In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in “finding topics of conversation fit for the entertainment of rational creatures.”
International tourist arrivals reached 1.2 billion in 2015, and are projected by the UNWTO to rise by 50% in the next 15 years.
The main destinations of tourism are perhaps not much of a surprise. European countries rank highly, in part because of the number of trips from one European country to another. The US is a major destination. But there are some surprises. I would not necessarily have expected China to rank 4th, Turkey to rank 6th, or Russia to rank 10th around the world in tourist arrivals.
When it comes to countries sending tourists, China is far and away on top.
The UNWTO report is focused on numbers and trends, not on economic insights. But it provides food for thought. In high-income countries, many people have a standard of living where they can focus not just on buying goods and services for daily consumption, but on a \”bucket list\” of leisure experiences As more people around the world enter the global middle class, they often want to expand consumption of travel and tourism.
In an economic sense, tourism (both international and domestic) is a very large industry, and it is shaped by a mixture of policies toward visitors, ease of transportation and lodging, and a mixture of public and private amenities and destinations. When the US ranks behind France as a tourist destination, it suggests that the US is not doing what it could to facilitate tourism. For a number of lower-income and medium-income countries, one of their important economic questions is how to grow their tourism industry, and then how to incorporate the economic gains into gains in the standard of living for their economy. After all, many skills that facilitate tourism can help the economy in other ways, too, like reliable communications, logistics and scheduling, handling financial payments, clean water, electricity, transportation, and more. In a big-picture sense, I\’m enough of an optimist to hope that the associations and connections that often result from international tourism can have a positive effect across countries and cultures, too.
For the past 30 years, my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which back in 2011 decided–much to my delight–that the journal would be freely available on-line, from the current issue back to the first issue in 1987. Here, I\’ll start with Table of Contents for the just-released Summer 2016 issue. Below are abstracts and direct links for all of the papers. I will almost certainly blog about some of the individual papers in the next week or two, as well.
Schools and Accountability
\”The Importance of School Systems: Evidence from International Differences in Student Achievement,\” by Ludger Woessmann Students in some countries do far better on international achievement tests than students in other countries. Is this all due to differences in what students bring with them to school–socioeconomic background, cultural factors, and the like? Or do school systems make a difference? This essay argues that differences in features of countries\’ school systems, and in particular their institutional structures, account for a substantial part of the cross-country variation in student achievement. It first documents the size and cross-test consistency of international differences in student achievement. Next, it uses the framework of an education production function to provide descriptive analysis of the extent to which different factors of the school system, as well as factors beyond the school system, account for cross-country achievement differences. Finally, it covers research that goes beyond descriptive associations by addressing leading concerns of bias in cross-country analysis. The available evidence suggests that differences in expenditures and class size play a limited role in explaining cross-country achievement differences, but that differences in teacher quality and instruction time do matter. This suggests that what matters is not so much the amount of inputs that school systems are endowed with, but rather how they use them. Correspondingly, international differences in institutional structures of school systems such as external exams, school autonomy, private competition, and tracking have been found to be important sources of international differences in student achievement.
\”Accountability in US Education: Applying Lessons from K-12 Experience to Higher Education,\” by David J. Deming and David Figlio A new push for accountability has become an increasingly important feature of education policy in the United States and throughout the world. Broadly speaking, accountability seeks to hold educational institutions responsible for student outcome using tools ranging from performance \”report cards\” to explicit rewards and sanctions. We survey the well-developed empirical literature on accountability in K-12 education and consider what lessons we can learn for the design and impact of college ratings. Our bottom line is that accountability works, but rarely as well as one would hope, and often not entirely in the ways that were intended. Research on K-12 accountability offers some hope but also a number of cautionary tales. Full-Text Access | Supplementary Materials
\”What Can We Learn from Charter School Lotteries?\” by Julia Chabrier, Sarah Cohodes and Philip Oreopoulos We take a closer look at what can be learned about charter schools by pooling data from lottery-based impact estimates of the effect of charter school attendance at 113 schools. On average, each year enrolled at one of these schools increases math scores by 0.08 standard deviations and English/language arts scores by 0.04 standard deviations relative to attending a counterfactual public school. There is wide variation in impact estimates. To glean what drives this variation, we link these effects to school practices, inputs, and characteristics of fallback schools. In line with the earlier literature, we find that schools that adopt an intensive \”No Excuses\” attitude towards students are correlated with large positive effects on academic performance, with traditional inputs like class size playing no role in explaining charter school effects. However, we highlight that No Excuses schools are also located among the most disadvantaged neighborhoods in the country. After account ing for performance levels at fallback schools, the relationship between the remaining variation in school performance and the entire No Excuses package of practices weakens. No Excuses schools are effective at raising performance in neighborhoods with very poor performing schools, but the available data have less to say on whether the No Excuses approach could help in nonurban settings or whether other practices would similarly raise achievement in areas with low-performing schools. We find that intensive tutoring is the only No Excuses characteristic that remains significant (even for nonurban schools) once the performance levels of fallback schools are taken into account. Full-Text Access | Supplementary Materials
\”The Measurement of Student Ability in Modern Assessment Systems,\” Brian Jacob and Jesse Rothstein Economists often use test scores to measure a student’s performance or an adult’s human capital. These scores reflect non-trivial decisions about how to measure and scale student achievement, with important implications for secondary analyses. For example, the scores computed in several major testing regimes, including the National Assessment of Educational Progress (NAEP), depend not only on the examinees’ responses to test items, but also on their background characteristics, including race and gender. As a consequence, if a black and white student respond identically to questions on the NAEP assessment, the reported ability for the black student will be lower than for the white student—reflecting the lower average performance of black students. This can bias many secondary analyses. Other assessments use different measurement models. This paper aims to familiarize applied economists with the construction and properties of common cognitive score measures and the implications for research using these measures. Full-Text Access | Supplementary Materials
\”The Need for Accountability in Education in Developing Countries,\” Isaac M. Mbiti Despite the rapid growth in enrollment rates across the developing world, there are major concerns about the quality of education that children receive. Across numerous developing countries, recent learning assessments have revealed that children are not able to develop basic numeracy and literary skills. These low levels of learning are the result of a number of interrelated factors, many of which reflect the low levels of accountability across multiple levels of the education system. In this paper, I document the main education challenges facing developing countries, including the lack of accountability among teachers and school management. I also review recent literature that documents the effectiveness of interventions aimed at addressing these accountability issues. Finally, I assess the potential for the market to improve accountability in the education sector in developing countries. Full-Text Access | Supplementary Materials
