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Back in the 1980s and 1990s, there was an occasional outbreak of controversy around the idea of the check \”float,\” defined as how long after you deposited a check in your account were the funds actually available to you. Banks were often accused of failing to credit deposited checks to accounts as quickly as they could, because if they could hang on to the money for a few days longer, they could earn a bit of additional interest. The Expedited Funds Availability Act of 1987 was passed to limit the ability of banks to hold checks and benefit from the \”float\” (For example, here a 1997 article on some aspects of the check float controversy from the Federal Reserve Bank of Richmond.)

But the events of September 11, 2001, led–along with a host of considerably more important consequences–to a movement away from paper checks and to digital images of checks, thus largely ending the check float controversy. David B. Humphrey and Robert Hunt tell the story in \”Getting Rid of Paper: Savings from Check 21,\” just published as Working Paper 12-12 for the Federal Reserve Bank of Philadelphia.

Here is their description of the past process in clearing checks: \”The Uniform Commercial Code has long required U.S. checks to be physically presented to the banks they are drawn on for payment. … [T]he required physical presentment generated expensive air and land courier transportation costs. It also led to delays in check collection of from 1 to 5 days, averaging 1 day for local or within-city checks and usually 2 to 3 days for non-local items such as checks going from one city to another across the country.\”

But the events of 9/11 led to legislation allowing banks to accept digital images of checks that could be transmitted electronically.  \”On September 11, 2001, planes were grounded and check fl‡oat—–the value of checks in the process of transportation and collection—–rose to $47 billion (about eight times the normal daily level), while electronic payments were unaffected. Although the technology has been available for almost two decades to digitize check images and collect checks electronically on a same-day basis, the legal requirement of physical presentment inhibited its adoption. … The September 2001 disruption spurred the Federal Reserve to ask Congress to allow a paper representation of the digital image of the front and back of a check (called a substitute check) to be legally the same as the original physical item for purposes of collection and presentment. This legislation, adopted in 2003 and known as Check 21 (Check Clearing for the 21st Century Act), along
with other initiatives, currently permits almost all of the 24.5 billion checks paid annually in the U.S. (worth $32 trillion) to be collected electronically on a same-day (or next-day) basis once they are deposited at a bank. The original check is imaged and transported electronically, and a substitute check is printed close to where the paying bank is located. The substitute check is then physically
presented for payment. Since accepting billions of substitute checks is more costly than accepting and paying the electronic image itself, almost all paying banks now receive and pay the image.\”

 As the figure shows, digital images of electronic checks rapidly took over from paper checks between about 2005 and 2008. The figure shows checks processed by the Federal Reserve, but commercial banks have also moved dramatically to using digital images of checks.

The Check 21 legislation has shortened the float, so that it often happens in the same day or in one day, and never in more than two days. \”Since with Check 21 geography no longer matters, all deposited checks must be made available within 2 business days under Regulation CC (which implements the 1987 Expedited Funds Availability Act). Previously, some transit items could have had a maximum delay of up to 5 days when collection was physically difficult.\”

Allowing banks to transmit digital images of checks, rather than paper checks themselves, led to three main areas of cost savings:

• Savings in the physical cost of processing checks. It cost the Federal Reserve 9.6 cents to process a paper check in 2006, but 2.5 cents to process an digital image of a check in 2010. Applied to the 8.4 billion checks the Fed processed in 2010, and the 7.9 billion more processed by commercial banks, Humphrey and Hunt estimate: \”The total production cost savings from Check 21 for the U.S. payments system during 2010 is thus estimated to have been $1.16 billion.\” 
• Savings to businesses receiving checks from being able to collect the money a day earlier. \”[B]usiness payees may have saved $1.37 billion in working capital costs by being able to collect checks a minimum of one day earlier because of Check 21.\”
• Savings to consumers who can hold on to their money for a day or two longer before paying their credit cards or other debts. \”Combining all of this information leads to a rough estimate that consumers may have saved $0.64 billion from Check 21.\”

Along with this $3 billion or so in itemized gains, participants in the financial system would also have benefited from the greater certainty of knowing that your money would be available sooner.

A few weeks ago on May 21, I posted about \”Illustrating Economies of Scale,\” and the conversion from paper checks to digital images offers an example. Humphey and Hunt argue that as digital electronic checks ramped up, they were able to take advantage of economies of scale to reduce averae per-unit costs. On the other side, as paper checks were phased out, they lost the advantages of economies of scale and thus saw per-unit costs rise. Here\’s the figure:

The story of the transition from paper checks to digital checks isn\’t a major economic episode. But it\’s one more nice illustration of how digital technology and the Internet have been transforming the ways in which economic activity is conducted.

\”Unconventional\” natural gas production is booming in the U.S.: that is, shale gas, coalbed methane, and \”tight gas,\” which is similar to shale gas but found in low-permeability formations.  However, there are two sets of environmental concerns. One involves protecting the environment while actually extracting this gas. The second involves how finding a substantial new source of energy might affect air pollution, including the carbon emissions that pose a risk of global warming.  The International Energy Agency discusses the issues in \”Golden Rules for a Golden Age of Natural Gas.\” (The IEA is an autonomous international agency with 28 member countries and a staff of 260. It was founded back in 1973-74 as part of the response to the oil price shock at that time.)

