Conversable Economist

Charles Dickens wrote what has become one of the iconic stories of Christmas day and Christmas spirit in A Christmas Carol. But of course, the experiences of Ebenezer Scrooge are a story, not a piece of reporting. Here\’s a piece by Dickens written for the weekly journal Household Words that he edited from 1850 to 1859. It\’s from the issue of January 26, 1856, with his first-person reporting on \”A Nightly Scene in London.\” Poverty in high-income countries is no longer as ghastly as in Victorian England, but for those who take the time to see it in our own time and place, surely it is ghastly enough. Thus, I repeat this post each year on Christmas day.

Economists might also wince just a bit at how Dickens describes the reaction of some economists to poverty, those who Dickens calls \”the unreasonable disciples of a reasonable school.\” Dickens writes: \”I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity …\”  Here\’s a fuller passage from Dickens:

A NIGHTLY SCENE IN LONDON

On the fifth of last November, I, the Conductor of this journal, accompanied by a friend well-known to the public, accidentally strayed into Whitechapel. It was a miserable evening; very dark, very muddy, and raining hard.

There are many woful sights in that part of London, and it has been well-known to me in most of its aspects for many years. We had forgotten the mud and rain in slowly walking along and looking about us, when we found ourselves, at eight o\’clock, before the Workhouse.

Crouched against the wall of the Workhouse, in the dark street, on the muddy pavement-stones, with the rain raining upon them, were five bundles of rags. They were motionless, and had no resemblance to the human form. Five great beehives, covered with rags— five dead bodies taken out of graves, tied neck and heels, and covered with rags— would have looked like those five bundles upon which the rain rained down in the public street.

\”What is this! \” said my companion. \”What is this!\”

\”Some miserable people shut out of the Casual Ward, I think,\” said I.

We had stopped before the five ragged mounds, and were quite rooted to the spot by their horrible appearance. Five awful Sphinxes by the wayside, crying to every passer-by, \” Stop and guess! What is to be the end of a state of society that leaves us here!\”

As we stood looking at them, a decent working-man, having the appearance of a stone-mason, touched me on the shoulder.

\”This is an awful sight, sir,\” said he, \”in a Christian country!\”

\”GOD knows it is, my friend,\” said I.

\”I have often seen it much worse than this, as I have been going home from my work. I have counted fifteen, twenty, five-and-twenty, many a time. It\’s a shocking thing to see.\”

\”A shocking thing, indeed,\” said I and my companion together. The man lingered near
us a little while, wished us good-night, and went on.

We should have felt it brutal in us who had a better chance of being heard than the working-man, to leave the thing as it was, so we knocked at the Workhouse Gate. I undertook to be spokesman. The moment the gate was opened by an old pauper, I went in, followed close by my companion. I lost no
time in passing the old porter, for I saw in his watery eye a disposition to shut us out.

\”Be so good as to give that card to the master of the Workhouse, and say I shall be glad to speak to him for a moment.\”

We were in a kind of covered gateway, and the old porter went across it with the card. Before he had got to a door on our left, a man in a cloak and hat bounced out of it very sharply, as if he were in the nightly habit of being bullied and of returning the compliment.

\”Now, gentlemen,\” said he in a loud voice, \”what do you want here?\”

\”First,\” said I, \” will you do me the favor to look at that card in your hand. Perhaps you may know my name.\”

\”Yes,\” says he, looking at it. \” I know this name.\”

\”Good. I only want to ask you a plain question in a civil manner, and there is not the least occasion for either of us to be angry. It would be very foolish in me to blame you, and I don\’t blame you. I may
find fault with the system you administer, but pray understand that I know you are here to do a duty pointed out to you, and that I have no doubt you do it. Now, I hope you won\’t object to tell me what I want to know.\”

\”No,\” said he, quite mollified, and very reasonable, \” not at all. What is it?\”

\”Do you know that there are five wretched creatures outside?\”

\”I haven\’t seen them, but I dare say there are.\”

\”Do you doubt that there are?\”

\”No, not at all. There might be many more.\”

\’\’Are they men? Or women?\”

\”Women, I suppose. Very likely one or two of them were there last night, and the night before last.\”

\”There all night, do you mean?\”

\”Very likely.\”

My companion and I looked at one another, and the master of the Workhouse added quickly, \”Why, Lord bless my soul, what am I to do? What can I do ? The place is full. The place is always full—every night. I must give the preference to women with children, mustn\’t I? You wouldn\’t have me not do that?\”

\”Surely not,\” said I. \”It is a very humane principle, and quite right; and I am glad to hear of it. Don\’t forget that I don\’t blame you.\”

\”Well!\” said he. And subdued himself again. …

\”Just so. I wanted to know no more. You have answered my question civilly and readily, and I am much obliged to you. I have nothing to say against you, but quite the contrary. Good night!\”

\”Good night, gentlemen!\” And out we came again.

We went to the ragged bundle nearest to the Workhouse-door, and I touched it. No movement replying, I gently shook it. The rags began to be slowly stirred within, and by little and little a head was unshrouded. The head of a young woman of three or four and twenty, as I should judge; gaunt with want, and foul with dirt; but not naturally ugly.