Motivated Beliefs \”The Mechanics of Motivated Reasoning,\” by Nicholas Epley and Thomas Gilovich Whenever we see voters explain away their preferred candidate\’s weaknesses, dieters assert that a couple scoops of ice cream won\’t really hurt their weight loss goals, or parents maintain that their children are unusually gifted, we are reminded that people\’s preferences can affect their beliefs. This idea is captured in the common saying, \”People believe what they want to believe.\” But people don\’t simply believe what they want to believe. Psychological research makes it clear that \”motivated beliefs\” are guided by motivated reasoning–reasoning in the service of some self-interest, to be sure, but reasoning nonetheless. People generally reason their way to conclusions they favor, with their preferences influencing the way evidence is gathered, arguments are processed, and memories of past experience are recalled. Each of these processes can be affected in subtle ways by people\’s motivations, leading to biased beliefs that feel objective. In this symposium introduction, we s et the stage for discussion of motivated beliefs in the papers that follow by providing more detail about the underlying psychological processes that guide motivated reasoning. Full-Text Access | Supplementary Materials
\”Mindful Economics: The Production, Consumption, and Value of Beliefs,\” by Roland Bénabou and Jean Tirole In this paper, we provide a perspective into the main ideas and findings emerging from the growing literature on motivated beliefs and reasoning. This perspective emphasizes that beliefs often fulfill important psychological and functional needs of the individual. Economically relevant examples include confidence in ones\’ abilities, moral self-esteem, hope and anxiety reduction, social identity, political ideology, and religious faith. People thus hold certain beliefs in part because they attach value to them, as a result of some (usually implicit) tradeoff between accuracy and desirability. In a sense, we propose to treat beliefs as regular economic goods and assets–which people consume, invest in, reap returns from, and produce, using the informational inputs they receive or have access to. Such beliefs will be resistant to many forms of evidence, with individuals displaying non-Bayesian behaviors such as not wanting to know, wishful thinking, and reality denial. Full-Text Access | Supplementary Materials
\”The Preference for Belief Consonance,\” by Russell Golman, George Loewenstein, Karl Ove Moene and Luca Zarri We consider the determinants and consequences of a source of utility that has received limited attention from economists: people\’s desire for the beliefs of other people to align with their own. We relate this \’preference for belief consonance\’ to a variety of other constructs that have been explored by economists, including identity, ideology, homophily, and fellow-feeling. We review different possible explanations for why people care about others\’ beliefs and propose that the preference for belief consonance leads to a range of disparate phenomena, including motivated belief-formation, proselytizing, selective exposure to media, avoidance of conversational minefields, pluralistic ignorance, belief-driven clustering, intergroup belief polarization, and conflict. We also discuss an explanation for why disputes are often so intense between groups whose beliefs are, by external observers\’ standards, highly similar to one-another. Full-Text Access | Supplementary Materials
\”Motivated Bayesians: Feeling Moral While Acting Egoistically,\” Francesca Gino, Michael I. Norton and Roberto A. Weber Research yields ample evidence that individual\’s behavior often reflects an apparent concern for moral considerations. A natural way to interpret evidence of such motives using an economic framework is to add an argument to the utility function such that agents obtain utility both from outcomes that yield only personal benefits and from acting kindly, honestly, or according to some other notion of \”right.\” Indeed, such interpretations can account for much of the existing empirical evidence. However, a growing body of research at the intersection of psychology and economics produces findings inconsistent with such straightforward, preference-based interpretations for moral behavior. In particular, while people are often willing to take a moral act that imposes personal material costs when confronted with a clear-cut choice between \”right\” and \”wrong,\” such decisions often seem to be dramatically influenced by the specific contexts in which they occur. In particular, when the c ontext provides sufficient flexibility to allow plausible justification that one can both act egoistically while remaining moral, people seize on such opportunities to prioritize self-interest at the expense of morality. In other words, people who appear to exhibit a preference for being moral may in fact be placing a value on feeling moral, often accomplishing this goal by manipulating the manner in which they process information to justify taking egoistic actions while maintaining this feeling of morality. Full-Text Access | Supplementary Materials
NSF Funding for Economists
\”In Defense of the NSF Economics Program,\” by Robert A. Moffitt The NSF Economics program funds basic research in economics across all its disparate fields. Its budget has experienced a long period of stagnation and decline, with its real value in 2013 below that in 1980 and having declined by 50 percent as a percent of the total NSF budget. The number of grants made by the program has also declined over time, and its current budget is very small compared to that of many other funders of economic research. Over the years, NSF-supported research has supported many of the major intellectual developments in the discipline that have made important contributions to the study of public policy. The public goods argument for government support of basic economic research is strong. Neither private firms, foundations, nor private donors are likely to engage in the comprehensive support of all forms of economic research if NSF were not to exist. Select universities with large endowments are more likely to have the ability to support general economic research in the absence of NSF, but most universities do not have endowments sufficiently large to do so. Support for large-scale general purpose dataset collection is particularly unlikely to receive support from any nongovernment agency. On a priori grounds, it is likely that most NSF-funded research represents a net increase in research effort rather than displacing already-occurring effort by academic economists. Unfortunately, the empirical literature on the net aggregate impact of NSF economics funding is virtually nonexistent. Full-Text Access | Supplementary Materials
\”A Skeptical View of the National Science Foundation\’s Role in Economic Research,\” by Tyler Cowen and Alex Tabarrok We can imagine a plausible case for government support of science based on traditional economic reasons of externalities and public goods. Yet when it comes to government support of grants from the National Science Foundation (NSF) for economic research, our sense is that many economists avoid critical questions, skimp on analysis, and move straight to advocacy. In this essay, we take a more skeptical attitude toward the efforts of the NSF to subsidize economic research. We offer two main sets of arguments. First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broa der dissemination of economic insights, and more. Given these critiques, we suggest some possible ways in which the pattern of NSF funding, and the arguments for such funding, might be improved. Full-Text Access | Supplementary Materials
Articles
\”Can War Foster Cooperation?\” by Michal Bauer, Christopher Blattman, Julie Chytilová, Joseph Henrich, Edward Miguel and Tamar Mitts In the past decade, nearly 20 studies have found a strong, persistent pattern in surveys and behavioral experiments from over 40 countries: individual exposure to war violence tends to increase social cooperation at the local level, including community participation and prosocial behavior. Thus while war has many negative legacies for individuals and societies, it appears to leave a positive legacy in terms of local cooperation and civic engagement. We discuss, synthesize, and reanalyze the emerging body of evidence and weigh alternative explanations. There is some indication that war violence enhances in-group or \”parochial\” norms and preferences especially, a finding that, if true, suggests that the rising social cohesion we document need not promote broader peace. Full-Text Access | Supplementary Materials
Now that the first wave of triumphalism and consternation about Brexit vote on June 23 has died down a bit (my own thoughts just after the vote are here), it\’s useful to start thinking about actual next steps. Richard E. Baldwin has edited an e-book for VoxEU, Brexit Beckons: Thinking Ahead by Leading Economists, with short and readable contributions by 19 economists. Here, I\’ll draw on their contributions and offer some thoughts of my own.
