Author: conversableeconomist

Every year since 1952, the BP Statistical Review of World Energy provides a volume full of tables and charts about energy usage around the world. What are some patterns that emerge from the just-released 2021 report?  Here’s an overview comment from the introduction by chief executive officer Bernard Looney:

Global energy demand is estimated to have fallen by 4.5% in 2020. This is the largest recession since the end of World War II, driven by an unprecedented collapse in oil demand, as the imposition of lockdowns around the world decimated transport-related demand. The drop in oil consumption accounted for around three-quarters of the total decline in energy demand. …  The fall in carbon emissions from energy use was equally striking, with emissions falling by over 6% in 2020 – again, the largest decline since 1945. Although unmatched in modern peacetime, the rate of decline in carbon emissions last year is similar to what the world needs to average each year for the next 30 years to be on track to meet the aims of the Paris Agreement.

That last sentence is worth some consideration. It’s easy for international conferences and countries and states and cities to make promises about future reductions in carbon emissions, and in particular to announce with fanfare goals for net-zero carbon emissions that are two or three decades in the future. But achieving those goals would require the immediate embrace of dramatic and ongoing changes in a way that would last for several decades, which in all honesty, just isn’t actually happening anywhere.

Here’s a figure showing sources of “primary energy” for the world as a whole. This includes all commercially traded sources of energy: that is, it’s a broad meausure that includes transportation, commercial and industry use, and homes.

As the report summarizes this figure: “Oil continues to hold the largest share of the energy mix (31.2%). Coal is the second largest fuel in 2020, accounting for 27.2% of total primary energy consumption, a slight increase from 27.1% in the previous year. The share of both natural gas and renewables rose to record highs of 24.7% and 5.7% respectively. Renewables has now overtaken nuclear which makes up only 4.3% of the energy mix. Hydro’s share of energy increased by 0.4 percentage points last year to 6.9%, the first increase since 2014.”

I’d put it another way: there are three big energy sources each with about 25-30% of the global market, and they are all fossil fuels: oil, coal, and natural gas. There are three much smaller energy sources, all carbon-free but each with well under than 10% of the global market: hydroelectricity, nuclear, and renewables (like solar, wind, and geothermal).

Energy use around the world is highly unequal, and as lower- and middle-income countries develop it seems virtually certain that their demand for energy will rise. Here’s a figure showing energy consumption per capita by region of the world. For the world as a whole (gray line), energy use is 71 gigajoules per person. For North America, it’s about three times as much; for Europe, the Middle East, and the Commonwealth of Independent States (mainly Russia) it’s twice as much. Other regions are still below the global average.

This figure shows the distribution of energy use per capita across countries. It’s a cumulative distribution: thus, the green line for 2018 is lower at the bottom left of the figure and higher at the top right, showing that a smaller share of the world population is in countries with very low energy consumption. The big vertical jump in the middle of the green line is the population of China. As the report notes: “In 2020 63.7% of the global population lived in countries where average energy demand per capita was less than 100 GJ/head, a significant decrease from 81% in 2019, as energy demand per capita in China increased to 101 GJ/head from 99 GJ/head in 2019.” As the figure shows, about 80% of the global population consumes 100 gigajoules per person or less, while the top few percent of the global population consume three times that much energy

In terms of global carbon emissions, about one-third of all the emissions are from high-income countries, and two-thirds from low-income countries. Here’s a table that I condenses from a larger table in the report. The US accounts for 13.8% of global carbon emissions, and total US carbon emissions have been falling 0.5% per year for the decade up to 2019, with a bigger fall during the pandemic. Carbon emissions for Europe are similar, although they have been declining about twice as fast. However, the Asia/Pacific region accounts for more than half of all global carbon emissions, and before the pandemic carbon emissions from this region were growing at 2.6% per year over the decade up to 2019. China alone is 30.7% of global carbon emissions.

In short, no plan for reducing global carbon emissions can be considered serious if it doesn’t have a heavy focus on the Asia/Pacific region and on China. Moreover, any such plan can’t just replace existing sources of energy, but also needs to show how total energy consumption can rise dramatically–for this region and in other low-income countries around the world–while still putting carbon emissions on a downward trajectory.

There was a time, not so very long ago, when discussions of international trade focused on global talks held through the World Trade Organization. But the so-called “Doha round” of global trade that started back in 2001 seemed almost dead even a decade ago, and it hasn’t jolted back into life since then.

James McBride, Andrew Chatzky, and Anshu Siriparapu recently updated their “Backgrounder” article for the Council of Foreign Relations on “What’s Next for the WTO?” (June 14, 2021). As they point out, the main multilateral success for WTO in the last decade was a Trade Facilitation Agreement back in 2015 to speed up and coordinate customs for imported products. They also point out that the WTO has shifted from worldwide “multilateral” agreements to “plurilateral” agreements among smaller groups of interested countries focused on a specific set of products. For example, 14 countries pursued an Environmental Goods Agreement about liberalizing trade in products like wind turbines and solar panels and 19 countries are signed on to a Government Procurement Agreement which tries to assure that governments will consider buying imported products when that would benefit taxpayers, rather than just funneling their purchasing power to domestic producers.

