Conversable Economist

Discussions of the US health care system and how it might be reformed sometimes have a tendency to imply that the other high-income countries of the world have a single template for the financing and provision of health care, and only the US is unique. For example, one sometimes hears statements about how \”the United States is the only high-income country without national health insurance,\” which is true, but which also neglects the fact that other high-income countries finance and provide health insurance in some very different ways.

For an overview of the details and differences across the health care systems of major countries around the world, a useful starting point is the 2015 International Profiles of Health Care Systems, 
published by the Commonwealth Fund in January 2016. The volume includes some overview table of differences across countries, followed by pithy essays sketching the nuts and bolts differences across countries–some written by individuals, some by the Commonwealth Fund. It was edited by Elias Mossialos and Martin Wenzl of the London School of Economics and Political Science and by Robin Osborn and Dana Sarnak of the Commonwealth Fund. As they write: \”Each overview covers health insurance, public and private financing, health system organization and governance, health care quality and coordination, disparities, efficiency and integration, use of information technology and evidence-based practice, cost containment, and recent reforms and innovations.\” The 18 countries included in the report are mostly high-income countries, but overviews of China and India are also included. Every reader will mine their own nuggets from a report like this, but here are a few points that caught my eye.

I recently heard someone in a casual discussion suggest that \”the US health care system should be more like the UK or Canada\”–but of course, the UK and Canada actually have rather different health care systems. To list just a few of the differences as they arise in the report:

• Canada spends $4,500 per person per year on health care; in the United Kingdom, it\’s $3,300 per person per year. The US is much higher at $9,100 per person, but the Canada-UK gap is still significant. 
• Britain\’s National Health Service is run at the national level, while many of Canada\’s government health care funding and policy-making is at the regional level. As the report notes: \”\”Provinces and territories in Canada have primary responsibility for organizing and delivering health services and supervising providers. Many have established regional health authorities that plan and deliver publicly funded services locally. Generally, those authorities are responsible for the funding and delivery of hospital, community, and long-term care, as well as mental and public health services.\”
• In Canada, \”Nearly all health care providers are private.\” In the UK, about two-thirds of general practictioners are private. When it comes to specialists in England, \”Nearly all specialists are salaried employees of NHS [National Health Service] hospitals, and CCGs [cliical commissioning groups] pay hospitals for outpatient consultations at nationally determined rates. Specialists are free to engage in private practice within specially designated wards in NHS or in private hospitals; the most recent estimates (2006) were that 55 percent of doctors performed private work …\”
• In England, 11% of the population buys private health insurance for uncovered services; in Canada, 67% of the population buys private health insurance for uncovered services.
• Average per capita out-of-pocket health care spending is about $300 in the UK, $600 in Canada, and $1100 in the US. 
• Of all primary care physicians, 98% use electronic medical records in the UK, compared with 84% in the US and 73% in Canada.  
• As one measure of access to medical technology, the UK has 6.1 MRI (magnetic resonance imaging) machines per 1 million people; Canada has 8.8 MRI machines per million; and the US has 35 MRI machines per million. 
• When people are surveyed about whether they are \”Able to get same-day/next-day appointment when sick,\” 52% say \”yes\” in the UK, 48% say \”yes\” in the US, and 41% say \”yes\” in Canada. 
• getting care, 
• When people are surveyed about whether they have \”Waited 2 months or more for specialist appointment,\” 29% of Canadians say \”yes,\” compared with 7% in England and 6% in the US. 
• When people are surveyed about whether they have \”Waited 4 months or more for elective surgery,\” 18% of Canadians say \”yes\” compared with 7% of Americans. This measure isn\’t available for the UK.
• When it come to cost control in England, \”Rather than using patient cost-sharing or imposing direct constraints on supply, costs in the NHS [National Health Service] are constrained by a global budget that cannot be exceeded. NHS budgets are set at the national level, usually on a three-year cycle. CCGs [Clinical Commissioning Groups] are allocated funds by NHS England, which closely monitors their financial performance to prevent overspending. They are expected to achieve a balanced budget each year. The current economic situation has resulted in a largely flat NHS budget against a backdrop of rising demand.\” In Canada, \”\”Costs are controlled principally through single-payer purchasing, and increases in real spending mainly reflect government investment decisions or budgetary overruns. Cost-control measures include mandatory global budgets for hospitals and regional health authorities, negotiated fee schedules for providers, drug formularies, and resource restrictions vis-à-vis physicians and nurses (e.g., provincial quotas of students admitted annually) as well as restrictions on new investment in capital and technology. The national health technology assessment process is one of the mechanisms for containing the costs of new technologies … The federal Patented Medicine Prices Review Board, an independent, quasi-judicial body, regulates the introductory prices of new patented medications.\” 

So when a US person says \”be like Canada or the UK,\” they are ducking some real differences. Are they advocating that US health care spending per person should be cut by 50% (Canada) or by 65% (UK)? Are they saying that the health care system should be run by states, or by the national government? Are they envisioning a system where most people have outside private health insurance, or where no one does? A system where most health care specialists are direct employees of the government, or not? What kinds of waiting times will be expected? What kinds of cost controls and budget caps?

Saying the US health care system \”should be like the UK or Canada\” is a little like says that we should head either northeast or northwest–sure, both directions are north, but there\’s a considerable difference in where you eventually end up.