Brexit was a vote for the United Kingdom to leave the European Union, but it didn\’t specify what comes next. Leaving the EU isn\’t just about trade and immigration with the EU directly. The European Union acted on behalf of its members in negotiating trade agreements with the rest of the world, and so the UK must also renegotiate all of those trade agreements, along with renegotiating its status with the World Trade Organization. Moreover, part of membership in the single European market was a very large number of specific rules and regulations about certain industries, some that were doubtless silly, but others that facilitated contractual and financial arrangements across countries. Membership in the EU also meant, for example, support payments to Britain\’s farmer and easy access to the European market for their production. As Baldwin notes in his overview, the prospect of all this renegotiation is \”massively complex.\”
Meanwhile, firms around the world are every day making decisions about where to expand or start up a new office or operation–and where to not expand, pull back, or shut down. If the UK process of renegotiation is long and drawn-out, there will be an dose of extra uncertainty about making business plans involving the UK.
So what are the main options for Britain\’s renegotiators? Probably the most popular choice among the writers in this book is referred to as the EEA or the \”Norway\” option.\” Without trying to decrypt all of the alphabet soup of initials around the European Union, the European Economic Area is an overlapping and broader concept. It includes the EU countries, as well as Norway, Iceland, and Liechtenstein. These countries participate in the European single market (with some exceptions like agriculture and fisheries), but are not members of the EU. They make lower contributions to the EU budget, and are not part of EU decision-making.
It\’s easy to see some the attractions of this approach. There is a template to follow, so the renegotiation could be fairly quick. The UK could send a lot less money to Brussels, which would surely look like a win to the \”Leave\” proponents. For the \”Remain\” proponents, the UK economy would along many dimensions continue to be part of the single market.
That said, it\’s not at all clear that this approach would be politically acceptable in the UK. The UK would still be complying with single market rules, but would no longer be involved in negotiating those rules. In particular, the UK would need to remain open to immigration. Thus, some variations on the EEA concept are being floated.
For example, in his contribution to the volume, Jonathan Portes discusses the likelihood of what he calls the \”EEA-minus\” option–that is, EEA membership but while limiting immigration. He writes:
Immigration was a major factor – perhaps the major factor – in the Brexit vote. … It looks likely that the UK’s negotiating position may coalesce around an ‘EEA minus’ arrangement. While free movement would not continue as now, this would not imply moving to a system that gives effectively equal treatment to EU and non-EU nationals; there would still be a considerable degree of preference for the former. The negotiations would likely be legally, economically, and politically complex, but this does not mean that it is not worth trying.
If the UK’s vote to leave the European Union was a vote against anything, it was a vote against free movement of workers within the EU – a vote to “take (back) control” over immigration policy. For most economists, this is paradoxical. There is a clear consensus that in the UK the economic impacts of immigration, particularly from within the EU, have been largely benign. In particular, there is little or no evidence of economically significant negative impacts on native workers, either in terms of jobs or wages, while the public finances and hence public services have, if anything, benefited.
Of course, there is no particular reason to believe that the EU is willing to negotiate this kind of option, given that other members will be watching carefully to see if they might want to demand some additional flexibility of their own, whether on immigration or on other issues. Overall, it\’s not clear whether the EU will react to the Brexit vote as a signal that it should take a half-step back and allow its member states greater freedom and flexibility in certain areas, or whether it will react–expecially now that the UK is no longer involved in meetings and making an anti-interventionist case–by creating an imposing a new wave of common rules and regulations.
Richard Baldwin offers a different twist, which he calls EEA+AE:
The alternative that seems most sensible from an economic perspective is the Norway option. It may well be that the UK government could make this palatable, despite the free movement of people, by bundling it together with a very thorough set of policies to help the UK citizens who have been left behind by globalisation, technological advances, and European integration. Maybe we could call it the ‘EEA plus anti-exclusion option’ (EEA+AE). If this came to pass, the main economic policy outcome of the Brexit vote would be simple. The UK would end up with more influence over its trade, agricultural, and regional policies, but less influence over the rules and regulation governing its industrial and service sectors.
If an EEA-related isn\’t practical, either for UK political reasons or because the EU isn\’t willing to negotiate it, then what other options are possible? Another model is Switzerland, an economy with a large financial sector (like the UK) which has negotiated a set of bilateral deals with the European Union. Canada has signed a free trade agreement with the EU, and presumably the UK could do the same. Or the UK could just become part of the World Trade Organization and trade with the EU under those rules, which has been the legal framework for how the US trades with the EU.
