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.”
His speech contains one of my own favorite comments: “The spirit of liberty is the spirit which is not too sure that it is right …” Hand viewed liberty within an ordered society not as the freedom of isolated individuals to act as they wish, but as part of a shared concern for others. He also viewed freedom as an ideal toward which America continually strives. He said:
What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it; no constitution, no law, no court can even do much to help it. While it lies there it needs no constitution, no law, no court to save it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.
What then is the spirit of liberty? I cannot define it; I can only tell you my own faith. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the minds of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near 2,000 years ago, taught mankind that lesson it has never learned, but has never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest.
And now in that spirit, that spirit of an America which has never been, and which may never be; nay, which never will be except as the conscience and courage of Americans creates it; yet in the spirit of that America which lies hidden in some form in the aspirations of us all; in the spirit of that America for which our young men are at this moment fighting and dying; in that spirit of liberty and America I ask you to rise and with me pledge our faith in the glorious destiny of our beloved country.
The end of the US Revolutionary War happened with the surrender of the British forces at the Battle of Yorktown on October 19, 1781. However, George Washington is not inaugurated as the first President of the United States until April 30, 1789. In the nearly eight years between these events, the US federal government existed under the Articles of Confederation, adopted by the Continental Congress on November 15, 1777, but not ratified by the states until nearly the end of the US Revolutionary War on March 1, 1781. As the word “confederation” implies, most of the power remained with state governments. Hearty congratulations to the US history buffs among you who can name the 14 people who served in the largely ornamental role of “President of the Continental Congress” during the 14 years from 1774 to 1788 (without looking it up, as I always need to do), from Peyton Randolph to Cyrus Griffin. Not only was the US central government very weak at this time., but it was a time of strong divisions between states and local rebellions within states.
Thus, a group led by James Madison drafted a Constitution for the United States. It was approved by the US Congress on September 17, 1787. But it needed to be ratified by nine of the 13 states before taking effect. Thus, Madison together with Alexander Hamilton and John Jay decided to write a set of essays, using the pen name “Publius,” to explain and justify the structure of government proposed by the Constitution. On October 27, 1787, the first essay of what later became known as The Federalist Papers was published. this one written by Alexander Hamilton. As modern Americans look back at this moment in time, it is worth nothing that it was a time when the country was far from unified. In Federalist #1, Hamilton explains the need for rational discourse in times of national stress and unrest, especially when major changes are being proposed. The Federalist Papers were published between October 1787 and May 1788, and the US Constitution took effect after being ratified by a ninth state (New Hampshire) on June 21, 1788. Hamilton started:
After an unequivocal experience of the inefficiency of the subsisting federal government, you are called upon to deliberate on a new Constitution for the United States of America. … It has been frequently remarked that it seems to have been reserved to the people of this country, by their conduct and example, to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend for their political constitutions on accident and force.
Hamilton then pointed out that while one might hope for such arguments to be made purely on the merits, this was highly unlikely. Instead, he stated that in many cases argumentative strategy that would be broadly used by both side is that they “will mutually hope to evince the justness of their opinions, and to increase the number of their converts by the loudness of their declamations and the bitterness of their invectives.” He wrote:
Happy will it be if our choice should be directed by a judicious estimate of our true interests, unperplexed and unbiased by considerations not connected with the public good. But this is a thing more ardently to be wished than seriously to be expected. The plan offered to our deliberations affects too many particular interests, innovates upon too many local institutions, not to involve in its discussion a variety of objects foreign to its merits, and of views, passions and prejudices little favorable to the discovery of truth. …
A torrent of angry and malignant passions will be let loose. To judge from the conduct of the opposite parties, we shall be led to conclude that they will mutually hope to evince the justness of their opinions, and to increase the number of their converts by the loudness of their declamations and the bitterness of their invectives. … History will teach us that … of those men who have overturned the liberties of republics, the greatest number have begun their career by paying an obsequious court to the people; commencing demagogues, and ending tyrants.
Hamilton then says that he won’t preach about his own good intentions; in fact, be suspicious of those who preach about their intentions. Also, he will not fake an uncertainty about his views, pretending to be a neutral observer weighing the arguments when he is actually a supporter of the new Constitution. Instead, he will make his case with arguments open to all. He writes:
In the course of the preceding observations, I have had an eye, my fellow-citizens, to putting you upon your guard against all attempts, from whatever quarter, to influence your decision in a matter of the utmost moment to your welfare, by any impressions other than those which may result from the evidence of truth. You will, no doubt, at the same time, have collected from the general scope of them, that they proceed from a source not unfriendly to the new Constitution. Yes, my countrymen, I own to you that, after having given it an attentive consideration, I am clearly of opinion it is your interest to adopt it. I am convinced that this is the safest course for your liberty, your dignity, and your happiness. I affect not reserves which I do not feel. I will not amuse you with an appearance of deliberation when I have decided. I frankly acknowledge to you my convictions, and I will freely lay before you the reasons on which they are founded. The consciousness of good intentions disdains ambiguity. I shall not, however, multiply professions on this head. My motives must remain in the depository of my own breast. My arguments will be open to all, and may be judged of by all. They shall at least be offered in a spirit which will not disgrace the cause of truth.