\”Tell us,\” said I, stooping down. \”Why are you lying here?\”

\”Because I can\’t get into the Workhouse.\”

She spoke in a faint dull way, and had no curiosity or interest left. She looked dreamily at the black sky and the falling rain, but never looked at me or my companion.

\”Were you here last night?\”

\”Yes, All last night. And the night afore too.\”

\”Do you know any of these others?\”

\”I know her next but one. She was here last night, and she told me she come out of Essex. I don\’t know no more of her.\”

\”You were here all last night, but you have not been here all day?\”

\”No. Not all day.\”

\”Where have you been all day?\”

\”About the streets.\”

\’\’What have you had to eat?\”

\”Nothing.\”

\”Come!\” said I. \”Think a little. You are tired and have been asleep, and don\’t quite consider what you are saying to us. You have had something to eat to-day. Come! Think of it!\”

\”No I haven\’t. Nothing but such bits as I could pick up about the market. Why, look at me!\”

She bared her neck, and I covered it up again.

\”If you had a shilling to get some supper and a lodging, should you know where to get it?\”

\”Yes. I could do that.\”

\”For GOD\’S sake get it then!\”

I put the money into her hand, and she feebly rose up and went away. She never thanked me, never looked at me— melted away into the miserable night, in the strangest manner I ever saw. I have seen many strange things, but not one that has left a deeper impression on my memory than the dull impassive way in which that worn-out heap of misery took that piece of money, and was lost.

One by one I spoke to all the five. In every one, interest and curiosity were as extinct as in the first. They were all dull and languid. No one made any sort of profession or complaint; no one cared to look at me; no one thanked me. When I came to the third, I suppose she saw that my companion
and I glanced, with a new horror upon us, at the two last, who had dropped against each other in their sleep, and were lying like broken images. She said, she believed they were young sisters. These were the only words that were originated among the five.

And now let me close this terrible account with a redeeming and beautiful trait of the poorest of the poor. When we came out of the Workhouse, we had gone across the road to a public house, finding ourselves without silver, to get change for a sovereign. I held the money in my hand while I was speaking to the five apparitions. Our being so engaged, attracted the attention of many people of the very poor sort usual to that place; as we leaned over the mounds of rags, they eagerly leaned over us to see and hear; what I had in my hand, and what I said, and what I did, must have been plain to nearly all the concourse. When the last of the five had got up and faded away, the spectators opened to let us pass; and not one of them, by word, or look, or gesture, begged of us.

Many of the observant faces were quick enough to know that it would have been a relief to us to have got rid of the rest of the money with any hope of doing good with it. But, there was a feeling among them all, that their necessities were not to be placed by the side of such a spectacle; and they opened a way for us in profound silence, and let us go.

My companion wrote to me, next day, that the five ragged bundles had been upon his bed all night. I debated how to add our testimony to that of many other persons who from time to time are impelled to write to the newspapers, by having come upon some shameful and shocking sight of this description. I resolved to write in these pages an exact account of what we had seen, but to wait until after Christmas, in order that there might be no heat or haste. I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity; and I address people with a respect for the spirit of the New Testament, who do mind such things, and who think them infamous in our streets.

Once coffee was the new invention, and at different places and times, it was repeatedly banned. William Akers tells many of the stories in his 1922 book, All About Coffee.

The \”first persecution of coffee,\” as Akers calls it, happened in 1511 in Mecca, when Kair Bey was governor on behalf of the sultan of Egypt.

He appears to have been a strict disciplinarian, but lamentably ignorant of the actual conditions obtaining among his people. As he was leaving the mosque one evening after prayers, he was offended by seeing in a corner a company of coffee drinkers who were preparing to pass the night in prayer. His first thought was that they were drinking wine; and great was his astonishment when he learned what the liquor really was and how common was its use throughout the city. Further investigation convinced him that indulgence in this exhilarating drink must incline men and women to extravagances prohibited by law, and so he determined to suppress it. First he drove the coffee drinkers out of the mosque.

The next day, he called a council of officers of justice, lawyers, physicians, priests, and leading citizens, to whom he declared what he had seen the evening before at the mosque; and, \”being resolved to put a stop to the coffee-house abuses, he sought their advice upon the subject.\” The chief count in the indictment was that \”in these places men and women met and played tambourines, violins, and other musical instruments. There were also people who played chess, mankala, and other similar games, for money; and there were many other things done contrary to our sacred law …

The lawyers agreed that the coffee houses needed reforming; but as to the drink itself, inquiry should be made as to whether it was in any way harmful to mind or body; for if not, it might not be sufficient to close the places that sold it. It was suggested that the opinion of the physicians be sought.

Two brothers, Persian physicians named Hakimani, and reputed the best in Mecca, were summoned, although we are told they knew more about logic than they did about physic. One of them came into the council fully prejudiced, as he had already written a book against coffee, and filled with concern for his profession, being fearful lest the common use of the new drink would make serious inroads on the practise of medicine. His brother joined with him in assuring the assembly that the plant bunn, from which coffee was made, was \”cold and dry\” and so unwholesome. When another physician present reminded them that Bengiazlah, the ancient and respected contemporary of Avicenna, taught that it was \”hot and dry,\” they made arbitrary answer that Bengiazlah had in mind another plant of the same name, and that anyhow, it was not material; for, if the coffee drink disposed people to things forbidden by religion, the safest course for Mahommedans was to look upon it as unlawful.

