Conversable Economist

The theme for the 2013 World Development Report from the World Bank is one word: \”Jobs.\” The discussion reaches usefully beyond the issue of recovery from the Great Recession (although that topic is covered as well) and looks at issues of job creation in the long run. At least to me, much of the underlying message is not so much about the raw numbers of jobs that need to be created, but is the idea that stable relationships between employers and employees, with shared benefits for both, are part of a broader web of social institutions and interrelationships.

\”As the world struggles to emerge from the global crisis, some 200 million people—including 75 million under the age of 25—are unemployed. Many millions more, most of them women, find themselves shut out of the labor force altogether. Looking forward, over the next 15 years an additional 600 million new jobs will be needed to absorb burgeoning working-age populations, mainly in Asia and Sub-Saharan Africa. Meanwhile, almost half of all workers in developing countries are engaged in small-scale farming or self-employment, jobs that typically do not come with a steady paycheck and benefits.

The problem for most poor people in these countries is not the lack of a job or too few
hours of work; many hold more than one job and work long hours. Yet, too often, they are not earning enough to secure a better future for themselves and their children, and at times they are working in unsafe conditions and without the protection of their basic rights. Jobs are instrumental to achieving economic and social development. Beyond their critical importance for individual well-being, they lie at the heart of many broader societal objectives, such as poverty reduction, economy-wide productivity growth, and social cohesion. The development payoffs from jobs include acquiring skills, empowering women, and stabilizing post-conflict societies.\”

Here\’s a figure showing on the left  how much absolute job creation is needed in various regions of the world by 2020, given population growth, and on the left, the annual rates of job creation needed. The challenge of creating jobs with decent and growing compensation at these rates is an enormous one.

In much of the world, it\’s important to remember that those counted as having a \”job\” have neither an employer nor a regular paycheck.

\”To many, a “job” brings to mind a worker with an employer and a regular paycheck. Yet, the majority of workers in the poorest countries are outside the scope of an employer-employee relationship. Worldwide, more than 3 billion people are working, but their jobs vary greatly. Some 1.65 billion are employed and receive regular wages or salaries. Another 1.5 billion work in farming and small household enterprises, or in casual or seasonal day labor. Meanwhile, 200 million people, a disproportionate share of them youth, are unemployed and actively looking for work. Almost 2 billion working-age adults, the majority of them women, are neither working nor looking for work, but an unknown number of them are eager to have a job.\”

As the figure shows, 70-80% of those who are have jobs in sub-Saharan Africa have nonwage employment. The figure illustrates that the prevalence of wage employment is actually closely associated with economic development, and more broadly with whether the society is one in which organizations called private firms have the ability and flexibility to create themselves and to expand.

World Bank reports always make me smile a bit when they discuss the role of the private and the public sector. My sense is that many of the readers of such reports are skeptical of free market economics. Thus, the economists at the World Bank find themselves needing to straddle the fence: on one side, they do speak up for the importance of the private sector and free markets; on the other side, they spend a lot of words pointing out that government has an important role to play, and leaving the door open for the possibility that certain government interventions might be useful. Thus, here\’s the report on the centrality of the private sector in creating jobs:

\”[T]he private sector is the main engine of job creation and the source of almost 9 of every 10 jobs in the world. Between 1995 and 2005, the private sector accounted for 90 percent of jobs created in Brazil, and for 95 percent in the Philippines and Turkey. The most remarkable example of the expansion of employment through private sector growth is China. In 1981, private sector employment accounted for 2.3 million workers, while state-owned enterprises (SOEs) had 80 million workers. Twenty years later, the private sector accounted for 74.7 million workers, surpassing, for the first time, the 74.6 million workers in SOEs. In contrast to the global average, in some countries in the Middle East and North Africa, the state is a leading employer, a pattern that can be linked to the political economy of the postindependence period, and in some cases to the abundance of oil revenues. For a long period, public sector jobs were offered to young college graduates. But as the fiscal space for continued expansion in public sector employment shrank, “queuing” for public sector jobs became more prevalent, leading to informality, a devaluation of educational credentials, and forms of social exclusion. A fairly well-educated and young labor force remains unemployed, or underemployed,and labor productivity stagnates.\”

And on the other side of the fence, here\’s the report on the importance of government, along with implications that a great many types of government interventions in labor markets can be justified.

\”While it is not the role of governments to create jobs, government functions are fundamental for sustained job creation. The quality of the civil service is critically important for development, whether it is teachers building skills, agricultural extension agents improving agricultural productivity, or urban planners designing functional cities. Temporary employment programs for the demobilization of combatants are also justified in some circumstances. But as a general rule it is the private sector that creates jobs. The role of government is to ensure that the conditions are in place for strong private-sector-led growth, to understand why there are not enough good jobs for development, and to remove or mitigate the constraints that prevent the creation of more of those jobs. Government can fulfill this role through a three-layered policy approach:
 • Fundamentals….  Macroeconomic stability, an enabling business environment, human capital accumulation, and the rule of law are  among the fundamentals. … Adequate infrastructure, access to finance, and sound regulation are key ingredients of the business environment. Good nutrition, health, and education outcomes not only improve people’s lives but also equip them for productive employment….
 • Labor policies. …  Labor policy should avoid two cliffs: the distortionary interventions that clog the creation of jobs in cities and in global value chains, and the lack of mechanisms for voice and protection for the most vulnerable workers, regardless of whether they are wage earners. …
• Priorities. Because some jobs do more for development than others, it is necessary to understand where good jobs for development lie, given the country context.