In passing, I’ll note that the pretense of being an uncertain neutral observer comes up a lot in academic writing. There will be a neutral-sounding title like “Weighing the Costs and Benefits of the Minimum Wage,” immediately followed by an essay that either all benefits or all costs.
Although The Federalist Papers are most often read for its lessons on constitutional interpretation, Federalist No. 1 actually had an additional purpose. Hamilton wanted his readers to understand the imperative of civility in discourse, a presumption of good faith applied to one’s political opponents, and the importance of respecting different opinions when engaging in the most important, often contentious, conversations of the day.
The age-earnings profile for a given year tells how much more a typical 60 year-old makes than a typical 40 year-old or a typical 25 year old. It turns that the age-earnings profile is getting both higher and later in life. David J. Deming explores this theme in “The Growing Importance of Decision-Making on the Job” (April 2021, NBER Working Paper #28733, subscription required).
Here is Deming’s description of the pattern, followed by a figure:
Age-earnings profiles in the U.S. in 1960 … Earnings growth peaks at about 40 percent when workers are in their late thirties and early forties. This peak is followed by a gradual decline of about 10 percentage points over the next twenty years of age. The 1980 profile is shifted upward, with a peak around 50 percent, but is otherwise similar to 1960. By 2000, U.S. age earnings profiles had shifted outward dramatically, with a higher peak that occurs much later in the life-cycle. In 2000, full-time workers age 50-54 earned about 90 percent more than full-time workers age 20-24. In 2017, earnings growth peaked at nearly 100 percent and workers age 55-59 were earning substantially more than workers in their 30s.
Why the change? Deming provides an array of evidence suggesting that jobs which involve decision-making have been getting ever-higher pay. For example, the share of all wages being paid to management-related occupations was 15% back in 1960, but is now approaching 35%. The share of jobs requiring decision-making skills (based on text analysis of classified ad data for the historical numbers) was 5% in 1960 and is now up around 35%. When job tasks are classified using the data from the Occupational Information Network (O*NET) survey, the jobs that require more decision-making are the ones with the higher earnings peaks later in life.
It seems to me that this is an underappreciated shift in what is being appreciated and desired in the labor market. There has been a lot written in the last few years about the “polarization” of labor markets, and how the rise of automation and digital technologies has wiped out a number of formerly middle-income jobs. However, many organizations now do their work through groups of overlapping teams, and the managers of those teams are often the ones receiving higher pay.
But it also feels to me as if some puzzles remain about this shift. For example, the current pattern at least seems to be that, on average, employers tend to view workers in their 50s as the most capable of being decision-makers and running such teams, even in an increasingly digital and technological environment. Is there something about the experience of workers in their 50s that justifies this confidence? Or is it in part that the post World War II baby boom generation is aging, and thus the share of older workers in the workplace is relatively high? Or is it that choosing an older person is in part a seniority-based system that is easier for management to justify? Or is it that teams, and older workers on those teams, don’t respond well if a younger person is the putative leader? Given past trends, and looking ahead 20 years, will we be viewing it as somehow “natural” that the wise 70 year-olds hold a disproportionate share of the managerial decision-making roles?
Most money is already digital: for example, my paycheck flows automatically into my bank account, my mortgage payments automatically flow out, and I authorize my bank to pay credit card charges online. So what would be different about a central bank digital currency?
Just to be clear, the idea here is not that the Federal Reserve, the European Central Bank, the Bank of Japan, and others would start up competitors for the cryptocurrencies like Bitcoin, Ethereum, or Dogecoin. Instead, a central bank digital currency would be a form of the nation’s existing currency. Like currency in the form of coins or paper money, you would be able to use the digital current as a medium of exchange when buying and selling. However, unlike the examples of digital money I mentioned a moment ago, a central bank digital currency would not need to move through your bank.
Thinking about a central bank digital currency in this way raises obvious practical questions. What form would it take? How would it be accessed when buying or selling? What security would protect it? Would digital currency be anonymous, like physical currency, or could it be tracked? It also raises a bigger conceptual question: What benefits might result from central bank digital currency?
The main potential benefit claimed for a central bank digital currency is an improvement in “payment systems,” which is the jargon-heavy term for the idea that many of the current ways of making digital payments through banking involve fees of some kind. Current digical payments are mostly “bank-railed,” to use a term from Darrell Duffie–that is, they flow through connections set by banks. Sometimes the fees are explicit, from banks or credit card companies or payment services. Other times the fees are implicit, like when a financial firm takes a day or two or three before a payment clears–time when someone is potentially earning interest on that money. In many places, these fees for making payments can be 1% of GDP or more.
Here’s a figure from the BIS report on the size of payment-related fees around the world, where EMEA is an abbreviation referring to a selection of countries in Europe, the Middle East, and Africa.
Here’s a similar figure from Duffie on costs of payment systems. Duffie writes: “It takes too long for U.S. merchants to receive their payments, often more than a day. Based on McKinsey data, moreover, Americans pay about 2.3% of GDP for payment services, far more than Europeans, particularly because of extremely high fees for credit cards, as illustrated in Figure 1. This is not because Americans are getting better quality service. Further, the primary payment instrument of Americans, their bank deposits, is compensated with extremely low interest rates.”
