Conversable Economist

In the Oxford English Dictionary, the origin of the term \”fire-walls\” is traced to a comic play published in 1799 by G.E. Lessing, called \”School for Honor.\” One character is booted out of his hotel room for the arrival of a beautiful lady, and given an inadequate replacement room, which is described as \”behind the pigeon-loft; with the prospect between the neighbor\’s fire-walls.\”

But for those who care about such matters, Adam Smith has a reference to fire-walls in The Wealth of Nations. Even better, Smith\’s reference draws an explicit parallel between the \”obligation of building party walls, in order to prevent the communication of fire,\” and his support of a certain kind of financial regulation. In the OED, the origin of using the word \”firewall\” in the sense of \”any structure, device, or procedure designed to protect the security or integrity of a system, process\” is only dated back to a use in Business Week in 1975. The Adam Smith passage is from Book II, Chapter II, and I quote here from the ever-useful version of TWN available on-line at the Library of Economics and Liberty website. Smith writes:

II.2.94

\”To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.\”

What is Smith talking about here? At this time, money took two main forms. There was gold and silver money, which held its value because of its content of precious metals, and there were bank notes–that is, a note issued by a bank that could be used as a medium of exchange because it could be redeemed for gold or silver at the bank. The difficulty is that anyone could start a bank and begin issuing \”bank notes\” to pay for goods and services, which led to difficulties. Smith wrote:

\”Where the issuing of bank notes for such very small sums is allowed and commonly practised, many mean people are both enabled and encouraged to become bankers. A person whose promissory note for five pounds, or even for twenty shillings, would be rejected by everybody, will get it to be received without scruple when it is issued for so small a sum as a sixpence. But the frequent bankruptcies to which such beggarly bankers must be liable may occasion a very considerable inconveniency, and sometimes even a very great calamity to many poor people who had received their notes in payment. It were better, perhaps, that no bank notes were issued in any part of the kingdom for a smaller sum than five pounds. Paper money would then, probably, confine itself, in every part of the kingdom, to the circulation between the different dealers, as much as it does at present in London, where no bank notes are issued under ten pounds value …\”

Thus, Smith was essentially arguing that financial sector firms should not be allowed to issue promises to pay unless they had actual assets, and that undercapitalized financial firms–\”beggarly bankers\”–should not be allowed to operate. Smith goes on to a discussion of how in  North America, paper money was often issued by governments who then tried to require others to accept the paper as legal tender. The British Parliament banned such actions, and although the colonists complained, Smith defended Parliament\’s financial regulatory action (and offered a present discounted value calculation along the way):

\”The paper currencies of North America consisted, not in bank notes payable to the bearer on demand, but in government paper, of which the payment was not exigible till several years after it was issued; and though the colony governments paid no interest to the holders of this paper, they declared it to be, and in fact rendered it, a legal tender of payment for the full value for which it was issued. But allowing the colony security to be perfectly good, a hundred pounds payable fifteen years hence, for example, in a country where interest at six per cent, is worth little more than forty pounds ready money. To oblige a creditor, therefore, to accept of this as full payment for a debt of a hundred pounds actually paid down in ready money was an act of such violent injustice as has scarce, perhaps, been attempted by the government of any other country which pretended to be free. It bears the evident marks of having originally been, what the honest and downright Doctor Douglas assures us it was, a scheme of fraudulent debtors to cheat their creditors. … Notwithstanding any regulation of this kind, it appeared by the course of exchange with Great Britain, that a hundred pounds sterling was occasionally considered as equivalent, in some of the colonies, to a hundred and thirty pounds, and in others to so great a sum as eleven hundred pounds currency; this difference in the value arising from the difference in the quantity of paper emitted in the different colonies, and in the distance and probability of the term of its final discharge and redemption. No law, therefore, could be more equitable than the Act of Parliament, so unjustly complained of in the colonies, which declared that no paper currency to be emitted there in time coming should be a legal tender of payment.\”

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel –aka \”the Nobel prize in economics\”–has been awarded in 2013 to Eugene Fama, Lars Peter Hansen, and Robert Schiller. Each of them has done absolutely top-notch academic work. But at least for me, it is difficult to describe this year\’s prize in a compact way involving a unified theme.

The prize committee said that the award was given \”for their empirical analysis of asset prices,\” but also writes in the description of why the award was given that \”we do not yet fully understand how asset prices are determined.\” Fama is commonly identified as a supporter of the \”efficient markets\” school of finance, which usually holds that asset prices and changes in asset  prices can be explained by underlying economic factors. Meanwhile, Shiller published a book back in 2000 called Irrational Exuberance and is commonly identified as someone who believes that financial markets are frequently irrational or \”behavioral\” issues.. Meanwhile, Hansen developed a high-powered statistical tool called the Generalized Method of Moments that has become standard in analyzing asset-market data. So yes, all three winners have done \”empirical analysis of asset prices,\” but they often seem to be coming and going in different directions. In a way, this is a follow-up Nobel prize to the one given in 1990 to Harry Markowitz, Merton H. Miller, and William F. Sharpe \”for their pioneering work in the theory of financial economics.\” But the theoretical models of finance for which that prize told a story in a way that this prize–at least for me–does not. 

