Conversable Economist

The Summer 2013 Issue of the Journal of Economic Perspectives is now available on-line. Like all issues of JEP back to the first issues in Summer 1987, it is freely available courtesy of the American Economic Association. I\’ve been the managing editor of JEP since that first issue, so for me, it\’s issue #105.

The issue has two main symposia: one has six papers with various perspectives on the top 1% of the income distribution; the other has four papers on what has happened with the euro. There\’s also a paper at the end about the legacy of John Maynard Keynes as a highly successful institutional investor, and my own \”Recommendations for Further Reading\” column. I\’ll post more about specific papers next week. For now, here are abstracts of the articles, with the article titles in boldface, and weblinks.

Symposium: The Top 1 Percent
 

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\”The Top 1 Percent in International and Historical Perspective,\” by Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez
The top 1 percent income share has more than doubled in the United States over the last 30 years, drawing much public attention in recent years. While other English-speaking countries have also experienced sharp increases in the top 1 percent income share, many high-income countries such as Japan, France, or Germany have seen much less increase in top income shares. Hence, the explanation cannot rely solely on forces common to advanced countries, such as the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twentieth century experienced in virtually all high-income countries. We highlight four main factors. The first is the impact of tax policy, which has varied over time and differs across countries. Top tax rates have moved in the opposite direction from top income shares. The effects of top rate cuts can operate in conjunction with other mechanisms. The second factor is a richer view of the labor market, where we contrast the standard supply-side model with one where pay is determined by bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus. Indeed, top rate cuts may lead managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. Overall, private wealth (relative to income) has followed a U-shaped path over time, particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a return. The fourth, little investigated, element is the correlation between earned income and capital income, which has substantially increased in recent decades in the United States.
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\”Defending the One Percent,\” by N. Gregory Mankiw
 Imagine a society with perfect economic equality. Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J. K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies. The new product makes the entrepreneur much richer than everyone else. How should the entrepreneurial disturbance in this formerly egalitarian outcome alter public policy? Should public policy remain the same, because the situation was initially acceptable and the entrepreneur improved it for everyone? Or should government policymakers deplore the resulting inequality and use their powers to tax and transfer to spread the gains more equally? In my view, this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades. Since the 1970s, average incomes have grown, but the growth has not been uniform across the income distribution. The incomes at the top, especially in the top 1 percent, have grown much faster than average. These high earners have made significant economic contributions, but they have also reaped large gains. The question for public policy is what, if anything, to do about it.
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\”It\’s the Market: The Broad-Based Rise in the Return to Top Talent,\” Steven N. Kaplan and Joshua Rauh
One explanation that has been proposed for rising inequality is that technical change allows highly talented individuals, or \”superstars\” to manage or perform on a larger scale, applying their talent to greater pools of resources and reaching larger numbers of people, thus becoming more productive and higher paid. Others argue that managerial power has increased in a way that allows those at the top to receive higher pay, that social norms against higher pay levels have broken down, or that tax policy affects the distribution of surpluses between employers and employees. We offer evidence bearing on the different theories explaining the rise in inequality in the United States over recent decades. First we look the increase in pay at the highest income levels across occupations. We consider the income share of the top 1 percent over time. And we turn to evidence on inequality of wealth at the top. In looking at the wealthiest Americans, we find that those in the Forbes 400 are less likely to have inherited their wealth or to have grown up wealthy. The Forbes 400 of today also are those who were able to access education while young and apply their skills to the most scalable industries: technology, finance, and mass retail. We believe that the US evidence on income and wealth shares for the top 1 percent is most consistent with a \”superstar\”-style explanation rooted in the importance of scale and skill-biased technological change. It is less consistent with an argument that the gains to the top 1 percent are rooted in greater managerial power or changes in social norms about what managers should earn.
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\”The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes,\” by Josh Bivens and Lawrence Mishel

