Author: conversableeconomist

David A. Price of the Richmond Fed carries out an interview titled “Angus Deaton: On deaths of despair, randomized controlled trials, and winning the Nobel Prize” (Econ Focus: Federal Reserve Bank of Richmond, Fourth Quarter 2023, pp. 18-22). Here are a few of Deaton’s comments that caught my eye:

On his shift from “cosmopolitan prioritarianism” to “domestic prioritarianism”

If you try to find out what an economist believes philosophically, they will say it’s utilitarianism. … And so there’s a widespread belief in economics that poorer people deserved our attention more than less poor people, because an extra dollar given to someone who is really poor would do more good than an extra dollar going to someone who already had plenty. Philosophers nowadays call that “prioritarianism,” meaning people who have the lowest level of well-being are the ones who deserve the most at the margin.

The other dimension is “cosmopolitan,” meaning you apply this idea across the whole world, without paying attention to national boundaries. Many do seem to embrace cosmopolitan prioritarianism, in which you metaphorically line up everybody in the world from worst off to best off and you prioritize the people at the bottom — without regard to where they are.

I certainly believed this for a long time, and I spent many years consulting for the World Bank where this view was strongly held. But I now think it’s wrong for a number of reasons … One of them is that national boundaries really do matter. … We accept obligations for other people in our country, which we don’t accept for other people outside the country. So whether we like it or not, we’re locked in this tangle or this system of reciprocal obligation … Our fellow countrymen, whether we care for them because we feel like them or not, we have a responsibility for in terms of our taxes and welfare systems, such as they are, and so on. So that’s part of it.

The other part is my suspicion, and this is deeply controversial, that some of the poorest people in America are every bit as poor in terms of overall well-being as the people in Africa or India or wherever the aid agencies like to hold up in front of us. And again, that’s not just money. It’s living in a functional society with societal supports. For instance, if you read some of the ethnographic literature about the Mississippi Delta, there are horrible things going on there in people’s lives. I don’t know how to estimate those in terms of numbers, because we don’t have very good tools for that. But I do challenge the idea that there’s no global poverty in America. So I am increasingly drawn to a form of domestic prioritarianism in which I worry a lot about others in my country who have the least.

On his doubts about the research methodology of randomized control experiments:

In the old days, we used to say here’s a regression and here’s a bunch of regression diseases. There’s a bunch of randomized controlled experiment diseases, too, which can get in the way.

People seem to think if you randomize — if you have two groups picked at random and one gets the treatment and one doesn’t — they say the only difference between the two groups is the treatment. But it’s dead wrong. When I used to teach this class, I would say, if I pick one of you at random with my eyes shut, and I pick another one with my eyes shut, does that make you identical? Of course not. You could argue that’s a large-sample or small-sample thing: If you pick a million people at random, then on average, they’re going to be the same in the two groups. And that’s true. But we don’t know how big it really has to be. And a lot of the experiments are pretty small. So it could be that the two groups you’re looking at are different at random but still different.

The other thing is that randomization can’t control for things that are the same in the two groups. That’s the external validity issue. One of my co-authors in the field of randomized controlled trials, the philosopher Nancy Cartwright, has an example that I like to give. There is famous work that Ed Miguel and Michael Kremer did on worms and deworming. They gave deworming pills in Kenya, and the kids who got the deworming pills did much better in school. Nancy lives in Oxford, and she said, “I have my granddaughter living with me and she’s not doing very well in school, so now I know what I should do, which is I should give her deworming pills, right?” But somewhere between Kenya and Oxford, the pills stop working.

So then, why and where? Of course, what’s on the line is there has to be worms or there has to be lack of sanitation or people are not wearing shoes or something, which is never in the experiment, because everybody in the experiment doesn’t have shoes. Or everybody in the experiment is walking around in an unsanitary field or something, and that’s not what you get in Oxford, so it’s not going to work there. But you have to know what these conditions are if you’re actually going to use those results. So sometimes these little experiments are not much more than anecdotes. You don’t really know what to take away from them. To paraphrase Bertrand Russell, you need a deeper view of the structure of reality.

. Is the rise in US health care spending slowing down? For perspective, health care spending as a share of GDP had been rising steadily over the half-century prior to 2010: 5% of GDP in 1960, 6.9% of GDP in 1970, 8.9% of GDP in 1980, 12.1% of GDP in 1990, 13.3% of GDP in 2000, and 17.2% of GDP in 2010, and US health care spending reached a peak of 19.5% of GDP in 2020.

However, 2020 was the first year of the pandemic. The most recent figures on US health care spending show that it was 17.3% of GDP in 2022, similar to the average of the pre-pandemic years from 2016-2019.

Understanding health care spending matters. After all, back in 1960 health care spending was one-twentieth of the US economy; now, it’s closer to one-fifth. For workers whose employers pay for their health insurance, it has been common over the years to see pay “raises” in the form of more costly health insurance coverage, rather than equivalently higher take-home pay. For government, the soaring costs of health care programs like Medicaid and Medicare are a substantial part of what is driving higher long-run budget deficits.

For an overview of the just-released data on US health care spending in 2022, the baseline starting point is “National Health Care Spending In 2022: Growth Similar To Prepandemic Rates,” by Micah Hartman, Anne B. Martin, Lekha Whittle, Aaron Catlin, and The National Health Expenditure Accounts Team (Health Affairs, published online December 13, 2023, forthcoming in January 2024 issue).

The authors point out that in 2022, unlike in so many earlier years, inflation in other goods and services was faster than inflation in health care, which explains the lower ratio of health care spending to GDP in 2022.

In 2022, nominal GDP growth was largely driven by rapid economywide inflation (unlike in 2021), as the GDP price index increased 7.1 percent (the fastest rate since 1981), after growth of 4.6 percent in 2021. Medical price inflation, in contrast, increased only 3.2 percent in 2022 after even slower growth of 1.5 percent in 2021. Inflation in the medical sector might not follow the patterns of the overall economy, as prices for some goods and services that are predominantly paid for by insurance (such as Medicare, Medicaid, and private health insurance) tend to be set in advance through legislation, regulation, or contractual agreements.