There are various concerns about these fees. If relatively few companies are providing payment services, the fees may be higher than they need to be because of lack of competition. In addition, a substantial number of people are “unbanked,” and without a bank account, the payment fees charged by nonbank payment service companies (say, those sending funds across borders) can be quite high. There are also questions about whether the current digital payment systems do a good job of protecting people’s personal information and privacy.
How would a central bank digital currency address the problem. For example, would people and businesses have individual accounts at the Federal Reserve? This would avoid banks, but it would also be a major change in the function of the Federal Reserve, which serves the function of coordinating payments across banks, but not being a bank itself. The BIS describes what a retail-level central bank digital currency might look like this way:
Retail CBDCs come in two variants. One option makes for a cash-like design, allowing for so-called token-based access and anonymity in payments. This option would give individual users access to the CBDC based on a password-like digital signature using private-public key cryptography, without requiring personal identification. The other approach is built on verifying users’ identity (“account-based access”) and would be rooted in a digital identity scheme. This second approach is more compatible with the monitoring of illicit activity in a payment system, and would not rule out preserving privacy: personal transaction data could be shielded from commercial parties and even from public authorities by appropriately designing the payment authentication process. …
From the public interest perspective, the crucial issue for the payment system is how the introduction of retail CBDCs will affect data governance, the competitive landscape of the PSPs [payment services providers] and the industrial organisation of the broader payments industry.
At least to me, other advantages sometimes cited for a central bank digital currency often miss the point. For example, one will sometimes hear claims that the Fed needs a digital currency to compete with the cryptocurrencies like Bitcoin and Ethereum. But it’s not at all clear to me that these cryptocurrencies are anywhere near unseating the US dollar as a mechanism for payments, and it’s quite clear to me that competing with Bitcoin is not the Fed’s job. Or one will hear that because other central banks are trying digital currencies, the Fed needs to do so, also. My own sense is that it’s great for some other central banks to try it out, and for the Fed to wait and see what happens. There is a hope that zero-cost bank accounts at the Federal Reserve might help the unbanked to get bank accounts, but it’s not clear that this is an effective way to reach the unbanked (who are often disconnected from the financial sector and even the formal economy in many ways), and there are a number of policy tools to encourage banks to offer cheap or even zero-cost no-frills bank accounts that don’t involve creating a central bank digital currency.
Quarles at the Fed sums up the current case against a CBDC in this way (footnotes omitted):
In brief, the potential benefits of a Federal Reserve CBDC are unclear. Conversely, a Federal Reserve CBDC could pose significant and concrete risks. First, a Federal Reserve CBDC could create considerable challenges for the structure of our banking system, which currently relies on deposits to support the credit needs of households and businesses. An arrangement where the Federal Reserve replaces commercial banks as the dominant provider of money to the general public could constrict the availability of credit, fundamentally alter the economy, and expose the public to a host of unanticipated, and undesirable, consequences. Among other potential problems, a dominant CBDC could undermine the consumer and other economic benefits that accrue when commercial banks compete to attract customers.
A Federal Reserve CBDC could also present an appealing target for cyberattacks and other security threats. Bad actors might try to steal CBDC, compromise the CBDC network, or target non-public information about holders of CBDC. The architecture of a Federal Reserve CBDC would need to be extremely resistant to such threats—and would need to remain resistant as bad actors employ ever-more sophisticated methods and tactics. Designing appropriate defenses for CBDC could be particularly difficult because, compared to the Federal Reserve’s existing payment systems, there could be far more entry points to a CBDC network—depending on design choices, anyone in the world could potentially access the network. Critically, we also would need to ensure that a CBDC does not facilitate illicit activity. … [I]t may be challenging to design a CBDC that respects individuals’ privacy while appropriately minimizing the risk of money laundering.
The Federal Reserve is preparing what it calls a “comprehensive discussion paper” on central bank digital currency, so the subject is sure to remain a live one. My own sense is that, at present, the proposal can be seen as a shot across the bow from US policymakers of US banks and the US financial system: basically, “help us figure out a way to make the payments system cheaper and more accessible to all, or we might do something drastic.” Duffie argues: “U.S. banks are capable of providing an effective low-cost payment system but have not done so. Regulations, network effects that limit entry, and profit incentives have not promoted an open, innovative, and competitive market.”
The Centre for Development and Enterprise has published “Lant Pritchett in Conversation with Ann Bernstein” (June 2021), a transcript of a one-hour conversation. Here are a few of Pritchett’s comments that caught my eye, but see the interview for thought-provoking comments on education, corruption, and other topics.
On prioritizing national development over poverty reduction:
Development is a process that happens at the level of countries. The four transformations a country should make are: (1) to a productive economy, (2) to a capable state, so that it is able to do what it sets out to do, (3) to a government responsive to the needs and wishes of citizens, and (4) to a society where equal treatment of all before the law and of each other is a bedrock principle. I think those four characterise the transformation that takes a country from chaos and poverty to the levels of prosperity and well-being that we see in developed countries.
I strongly favour a focus on prosperity over a focus on poverty. You often hear the phrase ‘this or that isn’t a panacea’. My argument is: national development is a panacea. If your country manages to undergo the four transformations of national development, then all problems get solved because that is a machinery for nominating and solving problems.