The broader shift is that international trade agreements used to be focused on reducing explicit barriers to trade, like tariffs and import quotas. The new wave of regional trade agreements is focused on agreements about assuring common regulations and standards throughout an industry, which can then facilitate global supply chains. These kinds of rules go far deeper than just reducing tariffs and import quotas. For example, imagine the set of health and safe rules that applies if ingredients for a pharmaceutical product are going to be made in different countries and traded across borders, or the set of regulations that applies if insurance or banking services are going to be internationally traded.

These “deep trade agreements” seem both necessary for trade in a modern global economy, and also necessarily more controversial. They are increasingly necessary because world trade is less and less about basic commodities like oil or timber, or basic goods like clothing, and more and more about complex goods and services. But of course, the more a country agrees to detailed agreements for trade, or demands such detailed agreements as a condition for trade, the greater the likelihood that the agreed-upon rules will not actually be about advancing trade, but instead will be about domestic firms and various special interests trying to piggyback their own agendas on to the trade agreement. Or to put it more simply: The analysis of changing tariffs or import quotas is fairly straightforward; the analysis of hundreds of pages of detailed regulations governing trade is messy.

In a recent e-book, Ana Margarida Fernandes, Nadia Rocha, and Michele Ruta have have edited an e-book of essays on these topics titled The Economics of Deep Trade Agreements (CEPR Press, June 2021). Many of the essays provide readable overviews of the key findings of recent research, and I’ll provide a full Table of Contents for the book below. But as example, here are a couple of thoughts from the essay “Lobbying on Deep Trade Agreements: How Large Firms Buy Favourable Provisions,” by Michael Blanga-Gubbay Paola Conconi, In Song Kim, and Mathieu Parenti.

The authors point to the sharp rise in the number of regional and bilateral trade agreements in the last 25 years::

The authors point to a recent data set that contains detailed information on the provisions of current trade agreements in 17 areas. As they write:

Some of these deep trade issues are related to trade policies: Export Restrictions, Rules of Origin, Trade Facilitation and Customs, and Trade Remedies. Others concern non-trade policies: Intellectual Property Rights, Sanitary and Phytosanitary Measures, Technical Barriers to Trade, Public Procurement, Subsidies, Services Investment, Movement of Capital, Visa and Asylum, State Owned Enterprises, Competition Policy, Environmental Laws, and Labour Market Regulations.

In addition, several of the essays point out, the question of how (or whether) the rules will be enforced is of key significance: Domestic courts in the exporting or importing country? Arbitrators? International tribunals? The authors also refer to an essay by Dani Rodrik in the Spring 2018 issue of the Journal of Economic Perspectives (where I work as Managing Editor).

To illustrate the increase in depth of trade agreements, Rodrik (2018) compares US trade agreements with two small nations, Israel and Singapore, signed two decades apart. The US-Israel agreement, which went into force in 1985, is less than 8,000 words in length and contains 22 articles and three annexes, mostly devoted to trade issues such as tariffs, agricultural restrictions, import licensing, and rules of origin. By contrast, the US-Singapore agreement, which went into force in 2004, is nearly ten times as long, taking up 70,000 words and containing 20 chapters, more than a dozen annexes, and multiple side letters. Of its 20 chapters, seven cover conventional trade topics, while the others deal with behind-the-border topics. For example, provisions on intellectual property rights take up a third of a page (and 81 words) in the US-Israel agreement; they occupy 23 pages (and 8,737 words) plus two side letters in the US-Singapore agreement.

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Here’s the full Table of Contents for the book:

“Introduction: The economics of deep trade agreements,” by Ana Margarida Fernandes, Nadia Rocha, and Michele Ruta

The economic impact of deep trade agreements
1 “The enduring role of international integration in development,” by Pinelopi Goldberg and Tristan Reed
2 “Quantifying the impact of deep trade agreements: A general equilibrium
approach,” by Lionel Fontagné,Nadia Rocha, Michel Ruta, and Gianluca Santoni
3 “Using machine learning to assess the impact of deep trade agreements,” by Holger Breinlich, Valentina Corradi, Nadia Rocha, Michele Ruta,
João. M.C. Santos Silva, and Tom Zylkin

Political economy and design of deep trade agreements
4 “Lobbying on Deep Trade Agreements: How Large Firms Buy
Favourable Provisions,” by Michael Blanga-Gubbay, Paola Conconi, In Song Kim, and Mathieu Parenti
5 “Global value chains and deep integration,” by Leonardo Baccini, Matteo Fiorini, Bernard Hoekman, Carlo Altomonte, and Italo Colantone
6 “Pro-competitive provisions in deep trade agreements,” by Meredith A. Crowley, Lu Han, and Thomas Prayer

Protectionism at the border and beyond
7 “The impact of preferential trade agreements on the duration of antidumping protection,” by Thomas J. Prusa, and Min Zhu
8 “Trade facilitation provisions in deep trade agreements: Impact on Peru’s exporters,” by Woori Lee, Nadia Rocha, and Michele Ruta
9 “Heterogeneous impacts of sanitary and phyto-sanitary and technical barriers to trade regulations: Firm-level evidence from deep trade agreements,” by Ana Margarida Fernandes,Kevin Lefebvre, and Nadia Rocha

