The Education of Henry Adams (1905) is an odd book. It’s an autobiography in which the Henry Adams (1838-1918) refers to himself as “Adams” and discusses what “Adams” learned and observed–as if he was writing not about himself, but about a different person.
Adams was a direct descendant of two US presidents–great-grandson of John Adams and the grandson of John Quincy Adams–and thus moved in high levels of society and politics all his life. In many ways, the book is more about looking back at the 19th century from the vantage point of the early 20th century. For example, as an “autobiography” the book has some notable gaps. At one point the author–that is, Adams–skips over 20 years of Adams’s life, a period when he published a nine‐volume History of the Jefferson and Madison Administrations, along with biographies of Albert Gallatin and John Randolph and two novels. As we approach another Election Day here in in the United States, here are some characteristically pithy comments from Adams on how the drive for political power can corrupt judgement.
Those who seek education in the paths of duty are always deceived by the illusion that power in the hands of friends is an advantage to them. As far as Adams could teach experience, he was bound to warn them that he had found it an invariable disaster. Power is poison. Its effect on Presidents had been always tragic, chiefly as an almost insane excitement at first, and a worse reaction afterwards; but also because no mind is so well balanced as to bear the strain of seizing unlimited force without habit or knowledge of it; and finding it disputed with him by hungry packs of wolves and hounds whose lives depend on snatching the carrion. [Theodore] Roosevelt enjoyed a singularly direct nature and honest intent, but he lived naturally in restless agitation that would have worn out most tempers in a month, and his first year of Presidency showed chronic excitement that made a friend tremble. The effect of unlimited power on limited mind is worth noting in Presidents because it must represent the same process in society, and the power of self-control must have limit somewhere in face of the control of the infinite. …
The effect of power and publicity on all men is the aggravation of self, a sort of tumor that ends by killing the victim’s sympathies; a diseased appetite, like a passion for drink or perverted tastes; one can scarcely use expressions too strong to describe the violence of egotism it stimulates.
Positions of power, authority, and prominence can generate extreme egotism. It’s true in the private sector, when a successful business executive starts believing that his or her opinions on all subjects–politics, healthy habits, the meaning of life–must also be true. It’s true for some prominent athletes, movie stars, and musicians. It’s true for some prominent academics. It’s also true for successful politicians, who have a tendency to believe that being elected validates their past and future judgements and their lofty human value in a profound way, rather than just meaning that in choice between flawed alternatives, they were favored by 50% plus one.
I have been the Managing Editor of the Journal of Economic Perspectives since the first issue in Summer 1987. The JEP is published by the American Economic Association, which decided about a decade ago–to my delight–that the journal would be freely available on-line, from the current issue all the way back to the first issue. You can download individual articles or entire issues, and it is available in various e-reader formats, too. Here, I’ll start with the Table of Contents for the just-released Fall 2022 issue, which in the Taylor household is known as issue #142. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the few weeks, as well.
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Symposium on Labor Market Institutions
“Is There Any Future for a US Labor Movement?” by Suresh Naidu
A recent flurry of labor movement activity has been driven by younger workers, tight labor markets, and a sympathetic federal government. Nonetheless, US union density remains low, even as unions remain popular. This is because employer opposition and US labor law together imply that workers need to overcome substantial collective action problems at work in order to win union recognition and collective bargaining agreements. These barriers make dense social networks and high levels of social capital at work a prerequisite for unionization. Labor organizing can build this social capital, but faces an uphill battle without policy changes that extend collective bargaining across employers and up the value-chain and make unionization easier. Partnering with labor unions, researchers can study theoretical problems of collective action while also getting a window into what strategies of a renewed labor movement may work.
“Facts and Fantasies about Wage Setting and Collective Bargaining,” by Manudeep Bhuller, Karl Ove Moene, Magne Mogstad and Ola L. Vestad
In this article, we document and discuss salient features of collective bargaining systems in the OECD countries, with the goal of debunking some misconceptions and myths and revitalizing the general interest in wage setting and collective bargaining. We hope that such an interest may help close the gap between how economists tend to model wage setting and how wages are actually set. Canonical models of competitive labor markets, monopsony, and search and matching all assume a decentralized wage setting where individual firms and workers determine wages. In most advanced economies, however, it is common that firms or employer associations bargain with unions over wages, producing collective bargaining systems. We show that the characteristics of these systems vary in important ways across advanced economies, with regards to both the scope and the structure of collective bargaining.