They also point out that the share of Americans with some form of health insurance reached an all-time high in 2022: “The insured share of the population reached a historic high of 92.0 percent in 2022 as enrollment in private health insurance increased at a faster rate relative to 2021 and Medicaid enrollment continued to experience strong growth.”

Will US health care spending as a share of GDP tend to remain where it is in 2022, or perhaps even decline a bit? In late October, the Economist magazine pointed out that the rise in health care spending seemed to be slowing down, not just in the US, but in high-income countries across the world. The article put forward various hypotheses: supply-side technology changes and government pressures for lower prices. For example:

The nature of technological innovation in health care may now be changing. One possibility is that there has been a generalised slowdown in treatments that represent medical breakthroughs and are costly, such as dialysis. But this is difficult to square with a fairly healthy pipeline of drugs coming to market. Another possibility, which is perhaps more plausible, is that the type of advancements has changed, involving a shift from whizzy curative treatments to less glamorous preventive ones. There is decent evidence that the increased use of aspirin, a very low-cost preventative treatment, in the 1990s has cut American spending on the treatment of cardiovascular diseases today. …

Demand-side factors may also be keeping health-care spending in check. In America the Affordable Care Act (ACA)—which was introduced in 2010, at about the time costs tailed off—tightened up the ways in which the government reimburses companies that provide treatment. The aca also made it more difficult for doctors to prescribe unnecessary treatments (seven expensive scans, perhaps, instead of one cheap one) in order to make more money.

On the other side, the semi-official government predictions suggest that the rise in health care spending as a share of GDP is still proceeding. In a Health Affairs article back in June 2023, a team of government health care economists provided “National Health Expenditure Projections, 2022–31: Growth To Stabilize Once The COVID-19 Public Health Emergency Ends,” by Sean P. Keehan, Jacqueline A. Fiore, John A. Poisal, Gigi A. Cuckler, Andrea M. Sisko, Sheila D. Smith, Andrew J. Madison, and Kathryn E. Rennie.

These authors had health care spending data through 2021, and they forecasted the final spending levels of 2022 spending quite accurately. However, their projection is for US health care spending as a share of GDP to rise gradually through the rest of the 2020s, reaching 19.6% of GDP by the end of their projection window in 2031. One of the big drivers of the shift is the rise in the number of elderly and very elderly Americans. This forecast suggests that although the rise in US healthcare spending as a share of GDP paused in the 2010s, but will return in the 2020s.

But although the demographic patterns of an aging America are pretty much set in stone for the next couple of decades, the patterns of health care spending can be altered. As one example, I’ve argued in the past that although finding ways to support people in managing their chronic conditions (like high blood pressure and diabetes) has traditionally been outside what is regarded as “health care spending,” it could have large payoffs in terms of improved health and reduced need for expensive episodes of hospitalization (for discussion, see here, here, and here).

When thinking about converting values from the distant past or the distant future to the present, the actual values themselves are often considerably less important than what is called the “discount rate”–that is, the annual percentage rate at which you do the conversion from past or future to the present. An example of converting future values into “what it would be worth today” is the debate over the costs that climate change may impose decades or a century into the future. An example of converting a past value into “what it would be worth today” is the effort to put a value on the costs imposed on American slaves before the US Civil War.

In general, the problem that arises is applying a percentage growth rate over long periods of time can lead to counterintuitive conclusions. As one example, consider the old story that the Dutch purchased Manhattan from the local Native American tribe for $24. Here, let’s set aside the details about the actual transaction, and whether it was in the form of guilders or trade goods. (For details, this useful article argues that the purchase price was equal to about 3-4 months wages for a skilled artisan in Holland, or what would have been paid for 30 beaver skins.)

For my purpose, the key question here is: “What was $24 (or whatever the relevant amount is) that was paid 400 years worth in today’s currency?” For simplicity and clarity, let’s say that the Dutch paid an amount that we will just set equal to 100.

Well, if we apply an interest rate of 0% over the intervening 400 years, that amount of 100 paid for Manhattan would still be 100 today.

If we apply an interest rate of 1% per year over the intervening 400 years, that amount of 100 paid for Manhattan would be (about) 5,300 today.

If we apply an interest rate of 3% per year over the 400 years, that amount of 100 paid for Manhattan would be (about) 13.6 million today.

And if we apply an interest rate of 6% per year over 400 years, that amount of 100 paid for Manhattan would be about 1.3 quadrillion today.

This example should illustrate that in thinking about converting the amount paid for the island of Manhattan 400 years ago to a modern value, the actual amount paid is almost irrelevant to the conversation. The original amount paid 400 years ago could be one-tenth as much or 10 times as much, but what really makes the difference in the conversion to a modern-day value is the annual interest rate you choose to apply. In addition, the example emphasizes that relatively small differences in interest rates, even just a percent or two per year, can lead to really dramatic differences in value when compounded over long periods of time.

Consider a more hot-button example: What is the value of the wages not paid to American Slaves from 1776 to 1860, converted to a modern value? Thomas Cramer carried out a set of calculations under various scenarios. In one of this scenarios, as a commenter notes, projecting his estimate of historical costs forward to 2009 at an annual rate of 3% leads to a total value of $14.2 trillion; however, projecting the same costs forward to 2009 at an annual rate of 6% leads to a total value of $7 quadrillion.

For perspective, US GDP is now about $26 trillion. A proposal to pay slavery reparations of $14 trillion is thus at least at the edge of conceivable, if spread out over time. However, a cost of $7 quadrillion for slavery reparations would require paying the equivalent of all of current US GDP for the next 260 years, which is not conceivable in practical terms.

