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Economists have traditionally focused on policies aimed directly at low-income people, rather than at low-income places. For example, programs like welfare payments, food stamps, Medicaid, and Supplemental Security Income are based on individuals. But there has been a push in the last few years for consideration of “place-based policies,” which focus on different rules for tax or government benefit, or for finance and regulation, rules within certain geographical boundaries. The sense behind advocacy of place-based policies is that individual-based policies are all very well, but when certain places within metropolitan areas or certain regions within countries have been lagging for decades, perhaps supplementing with other approaches may be useful.

Anthony Venables digs into these issues in “The case for place-based policy” (Centre for Economic Policy Research Policy Insight 128, February 2024). Venables starts by describing how a model of unfettered free markets would predict that economically distressed areas can bounce back, and how the forces in that model don’t seem strong enough.

For example, the standard market-oriented story is that if an area lags badly in economic terms for a time–say, in terms of business formation, employment opportunities, and growth–then several effects should occur. At least some people will migrate out of that area to find jobs elsewhere, which will in a mechanical sense reduce unemployment in that area. In addition, real estate in that area should diminish in value: as a result, firms should begin to see that area as a less-expensive spot to relocate, and people should begin to see that area as a less-expensive spot to live. Over some (not very clear) period of time, the local economy of the distressed area should rebalance itself.

Venables emphasizes several problems with this vision:

1) Not everyone will find it easy to migrate to another area of the city or the country. In fact, those who find it easiest to migrate will be those who have good job opportunities elsewhere–or more generally, those who have a personal and economic network elsewhere on which they can draw. Some people will also just have a degree of drive and determination that manifests itself in moving. Thus, out-migration from a distressed economic area means that the area will lose many of those that, for purposes of future economic development, it would prefer to keep.

2) While some prices will adjust when an area becomes economically distressed, not all of them will. For example, a minimum wage may apply across a given area, or various good and services may have a similar cost across areas, or interest rates will tend to rise and fall across areas. Indeed, other than real estate costs, it’s not clear the extent to which costs will be lower for firms or households in an economically distressed area.

3) The movements of firms and households in response to these price changes may not be large, either. For a firm, the potential benefits of a cheaper location in an economically depressed area need to be weighed against the benefits of locating in an economically more vibrant area where the pool of workers, suppliers, and ideas is likely to be deeper. For a household, a lower cost of housing is a nice thing in isolation, but living surrounded by other people attracted by the lower cost of housing may have tradeoffs concerning the qualities of the neighborhoods, parks, schools, and so on. Venables calls this a “low-level spatial equilibrium”: “Firms don’t want to move [to the economically distressed area] because other firms have not moved, or because workers do not have appropriate skills. Workers don’t want to acquire particular skills, as they do not see job opportunities arising from them, and so on in a vicious circle.”

Of course, none of this is to say that all economically depressed areas are doomed forever. Some areas do reinvent their local or regional economies. But when it works, it often takes a substantial time; and many times, it doesn’t seem to work at all.

One can concede and appreciate the reasons why certain places seem stuck in a “low-level spatial equilibrium,” but lack confidence in the ability of government to engineer a solution. A few tax breaks aren’t likely to cut it. An “all-of-the-above” approach that tries to address to address all of the concerns of firms and households about moving to an economically depressed area might work in some cases, but there aren’t any guarantees. One can imagine an “on-the-edges” approach that tries to at least shrink the economically distressed area around its geographic edges. In this essay, Venables doesn’t have much to offer here other than a very high-level discussion of “clear objectives,” encouraging “complementaries,” considering “alternative scenarios,” and the like.

At a baseline level, one can imagine governments making an attempt to relocate a substantial portion of their own operations and employees to distressed areas. If such relocation runs into problems–say, a lack of transportation infrastructure to get to the jobs, or concerns about the safety of walking, parking, or receiving deliveries in the neighborhood–then that helps the government understand what needs fixing for private employers and households to be willing to relocate as well.

For additional discussion on place-based policies, I’ve posted on the subject before:

• “Distressed Places: How to Encourage Jobs” (August 10, 2022)
• “When Local Governments Subsidize Firms: Some Guidelines” (September 29, 2020)
• “Some Economics of Place-Based Policies” (March 9, 2018)

Also, the Summer 2020 issue of the Journal of Economic Perspectives (where I work as Managing Editor), had a two-paper “Symposium on Place-based Policies” in the Summer 2020 issue.

”Using Place-Based Jobs Policies to Help Distressed Communities,” by Timothy J. Bartik
Place-based jobs policies seek to create jobs in particular local labor markets. Such policies include business incentives provided by state and local governments, which cost almost 50 billion USD annually. The most persuasive rationale for these policies is that they can advance equity and efficiency by increasing long-term employment rates in distressed local labor markets. However, current incentives are not targeted at distressed areas. Furthermore, incentives have high costs per job created. Lower costs can be achieved by public services to business, such as manufacturing extension, customized job training, and infrastructure. Reforms to place-based jobs policies should focus on greater targeting of distressed areas and using more cost-effective policies. Such reforms could be achieved by state and local governments acting in their residents\’ interests or could be encouraged by federal interventions to cap incentives and provide aid to distressed areas.
Full-Text Access | Supplementary Materials

”Place-Based Policies and Spatial Disparities across European Cities,” by Maximilian v. Ehrlich and Henry G. Overman
Spatial disparities in income levels and worklessness in the European Union are profound, persistent and may be widening. We describe disparities across metropolitan regions and discuss theories and empirical evidence that help us understand what causes these disparities. Increases in the productivity benefits of cities, the clustering of highly educated workers and increases in their wage premium all play a role. Europe has a long-standing tradition of using capital subsidies, enterprise zones, transport investments and other place-based policies to address these disparities. The evidence suggests these policies may have partially offset increasing disparities but are not sufficient to fully offset the economic forces at work.
Full-Text Access | Supplementary Materials

Many government agencies with enforcement power face a common problem: they only have the resources to visit or audit a tiny fraction of the possibilities, so they need to pick and choose their targets. How should they make that choice?