“The German Model of Industrial Relations: Balancing Flexibility and Collective Action,” by Simon Jäger, Shakked Noy and Benjamin Schoefer
We give an overview of the “German model” of industrial relations. We organize our review by focusing on the two pillars of the model: sectoral collective bargaining and firm-level codetermination. Relative to the United States, Germany outsources collective bargaining to the sectoral level, resulting in higher coverage and the avoidance of firm-level distributional conflict. Relative to other European countries, Germany makes it easy for employers to avoid coverage or use flexibility provisions to deviate downwards from collective agreements. The greater flexibility of the German system may reduce unemployment, but may also erode bargaining coverage and increase inequality. Meanwhile, firm-level codetermination through worker board representation and works councils creates cooperative dialogue between employers and workers. Board representation has few direct impacts owing to worker representatives’ minority vote share, but works councils, which hold a range of substantive powers, may be more impactful. Overall, the German model highlights tensions between efficiency-enhancing flexibility and equity-enhancing collective action.
“Danish Flexicurity: Rights and Duties,” by Claus Thustrup Kreiner and Michael Svarer
Denmark is one of the richest countries in the world and achieves this in combination with low inequality, low unemployment, and high-income security. This performance is often attributed to the Danish labor market model characterized by what has become known as flexicurity. This essay describes and evaluates Danish flexicurity. The Danish experience shows that flexicurity in itself, that is, flexible hiring and firing rules for firms combined with high income security for workers, is insufficient for successful outcomes. The flexicurity policy also needs to include comprehensive active labor market programs (ALMPs) with compulsory participation for recipients of unemployment compensation. Denmark spends more on active labor market programs than any other OECD country. We review theory showing how ALMPs can mitigate adverse selection and moral hazard problems associated with high income security and review empirical evidence on the effectiveness of ALMPs from the ongoing Danish policy evaluation, which includes a systematic use of randomized experiments. We also discuss the aptness of flexicurity to meet challenges from globalization, automation, and immigration and the trade-offs that the United States (or other countries) would face in adopting a flexicurity policy.
“Debt Revenue and the Sustainability of Public Debt,” by Ricardo Reis
While public debt has risen in the last two decades, the return that it offers to investors has fallen, especially relative to the return on private investment. This creates a revenue for the government as the supplier of the special services offered by public bonds, which include storage of value, safety, liquidity, and reprieve from repression. The present value of this debt revenue is large relative to the stock of public debt, keeping it sustainable even as the present value of primary balances is zero or negative. It gives rise to different policy tradeoffs than the conventional analysis of primary balances and makes different recommendation on the effects of austerity, the optimal amount of debt, or the spillovers between monetary and fiscal policy.
The fiscal theory states that inflation adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines the path of expected inflation, while news about the present value of surpluses drives unexpected inflation. I use fiscal theory to interpret historical episodes, including the rise and fall of inflation in the 1970s and 1980s, the long quiet zero bound of the 2010s, and the reemergence of inflation in 2021, as well as to analyze the gold standard, currency pegs, the ends of hyperinflations, currency crashes, and the success of inflation targets. Going forward, fiscal theory warns that inflation will have to be tamed by coordinated monetary and fiscal policy.
“Emerging Market Sovereign Debt in the Aftermath of the Pandemic,” by Kenneth Rogoff
For emerging markets, fiscal space is a very real constraint that can surface under a variety of circumstances, including rising world interest rates, falling commodity prices, or a global recession. Some emerging markets, and the majority of low-income developing economies, are already in debt distress or default. Near-term, making sure that troubled debtor countries are aware of the full menu of options, including heterodox strategies such as default, is important. Longer-term, a rethink of the Bretton Woods financial institutions to incorporate a greater emphasis on outright grants instead of loans, makes more sense than ever.
“Popular Personal Financial Advice versus the Professors,” by James J. Choi
I survey the advice given by the fifty most popular personal finance books and compare it to the prescriptions of normative academic economic models. Popular advice frequently departs from normative principles derived from economic theory, which should motivate new hypotheses about why households make the financial choices they do, as well as what financial choices households should make. Popular advice is sometimes driven by fallacies, but it tries to take into account the limited willpower individuals have to stick to a financial plan, and its recommended actions are often easily computable by ordinary individuals. I cover advice on savings rates, the advisability of being a wealthy hand-to-mouth consumer, asset allocation, non-mortgage debt management, simultaneous holding of high-interest debt and low-interest savings, and mortgage choices.