The debate over the extent and causes of rising inequality of American incomes and wages has now raged for at least two decades. In this paper, we will make four arguments. First, the increase in the incomes and wages of the top 1 percent over the last three decades should be interpreted as driven largely by the creation and/or redistribution of economic rents, and not simply as the outcome of well-functioning competitive markets rewarding skills or productivity based on marginal differences. This rise in rents accruing to the top 1 percent could be the result of increased opportunities for rentshifting, increased incentives for rent-shifting, or a combination of both. Second, this rise in incomes at the very top has been the primary impediment to having growth in living standards for low- and moderate-income households approach the growth rate of economy-wide productivity. Third, because this rise in top incomes is largely driven by rents, there is the potential for checking (or even reversing) this rise through policy measures with little to no adverse impact on overall economic growth. Lastly, this analysis suggests two complementary approaches for policymakers wishing to reverse the rise in the top 1 percent\’s share of income: dismantling the institutional sources of their increased ability to channel rents their way and/or reducing the return to this rent-seeking by significantly increasing marginal rates of taxation on high incomes.
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\”Income Inequality, Equality of Opportunity, and Intergenerational Mobility,\” Miles Corak
My focus is on the degree to which increasing inequality in the high-income countries, particularly in the United States, is likely to limit economic mobility for the next generation of young adults. I discuss the underlying drivers of opportunity that generate the relationship between inequality and intergenerational mobility. The goal is to explain why America differs from other countries, how intergenerational mobility will change in an era of higher inequality, and how the process is different for the top 1 percent. I begin by presenting evidence that countries with more inequality at one point in time also experience less earnings mobility across the generations, a relationship that has been called \”The Great Gatsby Curve.\” The interaction between families, labor markets, and public policies all structure a child\’s opportunities and determine the extent to which adult earnings are related to family background — but they do so in different ways across national contexts. Both cross-country comparisons and the underlying trends suggest that these drivers are all configured most likely to lower, or at least not raise, the degree of intergenerational earnings mobility for the next generation of Americans coming of age in a more polarized labor market. This trend will likely continue unless there are changes in public policy that promote the human capital of children in a way that offers relatively greater benefits to the relatively disadvantaged.
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\”Why Hasn\’t Democracy Slowed Rising Inequality?\” by Adam Bonica, Nolan McCarty, Keith T. Poole and Howard Rosenthal
During the past two generations, democratic forms have coexisted with massive increases in economic inequality in the United States and many other advanced democracies. Moreover, these new inequalities have primarily benefited the top 1 percent and even the top .01 percent. These groups seem sufficiently small that economic inequality could be held in check by political equality in the form of \”one person, one vote.\” In this paper, we explore five possible reasons why the US political system has failed to counterbalance rising inequality. First, both Republicans and many Democrats have experienced an ideological shift toward acceptance of a form of free market capitalism that offers less support for government provision of transfers, lower marginal tax rates for those with high incomes, and deregulation of a number of industries. Second, immigration and low turnout of the poor have combined to make the distribution of voters more weighted to high incomes than is the distribution of households. Third, rising real income and wealth has made a larger fraction of the population less attracted to turning to government for social insurance. Fourth, the rich have been able to use their resources to influence electoral, legislative, and regulatory processes through campaign contributions, lobbying, and revolving door employment of politicians and bureaucrats. Fifth, the political process is distorted by institutions that reduce the accountability of elected officials to the majority and hampered by institutions that combine with political polarization to create policy gridlock.
Full-Text Access | Supplementary Materials

Symposium: The Euro

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\”What Is European Integration Really About? A Political Guide for Economists,\” by Enrico Spolaore
Europe\’s monetary union is part of a broader process of integration that started in the aftermath of World War II. In this \”political guide for economists,\” we look at the creation of the euro within the bigger picture of European integration. How and why were European institutions established? What is European integration really about? We address these questions from a political-economy perspective, building on ideas and results from the economic literature on the formation of states and political unions. Specifically, we look at the motivations, assumptions, and limitations of the European strategy initiated by Jean Monnet and his collaborators of partially integrating policy functions in a few areas with the expectation that more integration will follow in other areas in a sort of chain reaction toward an \”ever-closer union.\” The euro with its current problems is a child of that strategy and its limits.
Full-Text Access | Supplementary Materials