My other concern with the invocation of Canada and the UK as models for US health care policy goes back to a standard comment in discussions of public policy that how to design a new policy can be quite different from issues of how to reform an existing policy. For example, one might not choose to design a US tax code which doesn\’t tax employer-provided health insurance as income, which then helps to feed a system of private health insurance provided through employers. But once those provisions have been in place for decades, and people and companies have made plans based on those tax provisions, figuring out how to reform the existing system becomes a delicate problem.

For that reason, I\’ve for some years been intrigued by Germany\’s approach to a national health insurance system, because it\’s based on somewhat decentralized system of 124 \”sickness funds\”–essentially nonprofit and nongovernmental health insurance companies–competing against each other in a national exchange. Those with high incomes can opt out and buy private health insurance from one of about 42 companies. About 11% of the population does so. However, when you buy private health insurance, the price and coverage is based on an expectation of a lifetime contract between you and the insurance company. Doctors belong to regional associations that negotiate fees with the sickness funds. The same health care providers treat those with insurance from the sickness funds and those who have private insurance, and \”Individuals have free choice among GPs, specialists, and, if referred to inpatient care, hospitals.\”

As the report describes the German health care system: \”States own most university hospitals, while municipalities play a role in public health activities, and own about half of hospital beds. However, the various levels of government have virtually no role in the direct financing or delivery of health care. A large degree of regulation is delegated to self-governing associations of the sickness funds and the provider associations, which together constitute the most important body, the Federal Joint Committee. … Within the legal framework set by the Ministry of Health, the Federal Joint Committee has wide-ranging regulatory power to determine the services to be covered by sickness funds and to set quality measures for providers …\”

Of course, just as the Canadian and UK health care systems could not be easily transplanted to the US, neither could the German system. In particular, Germany seems better able than the US to have organizations like the Federal Joint Committee that manage to shape consensus decisions with input from health care providers, insurance companies, patient representatives, and government. That said, the German health care system is in many ways a closer cousin to the US approach, and as long as we are tossing out casual comparisons of where the US health care system might look to learn some lessons, it should surely be included. For a readable comparison of the German and US systems, here\’s a link to an article in the Atlantic a couple of years ago.

When people discuss the reasons behind lower fertility rates, a commonly heard claim is that as women have entered the paid workforce in greater numbers, the time and money tradeoffs make having children look less attractive. But that simple story doesn\’t capture the facts. The actual pattern is that the high-income countries where women are more likely to be in the labor force are also the countries with higher fertility rates. Yuko Kinoshita and Kalpana Kochhar lay out the evidence, along with broader arguments about the economic gains from including more women in the workforce, in their article \”She Is The Answer,\” which appears in the March 2016 issue of Finance & Development, published by the International Monetary Fund.

Here\’s a graph showing the female labor force participation rate for high-income countries on the horizontal axis, and the fertility rate on the vertical axis. The best-fit line clearly shows that countries where women are more likely to be in the labor force are also countries with higher fertility rates.

The details of this evidence are interesting. Traditionally, if one looks at data from within a single country, a typical finding was that women who had more children were indeed less likely to be in the labor force during their lifetimes. But in high-income countries, that relationship now appears to have changed. Kinoshita and Kochhar  explain (citations omitted):

Researchers have explained this apparent contradiction by looking at the contribution that men make to their households. They find that women in countries where men participate more in housework and child care are better able to combine motherhood and a job, which leads to greater participation in the labor force at relatively high fertility levels. 

Moreover, the relationship between female labor participation and fertility seems to have shifted from negative to positive in Organisation for Economic Co-operation and Development advanced economies since 1985. This shift implies that when more women work and bring home a paycheck households can support more children. This trend also reflects changes in social attitudes toward working mothers, fathers’ involvement in child care, and advances in technology that allow more workplace flexibility. Public policies such as more generous parental leave and greater availability of child care also helped.

My own unscientific explanation for this change, vetted mainly by my wife and some female friends, is that women in societies with more traditional gender roles may not have the freedom to get the level of skills and jobs they want in the paid labor market, but they recognize that having children could lock them into a very traditional lifestyle that they do not want. When a society breaks out of those traditional gender roles, women both have greater opportunities in the labor market and also greater time-and-energy support from their spouse within the family, at which point having children looks like a more attractive life choice.

Renee Haltom has an \”Interview\” with Emi Nakamura in Econ Focus, published by the Federal Reserve Bank of Richmond (Third Quarter 2015, pp. 26-30). Much of her work focuses on measurements of price stickiness, and then implications of those facts for the effects of macroeconomic policies and outcomes. Here are a few of the comments that jumped out at me.

Sales,  Price Stickiness, Demand Shocks

\”All this means that even if we were to see a huge number of price changes in the micro data, the aggregate inflation rate may still be pretty sticky. And if one abstracts from the huge number of sales in retail price data, then prices look a lot less flexible than they first appear. … It turns out sales have quite special characteristics that suggest that they do not contribute much to aggregate price flexibility — for example, they are very transient; they often return to the original price after a sale. … To me, the key consequence of sticky prices is that demand shocks matter. Demand shocks can come from many places: house prices, fiscal stimulus, animal spirits, and so on. But the key prediction is that prices don\’t adjust rapidly enough to eliminate the impact of demand shocks.\”

What are \”real rigidities\”?