“A Linear Panel Model with Heterogeneous Coefficients and Variation in Exposure,” by Liyang Sun and Jesse M. Shapiro
Linear panel models featuring unit and time fixed effects appear in many areas of empirical economics. An active literature studies the interpretation of the ordinary least squares estimator of the model, commonly called the two-way fixed effects (TWFE) estimator, in the presence of unmodeled coefficient heterogeneity. We illustrate some implications for the case where the research design takes advantage of variation across units (say, US states) in exposure to some treatment (say, a policy change). In this case, the TWFE can fail to estimate the average (or even a weighted average) of the units’ coefficients. Under some conditions, there exists no estimator that is guaranteed to estimate even a weighted average. Building on the literature, we note that when there is a unit totally unaffected by treatment, it is possible to estimate an average effect by replacing the TWFE with an average of difference-in-differences estimators.
“Sadie T. M. Alexander: Black Women and a `Taste of Freedom in the Economic World,'” by Nina Banks
The employment history of African American women is notable because of their higher labor force participation rates compared to other women in the US. This essay discusses Sadie T. M. Alexander’s analysis of Black women and work based on her 1930s speeches and writings. Alexander assessed Black women workers’ contribution to Black American living standards and national output. A proponent of women’s gainful employment and economic independence, Alexander’s views on the benefits of industrial employment for women and family life stood in stark contrast to White social welfare reformers who discouraged maternal employment in favor of households with male breadwinners. Alexander criticized the unequal treatment of Black and White women under protective labor law, particularly with respect to domestic servants’ exclusion from New Deal minimum wage and maximum hour protections. The legacy of discriminatory policies continues to affect the economic status of African American women today through racial disparities in social welfare provisions and worker benefits.
Aquatic plants grow in freshwater, coastal marine waters, or open oceans and are the starting point of many food webs. This survey focuses on three such plants: microalgae, seaweeds (or macroalgae), and duckweed (MSD). Although microalgae are a photosynthetic aquatic organism, seaweed and duckweed are aquatic plants. However, for simplicity, we refer to them as aquatic plants. These plants are mostly directly consumed as human food and animal feed; however, they are consumed in much smaller volumes in pharmaceuticals and cosmetics, textiles, biofertilizers/biostimulants, and biopackaging products and applications. MSD have considerable potential to become an essential player in the bioeconomy as a source for plant-based protein and other biochemicals, feedstock for bio-oils and biofuels, a variety of high-value bioproducts, and a viable source for carbon sequestration.
The comparative advantages of MSD are the much higher biomass productivity than that of terrestrial plants (Casoni et al. 2020) while not competing for land or freshwater (Palatnik & Zilberman 2017). Importantly, MSD have higher photosynthetic efficiencies than land-based biomass production and are more efficient in capturing carbon (Packer 2009, Duarte et al. 2017). Moreover, MSD can be cultivated efficiently without antibiotics, fertilizers, and pesticides (Golberg et al. 2020a), and the global MSD biomass cultivation potential can sustain the industry’s rapid growth. For example, the offshore cultivation potential of seaweeds can provide up to a quarter of predicted plant protein demand by 2054 (Lehahn et al. 2016). Roughly 0.3% of the ocean surface would be enough to produce as much biomass as is produced annually in all of global agriculture (Bjerregaard et al. 2016).
Demand for meat, fish, and dairy is soaring, particularly among the rapidly growing middle classes in parts of the developing world (GFI 2021). Producing those products in traditional agriculture uses large amounts of land, water, and pesticides and produces gigatons of greenhouse gases. Commercial fishing may not be sustainable, and overfishing pushes fish populations to become endangered or threatened. Dairy production also creates a range of negative externalities. Thus, MSD cultivation is a double dividend and may significantly address humanity’s primary challenges: food security and climate change.
In 2019 the market for MSD products and applications was worth approximately US$20 billion (FAO 2021). The growing demand for sustainable biobased products and applications can potentially significantly increase the market. Furthermore, carbon pricing might dramatically exacerbate the demand for MSD.
In the context of the global economy, these markets are tiny. An optimist would view this fact as suggesting room for dramatic growth, while pessimist would say that they are small because all this talk of potential benefits is a dramatic overestimate. The authors argue that there is a pathway followed for new agricultural products: it begins with a reliance on harvesting wild products, then shifts to cultivated products, and then shifts further to science-based insights about both cultivation and potential use. For microalgae, seaweeds (“macroalgae”), and duckweed, the shift from harvesting wild products to cultivation is barely underway, and the development of science-based insights about cultivation and use are also at a very early stage. But just to take a few examples, if microalgae can be used as a basis for biofuels, and if seaweed and duckweed could be useful for animal feed, those kinds of applications could dramatically reshape the constraints facing land-based agriculture in the next few decades.
A number of states have decided that it is important for high school students to have a class in economics, in personal finance, or both. The Council for Economic Education does a survey of state rules along these lines once every two years. Here are some results from its most recent “Survey of the States” (May 2022).
