capital. When it appears that those inflows of capital will not be repaid, and thus are unlikely to continue, the IMF often enters the picture. When the global economic crisis hit in 2008, the market collapsed for Ukraine\’s main export, steel, and international capital stopped going to Ukraine.  The value of Ukraine\’s currency plunged 40%–in other words, Ukraine\’s exports were selling for 40% less on world markets and Ukraine\’s imports cost 40% more. Here\’s a graph created by the useful XE.com site showing the exchange rate for Ukraine\’s currency, the hryvnia, in terms of how many hryvnia per euro. More hyrivia per euro means that the currency is getting weaker. You can see the major currency depreciation, followed by a more-or-less stable currency up until very recently, and then another huge depreciation.

Back in 2008 Ukraine\’s banking system (like the banks of most developing countries) had borrowed in foreign currencies, and when the Ukrainian currency was worth so much less, those loans couldn\’t be repaid on time.  In 2008, the IMF loaned Ukraine  $16.8 billion. As always, the IMF loan was intended as short-term help so that the economy could get over the short-term crisis over the hump so that it has some time to put its economic house in order. The banking system was recapitalized, and Ukraine agreed to policies like reducing energy subsidies and restraining wage subsidies (while protecting those with low incomes).

But by  December 2013, the economic situation in Ukraine was looking dire all over again. The same cycle of large trade deficits, capital inflows that turned on and then turned off, and banks that couldn\’t repay their international loans had surfaced all over again. But this time, the IMF felt that Ukraine had not kept its promises of reform in 2008, and was reluctant to step in again.   That\’s when Vladimir Putin stepped up with his plan to buy $15 billion in Ukrainian bonds and also to offer lower natural gas prices.

The IMF put out a press release on December 19, 2013, summarizing its concerns about Ukraine\’s economy. Here are a few points that caught my eye:  

\”The Ukrainian economy has been in recession since mid-2012, and the outlook remains challenging. In January–September 2013 GDP contracted by 1¼ percent y-o-y, reflecting lower demand for Ukrainian exports and falling investments. … Weak external demand and impaired competitiveness kept the trailing 12-month current account deficit elevated at about 8 percent of GDP by end-September despite a significant reduction in natural gas imports. The high current account deficit amid less favorable international market environment pressured international reserves, which fell below the equivalent of 2½ months of imports by end-October 2013. The fiscal stance loosened in 2012–13, contributing to the buildup of vulnerabilities. Large pension and wage increases, generous energy subsidies, and soccer cup spending led to a widening of the combined deficit of the general government and the state-owned company Naftogaz to 5½ percent of GDP in 2012. In 2013, the combined government-Naftogaz deficit is projected to expand to 7¾ percent of GDP. … An inefficient and opaque energy sector continues to weigh heavily on public finances and the economy. Overall energy subsidies in Ukraine reached about 7½ percent of GDP in 2012. The very low tariffs for residential gas and district heating cover only a fraction of economic costs and encourage one of the highest energy consumption levels in Europe. As a result, Naftogaz’s losses in 2013:H1 more than doubled and the company is late on payments for imported gas.\”

The IMF writes that Ukraine has \”low program policy ownership,\” which basically means that the government doesn\’t do what it says it will do, like trimming back on energy subsidies and wage subsidies. For example, a table at the bottom of the IMF reports that real (inflation-adjusted) wages in Ukraine rose 8.8% in 2011, 14.2% in 2012, and 9.3% in 2013, which is not a sign of economic health, but rather a sign that the government and its pet energy company are borrowing hand-over-fist to subsidize wages in many areas.

Ukraine\’s economy has some strengths. Inflation is under control. Unemployment at about 8% is not  super-high. The accumulated public debt, at about 41% of GDP, is not especially high.  But Ukraine is also a highly open and not very diversified economy, and thus highly vulnerable to movements of a few key prices on world markets–steel exports, energy imports, its own exchange rate. Add undisciplined government spending that hands out copious energy and wage subsidies, together with an unstable financial sector and a lack of productivity growth, and Ukraine\’s economy is primed to melt down, as it did in 2008 and again in 2013. With the current turmoil, it\’s obviously not a convenient time for Ukraine to be building stronger economic and political institutions. But without such reforms and institutions, Ukraine\’s economy will remain highly unstable.