Consider the Occupational Safety an Health Administration, which is responsible for monitoring and passing rules about workplace safety. OSHA has jurisdiction over about 8 million workplaces, but (in cooperation with state-level agencies) it has resources to actually visit less than 1% of that number. How to choose which ones? Matthew S. Johnson, David I. Levine, and Michael W. Toffel discuss their research on this topic in “Making Workplaces Safer Through Machine Learning” (Regulatory Review, Penn Program on Regulation, February 26, 2024; for the underlying research paper, see “Improving Regulatory Effectiveness Through Better Targeting: Evidence from OSHA,” published in the American Economic Journal: Applied Economics, October 2023, 15:4, pp. 30-67; for an ungated preprint version, see here).

One insight is that it’s useful for regulatory purposes if the inspection process has a degree of randomness, because then firms need to be just a little on their toes. As it turns out, the largest OSHA inspection program from random OSHA process also allows researchers to look at workplace safety records in the aftermath of an OSHA inspection from 1999-2014 was called Site-Specific Targeting. The idea was to develop a list of firms that had the highest injury rates two years ago, and the randomly select a group of them for visits. It’s then possible to compare the aftermath of an OSHA regulatory visit for firms that (randomly) got one to the firms (remember, with similar high injury rates) that didn’t get one. The authors write: “We find that randomly assigned OSHA inspections reduced serious injuries at inspected establishments by an average of 9 percent, which equates to 2.4 fewer
injuries, over the five-year post- period. Each inspection thus yields a social benefit
of roughly $125,000, which is roughly 35 times OSHA’s cost of conducting an
inspection.”

But might it be possible, holding fixed the limited resources of OSHA, to do better? For example, what if instead of looking at injury rates from two years ago, one instead looked at the average injury rate over the previous four years–to single out firms with sustained higher rates of workplace injury? But is it possible to do better? What if we used a machine-learning model to predict which firms are likely to have the most injuries, or which firms could have the biggest safety gains, and and focused on those firms? The authors write:

We find that OSHA could have averted many more injuries had it targeted inspections using any of these alternative criteria. If OSHA had assigned to those establishments with the highest historical injuries the same number of inspections that it assigned in the SST program, it would have averted 1.9 times as many injuries as the SST program actually did. If OSHA had instead assigned the same number of inspections to those establishments with the highest predicted injuries or to those with the highest estimated treatment effects, it would have averted 2.1 or 2.2 times as many injuries as the SST program, respectively.

A few thoughts here:

1) I was surprised that the simple rule of looking back over four years of injury rates, rather than just looking at injury rates from two years ago, had such substantial gains. The reason is that injury rates in any given year can bounce around a lot. For example, imagine a firm that has one bad episode every 20 years, but quickly corrects the situation. In that bad year, it could turn up on the OSHA high-priority list–but the OSHA inspection won’t do much. A firm that is poorly ranked for accidents over four years is more likely to have a real problem.

2) Going beyond changing the inspection rule in the simple way of looking at fouro years of injury rates to using a more sophisticated and hard-to-explain machine learning approach has only modest gains. It might be that the machine learnig analysis is useful for showing if large gains are possible through better regulatory targeting, and if so, then regulators might wish to figure out a way to get most of those gains using a simple rule that they can explain, rather than black-box machine-learning rules they can’t easily explain.

3) One concern is that these new methods of targeting would leave out the randomization factor: firms would be able to predict that they were more likely to receive a visit from OSHA. It’s not clear that this is a terrible thing: firms which have poor workplace safety records over a period of several years should be concerned about a visit from regulators. But it may be wise to keep a random element in who gets visited.

Finally, it feels to me as if regulators, who are always under political pressure, sometimes see their role as akin to law enforcement: that is, they have an incentive to show that they are going after those who are provably in the wrong. But as this OSHA example shows, going after employers who had a really bad workplace event two years ago may not lead to as big a gain in workplace safety as going after employers who have worse records over a sustained time.

I wrote last year about a similar issue that arises in IRS audits. It turns out that when the IRS is deciding who to audit, it puts a lot of weight on whether it will be easy to prove wrongdoing. Thus, it tends to do a lot of auditing of low-income folks receiving the Earned Income Tax Credit, where the computers show that it should be straightforward to prove wrongdoing. But of course, there isn’t a lot of money to be gained from auditing those with low incomes. Consider the situation where the IRS audits 10 people who all had more than $10 million in income last year. Perhaps nine of those audits find nothing wrong, but the 10th results in collecting an extra $500,000. If the IRS auditors are focused on a high conviction rate, they make one choice; if they are focused on a strategy which brings in the most revenue, they will chase bigger fish.

My point is not that the choice of regulatory priorities should be turned over to machine learning! Instead, the point is that machine learning tools can help evaluate whether the existing rules are being set appropriately, and how well those rules work relative to alternatives.

Making Workplaces Safer Through Machine Learning

Imagine that in the market for generic drugs, a group of companies form a cartel to raise prices on the products controlled by their group. Other companies were not involved. What pattern might you expect to see for the prices of drugs controlled by the cartel, or not controlled by the cartel. Amanda Starc and Thomas G. Wollmann carry out this analysis in “Does Entry Remedy Collusion: Evidence from the Generic Prescription Drug Cartel “(NBER Working Paper 29886, April 2023).

The blue line shows prices of generic drugs where supply was controlled by the firms in the cartel. The black line shows prices of generic drug where supply is not controlled by the cartel. As you can see, prices changes for these two groups of generic drugs track each other closely before 2013. But after 2013, prices for the group of drugs not controlled by the cartel continues on its downward trajectory, while prices for the group of drugs controlled by the cartel suddenly rise and then maintain a higher level.