As a starting point, here\’s an overview of the U.S. situation, with a map showing where the main deposits are located:

\”Until recently, unconventional natural gas production was almost exclusively a US phenomenon. Tight gas production has the longest history, having been expanding steadily for several decades. Commercial production of coalbed methane began in the 1980s, but only took off in the 1990s; it has levelled off in recent years. Shale gas has also been in production for several decades, but started to expand rapidly only  in the mid-2000s, growing at more than 45% per year between 2005 and 2010. Unconventional gas production was nearly 60% of total gas production in the United States in 2010. While tight gas and shale gas account for the overwhelming bulk of this, shale gas is expected to
remain the main source of growth in overall gas supply in the United States in the coming
decades. The United States and Canada still account for virtually all the shale gas produced
commercially in the world … There are large resources of all three types of unconventional gas across the United States. Of the 74 trillion cubic metres (tcm) of remaining recoverable resources of natural gas at end-2011, half are unconventional; in total, gas resources represent around
110 years of production at 2011 rates.\”

One part of the report tried to enunciate a set of \”golden rules\” that should be followed to protect the environment while extracting this gas. There is a lengthy discussion of these \”golden rules,\” but the overall tone can be discerned from the main headings (each of which has several subheadings): Monitor, disclose and engage; Watch where you drill; Isolate wells and prevent leaks; Treat water responsibly; Eliminate venting, minimise flaring and other emissions; Be ready to think big; Ensure a consistently high level of environmental performance.

Intriguingly, the IEA finds that the costs of implementing this \”golden rule\” environmental agenda are quite manageable in the context of the overall cost of these projects: \”We estimate that applying the Golden Rules could increase the overall financial cost of development a typical shale-gas well by an estimated 7%.\”  I would interpret this finding as saying that there is no cost-based justification for not undertaking at least this level of environment projection, if the exploitation of unconventional gas reserves is to proceed. 

The other main environmental issue is the concern that abundant natural gas will add to air pollution, including both conventional pollutants and carbon emissions that bring a risk of climate change. The IEA modelling suggests several effects would take place. Natural  gas will reduce the need for burning coal to generate electricity and burning oil for heating and transportation, which tends to reduce carbon emissions. But on the other side, cheaper natural gas will also slow the deployment of more expensive non-carbon energy sources, and the quantity demanded of natural gas will rise as it gets cheaper. Overall, these counterbalancing effects would lead to a modest reduction in carbon emissions. The IEA writes:

\”[I]t is difficult to make the case that a reduction in unconventional gas output brings net environmental gains. The effect of replacing gas with coal … is to push up energy-related CO2 emissions, which are 1.3% higher [without added natural gas] than in the Golden Rules Case. …  Additional investment in coal-fired generation locks in additional future emissions, since any new coal-fired power plant has an anticipated operating lifetime in excess of 40 years. Though many of those concerned with environmental degradation may find it difficult to accept that unconventional gas resources have a place in a sustainable energy policy, a conclusion from this analysis is that, from the perspective of limiting global greenhouse gas emissions, a Golden Rules Case has some advantages … while also bringing with it other benefits in terms of the reliability and security of energy supply.\”

The IEA immediately goes on to say that a strategy of encouraging development of unconventional natural gas isn\’t enough to ameliorate climate change concerns:

\”[R]reaching the international goal of limiting the long-term increase in the global mean temperature to 2°C above pre-industrial levels cannot be accomplished through greater reliance on natural gas alone. Achieving this climate target will require a much more substantial shift in global energy use, including much greater improvements in energy efficiency, more concerted efforts to deploy low-carbon energy sources and broad application of new low-carbon technologies, including power plants and industrial facilities equipped for carbon capture and storage. Anchoring unconventional gas development in a broader energy policy framework that embraces these elements would help to allay the fear that investment in unconventional gas comes at the expense of investment in lower carbon alternatives or energy efficiency.\”

 My own grand compromise proposal is for the \”Drill Baby Carbon Tax.\” On one side, it calls for making a national commitment to using domestic energy resources including natural gas, coal and oil, for the jobs, the lower energy prices, and the reduced dependence on imported energy. On the other side, it also calls for a carbon tax so that the prices paid by consumers for energy sources that pollute the air reflect the full social costs of that energy production, and thus will also encourage development of cleaner energy sources.  Indeed, one can envision a future for electricity generation where there is increasing reliance on noncarbon sources over time, but when the sun isn\’t shining and the wind isn\’t blowing, we have abundant natural gas as a reliable backup.

The Congressional Budget Office has published \”The 2012 Long-Term Budget Outlook.\” It\’s a go-to source for balanced and unheated analysis on this subject. The main focus is not on the annual budget deficits of the last few years or the next few years, but rather on the overall accumulation of federal debt. Here are some points that caught my eye.