Angus Armstrong tackles this question in his essay by trying to define what Britain\’s trade priorities should look like, give the shape of the modern British economy. He writes:
\”It is more than four decades since the UK last was in charge of trade negotiations. Back then, exports were mostly domestic manufactured goods, where a pound of exports meant a pound of local profits and wages. Today, the UK is at the forefront of complex global value chains where services generate more than half of its domestic profits and wages from trade. This matters when negotiating the best type of trade arrangements. Trade policy is no longer just about reducing tariffs and subsidies to unprofitable industries; it is common standards and regulation, property rights and investment protection, infrastructure and communications, and the free movement of ideas and human capital.\”
Armstrong offers a chart on the main UK trading sectors. He writes:
\”Figure 2 gives a breakdown of value added by domestic and foreign firms in UK exports by the most important trading sectors. It is striking that business services, finance, and wholesale and retail trade account for the same domestic value added as the 17 other sectors from chemicals onwards. For these businesses, trade policy is about market access, equivalent regulations, and mutual recognition. Many FTAs include service sector provisions, but they typically involve official procurement opportunities, cross-border exports of services (as opposed to locating firms in foreign markets) and transparency agreements, and cover specific sectors only. No FTAs offer anything like the service sector access offered by the Single Market.\”
In short, the UK can in some ways agree to replicate a number of existing trade agreements. It could go to the WTO, and say that it will just more-or-less leave all its trade commitments as is. There\’s no precedent for how such a negotiation should happen, but this seems at least theoretically possible. As Armstrong points out: \”The EU has 53 preferential trade agreements – mostly with developing states – that will no longer cover the UK after withdrawal. The UK would also need to consider if, and how, to be included in the US-EU Transatlantic Trade and Investment Partnership (TTIP) and other free trade agreements (FTAs) under negotiation. The UK can seek to join regional trade agreements such as the Trans-Pacific Partnership, and enter into other negotiations such as the Trade in Services Agreement (TiSA). Whether the UK has more success or less influence outside the EU remains to be seen.\”
But the essential issue here is that more than half of UK trade with the EU, and the bulk of that trade is in business services, finance, and wholesale and retail trade. These are areas where trade often requires detailed agreement on financial and legal regulations–the kind of detailed agreements that are part of the EU. Armstrong writes: \”From n economics perspective, it is clear that agreements offering deep market access are more preferable than WTO access and many FTAs. The problem is that policies which enable deep market access encroach on the traditional domain of domestic policy.\”
Given the importance of the financial sector in the UK economy, what happens to that sector next seems especially important. For example, there are questions of \”passporting,\” meaning whether UK financial firms can operate freely in Europe, and whether common regulations will be imposed. In her essay, Patricia Jackson offers what seems to me a cautiously optimistic scenario that that the UK banking sector may be able to adapt. She writes:
The Brexit vote has undoubtedly created uncertainty and market volatility, with particular uncertainty for London, the EU’s largest financial centre. One issue facing the UK banking sector is the right to conduct cross-border activity in the EU (so-called passporting) when the UK is no longer an EU member. Another is the impact of Brexit on flexible recruitment in London. A further issue is the possibility that UK regulation moves away from that in the EU. …
Currently, banks established in the UK – either UK owned or UK subsidiaries of overseas banks – have the right to establish branches or carry out cross-border activity in the rest of the EU and other EEA states (passporting). It is far too early to say if these rights will be maintained as a result of the exit negotiations. If the rights are not maintained, then many banks may have to reassess their European structures if they wish to carry out cross-border activity into the EEA. Before deciding on changes, however, the banks need to consider the extent to which they can utilise existing subsidiaries established in the rest of the EU to achieve their passporting rights. A quick review of a sample of major non-European banks with subsidiaries in London indicates that around three-quarters also have subsidiaries elsewhere in the EU.
In addition, the Markets in Financial Instruments Directive (MiFID) does allow for cross-border access by banks established outside the EU to exchanges, clearing houses, and clearing and settlement systems, and third-country equivalence provisions allow passporting into the EU to deal with professional clients. Third-country equivalence requires an assessment of areas such as authorisation and supervision, rules covering market abuse, and so on. The questions are therefore much more about access to non-professional customers, and here existing subsidiaries could in many cases be used to provide passporting. …
One concern that the industry has is that UK regulation could diverge from that of the EU, adding cost and complexity. However, capital regulation of banks is underpinned by the Basel Accords, making it unlikely that the UK would move away from the EU in this area. Of course, over time some differences in application might develop, but in terms of implementation the UK has had a distinct approach. Indeed, changes in the Single Supervisory Mechanism led by the ECB are tending to bring the continent closer to the UK’s approach in areas such as Pillar II, the assessment of risks in the round and adequacy of capital. The UK has also always had a distinctive approach to conducting regulation.
As the high-profile decisions get made, like when (or whether?) the UK will withdraw officially from the EU, and whether to pursue an EEA-related approach, my expectation is that there will be a continual succession of political land mines which blow up at unexpected times. For example, British agriculture is likely to be in turmoil, Baldwin sketches the issues in his overview (citations omitted):
The farm problem is a particularly significant one. During the referendum campaign, UK farmers reportedly received assurances from Leave campaigners that the subsidies they now receive from the EU would be continued after Brexit. This is no small matter, as EU direct payments make up 54% of British farmers’ income.
One issue may arise, however, with the nature of the payments. Under WTO rules it is not possible for the UK to provide trade-distorting subsidies to its farmers unless the UK has an agreement that permits it. Today, such payments are possible due to a deal that the EU stuck with its WTO partners when the UK was part of the EU. After leaving, the UK would either have to abandon the policy, or negotiate new exceptions with the other 162 WTO members. As some of the other members are vehemently opposed to such payments, negotiating such a waiver could be difficult. Additionally, continued access to the EU market for farm products is important since the EU buys over 60% of the UK’s agricultural exports. Even under the Norway option, this access is not assured since agriculture was excluded from the European Economic Area agreements (at the request of Norway, inter alia, when the deal was being crafted in the 1990s).
There will be questions about how the preferences of Scotland and Northern Ireland will be reflected in the negotiations to come, and how this affects politics within the UK. Membership in the EU did limit UK policy choices in certain ways, for example, by limiting the ability of governments to hand out industrial subsidies. My guess is that at least some of the \”Leave\” supporters will soon be pushing for a new wave of such subsidies.
