Conversable Economist

The BP Statistical Review of  World Energy is out for 2012. It\’s always a good reference for basic quantity and price data. Here are three graphs that caught my eye, and a few thoughts.

As a starting point, here\’s a figure showing world consumption of energy by source going back 25 years to 1986. The comment under the table reads: \”World primary energy consumption grew by 2.5% in 2011, less than half the growth rate experienced in 2010 but close to the historical average. Growth decelerated for all regions and for all fuels. Oil remains the world’s leading fuel, accounting for 33.1% of global energy consumption, but this figure is the lowest share on record. Coal’s market share of 30.3% was the highest since 1969.\”

The sources of energy on the figure from bottom to top are green for oil, red for natural gas, light orange for nuclear, blue for hydroelectricity, dark orange for renewables, and gray for coal. It\’s true that the \”renewables\” slice has grown over time, from nearly imperceptible to actually visible. But it\’s useful to bear in mind that despite all the publicity about solar, wind, biofuels, and other renewable resources, they remain tiny compared with the other energy sources–especially the big three of oil, natural gas and coal. Even if public policies less favorable to fossil fuels were enacted worldwide, like a meaningful carbon tax, and even if technological progress in renewables continues to ramp up at a rapid pace, realistically speaking the big three fossil fuels will dominate world energy production for the next few decades.

The share of oil in world energy consumption is the lowest on record, BP reports. Part of the reason is the price. Here\’s a figure showing the long-term price of oil going back 150 years to 1861. The dark green line shows oil prices in nominal dollars; the light green line shows oil prices in real inflation-adjusted dollars. It\’s striking that after the Pennsylvania oil boom of the 1860s, real oil prices dropped to historically low levels and pretty much stayed there from 1880 up to the early 1970s–nearly a century of relatively cheap oil. Since then, crude oil prices have been seen two enormous spikes: one in the 1970s and one in the last few years. Both spikes took real prices of crude oil roughly back to where they were in 1860, before the era of cheap oil began. 

Oil is produced, shipped and sold in a global market. Natural gas is tougher to ship all around the world, unless or until there is a very large investment in the pipelines and ships that could make it possible. As a result, natural gas prices are falling in the U.S in the last few years (red line on the graph) while rising in places like Germany, the UK, and Japan.

 Of course, the fall in U.S. natural gas prices is largely due to the rise in unconventional natural gas production. I posted on June 7, 2012, about \”Unconventional Natural Gas and Environmental Issues.\” My own grand compromise proposal for U.S. energy policy is the \”Drill Baby Carbon Tax\” — basically push ahead with domestic production of fossil fuels, with environmental safeguards in place, but at the same time impose a carbon or pollutant tax to encourage the transition to increased energy conservation and to less-polluting sources of energy. 

Back in the late 1970s and early 1980s, when I was first getting my feet wet in the arguments over health care finance, it was common to point out that national health care spending had risen from 5.5.-6.0% of GDP in the early 1960s to 9.2% of  GDP by 1980. Surely, we argued, such an increase couldn\’t continue. By 1993, early in the Clinton administration, when proposals for reforming health care finance were in the air, health care spending had reached an extraordinarily high 13.8% of GDP. Surely it was close to topping out?!?

But by 2009, when the Obama administration\’s health care reform package was announced, national health care spending had reached an unbelievably high 17.8% of GDP.  After several decades of watching U.S. health care spending climb higher than I would have believed plausible, I suppose I should be inured to the trend. But I still found my eyes bulging at the most recent official projections that health care spending will hit 19.6% of GDP by 2021. The estimates are from a team of actuaries from the Centers for Medicare and Medicaid Services, led by senior economist Sean P. Keehan, and they appear in \”National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands And Economic Growth Accelerates\” in the July 2012 issue of Health Affairs.  


 The actuaries project relatively slow growth in health care spending through 2013, due to the \” sustained effects of the recent recession and modest recovery on projected growth in disposable personal income, insurance coverage,and unemployment rates …\” But as the economy recovers, demand for health insurance and health care will pick up again. Also, \”[b]eginning in 2014, major coverage expansions from the Affordable Care Act will take effect. These expansions are expected to increase the number of people with health insurance; the demand for health care (particularly prescription drugs and physician care); and the share of total health spending sponsored by federal, state, and local governments.\” Here are a few highlights from the much more detailed and lengthy tables. First, here is total health care spending, per capita health care spending, and health care spending as a share of GDP projected for 2021.