Services trade and state intervention
10 “Scoping services trade agreements: What really matters,” by Ingo Borchert and Mattia Di Ubaldo
11 “Trade barriers in government procurement,” by Alen Mulabdic and Lorenzo Rotunno
12 “The spillover effect of deep trade agreements on Chinese state-owned enterprises,” by Kevin Lefebvre, Nadia Rocha, and Michele Ruta

Non-trade issues in trade agreements
13 “How preferential trade agreements with strong intellectual property provisions affect trade,” Keith E. Maskus and William Ridley
14 “Deep integration in trade agreements: Labour clauses, tariffs, and trade flows,” by Raymond Robertson
15 “Trade agreements with environmental provisions mitigate deforestation,” Ryan Abman, Clark Lundberg, and Michele Ruta

Conclusion
16 Why deep trade agreements may shape post-COVID-19 trade,” by Aaditya Mattoo, Nadia Rocha, and Michele Ruta

Bill Kerr interviews Erica Groshen, who ran the Bureau of Labor Statistics from 2014-17, on topics involving how to improve labor market statistics in particular and government statistics overall in a Harvard Business School podcast titled “Infrastructure: Upgrading the US labor statistics system” (June 30, 2021, audio and a transcript available).

A lot of economic data has traditionally been collected by household surveys: that is, asking people what they earn, how many hours they work per week, how they spend their money, what government benefits they receive, and so on. These surveys are carefully designed and conducted, but at the end of the day, they have an irreducible amount of measurement error–because you are relying on people to remember and report accurately. Thus, there has has been a shift in recent decades to “administrative” data–that is, data collected by government agencies for other purposes like taxes or Social Security records–which seems likely to be more accurate than household surveys. Thus, Groshen points out that the unemployment insurance system could be expanded and converted into a way of gathering much more accurate data on labor markets and jobs. She notes:

[S]tate unemployment insurance agencies that, as part of running the program, collect worker wage records every quarter from every employer that lists the wages of workers for every month during that quarter. They also collect claims records from people who apply for claims. And these data are generally not available to BLS to augment or replace its current data collections. And that’s basically a shame, because it would be quite useful for statistical purposes. And employers, of course, have to report the same or slightly different data to a number of different government agencies. Our economics statistics are also not as good as they could be as a consequence of this. UI [unemployment insurance] wage records include who the person’s employer is and their earnings—that’s what’s in there. They should have job title, because that is closely associated with the person’s occupation. … And this would enable us to track workforce supply and demand much more closely, make better projections about the future of work. You also would want the number of hours worked for the wages that are being reported so that you know if someone is full time or part time, so you can get hourly rates, and really follow that dimension on which wages vary. Another thing you want is the actual work location of the people … And then, the last thing, particularly in these times of understanding demographic inequities—racial inequities, in particular, but also gender inequities, things like that—you want to have demographics so that you can track social justice issues and advances and understand how the world of work is affecting demographic outcomes. These data should also, of course, be curated—by which I mean, they have to clean them up so that you can really analyze them and made accessible to the statistical agencies, for particular with the BLS, so that they can create better statistics. You could get better, cheaper, and more-frequent program-policy evaluations so that policy makers could make better decisions.

What are some of the payoffs of this approach? One set of gains is that improved data can improve public policy. As a recent example, during the pandemic

I’ll give you an example of one of the things that happens when you don’t have the attention of national statisticians to administrative data. You can think about the unemployment insurance initial claims releases. There’s been a lot of attention to that during the course of the pandemic, because it’s some of the most-timely data and very closely associated with what was going on in the labor market. But those are administrative totals. They are not constructed to be economic indicators. And most of the people paying attention to them were looking for an economic indicator. The solution is clear, which is to have BLS partner with the unemployment insurance system and take over production of the creation of economic indicators from this inputted information a new program that takes advantage of the skills of a national statistical agency to input that data and create an economic indicator that wouldn’t require all of the journalists and all of the economists everywhere else to say, “Well, let me make this adjustment; maybe that’ll tell me what’s really going on.”

Another payoff, further in the future, is that workers with access to their own personal records could have a work history authenticated by the records of their past employers.

They want to come up with a mechanism to provide workers with portable, authoritative job records that they could tap into for applications, for jobs, for educations, for UI benefits, and other public programs as well. Anytime when they say, “What’s your work history?” the worker would be able to plug in their ID and their password or something like that, and they’d have an authenticated work history with skills information and duration and other information on it. 

As another example of a gap in labor market data that I’ve become aware of in my own reading, we know very little about workplace skills and the extent of on-the-job training. As Groshen says:

We know how to count years of education, and we have some ideas on quality. And we know test scores and things like that. But we actually don’t track workplace skills very well—either on the micro or the macro level—for individuals or for the country or groups as a whole. A very large component of skills training is done by employers. And we have no good measures of that. We don’t know who gets what kind of training. We don’t know what our skill gaps are. And so how can we be making the right decisions if we don’t have that information? The last authoritative source of employer-provided training was by the BLS, and it was done in 1995. Congress hasn’t funded it since then. 