Current Federal Debt in Long-Run Perspective
Here\’s a figure showing the ratio of federal debt/GDP from 1790 to the present. Notice that before World War II, the highest points of federal borrowing–the Revolutionary War, the Civil War,  World War I, and the Great Depression–were all below a debt/GDP ratio of 50%. World War II pushed the debt/GDP ratio above 110%, but then it dropped back down after a few decades. Even after the big budget deficits of the 1980s and early 1990s, the debt/GDP ratio didn\’t get above 50%. But the current debt/GDP ratio is now above 70%, higher than any previous episode in U.S. history other than World War II. The federal debt isn\’t in completely uncharted territory, but it hasn\’t visited this neighborhood often before.

Alternative Scenarios for Long-Run Debt
The CBO does two main projections for long-run federal debt. One projection assumes that current law will be followed exactly. Under this scenario, which the CBO calls the \”Extended Baseline Scenario,\” the debt/GDP ratio soon flattens out and fades. But frankly, this current law scenario can\’t be trusted. After all, nothing stops Congress from passing and the President from signing a law that says all federal budgets will be balanced after, say, 2020. On paper, this solves the debt problem! But in practice, if the law is virtually certain to be changed before 2020, it solves nothing.

Thus, the CBO also offers the \”Extended Alternative Fiscal Scenario,\” which \”incorporates the assumptions that certain policies that have been in place for a number of years will be continued
and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider “current policies,” as opposed to current laws.\”

For example, tax cuts enacted by a Republican Congress and signed into law by President Bush in 2001 were scheduled to expire in 2010. But in 2010, a Democratic Congress and President Obama extended those tax cuts through 2012. The CBO \”alternative\” scenario assumes that this lower level of taxes will continue after 2012. It also assumes that Congress will continue to pass \”temporary\” relief from the Alternative Minimum Tax. It assumes that Congress will prevent the large cuts in Medicare now written into current law: a 31% cut in physician payments scheduled for next year, and automatic reductions of 1% per year in other reimbursements over the long term.  The alternative fiscal scenario also assumes that federal spending for activities other than health care and Social Security will remain more or less at their average levels for the last two decades (as a share of GDP), rather than dramatically falling in size over the next decade or two as current law somewhat mysteriously requires. The alternative scenario concludes that when push comes to shove, Congress and the President won\’t let the automatic spending cuts mandated by the Budget Control Act a few years ago take effect.

Under the alternative \”current policies\” scenario, the federal debt takes off.  It hits a debt to GDP ratio around 100% in about 2023, 150% by the early 2030s, and 200% by 2040. Of course, matters are unlikely to go that far. One way or another, the wheels would come off the wagon by then.

Health Care Spending Drives the Long-Run Debt Forecast
Social Security spending is slated to rise as the post WWII baby boomers hit retirement age, rising from 5% now to about 6% of GDP in 2037. However, spending on federal health care programs under current law (that is, assuming the unrealistic cuts in Medicare) would still rise from 5^% of GDP today to 10% of GDP by 2037. The sustained rise in federal spending in the alternative scenario is first due to health care spending and to not assuming that all other federal spending is slashed as current law projects–and then later due to monumental interest costs that build up from the earlier borrowing.

The upper left bar graph compares the average level of Social Security and federal health spending for the average of 1972-2011, and then looks at what it would be 25 years from now in 2037 under the baseline and the alternative scenario. Notice that under the baseline scenario the increase is large, and under the alternative scenario it\’s even larger. Under both scenarios, all other federal spending (except interest payments) decreases. Total revenues are higher in the baseline scenario, which assumes that the Bush/Obama tax cuts will be eliminated and the reach of the Alternative Minimum tax will greatly expand.

Why acting sooner is better than later.
The CBO is careful to take no stand on exactly how soon federal deficits should start coming down.  The report does make the point that sooner is better than later for long-term economic growth. But it also points out that postponing a solution tends to be better for anyone born more than 21 years ago—that is, for most voters!–because it pushes more of the costs of addressing the federal debt on to those who are under 21 or not yet born.

\”CBO’s analysis suggested that, depending on the policy used to stabilize the debt, delaying action for 10 years—which would allow the debt-to-GDP ratio to rise by an additional 40 percentage points under the assumptions used for that analysis—would cause real output to be lower by between 2½ percent and 7 percent in the long run than it would have been if the ratio had been stabilized earlier at a lower level. … Most of the decline in output caused by delaying action would stem from two factors: the crowding out of investment in productive capital, which would reduce the size of the capital stock by between 7 percent and 18 percent; and the effects of higher marginal tax rates (which would ultimately be required under the policy that stabilizes debt by raising taxes) on people’s incentives to work and save.

Another conclusion of CBO’s analysis was that generations born after about 2015 would be worse off if action to stabilize the debt-to-GDP ratio was postponed from 2015 to 2025. People born before 1990, however, would be better off if action was delayed, largely because they would partly or wholly avoid the policy changes needed to stabilize the debt …\”

There is legitimate room for disagreement over how quickly and how severely to try to reduce federal budget deficits, given the continued sluggishness of the economy. But a growing body of research (for example, see here and here) suggests that the ratio of public debt/GDP can reach about 90% of GDP without much negative effect, and then the chances of reduced growth or even a financial crisis become much more severe. Over the next 10 years, or maybe sooner, current federal budget policies are putting the debt/GDP ratio on a collision course with a very hard reality.