And here are a few bits from a more detailed table in which total health care spending is divided up into who pays the bills: private business (through private health insurance), households (through private health insurance premiums and out-of-pocket spending) and government (including federal, state and local government, both government programs that provide health insurance to citizens as well as health insurance for government employees). The government share of health care spending was 46% in 2011, and is projected to be 49.6% of health care spending in 2021. 

Mark Lino of the U.S. Department of Agriculture has authored this year\’s version of Expenditures on Children by Families, 2011, a report going back to 1960. This year\’s version uses data from the Consumer Expenditure Survey of 2005-06 on what people buy, and then the prices adjusted to their 2011 levels. My wife and I have three little bundles of joy–actually, they are rapidly metamorphosing into lanky adolescent bundles of joy–so this report always catches my eye. The headline finding, I suppose, is that average lifetime expenditures by a husband-wife family on a child were $234,900 in 2011.

Here is annual spending per child by household income level and by age of the child–more specifically, for the younger child in a family with two parent and two children. Spending per child for each age group is more twice as high in the higher as opposed to the lower income group.

The primary expense is housing, but health care is also important. Over time, the actual cost of feeding and clothing children has become less important, while the out-of-pocket costs of child care and education have become more important.

The costs of raising a child are rising over time, but the total size of the increase may be less important than the specific drivers behind the rise. Here\’s Lino on the cost differences from 1960 to 2011 in raising a child (references to figures omitted):

\”In 1960, average expenditures on a child in a middle-income, husband-wife family amounted to $25,229, or $191,723 in 2011 dollars. By 2011, these estimated expenditures climbed 23 percent in real terms to $234,900 … Housing was the largest expense on a child in both time periods and increased in real terms over this time. Food was also one of the largest expenses in both time periods, but decreased in real terms. Changes in agriculture over the past 50 years have resulted in family food budgets being a lower percentage of household income. Transportation expenses on a child increased slightly in real terms from 1960 to 2011.\”

\”Clothing and miscellaneous expenses on a child decreased as a percentage of total child-rearing expenses and in real terms from 1960 to 2011. Reduced real expenses on children’s clothing is somewhat of a surprise given the popularity of many designer clothing items today; however, it is likely that technological changes and globalization have made clothing less expensive in real terms. …\”

\”Health care expenses on a child doubled as a percentage of total child-rearing costs, as well as increasing in real terms, from 1960 to 2011. …  Perhaps the most striking change in child-rearing expenses over time relates to child care and education expenses. It should be noted that in 1960, child care/education expenses included families with and without the expense. Even so, these expenses grew from 2 percent of total child-rearing expenditures in 1960 (for families with and without the expense) to 18 percent (for families with the expense) in 2011. Much of this growth is likely related to child care. In 1960, child care costs were negligible, mainly consisting of in-the-home babysitting. Since then, the labor force participation of women has greatly increased, leading to the need for more child care. Child-rearing expense estimates were not provided for single-parent families in 1960, likely because of the small percentage of children residing in such households at the time.\”

When I contemplate the costs of child-raising, I sometimes remember a bit of good cheer I once heard from a financial planner: Those who have children often feel much better about their standard of living in retirement. Those without children experience retirement as a time when their income has diminished, but their desired expenditures are the same or higher. But for those of us with children, retirement will be a time when our income has diminished but our expenditures–when we are no longer supporting children–will also be much lower. Just one more blessing of parenthood!