In a biggest picture sense, UK trade relations are really just a step toward the bigger goal, which is a shared and growing prosperity for the country. Here, the concern should be that Britain\’s political system is so wrapped up in renegotiating with the EU and the rest of the world that it pays insufficient attention to the fundamental underpinnings of economic growth. As I\’ve argued on this blog in the past, international trade is often treated as a scapegoat for economic problems that are more fundamentally about technology and the pace of change in a globalizing economy.
Nicholas Crafts offers a useful reflection on this theme, pointing out that when it comes to long-run growth in the United Kingdom, the most important policy choices have always been, and will continue to be, the choices made in Westminster, not by EU bureaucrats in Brussels. Crafts writes (citations omitted):
The proximate sources of growth can be found in rates of increase of factor inputs, including capital, human capital, and hours worked, and of the productivity of those inputs. At a deeper level, economics highlights the importance of micro-foundations of growth in terms of the key role played by the incentive structures which inform decisions to invest, to innovate, and to adopt new technology, and which depend on institutions and policy. Obviously, there are a large number of supply-side policies that affect growth performance. These include areas such as competition, education, infrastructure, innovation, regulation, and taxation. Moreover, even for EU members, to a large extent these are very largely under the control of national governments.
Even though relative UK growth performance improved prior to the Global Crisis, there have been long-standing failings in supply-side policy. The most obvious is in innovation policy, which is reflected in a low level of R&D, but education, infrastructure, land-use planning regulation, and the tax system also give significant cause for concern, while British capital markets remain notably short-termist with a bias against long-term investment.
Although Eurosceptics complain about the costs of EU-imposed regulations, it should be recognised that the UK has persistently been able to maintain very light levels of regulation in terms of key OECD indicators such as product market regulation (PMR) and employment protection legislation (EPL), for which high scores have been shown to have significant detrimental effects. In 2013, the UK had a PMR score of 1.09 and an EPL score of 1.12, the second and third lowest in the OECD, respectively. Moreover, it is noticeable that the regulations which it might be politically feasible to remove in the event of Brexit do not include anything that might make a significant difference to productivity performance.
In short, the Brexit decision that the UK should renegotiate all its trade agreement–both directly with the EU and those agreements made by the EU with other countries–might not have much negative effect on the UK economy, assuming a new set of trade agreements not too different from existing arrangements goes into effect fairly soon. (Did I ram enough qualifiers into that sentence?) But existing trade agreements were not a primary source of Britain\’s economic issues, and so renegotiating trade agreements won\’t be a path to economic prosperity for the UK.
\”Inclusive growth\” is an unquestionably astute rhetorical formulation. Those who use it can support both economic growth and helping the poor in a two-word phrase. But where did the term come from? Does the term have different content from seemingly similar terms like \”broad-based growth\” or \”pro-poor growth\”? Or do all these terms mean pretty much the same thing? Most of all, is \”inclusive growth\” a specific set of policies or just a desirable outcome?
Apparently, the term \”inclusive growth\” originated in an essay \”What is Pro-poor Growth?\” by Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term \”inclusive\” growth only once, and in a way which makes it synonymous with \”pro-poor growth.\” They write: \”Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth.\”
The reasons why \”inclusive growth\” or \”pro-poor growth\” seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The \”Kuznets curve\” held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.
All of these frameworks have been challenged in various ways. It\’s not clear that low-income countries are in a poverty \”trap\”–it\’s just that they have slow growth, which isn\’t necessarily the same thing. It wasn\’t clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian \”growth miracle\” that saw the take-off of economies like South Korea, Thailand, and Taiwan didn\’t involve a large rise in inequality, nor did the earlier take-off of Japan\’s economy. As Ranieri and Ramos note:
Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality, it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” …
But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word \”inclusive\” apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the \”inclusiveness\” of growth be understood at least partially in terms of institutions for democratic representation and governance?
These different concepts of inclusive growth have different policy implications. While it\’s easy to feel an attraction to the concept of inclusive growth, it\’s not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn\’t seemed that their choice was between \”inclusive growth\” or \”noninclusive growth,\” but rather they were just struggling to have meaningful growth of any kind.
There\’s no question that the conceptual problems with \”inclusive growth\” are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:
\”[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth.\”
But despite the conceptual confusion, it seems to me that the terminology of \”inclusive growth\” does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.
But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder. When thinking about policies to encourage development, it\’s a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it\’s a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people–whether through jobs and wages or through more affordable goods and services.
To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a \”constructive interaction of declining poverty and inequality and economic growth.\” That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.
We promote the use of plain English on GOV.UK. We advocate simple, clear language. Terms like eg, ie and etc, while common, make reading difficult for some. Anyone who didn’t grow up speaking English may not be familiar with them. Even those with high literacy levels can be thrown if they are reading under stress or are in a hurry – like a lot of people are on the web.
Of course, now that my desire to purge plain English of Latinisms has won this small victory, my horizons are expanding. A number of economists apparently have a psychological need to write \”ex ante\” and \”ex post,\” rather than using the vocabulary of commonplace words that describe sequences in either temporal or expectational terms, including \”beforehand\” or \”expected\” or \”before the fact,\” as well as \”afterwards\” or \”realized\” or \”occurred later.\” And yes, these issues actually raise the blood pressure of pedants like me.
The basic calculation here is to look at the assets that public pension funds have on hand, and to compare that amount with what is needed to pay the benefits that have already been promised to be paid in the future. To make this calculation, you need to make a guess about what rate of return will be earned by the assets currently on hand. A typical current estimate is that pension fund assets will earn an average of 7.6% per year for decades to come. We\’ll return to the realism of that number in a moment. But using it as a given, Munnell and Aubry present calculations that the average state and local pension fund has on hand about 74% of what it needs to pay the benefits that have already been promised. (The exact percentage varies a bit because of some alternative accounting rules.)
Notice that when the stock market peaked right around 2000, there was a golden moment when public pension funds were fully funded. But rather than build on that moment, by assuring that the funds would remain fully funded into the future, a number of state and local governments saw this as a chance to promise higher pension benefits and to make lower contributions to pension funds. Apparently these actions were acceptable both to elected officials and to the leadership of public employee unions. And now here we are.