Rather than try to create a of cohesive narrative of the work behind this Nobel prize, I\’ll just try give a flavor of the work that Fama, Hansen, and Shiller have done in the empirical analysis of asset prices: some main findings, innovations in methods, new data, and implications. I\’ll draw on the always-useful materials that the Nobel committee posts on its website, both the \”Popular Information,\” short essay called \”Trendspotting in Asset Markets,\” and the \”Advanced Information,\” a longer and more technical paper called (a bit optimistically!) \”Understanding Asset Prices.\”

Findings: One theme is that movements in asset market prices, like stock prices, are not predictable in the short run, but are somewhat predictable in the long run. This may sound contradictory but actually, the two points are closely related.. For example, the sharp fluctuations in the short run can lead to times when assets are distinctly overvalued or undervalued compared to long-run benchmarks. In the short run, this high level of volatility isn\’t predictable, but when asset prices get far out of alignment, they do tend to correct. Fama is responsible for a substantial body of empirical work starting in the 1960s that pointed out that asset prices are not predictable in the short run. Shiller is responsible for a body of work starting in the 1980s that emphasized that the short-run movements in asset prices were often so large that some bounceback at some point in the longer term becomes predictable. Of course, exactly when that longer term bounceback will arrive is unclear. There\’s a piece of old investor wisdom sometimes attributed to Keynes, \”Remember that the market can stay irrational longer than you can stay solvent.\”

Methods: Fama was an early leader in what is called an \”event study\” method: basically, look at the price of an asset before a certain event happens and after a certain event happens–like a corporate takeover, or a dividend payment, or news that affects future profits. Event studies can help to show if an event is anticipated (did the price move before the event?), the economic value of the event (shown by the price shift), and whether the effect had a permanent or temporary effect (did the price jump during the event and then return to the previous level?). Event studies have become a standard piece in the toolkit of empirical economists. 

Hanson made use of a statistical method called the Generalized Method of Moments. I won\’t try to explain it here, partly because I\’m fairly sure I\’d mess it up, but here\’s one way of thinking about what it means. A \”moment\” refers to ways of characterizing a pattern of data. For example, if you are trying to describe a bunch of data, a first step might be to take the average: that is, to add up the data and divide by the quantity of data.  A second step might be to think about how spread out the data is, which statisticians measure by the \”variance.\” A third step might be to think about whether the distribution of data is symmetric around the mean, or tends to \”lean\” one way or the other, which is \”skewness.\” Yet another step might be to look at whether the distribution of data has a substantial share of extreme values far from the mean, which to statisticians is \”kurtosis.\” Each of steps,and others still more complex, are called a statistical \”moment.\” With this framework, you can look at a theory of what would cause asset market prices to change or vary, and then using all the statistical moments you can compare the actual pattern of asset market prices to what the theory predicts. Thus, this approach provides a workhorse statistical tool for looking at theoretical explanations of asset market prices and comparing them to data. 

Data: Fama was one of the first to use the CRSP data, which is a dataset that commenced in the early 1960s from the Center for Research in Security Prices at the University of Chicago, and includes information on a very wide array of securities prices and returns. Shiller together with Karl Case constructed the first high-quality index of housing prices in the 1980s. The index has not only been useful in looking at the housing market, but it has formed the basis for financial contracts based on this index which can allow for hedging against falls in real estate prices. 

Implications: Movements in asset prices matter enormously to individuals, to firms, to the financial sector, and to the macroeconomy as a whole. Empirical findings in this area thus often lead to real-world consequences. For example, the finding that stock prices don\’t have much short-term predictability is part of what triggered the enormous growth of index fund investing in the last few decades. The arguments that people are not fully rational in how they think about asset prices, and pointing out that people are often not well-diversified against risks like unemployment or a falling house price, has led to the invention of a wide array of financial instruments, as well as to public policies that encourage saving. The U.S. financial crisis and the Great Recession in recent years have led to numerous policy proposals, all of which are at least implicitly based on a theory of how asset prices are generated. 

For a sample of the work from the 2013 Nobel laureates, I can recommend some articles from the Journal of Economic Perspectives, where I have work as Managing Editor since 1987: 

In the Summer 2004 issue, Eugene Fama and Kenneth R. French wrote \”The Capital Asset Pricing Model: Theory and Evidence,\” (18:3, pp 25-46).

In the Winter 2003 issue, Robert Shiller wrote \”From Efficient Markets Theory to Behavioral Finance (17:1, pp. 83-104).

In the Winter 1996 issue, Lars Peter Hansen and James J. Heckman wrote \”The Empirical Foundations of Calibration\” (10:1,  87-104). That article is about calibration as a tool for macroeconomic modeling, rather than about the statistical work which is the emphasis of the prize. In the Fall 2001 issue, Jeffrey M. Wooldridge made an heroic effort to explain Generalized Method of Moments in an only mildly mathematical way in \”Applications of Generalized Method of Moments Estimation\” (15:4,  87-100).

For posts on the previous Nobel prize winners, see: The 2012 Nobel Prize to Shapley and Roth (October 17, 2012) and the 2011 Nobel Prize to Thomas Sargent and Christopher Sims (October 10, 2011).  