Yet the current focus in development is on what I call ‘kinky development’, which involves tinkering on the margins to help the poorest of the poor. That is the wrong focus. If you achieve national development, you will solve poverty and provide prosperity for the general population, whereas focusing on poverty alone often is at odds with getting you to desirable levels of prosperity. We should ask ourselves with everything we do: “Is this contributing to one of the four transformations we need to do, and if so, how?” …
No country has high levels of human wellbeing without having achieved national development; and every country that has high national development achieves very high levels of human well-being. So, the only path to high human well-being is through national development.
Why following “best practice” is a poor and even counterproductive development strategy:
The AK47 is the world’s most popular weapon. The M16, which is the standard weapon in the US army, is far and away a more accurate weapon than the AK47, which beyond a few hundred yards, cannot hit a thing. The AK47 emerged from the Soviet Union, where they designed their weapons for the soldiers they had, low capability with little training. They also designed the AK47 to be unbelievably robust; no matter what you do to it, when you pull the trigger, it fires. You can basically hand anybody an AK47 and it will be a reasonably effective weapon. The United States took the opposite approach of designing the best possible weapon and training soldiers to match the weapon. It is an excellent weapon, but if you do not keep it clean and in good functioning order, it will misfire.
The problem is when you give the M16 with its perfect design to a poor soldier it won’t work. This mirrors a lot of what has happened in development – the desire to adopt best practice, leads to a gap between practice design and the capability for implementation. Rather than organically building designs that work in a low-implementation environment, policymakers have tried to borrow designs and fit them into countries, and it just does not work. When well-designed programmes are poorly implemented the reason is obvious, but the problem repeats itself, because no one ever admits that what they need is an AK47. You need to design the programme for the soldiers you have.
Within the US, I often find a widespread sense that what happens in US (and perhaps also European) car markets will be the key factor in shaping world car markets. But that’s highly unlikely to be true. The US accounted for 62% of all global car registrations in 1960. Even by 2000, the US included 22% of all global car registrations. But by 2018, the US share of global car registrations was 11% and still falling. The US and European car markets are essentially stagnant in terms of total quantity of cars, but rapid growth in cars is happening in the rest of the world, including in China.
This table shows car production by country for 2000 and 2018. The US now runs a distant fourth, behind China, Japan, and and Germany, just ahead of India, Brazil, and Spain.
This figure shows total ownership of cars, comparing 1960, 2000, and 2018. Here, the US still runs second, behind China, but of course this is in part because of the much larger US population compared to most of the other countries listed here. It’s also true that US cars are lasting much longer, so the gap between annual production and total ownership has risen. For example, in the US back in 1970, half the cars on the road were four years old or younger, and only 2.9% of cars on the road were 15 years old or more. In 2018, only about one-quarter of the cars on the road were four years old or less, and 19% of the cars on the road were 15 years old or more.
Of course, the fundamental driver of the rising share of global car production and usage outside the US is a result of faster-growing economies in those places. How much farther do other countries have to go before they begin to approach US levels of car ownership?
This figure helps put US car ownership in perspective with other countries. The dark line in the figure shows US vehicles per 1000 people over time from 1900 to the present. In the upper right, you can see how this measure flattens out for the US in recent decades. Then the car ownership of other nations per 1000 people is plotted on this same line. Thus, you can see that Canada in 2018, or western Europe in 2018, had about the same number of vehicles per 1000 population as the US had in the early 1970s. Further down the line, you can see that Mexico in 2018 had about the same number of vehicles per 1000 population as the US had in 1950.
What about China and India and others? To see where they are on this line, the second figure is a blow-up of the bottom left corner of the above figure. Here, the rise in US car consumption goes only from 1900 to 1930. You can see that Brazil’s vehicle ownership in the 2018 was at about the same level (per 1000 population) as the United States in the late 1920s, while China’s vehicle ownership in 2018 per 1,000 people was at about the US level of the early 1920s.
In short, the future of the global car industry in terms of sales and technology and how automotive technology affects the world’s environment is going to be written largely outside US borders. A just-released study of demand for cars in China found an income elasticity of demand for cars in China of 2.5: that is, every 10% rise in incomes in China (roughly what has been happening every year or so) has been leading to a 25% rise in quantity of cars demanded.
The pandemic has pushed all of us into Zoom World: that is, a world where many more of our interpersonal connections, both work and personal, happen online. This de-emphasis on direct interpersonal connections and greater emphasis on long-distance online connections has some inevitable tradeoffs.
For example, there is a tradeoff that geographically close relationships have been to some extent devalued relative to long-distance ones. There is a tradeoff that the more formal and pre-planned interactions have increased in importance, while informal and unplanned interactions and conversations have been reduced. There is a tradeoff that those with a strong network of pre-existing long-distance relationships find it easier to continue in those relationships, while those without such a pre-existing network will find it harder to break into such relationships. There is “superstar” effect that many of us now have greater access to high-profile people than we did before, but the tradeoff is that this access is via an online channel that often lacks interactivity, and in the meantime we may be neglecting the mid-profile and lower-profile people around us with whom we could have a higher level of interactivity.