This mildly split personality–between emphasizing the private sector and markets on one side and looking at possible roles for government on the other side–is probably an occupational hazard for economists. I doubtless suffer the affliction myself. But that said, I fear that the World Bank report may understate the difficulties of large-scale private-sector job creation in many countries around the world. Ultimately, true job creation occurs when an employer does not rely on government subsidies or handouts, and instead is producing a product at a price that customers actually want to buy. It requires letting firms fail, when they prove incapable of meeting this standard. And it requires letting firms continue and grow when they do meet this standard, even though a successful and growing firm can become a potential source of political and economic power that might in some way challenge the existing government. All of this is a long way of saying that when 40%, 50%, or 80% of the workers in an economy are involved in non-wage employment, the transition to a situation in which private-sector firms are numerous and large enough to offer wage employment to a very large proportion of the adults in a country is an enormous and difficult task.

I try to work from home a couple of days each week: it saves me the commuting time, and I can be home when the children get off the school-bus in the afternoon. Thus, I\’m also intimately aware of the temptations of working from home, like a sudden overpowering urge to re-arrange the living room furniture or to bake a batch of cookies. In its report on \”Home-Based Workers in the United States: 2010,\” a group of U.S. Census Bureau analysts (Peter J. Mateyka, Melanie A. Rapino, and Liana Christin Landivar) steer clear of the gains and losses from working at home, and lay out the statistics on how widespread the practice is. The underlying data comes from two sources that are not directly comparable, because they ask about home-based work in somewhat different ways: the Survey of Income and Program Participation (SIPP) and the American Community Survey (ACS). That said, here are a few facts that jumped out at me. 

The proportion of workers who work from home has increased in the last decade or so, but it remains relatively low. \”The percentage of all workers who worked at least 1 day at home increased from 7.0 percent in 1997 to 9.5 percent in 2010, according to SIPP. During this same time period, the population working exclusively from home in SIPP increased from 4.8 percent of all workers to 6.6 percent … The percentage of workers who worked the majority of the workweek at home increased from 3.6 percent to 4.3 percent of the population between 2005 and 2010, according to the ACS.\”

Those who work at home part of the time and at a workplace part of the time typically have higher incomes either than those who are at a workplace all the time or those who are at home all the time. \”Median personal earnings for mixed workers were significantly higher ($52,800) compared with onsite ($30,000) and home ($25,500) workers. While home workers had lower personal earnings than onsite workers did, respondents that reported working at least 1 day at home had significantly higher household incomes than respondents that reported working only onsite.\”

The prevalence of home-based work has followed a U-shape in recent decades, falling in the 1960s and 1970s but rising since then. \”In the 1960s, home-based workers were primarily self-employed family farmers and professionals, including doctors and lawyers. Home-based work in the United States declined from 1960 to 1980, driven by changes in market conditions and the agriculture industry that began decades prior and favored large specialized firms over family farms. In 1980, the multiple-decade decline in home-based work reversed, led partly by self-employed home-based workers in professional and service industries.\”

The most rapid

\”Between 2000 and 2010, there was a 67 percent increase in home-based work for employees of
private companies. Although still underrepresented among homebased workers, the largest increase in home-based work during this decade was among government workers, increasing 133 percent
among state government workers and 88 percent among federal government workers.

Those \”mixed\” workers who are partly at home and partly at the office are more likely to work at home on Mondays and Fridays (a fact that seems to me creates some suspicion about how much work is actually getting done). \”About 90 percent of home workers reported working
Monday through Friday at home, compared with less than 40 percent of mixed workers. The most
popular days worked at home for mixed workers were Monday (37.6 percent) and Friday (37.8 percent) …\”

The top three cities for home-based work are Boulder, CO, Medford, OR, and Santa Fe, NM. Two of the top ten areas are in my home state of Minnesota–small cities with a branch of the state university system about an hour\’s drive from Minneapolis and St. Paul.

There\’s always a chicken-and-egg question about the interrelationship between television and social values. Does the behavior shown in television shows change social values, or does it just reflect changes in social values that have already happened? Eliana La Ferrara, Alberto Chong, and Suzanne Duryea offer one example in which television does seem to have altered social values in \”Soap Operas and Fertility: Evidence from Brazil.\” The paper appears in the most recent issue of the American Economic Journal: Applied Economics (2012, 4(4): 1–31). The journal isn\’t freely available on-line, but those in academia will often have on-line access through their libraries. 

To disentangle the cause and effect of television and social values, the ideal experiment would be to have some random selection areas with television, and other nearby areas without television–and then to compare across areas. While a pure random experiment of this kind is hard to come by, many developing countries saw a dramatic expansion in the availability of television from the 1970s up through the 1990s. Thus, researchers can look at what happened in different areas as television coverage arrived. La Ferrara, Chong, and Duryea start their discussion this way:

\”In the early 1990s, after more than 30 years of expansion of basic schooling, over 50 percent of 15 year olds in Brazil scored at the lowest levels of the literacy portion of the Programme for International Student Assessment (PISA), indicating that they could not perform simple tasks, such as locating basic information within a text. People with 4 or fewer years of schooling accounted for 39 percent of the adult population in the urban areas, and nearly 73 percent in rural areas as measured by the 2000 census. On the other hand, the share of households owning a television set had grown from 8 percent in 1970 to 81 percent in 1991, and remained approximately the same 10 years later. The spectacular growth in television viewership in the face of slow increases in education levels characterizes Brazil as well as many other developing countries. Most importantly, it suggests that a wide range of messages and values, including important ones for development policy, have the potential to reach households through the screen as well as through the classroom. …\”