Of course, one graph doesn’t prove that a cartel was actually formed or was successful in raising prices. It’s theoretically possible that a sudden surge of increased demand or reduced supply caused prices for all the drugs controlled by the supposed cartel to leap up in this way at just the time that an employee at Teva Pharmaceuticals started coordinating efforts across a number of firms to keep prices high. But as circumstantial evidence goes, it does raise one’s eyebrows.

Some antitrust cases are resolved all at once, with a well-publicized court finding or a legal settlement. But in other cases, the resolution trickles out over time in a series of announcements, one company at a time. . That’s what seems to be happening in the ongoing antitrust case about the prices of a number of generic drugs. Last summer, Teva Pharmaceuticals and Glenmark Pharmaceuticals became the sixth and seventh companies to announce consent agreements with the antitrust authorities at the US Department of Justice. Teva, which is especially central to this case, agreed to a criminal penalty of $225 million to settle the case, along with divesting a certain cholesterol drug and other penalties.

What exactly did Teva do? It’s hard to know what happened behind the scenes, and part of the reason that a company signs a consent decree is to avoid acknowledging the full extent of what happened. But we at least know the accusations that were laid out in US District Court in 2019.

The complaint starts out by alleging that there has been a long-standing pattern in the generic drug industry of firms agreeing (at least tacitly) to divide up the market and not to compete too hard with each other. I can’t speak to the truth of this allegation, and the evidence above shows that prices of generic drug were falling steadily up through 2013. Thus, the heart of the case is not the allegations about a long-standing lack of competition, but events that started in 2013. Here, I’ll quote the allegations of the complaint about the actions of Nisha Patel at Teva Pharmaceuticals in 2013 (starting around p. 158 of the complaint):

565. In April 2013, Teva took a major step toward implementing more significant price increases by hiring Defendant Nisha Patel as its Director of Strategic Customer Marketing. In that position, her job responsibilities included, among other things: (1) serving as the interface between the marketing (pricing) department and the sales force teams to develop customer programs; (2) establishing pricing strategies for new product launches and in-line product opportunities; and (3) overseeing the customer bid process and product pricing administration at Teva.

566. Most importantly, she was responsible for – in her own words – “product selection, price increase implementation, and other price optimization activities for a product portfolio of over 1,000 products.” In that role, Patel had 9-10 direct reports in the pricing department at Teva. One of Patel’s primary job goals was to effectuate price increases. This was a significant factor in her performance evaluations and bonus calculations and, as discussed more fully below, Patel was rewarded handsomely by Teva for doing it.

567. Prior to joining Teva, Defendant Patel had worked for eight years at a large drug wholesaler, ABC, working her way up to Director of Global Generic Sourcing. During her time at ABC, Patel had routine interaction with representatives from every major generic drug manufacturer, and developed and maintained relationships with many of the most important sales and marketing executives at Teva’s competitors.

568. Teva hired Defendant Patel specifically to identify potential generic drugs for which Teva could raise prices, and then utilize her relationships to effectuate those price increases. …

571. When she joined Teva, Defendant Patel’s highest priority was identifying drugs where Teva could effectively raise price without competition. On May 1, 2013, Defendant Patel began creating an initial spreadsheet with a list of “Price Increase Candidates.” As part of her process of identifying candidates for price increases, Patel started to look very closely at Teva’s relationships with its competitors, and also her own relationships with individuals at those competitors. In a separate tab of the same “Price Increase Candidates” spreadsheet, Patel began ranking Teva’s “Quality of Competition” by assigning companies into several categories, including “Strong Leader/Follower,” “Lag Follower,” “Borderline” and “Stallers.”

572. Patel understood – and stressed internally at Teva – that “price increases tend to stick and markets settle quickly when suppliers increase within a short time frame.” Thus, it was very important for Patel to identify those competitors who were willing to share information about their price increases in advance, so that Teva would be prepared to follow quickly. Conversely, it was important for Patel to be able to inform Teva’s competitors of Teva’s increase plans so those competitors could also follow quickly. Either way, significant coordination would be required for price increases to be successful – and quality competitors were those who were more willing to coordinate.

573. As she was creating the list, Defendant Patel was talking to competitors to determine their willingness to increase prices and, therefore, where they should be ranked on the scale. …

574. It is important to note that Defendant Patel had several different ways of communicating with competitors. Throughout this Complaint, you will see references to various phone calls and text messages that she was exchanging with competitors. But she also communicated with competitors in various other ways, including but not limited to instant messaging through social media platforms such as Linkedin and Facebook; encrypted messaging through platforms like WhatsApp; and in-person communications. Although the Plaintiff States have been able to obtain some of these communications, many of them have been destroyed by Patel.

575. Through her communications with her competitors, Defendant Patel learned more about their planned price increases and entered into agreements for Teva to follow them. …

576. By May 6, 2013, Patel had completed her initial ranking of fifty-six (56) different manufacturers in the generic drug market by their “quality.” Defendant Patel defined “quality” by her assessment of the “strength” of a competitor as a leader or follower for price increases. Ranking was done numerically, from a +3 ranking for the “highest quality” competitor to a -3 ranking for the “lowest quality” competitor. …

577. Defendant Patel created a formula, which heavily weighted those numerical ratings assigned to each competitor based on their “quality,” combined with a numerical score based on the number of competitors in the market and certain other factors including whether Teva would be leading or following the price increase. According to her formula, the best possible candidate for a price increase (aside from a drug where Teva was exclusive) would be a drug where there was only one other competitor in the market, which would be leading an increase, and where the competitor was the highest “quality.” Conversely, a Teva price increase in drug market with several “low quality” competitors would not be a good candidate due to the potential that low quality competitors might not follow Teva’s price increase and instead use the opportunity to steal Teva’s market share.

578. Notably, the companies with the highest rankings at this time were companies with whom Patel and other executives within Teva had significant relationships.