The friends of coffee were covered with confusion. … The mufti of Aden, being both an officer of the court and a divine, undertook, with some heat, a defense of coffee; but he was clearly in an unpopular minority. He was rewarded with the reproaches and affronts of the religious zealots.

So the governor had his way, and coffee was solemnly condemned as thing forbidden by the law; and a presentment was drawn up, signed by a majority of those present, and dispatched post-haste by the governor to his royal master, the sultan, at Cairo. At the same time, the governor published an edict forbidding the sale of coffee in public or private. The officers of justice caused all the coffee houses in Mecca to be shut, and ordered all the coffee found there, or in the merchants\’ warehouses, to be burned.

Naturally enough, being an unpopular edict, there were many evasions, and much coffee drinking took place behind closed doors.

However, Keir Bey had failed to check with his master, the sultan of Cairo, who apparently liked coffee himself, and quickly overturned the ban.

Aker\’s describes other episodes of coffee-related persecution which follow a common pattern: coffee was making people too happy, so it must be bad for health and morals, and therefore should be banned. But the bans were then widely evaded, and soon came to an end. Here\’s one more set of stories, from the arrival of coffee in Italy in the late 16th century.

Shortly after coffee reached Rome, according to a much quoted legend, it was again threatened with religious fanaticism, which almost caused its excommunication from Christendom. It is related that certain priests appealed to Pope Clement VIII (1535–1605) to have its use forbidden among Christians, denouncing it as an invention of Satan. They claimed that the Evil One, having forbidden his followers, the infidel Moslems, the use of wine—no doubt because it was sanctified by Christ and used in the Holy Communion—had given them as a substitute this hellish black brew of his which they called coffee. For Christians to drink it was to risk falling into a trap set by Satan for their souls

It is further related that the pope, made curious, desired to inspect this Devil\’s drink, and had some brought to him. The aroma of it was so pleasant and inviting that the pope was tempted to try a cupful. After drinking it, he exclaimed, \”Why, this Satan\’s drink is so delicious that it would be a pity to let the infidels have exclusive use of it. We shall fool Satan by baptizing it, and making it a truly Christian beverage.\” …

And here\’s one more:

About the year 1660 several merchants of Marseilles, who had lived for a time in the Levant and felt they were not able to do without coffee, brought some coffee beans home with them; and later, a group of apothecaries and other merchants brought in the first commercial importation of coffee in bales from Egypt. The Lyons merchants soon followed suit, and the use of coffee became general in those parts. In 1671 certain private persons opened a coffee house in Marseilles, near the Exchange, which at once became popular with merchants and travelers. Others started up, and all were crowded. The people did not, however, drink any the less at home. \”In fine,\” says La Roque, \”the use of the beverage increased so amazingly that, as was inevitable, the physicians became alarmed, thinking it would not agree with the inhabitants of a country hot and extremely dry.\”

The argument turned mainly on the medicinal question, the Church this time having no part in the dispute. \”The lovers of coffee used the physicians very ill when they met together, and the physicians on their side threatened the coffee drinkers with all sorts of diseases.\”

Matters came to a head in 1679, when an ingenious attempt by the physicians of Marseilles to discredit coffee took the form of having a young student, about to be admitted to the College of Physicians, dispute before the magistrate in the town hall, a question proposed by two physicians of the Faculty of Aix, as to whether coffee was or was not prejudicial to the inhabitants of Marseilles.

The thesis recited that coffee had won the approval of all nations, had almost wholly put down the use of wine, although it was not to be compared even with the lees [that is, the deposits of dead yeast that fall to the bottom of a wine barrel during fermentation] of that excellent beverage; that it was a vile and worthless foreign novelty; that its claim to be a remedy against distempers was ridiculous, because it was not a bean but the fruit of a tree discovered by goats and camels; that it was hot and not cold, as alleged; that it burned up the blood, and so induced palsies, impotence, and leanness; \”from all of which we must necessarily conclude that coffee is hurtful to the greater part of the inhabitants of Marseilles.\”

Thus did the good doctors of the Faculty of Aix set forth their prejudices, and this was their final decision upon coffee. Many thought they overreached themselves in their misguided zeal. They were handled somewhat roughly in the disputation, which disclosed many false reasonings, to say nothing of blunders as to matters of fact. The world had already advanced too far to have another decision against coffee count for much, and this latest effort to stop its onward march was of even less force than the diatribes of the Mohammedan priests. The coffee houses continued to be as much frequented as before, and the people drank no less coffee in their homes. Indeed, the indictment proved a boomerang, for consumption received such an impetus that the merchants of Lyons and Marseilles, for the first time in history, began to import green coffee from the Levant by the ship-load in order to meet the increased demand.

There are enough of these episodes of coffee-related persecution to make a person wonder: is there something in human nature that, when consumption of a good seems sociable and pleasant–and if not perfectly healthy, at least as healthy as the common alternatives on offer–nonetheless wants to limit and ban the good?