Here’s the pattern for high school coursework in economics. It’s easiest to read this graph from top to bottom. Every state, and Washington, DC, has economics in their high school standards broadly understood. However, five states don’t require the standards to be implemented. The standards can often be satisfied by incorporating some economics into a social studies class in, say, government or history. Half the states require that a separate high school economics course be offered, and 21 state require that all students take it. Nine states have standardized testing of the results.
Here’s the parallel figure for a high school course in personal finance. In this case, 47 states include some personal finance in their standards, and 40 require that school districts implement this standard. As the figure shows, 27 states require that high schools offer a personal finance course, but only nine require that students take such a course, while 14 more require that personal finance coursework be integrated into another course. Four states have standardized testing of personal finance concepts.
Given that I work as the managing editor of an academic economics journal, I suppose I should be in favor of continued growth in high school classes in economics and personal finance, but I admit to being a little dubious about both. There’s a real challenge in thinking about what economics should be required as a graduation requirement for every student, and what should be offered as an option to college-bound students. Many high school economics teachers don’t have a strong background of their own in economics, but instead focused on government or history when getting their education credential. Such teachers can be shaky on the difference between teaching the structure of economic reasoning and making economics-related assertions about how history and government work.
Similarly, a personal finance class for 17 year-olds faces some challenges, as well. In my own high school econ class, many years ago, we spent a few periods learning to fill out the one-page 1040EZ form, which came in handy when I had to file taxes on my earnings from Arby’s and a newspaper delivery route. But it didn’t go much deeper. We certainly didn’t get into practical issues like thinking about credit card use, or choices of deductibles and copays in auto or health insurance, or how to think about loans for college or a car, or saving for short-term goals or long-term retirement. As I think back on myself and my classmates as high school students, I’m not sure those subjects would have meant much to us, either.
There’s also the basic problem that high school has a limited number of courses, so adding economics and/or personal finance requirements will necessarily take a bite out of something else. One option is to find a way to combine the two classes. I suspect that it would be quite possible to put together a reasonable required single course for all high school students that combined elements of personal finance and economics. But such a course would, given time constraints, have less economics than a pure economics course and less personal finance than a pure personal finance course–and thus is likely to rattle the cages of current teachers and supporters of these classes.
So yes, I would like to see more high school students graduate with some basic knowledge of economics and personal finance. But I’m very aware that drawing up state-level requirements is relatively easy, and figuring out how it works in actual classrooms is not.
Greenpeace and its philosophy of “non-violent creative action” in the service of environmentalist goals has inspired a wide range of reactions, but pretty much no one views the organization as a sell-out or a pawn for corporate interests. Thus, it’s intriguing that the organization has recently laid waste to the practicality and benefits of plastics recycling in its recent report, Circular Claims Fall Flat Again (October 24, 2022).
Here’s what Greenpeace has to say (footnotes omitted):
Mechanical and chemical recycling of plastic waste has largely failed and will always fail because plastic waste is: (1) extremely difficult to collect, (2) virtually impossible to sort for recycling, (3) environmentally harmful to reprocess, (4) often made of and contaminated by toxic materials, and (5) not economical to recycle. Paper, cardboard, metal, and glass do not have these problems, which is why they are recycled at much higher rates.
Due to toxicity risks, post-consumer recycled plastic from household waste is not being produced at commercial scale for food-grade uses globally or in the U.S., and likely never will be. While there is limited availability of food-grade PET#1 for beverage bottles only, there are growing toxicity concerns there, too.
As described in a May 2022 OpEd in The Atlantic, “The problem lies not with the concept or process of recycling but with the plastic material itself – it is plastic recycling that does not work.” The high recycling rates of post-consumer paper, cardboard, and metals in the U.S. prove that recycling can be an effective way to reclaim valuable natural material resources. Plastic recycling in particular has failed because the thousands of types of synthetic plastic materials produced are fundamentally not recyclable.
As support for these claims, Greenpeace gathered evidence from 370 “material recovery facilities” across the US in the 2020, and the updated the survey this year. In other words, they aren’t looking at how much plastic was collected with a claim that it could be recycled, but at how much is actually recycled and reused.
The failure of the concept of plastic recycling is finally becoming impossible for the companies and industry associations that promote it – and the nongovernmental organizations (NGOs) that they fund for this purpose – to ignore. After three decades and billions of dollars of taxpayer spending, the excuse offered by the American Chemistry Council (ACC) that plastic recycling is still “in its infancy” can now be seen for the delaying tactic that it is.