\”I think we have a pretty good sense by now of how often prices change. But there\’s a lot of evidence from the aggregate data suggesting that prices don\’t respond fully even when they do change. If the pricing decisions of one firm depend on what other firms do, then even when one firm changes its prices, it might adjust only partway. And then the next firm adjusts only partway, and so on. This goes under the heading of real rigidities, and there are many sources of them. One example is intermediate inputs; if you buy a lot of stuff from other firms, then if they haven\’t yet raised their prices to you, then you don\’t want to raise your prices, and so on. Another source is basic competition: If your competitors haven\’t raised their prices, you might not want to raise your prices. The same thing occurs if some price changes are on autopilot, or if the people changing prices aren\’t fully responding to macro news — this is the core of the sticky information literature. These knock-on effects mean that inflation can still be \”sticky\” long after all the prices in the economy have adjusted.

\”Real rigidities are where it\’s much more complicated to do an empirical study. You have to ask not only whether the price changed, but whether it responded fully; so you need to have not only the price data, but also to see the shock to form an idea of what the efficient response would be. For that, the difficulty is that you don\’t often have good cost data. … The other type of evidence that speaks to this question comes from exchange rate movements. When you have changes in the exchange rate, you have a situation where there\’s an observable shock to firms\’ marginal costs, and you can use that to figure out how much prices respond conditional on having adjusted at all. But fundamentally, this is a much more challenging empirical problem.\”

Sticky Prices and the Great Recession

\”I think the Great Recession has actually increased the emphasis in macroeconomics on traditional Keynesian frictions. The shock that led to the Great Recession was probably some combination of financial shocks and housing shocks — but what happened afterward looked very Keynesian. Output and employment fell, as did inflation. And for demand shocks to have a big impact, there have to be some frictions in the adjustment of prices. The models that have been successful in explaining the Great Recession have typically been the ones that have combined nominal frictions with a financial shock of some kind to households or firms.

\”One can also see the effects of traditional Keynesian factors in other countries. Jón is from Iceland, which experienced a massive exchange rate devaluation during its crisis. Other countries that were part of the euro, such as Spain, did not. I think this probably mattered a lot; if prices and wages were flexible, the distinction between a fixed and flexible exchange rate wouldn\’t matter. Another example is Detroit. If Detroit had had a flexible exchange rate with the rest of the United States, a devaluation would have been possible to lower the relative wages of autoworkers, which might have been very helpful. Much of what happened during the Great Recession felt like a textbook example of the consequences of Keynesian frictions.\”

Bias in China\’s Inflation Rate?

\”There\’s a lot of skepticism about Chinese official statistics, and we wanted to think about alternative ways of estimating Chinese inflation. We use Chinese consumption data to estimate Engel curves, which give you a relationship between people\’s income and the fraction of their income that they spend on luxuries versus necessities. All else equal, if Chinese people are spending a lot more of their total food budget on luxuries such as fish, that could tell us that their consumption is growing very rapidly. Holding nominal quantities fixed, higher growth is associated with lower inflation, so we can invert estimates of consumption growth to get the bias in the inflation rate.

\”This approach has been applied to many countries, including the United States, and the usual finding is that the inflation estimate you get is lower than official statistics. This is usually attributed to the idea that official statistics don\’t accurately account for the role of new goods, resulting in lower estimates of inflation.

\”But for China we found an interesting pattern. We did find lower estimates of inflation for the late 1990s. But for the last five or 10 years, we find the opposite: Official inflation was understating true inflation, and official estimates of consumption growth were overstating consumption growth. Our estimates suggest that the official statistics are a smoothed version of reality.

\”There are a couple of reasons why this could be. One possibility is, of course, tampering. Whenever we present this work to an audience of Chinese economists, they are far more skeptical of the Chinese data than we are. But a second possible interpretation is that it\’s just very difficult to measure inflation in a country like China where things are changing so quickly.\”

So you want to be an academic researcher? Nakamura finished her Ph.D. in 2007, so this particular project has been bubbling along for a decade or more.

\”One of the things I\’ve been doing since grad school is working on recovering data underlying the CPI from the late 1970s and early 1980s. This is an exciting period for analyzing price dynamics since it incorporates the U.S. Great Inflation and the Volcker disinflation — the only period in recent U.S. history when inflation was really high. In the course of our other research, Jón and I figured out that there were ancient microfilm cartridges at the BLS from the 1970s in old filing cabinets. The last microfilm readers that could read them had literally broken, and they couldn\’t be read by any modern readers. Moreover, they couldn\’t be taken out of the BLS because they\’re confidential.

\”So we decided to try to recover these microfilm cartridges. We had an excellent grad student, who became our co-author, who learned a lot about microfilm cartridge readers and found some that could be retrofitted to read these old cartridges. After we scanned in the data, we had to use an optical character recognition program to convert it into machine-readable form. That was very tricky. The first quote we got to do this was over a million dollars, but our grad student ultimately found a company that would do it for a 100th of the cost. This has been quite an odyssey of a project, and there were many times when I thought we might never pull it off. We are now finally getting to analyze the data.\”

Demographic change is a relatively slow and gradual process, but then, so are the shifts of tectonic plates that can lead to earthquakes and volcanoes. The March 2016 issue of Finance & Development, published by the International Monetary Fund, contains five articles on various major population shifts. David Bloom contributed the lead article, called in \”Taking the Power Back.\” He writes:

The world continues to experience the most significant demographic transformation in human history. Changes in longevity and fertility, together with urbanization and migration, are powerful shapers of our demographic future, and they presage significant social, political, economic, and environmental consequences.