Catherine Herfeld has an interview with Gary Becker in the Spring 2012 issue of the Erasmus Journal for Philosophy and Economics. It\’s called \”The potentials and limitations of rational choice theory: an interview with Gary Becker.\” I found it in a post from Peter Klein at the \”Organization and Markets\” blog. Herfeld tries to push Becker on the limitations of rational choice theory and whether economists should be considering alternatives like behavioral economics, and Becker pushed back. Here are a few excerpts:

Becker on behavioral economics and the financial crisis

\”But did the behavioral economists predict the crisis any better? When taking a look at the literature, one does not find better results. … In terms of understanding the crisis, I do not think that more realistic behavioral assumptions would solve the problem. …  In fact, I do not think that behavioral economics is a revolution. However, it has added some insights into human behavior and those insights, to the extent that they are verifiable, will be absorbed into the rational choice model. They will not lead to a radical change of the model. The real issues are how important are those insights and where do they apply?\”

\”So, for example, the explanation that consumers were somehow misled in the credit market, and that this in turn contributed to the financial crisis: I think there is very little empirical support for that. A lot of consumers were making pretty rational decisions, even those who were taking out mortgages with low interest rates and low down payments. Maybe they were going to default. But they did not default on their own capital. They defaulted on the lender’s capital. So I see very little evidence from this that consumers are not rational, in the sense that the rational choice model cannot explain most of what they did.\”

Becker on the use of mathematics in economics

\”There is a lot of critique against mathematics in economics, from non-economists, from Austrian economists and from other groups, and I think it is misplaced. Mathematics can be a very useful servant; when it becomes the master, we are not in a good situation. However, I do not think it has become a master in economics. I think we made mistakes in understanding how economies move forward, even in understanding the pricing of derivatives. But one can make these mistakes, and plenty of mistakes have been made, without using any mathematics. Sociologists make a lot of mistakes without using mathematics. So I do not think that the problem is the use of mathematics per se. … If we did it all verbally, would that improve our science? Economics was a verbal science until the 1940s and I would say we are now doing much better than the economists back then.\”

Becker on \”takes a theory to beat a theory\”

\”If you want to abandon rational choice theory altogether, you have to substitute it with a new framework, and I do not see any new framework available at the moment—neither in the behavioral economics literature nor anywhere else—that has comparable explanatory and predictive power. That is the test. It is an old saying that you need a theory to beat a theory. That does not mean that you cannot extend the existing theory or modify it—you can and you should. As we learn more, we will modify rational choice theory. Maybe fifty years from now it will not be like rational choice theory anymore, because by then it will have been modified and changed in so many ways. That is how things evolve.\”

Becker on  how economics looks at aggregates and market relations, not at particular individuals

\”Economists can make use of individual data panels and other data based on observations about the individual. However, what we are interested in are aggregates and market relations. For example, if the political aim is to subsidize education, economists do not care about how you respond or I respond in particular. Maybe there are differences in how Germans respond or Americans respond, or how people who study at the University of Chicago respond in comparison to how students from Columbia University respond, and I guess that we would care about that. But not about how the individual responds. In my opinion, this is a fundamental difference between psychology and economics.\”

The number of people with job market certificates as their highest level of education has risen from 2% in 1984 to 12% by 2009. The number of certificates awarded has risen eight-fold in the last 30 years. What\’s going on here? Anthony P. Carnevale, Stephen J. Rose, Andrew R. Hanson tell the story and discuss the evidence in \”Certificates: Gateway To Gainful Employment and College Degrees,\” a June 2012 report from the Georgetown University Center on Labor and the Workforce.

Defining certificates

\”Certificates are often confused with industry-based certifications, like a Microsoft or Cisco certification, for example. The essential difference between a certificate and an industry-based certification is that the certificates are earned through seat time in a classroom and industry-based certifications are awarded based on performance on a test, irrespective of where the learning occurs. Certificates more closely resemble degrees: They are awarded mainly by public, two-year schools or private, for-profit, non-degree granting business, vocational, technical, and trade schools. Certificates are typically classified by length of program: the amount of time a program is designed to be completed in, typically for students who are enrolled on a full-time basis. Short-term certificates take less than a year; medium-term certificates take between one and two years to complete; long-term certificates take between two and four years. Short-term certificates are most common, accounting for 54 percent in the most recently available data. Medium-term certificates account for 41 percent of certificates, while the remaining 5 percent are long-term certificates.\”

What fields do certificates cover?
Some of the most common areas for certification are health care, business and office management, computer and information services, auto mechanics, construction, metalworking, and electronics. As the table below shows, many of these certificate fields are dominated by either men or women.

Certificate holders tend to come from lower-income households and lower education levels, and to get their certificate at a young age.