\”Political Credit Cycles: The Case of the Eurozone,\” by Jesús Fernández-Villaverde, Luis Garicano and Tano Santos
We study the mechanisms through which the entry into the euro delayed, rather than advanced, key economic reforms in the eurozone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the euro.
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\”Cross of Euros,\” Kevin H. O\’Rourke and Alan M. Taylor
The eurozone currently confronts severe short-run macroeconomic adjustment problems and a deficient institutional architecture that has to be reformed in the longer run. Europe\’s efforts at economic and monetary union are historically unprecedented. However, the gold standard provides lessons regarding what will and won\’t work, macroeconomically and politically, in the short run, while US history provides long-run lessons regarding appropriate institutional structures. The latter also suggests that institutional reform only happens at times of great crisis, and that it cannot be taken for granted. The eurozone\’s leaders may therefore ultimately have to take heed of the lessons of history regarding currency union breakups.
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\”Downward Nominal Wage Rigidity and the Case for Temporary Inflation in the Eurozone,\” by Stephanie Schmitt-Grohé and Martin Uribe
Since the onset of the Great Recession in peripheral Europe, nominal hourly wages have not fallen from the high levels they had reached during the boom years — this in spite of widespread increases in unemployment. This observation evokes a well-known narrative in which nominal downward wage rigidity is at the center of the current unemployment problem. We embed downward nominal wage rigidity into a small open economy with tradable and nontradable goods and a fixed exchange-rate regime. In this model, negative external shocks cause involuntary unemployment. We analyze a number of national and supranational policy options for alleviating the unemployment problem caused by the combination of downward nominal wage rigidity and a fixed exchange-rate regime. We argue that, in spite of the existence of a battery of domestic policies that could be effective in solving the unemployment problem, it is unlikely that a solution will come from within national borders. This leaves supranational monetary stimulus as the most compelling avenue out of the crisis. Our model predicts that full employment in peripheral Europe could be restored by raising the euro area annual rate of inflation to about 4 percent for the next five years.
Full-Text Access | Supplementary Materials

Features

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\”Retrospectives: John Maynard Keynes, Investment Innovator,\” by David Chambers and Elroy Dimson
John Maynard Keynes made a major contribution to the development of professional investment management. Based on detailed archival research at King\’s College, Cambridge, we describe Keynes\’ investment philosophy, his investment performance, and the evolution of his investment approach as the manager of a large educational endowment. His portfolios were actively managed and unconventional. He was an investment innovator both in making a substantial allocation to the then new institutional asset class of common stocks as well as in championing value investing.
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\”Recommendations for Further Reading,\” by Timothy Taylor
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Notes and Errata

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\”Under this plan, quotas for hunting of whales would be traded in global markets. But again, and unlike most “catch share” programs in fisheries, the whale conservation market would not restrict participation in the market; both pro- and antiwhaling interests could own and trade quotas. The maximum potential harvest for any hunted species in any given year would be established in a conservative manner that ensures sustainability of the marketed species (that is, harvest levels would be established that would not permit taking more individuals than can be replaced) and maintains their functional roles in the ecosystem. The actual harvest, however, would depend on who owns the quotas. Conservation groups, for example, could choose to buy whale shares in order to protect populations that are currently threatened; they could also buy shares to protect populations that are not presently at risk but that conservationists fear might become threatened in the future.\”

\”Despite the widely acknowledged failure of the IWC [International Whaling Commission] moratorium to curtail unsustainable whaling, the whale conservation market idea has proved to be wildly controversial within conservation and antiwhaling circles. Concerns have been raised about how the system would be established (for example, under what guidelines would the original shares be allocated?) and how it would play out over time (for example, would a legal market lead to increased whaling?). Many critics of the idea are also plainly not comfortable with the ethics of putting a price on such iconic species—that is, with using contingent market methods for what they believe should be a categorical ethical obligation to preserve whales. On the other hand, the negotiation failures surrounding the global management of whales underscore the need for a realistic and pragmatic discussion about available policy alternatives. Indeed, the vulnerable status of many whale populations and the failure of the traditional regulatory response to halt unsustainable harvests call for a more innovative and experimental approach to whale policy, including considering unconventional proposals, such as the whale conservation market.\”

My own sense, trained as I am into economic ways of thinking, is that if ethics are to be meaningful, they need to engage with pragmatic realities. The moratorium on commercial whaling is not, in fact, protecting a biologically sufficient number of whales. The arguments that whales should not be hunted, whatever their merits, have not been winning where it counts–that is, as measured by the size of the whale population. Arguments about the ethics whaling have even not brought us to a biologically sustainable situation, much less to the far more stringent limits on whaling that many environmentalists would prefer. In that situation, real-world ethical behavior calls for looking at alternatives.