Here, I’ll point out some thoughts on how these tradeoffs and Zoom World in general are playing out in several contexts: academic seminars, family balance, and urban workplaces. The comments are all drawn from a recent e-book book by Luis Garicano: Capitalism After COVID: Conversations with 21 Economists(June 2021, CEPR Press) However, I should emphasize that Garicano’s book is not focused on this narrow topic, and indeed is very broad in scope. I’ll provide a full list of interviewees at the bottom of this post.
Here’s Jesús Fernández-Villaverde commenting in his interview with Garicano on the tradeoffs of on-line academic seminars, in an interview titled ” Economists and the pandemic:”
You and I waste an enormous amount of time in airports, and now we’re doing everything by Zoom. It’s very hard to figure out how much is being lost in terms of output. That’s true. Let me give you the positive and the negative. In my view, the positive is that this is opening up, for instance, seminars to people that are ‘out of the circuit’. The top people in the profession are hard to attract to your seminar series if you are a relatively small university – often because they don’t have the money. Over the last few weeks, however, I have given my paper on Covid in a lot of South American universities. The average South American university may not have the budget to bring someone from the US and put them in a hotel. And I will not have the time. So suddenly it’s easier for them to do a conference. On the other hand, Zoom is not a great substitute for person-to-person. So, if the host is the London School of Economics, the department of economics there is getting less now from its seminars than it did on a personal basis. There are winners and there are losers.
And the second thing that is important is the difference between maintaining existing relations and creating new relations. We can spend a year on Zoom because we already know each other. We have some dynamics, we can interact. But what is going to happen with the new assistant professors and the new graduate students trying to get into the circuit through zoom? It is going to be much harder. Zoom gives a premium to eloquence that maybe in a person-to-person relationship is not so strong.
You worked at Chicago with Sherwin Rosen. Rosen wrote the famous paper on the economics of superstars (Rosen, 1981) and his example was, of course, music. Why are you going to go and listen to a good opera singer when, thanks to a DVD, you can listen to an amazingly extraordinary opera singer? This may happen with economics. Why are you going to go to a seminar by a good professor of economics when you can listen to the seminar by Ivan Werning?
Here’s Fernández-Villaverde on the tradeoffs of Zoom World from in the balance between family and work life:
One thing that I find disappointing for societies is that either you work eight hours a day or you work zero. Some societies, especially in the north of Europe, have made progress in terms of solutions, but it’s something we should push very hard. For instance, let’s think about fertility. One of the reasons why fertility is so low these days is because having a kid and trying to keep a full-time job is very difficult. That usually has a gender component because women usually assume most of the cost of it, and that generates many tensions and unhappiness in society that I fully understand. So, imagine we are in a society where we have more flexible forms of work. Thanks to Zoom, I can go from being expected to work eight hours a day, to being expected to work six hours and half hours, to say a random number. Then, it’s much easier to reconcile work with family. In the old world where you had a factory, that’s difficult to accomplish.
Governments here should have a leading role. A lot of what we do is about coordination. I want to be in the office at 9:00 because someone else is going to be at there at that time. You just need to have a focal point, and governments can help to coordinate us in good focal points. I can imagine many people who are aged 65 or 66 and are reluctant to work eight hours a day, but at the same time they are not very happy working zero hours a day. If we could get to a society where you can flexibly work four or five hours a day, maybe we could extend the working life of many people, contributing to GDP and helping us a lot to transition. It will also have positive health benefits. We have actually quite a bit of evidence that when people suddenly retire, they start an exponential decay, and especially if they are men they tend to drink and gain weight. So, I think that these solutions will help society a lot. Thanks to telecommuting and Zoom, we may be able to do that much better than in the past.
Finally, here are some comments from Esteban Rossi-Hansberg about the question of how Zoom world and online interactions will ultimately affect the density of urban areas.
This is highly speculative, of course, but I think the evidence from urban economics and from all the studies of cities is that systems of cities tend to be very resilient to shocks. Cities tend to come back after shocks, and the distribution of cities doesn’t tend to change that much. For example, if you look at the evolution over time of the size distribution of cities in the United States, or in many countries in Europe (certainly in France), it looks very similar today to what it did 50 years ago. The overall size of the cities has changed, but the distribution itself – how much bigger the biggest city is than the second and so on – is very similar.
So cities have proven very resilient to shocks. The question is: is this time different? I do think there’s a potential for it to be different, in particular because of telecommuting technologies. These are not new, and we’ve seen them improve over time. Telecommuting was already growing before the pandemic, but it was at very low levels (around 5%). But it’s rising, as you would expect from the technology getting better over time, or a lot better over time. That’s the standard evolution and it is perhaps not going to change cities in a dramatic way, at least in the nearby future. With Covid of course, a lot of us were sent or chose to go home. In a world in which there’s multiple equilibria, can this change the equilibrium?
Let me be a little bit more explicit. How much we get out of going to the office depends on how many of our colleagues go to the office. If we all go to the office and we all interact in the office, we get more out of the office. We learn from our co-workers and there’s externalities, knowledge spillovers. That’s why there’s offices. Of course, these spillovers also operate across firms. And that’s why it costs so much money to rent an office in the middle of Palo Alto or in the middle of Manhattan. It pays to be there. This creates a coordination problem. Going to the office works if everyone else goes to the office too. But if no one goes to the office, it’s not so good because you have to pay all of the commuting costs and there will be no one there. Now, suppose the vaccine comes and the whole pandemic goes away. Are we going to go back to the office? Well, if we’re coordinating in the equilibrium of not going to the office, we’re going to stay there. Why? Because no one wants to be the first mover and go to the office.