\”We are interested in the effect of exposure to one of the most pervasive forms of cultural communication in Brazilian society, soap operas or novelas. Historically, the vast majority of the Brazilian population, regardless of social class, has watched the 8 pm novela. In the last decades, one group, Rede Globo, has had a virtual monopoly over the production of Brazilian novelas. Our content analysis of 115 novelas aired by Globo in the two time slots with the highest audience between 1965 and 1999 reveals that 72 percent of the main female characters (age 50 and lower) had no children at all, and 21 percent had only one child. This is in marked contrast with the prevalent fertility rates in Brazilian society over the same period.\”

Fertility rates have been dropping in Brazil in the last few decades, as in many other countries. \”The total fertility rate was 6.3 in 1960, 5.8 in 1970, 4.4 in 1980, 2.9 in 1991, and 2.3 in 2000. It is noteworthy that this decline was not the result of deliberate government policy. In Brazil no official population control policy was enacted by the government and, for a period of time, advertising of contraceptive methods was even illegal. The change therefore originated from a combination of supply factors related to the availability of contraception and lower desired fertility.\” Of course, there is a standard argument among economists and demographers that as a country go through a \”demographic transition,\” as the economy become wealthier and life expectancies increase, fertility rates decline. The estimates in this study suggest that receiving the TV signal can account for about 7 percent of the overall decline in fertility. They write: \”Globo coverage is associated with a decrease in the probability of giving birth of 0.5 percentage points, which is 5 percent of the mean. The magnitude of this effect is comparable to that associated with an increase of 1.6 years in women’s education.\”

Their investigation also turned up a number of supportive connections. For example: \” The (negative) effect of Globo exposure is stronger for households with lower education and wealth, as one would expect given that these households are relatively less likely to get information from written sources or to interact with peers that have small family sizes. the effect of exposure to soap operas in Brazil.\” \”We find that decreases in fertility were stronger in years immediately following novelas that portrayed messages of upward social mobility, consistent with the desire to conform with behavior that leads to positive life outcomes.\” \”Also, we find that the effect of Globo availability in any given year was stronger for women whose age was closer to that of the main female characters portrayed that year.\”

And most striking to me: \”[W]e estimate the probability that the 20 most popular names chosen by parents for their newborns in a given metropolitan area include one or more names of the main characters of novelas aired in the year in which the child was born. This probability is 33 percent if the area where parents lived received the Globo signal and only 8.5 percent if it did not, a statistically
significant difference. Since novela names tend to be very idiosyncratic in Brazil, we take this evidence as suggestive of a strong link between novela content and behavior.\”

Like most people in  my professional universe, I try to carry around in my head some basic facts and comparisons. Here are some basic tables and figures about the world economy, which I have edited and adapted (by leaving out some smaller countries) from the 2012 edition of \”Charting International Labor Market Comparisons\” published by the U.S. Bureau of Labor Statistics. 

As a starting point, make a mental list of the large economies in the world–say, those with GDP larger than $1 trillion. Here\’s a figure listing them, where GDP calculated in 2010 U.S. dollars using purchasing power parity exchange rates. For most people, it\’s not a big surprise to see the U.S. at the top, followed by China and Japan. But seeing India ahead of Germany and the United Kingdom is a bit unexpected, as is seeing Brazil ahead of Italy, Mexico ahead of Spain, and South Korea ahead of Canada.

One aspect of that omnibus term \”globalization\” is that the U.S. economy plays a smaller role in the world economy, while China and other nations are playing a larger role. Here\’s a figure showing the shift in what countries are producing what share of global GDP from 1990-2010. The decline in Japan\’s importance is more than offset by the rise of China. The U.S. and European share of world output is falling, and the \”rest of the world\” share is rising.

Of course, comparisons across countries don\’t take population differences into account. As a final test, form a mental picture of what per capita GDP or per capita GDP per worker would look like for 2010. Again, it\’s no shock to see the U.S. economy near the top of the list (although Norway, not shown here, is actually a little higher in both categories).  At least to me, it is a modest surprise to see the western European countries outranking Japan so decisively, and a bigger surprise to see that South Korea is now so close behind Japan. Mexico considerably exceeds Brazil, with both Latin American countries lagging behind eastern Europe. And China remains quite poor on a per capita basis. As the BLS reports: \”Gross domestic product (GDP) per capita in the United States was approximately six times larger than the GDP per capita in China.\” Of course, this also suggests that China has the potential, with appropriate policies, for at least several decades more of very rapid economic growth. 

Pedro Amaral and Margaret Jacobson offer some encouraging recent news about U.S. exports in a short article in  Economic Trends from the Federal Reserve Bank of Cleveland. \”In fact, despite the recovery’s frustratingly slow growth, exports have averaged 8 percent yearly growth since the beginning of 2010 and continue to reach record levels in terms of total nominal and real dollars. The ratio of exports to GDP has been growing at a far faster rate in the current recovery than in an average one.\” They point to strong demand from abroad–and it\’s not from high-incomne countries like Europe or Japan!–as well as to a lower foreign exchange rate of the U.S. dollar as driving the rise in exports.

But how can the high-wage U.S. economy hope to compete in the lower-wage world economy? J. Bradford Jenson offers a nice discussion of \”Opportunities for U.S. Exports of Business Services\” in some recent Congressional testimony that I ran across at the website of the Peterson Institute for International Economics.