Credit Suisse has published its Global Wealth Report 2013. Reports like this help me update the mental picture of the world economy that I try to carry around with me. First, the quick overview of global wealth looks like this: Total world wealth was about $241 trillion in 2013, with a little under one-third in North America, a little under one-third in Europe, and the rest spread around the rest of the world. Average wealth per adult for the world economy was $52,000, with North Americans averaging about six times that amount, while those in Africa and India averaged less than one-tenth of that amount.

The report has lots of detailed information about how wealth is held in financial and nonfinancial forms, trends in the last year, and trends back to 2000. I found especially interesting the discussion of what happens if we look at the distribution of global wealth not as averages across regions, as in the table above, but across individuals?

\”To determine how global wealth is distributed across households and individuals – rather than
regions or countries – we combine our data on the level of household wealth across countries with information on the pattern of wealth distribution within countries. Our estimates for mid-2013 indicate that once debts have been subtracted, an adult requires just USD 4,000 in assets to be in the wealthiest half of world citizens. However, a person needs at least USD 75,000 to be a member of the top 10% of global wealth holders, and USD 753,000 to belong to the top 1%. Taken together, the bottom half of the global population own less than 1% of total wealth. In sharp contrast, the richest 10% hold 86% of the world’s wealth, and the top 1% alone account for 46% of global assets.\”

Here\’s a pyramid of wealth for the world economy. The 32 million people around the world who have more than $1 million in wealth represent 0.7% of the world population, and hold 41% of the world\’s wealth.

What countries are these people from? Here\’s a division of the millionaires by country. Remember, these are not people who have $1 million in annual income, but rather people who have $1 million or more of combined value in their financial accounts, including retirement accounts, and in home equity and other nonfinancial assets.

What about if we look at the top of that wealth pyramid, with a focus on those who have more than $1 million in wealth? There are roughly 100,000 people in the world with more than $50 million in wealth.

And finally, how about if we look at the ultra-wealthy, the top of the top of the wealth pyramid, meaning those 100,000 people with more than $50 million in wealth. What countries are they from? The United States is first on the list, which isn\’t big surprise, but I found it startling that among countries, China has the second-largest number of ultra-wealthy  people.

Apples are part of the American language: Johnny Appleseed, American as apple pie, apple-pie order, apple of my eye, sure as God made little green apples, the  Big Apple of New York City, and here in Minnesota, the Mini-Apple of Minneapolis. So it\’s a little startling to discover at the website of the Food and Agriculture Organization that the US is actually #2 in the world in apple production, lagging far behind China. In fact, China produced 36 million tons of apples in 2011, while the U.S. produced 4.2 million tons. Other major world apple producers include the far-flung group of Turkey, Italy, India, Poland, France, and Iran.

But even within the production of apples, there is global specialization. The US economy both exports and imports apples, depending on the season, but overall runs a trade surplus in apples. However, the U.S. runs a substantial trade deficit in frozen apple juice concentrate, relying heavily on imports from China. Here are some statistics about U.S. trade in apples from the U.S. Department of Agriculture (which are helpfully archived on-line at Cornell University).

For trade in fresh apples, the website of the US Apple Association reports: \”Approximately one out of every four fresh apples grown in the United States is exported.\” The USDA statistics for 2010 show that the main destinations for exports of fresh apples were Mexico and Canada, as one might expect from proximity, then followed by Taiwan, Indonesia, Hong Kong, and the United Kingdom. One suspects that unless the 7 million people of Hong Kong are completely obsessed with eating apples, a substantial share of those U.S. exports of fresh apples are ending up in China.

In terms of imports, the U.S. Apple Association reports that about 6% of all fresh apples consumed in the United States are imported. Roughly two-thirds of those imported fresh apples come from Chile and another 20% from New Zealand–that is, U.S. imports of fresh apples are mainly from the Southern Hemisphere when apple production is out of season here. The total value of U.S. fresh apple exports was $827 million in 2010, while the value of fresh apple imports was $169 million.

When it comes to apple juice and cider, on the other hand, about 85% of U.S. consumption is imported, and about 80% of those imports come from China, according to the USDA statistics for 2010. Only about 8% of U.S. production of apple juice and cider is exported, most of that to Canada. Total value of U.S. apple juice imports in 2010 was $444 million; total value of U.S. apple juice exports, just $32 million.

I will spare you additional data on dried apples, canned apples, comparisons of apple yield statistics over time, and the like. But the main point is that the world economy is full of patterns that I would not have guessed before looking at the data.  The notion that the U.S. exports fresh apples to China and runs a trade surplus in fresh apples, while importing apple juice from China and running a trade deficit in apple juice, is one of those patterns. But if you think about varieties of apples, some more suited to being eaten as fresh apples and some more suited to being used for juice, along with the differing transportation costs of shipping fresh apples and apple juice, these patterns make some economic sense.

Note: Thanks to faithful reader Chris Laughton, the Director of Knowledge Exchange at Farm Credit East, for calling the basic facts about U.S. international trade in apples to my attention.