Again, the choice of how to translate a value from the distant past into present-value terms is not primarily about the historical cost, but about the interest rate that one chooses to adjust the past value to the present. As Cramer wrote in his 2015 article: “Debt estimates over long periods of time are extremely sensitive to the choice of interest rate … Thus, settling on an interest rate would likely represent the most important topic of political negotiations in any reparations debate.”

The example of translating a future cost into a present cost which comes up most often these days relates to climate change issues. Back in 2006, the very eminent Nicholas Stern published what became known as the “Stern review” on The Economics of Climate Change. Soon after, the also very eminent William Nordhaus published a review of the book. Stern and Nordhaus are both prominent economists arguing that the risks of climate change are large and real and need policy action. However, they differ in the discount rate they would apply to future harms: Stern argued for a discount rate of 1.4%, while Nordhaus argued for a rate of around 4.5%.

The percentage difference may seem small, but remember that these are annual percentage rates, so when projected out over long periods of time, they make a huge difference.

If you are calculating how much to pay in the present to avoid a cost of $1 that will be incurred 100 years from now, and you apply an annual rate of 1.4%, the answer is about 25 cents. That is, $0.25 x (1 + .014)¹⁰⁰≈ $1.

However, if you apply an annual rate of 4.5%, then the answer of how much to pay in the present to avoid a cost of $1 that will be incurred 100 years from now is about 1.2 cents. That is, $0.012 x (1 + .045)¹⁰⁰≈ $1.

The Trump administration proposed applying a discount rate of 7%. With that discount rate, then the answer of how much to pay in the present to avoid a cost of $1 that will be incurred 100 years from now is about one-tenth of a cent. That is, $0.001 x (1 + .07)¹⁰⁰≈ $1.

Notice that even if there is no difference at all in the estimates of the future costs of climate change a century from now, the choice of discount rates leads to dramatic differences in how much we should be willing to spend in the present to prevent those costs. The 1.4% rate implies spending 20 times as much as the 4.5% rate. The 7% rate suggest spending close to nothing.

The Environmental Protection Agency has recently been updating its estimates of the “social cost of carbon”–that is, the cost of emitting a ton of carbon into the atmosphere when all future environmental costs are taken into account. As I wrote in an earlier post: “The current EPA estimate of the social cost of carbon is $190 per metric ton, using a 2% discount rate. But to give a sense of how much the discount rate matters, the cost estimate would be $120/ton with all the same underlying estimates and a discount rate of 2.5%, but $340/ton with all the same estimates and a discount rate of 1.5%.” Notice how much difference moving the discount rate by just half-a-percent makes!

To repeat the earlier lessons, the choice of how to translate a value from the distant future into present-value terms is not primarily about the estimates of future cost, but about the interest rate that one chooses to adjust the future values back to the present. Even small differences in the interest rate that is used will lead to dramatic differences in the policy prescriptions.

So what discount rate is the correct one to choose? This question is both of central importance and brutally hard. As a useful starting point, The most recent Annual Review of Financial Economics has a four-paper symposium, along with an introduction, on the issues of choosing an appropriate discount rate. The papers are:

• “Introduction to the ARFE Theme on the Social Discount Rate,” by Deborah Lucas (pp. 115–125)
• “The Social Discount Rate: Legal and Philosophical Underpinnings,” W. Kip Viscusi (pp. 127–145)
• “Fixing Our Public Discounting Systems,” by Frédéric Cherbonnier and Christian Gollier (pp. 147–164)
• “Missing Participants, Missing Markets, and the Social Discount Rate: Borrowing Constraints, Intergenerational Transfers, Altruism, and the Desire for Legacy,” by Andrew Caplin and John Leahy (pp. 165–184)
• “Reflections on What Financial Economics Can and Cannot Teach Us About the Social Discount Rate,” by Deborah Lucas (pp. 185–195)

I can’t hope to review the papers here. Instead, I’ll just offer a list of themes and questions that seek to highlight some of the issues involved.

1) The choice of an appropriate social discount rate is a bear-trap of complexities. It will depend on interest rates, technological change, judgements about risk, choices about intergenerational fairness, and other factors. The choice might reasonably differ across specific issues.

2) Those who are focused on costs imposed in the past often prefer to apply a high discount rate–so that when projecting costs from the past up to the present, these past costs will look larger. Conversely, those who are concerned about taking steps in the present to avoid costs that may arise in the future tend to prefer a low discount rate–so that the costs from the future will look larger in the present, as well. Taking these together, a common implication that the present generation should bear both high costs for long-ago past injustices and also high costs for long-distant future benefits.

3) Thinking about questions of fairness in the present–what do those who have more money and wealth owe to those with less money and wealth–is difficult. Questions of fairness and equity become even harder when they reach across multiple generations. Almost none of the people who would be affected by climate change in 100 years are even born yet. Those who suffered deep and grave injustices a century or more ago are dead and gone.

4) A common belief is that social costs should be imposed more heavily, where possible, on the better-off. Thus, an issue with fairness choices across multiple generations is that, for the last couple of centuries, incomes have been rising in high-income countries. Given the long-term real growth rate of 2% for the US economy, the average person from the the present has about 7 times as much income as someone from 100 years ago–and the present also has a much longer life expectancy and access to a much wider array of technologies. It’s likely that people who are living 100 years from now will have much higher incomes, life expectancies, and technologies as well. Thus, imposing costs on the present generation for the benefit of those living 100 years from now will, in all likelihood, be a transfer from the relatively poor to the relatively rich.

5) Basing the discount rate on the interest rates might work fairly well when costs are, say, a decade or two in the past or a decade or two in the future–but then not work so well when the past or future events are many decades or centuries in the future. Lucas writes in her paper in the symposium:

For policies with long-term impacts, intergenerational concerns become paramount, projections of cash flows and discount rates become highly uncertain, and present value calculations are an intrinsically unreliable measure of value. No approach to discount rate selection can overcome those problems; alternative decision criteria need to be established. However, most government investments involve much shorter horizons, and the adoption of standard approaches to risk adjustment could significantly improve social welfare.