Corporate plastic pledge performance reporting does not reflect the failure of plastic recycling because it relies on the theoretical possibility of recycling a plastic item, rather than actual plastic waste processing rates. The reported shares of recyclable, reusable, or compostable plastic packaging used by EMF NPE and U.S. Plastics Pact member companies – 65.3% at the global level and 37% in the U.S. – can hardly be taken at face value when credible estimates show that only 9% of plastic was recycled globally in 201921 and only 5–6% of plastic waste was recycled in the U.S. in 2021.
The Greenpeace argument is definitely not that, with some additional effort, plastic recycling will work. The argument is that given the nature of plastics, recycling plastic will never work.
After more than 30 years, it is time to accept that plastic recycling is a failed concept. Unlike with paper or metals, there are two insurmountable barriers that prevent plastic recycling from ever working at scale: toxicity and economics. Plastic cannot be safely recycled from postconsumer household waste back into new food-grade plastic products. The flood of 400 million tons/year of cheap new plastic production kills the business case for large-scale investment in plastic recycling. And the problem lies not with the concept or process of recycling but with the plastic material itself – it is plastic recycling that does not work.
If one accepts the Greenpeace indictment of plastics recycling, the question becomes what to do next. The Greenpeace solution is to phase out all single-use plastics. I’m not confident that the policy approach can or should be that absolute. But a first step to having that conversation would be a broader acceptance that the efforts at recycling plastics have largely failed.
This figure shows US “primary” energy consumption by source. The attentive reader will notice that “electricity” does not appear as a source of energy. The reason, of course, is that while electricity is used primarily as a mechanism for transmitting power, and sometimes (batteries) for storing power, electricity is not a “source” of power iteself, but instead needs to be generated from a underlying source.
As the figure shows, total US energy consumption levelled off in late 1990s. Use of coal is dramatically down in the last two decades, but use of natural gas has risen correspondingly–so that the sum of coal and natural gas in the figure hasn’t changed much in the last two decades. Petroleum as a source of energy is down about 10% in the last two decades. Nuclear has edged up just a bit in terms of total energy produced since 2000. The quantity of energy produced by renewables has doubled, from about about 6 to 12 quadrillion BTUs.
The category of renewables, however, includes more than wind and solar. Here’s a breakdown for US energy consumption in 2021:
As the figure shows, two-fifths of renewables is biofuels, including ethanol and wood. About one-fifth is hydroelectric dams. The other two-fifths are what a lot of people mean when they refer to renewables: wind, solar, and geothermal. In other words, wind, solar, and geothermal are a little less than 5% of US energy consumption at present.
For those who are mentally relying on solar/wind/geothermal as the primary power sources of the future, these numbers suggest the scale of the challenge. The share of US energy consumption coming from fossil fuels–coal, natural gas, petroleum–was about 85% of the total in 2000, and is now about 79%. The rise in renewables, especially biomass, wind, and solar, explains how this decline in fossil fuels occurred.
But this change has taken two decades. If the US economy is going to consume roughly the same level of energy over time, which is the pattern of the last few decades, then wind/solar/geothermal will need to grow by a multiple of 10 if these sources are to provide half of US energy consumption. A transformation of this scale would require, among other changes, an extraordinary build-out of new power lines from these new sources of energy to where the electricity is needed; an extraordinary rise in mining to provide the materials needed both for solar cells and for the power lines; re-engineering the power grid to be more capable of addressing sources of electricity that can fluctuate; the development of new methods for storage of electricity for when the wind isn’t blowing or the sun isn’t shining; and an extraordinary rise in capabilities to recycle old solar cells and wind turbines when they have reached the end of their cost-effective lifespans.
My own sense is that new technologies will be needed in all of these areas, and others, including use of hydrogen for energy storage, nuclear as an energy sources, probably methods of carbon capture and storage, and methods of conserving on existing energy use.
Here’s a final figure to show some of the complexity of the energy problem. The left-hand panel shows the primary sources of energy. The right-hand panel shows the end-use sectors for energy. Sometimes the source of energy is used directly by a certain sector: for example, the top line shows that 69% of petroleum is used in the transportations sector, where it represents 90% of all the energy used.
In other cases, the primary energy flows through the electricity sector. For example, 37% of natural gas energy goes to electricity, as does 59% of renewable energy, 90% of coal energy, and 100% of nuclear energy. But of the energy flowing into the electricity system, about two-thirds is lost in maintaining the system itself, and only one-third goes back out to end-use sectors. To put it another way, when we build renewable energy sources to feed the electrical grid, only one-third of the electricity produced finds its way to end-users.
The challenge of reducing reliance on fossil fuels isn’t just on the left-hand side of this figure: that is, raising output of renewables in a way that can offset use of fossil fuels. It’s about rethinking and rewiring all the connections between primary energy and end-users in this figure.