As the unemployment rate has drifted down from its peak of 10% in October 2009 to its current level at 7.3%, a number of commenters have noted that the labor force participation rate has also been falling, from about 66% in late 2007 before the start of the recession to a current level of around 63.2%. Thus, is the drop in the unemployment rate nothing more than a drop in the share of adults seeking to participate in the labor market in the first place? More specifically, what do the statistics tell us about whether those who are outside the labor force are seeking to work?

Just to be clear on the basics, the unemployment rate is calculated as part of the Current Population Survey, which defines unemployment in this way: \”Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off are also included as unemployed. Receiving benefits from the Unemployment Insurance (UI) program has no bearing on whether a person is classified as unemployed.\”

What about those who would like a job, but are so discouraged that they have given up on looking? The same survey asks people who are not in the labor market various questions, and divides them up into categories. As of August 2013, there were about 90 million adults not in the labor force. However, many of them were out of the labor force by choice: for example, they were retired, or full-time students, or spouses staying home with children. The survey asks those who are out of the labor force if they want a job, and in August 2013, about 6.3 million answered \”yes.\” Here\’s a graph from the Bureau of Labor Statistics website showing the number of those out of the labor force who tell the survey that they want a job. The number has clearly risen substantially, by about 2 million, since the start of the recession in 2007. However, it\’s interesting to note that the total of those out of the labor force who want a job is not that different now than it was back in 1994, in the aftermath of the 1990-91 recession and before the dot-com boom of the mid- and late 1990s had taken hold.

Of those who are out of the labor force but would like a job, a subcategory is the \”Marginally Attached to the Labor Force,\” which refers to \”persons who want a job, have searched for work during the prior 12 months, and were available to take a job during the reference week, but had not looked for work in the past 4 weeks.\” In August 2013 there were about 2.3 million of the \”Marginally attached,\” and here\’s a graph showing how that number has evolved over time.

Of the \”Marginally Attached,\” yet another subcategory is \”Discouraged Workers,\” which refers to \”those who did not actively look for work in the prior 4 weeks for reasons such as thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination.\” There were 866,000 discouraged workers in August 2013, and here\’s how their number has evolved over time.

So what does all this mean about interpreting the fall  in the unemployment rate? Troy Davig and José Mustre-del-Río discuss what they call \”\”The Shadow Labor Supply and Its Implications for the Unemployment Rate\” in the Third Quarter 2013 Economic Review published by the Federal Reserve Bank of Kansas City. They refer to those who are out of the labor force but tell the survey that they would like to work as the \”shadow labor force.\” They write:

\”Nevertheless, despite the swelling size of the shadow labor supply, a return of these individuals to the labor force in numbers that would considerably affect the unemployment rate appears unlikely. Variation in their job search behavior may influence the future path of the unemployment rate modestly, but not greatly. Although individuals in the shadow labor force do flow back into unemployment, the peak in their return to the labor force typically occurs in the first few post-recession years. The recent, post-recession peak of their flow back into unemployment has already occurred, in mid-2010. While another surge back into the labor force by individuals in the shadow labor supply is possible, historical evidence suggests it is unlikely.\”

Although Davig and Mustre-del-Río don\’t put it this way, my own interpretation would be that the decline in the unemployment rate since about 2010 is the sign of an economy that is tottering back to a healthier labor market. The number of those out of the labor force who tell the survey that they would like a job bounces around through the year–it\’s not a seasonally adjusted number–typically peaking in June when people start looking for summer jobs. But it hasn\’t shown any particular trend since 2010. I\’ve posted earlier about the long-term decline in the labor force participation rate, a trend which predates the Great Recession, here and here.

C. Robert Taylor and Diana L. Moss have written \”The Fertilizer Oligopoly: The Case for Antitrust Enforcement,\” as a monograph for the American Antitrust Institute. Those looking for examples of possibly anticompetitive behavior, whether for classroom examples or for other settings, will find the argument intriguing. Taylor (no relation!) and Moss set the stage this way:

\”Fertilizers are a critical input in the agricultural sector. Industrial farming in much of the world is heavily dependent on external inputs of nitrogen, phosphorus, and potassium or potash. Following an industry shakeout from 1998 to 2004, fertilizer prices increased dramatically in 2008.High prices persisted for several quarters, dipped in 2009, and have since returned to supracompetitive 2008 levels. The fertilizer industry has, and continues to be, marked by considerable excess capacity. At the same time, large buyers of fertilizer such as China and India are becoming increasingly powerful, putting downward pressure on high prices. Earlier in 2013, the decision of key eastern European potash producers to refuse to deal with such buyers or cut their prices has caused significant disturbance among global producers, with falling profits industry-wide. The foregoing pattern raises a number of questions about the dynamics of supracompetitive fertilizer price increases and profits. Price setting appears to have been the dominant strategy in 2008, shifting to supply cutbacks in 2011 in order to strengthen and maintain prices, particularly with major customers. This was followed by apparent defections from tacit or explicit agreements among global potash producers in mid-2013. Such defections and the subsequent breakdown in any tacit or explicit agreement among producers should be a strong signal that anticompetitive coordination has been at play.\”