Can we solve that coordination problem and make everyone go to the office? It’s not going to be that easy. There are individual advantages of staying at home. Most people are saving an hour on average a day not having to go to work and back, and that hour is valuable. Unless firms and governments are proactive in moving us back to an equilibrium where we all go to the office, we’re going to stay home. Now is this new equilibrium bad? Maybe it is a great advantage of the modern world. Maybe it is great to telecommute. But all the evidence that we have is that the interactions we would be missing are valuable. Hence, if the economy doesn’t get all those interactions and to the extent that telecommuting doesn’t exploit and encourage those interactions, the economy is going to suffer because productivity is going to suffer in the long run. Furthermore, cities are going de-agglomerate as a result of this. So, some of these externalities are external, not just to the worker, but even to the firms – externalities that firms aren’t capturing. The firm is saving itself some money by not paying the rent. But the city and the productivity of the whole economy could suffer. …
We were in a good equilibrium in which we were paying a lot of commuting cost. But at that cost we were getting a big benefit, which was all these productivity enhancements from all of us being there. It’s a quantitative question to what extent the benefits from not commuting and all the potentially large environmental benefits of having fewer people driving and so on are going to compensate for the productivity losses that we’re going to see from people not going to the office. Now, if we’re in the equilibrium where we don’t go to the office, that may also encourage biased technological change to improve those interactions online. It is a possibility. But it is something that we still don’t know. We don’t know how good these technologies can be.
Debt sustainability Markus Brunnermeier: Let’s compare the central bank to a race car 11 John Cochrane: Throwing money down ratholes 17 Jesús Fernández-Villaverde: Economists and the pandemic 23 Agnès Bénassy-Quéré: How to design a recovery plan 29
Tackling inequality Oriana Bandiera: Overcoming poverty barriers 39 Stefanie Stantcheva: Taxes and social economics 45 Esteban Rossi-Hansberg: Will working from home kill cities? 53 Atif Mian: The savings glut of the rich 59
A more balanced globalisation Dani Rodrik: Globalisation after the Washington Consensus 69 Pol Antràs: Is globalisation slowing down? 75 Michael Pettis: Trade wars are class wars 83
Containing the new leviathan Daron Acemog˘lu: The Great Divergence 93 Wendy Carlin: The Third Pole 99 Lucrezia Reichlin: Democratising economic policy 107 Carol Propper: Targets and terror 111 Raffaella Sadun: Management for the recovery 117
Promoting innovation and curbing the power of digital giants Philippe Aghion: Is ‘cutthroat’ capitalism more innovative? 127 John Van Reenen: The Lost Einsteins 133 Fiona Scott Morton: What should we do about big tech? 141
Combatting global warming Nicholas Stern: Zero-emissions growth 149 Michael Greenstone: The real enemy here is carbon 157
While a one-standard-deviation increase in ability is associated with 3%–6% higher wages, attractive or very attractive individuals earn 5%–10% more than average-looking individuals. Another study even finds that returns to perceived attractiveness unfold over the life course and are robust to a wide array of potentially relevant controls, such as educational attainment, parental background, personality traits, IQ, and so on.
Of course, some obvious questions in this line of research include who is deciding what is “attractive,” and whether “attractive” is primarily a marker for other categories like race/ethnicity or gender. For example, if one compares within the category of, say, black women, is there still a positive association between attractiveness and income? How is the benefit of attractiveness distributed across groups, and it is larger for some groups than others? The authors describe their results in this way (references to figures omitted):
[W]e must emphasize, however, that perceived physical attractiveness is a major factor of inequality and stratification regardless of one’s race or gender. In fact, our analyses suggest that the magnitude of the earnings gap among White men along the perceived attractiveness continuum rivals that of the canonical Black-White wage gap and the attractiveness earnings gap among White women actually exceeds, in real dollars, the Black-White wage gap.
This, however, is not at all to say that race and gender do not matter. Quite the contrary. We find that while the returns to perceived physical attractiveness are similar for most race-by-gender combinations, the slope of the returns to perceived physical attractiveness is steepest among Black women and Black men. The returns to attractiveness among Black women, for instance, are so immense, that the earnings of the most attractive Black women appear to converge or even overlap those of white women of similar levels of attractiveness. Notably, the returns to perceived physical attractiveness, in terms of real dollars, are similar between White males and Black females even though Black females make significantly less than White males on average. Similarly, the returns to attractiveness among Black men are quite substantial as well, though not enough to see a convergence or cross-over with white men. Among Black women and Black men, the wage penalties associated with perceived physical attractiveness are also so substantial that, taken together, the earnings disparity between the least and most physically attractive exceeds in magnitude both the Black-White wage gap and the gender gap.
Here’s a figure to illustrate some of the results. The horizontal axis is a measure of attractiveness. The vertical axis measures income. The lines on the graph are three shades of gray: the darkest line is the white population, the in-between gray is the black population, and the lightest shade of gray is the Hispanic population. For all groups the lines slope up: that is, those who are more attractive have higher income. But the slope of the “attractiveness” line is especially steep for black women and men.