UNICEF Innocenti Research Centre has issued its report: \”Measuring child poverty: New league tables of child poverty in the world’s rich countries.  The United States doesn\’t stack up very well, although it\’s important to be clear on just what the comparisons are showing.

For comparability across countries with different income levels, the report uses a working definition of \”poverty\” as half of the median income in that country. This graph shows the share of children in each country who are growing up in families where the income is less than half the median income for that country. The U.S., with 23.1% of its children in such families, ranks 34th out of 35 countries.

It\’s important to be clear on what this graph doesn\’t show. It doesn\’t show that U.S. children are more deprived in absolute terms than children in other countries. The U.S. has a higher level if incomes than these other countries–much higher than some of them. Indeed, the UNICEF report notes that half of the median income for the 10 richest countries in this table is more than the actual median income for the 10 poorest countries in the table.

In addition, income is more unequally distributed in the U.S. than in many of these other countries. As a result, the U.S. will have a larger share of its population living in households that earn less than 50% of the median income compared with countries that have a much more equal distribution of income like Iceland or Finland.  The UNICEF report offers an extended discussion of poverty lines set in absolute terms and those set in relative terms, and the report offers data and examples for both approaches. The argument that it can be useful to look at a relative poverty line, like 50% of median income in a country, goes like this:

\”In sum, a relative poverty line drawn at 50% of median income is an attempt to define a concept of poverty on which there is widespread agreement in principle – a concept which says that the poor are those who do not have access to the possessions, amenities, activities and opportunities that are considered normal by most people in the society in which they live … 50% of the median is a plausible measure of what it is intended to measure – the sense of falling so far behind the norms of one’s society as to be at risk of social exclusion. …

Thus, this argument holds that  the reason why the proportion of children in households below 50% of median income matters is that it represents the share of children missing the \”possessions, amenities, activities and opportunities that are considered normal by most people in the society in which they live.\” As an example of how these forces play out, I posted on May 23 about \”Dimensions of College Attendance,\” One figure in that post shows that for Americans born between 1979 and 1982, of those born into families in the bottom quarter of the income distribution, 9% completed a four-year college degree by age 25, and of those born into families in the top quarter of the income distribution, 54% completed a four-year college degree by age 25. I strongly suspect that this enormous gap has little to do with the cost of college or the availability of loans, but instead is closely linked to how those born into lower-income families get on average less support from family, local community, and the K-12 education system to prepare them for a college degree.

The UNICEF report also looks at the share of children living in households with less than 50% of median income before and after government taxes and transfers are taken into account. The darker blue bars show the child poverty rates from the preceding figure–that is, after government taxes and transfers are taken into account. The lighter blue bars show what the poverty rate among children would have been, if those taxes and transfers had not occurred. For countries at the top of the list, like Ireland, Hungary, the United Kingdom, Finland, and Australia, the overall effect of government taxes and transfers is a dramatic reduction in the proportion of children that would have been living in households below half of the median income. In the U.S., in contrast, the overall pattern of government taxes and transfers lead to a relatively small reduction in the number of children in such households. In Greece, remarkably enough, the overall pattern of government transfers actually increases the share of children living in households below 50% of the median income–which can happen if taxes are tilted toward families with kids and spending is focused on retirees.

The politics of designing government policies that affect children is complex, because only adults can vote. In many countries, including the United States, children are a decreasing share of the population. For example, U.S. Census data from 2010 showed that those under 18 years of age were 24% of the U.S. population–an all-time low. The U.S. Census Bureau (Table AVG1) estimates that America had 118 million households in 2011, which it divides into 78 million \”family\” households with an average of 3.25 people each and 40 million \”nonfamily\” households with 1.25 people each. Of the subset of \”family\” households, only about 46% have children–also an all-time low. No politician attuned to re-election ever says anything negative about \”the children,\” but as the proportion of children in the population and the share of households with children drops, it becomes politically harder to focus spending and tax policy on the concerns of families with children. 
 
Of course, it is always delicate to design government policy in support of children, because a sensible policymaker needs to be concerned about the incentives created when resources typically flow through their parents. But along with thinking about how U.S. tax and spending policy might support families with children in direct ways, it\’s also useful to think about how schools, libraries, community organizations, and public areas like parks and sidewalks can be supportive to the children.

I ran across the UNICEF report at Miles Corak\’s blog here.  In a post called \”The sad, sad story of the UNICEF Child Poverty Report and its critics,\”  Corak offers some pointed commentary on how such reports have been received in the past.

China is becoming a less attractive place for off-shoring of manufacturing. But the result isn\’t likely to be a large movement of jobs back to the United States. Instead, globally mobile manufacturers are likely to seek out alternative low-cost destinations. Michel Janssen, Erik Dorr, and Cort Jacoby of the Hackett Group discuss these issues in a report called \”Reshoring Global Manufacturing: Myths and Realities.\” The subtitle is: \”By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate.\” The report is freely available here, with free registration. 