They also point out that the fertilizer industry has a history of cartels going back more than a century. One writer identified 83 fertilizer cartel episodes from 1902 to 2010. The fertilizer industry includes a number of separate firms, but in the U.S. and Canada, they are organized into government-approved export cartels. In the United States, the Webb-Pomerene law passed back around World War I allowed small and medium-sized companies to form export cartels to counterbalance the power of foreign governments, as long as such cartels did not affect domestic prices. The fertilizer export cartel has been up and running since. Nowadays, the global industry structure looks like this:

\”The structure of the world’s phosphorus and potash markets, while complex, may best be viewed as duopolies with small, high cost fringe firms. The phosphorus duopoly is comprised of
the U.S. export cartel, PhosChem, operating with limited antitrust immunity under Webb-Pomerene, and the Moroccan monopoly OCP. There are presently only two members of PhosChem – PotashCorp and Mosaic. PhosChem members account for 52 percent of world phosphorus trade. … The potash duopoly is comprised of the Canadian sanctioned export cartel, Canpotex, that markets potash from Saskatchewan, and a Russian cabal.28 The three owner-members of Canpotex are PotashCorp, Mosaic, and Agrium, each with a fixed market share of 54 percent, 37 percent and 9 percent of export sales, respectively. Canpotex accounts for 61 percent of world potash trade, including trade by other potash companies in which PotashCorp has significant ownership. The Russian cabal accounts for 32 percent of trade, with a high-cost, non-integrated fringe accounting for the remaining seven percent.  … Many of the major phosphorus producers also manufacture nitrogen fertilizer, partly because a source of nitrogen is required to stabilize phosphorus, and partly because many fertilizer manufacturers sell blended nitrogen-phosphorus-potash fertilizer at wholesale and retail. … While global nitrogen fertilizer producers are not as closely intertwined as are phosphorus and potash producers, duopolies in phosphorus and potash potentially invite antitrust mischief. They achieve this, at a minimum, through the sharing of information and executive decision-making between PhosChem and Canpotex, and the division of markets inside and outside North America. \” 

Here\’s the pattern of fertilizer prices in recent years. In the nature of things, it is difficult to prove that price increases are a result of oligopolistic behavior as opposed to market prices, although Taylor and Moss provide a number of statistical and anecdotal arguments to make the case.

Their narrative is that the fertilizer oligopoly may have been derailed in 2013 by China and India. \”Major fertilizer customers such as India and China have developed into powerful buyers, a shift that could have potentially important implications for the pricing and output strategies of large sellers. …Reports indicate that fertilizer contracts for India and China are now negotiated by a single entity, or only a few entities for each country. … The exercise of countervailing power by China and India may be responsible in part for the significant market disruption in mid-2013.\”

The Federal Trade Commission has not pushed back against the fertilizer oligopoly, instead arguing that the price spike in 2008 was related to various demand and supply factors. However, in June 2012 the U.S. Court of Appeals for the 7th Circuit refused to dismiss a private antitrust suit concerning the potash market, and wrote in a unanimous opinion, “the inferences from these allegations is not just plausible but compelling that the cartel meant to, and did in fact, keep prices artificially high in the United States.” Soon after, the case was settled for more than $100 million.

Taylor and Moss write: \”Damages from supra-competitive pricing of fertilizer likely amount to tens of billions of dollars annually, the direct effects of which are felt by farmers and ranchers. But consumers all over the world suffer indirectly from cartelization of the fertilizer industry through higher food prices, particularly low income and subsistence demographics. … [I]t is clear that corporate and political control of essential plant nutrients may be one of the most severe competition issues facing national economies today.\” Without prejudging the verdict, the fertilizer market seems like a situation where the Federal Trade Commission, the U.S. Department of Justice, and antitrust agencies around the world should be taking another look.

My office is on a college campus, so it\’s especially hard to avoid noticing that the class of \’13 is going to graduate into a difficult job market, as did their predecessors in the classes of \’12, \’11, \’10, \’09, and \’08. Indeed, colleges and universities are now experiencing a situation in which freshmen arrived in a lousy job market, heard all about the lousy job market for four years of college, and then graduated into a lousy job market. When one hears complaints either about the excessively high cost of college education or about the overly careerist instincts of recent college cohorts, it\’s worth remembering that many of them have experienced subpar labor market rewards from their college degree in recent years. Anthony P. Carnevale,
Andrew R. Hanson, and Artem Gulish explore these issues in their report  Failure to Launch: Structural Shift and the New Lost Generation, a September 2013 report from the Georgetown Public Policy Institute. Here are a few of the figures that jumped out at me.

The proportion of young people in the labor market is dropping, while the share of older people int he labor market is rising. This figure shows that back in 1980, about 50% of all 18 year-olds were in the labor market; by 2012, it was about 30%. However, those in their 50s, 60s, and older are more likely to be in the labor market than they were in 1980.

In fact, the share of young people in the labor market has fallen to a 40-year low. While the decline has been especially pronounced in recent years, it clearly dates back several decades. The usual explanation is a combination of a positive and a negative factor. The positive factor is that more young people are attending colleges and universities, and so are not in the labor force in their early 20s. The negative factor is that the kinds of jobs that were were available to those without a college degree back in the 1960s and 1970s–blue-collar jobs with significant skills that offered the prospect of lifelong economic advancement–have become increasingly scarce.