After Schwartz graduated from Barnard College at age 18, and completed her masters\’ degree at Columbia a year later, she worked for several years at the U.S. Department of Agriculture and the Social Science Research Council before joining the research staff at the National Bureau of Economic Research in 1941. As James Poterba writes: \”With the exception of a brief period in the early 1980s when she served as Staff Director for the U.S. Commission on the Role of Gold in the Domestic and International Monetary Systems and was the primary author for the first volume of the commission’s
report, Anna remained an NBER affiliate for the next 71 years. At the time of her death, she had the longest NBER affiliation of any researcher—by several decades. Although Anna held a number of adjunct teaching positions during the course of her career, the NBER was always her primary
affiliation.\” As Allan Meltzer wrote: \”I want to say that the fact that Anna never received an appointment at any major university is the clearest example I know of discrimination against women in the past.\”

Several of the speakers remembered her direct and no-nonsense intellectual style, over decades of papers, books, and NBER seminars. Here\’s a story from William Poole about a discussion with Schwartz in mid-2008:

\”I argued with her that the U.S. economy was in fact doomed to financial crisis in early 2006 when Ben Bernanke took office. By that time, almost all the rotten subprime paper had been created and much had been included in risky portfolios of undercapitalized financial firms. Thus, I argued to Anna, if the Fed had allowed Bear Stearns to fail, the crisis would have become acute at that time instead of six months later when Lehman failed. Her response, in the mildly disapproving but friendly tone she always used with friends, was, “Ah, Bill. But the economy will go on after the financial crisis. What the Fed has done, which would not have much affected the course of the financial crisis anyway on your own argument, has created a serious long-run problem. Given Lehman, and weak public understanding, the Fed has created the presumption that any large financial firm in trouble will be bailed out. That presumption will be with us for many years, long after the memory of the financial crisis has dimmed.” …

Of course, she was right—very right. She not only understood the facts of economic history but also why history developed the way it did. … She also understood that it could take decades to undo an unwise policy decision. And here we are. What the public “knows,” what the market “knows,” and what Congress “knows,” is that letting Lehman fail was a mistake. The now firmly embedded presumption in government and market behavior—the presumption of a bailout of any large financial firm in trouble—did not have to be this way.\”

(Here\’s a Wall Street Journal article from October 2008 reporting Schwartz\’s views.)

And a number of the speakers remembered her love of work, balanced with her commitment to family and personal life.  Michael Bordo, who co-authored 30 articles and two books with her, noted: \”What I remember most about Anna is how much she loved her work. Her whole life was organized around going to the office. She officially retired from the Bureau when she was 65, but she didn’t stop working until she was 94. She went into the Bureau every day when she was in her eighties and nineties, and she still put in a full eight-hour day. … Yet she was a balanced person. She had a great family—Isaac, a caring husband with a great sense of humor, who died in 1999, four children, and many grandchildren and great grandchildren, and they used to come into New York to see her often.\”

Eloise Pasachoff, one of Schwartz\’s grandchildren, captured this theme of a life lived full-speed ahead especially nicely:

\”Notwithstanding the popular saying to the contrary, it is possible to get to your deathbed and wish you had spent more time at the office. Not because you don’t wish you’d had more time with your family, too; not because you don’t have a full and rich and interesting personal life; but because what you do all day long at work grips you with a passion you want to pursue. There are more problems to solve, more questions to answer, more cases to build, more theories to debunk. Here was the most reliable conversation starter with my grandmother: “What are you working on?” And in her answer, she brooked no nonsense.  … What else did she want to do? She wanted to work full time and raise four kids. So she got help with excellent childcare. … I learned from my grandmother … to take time to take pleasure in the pleasures of life. My grandmother spent several hours every weekend listening to the Met’s opera broadcast. She loved a good Trollope novel. She made sure she didn’t miss a day of the New York Times or the Wall Street Journal. She relished her favorite foods. For a while, when I was living near her, we had dinner once a week, and it was wonderful to eat with someone who took such enjoyment over a meal. She loved trout; she loved stuffed cabbage; she loved pineapple upside-down cake; she loved rice pudding. And I loved spending time with this amazing woman who had such a rich and full and ongoing life.