7) In thinking ab0ut how to project future costs back to what we should be willing to spend in the present, it seems important to remember that climate change is not the only issue here. Public resources are limited, and a standard guideline is to spend where the social rate of return, broadly understood, is highest. For example, how much should society be willing to spend now on young children to improve their changes of being healthy and productive adults some decades in the future? How much should we be willing to spend now to reduce the risks of future pandemics (naturally occurring or human-created, or nuclear wars, that might arise in future decades? How much should society be willing to spend now to reduce the solar storms, a supervolcano, or risk of the Earth being hit by a wayward comet some decades in the future?

8) I have occasionally seen interest groups who support aggressive spending against climate change argue that the idea of a discount rate is more-or-less just an excuse for inaction, and the appropriate discount rate for the future is zero percent. Frankly, I’m not sure these folks have thought through the implications of their position. A discount rate of zero implies that all future costs should be weighted as if they are occurring in the present. But is it really worth spending an equal amount to save the life of an existing person as it is to spend that amount to save the projected life of someone living 50 or 100 or 1000 years from now? We can have reasonable arguments about what discount rate makes sense in what context, but a zero discount rate that wipes out all distinctions between present, near future, and distant future is not sensible.

7) For a sense of the difficulties that arise if you wipe out the distinctions between present and future costs, consider the court case back in 2004 about storage of nuclear waste. Government regulators argued that they had projected 10,000 years ahead, and the risks of storing nuclear waste over that time interval were acceptable. The court ruled that looking “only” 10,000 years ahead wasn’t enough. Even a tiny positive discount rate will compound, over 10,000 years or more, to a point where the present value of taking action will be essentially zero. But the court was, in effect, arguing for a discount rate of zero percent. (Viscusi discusses this issue in the symposium.)

8) The expected path of future technology should affect one’s willingness to spend in the present as well. Imagine that we knew there was a high chance that new technology would provide batteries for electric cars in the next 5-10 year that used many fewer scarce resources, as well as being longer-lasting and easier to recharge. In that scenario, pushing everyone to buy today’s technology would be wasteful. Indeed, as Viscusi points out, if one assumes a discount rate of zero for the future, it can, perhaps counterintuitively, make sense to defer immediate spending on future problems, and instead use the better technology that will emerge.

9) For the record, none of this discussion is intended to express an opinion on appropriate current policy for climate change. However, I will say that, in my own mind, some of the strongest arguments for taking action to reduce fossil fuel emissions have to do with immediate and near-term costs of air pollution on human health. As the environmental economists say, there could be a “double dividend” of reducing the use fossil fuels, in both immediate and long-term ains.

10) In thinking about how to project past values to the present, it also seems important remember that the current topic under discussion is not the only event. If one thinks about past American injustices, for example, certainly slavery would loom large. But treatment of, say, Native Americans would also loom large, as would discriminatory events and practices against other ethnic groups and against women. One might then need to add other economic, social, and legal, and even foreign policy injustices. What the present owes to the past is a wide-ranging topic. It’s fine to argue that one might apply different interest rates to different examples. But

10) My own bias, for what it’s worth, is that achieving some understanding the past is enormously important. But I’m mostly not a fan of taking long-ago past events and turning them into present day conflicts. There are a lot of places around the world where some groups of people continue to bear deep and even violent grudges against other groups of people for injustices that occurred between these groups literally centuries ago. My preference is for current generations to be given a clean slate. In effect, I would argue for a very low or perhaps even a negative interest rate to be applied to the past.

11) For the record, my unwillingness to project costs of the distant past into the present doesn’t mean that one should ignore problems of the present! For example, some prominent proposals that the US should pay black Americans some form of reparations for slavery have shifted away from basing their argument on costs from the past, projected up to the present. Instead, their argument for reparations is based on the current black-white wealth gap, or the current socioeconomic gap between families of black and white children. This approach has the advantage of avoiding the social discount rate altogether. It also shifts the discussion, in a subtle way, from being directly about “reparations for slavery” to focus instead on current inequalities.  

12) There is a way for current generations to spend money, and then have future generations repay the loans. As a thought experiment, imagine a form of deficit spending in which no repayments are made for, say, 20 or 50 or 100 years. (The realistic version of this borrowing is that we just keep rolling over debts and interest as they grow, decade after decade.) Will the generations that eventually face repaying these debts be glad that we borrowed this money, or not? If the borrowed funds are spent on infrastructure, human capital, and long-term environmental preservation, and future generations are better-off than we are today, then such borrowing will look like a wise choice. But from the standpoint of 20 or 50 or 100 years into future, our announced intentions with regard to the future will not matter much. They will be able to judge our decisions by the actual consequences.

The Program for International Student Assessment, commonly known as PISA, tests 15 year-olds (that is, mostly 10th-graders in the US) on reading, mathematics, and science literacy. It is done about every three years, and coordinated across 81 countries by the OECD. It’s high-level data for cross-country comparisons of what students know. The 2022 results are out. Here’s are some headline measures of US results in international context.

The blue dots and lines show actual US results and scores. The black line shows a trend-line for US results based on those scores. The orange line is the average for 23 OECD countries (that is, typically other high-income countries around the world).

As you can see, US scores are a mixed bag: pretty much flat in reading, trending down in math, and trending up in science. Compared to the other OECD nations, the US scores are higher in reading, lower in math, and used to be lower but now are higher in science. The international comparisons also suggest a substantial drop-off in scores for other countries across the board, which seems to have started before the pandemic, and which allows the US scores in reading and science to look better. I do not know of a good theory as to why schools across the rest of the high-income countries have declined in performance.