Bloom backs up the big claim (\”most significant … in human history\”) with some vivid examples o shifts that are underway. Here are a few that especially caught my eye.

Some Shifts in Global Population

\”Ninety-nine percent of projected [population] growth over the next four decades will occur in countries that are classified as less developed—Africa, Asia (excluding Japan), Latin America and the Caribbean, Melanesia, Micronesia, and Polynesia. Africa is currently home to one-sixth of the world’s population, but between now and 2050, it will account for 54 percent of global population growth. Africa’s population is projected to catch up to that of the more-developed regions (Australia, Europe, Japan, New Zealand, and northern America—mainly Canada and the United States) by 2018; by 2050, it will be nearly double their size. …
Between now and mid-2050, other notable projected shifts in population include:

• India surpassing China in 2022 to have the largest national population; 

• Nigeria reaching nearly 400 million people, more than double its current level, moving it ahead of Brazil, Indonesia, Pakistan, and the United States to become the world’s third-largest population; 

• Russia’s population declining 10 percent and Mexico’s growing slightly below the 32 percent world rate to drop both countries from the top 10 list of national populations, while the Democratic Republic of the Congo (153 percent increase) and Ethiopia (90 percent) join the top 10; and 

• Eighteen countries—mostly in eastern Europe (and including Russia)—experiencing population declines of 10 percent or more, while 30 countries (mostly in sub-Saharan Africa) at least double their populations.\” 

Urbanization: From Megacity to Metacity

\”More than half the world’s population now lives in urban areas, up from 30 percent in 1950, and the proportion is projected to reach two-thirds by 2050 . … The number of megacities—urban areas with populations greater than 10 million—grew from 4 in 1975 to 29 today. Megacities are home to 471 million people—12 percent of the world’s urban population and 6 percent of the world’s total population. The United Nations recently introduced the concept of metacities, which are urban areas with 20 million or more residents. Eight cities had reached “meta” status in 2015. Tokyo heads the list, with 38 million residents—more than the population of Canada. No. 2 Delhi’s 26 million exceeds Australia’s population. Other metacities are Shanghai, São Paulo, Mumbai, Mexico City, Beijing, and Osaka. By 2025, Dhaka, Karachi, Lagos, and Cairo are projected to grow into metacities.\”

Life Expectancy

\”The number of global deaths annually per 1,000 people has declined steadily from 19.2 in 1950–55, to 7.8 today. … It corresponds to a 24-year gain in global life expectancy—from 47 in 1950–55 to 71 now. Given that the average newborn lived to about age 30 during most of human history, this 24-year increase, an average of nine hours of life expectancy a day for 65 years, is a truly astonishing human achievement—and one that has yet to run its course.\”

Fertility

Aging

In 1950, 8 percent of the world’s population was classified as old (that is, age 60 or over). Since then, the old-age share of world population has risen gradually to 12 percent today, about 900 million people. But a sharp change is afoot. By 2050 about 2.1 billion people, 22 percent of global population, will be older than 60. The United Nations projects that the global median age will increase from about 30 years today to 36 years in 2050 and that, with the exception of Niger, the proportion of elderly will grow in every country. …

Japan’s median age of 47 is the world’s highest and is projected to rise to 53 by 2050. But by then South Korea’s median age will be 54. In 2050, 34 countries will have median ages at or above Japan’s current 47. The world’s 15- to 24-year-olds now outnumber those ages 60 and above by 32 percent. But by 2026 these two groups will be equal in size. After that, those over age 60 will rapidly come to outnumber adolescents and young adults. This crossover already took place in 1984 among advanced economies and is projected to occur in 2035 in less-developed regions.

For insights into the possible implications of these trends, the imaginations of science fiction writers may be as relevant as the social science research literature. I\’ll just say that a number of assumptions that we take more-or-less granted for granted–say, about patterns of immediate family, extended family, age distribution of population, the shape of communities, and location of world population–are going to be transformed. Much of the change will happen in my own lifetime, and it will shape the world in which my children live.

For a post from a few weeks back on how demographic shifts will affect the future global workforce and make the distinctions between GDP and GDP per capita ever more important, see \”Demography is Destiny: Global Economy Edition\” (February 23, 2016).

It\’s well-known that lots of state and local pension funds have \”unfunded liabilities,\” which means that what they have already promised to pay retirees is more than what they are likely to have in the pension fund when the payments come due (based on what\’s currently in the pension fund and assuming a rate of return which is often pretty optimistic). What\’s not as well-known is that over the last few decades, a number of state and local governments missed a golden opportunity to run their pension funds sensibly. The Council of Economic Advisers lays out some of the evidence in its the 2016 Economic Report of the President. The report notes:

Unfunded pension obligations place a heavy burden on State and local government finances. The size of these unfunded pension liabilities relative to State and local receipts ballooned immediately after the recession and remains elevated at a level that was about 65 percent of a year’s revenue in the first three quarters of 2015 …

Here\’s a figure showing the pattern of unfunded liabilities since 1950. Notice that through the 1950s, 1960s and 1970s, the unfunded liabilities were gradually reduced. The underlying causes were a combination of good returns on pension fund assets, along with avoiding an overpromising of benefits.  Notice that by the mid-1980s, unfunded liabilities were essentially zero; indeed, by the late 1990s the unfunded liabilities were negative, which  means that state and local pension funds had more funds on hand than they needed.