Given that government statistics are produced as part of a bureaucracy, one way to produce better statistics is to improve the status of statisticians in the hierarchy. Groshen suggests:

There are many steps we can take to strengthen the independence of statistical agencies. And one of them would be to put them in their own agency outside of the control of a member of the cabinet, have it be headed up by the national statistician of the U.S.—and that’s a job that exists, but right now, the national statistician of the U.S. has an office of about seven people in OMB [the Office of Management and Budget]. So the alternative is put the national statistician actually in charge of the statistical agencies and move them away from reporting to the people who are in charge of policy directly.

There’s more in the interview about the productivity slowdown, the current churning in US labor markets and other topics.

The World Bank Lebanon Economic Monitor for Spring 2021 is subtitled “Lebanon Sinking (To the Top Three).” The reason for that somewhat cryptic title is described in the opening lines of the report:

The Lebanon financial and economic crisis is likely to rank in the top 10, possibly top three, most severe crises episodes globally since the mid-nineteenth century … [when] contrasted with the most severe global crises episodes as observed by Reinhart and Rogoff (2014) over the 1857–2013 period. In fact, Lebanon’s GDP plummeted from close to US$ 55 billion in 2018 to an estimated US$ 33 billion in 2020, with US$ GDP/per capita falling by around 40 percent. …

Overall, the World Bank Average Exchange Rate (AER) depreciated by 129 percent in 2020. Exchange rate pass through effects on prices have resulted in surging inflation, averaging 84.3 percent in 2020. Meanwhile, the stock of currency in circulation increased by 197 percent, even as broad money supply (which includes bank deposits) declined, with the latter weighed down by deleveraging in the financial sector.

There’s a lot to be said here about the dramatic rise in poverty and unrest, with implications beyond economics for political conditions in the Middle East region as a whole. Here, I want to focus on what happens when a society is faced with extremely high inflation rates.

Here, I’ll focus on an essay by Paul Wood, “What happens when your currency collapses? The Lebanese are living through a terrible economic experiment” (Spectator World, June 23, 2001):

The Lebanese currency has lost more than 90 percent of its value over the past 18 months and is continuing its steady decline. It would be foolish to keep more than a few days’ spending money on hand, so everyone has a moneychanger. Mine is Mohammed, who pops round on his moped with ever-fatter stacks of notes with ever more zeros on them. The currency grows physically as it shrinks in value. He passes over a wad of cash and says, smiling: ‘Our leaders are stupid and corrupt.’ That’s true, but only part of the story of what has gone wrong.

Mohammed is here because no one uses the banks to change money anymore. That would be crazy when the official exchange rate is still 1,500 lira to the dollar, one-tenth of the black-market rate of just over 15,000 to the dollar (at the time of writing). Mohammed used to be a chef, a job where he made things that people wanted, adding a small but tangible amount to the nation’s wealth. Now he’s one of thousands of people employed in the completely useless but absolutely indispensable business of ferrying stacks of printed paper back and forth by moped, to make up for the catastrophic failure of the banking system. It’s one small example of the inefficiencies that creep into an economy when you can’t trust the money anymore.

Wood has the kinds of stories you expect to hear in this setting: long lines forming for basic goods like food and groceries, taking a literal backpack full of money to the hospital to buy prescription drugs, and so on.

The point I would emphasize here is that when there is inflation at more than negligible levels, people and firms do need to worry about it. You need to worry if your paycheck is keeping up. Firms need to worry about price increases from their suppliers and raising prices to their customers. Borrowing money becomes fraught: Will your interest rate adjust and soar with additional inflation? The energy going into keeping pace with inflation is energy diverted from actual productive pursuits: education and learning skills, investing, cutting costs, research, and more.

For some previous examples from the last decade of nations coping with hyperinflation, interested readers might begin with For those who want more, here’s an earlier discussion of “Hyperinflation and the Venezuela Example” (April 28, 2016). Here’s a discussion of “Hyperinflation and the Zimbabwe Example” (March 5, 2012). Or for an historical list of such episodes, see “58 Episodes of Hyperinflation (Venezuela is #23)” (February 2, 2019).

From a little further back, one of the most succinct explanations of inflation and short-termism that I know appeared in an essay written back in 1992 by V.S. Naipaul, called “Argentina and the Ghost of Eva Peron,” in which Naipaul purportedly quoted “Jorge” on the situation of hyperinflation in Argentina. Here, I’m quoting from the essay as reprinted in the 2003 collection of Naipaul’s travel writing, The Writer and the World.

Another aspect of inflation is that you cease to worry about productivity and even technology. Now, that is the secret of all progress: productivity. But you really can get no more than 3 or 4 percent per annum improvement in productivity anywhere in the world. With inflation like ours you can get 10 per cent in one day, if you know when and where to invest. … It is much more important to protect your working capital than to think about long-term things like technology and productivity–although you try to do both.  So capital investment in Argentina is not even covering wear and tear. In short, when the current plant reaches the end of its working life there won’t be a provision built up to purchase new capital equipment. This is the inevitable result of inflation, which is the monetary disease. Your money is disintegrating. It’s like cancer. You live day to day. That’s all you can do when you have inflation of more than 1 per cent per day. You cease to plan, You’re just happy to make it to the weekend.