The two volumes of reports and underlying data, which look in more detail at issues like the distribution of top-level and bottom-level performers across countries, along with socioeconomic and gender differences, are available at https://www.oecd.org/publication/pisa-2022-results/index#pisa2022results. Here’s one of many interesting figures. The horizontal axis measures per capita GDP (converted at purchasing power parity exchange rates, a calculation which which emphasizes the prices of internationally traded goods), while the vertical axis measures mathematics scores.

In this type of figure, what’s interesting is to look at countries that are substantially above or below the curve–thus, performing substantially better or worse than one might expect given their per capita GDP. The US is in near the middle of the graph, underperforming the OECD average and lower than one would expect based on its per capita GDP. Those who are significantly outperforming what one would expect, based on per capita GDP, include a number of east Asian nations, ranging from Vietnam (on the left) to Japan and Korea (closer to the center) and Chinese Taipei, Macao, Hong Kong, and Singapore. Other out-performers in the middle of the figure include a cluster of eastern and central European countries, like Estonia, Latvia, Poland, Slovenia, and Czech Republic.

There’s literacy and numeracy, and somewhere in the intersection of the two lies “financial literacy.” If you mess up your monthly budget in a mild way, and end up eating beans and rice for week, perhaps no great harm is done. But the consequences can be more extreme: if you don’t have the money to get your car fixed, so you lose your job; or you can’t pay the electric bill, and your power gets turned off; or you run up debt on your credit cards, and the payments start casting a shadow over your days. In practical terms, “financial literacy” means avoiding the financial choices that you will later regret.

In the Fall 2023 issue of the Journal of Economic Perspectives (where I work as Managing Editor), Annamaria Lusardi, and Olivia S. Mitchell discuss “The Importance of Financial Literacy: Opening a New Field.” Lusardi and Jialu L. Streeter offer some additional evidence in “Financial literacy and financial well-being: Evidence from the US” in the Journal of Financial Literacy and Well-Being (published online October 5, 2023).

Surveys to measure financial literacy come in a variety of sizes, but the “Big Three” questions offer a well-tested if very basic approach. Here’s your very own financial literacy quiz:

Q1. “Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”

a) More than $102 (correct)
b) Exactly $102
c) Less than $102
d) Do not know
e) Refuse to answer

Q2. “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy?”

a) More than today
b) Exactly the same as today
c) Less than today (correct)
d) Do not know
e) Refuse to answer

Q3: “Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’”

a) True
b) False (correct)
c) Do not know
d) Refuse to answer

The first question checks understanding of interest rates; the second question is about inflation; and the their question is about diversification. Their recent survey results for the US population are 69% correct and 15% “don’t know” for the first question; 53% correct and 23% “don’t know” for the second question; and 41% correct and 45% “don’t know” for the third question. Overall, 28% of the respondents got all three questions correct, while 52% answered at least one of the three questions with “don’t know.”

Lusardi and Streeter go through these results in more detail, with breakdowns by groups and questions. But perhaps the key points are that the results of the “Big Three” questions are a fair representation of the state of financial literacy revealed by longer and more detailed surveys, and that when it comes to financial choices like credit card debt, student loans, borrowing money for a house or car, having a nest egg for flexibility in dealing with unexpected expenses, making contributions to a retirement account, and many others, these kinds of results do not fill one with confidence.

My own belief is that pretty much everyone can grasp these kinds of concepts, so that they could answer the questions correctly even if some may have a harder time than others in putting the knowledge into practice. In the last decade or so, financial literacy courses have become more widespread in high schools: 30 states now require a financial literacy course for high school graduation. Such courses are also becoming more common at the college level, sometimes just for general knowledge, sometimes as part of a program for those looking at jobs where becoming a “certified financial planner” is useful. The workplace is another obvious nexus for offering such courses: any workplace that can offer access to physical fitness programs should be able to find ways to offer a basic financial literacy course as well.

Inflation rates have come down since their peak in mid-2022. Does the Federal Reserve need to continue its inflation-fighting ways, keeping interest rates high? Anil Ari, Carlos Mulas-Granados, Victor Mylonas, Lev Ratnovski, and Wei
Zhao of the IMF look to historical and international experience in “One Hundred Inflation Shocks: Seven Stylized Facts” (September 2023, WP/23/190).

As background, here’s a standard measure of inflation from the US Bureau of Labor Statistics, showing monthly data on the rise in the Consumer Price Index over the previous 12 months. You can see the peak at above 8% in mid-2002, and the more recent decline to the range of 3-7%.

The IMF authors are careful to note that they are just looking at patterns from past episodes: that is, they are not claiming that history will necessarily repeat itself. They describe the underlying data this way:

This paper identifies over 100 inflation shock episodes in advanced and emerging economies between 1970 and today. Over half of these episodes are linked to the 1973 and 1979 oil crises—large commodities-related, terms-of-trade and supply-side shocks—making them particularly insightful for today’s policy debates. The remaining inflation shocks in our sample have various origins, including demand surges and/or sizeable exchange rate depreciations.

Here are their seven lessons.

Fact 1: Inflation is persistent, especially after a terms-of-trade shock
We start the analysis by documenting how long it took to resolve inflation shocks historically, i.e., to bring inflation back to within 1 percentage point of its pre-shock rate. The results … caution against anticipating speedy disinflation. Only in under 60 percent of episodes in the full sample (64 out of 111) was inflation resolved within 5 years after a shock. Even then, disinflation took on average over 3 years.

By this metric, the lower rate of inflation in the last year or so has been relatively rapid. The current inflation rate of 3-4% is about 1-2 percentage point above the pre-shock inflation rates that had been running in the range of 2-3%.

Fact 2. Most unresolved inflation episodes involved “premature celebrations”

In about 90 percent of unresolved episodes (42 out of 47 in the full sample, and 28 out of 32 during the 1973–79 oil crises), inflation declined materially within the first three years after the initial shock, but then either plateaued at an elevated level or re-accelerated. One possible explanation for “premature celebrations” relates to base effects. As the factors behind the initial inflation shock recede (e.g., energy prices revert, alleviating the terms-of-trade shock), headline inflation may decline
temporarily despite sticky underlying inflation. Another possible explanation relates to inconsistent policy settings, such as premature policy easing in response to declining inflation …

Fact 3: Countries that resolved inflation had tighter monetary policy

The IMF authors emphasize here: “The key finding is that the successful resolution of inflation shocks was associated with more substantial monetary policy tightening.”