The excellent position of state and local pension funds in the late 1990s was in some ways misleading, since it was based on the dot-com stock market boom that turned south around the year 2000. But if one looks back over the last 30 years, stock markets overall show a dramatic rise. The S&P 500 index, for example, rose from about 250 in 1986 to roughly 2,000 over a 30-year period. That\’s a nominal rise of about 7% per year, and adding the returns to shareholders from dividends paid out by firms would make the total return over this time a few percentage points higher. There\’s certainly no guarantee that stock markets in next 30 years will perform as well as they have over the last 30.

In short, the reason why the unfunded liabilities of state and local pension funds are so much higher in 2016 than 30 years ago isn\’t because the overall stock market performed poorly. Instead, it\’s a grim story of mistiming the moves in the market (rather than just being steadily invested throughout), trying out alternative investments that didn\’t pan out, not putting enough money aside in the first place, and overpromising what benefits could be paid. I have a lot of sympathy for the retirees and soon-to-be retirees who were depending on a pension from a state or local government, and are now finding that the money isn\’t there to pay for the promises. But when blame gets assessed for this grim situation, it\’s worth remembering that those who have been making the decisions about state and local pensions had a very favorable situation 30 years ago–that is, unfunded liabilities near zero, with a period of strong stock market growth over the next three decades coming up–and they messed it up.

The drop in crude oil prices from more than $100/barrel in June 2014 to just over $30/barrel at present has been astonishing. But then, the rise in oil prices from less than $20/barrel in late 1998 and early 1999 to a peak of $125/barrel in August 2008 was pretty astonishing, too. For that matter, the fall in oil prices from more than $100/barrel in March 1980 to around $30/barrel by mid-1986 was also quite astonishing–and so was the double-barreled rise in oil prices from around $20/barrel in 1972-73 up to over $50/barrel in early 1974 and then the additional rise to over $100/barrel by early 1980.

Here\’s a chart from Macrotrends showing the inflation-adjusted price of oil going back to the 1940s. If one had to characterize the pattern of oil prices since about 1970, it would be fair to say that there are some sharp rises and falls, but not much long-term trend either up or down.

Why do these violent movements in oil prices keep astonishing us? Christiane Baumeister and Lutz Kilian tackle this question in \”Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us,\” which appears in the Winter 2016 issue of the Journal of Economic Perspectives. (Full disclosure: I\’ve been the Managing Editor of JEP for almost 30 years. All issues of the journal, back to the very first, are freely available on-line courtesy of the publisher, the American Economic Association.)

At a political economy level, it seems to me that we are often astonished because we tell ourselves a story about the previous change in oil prices, and then we have a hard time shifting our story. For example, I\’m old enough to remember stories from the 1970s about how the iron grip of the OPEC cartel meant that oil prices would never fall again; and stories from the 1980s and 1990s about how deregulation of oil prices had broken the back of OPEC so that oil prices would be low; and stories from the mid-2000s about how the world was approaching \”peak oil\” production and oil prices would inevitably stay high. It\’s useful to remember that every story about price shifts comes with assumptions about other underlying conditions not changing–which means that such stories come with an expiration date.

Baumeister and Kilian go over oil prices since about 1970 in a much more systematic way. Here are a few of the points I took away from their article.

Like many academics, I have a bulletin board outside my office door where I tack up quotations or cartoons or headlines that catch my eye, and that might give passers-by a thought or a smile, or both. Here\’s a cartoon that I think is a few years old, but I only ran across recently, from the website Saturday Morning Breakfast Cereal by Zack Weinersmith.

There is no White House Council of Sociology Advisers, or Council of Political Science Advisers, or Council of History Advisers. But since President Harry Truman signed the Employment Act of 1946 into law, for the last 70 years there has been a Council of Economic Advisers. The current CEA takes a look at its own history in Chapter 7 of its just-released 2016 Economic Report of the President.  The chapter includes a dose of detailed history of the CEA, and mini-essays from a number of those who have served as CEA chairs. Here, I\’ll focus on three themes: What  makes the CEA distinctive as an organization? What are its tasks and some of the big policy choices it has championed? And is it important, in substantial part, for its role as an institutional skeptic?

Here\’s how the chapter describes the administrative structure and assigned tasks of the CEA:

CEA is in many ways a distinctive institution, both within the administration and in the international context. The CEA chair reports directly to the President on economic issues, but CEA has no regulatory authority and few prescribed operational responsibilities. For most of its history, CEA has had a small staff drawn mostly from the academic economics community and hired on the basis of professional expertise. …Because CEA has no fixed statutory responsibilities except for assisting in the preparation of the annual Economic Report of the President, its role and influence depend on the degree to which it can be useful and relevant to the President and other senior decision makers. … Today, CEA’s staff is composed of academic economists and economics graduate students who are on leave from their university positions, career government economists on temporary assignment from other agencies, some recent college graduates who have studied economics, and a small statistical, forecasting, and administrative staff.