As the pandemic eventually wanes, a major question is what economic patterns will bounce back. Pol Antràs argues that global supply chains are likely to bounce back. His argument comes in two parts: they they have bounced back before after the Great Recession of 2007-2009; and the large multinational firms that have made a long-term investment in these global supply chains will not quickly change their plans. Here are his comments from an interview with Luis Garicano, “Is globalisation slowing down?” The interview appears in a recent e-book book by Luis Garicano: Capitalism After COVID: Conversations with 21 Economists (June 2021, CEPR Press). Here’s Antràs:

One reassuring thing is that, contrary to expectations, trade flows and international exchanges have recovered.

A big chunk of world trade is associated with a few hundred companies that are large and that have complex global value chains. When the crisis came and things came to a halt, they didn’t reorganise things massively. For example, they didn’t start changing suppliers very dramatically, so that when things went back to normal, they could scale up again easily. We saw that from previous studies that looked at the Great Recession or previous studies that looked at the Asian financial crisis. These are large shocks. But even when those very large shocks happen, very often we don’t see international links being broken up. It’s very complex to set up value chains, so people tend to stick together and try to ride it out. The current crisis may have led companies to reassess what they should be doing – maybe they should move out of China and set up plants in their own country – but when they crunch the numbers, they may realise that it’s very expensive to build new plants, new equipment. There are such economies of scale that it’s very costly to move things around.

I must confess, you might remember back in 2008 and 2009 when the crisis was starting … That was probably the first time I was talking to the press. I was all sure of myself, and was warning that the recession would lead to depressed trade flows for the next five to ten years. Because it’s so hard to create those links, if the crisis breaks them up you can’t expect things to reappear quickly. But six months later, I was looking like a fool because things picked up very quickly.

I had missed that firms are not dumb. Firms realise that resetting value chains is very costly, so they hold together. If the supplier was in trouble, they would extend the line of credit just to keep things alive so that when things go back to normal, they can scale up. When, a couple of years later, people started looking at the microdata, what we call the extensive margin, the trade links did not move much. It was all an intensive margin – shut down and then back up. For the current covid crisis it’s a bit early to tell, but Asier Minondo (2020), a Spanish economist, has looked at Spanish data and found that things have recovered very quickly because the adjustment has been 95% of the intensive margin.

So I do think that it takes very large and persistent shocks to lead to a reorganisation of production, not even a Great Recession is enough. Policy shocks that are likely to persist are going to lead to this. But Covid to me, and especially at this point, looks like something that in a year we’re out of it.

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What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it; no constitution, no law, no court can even do much to help it. While it lies there it needs no constitution, no law, no court to save it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.

 

What then is the spirit of liberty? I cannot define it; I can only tell you my own faith. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the minds of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near 2,000 years ago, taught mankind that lesson it has never learned, but has never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest.

 

And now in that spirit, that spirit of an America which has never been, and which may never be; nay, which never will be except as the conscience and courage of Americans creates it; yet in the spirit of that America which lies hidden in some form in the aspirations of us all; in the spirit of that America for which our young men are at this moment fighting and dying; in that spirit of liberty and America I ask you to rise and with me pledge our faith in the glorious destiny of our beloved country.

The end of the US Revolutionary War happened with the surrender of the British forces at the Battle of Yorktown on October 19, 1781. However, George Washington is not inaugurated as the first President of the United States until April 30, 1789. In the nearly eight years between these events, the US federal government existed under the Articles of Confederation, adopted by the Continental Congress on November 15, 1777, but not ratified by the states until nearly the end of the US Revolutionary War on March 1, 1781. As the word “confederation” implies, most of the power remained with state governments. Hearty congratulations to the US history buffs among you who can name the 14 people who served in the largely ornamental role of “President of the Continental Congress” during the 14 years from 1774 to 1788 (without looking it up, as I always need to do), from Peyton Randolph to Cyrus Griffin. Not only was the US central government very weak at this time., but it was a time of strong divisions between states and local rebellions within states. 

By the later part of the 1780s, it seemed clear to many people that the Articles of Confederation were not enough. If the country was to live up the name of “United States,” which the Continental Congress voted to adopt on September 9, 1776 (about two months after adopting the Declaration of Independence), it needed formalized arrangements for a central government.  

Thus, a group led by James Madison drafted a Constitution for the United States. It was approved by the US Congress on September 17, 1787. But it needed to be ratified by nine of the 13 states before taking effect.  Thus, Madison together with Alexander Hamilton and John Jay decided to write a set of essays, using the pen name “Publius,” to explain and justify the structure of government proposed by the Constitution. On October 27, 1787, the first essay of what later became known as The Federalist Papers was published. this one written by Alexander Hamilton. As modern Americans look back at this moment in time, it is worth nothing that it was a time when the country was far from unified. In Federalist #1, Hamilton explains the need for rational discourse in times of national stress and unrest, especially when major changes are being proposed. The Federalist Papers were published between October 1787 and May 1788, and the US Constitution took effect after being ratified by a ninth state (New Hampshire) on June 21, 1788.  Hamilton started:

After an unequivocal experience of the inefficiency of the subsisting federal government, you are called upon to deliberate on a new Constitution for the United States of America. … It has been frequently remarked that it seems to have been reserved to the people of this country, by their conduct and example, to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend for their political constitutions on accident and force. 