The migration puzzle is that while Americans tend to think of themselves as a country where migration is commonplace, the actual rate of migration has been falling since about 1980. Raven Molloy, Christopher L. Smith, and Abigail Wozniak provide a nice overview of the changes in \”Internal Migration in the United States\” in the Summer 2011 issue of the  Journal of Economic Perspectives. (Full disclosure: I\’ve been holding down the Managing Editor job at JEP since the tail end of the Reagan administration. I posted about the Molloy, Smith, and Wozniak article here, soon after it was published. ) Since then, there are a couple of recent developments: some new evidence that the migration rate may be turning up a bit, and some new explanations for why it declined.

William Frey presents some recent evidence on the within-the-U.S. migration rate in a short overview article in the Milken Institute Review, July 2013. He writes: \”In 2011-12, 14 states (most of
them in the Sun Belt) showed bigger gains than the previous year. Phoenix picked up 37,000 intranational migrants, compared with just 4,000 the year before. At the same time, 27 states, most in the Snow Belt, were losing migrants at an accelerated pace. Metro New York, for example, lost 128,000, compared to 99,000 in the prior 12 months. To be sure, Snow Belt to Sun Belt flows are
not close to their peaks, or even to normal levels. In 2005-6 New York lost 290,000 migrants,
while Phoenix gained a tad less than 100,000. But there is clearly a thaw.\”

Explaining the decline in within-U.S. migration since the late 1980s or early 1990s migration has proven difficult. It\’s easy to suggest possible reasons. For example, perhaps as the average age of America\’s population rises, people become less likely to move. Or perhaps the increase in two-earner couples makes people less likely to move. But these kinds of explanations can easily be tested against the data: for example, by looking at areas that have more or less elderly people, or areas that have bigger or smaller shares of two-earner couples, and comparing mobility rates. As Malloy, Smith and Wozniak pointed out in their 2011 JEP article: \”Migration rates have fallen for most distances, demographic and socioeconomic groups, and geographic areas. The widespread nature of the decrease suggests that the drop in mobility is not related to demographics, income, employment, labor force participation, or homeownership.\”

However, Greg Kaplan and Sam Schulhofer-Wohl have written \”Understanding the Long-Run Decline in Interstate Migration ,\” published as Working Paper 697 by the Minneapolis Federal Reserve. Their paper is technical research economics, and thus not an easy read for the uninitiated, but the basic findings can be explained easily enough. They write: 

\”We show that micro data rule out many popular explanations for this change [of lower migration rates], such as aging of the population or changes in the number of two-earner households. But the data do support two novel theories. The rst theory is that labor markets around the country have become more similar in the returns they o er to particular skills, so workers need not move to a particular place to maximize the return on their idiosyncratic abilities. The second theory is that better information–due to both information technology and falling travel costs–has made locations less of an experience good, reducing the need for young people to experiment with living in di erent places. We build a model that makes these ideas precise and show that a plausibly calibrated version is consistent with cross-sectional and time-series patterns.\” 

As Kaplan and Schulhofer-Wohl readily admit, just how much of the change in migration is explained by these factors is not yet clear: it could be as little as one-third, or as much as all of it. I\’m sure future research will try to narrow this down. They also provide a useful compact explanation of why the level of migration, and the reasons why it slowed down, matter for labor markets and policy-makers (in what follows, citations are omitted).

\”Many policymakers have worried that the decline in migration heralds a less-flexible economy where workers cannot move to places with good jobs. In such an economy, the labor market might adjust more slowly to shocks, potentially prolonging recessions and reducing growth. Low migration has thus been proposed as an explanation for the slow recovery from the 2007-\’08 financial crisis. But the causes of decreased migration that we identify suggest that the economy may not be less flexible after all. Rather, low migration means that workers either do not need to move to obtain good jobs or have better information about their opportunities. In either case, the appropriate policy response may diff er from the appropriate response to a decrease in workers\’ ability to move. Thus, understanding the causes of the decline in gross migration is an important goal for economists.\”

Three years ago, the Wall Street Reform and Consumer Protection Act, commonly known as the Dodd-Frank act, was signed into law by President Obama. The legislation took a peculiar form: rather than Congress actually writing a new set of rules and regulations, the law involved a massive set of requirements that regulatory agencies write new rules.

The law firm of Davis Polk and Wardwell has been publishing regular progress reports on how the rule-making is proceeding. By their count, the legislation involved 398 new rule-making requirements. According to the third-anniversary report, the deadlines for writing 279 of those rules have been reached, but only 107 rules have been completed. Of the 172  rules where deadlines have now been missed, regulators have not yet submitted proposals for 64 of them. By their count, so far there are 15 million words worth of regulations to implement the 898-page legislation, and the count is rising.