Today\’s young adults are getting a slower start on adult life. I As a result, it is taking young people longer to start climbing the career ladder. This graph shows the earnings of someone at each age level compared to median earnings, for 1980 and for 2012. In 1980, for example the typical 18 year-old had earnings that were about one-quarter of the median income, but the typical 26 year-old had earnings that were equal to the median income. However, in 1980 earnings dropped off quite sharply when people reached their early 60s. In 2012, the typical workers reach the median level of earnings until age 30–four years later than their counterparts in 1980.And in 2012, while wages still drop off when people reach their early 60s, the decline is not as rapid or as far.

And of course, a later start on careers is also one of the reasons why people are getting married later and starting families later. Carnevale, Hanson, and  Gulish write: \” Evolving social norms entangled with economic hardships have led young people to delay household and family formation. Two-thirds of young adults in their 20s cohabitate; the average age of  marriage increased from 21 to 26 for women and 23 to 28 for men between 1970 and 2006. Over  the same period, the average age of a mother at the birth of her first child increased from 21 to 25. In 1960, three out of four women and two out of three men completed school, left home, achieved financial independence, were married and had children by age 30. In 2000, less than half of women and only one-third of men reached the same milestones by age 30.\”

There is a lot to be said for marrying and having children a little later in life. I married at age 30 and had my first child at age 37. But when I visit with friends my age whose children have already graduate from college, or when I coach youth soccer games on creaky knees, I recognize that a slower takeoff to adulthood has its tradeoffs, too.

Throughout the grim economic statistics of the last five years, I\’ve felt especially badly for three groups: those who have been unemployed at a time when finding a job has been so tough; young people trying to get a foothold in the stagnant labor market; and those who were near or into retirement. This last group is old enough that spending many more years in the labor market wasn\’t a realistic option, even if jobs had been available. Meanwhile, they saw the value of their retirement nest eggs slashed by falling house and stock prices, and have watched while their savings and money market accounts brought them only ultra-low interest rates. LaVaughn Henry offers some evidence on these points in \”Are Households Saving Enough for a Secure Retirement?\” an \”Economic Commentary\” written for the Federal Reserve Bank of Cleveland.

One rough-and-ready measure of how older generations are doing is to look at the accumulation of national wealth. Here\’s actual household wealth, with the brown line showing the actual pattern and the green line showing a steady-growth trend over time. Notice that wealth went above trend in the dot-com boom of the late 1990s, but at the end of that period wealth returned to more-or-less the long-term trend. However, in the housing bubble of the mid-2000s, household wealth not only went further above trend, but then fell to well below trend and has been slower to rebound.

How do wealth patterns look for near-retirement Americans in particular? This graph shows the ratio of wealth-to-income for four different age groups at three different years. Clearly, those in the 55-64 age bracket were feeling a lot better about their retirement prospects in 2007 than they were in 2010.

Although a quick glance at this figure might suggest that older Americans as a group are just as well-prepared for retirement as they were back in 1983, this conclusion would be too quick. As Henry points out, wealth-to-income ratios for the elderly should probably be higher now than in the early 1980s for three reasons. First, people are living longer, so they need more wealth when they retire. Second, back in the early 1980s, a larger share of the US workforce had \”defined benefit\” pension plans, in which an employer promised to pay them a certain amount that was not counted as part of their own household wealth.  Now more people have \”defined contribution\” plans, where your retirement funds are stored up in your own 401k or IRS account, which does count as part of your household wealth. Thus, retirees are more dependent on their own household wealth than they were three decades ago. Third, interest rates right now are historically very low, so retirees need more wealth to generate the income that they would have expected if interest rates were higher.

Finally, what share of retirees have saved enough to sustain their consumption patterns in retirement. Here, Henry turns to calculations from Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass at the Center for Retirement Research at Boston College called that they call the National Retirement Risk Index (for example, see here). They seek first to calculate how much income people will need in retirement, and then whether people have enough in savings to meet that goal. As they explain: \”A commonly used
benchmark is the replacement rate needed to allow households to maintain their pre-retirement standard
of living in retirement. People clearly need less than their full pre-retirement income to maintain this
standard once they stop working since they pay less in taxes, no longer need to save for retirement, and often have paid off their mortgage. Thus, a greater share of their income is available for spending.\” Using this measure, Henry presents a figure showing the share of households at age 65 that are at least 10% short of meeting this target. This particular rule is of course somewhat arbitrary, but the results are likely to look much the same for any given rule: that is, those in the 1980s were more likely to be ready for retirement than those in the 1990s; those in the 1990s were more likely to be ready for retirement than those in the 2000s; and those in 2010 were least likely of all to be ready for retirement.

There\’s an argument for another day about how to encourage people to save more for retirement during their working lives, but that argument isn\’t especially relevant to those who are already at the edge of retirement or already retired. Planning for retirement is an especially difficult economic decision because we get just one chance to do it; no one gets to live their life multiple times, trying out different patterns of saving and investment each time. And if you happen to be retiring just when the economy enters an epic slump, it\’s bad luck.