Fact 4. Countries that resolved inflation implemented restrictive policies more consistently over time

In addition to tighter macroeconomic policies per se, the policy stance in countries that resolved inflation was maintained more consistently over time …

Fact 5. Countries that resolved inflation contained nominal exchange rate
depreciation

Our data demonstrate that countries which successfully resolved inflation better maintained nominal exchange rate (ER) stability …

Exchange rate issues are less important for the enormous US economy, with its relatively low ratio ratio of trade-to-GDP compared to many other countries.

Fact 6. Countries that resolved inflation had lower nominal wage growth

We also analyze labor market outcomes, specifically wages. Due to lack of historical data on wages, and for this result only, we use the full sample of episodes during 1973–2014. We document that, in countries which resolved inflation, nominal wage growth moderated after the inflation shock.

This finding will be unhappy news for wage-earners. After a burst of inflation, w would all like it if our wages would also rise, so that we can catch up with the higher price levels. But lower overall wage growth is what tends to keep inflation tamped down.

Fact 7. Countries that resolved inflation experienced lower growth in the short term but not over the 5-year horizon

The pandemic recession is its own distinctive economic event, so I wouldn’t want to overinterpret these historical patterns in terms of policy advice. But some warnings here are worth noting. Have a consistent monetary policy. Beware of “premature celebrations” that inflation is over. Recognize that even if fighting inflation involved short-term losses in economic output, such losses are typically not lasting or permanent.

In my experience, discussions of the UK economy almost immediately jump to the “Brexit” question, or whether it was wise for the United Kingdom to leave the European Union. But the Brexit vote was in 2016, and problems with the UK economy are apparent in the data well before the bill passed. Ending Stagnation
A New Economic Strategy for Britain (December 2023, Resolution Foundation & Centre for Economic Performance)is one of those reports that draws on multiple study groups and background papers, in an attempt to build some consensus on an underlying narrative.

We [that is, the United Kingdom] were catching up with more-productive countries like France, Germany and the US during the 1990s and early 2000s. But that came to an end in the mid-2000s and our relative performance has been declining ever since, reflecting a productivity slowdown far surpassing those seen in similar economies. Labour productivity grew by just 0.4 per cent a year in the UK in the 12 years following the financial crisis, half the rate of the 25 richest OECD countries (0.9 per cent). The UK’s productivity gap with France, Germany and the US has doubled since 2008 to 18 per cent, costing us £3,400 in lost output per person. …

Weak productivity growth has fed directly into flatlining wages and sluggish income growth: real wages grew by an average of 33 per cent a decade from 1970 to 2007, but this fell to below zero in the 2010s. In mid-2023 wages were back where they were during the financial crisis. 15 years of lost wage growth has cost the average worker £10,700 a year. …

While Britons have been living with stagnant wages for the last 15 years, high inequality has been a problem for more than twice as long. Having surged during the 1980s, and remained consistently high ever since, income inequality in the UK is higher than any other large European country. … This toxic combination is a disaster for low-to-middle income Britain and younger generations. We might like to think of ourselves as a country on a par with the likes of France and Germany, but we need to recognise that, except for those at the top, this is simply no longer true when it comes to living standards.

Indeed, one can make a plausible case that the UK combination of stagnant growth and high inequality fed the political pressures for the Brexit vote. Here, I won’t work through the details of the nearly 300-page report, but instead offer some of the figures that caught my eye.

UK productivity fell behind France and Germany in the 1980s, but while those countries are now close to US levels (albeit based on fewer hours worked per person), the UK economy has not been closing the gap with the US.

Average weekly earnings in the UK are below the peak they reached in 2008.

The gap in average incomes between London and the other nations/regions of the UK has been rising.

Slower growth means fewer resources for many purposes. For example, waiting lists for the National Health Service have more than doubled since 2014–a change that started well before the pandemic.

Rates of fixed investment in the UK are at the bottom end of the range for advanced economies.

Other advanced countries are gradually expanding the area of their “built-up land,” but not the UK.

The grim news in the report goes on and on: shortcomings of public infrastucture, energy costs, pensions, housing prices, support for the working poor, and so on and on. The report discusses in some detail how Brexit isn’t helping the UK economy, either, but the country’s economic issues clearly run a lot deeper. One source of comfort for the UK: Sure, we’re not keeping up with Germany and France, but Italy is worse-off!

In some ways, “industrial policy” is a triumph of marketing and branding. With most proposals for corporate tax breaks or subsidies, there is a healthy dose of skepticism and pushback, often using of critical terms like “corporate welfare” or “trickle-down economics.” But if corporate tax breaks and subsidies can be relabeled as “industrial policy,” then a considerable share of the skepticism and pushback seems to evaporate.

However, most “industrial policy” isn’t likely to raise the number of well-paid jobs by very much, or at all. Dani Rodrik uses this insight as a starting point for what a jobs-based industrial policy might look like in “Productivism and new industrial policies: learning from the past, preparing for the future” (one of the essays in Sparking Europe’s New Industrial Revolution: A Policy for Net Zero, Growth, and Resilience, edited by by Simone Tagliapietra and Reinhilde Veugelers, Brueghel Blueprint Series #33). Rodrik writes:

As the name suggests, productivism focuses on enhancing the productive capabilities of all segments and regions of a society. While traditional forms of social assistance, especially better access to education and healthcare, can help in this regard, connecting people with productive employment opportunities requires interventions that go beyond these. It requires improvements on the demand side of the labor market as well as the supply side. Policies must directly encourage an increase in the quantity and quality of jobs that are available for the less-educated and less-skilled members of workforce, where they choose (or can afford to) live.