In some sense, this slow pace of producing final rules is no surprise, as I\’ve discussed earlier here. Writing a rule involves a legally defined process of proposals, comments, revised proposals, and so on. Writing several dozen new major rules to govern financial institutions and markets would be a major undertaking: writing several hundred new rules is a gargantuan task. Of course, each rule is contested between those of differing views. In a real sense, Dodd-Frank was not actually about Congress enacting financial reform, but rather about admitting that Congress doesn\’t have enough knowledge to enact financial reform–and handing off the task to others.
That said, how are the reforms proceeding? Daniel Tarullo of the Fed Board of Governors gave a talk on the subject in May. Here\’s how he listed the positives, and what remains to be done. On the positive side:

\”First, the basic prudential framework for banking organizations is being considerably strengthened, both internationally and domestically. Central to this effort are the Basel III changes to capital standards, which create a new requirement for a minimum common equity capital ratio…. Second, a series of reforms have been targeted at the larger financial firms that are more likely to be of systemic importance. … The governing principle for this new set of rules is that larger institutions should be subject to more exacting regulatory and supervisory requirements, which should become progressively stricter as the systemic importance of a firm increases. … A third set of reforms has been aimed at strengthening financial markets generally, without regard to the status of relevant market actors as regulated or systemically important. The greatest focus … has been on making derivatives markets safer through requiring central clearing for derivatives that can be standardized and creating margin requirements for derivatives that continue to be written and traded outside of central clearing facilities.\”

As Tarullo points out, a number of these rules are still being implemented. On the other side, here are his limitations and shortcomings. For example, he writes that the new capital standards for banks are lower than he would prefer, and do not fully address the \”too-big-to-fail\” problem. He also emphasizes: \”Most importantly, relatively little has been done to change the structure of wholesale funding markets so as to make them less susceptible to damaging runs. … [S]ignificant continuing vulnerability remains, particularly in those funding channels that can be grouped under the heading of securities financing transactions.\” In particular, Tarullo mentions \”[r]epo, reverse repo, securities lending and borrowing, and securities margin lending.\” 

For a more detailed discussion of shortcomings of Dodd-Frank, I recommend \”Financial Stability Monitoring\” by Tobias Adrian, Daniel Covitz, and Nellie Liang at the Fed, written as Finance and Economics Discussion Series 2013-21. For example, when Congress requires that rules are written for tighter regulation of depository institutions, they create incentives for larger parts of the financial sector to move out of the regulated sector and to what is often known as the \”shadow banking\” sector. These are financial entities that accept investments that can be withdrawn in the short-run, but often invest in financial securities that pay off over the long run–which as we have learned can set the stage for a financial crisis if many investors try to sell off these investments at the same time. As another example, when Congress attempts to set rules that limit what regulators can do when a financial institution is in trouble, it risks making a future financial crisis even more severe. They also emphasize Tarullo\’s point that the Dodd-Frank Act \”does not address structural problems in wholesale short-term funding markets, such as the susceptibility of money market funds to investor runs or the inherent fragility of repo markets.\”

It is remarkable and depressing to me that three years after the passage of this legislation, and more than four years after U.S. financial markets nearly melted down in late 2008 and early 2009, the issues of how to reform the financial sector remain so fluid and unresolved.

From time to time, I\’ve posted figures to help illustrate the sharpness and severity of the financial and economic shocks that hit the U.S. economy starting in 2007 and lasting into 2009. Some examples (here and here) included interest rate spreads, net lending by the financial sector, the housing price bubble, inflows of international capital, and the like. But here\’s an offbeat measure: in the transcripts of the meetings of the Federal Open Market Committee, which is at the center of making decisions about monetary policy, how many times does the transcript note that laughter occurred?

During the tail end of the Greenspan years, 10-30 laughs per meeting was about the norm. (Just to be clear, this humor is typically the sort of thing that would only provide chuckles to aficionados of monetary policy who are shut in a room together.) When Bernanke arrives, the laughter level rises up into the range of 70-80 laughs per meeting. But when the first stirrings of the financial crisis hit in late 2007, there are a few meetings with no almost no laughter at all.

The data only go through early 2008, because minutes of FOMC meetings are only released after a five-year lag. The figure is taken from a briefing book put together by the Stanford Institute for Economic Policy Research for their annual \”summit\” meeting last spring, and is based on data from Bianco Research. 