I ran across a mention of the coffee persecutions in a recent article by Matt Ridley, who focuses primarily on drawing a connection to what he views as overwrought reactions to fracking, which doesn\’t strike me as the most obvious analogy. But it\’s easy enough to come up with other examples of goods consumed that have pleased people enough that there has been a need to condemn them. Consumption of meat and saturated fats. Remember when butter was thought to be less healthy than margarine, and we were being encouraged by the US government to consume lots of carbohydrates in the form of grains? Sugar. Vaping, which isn\’t good for you, but is likely to be a lot better than smoking cigarettes. The US experience with Prohibition of alcohol, and the easing of the modern prohibition on marijuana. Food products where the gene-modification technologies were not \”natural\” cross-breeding over centuries but instead \”unnatural\” science.

William McChesney Martin chaired the Federal Reserve for 19 years and during the terms of five different presidents, from April 1951 to January 1970.  He became chair of the Federal Reserve at the time of the Treasury-Fed Accord of 1951, when the modern Federal Reserve invented itself by  declaring that it was no longer going to view its job as keeping interest rates low to facilitate government borrowing–as it had during World War II–but instead was going to focus on how monetary policy affected the economy as a whole. Martin became so synonymous with monetary policy that John F. Kennedy once told an adviser that, before he became president, he could only remember the difference between fiscal and monetary policy by reminding himself that \”m\” was the first letter of both \”monetary\” and \”Martin.\” He\’s the one who publicized the phrase that the job of the Federal Reserve was like a chaperone who needs to take away the punch bowl just when the party is warming up.

Martin also had considerable skepticism about the role of academic economists. Here\’s a story about William McChesney Martin as told by Richard T. McCormack, who served in a variety of economic policy and diplomatic positions in the Nixon, Reagan, and first Bush administrations. It\’s from a 2013 book, A Conversation with Ambassador Richard T. McCormack, which in turn is a transcription of an interview by Charles Stuart Kennedy and McCormack in 2002. McCormack is describing how he was given the job in 1970 of coming up with candidates to head a proposed Council on International Economic Policy, so we went to talk to Martin. It turned out that it was Martin\’s last day on the job after 19 years; indeed, it may have been Martin\’s final appointment on his final day. Here\’s how McCormack quotes Martin:

If you want this new office to be relevant, do not appoint an academic economist, and particularly avoid econometricians. …

We have 50 econometricians working for us at the Fed. They are all located in the basement of this building, and there is a reason why they are there. Their main value to me is to pose questions that I then pass along to my own network of contacts throughout the American economy. The danger with these econometricians is that they don\’t know their own limitations, and they have a far greater sense of confidence in their analyses than I have found to be warranted. Such people are not dangerous to me because I understand their limitations. They are, however, dangerous to people like you and the politicians because you don\’t know their limitations, and you are impressed and confused by the elaborate models and mathematics. The flaws in these analyses are almost always imbedded in he assumptions on which they are based. And that is where broader wisdom is required, a wisdom that these mathematicians generally do not have. You always want such technical experts on tap in positions like this, but never on top. 

Let me give you an example of what I mean. When I have a monetary policy decision to make, I get on the telephone and spend four or five days calling informed people around the country to seek their views of supply, demand, wage, and inflation trends. I speak with labor leaders, grain dealers, manufacturers, individuals I respect in the regional Federal Reserve Banks, and others who have their fingers on the pulse of the U.S. economy. Then I go up to New York City and spend two days visiting bankers and corporate leader and others I trust to seek their advice. The eventual results of these discussions form the basis for my monetary policy decisions.

Homage: I ran across this McCormack story about Martin in the 2016 book Signals, by Pippa Malmgren (pp. 80-82).

The front face of antibiotic resistance is a problem for medicine. But behind the scenes, the problem of antibiotic resistance becomes a problem of incentives and therefore of economics.

For example, health care providers for a long time had an incentive to under-invest in preventing infections, because after all, it was easy and cheap to cure infections with antibiotics.

In addition, each health care provider individually has an incentive to focus only on the patient sitting in front of them, and whether \”just-in-case\” or precautionary use of antibiotics might help that patient, while not taking into account the consequence that widespread use of antibiotics will also lead to a rise in infection that are resistant to antibiotics.

Further, the incentives for researchers to seek out and commercialize new antibiotics (or alternative anti-infection treatments) is shaped by incentives for innovation embodied in government support of research and development spending, regulations affecting how soon a new drug can be commercialized, protections for intellectual property, and whether government health care finance would (at least in some cases) be willing to pay a higher price for newly invented anti-infection drugs.

These issues all arise in Antibiotic Resistance Threats in the United States 2019, published by the Centers for Disease Control (November 2019). A substantial portion of the report is given over to estimating the size of the problem, and thus why the CDC concludes that the \”post-antibiotic era\” is \”already here.\”

More than 2.8 million antibiotic-resistant infections occur in the United States each year, and more than 35,000 people die as a result. The AR Threats Report also includes an estimate of the burden of Clostridioides difficile (C. difficile) infections, because C. difficile is caused by the same factors that drive antibiotic resistance—antibiotic use and the spread of germs. In 2017, nearly 223,900 people in the United States required hospital care for C. difficile and at least 12,800 people died.

To make the message just a little more grim, this issue is a global one. Globalization means that infections with antibiotic resistance can evolve anywhere, and then travel anywhere via people, animals, or even just in the environment.