In the future, most of these jobs will come not from manufacturing, but from services such as health and long-term care and retail. Even if policy succeeds in reshoring manufacturing and supply chains, the impact on employment is likely to remain limited. The experience of East Asian manufacturing superstars such as South Korea and Taiwan provides a sobering example. These two countries have managed to rapidly increase the share of manufacturing value added in GDP (at constant prices), yet they have experienced steady declines in manufacturing employment ratios.

Whatever might be in support of an industrial policy of encouraging domestic semiconductor manufacturing, it’s a very capital-intensive industry that doesn’t employs a lot of people, and especially not those with lower levels of skill. Similarly, while I’m a big supporter of support for expanded R&D, the direct effect of such support is to pay for highly-skilled researchers. In addition, as Rodrik writes:

Policies that target climate change are not a substitute for good-job policies, and vice versa. Shoring up the middle class and disseminating the benefits of technology broadly through society requires an explicit good-jobs strategy. Such a strategy would not be so fixated on competition with China; it would target services instead of manufacturing, and it would focus on incentivising worker-friendly technologies.

What might a jobs-oriented industrial mean in practice? Rodrik offers two main thoughts.

First, he suggests setting up “regional business bureaus,” which would be less about handing out subsidies to companies who relocate, and more about helping firms to solve problems. Some standard examples would be if a group of employers, defined either by industry or by geographic location, would come to the business bureau with a problem: perhaps a lack of local workers with specific skills they need, or a local zoning rule that is blocking expansion, or a problem with a local intersection that is always jammed with traffic, or lack of high-speed internet, and others. The businesses would make a commitment that if this problem was addressed, they would expand employment to average and below-average wage groups. Although the business bureaus would also be able to help arrange financing for certain business investments, the priority would be on job-creation. The business bureau would then try to work with government, with local high schools and community colleges, and with banks or financing options to address the specific problem. Ideally, the process would be step-by-step, with requests made and jobs created, thus building credibility for future requests.

Second, in thinking about how government supports new technologies by encouraging research and development, and how firms choose to invest, it should be an open topic of conversation for whether these new technologies are likely to substitute or existing workers, or to complement and increase productivity of existing workers. For example, if a firm is deciding between retrofitting an existing factory with new equipment, or moving the factory to another country and investing in really good broad-band internet, the choice of investment will matter to existing workers.

A standard dynamic of the information technology revolution as it evolved through the 1990s and early 2000s was that it tended to, in the buzzword of the time, “hollow out the middle class.” The idea was that in old-style factory, a firm needed multiple layers of middle-management to monitor workers and to collect information for top management. However, computerization reduced this need to middle-management. Instead, it increased the productivity of a smaller number top managers who could now monitor and get information on their screens.

However, drawing on the work of Daron Acemoglu and Pascual Restrepo, Rodrik argues that certain new technologies may instead increase the productivity of existing labor. For example:

AI could be used in education to create more specialised tasks for teachers, personalise instruction for students, and increase effectiveness of schooling in the process. … [I]individual students have different learning styles, which requires teaching to be adapted to their specific needs. By generating real-time information on learning and making recommendations, AI tools can enable customised, smaller-group teaching. They can also allow instruction to respond more rapidly to evolving technologies and labour-market needs. Such tools are unlikely to replace teachers; they might in fact increase the demand for teachers (as well as redefine their roles) by enhancing the return to individual or small group instruction. …

[I]n healthcare … AI tools can significantly enhance the diagnostic and treatment capabilities of nurses, physicians’ aides and other medical technicians. They can, in effect, allow “less skilled” practitioners to perform tasks that only physicians with many more years of professional education have traditionally undertaken. The same logic also applies to other areas to boost job opportunities for those without the most advanced skills. For example, AI systems already enable the drawing up of simple contracts (such as wills) and the provision of many other services without the actual involvement of lawyers. To date, such systems have replaced primarily paralegals rather than lawyers themselves, but more advanced systems could enable paralegals to perform more advanced tasks, such as document review, due diligence and document drafting (Remus and Levy, 2016). Machine learning and neural networks can enable mid-level finance professionals to do financial risk assessment, loan underwriting and fraud detection tasks that would otherwise be undertaken by more senior professionals …

[A]ugmented and virtual reality technologies in manufacturing … [can enable] humans and robots to work together in performing precision tasks (rather than the latter replacing the former). Such technologies are based on smaller, more nimble robots that also enable greater customisation of production in response to specific customer needs. … More broadly, shop floor apps augment relatively unskilled labour by allowing workers to carry out operations that more-skilled employees typically perform.

I guess the new buzzword here is “cobot,” a neologism based on “collaborative robot.” For many of us, our mental vision of a factory is a giant assembly line, producing mostly identical products. If the workers on such an assembly line are doing the same repetitive task all day, then yes, many of those jobs can be replaced by automation. But perhaps the mental vision of a future assembly line should instead include a substantial number of humans walking around, with lightweight cobots rolling after them as needed, with the human jobs being complemented by the cobots.

In short, it’s wise to be skeptical about promises that “industrial policy” will more-or-less automatically expand the number of well-paid jobs at the middle and bottom of the income distribution. If you want an expansion of well-paid jobs, that needs to be its own actual focus of policy.

Stanley Fish argues that “academic freedom” is “an unfortunate phrase because those who invoke it usually emphasize the word “freedom” and “forget about its controlling and limiting adjective. `Academic’ tells you what the scope of the claimed freedom is: It is the freedom — or, as I prefer, the ‘latitude’ — necessary to the performance of the academic task for which you are trained and paid.”