The rate at which health care costs are rising had slowed down in recent years, and perhaps not unexpectedly, Obama\’s economic advisers have sought to draw the link that \”As ACA Implementation Continues, Consumer Health Care Cost Growth Has Slowed.\” But an array of evidence suggests that something beyond that legislation–which after all, is mostly not yet implemented–is the cause.

1) The slowdown in the rise of health care spending was already being noted in newspaper articles back in early 2012. Writing in the New England Journal of Medicine in August 2012, Charles Roehrig, Ani Turner, Paul Hughes-Cromwick, and George Miller trace the timing and causes of the slowdown in \”When the Cost Curve Bent — Pre-Recession Moderation in Health Care Spending.\”
They measured the extent to which the rise in national health care spending exceeded growth of \”potential GDP: (that is, GDP adjusted to take out the effects of recessions and booms).  They find that the slowdown in health care spending started around 2003, and has been lower since 2005. Here\’s one of their figures:

They write: \”Spending for physician and clinical services has grown particularly slowly since the curve bent in 2005. In the pre-recession period, we trace this slowdown to slow growth in physician-payment rates relative to overall prices in the economy. In the post-recession period, payment-rate increases have remained low and the growth in the utilization of physician services has diminished.\” The authors acknowledge that the recession may also have contributed to a slower rise in health care spending, but they believe earlier structural factors–not yet well-understood–played a bigger role.

3) There\’s some reason to be dubious as to whether the slower rate of growth in health care spending will persist. Only a year ago, government actuaries were predicting that the rise in health care costs would pick up again as the economy accelerated, and total health care spending would rise from $17.8% of GDP in 2009 to nearly 20% of GDP by 2021.

In short, the case that the 2010 U.S. health financing reform legislation is already playing a substantial role in holding down health care costs seems weak. It seems clear that the recession held down the rise in health care costs both in the U.S. and in many other countries. And there\’s some reason to believe that the rise in U.S. health care costs may be slowing–although the evidence remains preliminary.

If the rise in health care costs is slowing down, and the health care cost curve is indeed bending, it would be huge news. For households, \”Health Care Costs are Eating Your Pay Raise,\” as I posted back in January 2012. For government, rising health care costs for current employees, for the poor, and for retirees are the major drivers of why budget deficits are projected to become so very large in the next few decades.

In almost every high income country, the share of 25-34 year-olds with higher education is higher than that for the age 25-64 population as a whole–about 7 percentage points higher. This is the pattern one would expect to see if a country is expanding access to higher education. But the U.S. is an exception, where the share of 25-34 year-olds with with a tertiary education degree is lower than for the age 25-64 population. Here\’s an illustrative figure, taken from Education at a Glance 2013, published by the OECD, and freely available with a slightly clunky browser here.

Although the U.S. used to lead the world share of adults with tertiary education few decades back, the figure shows that this is no longer the case. There\’s no reason to expect this to change in the next few years. When it comes to graduation rates from upper secondary school, the U.S. now falls below the OECD average.

Similarly, if you look at the share of students who are going to enter tertiary education and emerge with a degree, the U.S. falls below the OECD average.

The issue here doesn\’t seem to be primarily one of underspending. The U.S. has above-average spending per student by OECD standards–but this is expected, because the U.S. also has higher income levels, and so paying salaries to teachers will cost more. The following graph shows per capita GDP on the horizontal axis and spending per student on the vertical axis. The best-fit line drawn through the graph shows the average pattern of how education spending rises with a country\’s per capita income. For primary education and for secondary education, the U.S. spending levels are right on the best-fit line. For tertiary education, the U.S. is noticeably above the line–that is, we spend more than one would expect given U.S. per capita incomes.

Thus, the most obvious story told by these data is a frustrating one for the U.S. education system: Spending is roughly where it should be, but performance is lagging badly.

U.S. firms are holding $1.8 trillion in liquid assets: that is, either cash or marketable securities. What\’s going on here?  Laurie Simon Hodrick tackles the question, \”Are U.S. Firms Really Holding Too Much Cash?\” in a July 2013 Policy Brief written for the Stanford Institute for Economic Policy Research.

For background, here are a couple of figures. The first shows cash and marketable securities of firms over time–that is, \”liquid assets\”–rising rapidly. The second shows these liquid assets as a share of the short-term liabilities of firms. Of course, firms always like to have some cash on hand, but historically, that has been about 30% of all short-term liabilities. In the last few years, liquid assets have climbed to almost half of all short-term liabilities.