Two points here, as I see it, are that the CEA is largely made up of academics who will rotate back into academia, and that the \”CEA has no regulatory authority and few prescribed operational responsibilities.\” As a result, CEA members are arriving from high-level academic jobs outside government and not focused on policy-making. Moreover, CEA members know that they are likely to return fairly soon to academia, where their colleagues will pass judgement (sometimes quietly, sometimes not) over the extent to which they resisted the pressure to become grade-B politicians and instead remained grade-A economists.As the chapter notes says, former CEA chair

\”Joseph Stiglitz argues that the fact that CEA is composed of “citizen-bureaucrats” who know they will be returning to their academic perches shortly means that they “have a long-term incentive to maintain [their] professional reputations” (1997), and that this creates an incentive for CEA staff to ensure that its recommendations are economically defensible. …  CEA’s academic character also helps to bring fresh perspectives on policy into the government, both by bringing in new people who have new ideas, and through keeping open the channels of communication with academia. It also means that CEA’s views about policy tend to reflect economists’ current understanding of how best to promote the public interest.\”

Thus, even though members of the CEA are chosen and appointed by the White House, and are often either ideologically sympathetic to the president–or at least not oppositional–they are not locked into the same incentives as those who expect to be long-term Washington insiders.

The positions taken by the CEA predictably vary with the president, but what is perhaps more interesting is that the positions tend not to be especially extreme under any president. For example, under both Democrats and Republicans the CEA has been a voice for countercyclical fiscal policy during recessions.The report also notes:

\”Under both Republican and Democratic administrations, the Council has argued that reshaping incentives is often a better way of addressing market failures than imposing command-and-control regulation. It has also pushed for policies that promote overall economic efficiency, rather than the well-being of specific sectors, industries, or firms. Charles Schultze notes that “despite some areas of disagreement, a succession of CEAs under both parties has given similar advice on a wide range of microeconomic matters …. [T]the Council’s very first Report rejected both complete laissez-faire and overreliance on fiscal and monetary remedies as approaches to macroeconomic policy, denoting these two positions, respectively, as the “Spartan Doctrine of Laissez Faire” and the “Roman Doctrine of an External Remedy.”

A certain number of CEA tasks also fall into the general category of what I\’d call good economic housekeeping, like economic and budget forecasts, doing evaluations of past or proposed policies,, looking at regulations, foreign trade, and other issues. The chapter notes a number of cases in which the CEA played a relatively substantial role:

For example, the Burns Council supported the Federal Aid Highway Act of 1954, which began the present Interstate Highway System. The Heller Council under Presidents Kennedy and Johnson was especially prolific, “helping to shape transportation and trade bills, aiding in the development of the monetary ‘twist’ policy, helping to keep mortgage rates down, [and] developing the rationale of the wage-price guideposts” (Flash 1965). It also helped to develop the idea of the War on Poverty. … .. Former CEA Chairman Joseph Stiglitz enumerates a number of specific “narrow microeconomic initiatives” in which CEA has played an important role, such as designing tradable permits in pollutants, incorporating risk and discounting into cost-benefit analysis, and introducing auction mechanisms (1997). During negotiations over the Clean Air Act Amendments of 1990, CEA was viewed as the “repository of neutral competence” and was called on to produce unbiased cost estimates of a range of different provisions (Porter 1997).\”

The chapter includes a number of other examples. But a list of the issues where the CEA has championed a cause, successfully or not, leaves out an equally important role, which is to help with knocking bad ideas on the head. The fact that the CEA members are chosen by the president, and in some ways politically congruent with the president, is presumably a big help here. Criticism from the CEA can\’t be dismissed as obstructionist partisanship; instead, it\’s in-house criticism, friendly criticism from those who are on your side and wish you well. The report quotes former CEA Chairman Ben Bernanke also emphasized this function:

\”Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.\” 

Specific examples of proposals that were blocked? The CEA report gives some examples from history:

\”For instance, the Heller Council argued against a proposal during the Kennedy Administration to use nuclear explosives to widen the Panama Canal. In the Nixon Administration, CEA played a leading role in the analysis that led to the conclusion that the government should not subsidize the development of a supersonic transport or SST plane, dubbed the “sure-to-be-subsidized transport” (Schultze 1996). Under President Ronald Reagan, CEA participated in a Gold Commission, which investigated the feasibility of returning to the gold standard, and ultimately advised against doing so.\”

Or former CEA chair Joseph Stiglitz writes:

\”But we also did a lot to stop bad ideas and in collaboration with many allies across government, we succeeded in many arenas. We forged an alliance with the Antitrust Division of the Department of Justice to block a proposal to sustain the price of aluminum through the creation of a global aluminum cartel. We helped overcome legislative attempts to change the mandate of the Federal Reserve to focus only on inflation and not on unemployment, and helped defeat a constitutional amendment to require a balanced budget.\”

When you read a CEA report, there is always a certain admixture of politics, and at some points over the roughly 40 years I\’ve been reading these resorts, the partisanship has been severe enough to make me wince. But it\’s also true that one can read just about any report looking for ways to discredit it. My own approach is instead to search for nuggets of fact and insight, and over the years, CEA reports have typically offered plenty. Similarly, one can look at shortcomings of the CEA, like a degree of politicization, as a reason that it should be disregarded or even discarded. But that would be an egregious overreaction. The government might benefit from more short-term advisory roles designed for mid-career professionals, who will bring their expertise that cannot be dismissed on partisan grounds for a time–while planning to exit Washington and return to a non-government life.