It\’s also important to remember that antibiotics themselves can cause adverse drug reactions. (Some of my family members are allergic to just about any drug that ends in -cillin.)

Twenty percent of all hospitalized patients who received an antibiotic experienced an adverse drug event (ADE) as a result. In the community, antibiotic-associated adverse events often require emergency treatment. Among children, antibiotics are involved in 46 percent of emergency department visits for ADEs. Among adults, antibiotics are involved in 14 percent of emergency department visits for ADEs. This amounts to more than 214,000 emergency department visits each year. Because any antibiotic use has the potential to cause harm, clinicians should prescribe their patients these powerful drugs only when the benefits outweigh the potential risks.

Antibiotics definitely continue to make medical sense for specific targeted cases, but they are such a magic wand for fighting infection that they have been overused. \”CDC  estimates that U.S. doctors’ offices and emergency departments prescribe about 47 million antibiotic courses each year for infections that don’t need antibiotics. That’s about 30% of all antibiotics prescribed in these settings.\” Antibiotics have also be used extensively with both pets and feed animals, and on crops as well. But some germs fight back and develop antibiotic resistance.

The possible options fall into a few categories. One is to take as aggressive steps to reduce infections in the first place, so that fighting them isn\’t needed. Hospitals have become acutely aware of the problem, and there is solid evidence that hospital-acquired infections are declining (although it would of course have been nice if these efforts had ramped up about 20 years earlier). Higher vaccination rates, in the US and around the world, make infections less likely. Just getting everyone to wash their hands a few times each day could make a meaningful difference.

Of course, there\’s always a hope that we might manage to invent ourselves out of the problem, but while new inventions will help, they aren\’t likely to be a complete fix. The CDC report notes:

As a result of difficult scientific obstacles and challenging business incentives, many pharmaceutical companies are getting out of the antibiotic business altogether.

• Between 1962 and 2000, no new major classes of antibiotics were approved to treat common and deadly Gram-negative infections.
• Since 1990, 78% of major drug companies have scaled back or cut antibiotic research due to development challenges.

In addition, the report provides evidence that there are 42 new antibiotics being researched, but only four have reached the stage of an application to the Food and Drug Administration to allow used of a specific drug. Also, only about one in four of the new antibiotics being researched represent a new class of drugs or a new method of action, and it\’s clear how well many of the others would address existing antibiotic resistance. The CDC concludes:

With so few novel antibiotics and the number of effective antibiotics dwindling, it is clear we cannot rely on traditional antibiotics alone to treat infections. Alternative antibiotic agents and improved testing are key components to our national healthcare strategy to prevent and treat infections in new ways.

In short, antibiotic resistance is preventing the US healthcare system from saving more than 45,000 lives per year, and it\’s not going away. The ongoing battle is to use antibiotics only where needed, and find other options wherever  possible, so that antibiotics have as good a chance as possible to keep working where they can do so much good.

Here are some previous posts about the interaction of antibiotic resistance and economics:

• \”The Collective Action Problem of Resistance to Antibiotics\” (June 2, 2016)
• \”Antibiotic Resistance: A Mismanaged Public Good\” (May 19, 2014)
• \”Economics of Antibiotics Resistance\” (August 3, 2012)

The short answer for an estimate of the size of the space economy is: \”Probably around $400 billion.\”

The longer answer is that the U.S. Bureau of Economic Analysis is planning to calculate a \”Space Economy Satellite Account\” to measure the contribution of economic activities related to space in the US GDP. The beginning of these efforts is described in \”Measuring the Value of the U.S. Space Economy,\” by Tina Highfill, Patrick Georgi, and Dominique Dubria, in the December 2019 issue of the Survey of Current Business. They write:

Many estimates of the global and international space economy currently exist from various private and government organizations. The Space Foundation (2019), a nonprofit advocacy organization, reported global space activity to be $414.8 billion in 2018, with commercial space revenues representing 79 percent of total space activity. The OECD (2014) found commercial revenue in the global space economy was dominated by consumer services (58 percent), followed by space manufacturing and launch services (33 percent), and satellite operator services (9 percent) in 2013. The Canada Space Agency (2018) reported Canada\’s space sector generated revenues of $5.6 billion (CAD) in 2017, spearheaded by satellite communications. Likewise, the German space industry generated an estimated $3.1 billion in sales in 2013, driven by satellite manufacturing (OECD 2014).

In the United States, the FAA (2018) estimated the U.S. space industry was valued at approximately $158 billion in 2016. Similar to Canada, satellite communications reportedly lead the space sector in the United States, specifically, satellite services, manufacturing, ground equipment, and launch services (FAA 2018). The DOC Bureau of Industry and Security (2014, 3) estimated employment for the “U.S. space industrial base” was over 2.6 million workers in 2012. Additionally, a report by Aerospace Industries and Association (2019, 3) estimated that “space systems” within the aerospace and defense industries contributed $39 billion to U.S. economic output in 2018.