About 44% of certificate-holders earned their certificate before the age of 22; 66% earned it before age 29. But this does leave one-third who earned the certificate in their 30s and 40s and older, often as a way of brushing up their job market credentials.Certificate holders tend to come from households with lower income levels, although the gap isn\’t as large as I might have guessed. For example, for those from a three-person household with less than $34,000 in income, about 18% have a certificate; for those from households with more than $102,000 in income, 10% have a certificate. About 34% of certificate-holders have a college degree. 40% have only a high school degree–or didn\’t finish a high school degree.

Tennesssee is a leading example of a state with a focus on certificate programs.

\”TTC is known for its high completion rates and high placement rates in high skill, high wage jobs. Over 70 percent of students complete their program of study, compared to just 13 percent at the state’s community colleges. Graduates are placed in field at an 83 percent rate and 95 percent of students pass certification exams on the first attempt.\”

\”What stands out about TTC are its unique program structure, learning model, and support services. Students have one or two instructors over the course of their program and have an average of six hours of face time per day with those instructors. Students’ advancement through the program is based on mastery of skills rather than completion of individual course requirements. Students’ choices are significantly constrained; their only decisions are their program of study, whether they attend on a full- or part-time basis, and whether they attend during the day or evening.\”

\”Remedial coursework, which often bogs down community college students, is replaced by a Technology Foundations course that all students are required to take. Students’ learning is largely self-paced. TTC buildings are designed with a focus on hands-on learning, with few traditional classrooms and more “lab” space. Employers of TTC graduates report that the quality of their work is similar to others with two to three years of work experience. In addition, TTC’s faculty, staff, and administration are all part of the support services offered to students. TTC reports the support system is critical to the success of students from low-income communities.\”

Certificates seem to boost earnings for those with lower skill levels, but there are complexities.

The report notes: \”The median worker with a high school diploma earns slightly more than $29,000, while certificate holders earn slightly less than $35,000, meaning that the certificate premium over high school is 20 percent.\” This comparison includes only those for whom a certificate is their highest degree.

One difficulty with all such comparisons of course, is that those who get certificates may have more persistence or drive than those with similar education who don\’t. It may not be the certificate per se that helps them earn more money, but rather their extra persistence and drive. On the other side, the reports from Tennessee that those with certificates are similar to those with 2-3 years work experience suggests that the certificates are offering a real boost in skill levels, and thus helping some workers open a door to the labor market that they might not otherwise be able to achieve.

Another difficulty is that the amount by which a certificate improves earnings varies with many factors.  Certificates in health care, cosmetology, and food service often don\’t seem to increase pay by much. Other certificates like \”police and protective services, computer and information services, agriculture, and business and office management offer large earnings premiums.\” Certificates have a bigger effect in some states than in others–perhaps reflecting differences in what is needed to get a certificate in different states, or in the average pay levels in different states.

Yet another concern is that any boost in pay from such certificates needs to be weighed against the cost, which can vary a lot. \”The costs of attending public two-year schools are much less than private schools: less than $7,000 annually at public schools, $15,000 annually at private nonprofits, and almost $20,000 annually at private for-profits.\”

Finally, certificates may offer a earnings boost for those with lower levels of skill, but not for those with higher levels of skill. \”Certificates are a high achievement for low-skilled adults, but a low achievement for high-skilled adults.\”

Certificates may have a role to play in helping the transition from school to jobs, especially for those with lower skill levels.

One theme that I seem to touch on every few months is that it is highly unlikely that the U.S. is going to dramatically expand the number of people attending college–at least college in its current form, which is quite costly. We need to be thinking about other ways to smooth the transition from high school to work for those who, whether by skills or interests or inclinations, aren\’t going to flourish in a college setting. Certificates can play a role here. Here\’s some of the conclusion from Carnevale, Rose, and Hanson\”

\”In an American economy where the advancement of technology and globalization means that a
high school diploma alone is no longer able to provide family-sustaining earnings to many, certificates represent one piece of a multi-pronged solution on the road to a workforce with 60 percent postsecondary attainment. Though certificates currently aren’t counted in many measures
of postsecondary attainment, often they provide the outcomes that degree-seeking students
are looking for: gainful employment. Certificates can also serve as the first rung on the ladder
to a college degree or as training for workers with degrees who are engaged in the process of
lifelong learning and career advancement. The rapid growth of certificates over the past 30 years
is a promising signal that students and institutions are recognizing the value of certificates at an
increasing rate. The main lesson from the available data on certificates is this: They are diverse. While it is important to look at the value of certificates in the aggregate, their diversity in purpose and value means that transparency is absolutely essential. By and large, certificates work, but they do
not work for everyone.\”