I liked Jenson\’s discussion because it pushes all of us to see international trade and the U.S. economy as it operates today, not through a gauzy nostalgia for the role played by manufacturing in the U.S. economy of a  half-century ago.  He writes :

\”When we think of trade, most of us envision wheat, copper, crude oil, and manufactured goods such as clothing, furniture, consumer electronics, cars, and jet aircraft. We need only visit a port, border crossing, or big-box superstore to find an abundance of such goods from virtually every country in the world. By contrast, many believe the service sector is largely insulated from the international economy. Because many services require face-to-face interaction between buyer and seller, the prevailing assumption is that most services are not tradable. This belief has always been a misconception, and in today’s economy, it is an increasingly inappropriate one. The falling costs of travel and increased ease of communications, thanks to the Internet, have vastly expanded opportunities for services to be traded across long distances, including across borders.\”

He focuses in particular on \”business services.\” \”This group includes the information, finance and insurance, real estate, professional, scientific, and technical industries; management, administrative support, and waste remediation industry groups; and industries such as software, engineering services, architectural services, and satellite-imaging services. … The business service sector accounts for about 25 percent of the US labor force—two and a half times the size of the manufacturing sector. Moreover, the business service sector is growing. Over the past decade or so, manufacturing sector
employment has decreased by about 20 percent, while business services have increased by about 30 percent. And business service jobs are good jobs: Average wages in business services are more than 20 percent higher than average wages in manufacturing.

\”Many people hold an outdated view of the US economy. Just as an example, consider the relative size of one service industry, engineering services, relative to two important manufacturing industries: the automotive industry (including assembly and parts) and the aerospace industry. It might surprise you to learn that engineering services is the largest in terms of employment. Engineering services (NAICS 541330) employed 980,000 people in 2007—more than the automotive industry (910,000), and more than twice as many as aerospace (440,000), according to the most recent economic census. Average earnings in engineering services ($73,000) are significantly higher than in auto production ($52,000) or even in aerospace ($68,000).\”

Here\’s a figure from the ever-useful FRED website at the St. Louis Fed showing the trade surplus that the U.S. economy has been running in the service sector as a whole.  The figure shows monthly data, so the U.S. trade surplus in services has been was running about about $5-6 billion per month for much of the 1990s and first half of the 2000s–call it $60-$72 billion per year. But since early 2011, the monthly trade surplus in services has been more like $15 billion per month–call it a services trade surplus of $180 billion per year.

Jensen\’s testimony focuses in particular on how world trade talks could bring down barriers to exports of U.S business services, and while that is important, I suspect it is at least as important that U.S. business services providers have been orienting themselves more toward international markets. As the U.S. government and economy struggles to get its debt burdens under control in the years to come, export growth in services is one of the most promising sources of additional demand for U.S.-made output.

The IMF discusses \”The Good, the Bad and the Ugly: 100 Years of Dealing with Public Debt Overhangs,\” in Chapter 3 of its most recent World Economic Outlook. The IMF Fiscal Affairs Department has been compiling data on gross government debt-to-GDP ratios going back to 1875. This chapter focuses on the experience of the 22 advanced economies where there is good data over most of this period. What lessons can be drawn?

For starters: \”Public debt levels above 100 percent of GDP are not uncommon. Of the 22 advanced economies for which there is good data coverage, more than half experienced at least one high-debt episode between 1875 and 1997. Furthermore, several countries had multiple episodes: three for Belgium and Italy and two for Canada, France, Greece, the Netherlands, and New Zealand.\”

Here\’s a figure showing the 26 episodes for these 22 countries where government debt exceeded the 100% level. One way to eyeball this chart is to draw a mental line horizontally at the 100% debt/GDP ratio. It becomes clear that the experiences here are very diverse: some of countries are on their way to taking on much more debt at this level, while others are about to reduce their debt dramatically. Another lesson that comes out of the figure is that the episodes of high government debt/GDP are essentially in four time periods: the last quarter of the 19th century, the years after World War I, the years after World War II, and the last few decades. But there are almost no examples of high government debt/GDP ratios in this group of advanced economies from the 1950s up through the early 1980s.

Many of the episodes in which debt/GDP ratios decreased dramatically were in the aftermath of war–sometimes in accompaniment with hyperinflation after the war that ate away the value of the debt. Only three of these 26 debt overhang episodes ended in actual default: Germany (defaulted in 1932), and Greece (defaulted in 1894 and 1932).

How does taking on a lot of debt affect economic growth? The IMF authors are suitably reticent here about any claims of causality. As they point out, high government debt might cause slower economic growth, but it\’s also plausible that slower economic growth makes a debt/GDP problem worse, by raising the desire of government to borrow in hard times while holding down the denominator of the debt/GDP ratio. (For an argument and some supporting evidence that the causality does run from higher government debt to slower growth, Carmen Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff make that case as  part of their article in the Summer. 2012 issue of my own Journal of Economic Perspectives.) Thus, the IMF authors stick to looking at correlations, without making an argument about causality. 

One of those correlations struck me as especially interesting. When the separate cases where government debt was above 100% of GDP and rising from cases where debt is above 100% of GDP and falling, they find that growth performance is notably better in those cases where debt/GDP ratios are falling. In this sense, it\’s not just the high level of debt that\’s the problem, but whether the government is showing a clear ability to address the debt/GDP ratio. 