I think I have a bigger lesson, and it’s about what they call “work-life balance.” Except when I think about my grandmother’s example, I want to call it “work-life joy.”

I like the idea of \”work-life joy\” very much.

A identity is a equation that is true because of the way the terms are defined. Thus, when an economist says that \”gross national product is equal to the sum of consumption plus investment plus government spending on goods and services plus exports minus imports,\” that statement is actually just one definition of how to measure GDP.

When thinking about how budget deficits affect the economy, a different identity is typically used. This identity points out that for an economy at any given time, the total quantity of funds being saved must be equal to the total quantity of funds being invested. Or to spell it out a little more fully, the U.S. economy has two sources of savings: domestic saving, and the saving that flows in from other countries. The U.S. economy also has two sources of demand for those funds: private sector investment and government borrowing. Thus, it must hold true that when government budget deficits increase, some combination of three things will happen: 1) domestic saving will rise, to supply some of the funds needed for the rise in government borrowing; 2) the inflow of savings from foreign investors will rise, to supply some of the funds needed for the rise in government borrowing; or 3) private investment will decline, because the rise in government borrowing will \”crowd out\” some of the funds that would otherwise have gone to the private sector.

Again, this statement is not one where different schools of economics disagree; it holds true by definition, based on the meaning of these terms. Among professional economists, those who think budget deficits should be larger, or smaller, or about the same will all agree that if deficits rise, some combination of these three consequences must and will happen–by definition.

But how much of each will happen?  Jonathan Huntley of the Congressional Budget Office lays out some evidence in \”The Long-Run Effects of Federal Budget Deficits  on National Saving and Private Domestic Investment,\” published as a working paper by the Congressional Budget Office in February. As one might expect, the question of how more government borrowing affects these three other factors is not written in stone: it will vary both according to the specific situation of the economy and according to the econometric methods being used.

That said, Huntley describes the central estimate about the long-run effects of more government borrowing based on the review of the evidence like this:  For each additional dollar of government budget deficit, private saving rises by 43 cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional dollar of deficit leads to a 33 cent decline in domestic investment.

The lower range of estimates is that for each additional dollar of government borrowing, private saving rises by 61 cents and the inflow of foreign capital rises by 24 cents, so private sector investment falls by 15 cents. The higher range of estimates is that for each additional dollar of government borrowing, private saving rises by 29 cents, inflows of foreign capital rise by 21 cents, and private sector investment falls by 50 cents.

It\’s perhaps useful to put these investment totals in context. Here\’s a figure on U.S. investment levels created with the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The blue line on the top shows gross private domestic investment (quarterly data, seasonally adjusted annual rate). The red line shows net private domestic investment. The difference between the two lines is that a certain amount of U.S. capital wears out every year, and machinery, vehicles, computers, phone systems, and so on need to be replaced. A lot of gross investment goes to replacing existing capital, and the red \”net\” line thus shows the addition to the capital stock each year. Notice that for a couple of quarters toward the tail end of the Great Recession, net investment turned negative–that is, gross investment wasn\’t high enough even to replace the existing capital.

How much effect will the currently projected deficits have on domestic investment? Say that government borrowing now that we are past the worst of the Great Depress is about 4% of GDP each year into the future (which is roughly the CBO \”baseline\” estimate, which is probably optimistic for the long run). Then investment would be 1.3% of GDP lower as a result of government borrowing (that is, 33% of the 4% of GDP budget deficits). The US GDP in 2014 will be about $17 trillion. So a drop of investment equal to 1.3% of GDP is a fall in actual dollars of about $221 billion in investment.