I posted on January 16, 2012, about \”Certificate Programs for Labor Market Skills.\” For some other alternatives to the standard college degree, I posted last October 18 on \”Apprenticeships for the U.S. Economy\” and last November 3 on \”Recognizing Non-formal and Informal Learning.\”

One of the hot new trends in economics over the last decade or two is carrying out randomized controlled trials, and one of the most talked-about examples of this approach is now officially published. The study looks at whether providing teachers in low-income countries with a digital camera and then requiring them to take a time-stamped picture at the beginning and end of the school day–and then linking this to financial incentives–can reduce teacher absenteeism. The study is called \”Incentives Work: Getting Teachers to Come to School,\” by Esther Duflo, Rema Hanna, and Stephen P. Ryan, and it appears in the June issue of the American Economic Review. The article isn\’t freely available on-line, but many academics will have access through their libraries.

Teacher absenteeism at rates of 20 and 30% and more have long been recognized as a severe problem in many low- and middle-income countries. For example, in a Winter 2006 article in my own Journal of Economic Perspectives, Nazmul Chaudhury, Jeffrey Hammer, Michael Kremer, Karthik Muralidharan and F. Halsey Rogers wrote \”Missing in Action: Teacher and Health Worker Absence in Developing Countries.\”

Here\’s the Duflo, Hanna, and Ryan description of this randomized controlled trial run under the auspices of a nongovernment organization called Seva Mandir in India (footnotes and citations omitted):

\”Seva Mandir runs about 150 NFEs [nonformal education centers] in the tribal villages of Udaipur, Rajasthan. Udaipur is a sparsely populated, hard-to-access region. Thus, it is difficult to regularly monitor the NFEs, and absenteeism is high. A 1995 study found that the absence rate was 40 percent, while our first observation in the schools included in our study (in August 2003, before the program was announced) found that the rate was about 35 percent.  Before 2003, Seva Mandir relied on occasional visits to the schools, as well as reports by the local village workers, to monitor teacher attendence. They then use  bimonthly teacher meetings to talk to delinquent teachers. Given the high absence rate, they were aware that the level of supervision was insufficient.
 
\”Therefore, starting in September 2003, Seva Mandir implemented an external monitoring and incentive program on an experimental basis. They chose 120 schools to participate, with 60 randomly selected schools serving as the treatment group and the remaining 60 as the comparison group. In the treatment schools, Seva Mandir gave each teacher a camera, along with instructions for one of the students to take a photograph of the teacher and the other students at the start and end of each school day. The cameras had a tamper-proof date and time function that made it possible to precisely track each school’s openings and closings. Rolls were collected every two months at regularly scheduled teacher meetings, and payments were distributed every two months. If a camera malfunctioned, teachers were instructed to call the program hotline within 48 hours. Someone was then dispatched to replace the camera, and teachers were credited for the missing day.
 
At the start of the program, Seva Mandir’s monthly base salary for teachers was Rs. 1,000 ($23 at the real exchange rate, or about $160 at purchasing power parity) for at least 20 days of work per month. In the treatment schools, teachers received a Rs. 50 bonus ($1.15) for each additional day they attended in excess of the 20 days (where holidays and training days, or about 3 days per month on average, are automatically credited as working days), and they received a Rs. 50 fine for each day of the 20 days they skipped work. Seva Mandir defined a “valid” day as one in which the opening and closing photographs were separated by at least five hours and at least eight children were present in both photos. Due to ethical and political concerns, Seva Mandir capped the fine at Rs. 500. Thus, salaries ranged from Rs. 500 to Rs. 1,300 (or $11.50 to $29.50).\”

What was the result? 