The legal complaint runs to several hundred pages, documenting contacts between firms with agreements to raise prices, or not to underbid on contracts. Taking it all into account, the legal complaint alleges:

At the zenith of this collusive activity involving Teva, during a 19-month period beginning in July 2013 and continuing through January 2015, Teva significantly raised prices on approximately 112 different generic drugs. Of those 112 different drugs, Teva colluded with its “High Quality” competitors on at least 86 of them (the others were largely in markets where Teva was exclusive). The size of the price increases varied, but a number of them were well over 1,000%.

Again, it’s worth remembering that these allegations are one side. But when it comes to the communications between Teva and other generic drug firms from 2013 to 2015, they have many of the actual messages. This doesn’t look like a relatively subtle anticompetition case, like the one about how Amazon charges fees to firms selling on its website. It sure looks like good old-fashioned price fixing.

The final obvious question is: When prices for one group of generic drugs rose so substantially, why didn’t other manufacturers of generic drugs from outside the Teva-organized network enter the market? In the research mentioned above, Starc and Wollman find that some entry does occur. But entry isn’t simple. For example, because the regulatory process in the market generic drugs (even though the drugs are chemically identical!), it takes 2-4 years for a manufacturer of generic drugs to start producing a new product. Also, if a potential entrant gears up and invests to manufacture a new drug, the existing firms could then cut their prices, so that the funds spent on entering the market don’t pay off. Entering a new market is considerably easier in an economics textbook model than in the real world.

Jon Hartley has a wonderful interview with Steven Levitt at the “Capitalism and Freedom in the 21st Century” podcast (“Steven D. Levitt (Freakonomics co-author and University of Chicago Economics Professor) on His Career And Decision To Retire From Academic Economics,” March 7, 2024). Among a number of other topics, there’s a lot of good dishing about the University of Chicago economics department and prominent economists there, along with the future of economics and academics. Here, I’ll just offer some snippets that particularly caught my eye. One caution: the transcript is unedited, so read it with caution. As one example of many, there are places where “U of C” as a reference to the University of Chicago is spelled “UFC.”

On how Levitt ended up as an economics major:

But let me tell you how I did get into economics. It was not in a thoughtful and well-organized way. I was the worst kind of undergraduate student. I only tried to take easy courses. I just tried to get good grades. I didn’t care at all about anything intellectual, but I did already believe in markets, even though I had no economic training. And I went to Harvard and my view was if a thousand people are taking a class, that must be a good class and an easy class. And so, I took all the thousand person classes that they offered at Harvard. And first and foremost, among those was Ec 10. And I took it only because a thousand people were taking it. And I remember not too long into the class, maybe five or six lectures in the class and we were doing comparative advantage. And as the teacher went through it, I thought, “What a joke. How can they be teaching this?” Everyone knows, everyone understands comparative advantage. It’s the most obvious thing in the world. It’s five-year-old know that. And as I walked out of class, my best friend, who was also in the class, with me, said, “My God, that was the most confusing lecture I’ve ever heard in my life.” And I said, “What are you talking about?” He said, “It makes no sense to me. What is it you’ve been talking about?” And that was the first inkling I had that maybe I thought like an economist. And honestly, I only did economics because it came naturally to me. And I never liked it, per se. I never had this sense that economics was powerful. It’s just the only thing I was good at. And so… I just backed into it and I never had any intention, so I majored in economics, but I never had any intention of going further. I wanted to go into business.

On how a paper Levitt wrote as a graduate student about more police reducing crime entered the policy realm:

I wrote a paper on the effective police on crime, and I found, unlike other people before me, that looked like more police reduced crime. Perhaps not surprising, but it was very surprising to the criminologists. … And I think, if I remember correctly, and I might be confusing my stories, I think Alan Krueger put together a binder of papers for Bill Clinton every week. And Alan said that Bill was an amazing thinker, and he would really look at these papers. And he said, in particular, because they’re trying to get this crime bill passed that would add 100,000 police officers, Bill Clinton had gone over my paper, and he said you could see all the notes in the margin and had lots of questions and then Janet Reno apparently carried my paper around in a briefcase dozens of copies and gave it to anyone she could because she was trying to influence the senators and the representatives to vote on behalf of the Bill Clinton’s crime bill and I say I got completely the wrong idea. I had this idea that like you said wow the power of research and anyone can do it and you do good research and people recognize and it effects policy, I mean, I was so confused. It took me years and years to understand that, number one, usually nobody cares at all about your research. No matter how much you love it, it never gets any attention. Number two, the quality of my research had nothing to do with it being passed around. It was being passed around Washington because it was the only paper that supported the position that they had already chosen. Right, the policy outcome they want chosen first and then they went for papers. And I’m sure they were disappointed that the only article they could find that it all supported them was by some grad student, but they took what they could. And what I read, the real lesson I learned over time is that I don’t actually think that my research or even my writing, more popular writing, has ever really fundamentally changed the way any politician thought about anything and that it’s just, I’ve come to a different conclusion which is that it is incredibly hard to influence any policy or anyone’s beliefs by doing research.

On the negotiation between Levitt and Stephen Dubner on how to divide up the advance and royalties for Freakonomics:

[T]he publishers were interested in me doing a book, but I categorically said no. And eventually, Stephen Dubner’s agent called me up and said, hey, why don’t you write a book with Steven Dubner?” And I said, “Number one, I have no interest in writing a popular book. Number two, I’m sure Dubner doesn’t want to write a book with me because we honestly didn’t get along that well when he came out to interview me the first time.” But we agreed to talk and we shared, and we had a real commonality, which is that neither of us really wanted to write this book. Neither of us thought anybody would read a book if we did write it. But we both were kind of, prostitutes in some sense. And so, for the right amount of money, we were willing to write this book. And interestingly, the right amount of money turned out to be similar for both of us. And so much to our surprise, we got offered, I don’t know, three times that amount of money to write the book. And then the only thing that stood in the way of us writing the book is we had to figure out how to divide the profits, the payments. And Dubner, I don’t remember the exact numbers, but Dubner came to me and he said, “Hey, I know it’s uncomfortable to talk about this, but we need to decide to split.” And he said, “I was thinking 60 /40.” And I said, “I was actually thinking 2 /3, 1 /3.” And he said, “Oh, I’m just not willing to write this book for 1 /3.” And I said, “No, no, I was thinking 2 /3 for you and 1 /3 for me.” And he said, I was thinking 60 % for you and 40 % for me. So, it’s the easiest negotiation ever. We settled on 50 /50, we both felt like we got a lot of surplus and we’ve had a great relationship ever since.