Of course, this overall average is mixture of some funds that are doing better, and some doing worse. For example, here are examples of public pension funds that are less than 50% funded in 2015: Arizona Public Safety Personnel (49% funded), Chicago Municipal Employees (37%), Chicago Police (27%), Connecticut State Employees Retirement system (43%), Illinois State Employees Retirement System (36%), Kentucky Employee Retirement System (22%), and the Philadelphia Municipal Retirement System (44%).
And what if the pension fund assets on hand don\’t earn 7.6% per year? As Munnell and Aubry write: \”Public pensions currently hold about 70 percent of their assets in risky investments, including more than half of their assets in equities. As discussed, on average, plans assume a nominal return of 7.6 percent on their whole portfolios, which implies nominal stock returns of 9.6 percent. In contrast, many investment firms project much lower equity returns …\”
By their calculations, if one assumes only a 6% annual rate of return on pension fund assets going forward, then the average funds are only 58% funded at present. And if one assumes that the rate of return on pension fund assets is only 4% per year going forward, then the average fund is only 45% funded at present. Of course, those pension funds with below-average funding at present would be even worse off if returns are lower than hoped-for. As Munnell and Aubry write: \”What happens from here on out depends very much on investment performance.\”
Assuming that we will not have the pleasant surprise of very high investment returns that rescue the pension funds, what policy options are possible? Gale and Krupkin walk through the choices. As they write: \”The implications of the projections are unpleasant but straightforward. Governments that face significant shortfalls will have to cut employee benefits, raise employee contributions, or finance higher employer contributions with tax increases or spending cuts. The eventual changes may be modified (or hidden) by pension reform, but the basic direction of the required changes is clear.\” Ultimately, the argument is over who will bear the shortfall in public pension funds. The candidates are current retirees, current government workers, previous government workers who haven\’t yet claimed benefits, or the public through either taxes that are higher or government services that are lower than they would otherwise be.
I don\’t have a good sense of what sort of deals should be cut when some public pension funds inevitably can\’t fulfill their promises. But I do know that a hefty dose of the blame should go to the specific state or local coalitions of elected officials, public sector unions, and voters that found it easy to promise future payments, but apparently impossible to assure that sufficient funds were put aside for those promises. In many places around the country, public pension funds have been run with a reasonably high degree of responsibility (if not always quite as prudently as I would have preferred if I was a state employee), or where meaningful reforms in the direction of pension solvency have already been undertaken. But where the behavior has been imprudent, those state and local governments should have to face their own voters, and those public unions should have to face their own workers.
Adam Smith offered a characteristically pungent insight on the subject of the human capacity for self-deceit in his 1759 book, The Theory of Moral Sentiments. I quote here from the always-useful 1790 edition available online at the Library of Economics and Liberty website. Here\’s Smith in TMS (1759 [1790], part III, Ch. 1).
\”The opinion which we entertain of our own character depends entirely on our judgments concerning our past conduct. It is so disagreeable to think ill of ourselves, that we often purposely turn away our view from those circumstances which might render that judgment unfavourable. He is a bold surgeon, they say, whose hand does not tremble when he performs an operation upon his own person; and he is often equally bold who does not hesitate to pull off the mysterious veil of self-delusion, which covers from his view the deformities of his own conduct. Rather than see our own behaviour under so disagreeable an aspect, we too often, foolishly and weakly, endeavour to exasperate anew those unjust passions which had formerly misled us; we endeavour by artifice to awaken our old hatreds, and irritate afresh our almost forgotten resentments: we even exert ourselves for this miserable purpose, and thus persevere in injustice, merely because we once were unjust, and because we are ashamed and afraid to see that we were so. …
\”This self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life. If we saw ourselves in the light in which others see us, or in which they would see us if they knew all, a reformation would generally be unavoidable. We could not otherwise endure the sight.\”
It may be that modest degree of self-deceit about our own capabilities and appearance helps many of us to get up in the morning and face the day. But self-deceptions have an unpleasant habit of colliding with reality, sooner or later. One hopes that those collisions with reality can be gentle, and that they can be an opportunity for what Smith called \”a reformation\” and what we now label as a \”personal growth opportunity.\” But it\’s easy to think of situations where people become so highly invested in self-deception about their own conduct that, when the collision with reality occurs, they push back with anger and counter-accusations and retreat further into their self-deceit, rather than engaging in self-examination. Indeed, I offer as a hypothesis that 21st-century culture may in various ways encourage self-deceit over self-examination.
The ferocity of some of the arguments in the US over global trade can be a little surprising to me. After all, the US economy with its enormous internal market is considerably less exposed to international trade than the world average. Here\’s a figure generated from the World Bank website showing imports/GDP for the world economy as a whole, and the US economy. For the world economy on average, the import/GDP ratio is approaching 30%; for the US economy, the import/GDP ratio is higher than it ways, but still half the global level.
Doug Irwin offers a useful overview of the pro-trade position in his essay in the July/August 2016 issue of Foreign Affairs, \”The Truth About Trade: What Critics Get Wrong About the Global Economy.\” He writes: \”By and large, the United States has no major difficulties with respect to trade, nor does it suffer from problems that could be solved by trade barriers. What it does face, however, is a much larger problem, one that lies at the root of anxieties over trade: the economic ladder that allowed previous generations of lower-skilled Americans to reach the middle class is broken.\”
My usual way of making this point is to argue that international trade, and in particular arguments over the details of trade agreements, is an easy scapegoat for more profound and harder-to-tackle economic dislocations. I\’d be delighted if America\’s economic issues could be resolved by, say, renegotiating or just not signing some trade agreement. But I don\’t believe. it.
Irwin works through many of the concerns raised about international trade, like those who mistakenly believe that the US trade deficit was a main cause of job loss during the Great Recession. He writes:
In fact, the trade deficit usually increases when the economy is growing and creating jobs and decreases when it is contracting and losing jobs. The U.S. current account deficit shrank from 5.8 percent of GDP in 2006 to 2.7 percent in 2009, but that didn’t stop the economy from hemorrhaging jobs. And if there is any doubt that a current account surplus is no economic panacea, one need only look at Japan, which has endured three decades of economic stagnation despite running consistent current account surpluses.