They consider several episodes of public debt overhang, and seek to distill some lessons. Here are some lessons, intermixed with some of my own reactions: 

\”The first key lesson is that a supportive monetary environment is a necessary condition for successful fiscal consolidation.\” In my own mind, one of the strongest arguments for the Federal Reserve promising to keep interest rates low for some  years into to the future doesn\’t have anything to do with how it might influence current borrowing and demand; instead, it\’s because low interest rates help to reassure investors that the the large and growing U.S. government debt is affordable. If U.S. interest rates were to spike upward, paying the interest on the U.S. government debt could become much harder in a hurry. Of course, this insight also emphasizes that the Federal Reserve feels a need to facilitate the huge U.S. budget deficits–not because it favors the deficits, but because the alternative of not facilitating them could be worse. 

\”Second, debt reduction is larger when fiscal measures are permanent or structural and buttressed
by a fiscal framework that supports the measures implemented.\” What the authors mean here is that when governments try to address their debt problems with nonspecific policies like across-the-board spending cuts or spending caps, they often are failing to make any actual real choices about what will change. The countries that have had some success in recent decades in reducing debt/GDP ratios–Belgium in the 1980s, Italy around 1992, Canada around 1995–succeeded because they made specific choices about reforming pensions, entitlements and other spending programs.

Their third lesson is that strong external demand is a huge help. Looking at the world economy today, the potential source of strong external demand is the rapidly growing \”emerging market\” economies like China, India, Brazil, and others. 

Finally, their fourth lesson is that it takes years to address a massive debt overhang. I sometimes think of the trajectories of U.S. government spending and taxes heading off into the future, both rising, but under current projections slowly drawing further apart. If the government can take real steps to make the rise in the spending line a little flatter and the rise in the tax line a little steeper, then the problem is gradually solved. The IMF authors look at annual deficit/GDP ratios, and find that \”sustained improvements of more than 1 percentage point a year are rare.\” 

Where does the U.S. economy stand? The Congressional Budget Office is my go-to source for deficit and debt projections. Its August 2012  report has projections from 2012 to 2022. Using those numbers, the U.S. gross government debt passed the 100% debt/GDP ratio this year–and thus would be counted in future episodes of public debt overhang. Of course, the CBO and others often emphasize not \”gross\” government debt, which includes debt that the government owes to itself (like the Treasury bonds held in the Social Security trust fund), and instead look at \”debt held by the public. On that measure, using the CBO \”alternative fiscal scenario,\” which is a more realistic view, 
debt held by the public is at a 73% debt/GDP ratio in 2012 and is headed for a 90 percent debt/GDP ratio by 2022. 

To me, all of this says that the U.S. government debt burden is still at a level that remains bearable by the enormous U.S. economy. But it\’s high time to start making those specific medium-term changes that will keep the the U.S. 2012 episode of public debt overhang one that is short, and over the next few years turns a rising debt trajectory into a declining one. 

Back in July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The difficulty with the law has always been that while it was fairly clear on its goals, it did not specify how to reach those goals–instead turning over that task to current and newly-created regulatory agencies.  If you\’re looking for an update on how the law is proceeding, a good starting point is the Third Quarter 2012 issue of Economic Perspectives, published by the Federal Reserve Bank of Chicago, which has six articles on the Dodd-Frank legislation.

Douglas D. Evanoff and William F. Moeller offer an overview of the goals and approach of the law in their opening piece (footnotes and citations omitted):

\”The stated goals of the act were to provide for financial regulatory reform, to protect consumers
and investors, to put an end to too-big-to-fail, to regulate the over-the-counter (OTC) derivatives markets, to prevent another financial crisis, and for other purposes. … Implementation of Dodd–Frank requires the development of some 250 new regulatory rules and various mandated studies. There is also the need to introduce and staff a number of new entities (bureaus, offices, and councils) with responsibility to study, evaluate, and  promote consumer protection and financial stability. Additionally, there is a mandate for regulators to identify and increase regulatory scrutiny of systemically important institutions.  … Two years into the implementation of the act, much has been done, but much remains to be done.\”

How are those rules coming along? The law firm of Davis Polk & Wardwell publishes a regular Dodd-Frank report. The September 2012 edition summarizes:

• \”As of September 4, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have
  passed. This is 59.5% of the 398 total rulemaking requirements, and 84.6% of the 280
  rulemaking requirements with specified deadlines.
• \”Of these 237 passed deadlines, 145 (61.2%) have been missed and 92 (38.8%) have been
  met with finalized rules. Regulators have not yet released proposals for 31 of the 145 missed
  rules.
• \”Of the 398 total rulemaking requirements, 131 (32.9%) have been met with finalized rules and
  rules have been proposed that would meet 135 (33.9%) more. Rules have not yet been
  proposed to meet 132 (33.2%) rulemaking requirements.

The July 2010 Davis Polk update–the two-year anniversary of the legislation–offers some additional detail: \”The two years since Dodd-Frank’s passage have seen 848 pages of statutory text expand to 8,843 pages of regulations. Already at almost a 1:10 page ratio, this staggering number represents
only 30% of required rulemaking contained within Dodd-Frank, affecting every area of the financial markets and involving over a dozen Federal agencies.\”

It\’s important to  recognize that writing a new regulation isn\’t as simple as, well, just writing it. Instead, there is often first an in-house study, followed by a draft regulation, which then is open to public comments, and then can revised, and eventually at some point a new regulation is created. It\’s not unusual for a regulation to get dozens or hundreds of detailed public comments.