The last five years have brought economic policies that I would not have thought were even remotely possible if you had asked me in, say, mid-2007. The Federal Reserve and other central banks of high-income countries would push their policy-target interest rates to near-zero, and hold the rates there for years on end, while printing money to buy government debt? I wouldn\’t have believed it. The U.S. government would run budget deficits of 10.1% of GDP, 9.0% of GDP, 8.7% of GDP, and 7.0% of GDP in consecutive years, raising the debt/GDP ratio over that time from 40.5% in 2008 to 72.6% in 2012? I wouldn\’t have believed it. An IMF staff team led by Bernardin Akitoby offers some thoughts on how conventional wisdom about fiscal policy has change in the last five years in a September 2013 Policy Paper, \”Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies.\”

What was the consensus view on fiscal policy back in the Stone Ages of 2007? The IMF report reminds us (as usual, footnotes and citations omitted): \”The prevailing consensus before the crisis was that discretionary fiscal policy had a  limited role to play in fighting recessions. The focus of fiscal policy in advanced economies was often on the achievement of medium- to long-run goals such as raising national saving, external rebalancing, and maintaining long-run fiscal and debt sustainability given looming demographic spending pressures. For the management of business cycle fluctuations, monetary policy was seen as the central macroeconomic policy tool. Fiscal contraction was sometimes recommended during periods of economic overheating as a means of supporting monetary policy, for example to take pressure off the exchange rate in the face of persistent capital inflows. However, during downturns, it was deemed that there was little reason to use another instrument beyond monetary policy.\”

But when the Great Recession hit, this consensus wisdom went out the window in a hurry, not just in the U.S. economy but across the high-income countries of the world. Here\’s a figure comparing the usual rise in the debt/GDP ratio after a recession (the blue dashed line) with what has actually happened in advanced economies since the recession (the red line). The U.S. economy, with a rise in the debt/GDP ratio of just over 30 percentage points, is just about on the average of how high-income countries have expanded their government debt since the Great Recession.

What lessons have we learned about fiscal policy during this period? Here are a few suggested by the IMF:

1) Of course, one main reason that so many governments raised their debt/GDP ratios so much was that the Great Recession was so ferocious. Advanced economies are apparently more vulnerable to severe downturns than most would have believed five years ago. In particular, financial imbalances, asset bubbles, housing and credit booms, and other risks were more severe that expected. . They write: \”The fiscal risks created by large  (relative to GDP), growing, and interconnected financial sectors were also underappreciated, partly  because of confidence in financial markets’ capacity to self-regulate and the
opacity of cross-border exposures.\”

2) \”[T]here is a need for a more holistic approach to measuring public debt and determining “safe’’ levels of debt.\” During the financial crisis, it became apparent that many governments were offering various guarantees and support to their financial sector that would not have been counted as \”government debt\” back in 2007, but turned into government debt very quickly when the crisis hit. \”For example, in the United
States, potential contingent liabilities stemming from the debt of government-related enterprises is
estimated to exceed 50 percent of GDP …\” Official measurements of debt also don\’t take into account future promises for funding government programs, like providing support to the elderly.

3) In some \”safe havens (Japan and the United States, for example), markets can tolerate much higher debt ratios than previously thought, at least for a time.\”

4) In other advanced economies, high government debt can lead to a  harmful \”soverign debt feedback loop.\” Within a given country, banks typically hold a lot of debt from the government of that same country. If the government piles up so much debt that it begins to look risky, then the banks of that country have a lot of assets that look risky. But if the government is to step in and rescue the banks, it will pile up more debt, which will make the banks look even riskier. See the recent history of Greece for how this story unfolds.

5) \”While debate continues, the evidence seems stronger than before the crisis that fiscal policy can, under today’s special circumstances, have powerful effects on the economy in the short run. In particular, there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump ..Earlier research often assumed that the impact of fiscal policy was similar across different states of the economy, but a number of recent empirical studies suggest that fiscal multipliers may be larger during periods of slack. …The crisis has not offered conclusive lessons regarding the relative size of revenue and
government spending multipliers. Some recent studies suggest that spending multipliers are larger than revenue multipliers, while others reach the opposite conclusion … \”

6) Fiscal policy operates through automatic stabilizers and through discretionary policy. The automatic stabiliizers come into being because when an economy contracts, the reduction in  economic activity automatically leads to lower tax revenues and to more people eligible for government spending support–without any new legislation. (For more detail on automatic stabilizers, see here.) Discretionary fiscal policy consists of the additional tax cuts or spending increases that required new legislation. Here\’s the division of automatic and discretionary policy across some high-income countries. In the US, for example, automatic stabilizers were about 2/3 of the deficits in 2009-2010, and discretionary policy was the other third.

7) \”The fundamental challenge facing policymakers today is to reduce deficits and debt levels in a way that ensures stability but is sufficiently supportive of short-term economic growth, employment, and equity. …As mere promises to undertake fiscal adjustment later may not be persuasive, gradual consolidation needs to be anchored in a credible medium-term plan.