Why retire and become an emeritus professor at age 57?

I think two different forces at work here. The first one is that maybe between five and 10 years ago, I worked on three or four projects that I was just incredibly excited about that I felt were some of the best research that I’d ever done … [T]hese were four papers that I was really excited about and collectively they had zero impact. They didn’t publish well by and large, nobody cared about them and I remember looking at one point at the citations and seeing that collectively they had six citations. I thought, my god, what am I doing? I just spent the last two years of my life and nobody cares about it. And I really think it’s true that the way I approached economic problems, without a fashion, without a vogue, and for better or worse, probably the profession is better for having a different set of standards than I was used to meeting up with. And that was really discouraging to me. And you combine that with the idea, with the fact that along with Stephen Dubner, we’ve got this media franchise where Dubner’s podcast Freakonomics Radio gets a couple million downloads a month. And if I want to get a message out, I can get millions of people through a different medium. It just didn’t make sense to me to keep on puttering around, doing all this work, spending years to write papers that no one cared about when I had other ways of getting my ideas out. And really my interests were elsewhere. I didn’t get any thrill. … The question I should ask myself is why didn’t I retire a long time ago? It made no sense. I’ve just been, I’ve thought, I’ve known for years, it’s the wrong place for me to be. And it just took me a long time to figure out how to extricate myself from academics. And I’m so glad I’m doing it. It’s good for everyone. It doesn’t make any sense to, it feels to me awful to be in a place where I’m not excited and where I’m not contributing materially. So, for me, it feels like a breath of fresh air to be saying, “Hey, I’m not going to be an academic anymore. I’m going to be doing what I really love to do.”

One year ago in March 2023, Silicon Valley Bank melted down, quickly followed by similar meltdowns at Signature Bank and First Republic Bank. Measured by the nominal size of bank assets, these were three of the biggest four US bank failures in history. (The failure of Washington Mutual Bank in 2008 remains the largest.) Was this just a one-off, or a problem that has already been fixed? Or do the underlying causes continue to linger?

Tobias Adrian, Nassira Abbas, Silvia L. Ramirez, and Gonzalo Fernandez Dionis take on these issues in “The US Banking Sector since the March 2023 Turmoil: Navigating the Aftermath (IMF Global Financial Stability Notes, March 2024).

I’ve discussed different angles on failure of Silicon Valley Bank a few times on this blog already: for example, see “An Autopsy of Silicon Valley Bank from the Federal Reserve” (April 28, 2023) , “Was Bailing out the Silicon Valley Bank Depositors the Right Decision?” (June 6, 2023), “Why are the Recent US Bank Runs So Much Faster?” (June 20, 2023), and “Spreading Accounts Across Banks for the Deposit Insurance” (November 29, 2023). For an all-in-one-place overview with some additional time for reflection, I recommend Andrew Metrick’s essay, “The Failure of Silicon Valley Bank and the Panic of 2023” in the Winter 2024 issue of  Journal of Economic Perspectives (38:1, 133-52).

(Full disclosure: I’ve been Managing Editor of the Journal of Economic Perspectives since 1986, so the articles therein are necessarily of interest to me. However, the articles are also all freely available to all compliments of the American Economic Association, from the most recent to the first issue of the journal.)

In some ways, the banks that failed had problems that were not widely shared. Bank deposits in the US are insured up to $250,000 by the Federal Deposit Insurance Corporation. Thus, no one with deposits smaller than that amount has reason for concern about whether their bank might fail. However, companies might at sometimes hold more in their bank accounts, and companies at the Silicon Valley Bank, in particular, were holding a lot of money that they had received from venture capitalists. Indeed, a whopping 94% of the deposits at Silicon Valley Bank were above the $250,000 limit, and thus uninsured. This is not the situation for most banks.

However, some problems of Silicon Valley Bank were more widespread across the banking sector. In particular, if you are holding a financial asset that pays a fixed rate of interest, like most US Treasury bonds, and interest rates rise, then the value of that lower-interest-rate bond will decline. Many banks hold US Treasury bonds, although Silicon Valley Bank held more than most.

As the IMF authors note,

In March after the failure of SVB [Silicon Valley Bank] and SBNY [Signature Bank], depositors and investors became concerned, first about liquidity and then about the financial soundness of banks matching a certain profile with various attributes including: (1) sizable deposit outflows; (2) high concentrations of uninsured deposits; (3) reliance on borrowing and higher use of liquidity facilities, (4) substantial unrealized losses; and (5) high exposure to CRE [commercial real estate0. Although, the high level of uninsured deposits and sizable deposit outflows were unique characteristics of the failed institutions (SVB, SBNY, and FRB [First Republic Bank]), our analysis identifies a group of small and regional banks that have sizable uninsured deposits to total deposits, sizable unrealized losses, high concentration to CRE, and increased reliance on borrowings after the March 2023 stress.

The issue of commercial real estate wasn’t a problem for Silicon Valley Bank. But many regional banks have made substantial loans for those who are building commercial real estate. With the shift to a work-from-home economy, the value of commercial real estate has dropped and the risk of these loans has increased. The authors note:

Beyond the unrealized losses due to higher interest, the credit risk carried by some institutions, particular their exposure to CRE [commercial real estate], is at the center stage of investors’ fears today. Small and regional banks are substantially exposed with about two thirds of the $3 trillion in CRE exposures in the US banking system (Figure 4, panel 1). In January 2024, shifts in market expectations regarding the timing and pace of interest rate cuts in the United States, coupled with substantial losses announced by a large bank heavily exposed to CRE, prompted a 10 percent decline in the regional bank’s stock index.