\”[T]he manufacturing competitiveness of China compared to advanced economies and low-cost geographies is eroding. Stagnant or declining manufacturing wages in the West, rising transportation costs, concerns about intellectual property protection, and Chinese wage-rate inflation have brought traditional calculations about global manufacturing sourcing strategies to a tipping point  …. Our findings debunk a myth about the future of manufacturing that has been much discussed in the press recently: that manufacturing capacity is returning in a big way to Western countries as a result of rising costs in China. The reality is that the net amount of capacity coming back barely offsets the
amount that continues to be sent offshore. Our study confirms that China’s relative competitive position is indeed eroding rapidly, to the detriment of its overall economy. However, few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries.\”

Here is their estimate of  the gap in manufacturing costs and in \”total landed cost,\” which includes costs of manufacturing along with costs of raw materials and components, transportation and logistics, taxes and duties, and costs of carrying inventories. China continues to have an cost advantage, but the advantage is no greater than other  emerging markets. Moreover, the Hackett Group argues that when China\’s advantage in total landed cost gap drops to the levels projected for 2013, it starts to make sense to think about shifting production elsewhere.

I was also struck by some comments in the report about Apple\’s labor costs with the iPad and outsourcing to China. They emphasize that in some industries like furniture manufacturing, cost matters most. But in other industries, product quality, protection of intellectual property, time to market and ramp-up speed may matter more.

\”The Chinese labor-cost component of an entry-level iPad retailing for $500 is estimated at $10, or 2% of revenue, while the profit margin is estimated at $150, or 30% of revenue. If Apple were to move production to the USA, and if one assumes that assembly costs would triple (to $30), it is conceivable that Apple could convince customers to pay for a large portion of the price increase based on the appeal of a “made in the USA” product. … Furthermore, …  such a move could substantially boost Apple’s corporate image. However, the U.S. lacks the sheer labor capacity that would be required in order to ramp up production of iPads at the speed needed to maintain the company’s edge in the hyper-competitive tablet and mobile device market. … Thus one may assume that Apple’s manufacturing sourcing strategy is primarily motivated by scalability and supply chain
risk, and only secondarily by total landed cost.\”

When the Medicare trustees deliver their official forecasts for the Medicare system in their annual report, the actuaries who draft the report are required by law to assume that the law will be followed as written. For example, the current Medicare law says that physician payments will be cut 31% by 2013. For most other categories of Medicare services, 2009 hearth care reform legislation also specifies that the payment rates will be reduced each year by a rate equal to the economy-wide increase in multifactor productivity, which is projected at 1.1% per year. 

However, to their great credit, the Medicare actuaries also produce an annual background which explains why these assumed cost reductions are so implausible. This year\’s version was published on May 18 under the dry-as-dust title: \” Projected Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare Providers.\”

Here are a couple of figures projecting how Medicare reimbursement would compare with reimbursement from private health insurance. The first figure shows what current law projects for Medicare reimbursements for physician services, with comparisons to reimbursement from the Medicaid program and from private health insurance. Notice the 31% drop that is supposed to happen immediately, followed by an additional decline. In short, Medicare reimbursement of physicians is now about 80% of private health insurance, but under current law it is supposed to fall immediately to less than 60% of private insurance, and then over time to about 25% of private insurance.

The next figures shows a similar comparison for reimbursement for in-patient hospital services.  Medicare reimbursement for such services was about 90% of private health insurance reimbursement in the mid-1990s, is now down to about 65% of private health insurance reimbursement, and is projected under current law to continue falling to 40% of private health insurance reimbursement. 
 

Clearly, cost projections based on these continually falling rates of reimbursement can\’t be taken seriously. Indeed, there have been scheduled reductions in physician reimbursement every year since 2003–and Congress has overridden them every year. The scheduled 31% drop in physician reimbursements for next year is supposed to get us back on track for all the reductions that haven\’t happened since 2003, but no one believes it\’s going to happen. These kinds of reductions in reimbursements would either drive health care providers into insolvency, or lead them to stop serving Medicare patients.

As a result, the official current law estimates of future Medicare costs are wildly optimistic. The first column of this table shows that under current law, even with its unrealistic reimbursement reductions, Medicare costs nearly double as a share of GDP over the next seven decades. But under an alternative projection, which doesn\’t assume the immediate cut in physician reimbursements or the long-run slowdown in spending growth, Medicare spending is close to tripling as a share of GDP over the next seven decades. 

The actuaries are about as blunt as their profession allows about what all this means: \”The immediate physician fee reductions required under current law are clearly unworkable and are almost certain to be overridden by Congress. The productivity adjustments will affect other Medicare price levels much more gradually, but a strong likelihood exists that, without very substantial and transformational changes in health care practices, payment rates would become inadequate in the long range. … Thus, the current-law projections should not be interpreted as the most likely expectation of actual Medicare financial operations in the future but rather as illustrations of the very favorable impact of permanently slower growth in health care costs, if such slower growth can be achieved.\”

The May 19 issue of the Economist magazine, in an article  about California\’s budget problems and high prison costs, tossed in the following factoid: \”Excessive incarceration is an American problem. The country has about 5% of the world’s population but almost 25% of its prisoners, with the world’s largest number of inmates and highest per capita rate of incarceration.\”

This comment sent me scampering to the website of the  International Centre for Prison Studies,          and based on data from their World Prison Brief, I put together the following table. The table lists the 20 countries around the world that imprison the greatest numbers of people, and the first column shows the total for each country. The second column shows how many people are imprisoned in the country per 100,000 population. Either way you slice it, the U.S. leads the way with its 2,266,832 prisoners and an imprisonment rate of 730 per 100,000 population.