An obvious question in this kind of research is what data was used, and how “attractiveness” was defined. The data is from the National Longitudinal Study of Adolescent to Adult Health, which is “an ongoing, nationally representative survey of a group of individuals who were in grades 7–12 in 1994.” The original sample included more than 20,000 individuals from 132 schools across the country, and the survey was an in-depth home interview. There were four waves of surveys, in 1994-95, 1996, 2001-2, and 2007-8. They focus on the 9300 people who were in all four waves.
The survey asked the interviewers to evaluate the physical attractiveness of the respondent, but did not give them any guidelines for doing so. However, one can compare attractiveness rankings given by male and female interviewers, and across black and white interviewers. The short answer to these questions is that while it is hard to define “attractive,” people tend to know it when they see it. The authors write:
Overall, then, there seems to be overwhelming consensus on ratings of attractiveness across interviewers regardless of race/ethnicity and gender. Furthermore, our analyses reveal virtually no evidence of same-race bias in their attractiveness ratings. Thus, taken together, even though these measures are subjective and there is some variation, interviewers exhibit consensus, which is in line with the findings of research on judgments of attractiveness …
One can hypothesize about the possible reasons for a link between attractiveness and income. For example, perhaps attractiveness is more likely to get certain people hired or promoted, even if those people have otherwise identical skills. Alternatively, perhaps attractive people are more likely to have better skills when entering the workplace, perhaps because when they were younger or going through school their attractiveness meant that they got more attention and support. Or perhaps being “attractive” is in part the result of a set of soft social skills and behaviors–say, ability to notice and follow social cues about what attractiveness means, together with disciplined patterns of diet, exercise, and other personal habits–which are correlated with skill-sets that are desired in the workplace. Or perhaps the bias arises in part because potential customers in certain industries are more likely to give their eyeballs or their spending power, or both, to more attractive people.
The authors do not discuss the topic of how society might respond to attractiveness bias, and I will follow their example and sidestep the subject here. But at a personal level, it is worth being aware that when you are responding to other people–whether as a co-worker, a customer, a manager, a loan officer, or just someone you walk past on the street–it is likely for most of us that attractiveness bias is shaping our responses.
One of the simplest ways to measure the degree of competition in an industry is the “four-firm concentration ratio.” Take the market share of the four largest firms in the industry. Add them up. You’ve done it! For example, an industry where the biggest four firms each have 10% of the market would have a four-firm concentration of 40 percent. As a very rough rule of thumb, a four-firm ratio above 80 percent is commonly considered to be “high,” while a four-firm ratio of 50 to 80 percent is medium, and a ratio below 50 percent would be considered “low.”
Of course, one can immediately raise a number of concerns with this simple measure, which is why economists often use either a slightly more complex formula called the Herfindahl-Hirschman Index, or instead just skip past these overall measures of industry concentration and instead work with more detailed models of individual markets. In addition, when talking about industry concentration, a key question is always how one defines the relevant market. For example, does the measure of industry concentration look only at US firms, or also at imports? Is the measure of industry concentration looking at market share across the entire country, or at market shares within certain regions: for example, if there are only three or four big supermarkets chains near where I live, it’s may not matter much for practical competition that there are also completely different big supermarket chains in other regions.
The economic field of industrial organization spends a substantial chunk of its mental energy trying to think through alternative measures of concentration in a variety of contexts. Here, I want to make a simpler point. If there is a large and widespread increase in industry concentration in the US economy, it should presumably show up even in a relatively crude measure like the four-firm concentration index.
To understand the specific measure being used here, you need to know that the Economic Census classifies firms according to what is called the NAICS, which stands for North American Industry Classification System. The NAICS starts off by classifying industries into big categories, which are then subdivided into smaller group, and then subdivided again, and again, and again. The biggest categories are called “two-digit”–for example, manufacturing categories all start with a 31, 32, or 33. The three-digit category 335 is “Electrical Equipment, Appliance, and Component Manufacturing.” The four-digit category 3352 is “Household Appliance Manufacturing.” And continuing down the chain, 33510 is “Small Appliance Manufacturing” while 33520 is “Major Household Appliance Manufacturing.”
Obviously, when looking at the extent of competition in an industry, it makes sense to look at the greatest possible level of detail. Not all two-digit manufacturing firms will compete against each other. But “Small Appliance Manufacturing” firms are likely to have similar product line–or the ability to shift easily into similar product lines when it seems profitable to do so. The NAICS divides the US economy into 850 six-digit categories. Thus, a logical question when asking about industry concentration is to look at the extent of concentration and shifts in concentration across these 850 categories.
Here’s the overall breakdown from the ITIF report on level of concentration in 2017 as measured by the four-firm ratio:
One can then compare this level of concentration with the level found in the 2002 Economic Census. Here’s are some results of such a comparison from the ITIF report:
Despite widespread claims of widespread monopolization, just 4 percent of U.S. industries are highly concentrated, and the share of industries with low levels of concentration grew by around 25 percent from 2002 to 2017.
Overall, Census data show U.S. industries have not become more concentrated: The average C4 ratio (the share of sales that the top four firms capture in an industry) increased just 1 percentage point from 2002 to 2017.