For an overview of where space economics is headed, a useful starting point is an article by Matthew Weinzeirl, \”Space, the Final Economic Frontier.\” in the Spring 2018 issue of the Journal of Economic Perspectives. As Weinzeirl emphasizes, economic activity related to space is rapidly moving through a transition from being a primarily government-funded activity to being primarily privately funded, which in turn raises a variety of issues related to safety and liability, clean-up of space trash, property rights, and more. From the start of his article:

After decades of centralized control of economic activity in space, NASA and US policymakers have begun to cede the direction of human activities in space to commercial companies. Figure 1 shows that NASA garnered more than 0.7 percent of GDP in the mid-1960s, but that level fell precipitously in the late 1960s and then gradually but persistently over the next 40 years to around 0.1 percent of GDP today. Meanwhile, space has become big business, with $300 billion in annual revenue. Recent valuations of innovative space firms like SpaceX ($21 billion), Orbital ATK ($7.8 billion), and dozens of small startups (receiving $2.8 billion in funding in 2016) suggest the market is optimistic about what’s next. Recent high-profile successes, most recently the launch and return of SpaceX’s Falcon Heavy rocket, are generating a new surge of public interest and enthusiasm.

The shift from public to private priorities in space is especially significant because a widely shared goal among commercial space’s leaders is the achievement of a large-scale, largely self-sufficient, developed space economy. Jeff Bezos, whose fortune from Amazon has funded the innovative space startup Blue Origin, has long stated that the mission of his firm is “millions of people living and working in space.” Elon Musk (2017), who founded SpaceX, has laid out plans to build a city of a million people on Mars within the next century. Both Neil deGrasse Tyson and Peter Diamandis have been given credit for stating that Earth’s first trillionaire will be an asteroid-miner (as reported in Kaufman 2015). Such visions are clearly not going to become reality in the near future. But detailed roadmaps to them are being produced (National Space Society 2012), and recent progress in the required technologies has been dramatic (Metzger, Muscatello, Meuller, and Mantovani 2013). If such space-economy visions are even partially realized, the implications for society—and economists—will be enormous. After all, it will be our best chance in human history to create and study economic societies from a (nearly) blank slate. Though economists should treat the prospect of a developed space economy with healthy skepticism, it would be irresponsible to treat it as science fiction.

For a previous post on this subject, see \”Property Rights in Space\” (December 26, 2014).

A standard argument for the social usefulness of the stock market is that shareholders have an incentive to monitor and to scrutinize the companies in which they have invested. When this incentive is combined with requirements for firms to disclose information, to be audited, and to answer questions from shareholders–along with the ultimate power of shareholders to replace top executives–publicly-owned corporations must live an examined life. One can have honest arguments over how well this shareholder monitoring works. But the rise of index funds is a direct challenge to these arguments.

Lucian Bebchuk and Scott Hirsi have been writing a series of essays on this topic. In \”The Specter of the Giant Three,\” published earlier this year in the  Boston University Law Review (2019, 99:3, pp. 721-742), they lay out some facts and estimates about the growth of the Big Three. They write:

This Article analyzes the steady rise of the “Big Three” index fund managers—Blackrock, Vanguard, and State Street Global Advisors (“SSGA”). Based our analysis of recent trends, we conclude that the Big Three will likely continue to grow into a “Giant Three,” and that the Giant Three will likely come to dominate voting in public companies. …

• Over the last decade, more than 80% of all assets flowing into investment funds has gone to the Big Three, and the proportion of total funds flowing to the Big Three has been rising through the second half of the decade;
• The average combined stake in S&P 500 companies held by the Big Three essentially quadrupled over the past two decades, from 5.2% in 1998 to 20.5% in 2017;
• Over the past decade, the number of positions in S&P 500 companies in which the Big Three hold 5% or more of the company’s equity has increased more than five-fold, with each of BlackRock and Vanguard now holding positions of 5% or more of the shares of almost all of the companies in the S&P 500; … 
• Because the Big Three generally vote all of their shares, whereas not all of the non-Big Three shareholders of those companies do so, shares held by the Big Three represent an average of about 25% of the shares voted in director elections at S&P 500 companies in 2018. … 

Assuming that past trends continue, we estimate that the share of votes that the Big Three would cast at S&P 500 companies could well reach about 34% of votes in the next decade, and about 41% of votes in two decades. Thus, if recent trends continue, the Big Three could be expected to become the “Giant Three.” In this Giant Three scenario, three investment managers would largely dominate shareholder voting in practically all significant U.S. companies that do not have a controlling shareholder.

What are the possible risks? Bebchuk and Hirst address the question in \”Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy.\” The paper is forthcoming in the Columbia Law Review in December 2019, but what looks like a final version is also available as a working paper from the European Corporate Governance Institute. As they note early in this essay, the analytical framework for this paper is based on an essay by Bebchuk, Hirst, and Alma Cohen, \”The Agency Problems of Institutional Investors,\” which appeared in the Summer 2017 issue of the Journal of Economic Perspectives.