Hamilton then pointed out that while one might hope for such arguments to be made purely on the merits, this was highly unlikely. Instead, he stated that in many cases argumentative strategy that would be broadly used by both side is that they “will mutually hope to evince the justness of their opinions, and to increase the number of their converts by the loudness of their declamations and the bitterness of their invectives.” He wrote: 

Happy will it be if our choice should be directed by a judicious estimate of our true interests, unperplexed and unbiased by considerations not connected with the public good. But this is a thing more ardently to be wished than seriously to be expected. The plan offered to our deliberations affects too many particular interests, innovates upon too many local institutions, not to involve in its discussion a variety of objects foreign to its merits, and of views, passions and prejudices little favorable to the discovery of truth. …

A torrent of angry and malignant passions will be let loose. To judge from the conduct of the opposite parties, we shall be led to conclude that they will mutually hope to evince the justness of their opinions, and to increase the number of their converts by the loudness of their declamations and the bitterness of their invectives. … History will teach us that … of those men who have overturned the liberties of republics, the greatest number have begun their career by paying an obsequious court to the people; commencing demagogues, and ending tyrants.

Hamilton then says that he won’t preach about his own good intentions; in fact, be suspicious of those who preach about their intentions. Also, he will not fake an uncertainty about his views, pretending to be a neutral observer weighing the arguments when he is actually a supporter of the new Constitution. Instead, he will make his case with arguments open to all. He writes: 

In the course of the preceding observations, I have had an eye, my fellow-citizens, to putting you upon your guard against all attempts, from whatever quarter, to influence your decision in a matter of the utmost moment to your welfare, by any impressions other than those which may result from the evidence of truth. You will, no doubt, at the same time, have collected from the general scope of them, that they proceed from a source not unfriendly to the new Constitution. Yes, my countrymen, I own to you that, after having given it an attentive consideration, I am clearly of opinion it is your interest to adopt it. I am convinced that this is the safest course for your liberty, your dignity, and your happiness. I affect not reserves which I do not feel. I will not amuse you with an appearance of deliberation when I have decided. I frankly acknowledge to you my convictions, and I will freely lay before you the reasons on which they are founded. The consciousness of good intentions disdains ambiguity. I shall not, however, multiply professions on this head. My motives must remain in the depository of my own breast. My arguments will be open to all, and may be judged of by all. They shall at least be offered in a spirit which will not disgrace the cause of truth.

In passing, I’ll note that the pretense of being an uncertain neutral observer comes up a lot in academic writing. There will be a neutral-sounding title like “Weighing the Costs and Benefits of the Minimum Wage,” immediately followed by an essay that either all benefits or all costs.

Donald J. Kochan takes up this topic at greater length in “On the Imperative of Civil Discourse: Lessons from Alexander Hamilton and Federalist No. 1” (Southern California Law Review Postscript, 2020, vol. 94, pp. 32-43). As Kochan writes:

Although The Federalist Papers are most often read for its lessons on constitutional interpretation, Federalist No. 1 actually had an additional purpose. Hamilton wanted his readers to understand the imperative of civility in discourse, a presumption of good faith applied to one’s political opponents, and the importance of respecting different opinions when engaging in the most important, often contentious, conversations of the day.

The age-earnings profile for a given year tells how much more a typical 60 year-old makes than a typical 40 year-old or a typical 25 year old. It turns that the age-earnings profile is getting both higher and later in life. David J. Deming explores this theme in “The Growing Importance of Decision-Making on the Job” (April 2021, NBER Working Paper #28733, subscription required).

Here is Deming’s description of the pattern, followed by a figure:

Age-earnings profiles in the U.S. in 1960 … Earnings growth peaks at about 40 percent when workers are in their late thirties and early forties. This peak is followed by a gradual decline of about 10 percentage points over the next twenty years of age. The 1980 profile is shifted upward, with a peak around 50 percent, but is otherwise similar to 1960. By 2000, U.S. age earnings profiles had shifted outward dramatically, with a higher peak that occurs much later in the life-cycle. In 2000, full-time workers age 50-54 earned about 90 percent more than full-time workers age 20-24. In 2017, earnings growth peaked at nearly 100 percent and workers age 55-59 were earning substantially more than workers in their 30s.

Why the change? Deming provides an array of evidence suggesting that jobs which involve decision-making have been getting ever-higher pay. For example, the share of all wages being paid to management-related occupations was 15% back in 1960, but is now approaching 35%. The share of jobs requiring decision-making skills (based on text analysis of classified ad data for the historical numbers) was 5% in 1960 and is now up around 35%. When job tasks are classified using the data from the Occupational Information Network (O*NET) survey, the jobs that require more decision-making are the ones with the higher earnings peaks later in life.

It seems to me that this is an underappreciated shift in what is being appreciated and desired in the labor market. There has been a lot written in the last few years about the “polarization” of labor markets, and how the rise of automation and digital technologies has wiped out a number of formerly middle-income jobs. However, many organizations now do their work through groups of overlapping teams, and the managers of those teams are often the ones receiving higher pay.