The more concentrated industries were in 2002, the more likely they were to become less concentrated by 2017.
Prices rose less in industries with higher levels of concentration than they did in the overall economy from 2002 to 2017.
There was no relationship between industry concentration and profitability in that period.
I am of course aware that the message of this report runs counter to a wave of claims that there has been a large wave of increased concentration of industry in the United States. But as I have pointed out in the past, these claims about a a meaningful overall increase in industry concentration have been open to question. When you look more closely, it often turns out that the increase in concentration is that the share of the biggest four firms as measured at the six-digit NAICS level rose from, say, 20% to 25%, which is not likely to bring about a meaningful decrease in the extent of competition.
Pointing out specific concerns about lack of competition in certain industries or the growth of certain firms–say, antitrust issues raised by some of the big tech companies–does not prove that there has been an overall decrease in competition for the economy as a whole. The overall lesson here, perhaps, is to focus attention on specific companies and industries that raise concerns about lack of competition, but to be quite cautious about overall claims that competition has increased more broadly in all sectors.
Dismantling the barriers that have kept Black Americans from fully participating in the US economy could unleash a tremendous wave of growth, dynamism, and productivity. This research identifies critical gaps Black Americans face in their roles as workers, business owners, savers and investors, consumers, and residents served by public programs.
Much of the focus of the report is on pointing out gaps in various economic statistics. In terms of income. While such comparisons are not new, they do not lose their power to shock. For example:
Today the median annual wage for Black workers is approximately 30 percent, or $10,000, lower than that of white workers … We estimate a $220 billion annual disparity between Black wages today and what they would be in a scenario of full parity, with Black representation matching the Black share of the population across occupations and the elimination of racial pay gaps within occupational categories. Achieving this scenario would boost total Black wages by 30 percent … The racial wage disparity is the product of both representational imbalances and pay gaps within occupational categories—and it is a surprisingly concentrated phenomenon.
Here’s a figure showing a set of occupations, where the circles show the number of occupation. The horizontal axis shows typical wages in the occupation, while the horizontal axis shows the share of workers in each occupation who are black. Some of the larger circles are highlighted and labelled. The pattern that emerges is that blacks are overrepresented in lower-paying occupations.
These gaps in income levels and differences in occupations are part of a broader and interrelated picture, including difficulties that affect black-owned businesses, and lower accumulation of wealth for black households. Here are a few comments on black-owned businesses:
The US Census Bureau’s Annual Business Survey identified some 124,000 Black-owned businesses with more than one worker—which means that they constitute only 2 percent of the nation’s total, far below the 13 percent Black share of the US population. … White entrepreneurs start their businesses with $107,000 of capital on average, but the corresponding figure for Black founders is $35,000. Starting from behind in this way can create a heavier debt burden; in a McKinsey survey, almost 30 percent of Black-owned businesses reported directing more than half their revenues to debt service in 2019.23 Without the funding to launch and sustain their operations, many Black-owned businesses do not survive the startup stage.
These challenges may be one reason that Black entrepreneurship is stronger in less capital-intense industries. Roughly one-third of Black-owned employer businesses are in healthcare and social assistance. Many are home healthcare providers, daycare providers, and physician’s offices. The “low cost of failure” emerged as a theme in interviews we conducted with business owners in the home healthcare field. Access to patients and other providers can come from existing connections, and no capital-intensive equipment is needed. Scaling up such enterprises can be a difficult task, but starting can be relatively simple.
As expected, the differences in income, occupation, and business ownership translate into differences in wealth:
The median Black household has only about one-eighth of the wealth held by the median white household. The actual dollar amounts are striking: while the median white household has amassed $188,000, the median Black family has about $24,000. … Black households start with less family wealth and are constrained in their ability to save We estimate a $330 billion disparity between Black and white families in the annual flow of new wealth, some 60 percent of which comes from inheritances. Every year there is a massive intergenerational transfer of family wealth, creating an effect that is both profound and self-perpetuating. Black families are less likely to receive inheritances, and when they do, the amounts are smaller. The gap in inheritances between Black and white recipients is some $200 billion annually. …
The Black home ownership rate at the end of 2020 stood at 44 percent, which is 30 percentage points below the 74 percent home ownership rate of white Americans.50 While 18.6 percent of white households own stocks, the rate for Black households is 6.7 percent. Consequently, Black households are not positioned for gains when homes appreciate in value or the stock market has an upswing.
Finally, these economic differences translate into even more fundamental measures of well-being, like health and life expectancy:
An important measure of health outcomes is life expectancy. In 2018, life expectancy at birth was 76.2 years for white men but 71.3 years for Black men; it was 81.1 years for white women but 78.0 years for Black women.62 The average gap across both genders was about 3.5 years. If we apply those lost years across the entire Black population, the painful result is that 2.1 million more Black Americans could be alive today with parity in life expectancy. The COVID-19 pandemic has widened the disparity to a five-year gap. If we again apply those lost years across the Black population, the result is now 3.4 million Black Americans who would otherwise be alive today.
It’s fairly to list a bunch of policies that might reduce these gaps, but harder to quantify which policies would have a lasting effect at reasonable cost. Here, I won’t try to unpack those issues. I’ll just note that sometimes the start of a response can be recognizing that there is a problem.