Compared with gross private investment of about $2.8 trillion, this total doesn\’t look especially large. But remember, most of gross investment is replacing existing capital as it wears out. Compare a decline of $221 billion in investment to the net private investment of about $600 billion, and it looks more sizable. Thus, the budget deficit is a substantial drag on how much the U.S. economy is adding–in terms of net private investment–to its capital stock each year.

For the last few months, the euro situation has not been a crisis that dominates headlines. But the economic situation surrounding the euro remains grim and unresolved. Finance and Development, published by the IMF, offers four angles on Europe\’s road in its March 2014 issue. For example,
Reza Moghadam discusses how Europe has moved toward greater integration over time, Nicolas Véron looks at plans and prospects for a European banking union, and Helge Berger and Martin Schindler
consider the policy agenda for reducing unemployment and spurring growth.  But I was especially drawn to \”Whither the Euro?\” by Kevin Hjortshøj O’Rourke, because he finds himself driven to contemplating whether the euro will survive. He concludes:

The demise of the euro would be a major crisis, no doubt about it. We shouldn’t wish for it. But if a crisis is inevitable then it is best to get on with it, while centrists and Europhiles are still in charge. Whichever way we jump, we have to do so democratically, and there is no sense in waiting forever. If the euro is eventually abandoned, my prediction is that historians 50 years from now will wonder how it ever came to be introduced in the first place.

To understand where O\’Rourke is coming from, start with some basic statistics on unemployment and growth in the euro-zone. Here\’s the path of unemployment in Europe through the end of 2013, with the average for all 28 countries of the European Union shown by the black line, and the average for the 17 countries using the euro shown by the blue line. 

In the U.S. economy, we agonize (and rightfully so!) over how slowly the unemployment rate has fallen from its peak of 10% in October 2009 to 6.6% in January 2014. In the euro zone, unemployment across countries averaged 7.5% before the Great Recession, and has risen since then to more than 11.5%. And remember, this  average include countries with low unemployment rates: for example, Germany\’s unemployment rate has plummeted to 5.1%. But  Greece has unemployment of 27.8%; Spain, 25.8%; and Croatia, Cyprus, and Portugal all have unemployment rates above 15%.

Here\’s the quarterly growth rate of GDP for the 17 euro countries, for all 28 countries in the European Union, and with the U.S. economy for comparison. Notice that the European Union and the euro zone actually had two recessions: the Great Recession that was deeper than the U.S. recession, and the a follow-up period of negative growth from early 2011 to early 2013. As O\’Rourke writes: \”In December 2013 euro area GDP was still 3 percent lower than in the first quarter of 2008, in stark contrast with the United States, where GDP was 6 percent higher. GDP was 8 percent below its precrisis level in Ireland, 9 percent below in Italy, and 12 percent below in Greece.\”
 

For American readers, try to imagine what the U.S. political climate would be like if unemployment had been rising almost continually for the last five years, and if the rate was well into double-digits for the country as a whole. Or contemplate what the U.S. political climate would look like if instead of sluggish recovery, U.S. economic growth had actually been in reverse for most of 2011 and 2012.

O\’Rourke points out that this dire outcome was actually a predictable and predicted result based on standard economic theory before the euro was  put in  place. And he points out that there is no particular reason to think that the EU is on the brink of addressing the underlying issues.

The relevant economic theory here points out that if two areas experience different patterns of productivity or growth, some adjustment will be necessary between them. One possibility, for exmaple, is that the exchange rate adjusts between the two countries. But if the countries have agreed to use a common currency, so that an exchange rate adjustment is impossible, then other adjustments are possible. For example, some workers might move from the lower-wage to the higher-wage area. Instead of a shift in exchange rates cutting the wages and prices in global markets, wages and prices themselves could fall in an \”internal devaluation.\” A central government might redistribute some income from the higher-income to the lower-income area.