But it also feels to me as if some puzzles remain about this shift. For example, the current pattern at least seems to be that, on average, employers tend to view workers in their 50s as the most capable of being decision-makers and running such teams, even in an increasingly digital and technological environment. Is there something about the experience of workers in their 50s that justifies this confidence? Or is it in part that the post World War II baby boom generation is aging, and thus the share of older workers in the workplace is relatively high? Or is it that choosing an older person is in part a seniority-based system that is easier for management to justify? Or is it that teams, and older workers on those teams, don’t respond well if a younger person is the putative leader? Given past trends, and looking ahead 20 years, will we be viewing it as somehow “natural” that the wise 70 year-olds hold a disproportionate share of the managerial decision-making roles?

Most money is already digital: for example, my paycheck flows automatically into my bank account, my mortgage payments automatically flow out, and I authorize my bank to pay credit card charges online. So what would be different about a central bank digital currency?

Just to be clear, the idea here is not that the Federal Reserve, the European Central Bank, the Bank of Japan, and others would start up competitors for the cryptocurrencies like Bitcoin, Ethereum, or Dogecoin. Instead, a central bank digital currency would be a form of the nation’s existing currency. Like currency in the form of coins or paper money, you would be able to use the digital current as a medium of exchange when buying and selling. However, unlike the examples of digital money I mentioned a moment ago, a central bank digital currency would not need to move through your bank.

Thinking about a central bank digital currency in this way raises obvious practical questions. What form would it take? How would it be accessed when buying or selling? What security would protect it? Would digital currency be anonymous, like physical currency, or could it be tracked? It also raises a bigger conceptual question: What benefits might result from central bank digital currency?

The subject is hot right now. For example, the Bank of International Settlements, in its most recent annual report, devotes a chapter to “CBDCs: an opportunity for the monetary system.” Randal K. Quarles of the Fed Board of Governors just gave a talk on the subject called “Parachute Pants and Central Bank Money” (June 28, 2021). A subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs held hearings on “Building A Stronger Financial System: Opportunities of a Central Bank Digital Currency” earlier this month (June 9, 2021), including testimony from  Neha Narula, Director of the Digital Currency Initiative at MIT, Lev Menand of Columbia Law School, and Darrell Duffie of the Stanford Graduate School of Business.

The main potential benefit claimed for a central bank digital currency is an improvement in “payment systems,” which is the jargon-heavy term for the idea that many of the current ways of making digital payments through banking involve fees of some kind. Current digical payments are mostly “bank-railed,” to use a term from Darrell Duffie–that is, they flow through connections set by banks. Sometimes the fees are explicit, from banks or credit card companies or payment services. Other times the fees are implicit, like when a financial firm takes a day or two or three before a payment clears–time when someone is potentially earning interest on that money. In many places, these fees for making payments can be 1% of GDP or more.

Here’s a figure from the BIS report on the size of payment-related fees around the world, where EMEA is an abbreviation referring to a selection of countries in Europe, the Middle East, and Africa.

Here’s a similar figure from Duffie on costs of payment systems. Duffie writes: “It takes too long for U.S. merchants to receive their payments, often more than a day. Based on McKinsey data, moreover, Americans pay about 2.3% of GDP for payment services, far more than Europeans, particularly because of extremely high fees for credit cards, as illustrated in Figure 1. This is not because Americans are getting better quality service. Further, the primary payment instrument of Americans, their bank deposits, is compensated with extremely low interest rates.”

There are various concerns about these fees. If relatively few companies are providing payment services, the fees may be higher than they need to be because of lack of competition. In addition, a substantial number of people are “unbanked,” and without a bank account, the payment fees charged by nonbank payment service companies (say, those sending funds across borders) can be quite high. There are also questions about whether the current digital payment systems do a good job of protecting people’s personal information and privacy.

How would a central bank digital currency address the problem. For example, would people and businesses have individual accounts at the Federal Reserve? This would avoid banks, but it would also be a major change in the function of the Federal Reserve, which serves the function of coordinating payments across banks, but not being a bank itself. The BIS describes what a retail-level central bank digital currency might look like this way:

Retail CBDCs come in two variants. One option makes for a cash-like design, allowing for so-called token-based access and anonymity in payments. This option would give individual users access to the CBDC based on a password-like digital signature using private-public key cryptography, without requiring personal identification. The other approach is built on verifying users’ identity (“account-based access”) and would be rooted in a digital identity scheme. This second approach is more compatible with the monitoring of illicit activity in a payment system, and would not rule out preserving privacy: personal transaction data could be shielded from commercial parties and even from public authorities by appropriately designing the payment authentication process. …

From the public interest perspective, the crucial issue for the payment system is how the introduction of retail CBDCs will affect data governance, the competitive landscape of the PSPs [payment services providers] and the industrial organisation of the broader payments industry.