Here\’s a taste of the Bebchuk and Hirst argument:

We show that the Big Three devote an economically negligible fraction of their fee income to stewardship and that their stewardship staffing levels enable only limited and cursory stewardship for the vast majority of their portfolio companies. … Our analysis of the voting guidelines and stewardship reports of the Big Three indicates that their stewardship focuses on governance structures and processes and pays limited attention to financial underperformance. … 

[I]ndex fund investors could benefit if index fund managers communicated with the boards of underperforming companies about replacing or adding certain directors. However, our examination of director nominations and Schedule 13D filings over the past decade indicates that the Big Three have refrained from such communications. … 

Index fund investors would benefit from involvement by index fund managers in corporate governance reforms—such as supporting desirable proposed changes and opposing undesirable changes—that could materially affect the value of many portfolio companies. …  We find that the Big Three have contributed very few such comments and no amicus briefs during the periods we examine, and were much less involved in such reforms than asset owners with much smaller portfolios. … 

Legal rules encourage institutional investors with “skin in the game” to take on lead plaintiff positions in securities class actions; this serves the interests of their investors by monitoring class counsel, settlement agreements and recoveries, and the terms of governance reforms incorporated in such settlements. … Although the Big Three’s investors often have significant skin in the game, we find that the Big Three refrained from taking on lead plaintiff positions in any of these cases.

Interestingly, Bebchuk and Hirst do not find evidence in support of one concern sometimes raised: that because the big index funds want  high returns for investors, they will tend to favor less competition between firms as a way of generating higher profits for firms. The authors clearly believe that a reduction in firm monitoring by the growing Big Three index funds poses real problems, but this doesn\’t seem to be one of them.

In response to the growth of the Big Three index funds, Bebchuk and Hirst have some concrete suggestions. Various changes in accounting and other rules might encourage the index firms to spend more on interacting with companies in their portfolio. There are concerns that some index companies may have a conflict of interest: if an index company also runs the retirement fund for a given company, it may become reluctant to chastise management of that company. Such conflicts could be prohibited. There is also an issue that under Section 13(d) of the Securities and Exchange Act, an investor who holds more than 5% of a company\’s stock with the purpose of influencing control of the company faces a number of additional disclosure rules, and so the Big Three index funds demonstrate their lack of interest in influencing control by remaining largely uninvolved with specific companies.

These kinds of issue are likely to heat up in the next decade or two, as the share of stock markets held by the Big Three index funds continues to rise. In my own mind, I sometimes separate those corporate governance issues related to the strategy and leadership of a single company from those more general issues that may affect a broad range of companies. The Big Three index finds are in an interesting and potentially powerful position to take stances on that second group of more general issues.

\”[W]e conclude that the Bureau of Labor Statistics’ (BLS) CPI Prescription Drug Index (CPI-Rx) is the best available summary measure of the price changes of prescription drugs. According to this measure, not only are drug prices increasing more slowly than general price inflation; in the most recent period, drug prices have been decreasing. From the peak in June 2018 through August 2019, the CPI-Rx has declined by 1.9 percent. Figure 1 plots the year-over-year percentage change in the CPI-Rx. Through August 2019, the year-over-year change in the index has now been negative for 8 of the previous 9 months.\”

As a starter, here\’s the Consumer Price Index for Prescription Drugs as calculated by the US Bureau of Labor Statistics:

A price index is of course an average over all prices. In addition, it\’s a weighted average, where those items on which many people spend a lot get more weight than those items where only a few people spend.

Thus, if the price of an anti-cancer prescription drug used by a few thousand people rises by 100%, but but at the same time generic substitutes for some other prescription drug used by 20 million people become available at a fraction of the brand-name price, the overall price index for prescription drugs is likely to fall. The CEA report explains how the entry of generic equivalents into the prescription drug market are treated in this way:

The FDA approves generics if, among other things, the active ingredient is the same as the branded drug and the generic drug is bioequivalent to the brand name drug. As a result, generic drugs are considered substitutable (in fact, almost a perfect substitute) for the branded version but typically have a lower price, and many consumers switch from the branded version to the generic version shortly after the generic version becomes available. This switch is a price decline (lower price for an identical product) that is not captured by tracking the branded drug or the generic drug’s price over time. The CPI-Rx accounts for generic substitution by tracking the initial entry of a generic drug. After roughly 6 months after patent expiration (enough time for the generic to establish market share), the branded drug is randomly replaced with the generic drug, with a probability equal to the generic’s market share, and the price difference is recorded as a price decrease.

In addition, prescription drugs often have both a \”list price\” and an actual \”transaction price,\” which results from a negotiation between drug manufacturers, health insurance companies, pharmaceutical benefit managers, as well as in some cases direct rebates to consumers. The BLS price index is based on the transaction price, not the list price. As the CEA report notes: \”Express Scripts, one of the largest pharmacy benefit managers, reported that even though list prices increased in 2018, the prices paid by their clients fell. Some drug companies have themselves warned investors that increased discounts and rebates would offset any list price increases and that net prices would either be flat or fall in 2019 …\”

In addition, there is reason to believe that the prescription drug price index calculated by the BLS overstates the actual rise in prices because of a standard problem sometimes called the \”quality\” or \”new goods\” bias. Say that an old drug is replaced by a new drug, which works better and has fewer side effects, but sells for the same price. In this hypothetical, you are getting more for your money with the new drug; in fact, even if you paid a little more for the new drug, you might be better off. But while a perfect price index would presumably hold constant the quality and variety of drugs available, the practical reals-world price index doesn\’t do this, and for that reason will tend to estimate a higher rise in prices.

So why do so many news stories give the impression that prescription drug prices overall are rising quickly? Each news story has its own hook, of course, and the CEA report runs through a number of examples. In some cases, the news story might be focusing on a particular drug or small group of drugs. In other cases, the news story might focus only the average price increase for prescription drugs where the price rose, leaving out others. In other cases, the news story might count up how many drugs has price increase compared to how many did not, leaving out the issue of how much each of  the actual drugs is used.