This blizzard of evolving rules has to create considerable uncertainty in the financial sector. Matthew Richardson discusses the complexities of one particular issue in his contribution to the Chicago Fed publication. He picks one example: the problem that many banks made very low-quality subprime mortgage loans. What does the Dodd-Frank legislation do about this basic issue? As he describes, the act: 1) Sets up a Consumer Finance Protection Bureau in title X to deal with misleading products; 2)
Imposes particular underwriting standards for residential mortgages; 3) Requires firms performing securitization to retain at least 5 percent of the credit risk; and 4) Iincreases regulation of credit rating agencies. Each of these tasks requires detailed rulemaking. And as Richardson points out, \”with all of these new provisions, the act does not even address what we at NYU Stern consider to be a primary fault for the poor quality of loans—namely, the mispriced government guarantees in the system that led to price distortions and an excessive buildup of leverage and risky credit.\”

I\’m skeptical of anyone who has strong opinions about the Dodd-Frank legislation, because here we are more than two years later, less than halfway toward figuring out what rules the legislation will actually put in place. Wayne A. Abernethy of the American Bankers Association is one of the authors in the Chicago Fed symposium. Yes, he is speaking for the bankers\’ point of view. But his judgement about the overall process seems fair to me:

\”At least in the financial regulatory history of the United States, there has never been anything like it. I have seen no definitive count of the number of regulations that the Dodd–Frank Act calls forth. The numbers seem to range between 250 and 400—numbers so large that they are numbing. It all defies hyperbole. The Fair and Accurate Credit Transactions Act, adopted in 2003, astonished the financial industry with more than a dozen significant new regulations to be written. …

\”One of the most common criticisms of Dodd–Frank implementation has been a lack of order and coordination in the regulatory process. Instead, the Dodd–Frank Act has succeeded in replacing the financial crisis with a regulatory crisis.  … As agencies are grappling with impossible rulemaking tasks, most of them are also engaged in major structural reorganizations and shifts in the areas of responsibility. … Nothing like this has ever been tried before in the history of the United States. Writing 400 financial regulations of the highest significance and the greatest complexity in a couple of years has clearly been too much to expect. … Getting on with the work to end our self-inflicted regulatory crisis should be among the highest priorities.\”

 I\’m someone who believes that financial regulation needed shaking up. Many of the broad goals of the Dodd-Frank legislation make sense to me: rethinking bank and regulation to deal with macroeconomic risk, not just the risk of an individual institution going broke; figuring out better ways to shut down even large financial institutions when needed; and better regulation of certain financial instruments like credit default swaps and repo agreements; a closer look at technologies that allow ultra-high-speed financial trading; and others.

The Dodd-Frank legislation is almost not a law in the conventional meaning of the term, because it mostly isn\’t about actual specific activities that are prohibited. Instead, it\’s about handing over the difficult problems to regulators and telling them to fix it. I\’m not sure there was an easy alternative to this regulatory approach: the idea of Congress trying to debate, say, appropriate regulation of the over-the-counter swaps market is not an encouraging thought. But stating a goal is not the same as solving a problem. The passage of Dodd-Frank, in and of  itself, didn\’t solve any problems.

Margaret Jacobson and Filippo Occhino have been investigating the fact that labor has been receiving a declining share of total economic output over the last few decades. I posted on their work last February in \”Labor\’s Declining Share of Total Income.\”  Now they have written \”Labor’s Declining Share of Income and Rising Inequality,\” which is \”Economic Commentary\” 2012-13 published by the Federal Reserve Bank of Cleveland.

The starting point is to look at labor income relative to the size of the economy. The top line in the figure shows labor income as a share of GDP, as measured in the national income and product accounts from the U.S. Bureau of Economic Analysis. The lower line in the figure shows the ratio of compensation to output for the nonfarm business sector, as measured by the U.S. Bureau of Labor Statistics. The measures are not identical, nor would one expect them to be, but they show the same trend: that is, with some ups and downs as the economy has fluctuated, the labor share of income has been falling for decades, and is now at an historically low figure.

 This fact lies behind much of the rise in inequality of incomes over this time. The income that is not being earned by labor is being earned by capital–and capital income is much more concentrated than is labor income. Jacobsen and Occhino offer an intriguing figure that measures the inequality of labor income and the inequality of capital income. The measure used here is a Gini coefficient, which \”ranges between 0 and 1, with 0 indicating an equal distribution of income and 1 indicating unequal income.\” (Here\’s an earlier post with an explanation of Gini coefficients.)

The figure has two main takeaways. First, labor income has become more unequally distributed over time, but since the early 1990s, the big shift in income inequality is because capital income is more unequally distributed. Second, capital income tends to rise during booms and to fall in recessions. Thus, it seems plausible that the inequality of capital income has dropped in the last few years of the Great Recession and its aftermath, but will rise again as economic growth recovers.

What has caused the long-run decline of the labor share of income? Jacobson and Occhino explain this way: \”[W]e begin by looking at what determines the labor share in the long run. The main factor is the technology available to produce goods and services. In competitive markets, labor and
capital are compensated in proportion to their marginal contribution to production, so the most important factor behind the labor and capital shares is the marginal productivities of labor and capital, which are determined by technology. In fact, one important cause of the post-1980 long-run decline in the labor share was a technological change, connected with advances in information and
communication technologies, which made capital more productive relative to labor, and raised the return to capital relative to labor compensation. Other factors that have played a role in the long-run decline in the labor share are increased globalization and trade openness, as well as changes in
labor market institutions and policies.\”

There is no particular reason to believe that these trends will continue–or that they won\’t. But the declining share of income going to labor suggests the importance of finding ways to increase the marginal product of labor, especially for workers of low and medium skills, perhaps by focusing on the kind of training and networking that might help them make greater use of the advances in information and communication technology to improve their own productivity.