The first edition of Jeremy Siegel’s highly influential book, Stocks in the Long Run, came out almost 30 years ago in 1994. Now, the sixth edition has been published, and Jeremy Schwartz interviews Siegel (Knowledge at Wharton, “Why Stocks Will Remain Strong in the Long Run,” October 25, 2022). Given that I am becoming used to wincing each time I open up a statement from my retirement account and see how falling stock prices have affected my savings, the interview is at least a productive distraction. Here are some comments from Siegel that caught my eye:
On the long-run returns to stock market investing over time:
[T}he first edition, which came out in May 1994, used data through the end of 1992. The long-term real return (net of inflation, from investing in stocks) 1802 onward was 6.7% in real terms. I updated it till June of this year and it’s 6.7% real — exactly the same as the last 30 years, despite the financial crisis, COVID, and so forth. It’s remarkably durable. We also know returns from investing in stocks are remarkably volatile in the short run. But the durability of the equity premium (or the excess return from stocks over a risk-free rate like a Treasury bond) is quite remarkable.
On the performance of the Federal Reserve in the last two years:
I’ve been calling Jay Powell’s monetary policy the third worst in the 110-year history of the Fed. I may actually raise it to the second worst, but we’ll see what happens. The worst, of course, is the Great Depression, where they let all the banks fail when they were actually formed to prevent exactly that from happening. When the pandemic hit and money supply exploded, I said this is going to cause inflation. You’ve never seen that 25% M2 money supply increase — 1870 onward, there has never been a money supply increase that fast.
I said this is just absolutely crazy. This is going to produce a tremendous amount of inflation. And it did.
I was definitely hawkish [early this year], saying there would be eight increases [of 0.25% each] — that’s 2%. But now they’re talking about 4% by year-end. That’s 16 increases. In the September 2021 meeting … eight of the 16 FOMC (Federal Open Market Committee) members said there was no need to increase rates whatsoever this year. This was when inflation was already heating up; speculation was rampant in all asset markets. Five members said we will need an increase of 125 basis points. And three — the most hawkish — ventured that we might need an increase of 50 basis points by December this year.
Could you be more wrong than that? It’s impossible to be more wrong than that. It amuses me when people [predict the Fed’s actions] as if they have any concept of what they’re going to do in 2023. Clearly, in 2021, they had zero concept of what they were going to do this year.
There has been a high-profile effort in the last couple of years for an international treaty that would impose a minimum tax on corporate profits across countries. The intuitive appeal is straightforward: corporations can use various methods–say, where they locate their headquarters or how they finance the firm–so that profits in an accounting sense happen in a place with low or zero corporate taxes. A minimum corporate tax across countries wouldn’t eliminate this incentive, but perhaps it could ameliorate it?
As I have observed before, this intuitive appeal is quickly muddled by the realities of global corporate taxation. For example, should the profits of a multinational firm be allocated across countries by where the production facilities of the firm are based, by where the sales occur, by the legal residence of the firm, by the “source” of where the profits are generated through research and development or intellectual property–or by some overall formula that brings all these factors into the picture? International corporate taxation is messy.
The underlying issue, of course, is that governments around the world want to attract productive, job-generating companies. Even if an international agreement could be signed to prevent governments from attracting firms by offering a lower corporate tax rate, they can use other kinds of subsidies to attract firms. Gary Hufbauer mentions some possibilities in “The global minimum corporate tax will not end forces that drive tax competition” (Peterson Institute for International Economics, October 25, 2022).
Hufbauer points out that even as President Biden’s administration participates in international talks for a global minimum tax, a number of its legislative successes would allow companies to pay less than the minimum. The Creating Helpful Incentives to Produce Semiconductors Act of 2022, know as the CHIPS Act? “This law will funnel US$76 billion in tax credits and grants to major firms producing semiconductors in the United States … In fact, by some estimates, the Biden administration’s three big accomplishments—the infrastructure law as well as the CHIPS and IRA laws—could funnel hundreds of billions of dollars in subsidies and tax incentives that could benefit large corporations, enabling them to lower the tax liabilities that would be imposed under the global minimum.” Indeed, the Inflation Reduction Act (IRA) explicitly says that the semiconductor firms receiving assistance from CHIPS can pay lower tax rates than the US corporate minimum.
This isn’t just a US issue, of course. Hufbauer writes:
In today’s highly competitive global economy, public officials are challenged not only to raise tax revenues but also to save jobs, create jobs, advance technology, or deliver essential services, by deploying government incentives. Officials are not always content to let market forces prevail. The result is a mixture of trade protection, subsidies, tax relief, and in extreme cases, state-owned enterprises, depending on the country and its politics. If overt tax competition is ruled out, some officials will likely turn to other means to help favored corporations.