In an essay in the Chronicle of Higher Education (“Do Nothing Until You Hear from Me,” November 30, 2023), Fish spells out some implications of this view:

The bottom line, then, is that academic freedom is not a general license to say whatever you like on any topic under the sun. It is a limited freedom to follow where the evidence pertaining to an academic question leads. It certainly does not include the freedom to advocate for your political views or turn (or try to turn) your students into social-justice warriors or anti-social-justice warriors. You and they are jointly engaged in an intellectual effort to understand something, and that engagement is, or should be, intensely focused and has no legitimate room for activities that belong to other enterprises.

What is true of faculty is true of the administration. Those who insist, or should insist, that faculty stick to their academic knitting should stick to it too, pronouncing only on matters that directly affect their institutional — not general or human — responsibilities. …

This severely narrow view of what colleges are about is not in fashion now, but it has a long and rich history of adherents, including Aristotle (Ethics, book 10), Kant (What Is Enlightenment?”), Cardinal Newman, Max Weber, Michael Oakeshott, and Harry Kalven, whose report, issued on behalf of the University of Chicago in 1967, put it this way: “Since the university is a community only for limited and distinctive purposes, it … cannot take collective action on the issues of the day without endangering the conditions for its existence and its effectiveness.” And in the current scene there is this recent statement by Richard Saller, president of Stanford University, and Jenny Martinez, its provost: “We believe it is important that the university, as an institution, generally refrain from taking institutional positions on complex political or global matters that extend beyond our immediate purview, which is the operation of the university itself.” To the point, but a bit wordy. I much prefer the succinct response by the then provost of the University of Wisconsin at Madison to demands by students that the university speak out against the impending invasion of Iraq. He said, “The University of Wisconsin does not have a foreign policy.” That is beyond perfect.

Fish doesn’t mention it in this short essay, but this interpretation of “academic freedom” as specific and focused is also the one from the “General Report of the Committee on Academic Freedom and Academic Tenure,” as presented at the annual meetings of the American Association of University Professors in 1915, and as far as I know still the official guidance from the AAUP. A few years ago, I offered some discussion of that statement in “The Free Expression of Professors and Its Prudential Limits.”

If you want to drink deeply of unabashedly pro-globalization essays, the Cato Institute has a “Defending Globalization” project underway. The well-written essays are mostly short or mid-length, and clearly aimed at the general public–including undergraduate students. I can’t hope to summarize the essays here, and indeed, more essays are on their way (and you can sign up at the website to be on the distribution list).

But for a flavor of one essay, there’s are a few of the comments that caught my eye from the characteristically trenchant essay by Deirdre N. McCloskey titled “Globalization Creates a Global Neighborhood, Benefiting All,” and subtitled “Globalization puts everyone whose government permits it into a global neighborhood in which the price of a Samsung TV at a Best Buy in Washington is pretty much the same as in Beijing or New Delhi” (September 12, 2023).

McCloskey on the false allure of economic self-sufficiency:

A hermit could refuse to take advantage of globalization and achieve self‐​sufficiency in his own little hut. It sounds lovely and brave. Grow your own wheat. Make your own accordion. But it’s been calculated that nowadays a hamburger made wholly self‐​sufficiently would cost about $83. Perhaps it would be better to work a little in a market and then take the earnings to spend at the neighborhood McDonald’s. When Henry David Thoreau went to be self‐​sufficient for two years from 1845 to 1847 on the banks of Walden Pond in Concord, Massachusetts, he still bought nails in town for his hut, and hoes for his crops, and books to read. Every Sunday, he went into town for dinner. Towns and trade are mighty tempting, with their low prices in production achieved by specialization and their low prices in marketing achieved by arbitrage.

McCloskey on “if trade and globalization is so bad, then why has the rise in globalization since the 1960s and 1970s coincided with ongoing economic growth?”

If the neo‐​mercantilism of the 1930s, or for that matter the long‐​running opposition on the left of politics to “neo‐​liberalism,” as the left calls it, and now also on the right in the “new economic nationalism,” was a good idea, then the Kennedy Round and the GATT/WTO and the second globalization would have been a global disaster. It would have impoverished the poor of the world. One could buy bumper stickers declaring, “Milton Friedman, Father of Global Poverty.” But in 1960, four billion out of the five billion people in the world lived at an appalling $2 a day in present‐​day prices, cooking over cow‐​dung fires, hauling water two miles for drinking, and dying young and illiterate. It was how almost all humans had lived from the beginning. By now, one billion of the present eight billion people still live in such misery. But the other seven billion have leapt forward, many to the “superabundance” that Marian Tupy and Gale Pooley have recently chronicled. It happened in the face of gloomy predictions that rising population would starve us all, that our best days were behind us.

McCloskey on the gains from creative destruction:

Furthermore, the force of arbitrage works to erode pools of great wealth. The Nobel economist William Nordhaus has calculated that the gain from all the innovations in the United States since World War II went overwhelmingly to us, the customers, American and foreign, when competitors to General Motors, General Electric, and General Foods rushed in. Once upon a time we faced the terrible “monopolies” of Kodak, Nokia, IBM, Toys R Us, Tower Records, and Blockbuster. They are all now one with Nineveh and Tyre. Eighty‐​five percent of the Fortune 500 firms in 1955 are gone. That’s good, not bad. New ideas replace the old ones, and then new investment replaces the old, and new jobs replace the old, which is to our benefit.

McCloskey on globalization as a form of liberty:

The ethical case for globalization is not simply that it enriches us all, though it does. It’s also that permitting arbitrage is an implication of allowing you to buy and sell with anyone you wish. It’s elementary liberty. And liberty is liberty is liberty. The liberty to trade is among the liberty to speak and read and vote and live and love. The left and the right, and often enough the center, disagree. They want to stop you from buying marijuana or buying a Toyota or buying a book with gay characters, even in the land of the free. The economic historian J. R. T. Hughes pointed out long ago that Americans have two contradictory positions, “Don’t tread on me” and “Don’t do that.” That “that” consists of things like dressing as you want or loving whom you want or buying where you want. Globalization is part of liberty.