\”The program resulted in an immediate and long-lasting improvement in teacher attendance rates in treatment schools, as measured through monthly unannounced visits in both treatment and comparison schools. Over the 30 months in which attendance was tracked, teachers at program schools had an absence rate of 21 percent, compared to 44 percent at baseline and the 42 percent in the comparison schools.\”

Of course, the Duflo, Hanna and Ryan analysis goes much deeper than this graph. The research paper is technical, and it slices and dices the data with care and expertise to consider alternative explanations, alternative payment schedules, and more. But one basic message is that the combination of monitoring with the digital cameras and providing financial incentives did seem to improve attendance. Another message is that when teachers were in school more, students had more days of schooling, and their test results showed significant gains in learning. \”Two and a half years into the program, children from the treatment schools were also 10 percentage points (or 62 percent) more likely to transfer to formal primary schools, which requires passing a competency test.\”

Even teachers seemed pleased by the program, although they of course griped about some of the rule that the photos be taken five hours apart on a given day.

\”Overall, teachers did not complain about the principle of the program, although many teachers had some specific complaints about the inflexibility of the rules. For example, many did not like the fact that a day was not valid even if a teacher was present 4 hours and 55 minutes (the normal school day is 6 hours, but slack of 1 hour was given). On the other hand, many felt empowered as the onus of performing better was actually in their hands: “Our payments have increased, so my interest in running the center has gone up.” Others described how the payment system had made other community members less likely to burden them with other responsibilities once they knew that a teacher would be penalized if he did not attend school. This suggests that the program may actually have stronger effects in the long run, as it signals a change in the norms of what teachers are expected to do.\”

This study and this topic are heartbreaking in so many ways. The extremely high levels of teacher absenteeism are grim. The notion that a \”successful\” program for reducing teacher absenteeism gets the rate down from two out of every five days to one out of ever five days is grim. The thought of impoverished children faithfully showing up each day in the face of this absenteeism (students attendance doesn\’t seem higher when teachers show up more often) is grim. Just to help keep the students in mind, here\’s one of the actual photos from the project, taken from an article by Duflo and Abhijit Banerjit in the Winter 2006 issue of my own Journal of Economic Perspectives called \”Addressing Absence.\”

Perhaps most grim of all is that the entire Seva Mandir study was carried out in \”nonformal education centers,\” rather than schools, and using \”para-teachers,\” rather than regular teachers. The reason is that in India, as in many other low- and middle-income countries, teachers are a highly organized labor group that politicians don\’t dare to cross, and so proposals to increase the dismally low levels of teacher attendance don\’t even happen in the regular school sector. But there is something optimistic about the use of inexpensive digital technology as a way of addressing the problem–and perhaps even of eventually altering the social norms about what kind of teacher attendance should be expected.

The Federal Trade Commission has released the Hart-Scott-Rodino Annual Report 2011.  Each year, it summarizes the number of  mergers and acquisitions, their size, and some trends in antitrust enforcement. At least in my reading, the data in the report hints that a new wave of mergers may be on the way.

The Hart-Scott-Rodino legislation requires that when businesses plan a merger or an acquisition above a certain price–typically $66 million in 2011–it must first be reported to the Federal Trade Commission. The FTC can let the merger proceed, or request more information. Based on that additional information, the FTC can then let the merger proceed, block it, or approve it subject to various conditions (for example, requiring that the merged entity divest itself of certain parts of the business to preserve competition in those areas).

Here are the total mergers reported for the last 10 years. You can see the wave of mergers and acquisitions that peaked in 2007–and what appears as if it could be the start of a new merger wave in the last couple of years.

The total value of merger transactions reported under Hart-Scott-Rodino isn\’t completely comparable across years, because the threshold at which transactions need to be reported has risen over time. But for what it\’s worth, here\’s the pattern of the total dollar value of reported transactions since the late 1990s.

\”The total dollar value of reported transactions rose dramatically from fiscal years 1996 to 2000, from about $677.4 billion to about $3 trillion. After the statutory thresholds were raised, the dollar value declined to about $565.4 billion in fiscal year 2002, and $406.8 billion in fiscal year 2003. This was followed by an increase in the dollar value of reported transactions over the next four years: about $630 billion in fiscal year 2004, $1.1 trillion in fiscal year 2005, $1.3 trillion in fiscal year 2006, and almost $2 trillion in 2007. The total dollar value of reported transactions declined to just over $1.3 trillion in fiscal year 2008, and to $533 billion in fiscal year 2009, increased to $780 billion in fiscal year 2010, and $979 billion in fiscal year 2011.\”

And here\’s a table showing the size distribution of the reported mergers in 2011. About 28% of the transactions exceeded $500 million; 11% exceeded $1 trillion in size.