The argument usually heard for holding additional liquid assets is that the last few years have been times of considerable uncertainty about the economy and economic policy, so firms need a bigger cushion. This explanation has some truth in it, but it\’s not all of the truth.

1) This need for additional liquid assets is not affecting all firms or all industries equally, but instead is affecting a smaller number of highly profitable companies. For example, non-financial firms in the S&P 500 hold about $1.3 trillion in liquid assets. As Hodrick explains: \”Five companies, General Electric, Microsoft, Google, Cisco, and Apple, account for 25 percent of the $1.27 trillion, while 22 companies account for half of it. … [C]ash holdings are concentrated among highly profitable firms, many in the technology and health care sectors.\”

2)  Some of the cash holdings seem related to issues of the taxation of multinational firms. U.S. firms don\’t pay taxes on their international earnings until they \”officially\” bring the funds back to the U.S. Given that U.S. corporate tax rates are high by international standards, it makes sense to delay bringing back such funds until you\’re really sure that you want to do so. Hodrick: \”General Electric leads with $108 billion held overseas at the end of 2012. It is interesting to note that $102.3 billion of Apple’s total cash holding of $145 billion was offshore in lower-tax jurisdictions at the end of March
2013.\” It\’s especially interesting, or ironic, that waiting to bring foreign earnings back to the U.S. for tax purposes doesn\’t preclude investing those funds in the U.S. economy–just like any other foreign investor can do. Hodrick writes: \”It is also important to recognize that the “overseas” money owned by foreign subsidiaries need not be invested abroad, but instead can be held at U.S. banks, in U.S. dollars, or invested in U.S. securities. For example, according to SEC filings, $58 billion of Microsoft’s total cash holding of $66.6 billion is held by foreign subsidiaries. Surprisingly, about 93 percent of Microsoft’s cash held by foreign subsidiaries in 2012 was invested in U.S. government bonds, corporate bonds, and mortgage-based securities. The assets of Apple Operations International, Apple’s Irish subsidiary, are managed in Reno, Nevada, by employees at one of its wholly owned subsidiaries, Braeburn Capital, according to a Senate report, with the funds held in bank accounts in New York.\”

3) There\’s a long tradition in the economics and corporate finance literature of being suspicious about firms that hold large amounts of cash. After all, large amounts of cash on hand might help the job security and emotional comfort of the managers, but not necessarily be in the best interests of shareholders. There\’s an argument that cash-heavy firms should either have a plan for at least potentially investing that cash in a project that will increase future company profits, or a plan for paying it out to shareholders. I confess that I find it a little refreshing when firms hold large amounts of cash. It hints at a certain discipline on the part of management that they are waiting for an opportunity. Saying that you need a cash reserve to take advantage of unexpected opportunities sounds great–but after a few years of doing this, shouldn\’t firms be able to point to a series of actual unexpected opportunities of which they did take advantage?

There\’s are a few signs that, under pressure from shareholders and other investors, some firms are starting to pay out some of their cash hoard. \”On April 23, 2013, Apple Inc. announced its intention to pay out a total of $100 billion in cash by the end of calendar year 2015, the largest total payout
ever authorized.\” However, by some estimates this payout will only be enough to keep Apple\’s overall cash hoard from increasing–not actually to diminish it.

The US labor market has been improving from dismal to sluggish, and the overall unemployment rate has been drifting down. But it\’s worth remembering that after five years of sustained high unemployment, the  unemployed are disproportionately those who face the issues of long-run unemployment in a way that the U.S. economy  has not seen in its post World War II experience.

Here\’s a snapshot of the unemployment rate over time, generated with the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The sharp rise in unemployment during the Great Recession is striking, but what I want to focus on here is the amount of time that the U.S. economy has been experiencing an unemployment rate above 7.5%. Draw a mental line across the graph at 7.5% and take a look. The unemployment rate was above 7.5% for (almost all of) 26 months from January 1975 to February 1977. It was also above 7.5% for (almost all of) 51 months from May 1980 to August 1984. But since the unemployment rate rose above 7.5% in January 2009, it\’s now been above that level for 54 months and counting. Also, the graph shows that the spike in unemployment in the early 1980s was \”sharper,\” meaning that unemployment rates weren\’t at the very highest levels then for as long a time as they have been in the last few years.