But in the euro-zone, these adjustments are either not-yet-practical or impossible. With the euro as a common currency, exchange rate changes are out. Movement of workers across national borders is not that large, which is why unemployment can be 5% in Germany and more than 25% in Spain and Greece. Wages are often \”sticky downward,\” as economists say, meaning that it is unusual for wages to decline substantially  in nominal terms. The EU central government has a relatively small budget and no mandate to redistribute from higher-income to lower-income areas. Without any adjustment, the outcome is that certain countries have depressed economies with high unemployment and slow or negative growth, and no near-term way out.

Sure, one can propose various steps that in time might work. But for all such proposals, O\’Rourke lays two unpleasantly real facts on the table.

First, crisis management since 2010 has been shockingly poor, which raises the question of whether it is sensible for any country, especially a small one, to place itself at the mercy of decision makers in Brussels, Frankfurt, or Berlin. … Second, it is becoming increasingly clear that a meaningful banking union, let alone a fiscal union or a safe euro area asset, is not coming anytime soon.

For years economists have argued that Europe must make up its mind: move in a more federal direction, as seems required by the logic of a single currency, or move backward? It is now 2014: at what stage do we conclude that Europe has indeed made up its mind, and that a deeper union is off the table? The longer this crisis continues, the greater the anti-European political backlash will be, and understandably so: waiting will not help the federalists. We should give the new German government a few months to surprise us all, and when it doesn’t, draw the logical conclusion. With forward movement excluded, retreat from the EMU may become both inevitable and desirable.

OK, I know that only a very small group of people actually care about government statistics. I know I\’m a weirdo.  I accept it. But data is not the plural of anecdote, as the saying goes. If you care about deciphering real-world economic patterns, you need statistical evidence. Thus, it\’s unpleasant news to see the press release from the US Bureau of Labor Statistics reporting that, because its budget has been cut by $21 million down to $592 million, it will cut back on the International Price Program and on the Quarterly Census of Employment and Wages.

I know, serious MEGO, right? (MEGO–My Eyes Glaze Over.)

But as Susan Houseman and Carol Corrado explain, the change means the end of the export price program, which calculates price levels for U.S. exports, and thus allows economists \”to understand trends in real trade balances, the competitiveness of U.S. industries, and the impact of exchange rate movements. It is highly unusual for a statistical agency to cut a so-called principal federal economic indicator.\” As BLS notes: \”The Quarterly Census of Employment and Wages (QCEW) program publishes a quarterly count of employment and wages reported by employers covering 98 percent of U.S. jobs, available at the county, MSA [Metropolitan Statistical Area], state and national levels by industry.\” The survey is being reduced in scope and frequency, not eliminated. If you don\’t think that a deeper and detailed understanding of employment and wages is all that important, maybe cutting back funding for this survey seems like a good idea.

These changes seem part of series of sneaky little unpleasant cuts. Last year, the Bureau of Labor Statistics saved a whopping $2 million by cutting the International Labor Comparisons program, which produced a wide array of labor market and economic data produced with a common conceptual framework, so that one could meaningfully compare, say, \”unemployment\” across different countries. And of course, some of us are still mourning the decision of the U.S. Census Bureau in 2012 to save $3 million per year by ending the U.S. Statistical Abstract, which for since 1878  had provided a useful summary and reference work for locating a wide array of government statistics.