But to me, Irwin\’s key point is that the big underlying issue disrupting the US economy is technological change. Indeed, the changes in communication, logistics, transportation, and information processing are dramatically altering the US economy all by themselves. Indeed, developments in technology are a large part of what make global supply chains viable in the first place.International trade is part of the picture, too, but competition from robots and computers are ultimately a bigger disruptor than competition from workers in China or India. Irwin writes:
\”Although imports have put some people out of work, trade is far from the most important factor behind the loss of manufacturing jobs. The main culprit is technology. Automation and other technologies have enabled vast productivity and efficiency improvements, but they have also made many blue-collar jobs obsolete. One representative study, by the Center for Business and Economic Research at Ball State University, found that productivity growth accounted for more than 85 percent of the job loss in manufacturing between 2000 and 2010, a period when employment in that sector fell by 5.6 million. Just 13 percent of the overall job loss resulted from trade, although in two sectors, apparel and furniture, it accounted for 40 percent.
\”Although the United States boasts a highly skilled work force and a solid technological base, it is still the case that only one in three American adults has a college education. In past decades, the two-thirds of Americans with no postsecondary degree often found work in manufacturing, construction, or the armed forces. … Over time, however, these opportunities have disappeared. Technology has shrunk manufacturing as a source of large-scale employment: even though U.S. manufacturing output continues to grow, it does so with many fewer workers than in the past. Construction work has not recovered from the bursting of the housing bubble. And the military turns away 80 percent of applicants due to stringent fitness and intelligence requirements. There are no comparable sectors of the economy that can employ large numbers of high-school-educated workers.
\”This is a deep problem for American society. The unemployment rate for college-educated workers is 2.4 percent, but it is more than 7.4 percent for those without a high school diploma—and even higher when counting discouraged workers who have left the labor force but wish to work. These are the people who have been left behind in the twenty-first-century economy—again, not primarily because of trade but because of structural changes in the economy. Helping these workers and ensuring that the economy delivers benefits to everyone should rank as urgent priorities. But here is where the focus on trade is a diversion. Since trade is not the underlying problem in terms of job loss, neither is protectionism a solution.\”
I confess that I have my \”stop the world, I want to get off\” moments. But the rest of the world economy isn\’t going to stop. Whether or not the disruptive effects of technology continue to moves ahead in the US, technology is going to be developed and adopted elsewhere. If the US decides to take political actions to reduce its exposure to foreign trade, other countries are going to keep signing such agreements and building global supply chains. There are real challenges for how to create ladders of opportunity for successful careers–not just jobs paid by the hour–for workers across the spectrum of education and skills. And there are legitimate policy disputes concerning the fine print of what\’s in various trade agreements. But backing away from technology and the global economy is not a successful path to prosperity.
On one side, there seems to be near-universal agreement that the US economy would benefit from workers who had higher skill levels. But if the rising skill levels are generated by the immigration of high-skilled workers, this consensus can become wobbly. The National Academy of Sciences offers a useful overview of these issues in Immigration Policy and the Search for Skilled Workers: Summary of a Workshop, published late in 2015. As the title implies, this report is a description of a conference, and most of the report is in the form of having the rapporteurs, Gail Cohen, Aqila Coulthurst, and Joe Alper, paraphrases presentations made at the conference.
High-skilled immigration is tied both to education and to the labor market: if a country like the United States welcomes foreign students to American colleges and universities, as undergraduates, graduate students, and faculty, there will inevitably be more situations where US-based companies want to hire this foreign-born but geographically available talent. Here are a couple of illustrative figures from an presentation by Lindsay Lowell. The left-hand panel shows that the US attracts by far the largest number of international students in total terms. The right-hand panel shows that when focusing just on science, technology, engineering, and mathematics students, the US is still near the top in the percentage of those students who are international.
One result of this influx of foreign talent is that the enormous US economy, shown by the red dotted line below, is among the world leaders in the share of its workforce who fall into the broad job category of \”researchers\”– which is presumably a good thing in the coming knowledge economy.
Richard Freeman described this education-to-employment connection for technology-based skills in his presentation, paraphrased like this:
U.S. National Science Foundation estimates that 63 percent of all post-doctoral STEM students working in U.S. universities are international students, and that 49 percent of international post-doctoral fellows received their PhDs in the United States. There has been a corresponding increase in the number of scientific papers coming from U.S. laboratories that have Chinese co-authors or coauthors from other emerging economies. These international students are not merely getting an education in the United States—they are also becoming U.S. STEM workers after graduation. In 2005, over a third of all STEM workers with PhDs were foreign born, with 64 percent receiving their PhD from U.S. universities. Over a quarter of U.S. STEM workers with Master’s degrees were born in another country and 15 percent of foreign-born STEM workers with Master’s degrees received that degree in the United States. According to a different dataset, the percentage of foreign-born workers in U.S. STEM jobs increased from 11 percent to 19 percent between 1990 and 2011 for those with Bachelor’s degrees, from 19 percent to 34.3 percent for those with Master’s degrees, and from 24 percent to 43 percent for PhDs.
Lowell noted that after STEM fields, business was the next most-popular field for high-skill immigrants. Here\’s a paraphrase: \”After STEM fields, business was the most popular subject of study for international students in the United States during that period. The impact of a large number of business students may be substantial on growth, because it is often the business majors who take advantage of ideas and bring them to market …\”
The economics of immigration involves evaluating a set of tradeoffs. Do immigrants help the economy to grow, for example by allowing native workers in the economy to specialize in ways that potentially raise productivity and wages for everyone? Or do immigrants only compete for existing jobs in a way that reduces job prospects and standard of living for native workers? As William Kerr points out in his presentation, there are different historical examples of each of these. A study of the chemists who fled Nazi Germany for the United States suggest that they helped the US chemical industry to grow substantially. A study of the wave of Russian mathematicians who came to the US in the 1990s suggests wages and job opportunities for native-born US mathematicians were reduced as a result.
When looking only at high-skill immigration, it seems clearly beneficial to an economy to have immigrants who are also gifted entrepreneurs, building companies that provide jobs and secure high-wage employment. Moreover, there seem to be what economists call \”agglomeration effects\” in technology, where a group of people with interrelated technical skills all come together in one place, there can be an ongoing growth of innovation and production that exceeds what this group would have accomplished if they were dispersed. To put this in concrete terms, it\’s a good thing for the US economy that the Silicon Valley agglomeration, which relies heavily on an influx of technical and business talent from all around the world, is located in this country.