The high concentration of CRE exposures represents a serious risk to small and large banks amid economic uncertainty and higher interest rates, potentially declining property values, and asset quality deterioration. … One-third of US banks, mostly small and regional banks, held exposures to CRE exceeding 300 percent of their capital plus the allowance for credit losses, representing 16 percent of total banking system assets (Figure 4, panel 2).

The IMF authors are not doom-saying here. They refer to this issue as a “weak tail” of banks, by which they mean that it takes the confluence of all five factors they mention to cause a bank failure. But reading between the lines, I wouldn’t be surprised to see the bank regulator forcing mergers on some of the small and regional banks in the “weak tail,” and trying to do so before a bank’s financial situation becomes dire.

The growth of agricultural output matters. About 700 million people in the world live below a poverty line of consuming $2.15 per day, and if that poverty line is raised to $3.85 per day, more than 2 billion people are below it. Raising the standard of living for the very poor requires higher agricultural output. Greater productivity in global agriculture matters as well. In most low-income countries, half or even three-quarters of worker are still in agriculture, and part of economic development is that rising agricultural productivity helps fuel a migration of those workers to higher-paying jobs in other sectors. Even in a high-income context, it’s worth remembering that agriculture isn’t just about food, but that there are a large and growing number of bio-based consumer and industrial products that aren’t eaten.

Thus, it’s big news that the growth rate of agricultural output and agricultural productivity is slowing down. The US Department of Agriculture keeps the statistics, which Keith Fuglie, Stephen Morgan, and Jeremy Jelliffe use to generate this graph in “World Agricultural Output and Productivity Growth Have Slowed” (USDA Amber Waves website, December 7, 2023)

The black line at the top shows annual growth for global agricultural output. Of course, these annual rates compound over time. Over a decade, a drop 0.8% per year (what happens from the 2001-2010 period to the 2011-2021 period) means that total agricultural output will be more than 8% lower than it would otherwise have been.

The bars then break down that total growth into possible causes. Land expansion, irrigation intensification and input expansion (like machinery, labor, fertilizers, and pesticides) are measurable. The common approach is that whatever can’t be accounted for by measurable factors is called “productivity growth”–which becomes a nebulous category that includes everything from improved cultivation methods to better seeds. As you can see, essentially all of output growth that is lower by 0.8% per year reflects lower productivity growth.

The issues of low-income people and economies with half or more of the workers in agriculture are especially salient in economies across Africa. For an overview of the issues in improving technology there, see Tavneet Suri and Christopher Udry. 2022. “Agricultural Technology in Africa.” Journal of Economic Perspectives, 36 (1): 33-56. They emphasize the problem of enormous heterogeneity across the agricultural sector in countries of Africa, which has made it harder to discover and diffuse new agricultural technologies.

The primary argument for a government-provided basic income is that it will make those with low incomes better off, by increasing their financial resources and by allowing them to negotiate for better jobs. But the extent to which this conclusion holds true will depend on individual circumstances of the recipient, and what other adjustments happen in response to a basic income. For example, what happens if a basic income is counted as “income” and eligibility for other public support is correspondingly reduced? What happens if firms, recognizing that lower-income workers have an alternative source of support, look for ways to impose charges on employees (say, for training or for uniforms)? For that matter, what if owners of rental housing see a universal basic income as an opportunity to raise the rent? Of course, these kinds of counterreactions in government policy and markets are not what advocates of a universal basic income desire–but that doesn’t mean they won’t happen.

David A. Green delivered the Presidential Address to the Canadian Economic Association on the topic: “Basic income and the labour market: Labour supply, precarious work and technological change” (Canadian Journal of Economics, November 2023, pp. 1195-1220).

Green focuses in particular on potential interactions between a universal basic income and labor markets, and on how economic models which define work as a negative and leisure as a positive can miss important aspects of the debate. Green writes:

In our main models, people value leisure and would always prefer a life of living on benefits without work (if their earnings options place them near the benefit level of income). Supporting such a life for the least productive people in society is considered a policy success in a system in which walls are built to prevent others from joining them. My sense from the discussions with people who might actually need the benefits is that a more accurate model would be one in which people have a basic desire for working (for reasons of self-respect, feelings of self-efficacy and social connection) but would also, in any moment, prefer more leisure. … At the same time, many of the people who are in need of support face multiple barriers to work (health issues, poor work records, insufficient housing, etc.) that mean they face low paying, short duration jobs. That is, we should not think in terms of models in which they can be moved into permanent working states but ones in which they will repeatedly find themselves in need of support mixed with jobs they take in their search for self-respect and connection. The obvious trade-off is that we would want to create a system that provides support in this sporadic work pattern without creating incentives to take up sporadic work patterns for people who might not otherwise face them. I do not know of any papers that take this perspective when thinking about designing transfer policies. …

Returning to the main theme of this paper, a perspective that places more emphasis on supporting self-respect and social respect and their relationship to work has implications for how we think about a basic income. On the one hand, a basic income does well under this perspective. At the very least, it implies providing benefits without the judgement associated with work requirements. In that sense, it is closer to the recommendations of optimal tax theory. On the other hand, it does not pay enough direct attention to the relationship between respect and work. People could (and might) use a basic income as monetary support for their desire to find work and get training. But this is left entirely up to them. Surely, a system that provides direct supports would be more effective.

Here is Green’s argument as to whether a basic income is likely to be a useful tool for reducing the number of “bad jobs” and increasing the number of “just labour exchanges” by giving workers the freedom to leave a job and look for alternatives:

I think the answer is no for two reasons. The first is an ethical argument. If a key problem with bad jobs is that they damage workers’ self-respect and rob them of autonomy then a cash payment is not the correct response. A key tenant of justice is that the remedy should operate in the same realm as the problem. Paying someone cash to compensate them for an insult may, for example, heighten the feeling of being insulted rather than remedy the problem. The right realm would be to alter the work arrangements to remove the direct insult to dignity. I think this is a key problem with economic models when thinking about the justice of worker–firm relationships because we write our models in terms of individual utility and, ultimately, monetary equivalents, thus taking us away from a consideration of different realms of exchange. Put another way, when we broaden our lens to consider outcomes in terms of justice then we are led to consider jobs as locations of self-respect and self-image rather than simply as vehicles of increased income and reduced leisure. In that context, it becomes harder to think about reducing everything to monetary equivalents.