I\’ve posted back on November 30, 2011, about \”Too Much Imprisonment,\” and that post has details largely based on U.S. Department of Justice Statistics about the rapid rise in U.S. imprisonment over recent decades, the share of this rapid rise related to nonviolent offenses, and the cost.  Here, I want to raise a different question: If not prison, then what?

Here\’s an example from the local news: A woman named Amy Senser (wife of a former Minnesota Vikings professional football player Joe Senser) was convicted of two counts of criminal vehicular homicide: failing to immediately call for help and leaving the scene. Apparently she was taking an off-ramp from the highway, and the victim, Anousone Phanthavong, was putting gas into his stalled vehicle. It seems clear that Senser was driving the car when it hit him: her defense was that although she knew she had hit something, she didn\’t know it was a person. Senser may end up spending four years in prison.

Let me stipulate that I\’m utterly unsympathetic to drivers who leave the scene of accidents, and I\’m broadly unsympathetic to many of those who commit crimes. But whatever the ins and outs of the Senser case, it seems to me highly unlikely that she is going to drive a vehicle that hits someone else who is putting gas in their stalled car on a highway off-ramp. Moreover, my lack of sympathy with criminal behavior collides with other feelings. My skinflint spending tendencies note that imprisonment costs about $50,000 per year in the United States. My hard-headed practicality notes that most people who are imprisoned will re-enter society at some point, and we don\’t want to make that re-entry harder than it already is. Finally, my general soft-heartedness notes that those convicted of crimes also have children, parents, spouses, lovers and friends. When someone goes to prison, their community of human connections suffers as well.

For those who use violence in committing crimes against strangers, imprisonment seems appropriate. But for offenders who pose little or no danger of future violence, America needs to think about alternatives rather than blowing state and local budgets on imprisonment. Of course, those alternatives need to be chosen with care.

While fines or monetary penalties have their place, they aren\’t enough for me. I don\’t want the wealthy, or those with wealthy relatives, to be able to buy their way out of their misdeeds. I want to take the person\’s time, not their bank account. 

I\’m also not especially interested in the creative penalties that one sometimes reads about, where someone convicted of drunk driving needs to give talks to high school students, or attend the funerals of drunk driving victims, or spend weekend evenings in an emergency ward as casualties arrive. I doubt that it\’s practical to have tens of thousands of convicted criminals being shipped around from high school to YMCA to hospital emergency room. I don\’t like the legal system to be in the business of coercing half-hearted apologies. And I suspect that these \”creative\” penalties tend to apply more to those who are articulate and well-to-do and connected, and I see no reason why that group should get a break.

My thoughts about other alternatives are not well-formed. But in a world where we are deluged with concerns that technology is allowing us to be tracked and invading our privacy all the time, often without us knowing, it seems peculiar to me that our technology for dealing with criminals is a slightly more hygenic version of a penalty that has been around for millenia.

I find my thoughts turning to the \”rubber rooms\” where, as Stephen Brill discussed in the New Yorker magazine back in 2009, the New York City public school system was warehousing 600 public school teachers too incompetent to be returned to the classroom. These teachers much punch a time-clock at the beginning and end of the day, and in between, they stay in the room while the teachers\’ union appeals their disciplinary action. The average person has been there for three years–at full pay, of course. I also think about the jurisdictions where you see people in orange jumpsuits picking up trash by the side of the freeway. I think about ankle bracelets and applying advanced technology to old-fashioned house arrest, which might include monitoring or blocking of communication.

Put pieces of these together, and I imagine an alternative system that would serve many of the functions of punishment and incapacitation of the current prison system. It would combine requirements to report to supervised rooms for long periods of time, with an option to do certain kinds of physical labor around the community, but it would also send people home for most of the 24-hour day, under house arrest. There might be some flexibility where after a minimum time served, it would be possible for those in such a system to go to work, or to have a day or two off from reporting or surveillance each week. Those who didn\’t comply could of course end up in the traditional prison system. Such a system would still involve heavy and punitive restrictions on personal freedom. But it could be vastly cheaper for taxpayers, while also recognizing the reality that most of those convicted of most crimes will be walking, driving, working and living among us for most of their lives.

Since the early days of GDP accounting, and in every intro econ class since then, a  standard talking-point is that measures of economic output leave out home production. Further, if two neighbors stopped doing home production and instead hired each other to do housework and yardwork, total GDP would rise because those activities were now part of paid market exchange, even though the quantity of housework and yardwork actually done didn\’t rise.  But how much is household production actually worth in the U.S. economy and how has it changed over time? Benjamin Bridgman, Andrew Dugan, Mikhael Lal, Matthew Osborne, and Shaunda Villones tackle this question in Accounting for Household Production in the National Accounts, 1965–2010, which appears in the May 2012 issue of the Survey of Current Business. (I found this study at Gene Hayward\’s HaywardEconBlog.) Here are a few points that jumped out at me (footnotes omitted).