The FTC allows most mergers to proceed, which makes sense in a competitive market economy. As a general rule, those who run businesses are in a better position than government economists to plan strategies for their firms. In 2011, about 4.1% of the mergers reported to the FTC has a request for additional information. At the end of the day, the FTC actually challenged 20 mergers in 2011. Thirteen of these challenges went to court; 11 were settled by consent decree. Perhaps the best-known of these cases in 2011 was the FTC decision to block AT&T’s proposed acquisition of T-Mobile. With the other seven, two of the deals were abandoned, and the other five led to restructuring of the deal or changes in conduct.

The Federal Reserve has published results from the most recent Survey of Consumer Finance, the triennial survey that is the canonical source for looking at the wealth of households. The results are in an article in the June 2012 issue of the Federal Reserve Bulletin called \”Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,\” by a team of authors led by Jesse Bricker, Arthur B. Kennickell, Kevin B.Moore, and John Sabelhaus.

The headline finding from the report is that the median household wealth level fell from $126,000 in 2007 to $77,000 in 2010. Mean wealth is of course far higher than median wealth. It fell from 584,000 in 2007 to $499,000 in 2007. During a three-year period when housing prices and the stock market declined, a fall in wealth is expected. I\’m still trying to digest the data, but here, I\’ll focus on three patterns in the evolution of wealth that just happened to catch my eye: changes across the distribution of wealth, across regions, and across age groups. Here\’s a table with the mean and median household values for the 2001, 2004, 2007, and 2010 surveys.

Changes in the Distribution of Wealth

Those in the 90-100th percentiles of the wealth distribution have median wealth of $1,864,000, and mean wealth of $3,716,000 in 2010. That\’s also the part of the wealth distribution that had the smallest percentage decline in the median and the mean from 2007 to 2010. 

\”Median net worth fell for all percentile groups of the distribution of net worth, with the largest decreases in proportional terms being for the groups below the 75th percentile of the net worth distribution. From 2007 to 2010, the median for the lowest quartile of net worth fell from $1,300 to zero—a 100 percent decline; at the same time, the mean for the group fell from negative $2,300 to negative $12,800. For the second and third quartiles, the median and mean declines in net worth were smaller but still sizable; for example, median net worth for the second quartile fell 43.3 percent. Median and mean net worth did not fall quite as much for the higher net worth groups. For the 75th-to-90th percentile group, the median fell 19.7 percent while the mean fell 14.4 percent. For the wealthiest decile, the 11.0 percent decline in the mean exceeded the 6.4 percent decline in the median for that group; as was discussed earlier in the case of family income, this pattern of the changes in
the median and mean suggests that there was some compression of higher values in the wealth distribution.\”

Changes in Wealth by Region

The drop in housing prices hit especially hard in the western states, and the decline in median wealth was by far the highest in that region. Here\’s the Fed report: 

\”Between 2007 and 2010, median net worth fell dramatically for families living in all regions of the country, but especially for those living in the West—a 55.3 percent decline. This pattern reflects the effect of the collapse of housing values in several parts of the West region. Median wealth in every other region fell 28.2 percent or more. As with the overall population and most other demographic groups discussed earlier, the decline in mean net worth within every region was smaller than the drop in the median. In the South and Midwest regions, the percentage decline in the median was about twice as large as the percentage decline in the mean, but in percentage terms, the median for the West fell four times as much as the mean.\”

Changes in Wealth by Age

The age 35-44 group experienced the biggest falls in net worth. Oddly enough, the over-75 age group saw a modest rise in net worth from 2007 to 2010. This must mean that the over-75s were not as heavily exposed to the drop in housing prices and and the stock market. Here\’s the Fed:

\”The survey shows substantial declines in median and mean net worth by age group between 2007 and 2010, with the exception that mean net worth rose modestly (1.3 percent) for the 75-or-more age group. The 35-to-44 age group saw a 54.4 percent decline in median net worth during the most recent three-year period, and the mean for that age group fell 36.4 percent. The wealth decreases for the less-than-35 age group were also large; the median fell 25.0 percent while the mean fell 41.2 percent. The declines in median and mean net worth for middle-aged families (the 45-to-54 and 55-to-64 age groups) were also large.\”

Concentrated power is not rendered harmless by the good intentions of those who create it.

History suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.

The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.

With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.

The free man will ask neither what his country can do for him nor what he can do for his country.

The case for prohibiting drugs is exactly as strong and as weak as the case for prohibiting people from overeating.

If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.

Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.

I found myself checking some facts about the relative size of U.S. government revenues, expenditures, and debt in the OECD publication \”Government at a Glance 2011.\” Just to be clear, this data sums up all levels of government together, so for the United States, it includes federal, state, and local government.

Revenues

As a share of GDP, U.S. government revenues for all levels of government are well the OECD average in 2009, at a shade over 30% of GDP. Of course, this was a year when the Great Recession hit the U.S economy with particular force and held down incomes and tax payments quite substantially. In this group, the northern European economies like Norway, Denmark, Sweden and Finland lead the way by collecting more than 50% of GDP as government revenue. However, because the U.S. economy is richer on a per capita basis, even though U.S. government revenues as a share of GDP are low, government revenues in absolute dollars per personare actually just a bit above the OECD average–and similar to government revenues per person in Canada and the United Kingdom.

 
Expenditures

When it comes to spending as a share of GDP, the U.S. government at all levels ranks below the average for the OECD comparison group, but in spending, the U.S. isn\’t as much of an outlier as it is in expenditures. For example, expenditures as a share of GDP in the U.S. are quite similar to Canada, and above Japan and Australia. Again, because the U.S. economy is richer on a per capita basis, U.S. government expenditures on a per person basis are higher than the average for the group: for example, higher than expenditures per person in France, Germany, Italy and the United Kingdom.

How are government expenditures in the U.S. allocated differently than in the rest of the OECD comparison group? Not surprisingly, the table shows that 11.9% of all U.S. government spending goes to defense, compared with 3.8% in the other countries. More surprising, to me at least, is that the share of U.S. government spending going to health is substantially higher than the average for the comparison group: 20.5% in the U.S. compared with an average of 14.7%. Health care costs so much in the U.S. that our government ends up spending a larger share of its resources on health than the other countries, even though most of those countries have national health insurance systems. U.S. government as a whole also puts a greater share of its expenditures into education compared with the comparison group: 16.6% to 13.1%. The major area where U.S. government at all levels spends much less is the category of \”social protection,\” which is non-health and non-housing spending to aimed primarily at those with below-median incomes. U.S. government puts 19.4% of its spending into this category, compared with 33.5% for the comparison group.

Debt 

The calculation here is \”gross\” government debt, not \”net.\” The difference is that many governments owe some debt to themselves; in the U.S., for example, the $2.7 trillion or so in the Social Security Trust Fund is invested in Treasury bonds, which means that one part of the government owes the money to another part of the government. In a U.S. context, it is often common to look at \”debt held by the public,\” and thus to leave out the case where government owes a debt to itself. But for purposes of international comparisons, using gross debt is common.

Japan far and away leads the pack on gross debt, at a debt/GDP ratio of about 200%. But Japan is also a special case with an extremely high domestic savings rate, and limited possibilities for Japan\’s consumers to invest those savings outside the country. Japan has financed its own public debt, without a need for an inflow of foreign capital. But not far behind are some of the problem children of the euro area: Greece, Italy, Portugal and Ireland. Spain, despite the recent travails of its banking system, was actually a bit below the average for public debt/GDP ratio in 2010.

The U.S. position in 2010 is uncomfortably high: a bit behind some of Europe\’s problem cases like Greece and Italy and Ireland, but with a higher debt/GDP ratio than Germany, Canada, or the UK. It\’s also interesting to me that the high-tax, high-spending economies of northern Europe–Sweden, Denmark, Norway, and Finland–are all below the average on debt/GDP ratio. Their governments do spend more, but in this comparison group, they do a reasonable job of collecting the revenues to pay for it.