The second reason is that our models miss the nature of the problem at hand. Changing workplace conditions in a situation in which individuals do not freely move among jobs requires the workers to act collectively. Indeed, I believe that an accurate model of the creation of workplace amenities is one that involves both the employer and the set of employees, with a critical mass of the latter needing to act in order for changes to occur. Put another way, the set of employees at a workplace is a community and, in fact, is a key community for a person’s notions of self-respect. One individual in that community deciding to walk away from the job because she does not like the level of amenities will not be sufficient to alter the work conditions because frictions in the labour market prevent market discipline of the kind that happens in a simple neoclassical model. Using a basic income as a response in this situation involves hoping that each of the individuals takes their personal backstop as a means to engage in a community action. This might happen but there is no clear reason why it would. Maybe it would allow them all to walk away from a bad job but, as we have seen, it is not clearly the case that this will lead to a reduction in the proportion of bad jobs because it funds walking away from good jobs (in the hopes of finding an even better job) as well.

A problem with a basic income as a response to an over-abundance of bad jobs is that it ignores both of these issues. It acts as if money is the right realm and that backstopping individual effort is sufficient to correct the problem. But that would be true only in a neoclassical world and in that world, we are either in a compensating differential equilibrium—in which case no response is actually needed—or the more directly effective response is regulation not cash. In a world where individual workers do not have sufficient agency through the market to bring about change, a basic income is not the right response.

To put this another way, at least some advocates of a basic income have, in an indirect way, considerable faith in the operation of a free-market labor system. They believe that with a universal basic income, the decentralized negotiations between workers and employers, along with movement between jobs, will provide an improved incentive for employers to offer better jobs. On the other side, Green argues that better jobs are unlikely to result from the market-oriented dynamic: instead, he argues that better jobs are the result of collective action between workers who are staying on the job and their employers, as well as from regulation and government programs tied to issues like assistance with training, child care, and transportation costs.

There been a controversy in recent decades about the independence of central banks from the rest of the government. The ongoing concern–especially have high inflation rates rocked the US and other countries around the world in the 1970s and 1980s–was that governments have a bias toward inflation. Politicians want the central bank to help finance their spending; conversely, politicians will often oppose anything that might slow the economy, like higher interest rates. However, if the central bank can be given a clear goal, like a low rate of inflation, then it can push back against the inflationary biases of the rest of the government.

Thus, many central banks around the world, like the European Central Bank, have a clear-cut target for low inflation as their only policy goal. The US Federal Reserve has a “dual mandate,” to keep inflation low but also to fight recession. But central banks are often expected to deal with other tasks as well, like dealing with financial crashes and participating in bank and financial regulation.

Here, I won’t try to resolve these disputes, but instead will simply point out the long-term pattern: the arguments for greater central bank independence seem to be prevailing. David Romelli discusses “Trends in central bank independence: a de-jure perspective” (BAFFI CAREFIN Centre Research Paper N. 217, February 2024; for a readable short overview, https://cepr.org/voxeu/columns/recent-trends-central-bank-independence).

Basically, Romelli collects records of legal changes across 42 categories that reflect more or less central bank independence. I’ll provide the full list of categories below, but they can be grouped into categories like how the governor and board of the central bank are chosen and the rules of governance; how monetary policy is set; whether the central bank has specific statutory goals; limitations on the central bank loaning directly to the government; whether the central bank is financially independent; and rules governing reporting and disclosure for the central bank.

Taking these together, the basic theme is that central bank independence doesn’t change much up until about 1990, when there is a dramatic shift upward. The shift occurs across countries at all levels of economic development: high-income, middle-income, low-income. The momentum toward greater central bank independence stalls for a few years after the 2007-09 global financial crisis, when legislators and central banks were understandably focused on other topics, but has resumed since then.

Romelli writes:

This paper presents an extensive update to the Central Bank Independence – Extended (CBIE) index, originally developed in Romelli (2022), extending its coverage for 155 countries from 1923 to 2023. The update reveals a continued global trend towards enhancing central bank independence, which holds across countries’ income levels and indices of central bank independence. Despite the challenges which followed the 2008 Global financial crisis and the recent re-emergence of political scrutiny on central banks following the COVID-19 pandemic, this paper finds no halt in the momentum of central bank reforms. I document a total of 370 reforms in central bank design from 1923 to 2023 and provide evidence of a resurgence in the commitment to central bank independence since 2016. These findings suggest that the slowdown in reforms witnessed post-2008 was a temporary phase, and that, despite increasing political pressures on central banks, central bank independence is still considered a cornerstone for effective economic policy-making.

Here’s the list of 42 characteristics affecting central bank independence in Romelli’s index:

It seems plausible that being poor will have psychological effects. It seems at least possible that some of these psychological effects could, in turn, make it harder to escape poverty. Johannes Haushofer and Daniel Salicath explore the evidence on these and related issues in “The psychology of poverty: Where do we stand?” ( Social Philosophy and Policy, 2024, 40:1, 150-184; a pre-print draft is also available as NBER Working Paper 31977). The paper is part of a 12-paper symposium in this issue on topics of “Poverty, Agency, and Development.”

The evidence that lower-income people feel better-off when given money is pretty clear. The harder question is whether poverty has particular psychological effects that affect decision-making in a way that may cause one to remain in poverty. This thesis was put forward with force and clarity in a 2013 book by Sendil Mullainathan and Eldar Shafir, Scarcity: Why Having Too Little Means So Much. I wrote about this line of argument here at the Conversable Economist about a decade ago, mentioning work at the time by Haushofer and Mullainathan and Shafir, and also quoting some passages from George Orwell’s 1937 book, The Road to Wigan Pier, in which he describe (with frustration and empathy) how many poor and working-class people have become accustomed to living on a a “fish and chips” standard that combines unhealthy food, cheap luxuries, gambling, and electronic entertainment (in his day, the radio), in a way that helps to offset their limited economic prospects.