The less clear-cut case involves what might be called undistinguished high-skill immigrants–that is, someone who is at best an average computer programmer or laboratory researcher. By definition, the undistinguished are less likely to create companies or be a key ingredient in an agglomeration. However, they may well compete with average native high-skill workers for jobs and wage. But here as well, the question is whether high-skilled immigrants may in some ways be complementary with high-skilled native labor.
A lot of the NAS report considers public policies from different countries about high-skilled immigration. The US stands out as a country that has not been especially encouraging to high-skilled immigration, but seems to get a disproportionate share of those immigrants nonetheless. As the report points out, in the United States, about 70% of immigration is family related, another 15% is humanitarian, and the remaining 15% is employment-based (which includes temporary high-skilled immigrants). In Canada and Australia, by contrast, about 30-40% of immigration is family-based or humanitarian, and the remaining 60-70% is employment-based. But as Lowell noted (according to this paraphrase), the US still does very well in the global contest for talent:
\”Another indication of how well the United States is competing for international STEM workers comes from data on the number of high-skilled foreign-born workers in the 20 leading destination nations. From 1980 to 2010, the percentage of high-skilled migrants living in the United States relative to the other top destinations rose from 46 percent to 49 percent, even as the total number rose by more than four-fold. Similarly, data from the World Intellectual Property Organization showed that from 2001 to 2010, the flow of inventors around the world was dominated by flow into the United States, while OECD data shows that the United States remains the main destination for international authors of scientific papers.\”
Pia Orrenius made the point that while the US immigration system for attracting high-skill immigrants is not especialy welcoming, the US makes up for it by being more welcoming to high-skill immigrants in other ways. Here\’s a paraphrase:
Immigration policy is just one tool of many that can result in a better, more qualified, nimble and innovative workforce. Luckily for the United States, the nation does well in other areas—the quality of our institutions of higher education, the salaries that U.S. employers pay, the flexible labor markets with many job opportunities, and the relative ease with which foreign workers integrate in the U.S. workforce, among others—that enable the country to be competitive in the international market for high-skilled workers.
In the past, policy arguments over high-skilled immigration have often been jumbled together with overall arguments about comprehensive immigration reform, but the issues raised are not the same. Higher education is expanding dramatically around the world, emerging-market economies are growing more rapidly than the world average, and global talent pool is expanding quickly, too. Competition for where these workers choose to locate will be real and ongoing. But in the 21st-century global economy, only some of these high-skill workers will not be planning to immigrate permanently. Many other will be seeking to make connections and build experience, and then moving elsewhere. In this sense, the policy issues of high-skilled immigration are often not about permanent migration, but instead are about flexibility of work arrangements and geographic locations in an interconnected world.
At the NAS conference, Madeleine Sumption offered the intriguing thought that the US system of enticing high-skill immigrants through a mixture of educational and business opportunities, along with temporary work visas, may be the broadly the right approach for talent in the global economy. But in her view, the existing US approaches to high-skill migrants needs an overhaul with a big dose of additional flexibility. Sumption said: \”The U.S. has the right model, it is just falling apart. … We need to fix that model rather than think of something totally new.”
Average health care spending for Medicare recipients who died in 2014 was $34,529, nearly four times as high as the average Medicare spending of $9,121 for those who didn\’t die. This general pattern isn\’t surprising: after all, those who die often tend to have health issues beforehand. The detailed data shows that the biggest part of this cost difference is driven by higher spending for in-patient care in hospitals for those who died in 2014. What\’s interesting to me is that the share of Medicare spending going to those who die in that year seems to be diminishing.
What explains this shift? The report lists these causes:
\”In addition, we find that total spending on people who die in a given year accounts for a relatively small and declining share of traditional Medicare spending. This reduction is likely due to a combination of factors, including: growth in the number of traditional Medicare beneficiaries overall as the baby boom generation ages on to Medicare, which means a younger, healthier beneficiary population, on average; gains in life expectancy, which means beneficiaries are living longer and dying at older ages; lower average per capita spending on older decedents compared to younger decedents; slower growth in the rate of annual per capita spending for decedents than survivors, and a slight decline between 2000 and 2014 in the share of beneficiaries in traditional Medicare who died at some point in each year.\”
(A couple of notes here: 1) The graph and all the data here refer to \”traditional Medicare,\” which is the two-thirds of Medicare recipients who are not in \”Medicare Advantage\” plans. In traditional Medicare, the government pays health care providers on a fee-for-service basis, and thus has good data on what the costs were for services each year. In Medicare Advantage, Medicare makes monthly insurance-like payments to a managed care organization–like a health maintenance organization–and so the government does not have readily available data on the costs of what actual health care was provided at any given time. 2) The 13.5% in the graph above for 2014 doesn\’t match the 25% at the top. The difference is that this figure looks at the health care costs incurred in 2014 for those who died in 2014. The 25% figure refers to health care costs incurred in the 12 months before death–which usually reaches back into the previous year. For looking at trends, either approach can work fine, but plotting data for costs in the 12 months before death and comparing it to other spending in the same time interval is a more complicated tas, and the official data is organized on an annual basis, so that\’s what is reported here.)
A misconception which seems popular, at least based on the kind of questions I hear, is that end-of-life spending is especially high for the very elderly. That doesn\’t seem to be true. This figures shows spending of those who died in 2014 by age: for example, Medicare spending on 65 year-olds who died in 2014 averaged $38,840, while for those over age 100 it averaged $14,985. Conversely, Medicare spending on those who survived 2014 tends to rise by age.
This pattern seems like a positive one to me, in the sense that I suspect there is more that health care can do for the average person who is 65 or 70, compared to the average person who is 100 or 105. A more detailed breakdown of this data shows that when just looking at health care costs of those who died in 2014 by age, those who were in their late 60s had much higher expenditures on in-patient hospital costs (the orange bars), while the older age groups tended to have higher spending on hospice or skilled-nursing facility care.