At least to me, other advantages sometimes cited for a central bank digital currency often miss the point. For example, one will sometimes hear claims that the Fed needs a digital currency to compete with the cryptocurrencies like Bitcoin and Ethereum. But it’s not at all clear to me that these cryptocurrencies are anywhere near unseating the US dollar as a mechanism for payments, and it’s quite clear to me that competing with Bitcoin is not the Fed’s job. Or one will hear that because other central banks are trying digital currencies, the Fed needs to do so, also. My own sense is that it’s great for some other central banks to try it out, and for the Fed to wait and see what happens. There is a hope that zero-cost bank accounts at the Federal Reserve might help the unbanked to get bank accounts, but it’s not clear that this is an effective way to reach the unbanked (who are often disconnected from the financial sector and even the formal economy in many ways), and there are a number of policy tools to encourage banks to offer cheap or even zero-cost no-frills bank accounts that don’t involve creating a central bank digital currency.

Quarles at the Fed sums up the current case against a CBDC in this way (footnotes omitted):

In brief, the potential benefits of a Federal Reserve CBDC are unclear. Conversely, a Federal Reserve CBDC could pose significant and concrete risks. First, a Federal Reserve CBDC could create considerable challenges for the structure of our banking system, which currently relies on deposits to support the credit needs of households and businesses. An arrangement where the Federal Reserve replaces commercial banks as the dominant provider of money to the general public could constrict the availability of credit, fundamentally alter the economy, and expose the public to a host of unanticipated, and undesirable, consequences. Among other potential problems, a dominant CBDC could undermine the consumer and other economic benefits that accrue when commercial banks compete to attract customers.

A Federal Reserve CBDC could also present an appealing target for cyberattacks and other security threats. Bad actors might try to steal CBDC, compromise the CBDC network, or target non-public information about holders of CBDC. The architecture of a Federal Reserve CBDC would need to be extremely resistant to such threats—and would need to remain resistant as bad actors employ ever-more sophisticated methods and tactics. Designing appropriate defenses for CBDC could be particularly difficult because, compared to the Federal Reserve’s existing payment systems, there could be far more entry points to a CBDC network—depending on design choices, anyone in the world could potentially access the network. Critically, we also would need to ensure that a CBDC does not facilitate illicit activity. … [I]t may be challenging to design a CBDC that respects individuals’ privacy while appropriately minimizing the risk of money laundering. 

The Federal Reserve is preparing what it calls a “comprehensive discussion paper” on central bank digital currency, so the subject is sure to remain a live one. My own sense is that, at present, the proposal can be seen as a shot across the bow from US policymakers of US banks and the US financial system: basically, “help us figure out a way to make the payments system cheaper and more accessible to all, or we might do something drastic.” Duffie argues: “U.S. banks are capable of providing an effective low-cost payment system but have not done so. Regulations, network effects that limit entry, and profit incentives have not promoted an open, innovative, and competitive market.”

The Centre for Development and Enterprise has published “Lant Pritchett in Conversation with Ann Bernstein” (June 2021), a transcript of a one-hour conversation. Here are a few of Pritchett’s comments that caught my eye, but see the interview for thought-provoking comments on education, corruption, and other topics.

On prioritizing national development over poverty reduction:

Development is a process that happens at the level of countries. The four transformations a country should make are: (1) to a productive economy, (2) to a capable state, so that it is able to do what it sets out to do, (3) to a government responsive to the needs and wishes of citizens, and (4) to a society where equal treatment of all before the law and of each other is a bedrock principle. I think those four characterise the transformation that takes a country from chaos and poverty to the levels of prosperity and well-being that we see in developed countries.

I strongly favour a focus on prosperity over a focus on poverty. You often hear the phrase ‘this or that isn’t a panacea’. My argument is: national development is a panacea. If your country manages to undergo the four transformations of national development, then all problems get solved because that is a machinery for nominating and solving problems.

Yet the current focus in development is on what I call ‘kinky development’, which involves tinkering on the margins to help the poorest of the poor. That is the wrong focus. If you achieve national development, you will solve poverty and provide prosperity for the general population, whereas focusing on poverty alone often is at odds with getting you to desirable levels of prosperity. We should ask ourselves with everything we do: “Is this contributing to one of the four transformations we need to do, and if so, how?” …

No country has high levels of human wellbeing without having achieved national development; and every country that has high national development achieves very high levels of human well-being. So, the only path to high human well-being is through national development.

Why following “best practice” is a poor and even counterproductive development strategy:

The AK47 is the world’s most popular weapon. The M16, which is the standard weapon in the US army, is far and away a more accurate weapon than the AK47, which beyond a few hundred yards, cannot hit a thing. The AK47 emerged from the Soviet Union, where they designed their weapons for the soldiers they had, low capability with little training. They also designed the AK47 to be unbelievably robust; no matter what you do to it, when you pull the trigger, it fires. You can basically hand anybody an AK47 and it will be a reasonably effective weapon. The United States took the opposite approach of designing the best possible weapon and training soldiers to match the weapon. It is an excellent weapon, but if you do not keep it clean and in good functioning order, it will misfire.

The problem is when you give the M16 with its perfect design to a poor soldier it won’t work. This mirrors a lot of what has happened in development – the desire to adopt best practice, leads to a gap between practice design and the capability for implementation. Rather than organically building designs that work in a low-implementation environment, policymakers have tried to borrow designs and fit them into countries, and it just does not work. When well-designed programmes are poorly implemented the reason is obvious, but the problem repeats itself, because no one ever admits that what they need is an AK47. You need to design the programme for the soldiers you have.