In the more recent essay, Haushofer and Salicath describe the earlier hypothesis by Mullainathan and Shafir in this way:

The authors posit that poverty consumes cognitive resources, including attention, executive control, and working memory, thereby impairing decision-making. Specifically, they suggest that scarcity both reduces overall mental bandwidth and redirects attention toward salient, income-relevant features of a decision problem at the expense of less salient but potentially important other aspects. Two landmark studies accompanied publication of the book. Anuj Shah, Mullainathan, and Shafir showed in a series of lab experiments that participants experiencing scarcity in terms of their experimental “budgets” (of points or time) tended to “over-borrow” from their experimental budgets. Anandi Mani and coauthors primed low- and high-income participants in a mall in New Jersey with financial scenarios and reported reduced executive control and fluid intelligence when low-income participants thought about difficult financial problems. They also report lower performance on similar tasks among sugarcane farmers in India before the harvest (when resources are scarce) relative to after the harvest.

Haushofer and Salicath review a wide range of literature since then on how poverty or negative shocks to income affect psychological behaviors especially relevant to economic outcomes like cognitive functioning, short time horizons, trust, or excessive risk-taking. The evidence comes from a wide array of contexts: real-world evidence from shocks related to harvests for farmers in low-income countries; laboratory experiments where people work through structured games and scenarios in a classroom; natural settings where people experience greater or lesser stress on incomes and finances; and others. Alternative, there are studies that try to affect the aspirations of poor people (many of these studies are in low-income countries), sometimes by showing videos or presenting seminars that emphasize the possibilities for work and achievement, as well as by treating mental health issues more directly.

The authors summarize the evidence this way:

There has been significant progress in recent years, in particular, in establishing causality in the effect of income on psychological well-being; elucidating the precise functional form of psychological well-being with respect to income (satiation); and improving our understanding of the importance of relative income. Most saliently, the causal effect of income on psychological well-being is now robustly established. Research on the effects of scarcity and stress on economic decision-making has also made great strides in the past few years. However, the picture that emerges from these literatures is not as clear; individual studies are often statistically weak, provide conflicting evidence, and replication efforts have not always been successful. While the last word has perhaps not been spoken, in our view, the case for a poverty trap that operates through the effects of poverty on stress, decision-making, and cognition is currently not strong.

Alan Blinder delivered the 2023 Daniel Patrick Moynihan Lecture in Social Science and Public Policy to the American Academy of Political and Social Science last October on the topic “Economics and Politics: On Narrowing the Gap” (October 25, 2023; for text, see the Peterson Institute for International Economics website at https://www.piie.com/commentary/speeches-papers/economics-and-politics-narrowing-gap; to watch the presentation and accompanying discussion on YouTube, see https://www.youtube.com/watch?v=jaF4Cjundy4). Here are some of the nuggets that caught my eye.

On the extent to which much economists influence politics

May I start by dispelling a myth? Perhaps because economists are frequently trotted out to support or oppose policies, perhaps because we have a Council of Economic Advisers right in the White House, perhaps because the powerful Federal Reserve—so ably represented here today–is dominated by economic thinking, many people believe that economists have enormous influence on public policy. In truth, apart from monetary policy, we don’t. Almost a half century ago, George Stigler (1976, p. 351), later a Nobel prize winner, wrote that “economists exert a minor and scarcely detectable influence on the societies in which they live.” Stigler was no doubt exaggerating to make his point. But he had a point. And things have not changed much since.

On the time horizons of politicians

It is a commonplace that politicians have excruciatingly short time horizons. It is often said that they can’t see past the next election, but the truth is far worse. The political pros who advise politicians often can’t see past the next public opinion poll, maybe not even past the next tweet. Their natural time horizon extends only until that evening’s news broadcasts, if that long.

Advice to economists who want to participate in policy debates

Let me now turn to the minority of economists who wish to get engaged in policy. I have two suggestions to offer here … Both suggestions cut deeply against the grain. They are not what we teach in graduate school. …

I have just emphasized that political time horizons are too short for sound economic policy. But it’s also true that economists’ time horizons are too long for politics. Specifically, we economists typically focus on the “equilibrium” or “steady state” effects of a policy change. For example: What will happen eventually after a change in the tax code or a trade agreement? Don’t get me wrong. Those questions are important and highly pertinent to policymaking. We should not forget about them. But they are close to irrelevant in the political world because people don’t live in equilibrium states. Rather, they spend most of their lives in one transition or another. Yet economists often brush off “transition costs” as unimportant details. We shouldn’t. …

The process of adjustment to the superior free-trade equilibrium may be lengthy and painful, involving job losses, reduced incomes for some, decimated communities, and more. Economists know all this but don’t pay it sufficient heed. Politicians, by contrast, live in the real world of ever-present transition costs. They may not be in office long enough to enjoy the steady-state benefits. …

My second suggestion is that economists pay far more attention to issues of fairness rather than doting almost exclusively on efficiency, as we often do. In politics, perceived fairness almost always trumps efficiency—and politicians understand that. … Think, for example, about debates over the tax code, which are hardy perennials in Congress. Economists have a beautiful theory of optimal taxation, built around maximal efficiency. But that theory plays absolutely no role in congressional debates. Zero. Discussions of fairness, on the other hand, dominate the debates. And we get the tax mess that we do. …

So here’s my advice to economists interested in actual–as opposed to theoretical–policymaking. Don’t forget about efficiency. It matters. We are right about that. But we may have to content ourselves with nibbling around the edges, below the political headline level, to make the details of a complex policy package less inefficient. Call it the theory of the third or fourth best.