It is only when you read the fine print in the global minimum tax that you see that it gives an easy pass to these alternatives. So-called Qualified Refundable Tax Credits—credits payable within four years of the designated activity—are not deducted when calculating the tax paid by a business firm. Under International Financial Reporting Standards (IFRS) accepted by the Organization for Economic Cooperation and Development (OECD), subsidies can be allocated against the cost of an acquired asset, and are thereby only indirectly subject to tax over a period of years as the reduced cost of the asset is depreciated or amortized.
Of course, countries watch how other countries treat large corporations. For example, the US subsidizes semiconductor makers because other countries do so, and other countries subsidize semiconductor makers because the US does so. Hufbauer writes:
China, Japan, South Korea, and Taiwan have long subsidized semiconductor fabrication plants (fabs). According to data published by the Boston Consulting Group and the Semiconductor Industry Association, subsidies account for 15 percent of the cost of fab operations in Japan, up to 30 percent in Taiwan and South Korea, and up to 40 percent in China. Again, if a global minimum tax had existed in 2000, it would have made no difference to Asian fab incentives. Now that the US federal government has entered the fab subsidy race, so have Europe, India, and Mexico. Moreover, the CHIPS Act extends its application to two foreign semiconductor giants, Samsung and Taiwan Semiconductor Manufacturing Corporation (TSMC), and both have announced huge investments in US fabs.
Just to be clear, the existing treaty talks that focus on a minimum global corporate tax rate would have no effect on any of these other ways of subsidizing firms.
Global population will surpass 8 billion in just a few weeks on November 15, 2022, according to projections from the United Nations in its World Population Prospects 2022. I’m perhaps less concerned about global population growth than some commenters, because predictions about a population apocalypse have been around for a long time without coming true. But population changes do reflect underlying changes in life expectancy and birthrates in ways that shift age distributions and family patterns. In addition, shifts in where the global population lives will alter the shape of international politics in future decades.
Here’s the basic population pattern from the UN demographers from 1950 to 2050. Total population (blue line) is rising. It’s projected to top out at about 10.4 billion in the 2080s. The growth rate of the population (yellow line) has been falling to less than 1% annually, and heading lower.
The UN describes the underlying patterns of life expectancy and birthrates this way:
Population growth is caused in part by declining levels of mortality, as reflected in increased levels of life expectancy at birth. Globally, life expectancy reached 72.8 years in 2019, an increase of almost 9 years since 1990. Further reductions in mortality are projected to result in an average longevity of around 77.2 years globally in 2050. … In 2021, the average fertility of the world’s population stood at 2.3 births2 per woman over a lifetime, having fallen from about 5 births per woman in 1950. Global fertility is projected to decline further to 2.1 births per woman by 2050. … Given that most population increase until 2050 will be driven by the momentum of past growth, further actions by Governments aimed at reducing fertility would do little to slow the pace of growth between now and midcentury, beyond the gradual slowdown indicated by the projections presented here.
The increase in population is surely a matter for continued close attention, for economic, environmental and political reasons. But there have been prominent predictions of global overpopulation leading to mass famine for centuries now. Yes, predictions that have been wrong for centuries could still come true in the future. But before jumping to such conclusions, it’s worth taking a moment to acknowledge that the past predictions of overpopulation leading to a sharp degradation of living standards have been wrong, and to think about why.
For economists, the classic predictions of overpopulation are those of Thomas Robert Malthus in his 1798 Essay on the Principle of Population. Malthus argued that the growth of food supply happened in a linear way, while the growth of population happened in a geometric way. Thus, with population growing at a certain percentage rate each year, it would at some point spike upward beyond the food supply. Malthus didn’t provide a numerical estimate of the timing, but the general sense was that this shift was perhaps a few decades in the future. Global population was about 800 million when Malthus was writing, so the world population has growth 10-fold. The missing ingredient in Malthus’ reasoning was that food supplies–and in general economic growth–doesn’t need to happen in a linear way, but as a result of technological change it can also be geometric. There may be a race between the growth rates of population and food supply at certain times and places, but it is not a race that food supply is fated to lose.
Thus, while I know that higher global population will raise difficult issues, the historical record strongly suggests that cries of looming catastrophe have been overdone. It also suggest that the ultimate answers may involve developing new technologies.
The growth of global population is not evenly distributed around the world. Indeed, it will shake up some long-term patterns. Perhaps most notably, the UN predicts that the India will become the world’s most populous country, outstripping China, next year. Here are some shifts in the world’s most-populous countries over time.