For those who want more about the CEA, the Journal of Economic Perspectives, where I have labored in the fields as Managing Editor since 1986, published a \”Symposium on Fifty Years of the Council of Economic Advisers\” in its Summer 1996 issue, 20 years ago. All articles in JEP are freely available, courtesy of the publisher, the American Economic Association. One article was by a head of the CEA under Richard Nixon, another by the head of the CEA under Jimmy Carter, and the final piece by an economic historian about the context of the Employment Act of 1946 that established the CEA. Each of the three articles is cited several times in the 2016 CEA report  The articles were:

• \”A Successful Accident: Recollections and Speculations about the CEA,\” by Herbert Stein
• \”The CEA: An Inside Voice for Mainstream Economics,\” by Charles L. Schultze
• \”Keynesianism, Pennsylvania Avenue Style: Some Economic Consequences of the Employment Act of 1946,\” by J. Bradford De Long

Also, this CEA chapter discusses at some length the conflict between CEA’s first chairman, Edwin G. Nourse, and its second, Leon H. Keyserling, The Fall 1997 issue of JEP included an article W. Robert Brazelton about Leon Keyserling, who was involved in the passage of the Employment Act of 1946, was one of the original members of the CEA, and then succeeded Nourse to become the second chairman of the CEA.

If you, like me, have a purely academic fascination with billionaires, check out \”The Origins of the Superrich: The Billionaire Characteristics Database,\” by Caroline Freund and Sarah Oliver, published by the Peterson Institute for International Economics (February 2016, WP 16-1).

Their work is based on a list compiled by Forbes magazine each year from 1996-2015.  The 2015 list includes 1,826 billionaires. While it would obviously be unwise to generalize too dramatically based on this miniscule sliver of the world population, it\’s nonetheless interesting to see what the data has to say. Freund and Oliver sum it up this way:

The data show three interesting trends. First, extreme wealth is growing significantly faster in emerging markets than in advanced countries. The rise of emerging-market wealth is the subject of our book using this dataset, Rich People Poor Countries: Th e Rise of Emerging-Market Tycoons and their Mega Firms (Freund 2016). The book shows that there has been a sharp increase in billionaires from emerging markets over the past 20 years, a large and growing share of whom are company founders, creating new and innovative products. Th e emerging-market superrich are no longer concentrated in the resource and politically-connected sectors of the past.

Second, wealth is increasingly self-made, even in the advanced countries. The relatively rapid growth in the number of self-made billionaires and their wealth alleviates some concerns raised by the economist Thomas Piketty about returns to capital growing faster than income, which would cause fortunes to become more concentrated over time if capital remained in the same hands. In fact, extreme wealth is created and destroyed at a nearly constant rate in the United States, such that the median age of the businesses behind American fortunes is about the same now as in 2001. There is somewhat less dynamism in the other advanced economies, especially Europe, where fortunes are older and aging over time.

Finally, there are marked differences across regions and countries, even within income groups, which offer information about the climate for big business. Among emerging markets, East Asia is home to the large-scale entrepreneur. In contrast, the Middle East and North Africa is the only region where the share of inherited wealth is growing and the share of company founders is falling. Other emerging-market regions fall somewhere in between. … In Europe, inherited wealth still makes up the majority of billionaire wealth, while the growth in US billionaires has been driven by self-made wealth.

Here\’s an illustrative figure showing the source of billionaire-level wealth. In the US, the share of billionaires who inherited their wealth (darkest blue part of the bar) has fallen since 1996, while the share of those attaining billionaire wealth as \”self-made company founders\” and \”self-made financial sector\” have risen substantially. In that latter category, the more detailed US data shows an especially large rise in hedge-fund billionaires. In Europe, a large share of the growth of billionaires has been in \”traded sectors\” of the economy, while in emerging markets, most of the growth of billionaires has been in \”new sectors\” and \”nontraded sectors.\”

Those who are interested in a more systematic exposition about wealth inequality at all levels might begin with \”Piketty and Wealth Inequality\” (February 23, 2015).

Interest rates around the high-income countries of the world have been dropping for two decades. Why? Will the pattern reverse itself?

Charles Bean, Christian Broda, Takatoshi Ito, and Randall Kroszner explore the phenomenon in Low for Long? Causes and Consequences of Persistently Low Interest Rates,  Geneva Reports on the World Economy 17, published as an on-line ebook in October 2015 by the International Center for Monetary and Banking Studies and the Centre for Economic Policy Research. Lukasz Rachel and Thomas D Smith tackle many of the same questions in \”Secular drivers of the global real
interest rate,\”  published in December 2015 as Bank of England Working Paper #571.

Today\’s ultra-low interest rates aren\’t just a result of the Great Recession and its aftermath. The \”spot yield\” on 10-year government bond (which can be thought of as the rate on a zero coupon bond), has been declining since the mid-1990s. Here\’s a figure from Bean, Broda, Ito, and Kroszner, who write:

\”Reflecting the experience of the so-called ‘two lost decades’, Japanese sovereign yields have been low throughout the period, edging down from around 2% in 1997 to zero today. The downward trend is more marked for the other three jurisdictions, with yields starting at around 6-7% and falling to around 2% for the US and UK and to near zero for Germany. It is particularly notable that the financial crisis and subsequent Great Recession registers as little more than a minor blip on this downward trend; other forces have evidently been at work.\”

Notice that the decline in interest rates is global, which suggests that global economic factors are the driving force rather than national-level economic factors or  policy decisions. In addition, inflation has been mostly low and not changing much during this time, so this decline in nominal interest rates isn\’t a result of lower inflation. Indeed, the same pattern of declining interest rates appears in government-issued bonds that are indexed to the rate of inflation, like the Treasury inflation-protected securities in the US or the \”indexed gilts\” in the UK.