In a pure income tax, what is the appropriate way to tax owned housing? Jack Grigg and Thornton Matheson of the IMF explain in Chapter V of the \”United States: Selected Issues\” report published as IMF Country Report 12/214.

\”Neutral taxation of owner-occupied housing would call for taxing its imputed rental value, but allowing a full mortgage interest deduction.\” For those not indoctrinated into the jargon, the idea here is that when you live in a house that you own, you are–in a way–renting that house to yourself.  Thus, you are in effect paying rent to yourself, and paying mortgage expenses. In a pure income tax, you would pay income tax on the income you receive from your owned-and-rented-to-yourself property (\”imputed rental value\”), but you would be able to deduct from taxation the costs of that property–namely, the interest payed on the mortgage.

This logic may seem counterintuitive to many homeowners! But another way to think about it is that a pure income tax should not favor owning over renting. (That is, the decision to favor owning is a political policy decision that has costs and benefits, but it\’s not part of a pure income tax.) Thus, if I buy a house and rent it out, or if I buy the same house and live in that house, my income tax bill should look the same.

But practical difficulties surface immediately, of course. How would \”imputed rental income\” be calculated? Grigg and Thornton write:  \”Taxing imputed rents has generally proved impracticable, however, although several countries have at one time or another done so. Belgium taxes imputed rent, but the value was last reviewed in 1975 and has been indexed to inflation since 1990, resulting in imputed rents generally below their market counterparts, especially for old houses. In the Netherlands, imputed income is calculated as a percentage (up to 0.55 percent) of a property’s market value. Norway abolished its tax on imputed rents, based on property values, in 2005, and Sweden followed in 2007. While property values provide a readily observable basis for taxing imputed rents, they are likely to represent an imprecise measure of the returns to housing. An alternative is to use house prices and average price-to-rent ratios to estimate imputed rents, but this requires regular updating.\”

The administrative tax of figuring out an appropriate imputed rent in the enormous and diverse U.S. economy may be impractical. But then, if the gains from imputed rental income are not included in the income to be taxed, there is an argument for not allowing the deductibility of mortgage interest, either. The authors write: \”As imputed rent taxation is thus generally unattractive on administrative grounds,
tax neutrality could be better approximated by phasing out mortgage interest deductibility.\” Indeed, countries like Denmark ad France give only very limited mortgage interest deductions.

The U.S. tax treatment of housing is very generous by the standards of OECD countries. We don\’t tax imputed rental income: doing so would raise $337 billion in taxes over the next five years, according to Office of Management and Budget estimates. We do let mortgage interest be deductible for first and second homes up to $1 million, which reduces income  tax revenues by $606 billion over the next five years. In addition, we have various provisions so that capital gains in housing values are untaxed, which reduces income taxes by an estimated $171 billion over the next five years.

But the issues go well beyond costs to the government in a time when we need to be scrutinizing the spending and tax sides of the federal budget to find a trajectory toward smaller budget deficits over the medium and long term.  Tax breaks for housing create economy-wide distortions in the allocation of
investment across sectors. The authors explain: \”The marginal effective tax rate on housing investment in the U.S. is currently only 3½ percent, as compared to 25½ percent for business investment in equipment, structures, land and inventories. This discourages investment in productive assets, to the detriment of long-run economic growth.\”

Of course, it\’s never wise to make dramatic changes to tax policies affecting the housing market, because the existing tax policies are part of the conditions of demand and supply in the current market. The still-shaky U.S. housing market doesn\’t need another sudden shock. But the example of the United Kingdom shows how the mortgage interest deduction can be gradually phased out: set a ceiling on the total amount of the deduction, and then over time, reduce that ceiling in real terms and reduce the tax rate that can be applied to the deduction. Grigg and Thornton write:

\”The UK experience offers a lesson in how the mortgage interest deduction can be gradually phased out. Until 1974, mortgage interest tax relief (MITR) in the UK was available for home loans of any size. In that year a ceiling of £25,000 was imposed. In 1983, this ceiling was increased to £30,000, below the rate of both general and house price inflation. From 1983 onwards, the ceiling remained constant, steadily reducing its real value. Beginning in 1991, this erosion of the real value of MITR was accelerated by restricting the tax rate at which relief could be claimed, to the basic 25 percent rate of tax in 1991, and then to 20 percent in 1994, 15 percent in 1995 and 10 percent in 1998. These ceilings on the size of loans and restrictions on the tax rate at which relief could be claimed chipped away at the
value of the tax deduction, paving the way for its complete abolition in 2000 …\”

Similarly, one could phase in limits on the special treatment for capital gains in housing, limiting it to primary residences and to a maximum amount.

I\’m acutely aware that, given the fall in U.S. housing prices over the last few years, many homeowners would love to see housing prices soar again. But the U.S. economy and U.S. households have now absorbed most of the pain of the housing price decrease. The goal over the medium terms should be to make the housing market less tax-favored. It would benefit the U.S. economy to focus less on housing and more on investments that generate future economic growth. Most of the tax benefits of housing  go to those with well above-average incomes–since these are the people who are living in bigger houses and itemizing deductions. The additional revenue from reducing the favored tax treatment of housing can be part of a package to reduce marginal tax rates and trim future budget deficits.