 

One result is that a far higher share of the unemployed have been unemployed for 27 weeks or more than at any time since the end of World War II. In the past, the long-term unemployed typically made up 20-25% of total unemployment during recessions. In the Great Recession, the long-term unemployed were about 45% of the total unemployed, and the share of total unemployment accounted for by the long-run unemployed remains historically high.

A similar pattern emerges when looking at the average duration of unemployment. In past decades, this measure usually spiked up to about 15-20 weeks of unemployment in tough times. But in the aftermath of the Great Recession, the average duration of unemployment spiked up to 40 weeks, and even now is at a historically sky-high 35 weeks.

 

 A few observations here:

1) As someone on a college campus, where the undergraduates rotate in and out over four years, we have now reached a situation where entire classes of students have entered as freshmen during a terrible labor market and exited as seniors into a terrible labor market. This inevitably has an effect on how they perceive the costs and benefits of college, how their families see it, and how rising high school students see it.

2)  It seems plausible that the long-term unemployed have a harder time getting jobs than those who are more recently unemployed. In part, this may be that the long-term unemployed are less motivated or less attractive as employees–which is part of the reason they are long-term unemployed. After all, unemployed workers lose human capital: that is, they lose a chance for job experience and to keep their skills updated. But in addition, part of the reason is probably that employers make assumptions that the long-term unemployed are less likely to be desireable workers. When the labor market has been so poor for so long, such an assumption by employers is less justifiable than it would have been in the past.

3)  In short, those who are currently unemployed, as a group, are more likely to have experienced long-run unemployment than any previous group in post-World War II U.S. experience. Re-integrating these workers into the labor force is going to bring challenges and costs that I don\’t think employers, government, or workers themselves have yet thought through.

At least as far back as the Luddite movement of the early 19th century, when those who has made textiles by hand protested against labor-saving machinery, workers have feared that they might be replaced by machines. As the capabilities of robots increase and unemployment rates remain troublingly high, this fear may seem even more immediate today. Frank Levy and Richard J. Murnane look at the interaction between workers and machinery in \”Dancing with Robots: Human Skills for Computerized Work,\” written for the Third Way think tank.

Levy and Murnane offer a number of useful examples for thinking about the interaction between machinery and workers. Consider the dishwasher: \”The job of washing dishes consists of six tasks: clearing the dishes from the table, applying soap and hot water, scrubbing, rinsing, drying, and stacking dishes in the cabinet. The technology we call a “dishwasher” substitutes for human effort in four of these tasks, but not in the other two. Technology usually changes work by changing
how specific tasks are performed.\”

Levy and Murnane look at which occupations are growing (as a share of the labor force) over time, and which ones are shrinking. The picture looks like this: they argue that jobs with nonroutine physical work or unstructured cognitive work are hard to automate–and those are the kinds of jobs that are growing.

Here are a few thoughts about their arguments:

1) A worker with access to dishwashers can be far more productive than a worker who must do all six of the tasks by hand. But if your job was washing, rinsing and drying dishes by  hand, you could be out of luck. The the challenge for all 21st century workers is to find ways of being the one who uses technology and robots to magnify the productivity of the tasks that you do, not being the one who does tasks that can be replaced by a robot. In the economics jargon, you want technology to complement your work, not to substitute for it.

2) Back in the Stone Ages when I was in junior high school, we were all required to take \”shop\” classes in woodworking, metal-working, electrical circuits, and graphic drawing. While it remains important for students to have a grip on how material things work, someone who was relying on that kind of education would have experienced a miserable job market in the last few decades. Indeed, a large number of workers were educated in the 1950s, 1960s, 1970s and 1980s for jobs that barely existed by the end of the 20th century. The 21st century equivalent means knowing how things work, but also being able track down relevant information and make sense of it in solving problems that arise. Helping students memorize routines for addressing a task isn\’t a path to career advancement, because if a task can be reduced to a routine, it can also be automated. This calls for a shift in the educational system that is subtle, but substantial in teaching what Levy and Murnane call \”foundational skills.\” 

3)  At least to me, the bottom line for all concerns about machinery replacing workers is that if this was a big problem, surely it would have already been happening steadily during the last two centuries? It\’s easy to make the case that machinery and robots alter what workers do, and that it will shake up occupations and wages, but it flies in the face of two centuries of history to argue that mechanization will lead to mass unemployment.