Thus, the analytical task is to offer some reasons why real interest rates for risk-free assets might have fallen by about 4 percentage points over roughly the last two decades. Interest rates are of course just a price for borrowing or lending money, and for economists the natural reasons for a lower price are that demand fell or supply rose–or some combination. In markets for loanable funds, a greater supply could emerge from a higher rate of saving, while a lower demand could result from a drop in the propensity to invest. In addition, there could be specific factors affecting supply and demand for low-risk \”safe\” assets, like Treasury bonds. The authors of both reports converge on a similar set of explanations, although their emphasis is a little different.

Rachel and Smith even summarize their findings with a handy-dandy supply and demand diagram, which focuses on three reasons for an outward shift in supply of saving (shown in blue) and three reasons for an inward shift in demand for saving (shown in red). They describe the shift in terms of basis points or bps (there are 100 basis points in a percentage point):

Our analysis suggests the desired savings schedule has shifted out materially due to demographic forces (90bps of the fall in real rates), higher inequality within countries (45bps) and a preference shift towards higher saving by emerging market governments following the Asian crisis (25bps). In addition, desired investment rates appear to have fallen as a result of the decline in the relative price of capital goods (accounting for 50bps of the fall in real rates), a preference shift away from public investment projects (20bps), and an increase in the spread between the risk free rate and the return on capital (70bps). … This savings-investment framework provides a broad description of the relative sizes of the different forces at play. The confidence interval around such estimates is clearly very wide, but taken at face value, shifts in preferences appear to explain around 300bps of the decline in real rates since the 1980s, on top of the 100bps explained by the deterioration in the outlook for trend growth.

In a similar spirit, Bean, Broda, Ito, and Kroszner summarize their arguments in this way: w

Bringing together these various strands, we are led to conclude that there is no single driver of the decline in long-term risk-free real interest rates over the past two decades. Instead, different factors seem to have been more important at different times. In particular:
• Demographic pressure associated with increased longevity and lower fertility is likely to have been important, especially during the first half of the period. The surge in Chinese savings is likely to be a particular reflection of these demographic forces. But these pressures are likely to wane in coming years, as the population share of the high-saving middle-aged relative to that of dissaving retirees is presently around its peak.
• The gradual integration of China into global financial markets may have also placed downward pressure on the global real interest rate. The pattern of capital flowing ‘uphill’ from emerging to advanced economies is consistent with this explanation.
• While a decline in the propensity to invest seems less convincing as an explanation of the pre-crisis downward trend in real interest rates, it does seem likely to have played a role in explaining developments since 2008.
• Shifts in the supply of, and demand for, safe assets may also have placed downward pressure on the risk-free real rate, particularly since the financial crisis. This is consistent with the rise in equity risk premia in recent years, though some of the other evidence is less supportive.

Intriguingly, Bean, Broda, Ito, and Kroszner are willing to go out at least a little bit out on a limb. They note that financial markets are apparently expecting ultra-low interest rate to persist more-or-less indefinitely. In contrast, the authors write that while the timing is uncertain, a number of the supply and demand factors that have been bringing interest rates down seem likely to slow or even to reverse, which leads them \”to conclude that there may be rather more of a future rebound [in interest rates] than market participants presently appear to expect, although the magnitude and pace at which that will happen remains highly uncertain.\” They spell it out this way:

There are several reasons why it is reasonable to expect the natural real rate of interest to rebound in the future.
• The demographic pressures that have raised the propensity to save since the late 1990s have already begun to move into reverse as the population share of retirees has grown. This looks set to be a strong
force depressing aggregate savings propensities over the next few decades.
• The headwinds following the crisis should ease if the recovery strengthens. Firms are likely to become less cautious about investing as uncertainty recedes. And even if the growth in investment opportunities is curtailed in the advanced economies for the reasons cited by the advocates of secular stagnation, there should surely still be plenty of investment opportunities overseas in the emerging and developing world. Balance-sheet repair should also become less pressing for highly indebted households as income growth picks up.
• The portfolio shift towards safe assets could also start to unwind. China is no longer accumulating US Treasuries in the way it did before the crisis. And the preference for safe assets may also begin to lessen as uncertainty recedes and the appetite for risk returns.

In contrast, when Rachel and Smith look at the factors driving low interest rates, they argue: \”We expect most of these forces to persist and some may even build further.\”

The two reports also emphasize that a low interest rate environment poses some dangers and challenges for policymakers. Monetary policies to stimulate the economy may not work as well, and fiscal policy may need to shift in response. There may be a \”search for yield,\” which refers to when financial investors and some financial institutions take on excessive risk in an attempt to get a higher return than offered by the near-zero interest rates. A problem can also arise for financial firms that were basing their business model on higher interest rates: for example, life insurance companies  made promises about what policies would be worth, not expecting a long-term decline in interest rates, and low interest rates can squeeze the profit margins for many banks. There are lots of theories about how policymakers might regulate and react, but this situation of ultra-low interest rates does not have clear historical precedent. Bean, Broda, Ito, and Kroszner review some history of interest rates, and note:

The very low level of long-term risk-free real interest rates in the advanced economies is historically most unusual. Real rates have rarely been so low; when they have been, it has almost invariably been during or after a war, when there was a degree of financial repression and/or inflation was elevated. The present configuration of low real rates with low inflation appears to be unprecedented.