How should African elephants be protected from poachers? Just passing laws that elephants should not be harmed is clearly an insufficient policy, because many governments across Africa have limited ability to enforce such laws. Thus, two complementary  policies are often suggested. One is to encourage local people who live near Africa\’s elephants to help protect them and their habitat by making the elephants a valuable economic resource. For example, local people may see economic benefits from tourists who come to see the elephants. A  second proposal is for other countries to ban imports of ivory–or at least to ban imports that are not certified as coming from elephants that were killed as part of a sustainable wildlife management plan. 

But these policies aren\’t working to protect elephants. Brian Christy provides a journalistic overview of the situation in \”Ivory Worship,\” appearing in the October 2012 issue of National Geographic. The entire article is a great read, with all sorts of detail about ivory poaching in Africa and markets for ivory in the Philippines, China, Thailand, and elsewhere. Here, I\’ll just offer a smattering of quotations scattered throughout the article on some of the main points that relate to the policy choices on how best to protect elephants.

\”Elephant poaching levels are currently at their worst in a decade, and seizures of illegal ivory are at their highest level in years. … Still, according to Kenneth Burnham, official statistician for the CITES program to monitor illegally killed elephants, it is “highly likely” that poachers killed at least 25,000 African elephants in 2011. The true figure may even be double that. \”

\”[A] global ivory trade ban was adopted in 1989.  …  At the time of the ivory ban, Americans, Europeans, and Japanese consumed 80 percent of the world’s carved ivory. … . African ivory brought into a country before 1989 may be traded domestically. And so anyone caught with ivory invokes a common refrain: “My ivory is pre-ban.” Since no inventory was ever made of global ivory stocks before the ban, and since ivory lasts more or less forever, this “pre-ban” loophole is a timeless defense.\”

 \”Not all countries agreed to the [ivory] ban. Zimbabwe, Botswana, Namibia, Zambia, and Malawi entered “reservations,” exempting them from it on the grounds that their elephant populations were healthy enough to support trade. In 1997 CITES held its main meeting in Harare, Zimbabwe, where President Robert Mugabe declared that elephants took up a lot of space and drank a lot of water. They’d have to pay for their room and board with their ivory. Zimbabwe, Botswana, and Namibia made CITES an offer: They would honor the ivory ban if they were allowed to sell ivory from elephants that had been culled or had died of natural causes. CITES agreed to a compromise, authorizing a one-time-only “experimental sale” by the three countries to a single purchaser, Japan. In 1999 Japan bought 55 tons of ivory for five million dollars. Almost immediately Japan said it wanted more, and soon China would want legal ivory too…. \”

 \”In a 2002 report China warned CITES that a main reason for China’s growing ivory-smuggling problem was the Japan experiment: “Many Chinese people misunderstand the decision and believe that the international trade in ivory has been resumed.” Chinese consumers thought it was OK to buy ivory again. … By 2004 China had forgotten its concerns and petitioned CITES to buy ivory….  In July 2008 the CITES secretariat endorsed China’s request to buy ivory, a decision supported by Traffic and WWF. Member countries agreed, and that fall Botswana, Namibia, South Africa, and Zimbabwe held auctions at which they collectively sold more than 115 tons of ivory to Chinese and Japanese traders.\”

\”[I]t also meant, according to CITES, that China could now do its part for law enforcement by flooding its domestic market with the low-priced, legal ivory. This would drive out illegal traders, who CITES had heard were paying up to $386 for a pound of ivory. Lower prices, CITES’s Willem Wijnstekers told Reuters, could help curb poaching.  Instead the Chinese government did the unexpected. It raised ivory prices. … China also devised a ten-year plan to limit supply and is releasing about five tons into its market annually. The Chinese government, which controls who may sell ivory in China, wasn’t undercutting the black market—it was using its monopoly power to outperform the black market. Applying the secretariat’s logic that low prices and high volumes chase out smugglers, China’s high prices and restricted volumes would now draw them in. The decision to allow China to buy ivory has indeed sparked more ivory trafficking, according to international watchdog groups and traders I met in China and Hong Kong.And prices continue to rise. … By all accounts, China is the world’s greatest villain when it comes to smuggled ivory. In recent years China has been implicated in more large-scale ivory seizures than any other non-African country. …\”

\”The genie cannot be returned to her bottle: The 2008 legal ivory will forever shelter smuggled ivory. There is one final flaw in the CITES decision to let China buy ivory. To win approval, China instituted a variety of safeguards, most notably that any ivory carving larger than a trinket must have a photo ID card. But criminals have turned the ID-card system into a smuggling tool. In the ID cards’ tiny photographs, carvings with similar religious and traditional motifs all look alike. A recent report by the International Fund for Animal Welfare found that ivory dealers in China are selling ivory carvings but retaining their ID cards to legitimize carvings made from smuggled ivory. The cards themselves now have value and are tradable in a secondary market. China’s ID-card system, which gives a whiff of legitimacy to an illegal icon, is worse than no system at all.\”

In short, Brian Christy\’s essay makes a plausible case that a ban on imported ivory has some possibility of reducing incentives for elephant poaching. His article doesn\’t address the question of how much tourists coming to look at elephants can provide an economic incentive to protect them. But he makes a strong prima facie case that trying to have regular large sales of legally harvested ivory is a fiasco, more likely to encourage and facilitate additional smuggling than to undercut it.

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