The amounts of money saved with these kinds of cuts is tiny by federal government standards, and the costs of not having high-quality statistics can be severe. But don\’t listen to me. Each year, the White House releases an Analytical Perspectives volume with its proposed federal budget, and in recent years that volume  usually contains a chapter on  \”Strengthening Federal Statistics.\” As last year\’s report says:

Highways, roads, and bridges are are still mostly an early to mid-20th century technology.  Clifford Winston and Fred Mannering point to some of the directions for highways of the future in \”Implementing technology to improve public highway performance: A leapfrog technology from the private sector is going to be necessary,\” published in the Economics of Transportation. They set the stage like this (citations and notes omitted throughout):

\”The nation\’s road system is vital to the U.S. economy.Valued at close to $3 trillion, according to the Bureau of Economic Analysis of the U.S. Department of Commerce, 75 percent of goods, based on value, are transported on roads by truck, 93 percent of workers\’ commutes are on roads by private automobiles and public buses, and by far the largest share of non-work and pleasure trips are taken by road. Indeed, roads can be accurately characterized as the arterial network of the United States. Unfortunately,the arteries are clogged: the benefits that commuters, families,truckers,and shippers receive from the nation\’s road system have been increasingly compromised by growing congestion, vehicle damage, and accident costs.\”

These costs are high. Estimates of the value of time and fuel spent on congested roads are $100 billion per year. Poor road conditions cost American car drivers $80 billion in operating costs and repairs. And 30,000 Americans die in traffic fatalities each year.

Many of the policy recommendations are familiar enough. For example, the traditional economist\’s answer to road congestion is to charge tolls for driving during congested times. \”[P]oor signal timing and coordination, often caused by outdated signal control technology or reliance on obsolete data on relative  traffic volumes, contributes to some 300 million vehicle hours of annual delay on major roadways.\” Earlier work by Winston emphasized that roads and bridges are primarily damaged by heavier trucks, not cars: \”Almost all pavement damage tends to be caused by trucks and buses because, for example, the rear axle of a typical 13-ton trailer causes over 1000 times as much pavement damage as that of a car.\” Thus, charging heavy vehicles for the damage they cause is a natural prescription. For greater safety, enforcement of laws against drunk driving and driving-while-texting can be a useful step.

But as Winston and Mannering note, new technologies are expanding possibilities for the highway of the future. Certain technologies, like automated collection of tolls from cars that don\’t need to stop, are already widespread. The combination of GPS technology and information about road conditions is already helping many drivers find alternative routes through congestion. But more is coming. As they write:

\”Specific highway and vehicle technologies include weigh-in-motion capabilities, which provide real-time information to highway officials about truck weights and axle configurations that they can use to set efficient pavement-wear charges and to enforce safety standards efficiently; adjustable lane technologies,which allow variations in the number and width of lanes in response to real-time traffic flows; new vehicle attributes, such as automatic vehicle braking that could decrease vehicle headways and thus increase roadway capacities; improved construction and design technologies to increase pavement life and to strengthen roads and bridges; and photo-enforcement technologies that monitor vehicles\’ speeds and make more efficient use of road capacity by improving traffic flows and safety. … The rapid evolution of material science (including nanotechnologies) has produced advances in construction materials, construction processes, and quality control that have significantly improved pavement design, resulting in greater durability, longer lifetimes, lower maintenance costs, and less vehicle damage caused by potholes.\”

Of course, ultimately, the driverless car may dramatically change how cars and roads are used. (Indeed, driverless trucks are already in use in places like an iron ore mine in Australia, comfortably far from public roads–at least so far.)

But the roads and bridges are not a competitive company, trying out new technologies in the hope of attracting new customer and raising profits. They are run by government bureaucracies that are set in their old ways. The federal fuel tax isn\’t raising enough money for new investments in road technology, partly because it is fixed in nominal terms and inflation keeps eating away at its real value, and partly because higher fuel economy means that a fuel tax collects less money. Lobbies for truckers oppose charges that would reflect road damage; lobbies for motorists oppose charges that would reflect congestion. Stir up all these ingredients, and the result is not a big push for applying new technology to America\’s roads and bridges.

Winston and Mannering offer a ultimately optimistic view in which private investments in the driverless car trigger a wide array of other technological investments in roads and bridges. Maybe they will be proven right. I believe the social gains from applying all kinds of technology to roads and bridges could be very large. But I also envision a complex array of interrelated and potentially costly technologies, which would be confronting a thorny tangle of political and regulatory obstacles at every turn and straightaway.