The rise in the population rankings of Nigeria, Ethiopia, and Dem. Republic of the Congo by 2050 is part of a regional shift: the region of Africa will make up a larger share of global population. We are used to a world where the regions of Asia (light blue and dark blue lines) are the largest by population. But population growth in those regions has slowed. By about 2050, the region of sub-Saharan African will have almost caught up in total regional population. Thus, the issues of economic development for that region, and possibilities of out-migration from that region if development doesn’t take hold, are likely to loom especially large in the next few decades.
Nineteen states have enacted marijuana taxes, although five of them (Connecticut, New York, Rhode Island, Vermont, and Virginia) have not yet actually collected any revenue from them. But there is no common model. Some states impose the tax as a percentage of the purchase price: some based on the weight of the product sold; and some based on the potency of the product. Some use more than one of these approaches. Richard Auxier and Nikhita Airi discuss what’s happening and look at the tradeoffs in “The Pros and Cons of Cannabis Taxes” (Tax Policy Center, September 28, 2022).
Here’s the selection of state taxes used:
Given the different kinds of taxes used, and the underlying differences in ordinary sales taxes, comparing marijuana taxes across states isn’t simple. But based on assumptions about a standard price per ounce,, weight, and potency, they find that the total state and local tax burden on marijuana, including both marijuana-specific taxes and general sales taxes, is in typically in the range of 20-40%. Alaska, Colorado, Nevada and Washington all collect from 1.2% to 1.7% of state tax revenue from marijuana excise taxes; indeed, “[a]mong all 11 states that collected cannabis tax revenue for the entire 2022 fiscal year, eight collected more revenue from cannabis taxes than alcohol taxes, while Colorado, Nevada, and Washington collected more from cannabis taxes than cigarette taxes. … Colorado and Washington both collected more from state cannabis taxes than state alcohol and cigarette taxes in fiscal year 2022.”
A sales tax approach has the advantage of simplicity, especially if it can just be combined with an existing state-level sales tax, similarly to the way that some places impose additional sales taxes on hotels or car rental sales. A downside is that when marijuana is legalized, the price often starts fairly high and the declines over time–and so it’s possible that a sales tax approach may generate declining revenue over time. Of course, a state could also adjust its marijuana tax rates over time.
For examples of a weight-based tax, “Alaska levies a $50-per-ounce tax on flower and $25-per-ounce tax on leaves while Maine levies roughly a $20-per-ounce tax on flower and a $6-per-ounce tax on leaves,” while the New Jersey weight-based tax is the same for all parts of the plant. From the state’s point of view, a weight-based tax will also generate records of the quantity of marijuana produced. With a weight-based tax, state tax revenues don’t shift with the price of marijuana, but only with the quantity. In addition, it creates a record of the quantity being produced–which can help in checking that marijuana producers are not diverting part of their production to the illegal and untaxed market. On the other side, a weight-based tax requires a new bureaucracy to administer it, which is the main reason that California (and other states) repealed their original weight-based tax and went with the sales tax approach instead.
A potency-based tax is similar in intention to alcohol taxes that impose lower rates on beer and higher rates on whiskey. A main concern here is that if the marijuana tax is based on price or weight, there is some incentive to choose whatever price or weight provides the highest dose, while a potency-based tax rewards choosing a lower potency. In addition, a potency-based tax means that relatively low-potency legal marijuana would not be at a tax disadvantage vs. low-potency illegal marijuana–and thus help to put a damper on the untaxed illegal market. A potency-based tax does require a new bureaucracy to monitor the sampling of products, lab processes, and retention of records. But these steps could be simplified in a future where marijuana potency was more clearly labelled.
Ultimately, the main problem with choosing between these methods is that different policy goals are involved. One goal is raising tax revenue, which will tend to imply that the state desires high total sales. Another goal is offsetting the cost of externalities from legalizing marijuana use, like social costs of driving under the influence, which involve discouraging overuse in certain situations. Yet another goal is discouraging the use of extremely potent products, which is also aimed at both social harms and potential harms to the user.
The discussion above has focused on taxation of marijuana for recreational use. The authors also point out that of the 37 states that have legalized marijuana for medicinal uses, 10 of them have imposed specific taxes on this particular medicine. Indeed, “both medical and recreational cannabis are subject to the same excise tax in California (15 percent retail excise tax), Illinois (7 percent cannabis cultivation privilege tax), and Nevada (15 percent weight-based tax).” Of course, when medical and recreational uses of marijuana have the same tax, it implies that the costs and benefits of such use are the same, however they are labelled.