How can one estimate the value of home production?  
Get an estimate of hours devoted to home production, and then multiply by the wage that would be paid to domestic labor. \”To measure the value of nonmarket services, we make use of two unique surveys that track household labor activities and apply a wage to the total number of hours spent in home production. One of these surveys is the Multinational Time Use Survey (MTUS), which combined a number of time use surveys conducted by academic institutions into a single data set. These surveys were taken sporadically between 1965 and 1999. The other is the American Time Use Survey (ATUS) produced by the Bureau of Labor Statistics (BLS). This survey was taken annually between 2003 and 2010.  …

How does the value of home production relate to GDP?
\”We find that incorporating home production in GDP raises the level of GDP 39 percent in 1965 and
25.7 percent in 2010.\”

 Why has the value of home production fallen over time? 
Fewer hours spent in home production over time, and the wage of household workers relative to other workers in the economy has fallen. \”The impact of home production has dropped over time because women have been entering the workforce. This trend is driven by an increasing trend in the wage disparity between household workers and employees (that is, the opportunity cost of household labor).\”

How would including home production in national output alter the growth rate of this expanded definition of GDP over time?
\”Because standard GDP does not account for home production, some of the increase over time in GDP will be due to women switching from home production to market-based production. Our adjusted GDP measure includes the unmeasured home production, so the increase in GDP that occurs due to substitution from home production to market-based production will be smaller. During 1965 to 2010, the annual growth rate of nominal GDP was 6.9 percent. When household production is included, this growth rate drops to 6.7 percent.\”

How does time spent in home production vary with income level? How would including home production in output affect the inequality of income?
\”We find that home production hours do not vary with family income: for women, who contribute to the bulk of home production hours, the correlation between family income and home production is about 0.01. Therefore, adding home production income to family income is essentially the same as adding a constant number to family income, which will raise the income of low income families proportionately more than high income families, leading to a decrease in inequality. This finding is consistent with earlier work in this literature …\”

What are the gender patterns for time spent in home production?
\”In 1965, men and women spent an average of 27 hours in home production, and by 2010, they spent 22 hours. This overall decline reflects a drop in women’s home production from 40 hours to 26 hours, which more than offset an increase in men’s hours from 14 hours to 17 hours.\”

What is the connection between income and hours of household production?
 Those with more income spend tend to spend slightly more time on home production. \”Averaged over the years 2003 to 2010, the home production for women (men) in the lowest income category was 32.2  (23.3) hours per week, while in the highest income category it was 26.3 (19.0) hours per week.\”

The standard story of U.S.-China trade over the last decade or so goes like this: Huge U.S. trade deficits, matched by huge Chinese trade surpluses. One underlying reason for the imbalance is that China has been acting to hold its exchange rate unrealistically low, which means that within-China production costs are lower compared to the rest of the world, thus encouraging exports from China, and outside-China production costs are relatively high, thus discouraging imports into China.

This story is simplified, of course, but it holds a lot of truth. But it\’s worth pointing out that these developments are fairly recent–really just over a portion of the last decade–and not a pattern that China has been following since its period of rapid growth started back around 1980. In addition, these development seem to be turning: the U.S. trade deficit is falling, China\’s trade surplus is declining, and China\’s exchange rate is appreciating. Here\’s the evolution in graphs that I put together using the ever-helpful FRED website from the St. Louis Fed.

First, here\’s a look at China\’s balance of trade over time. The top graph shows China\’s  current account balance since 1980, roughly when China\’s process of economic growth got underway. Notice that China a trade balance fairly close to zero until the early 2000s, when the surpluses took off. Because the first graph stops in 2010, the second graph shows China\’s trade balance from 2010 through the third quarter of 2011. Clearly, China\’s trade surplus has dropped in the last few years, and in all likelihood will be lower in 2011 than in 2010.

China\’s pattern of trade surpluses maps loosely follows its exchange rate. Here is China\’s exchange rate vs. the U.S. dollar since 1980. When an economy is experiencing extremely rapid productivity growth, the expected economic pattern is that its currency will appreciate over time–that is, become more valuable. However, as China\’s growth took off in the 1980s and into the 1990s, its currency depreciated–on the graph, it took more Chinese yuan to equal $1 U.S. than before. In about 1994, there is an especially sharp depreciation of the yuan, as it went very quickly from about 5.8 yuan/$1 to about 8.6 yuan/$1. During the booming U.S. economy of the late 1990s, this change had relatively little effect on the balance of trade, but by the early 2000s, it began to pump up China\’s trade surplus.  However, notice also that the value of China\’s exchange rate has dropped quite substantially over the last few years, withe much of the change coming before the Great Recession hit (U.S. recessions are shown with shaded gray vertical bands in the figure.)

The U.S. balance of trade in the last decade or so looks like China\’s pattern, in reverse. As China\’s trade surplus takes off around 2000 or so, the U.S. trade deficit plummets at about that time. As China\’s trade surplus diminishes in the last few years, the U.S. trade deficit also diminishes.