The transportation of people and goods is in many ways a necessary evil. You rarely hear any person outside of car company advertisements bemoaning that their commute to work is too short, or that they wish it took a little longer to pick up bread and milk at the grocery. You never hear a business exalting that getting some parts or inputs from a distant location took especially long or required an especially high cost. Of course, there are sensible reasons why not all economic activity happens at one location and most people do not live immediately beside where they work; in effect, transportation is the cost we pay for the benefits that arise from this diversity of locations.  Clifford Winston writes \”On the Performance of the U.S. Transportation System: Caution Ahead,\” in the most recent issue of the Journal of Economic Literature (51: 3, pp. 773–824). (Full disclosure: The JEL is a sibling journal of the Journal of Economic Perspectives, where I work, both published by the American Economic Association. The JEL is not freely available on-line, but many in academia will have access through library subscriptions or through their AEA membership.)

Winston summarizes some facts about the sheer size of the US transportation sector in 2007 an eye-opening paragraph (as usual, footnotes and references are omitted for readability):

\”[C]onsumers spent $1.1 trillion on gasoline and vehicles commuting to work, traveling to perform household chores and to access entertainment, and traveling for  business and vacations, and spent an astronomical 175 billion hours in transit, which averages out to about 100 minutes per day for each and every American,valued at some $760 billion. Firms spent $1 trillion shipping products using their own and for-hire transportation, while the commodities that were shipped absorbed 25 billion ton-days in transit, valued at roughly $2.2 trillion. Local, state, and federal government spending on transportation infrastructure and services contributed an additional $260 billion,  bringing total pecuniary spending on transportation up to 2.4 trillion, or 17 percent of  GDP in 2007, which is as much as Americans spent on health care, and total annual money and time expenditures to more than $5 trillion! Finally, transportation looms large in American life because both the public and private sector have made huge investments in the transportation capital stock, which (after deducting depreciation) is valued by the U.S. Department of Commerce at nearly $4 trillion …\”

Many of these costs are not immediately apparent. After all, the transportation costs of firms are not costs that most of us see directly, but instead costs that are wrapped into the final cost of goods and services. The costs of time spent in traffic are not monetary costs. The link from transportation capital stock paid for in is government budgets and the tax revenues that ultimately support such spending is not especially clear.

Our public conversation about transportation policy often boils down to a claim that more government spending is good: fix and expand the road system, fix the bridges, build more mass transit, and so on. The transportation legislation that emerges from Congress every few years is perhaps the classic case of pork-barrel spending, usually with juicy tidbits for almost every legislative district. As one might expect, Winston takes a disciplined perspective: how can we set up institutions so that the transportation system works more efficiently, and so that additional infrastructure spending occurs when benefits are balanced against the costs, in a way that makes society more likely to focus on projects that have a higher payoff.  Some of the possibilities that go beyond pouring more concrete include:

• Cars should be charged for driving during times when traffic is congested. When you drive during a time when congestion is high, you of course experience the costs of having lots of other drivers on the road. But you also play a role in imposing those costs of time and delay on others. 
• Most big cities charge too little for street parking, at least during peak times For economists, when street parking is all taken for blocks around, and people are cruising the streets looking for a spot, it seems clear that the quantity of parking demanded is exceeding the quantity supplied at the existing price–and so the price should rise. 
• \”The gasoline tax that truckers are charged for highway travel does not adequately account for their damage to pavements because that damage depends on a truck’s weight per axle (for a given weight, trucks with more axles inflict less pavement damage) and for their stress on bridges, which  depends on a truck’s total weight.\” Higher charges would provide an incentive to use trucks with more axles, which would save wear and tear on roads and bridges. 
• \”The charge that an aircraft pays public airports to land (they are not charged to take off) is based on its weight and generally does not  vary by time of day. But the volume of aircraft traffic, which determines the length of time that a plane must wait on the ground or in the air, does. Efficient takeoff and landing (marginal cost) congestion charges that vary by time of day could significantly reduce air travel delays, generating a $6.3 billion annual welfare gain, accounting for the time savings to travelers and reduced operating costs to airlines …\”
• \”[U]sers of urban bus and rail transit pay fares that are set by transit authorities below marginal cost, some even ride at discounts from those fares, and some federal employees ride free. As pointed out later, such subsidies are hard to justify on distributional grounds because transit users generally live in households with incomes that are above the national average …\”
• \”Most highways in major metropolitan areas operate under congested conditions during much of the day, yet highway design standards are based on free-flow travel speeds. Policymakers could therefore reduce the cost of delays by expanding the range of alternative highway designs that, for example, could raise speeds during peak travel periods by increasing the number of lanes, although speeds during off-peak travel periods may be slower because lanes and shoulder widths would be narrower. Technology exists to install lane dividers that can be illuminated so that they are visible to motorists and that can be adjusted to increase or decrease the number of lanes that are available in response to traffic volume.\”
• \”[I]nvestments in highway durability—that is, pavement thickness—should minimize the sum of initial capital and ongoing maintenance costs. They determined that building roads with thicker pavement at an annualized cost of $3.7 billion would generate an annualized maintenance saving of almost 4 times as much—$14.4 billion—for a net annual welfare gain of $10.7 billion. Roads could also be made more durable by implementing innovations such as tack coats between pavement levels and thicker bottom layers of asphalt to avoid buckling, both of which can extend the functional life of a highway at little extra cost. But state departments of transportation award construction contracts on the basis of the minimum bid, not on the technological sophistication of the contractor …\”