So what about the story with which I started: an overvalued Chinese currency, leading to huge Chinese trade surpluses and correspondingly huge U.S. trade deficits? At a minimum, the story is much less true that it was a few years back. Indeed, William R. Cline and John Williamson at the Peterson Institute for International Economics argue that the U.S.-China exchange rate has largely returned to the fundamental value justified by productivity and price differences between the two economies. Their argument appears in a May 2012 Policy Brief called  \”Estimates of Fundamental Equilibrium Exchange Rates, May 2012.\”

They point out that China\’s trade surpluses are likely to be much smaller than the IMF, for example, was predicting a few years ago. And while they believe China\’s currency is still slightly undervalued, and needs to continue appreciating over time, they estimate that it\’s current value is not far from their \”fundamental equilibrium exchange rate\” or FEER.  They write:

\”China is still judged undervalued by about 3 percent … Thus, whereas a year ago we estimated that the renminbi needed to rise 16 percent in real effective terms and 28.5 percent bilaterally against the dollar (in a general realignment to FEERs), the corresponding estimates now are 2.8 and 7.7 percent, respectively. It is entirely possible that future appreciation will bring the surplus [China\’s trade surplus] down to less than 3 percent of GDP. But China still has fast productivity growth in the tradable goods industries, which implies that a process of continuing appreciation is essential to maintain its current account balance at a reasonable level.\”

In short, the episode of an overvalued Chinese currency driving huge trade imbalances may be largely behind us. The current U.S. trade deficits are thus more rooted in an economy which continues to save relatively little and to consume more than domestic production–thus drawing in imports.  

Wikipedia aspires to a neutral point of view. How well does it succeed? Shane Greenstein and Feng Zhu tackle this question in the May 2012 issue of the American Economic Review. (The article is not freely available, but many academics will have access through their library websites.) They conclude:

\”To summarize, the average old political article in Wikipedia leans Democratic. Gradually, Wikipedia’s articles have lost that disproportionate use of Democratic phrases, moving to nearly equivalent use of words from both parties, akin to an NPOV [neutral point of view] on average. The number of recent articles far outweighs the number of older articles, so, by the last date, Wikipedia’s articles appear to be centered close to a middle point on average. Though the evidence is not definitive about the causes of change, the extant patterns suggest that the general tendency toward more neutrality in Wikipedia’s political articles largely does not arise from revision. There is a weak tendency for articles to become less biased over time. Instead, the overall change arises from the entry of later vintages of articles with an opposite point of view from earlier articles.\”

How do they reach this conclusion? Greenstein and Zhu focus on entries that bear on topics of importance in U.S. politics; in particular, they begin by selecting all articles in January 2011 that include \”republican\” or \”democrat\” as keywords. This procedure generates about 111,000 articles, and when they have dropped the articles that aren\’t about U.S. politics, they have about 70,000 articles remaining.

They then rely on a process from earlier research, which selects \”1,000 phrases based on the number of times these phrases appear in the text of the 2005 Congressional Record, applying statistical methods to identify phrases that separate Democratic representatives from Republican representatives, under the model that each group speaks to its respective constituents with a distinct set of coded language. In brief, we ask whether a given Wikipedia article uses phrases favored more by Republican members or by Democratic members of Congress.\”

Some of their 70,000 articles don\’t include any of these phrases, and so can\’t be evaluated by this method. For the 28,000 article they can evaluate, they find on average a Democratic slant. \”[W]hen they have a measured slant, articles about civil rights tend to have a Democrat slant (-0.16), while the topic of trade tends to have a Republican slant (0.06). At the same time, many seemingly controversial topics such as foreign policy, war and peace, and abortion are centered at zero [that is, no slant].\”

They then look back at the earlier revisions of their 70,000 articles, and to keep the numbers manageable, when an article has more than 10 revisions they look only at 10.  This gives them 647,000 entries, but again many of them don\’t use any of the key phrases, leaving 237,000 that do include some of those phrases. They find that older revisions tend to lean more Democratic, while newer revisions and newer entries are more balanced.

Wikipedia is in many ways an extraordinary success. Greenstein and Zhu write:

\”As the largest wiki ever and one of the most popular websites in the world, Wikipedia accommodates a skyrocketing number of contributors and readers. At the end of 2011, after approximately a decade of production, Wikipedia supports 3.8 million articles in English and well over twenty million articles in all languages, and it produces and hosts content that four hundreds of millions of readers view each month. Every ranking places Wikipedia as the fifth or sixth most visited website in the United States, behind Google, Facebook, Yahoo!, YouTube, and, perhaps, eBay. In most countries with unrestricted and developed Internet sectors, Wikipedia ranks among the top ten websites visited by households.\” 

Any semi-serious researcher (and here I include junior-high-school students) knows that while Wikipedia can be a useful starting point, it should never be an endpoint. Instead, it can serve as a useful shortcut to finding links to other sources. But the Greenstein and Zhu evidence suggests that Wikipedia on average has found a reasonable level of political balance–although you may need to read a few related entries on the same broad topic to achieve it.