Of course, the CPI measure of changes in prescription drug prices has practical problems, as do all price indexes. It\’s based on a sample of prescription drugs, not all of them, and less-prescribed drugs are more likely to be left out. It is based retail prescription drugs, and so it doesn\’t include prices for hospital- and doctor-administered drugs. Figuring out transaction prices and gathering information on rebates to consumers is imperfect. If you personally need a certain drug, where they aren\’t good substitutes, and the price of that drug goes up, it\’s perhaps not very comforting to read about what is happening with an overall price index of drugs that includes all the ones you are not taking.

But if our society is going to address issues like the out-of-pocket cost of many prescription drugs, it\’s important to see the overall issue clearly. And the overall evidence is that the price index for prescription drugs has fallen in the last year or so. 

Mark A. Wynne of the Dallas Fed has one-hour interview: \”Douglas Holtz-Eakin on Economic Projections, Deficits and Climate Change\” (December 12, 2019). Holtz-Eakin has had an eminent academic career at Columbia and currently at Syracuse, but he is perhaps most widely lfor his time as head of the Congressional Budget Office from 2003-2005. Audio is available, but no full transcript. Here are some comments from Holtz-Eakin:

In my experience, carbon capture and storage (CCS) is often viewed as a quirky technological possibility, not of central significance to the overall issue of reducing the rise of atmospheric carbon. This perception is incorrect. The Global CCS Institute provides an overview in Global Status of CCS 2019. As the report notes: 

Analysis by the Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) has consistently shown that CCS is an essential part of the lowest cost path towards meeting climate targets. The IPCC\’s Fifth Annual Assessment Report (AR5) showed that excluding CCS from the portfolio of technologies used to reduce emissions would lead to a doubling in cost – the largest cost increase from the exclusion of any technology. … To limit global temperature rises to 1.5°C above pre-industrial levels, the world must reach net zero emissions by around 2050. Most modelling scenarios show that this will require significant deployment of negative emissions technologies. Bioenergy with CCS (BECCS) is one of the few available that can deliver to the necessary scale.

In the report, Nicholas Stern adds:

One of the opportunities that we have at hand, carbon capture, use and storage, will play a vital role as indicated by the Intergovernmental Panel on Climate Change’s Report on Global Warming of 1.5 ºC. The diversity of its applications is immense; from direct air capture delivering negative emissions, to the ability to prevent infrastructure emissions lock-ins by abating existing infrastructure in the industrial and power sectors, capturing, using and storing carbon will be a vital instrument in reaching net-zero emissions goals.

The report offers a detailed overview of report of CCS facilities around the world in various stages from early development to actually operational. However, the actual operational CCS facilities are currently measured in dozens, when they need to be measured in hundreds or thousands. Sally Benson, a professor of energy engineering at Stanford, writes about CCUS, or \”carbon capture, utilization, and storage\”:

Over the last 20 years, the role of carbon capture and storage has evolved from “nice to have,” to “necessary,” and now, CCUS is inevitable. We need Gt* scale CCUS now. … [W]e have an ambition gap between the rate that CCUS is growing today – about 10 per cent a year, compared to the rate needed to reach a Gt/year by 2040. If we could just double scale-up rate to 20 per cent per year, and sustain that to 2040, bingo, we reach 1 Gt/year by 2040.

Here\’s a partial sense of the range of possibilities for CCS. Perhaps the most obvious is to apply this technology at places where fossil fuels are being burned. For example, when burning natural gas:

Eliminating almost all greenhouse gas emissions along the natural gas value chain is necessary if we are to meet the target of net-zero emissions by mid-century. More than 700 Mtpa of indirect CO2 emissions – almost equal to the emissions of Germany in 2016 – could be eliminated from oil and gas operations through the application of CCS. Applying CCS at gas processing facilities costs around USD 20-25 per tonne of CO2.

But the technology can also be applied to other industrial operations that emit high levels of carbon, including factories that make cement, steel, and certain chemicals.

The good news is that as CCS expands in various ways, the cost of reducing carbon emissions in this way is falling.

There is strong evidence that capture costs have already reduced. … Two of the projects, Boundary Dam and Petra Nova are operating today. The cost of capture reduced from over USD100 per tonne CO2 at the Boundary Dam facility to below USD per tonne CO2 for the Petra Nova facility, some three years later. The most recent studies show capture costs (also using mature amine-based capture systems) for facilities that plan to commence operation in 2024-28, cluster around USD 43 per tonne of CO2. New technologies at pilot plant scale promise capture  costs around USD33 per tonne of CO2.

Just storing carbon underground is certain possible, but from an economic view, it\’s more productive to store the carbon in a form that gets some additional economic value from it.  One of the most prominent existing economic uses for stored CO2 is–heavy irony alert here–injecting it underground to extract more oil. But there are other examples: captured CO2 might be used as a feedstock for certain chemicals, polymers, concrete, and even fuels.

One possible future use for captured carbon emphasized in the report is in the production of clean hydrogen. There some recent buzz that clean-burning hydrogen might be greatly expanded in the future, but the question is how that hydrogen gets produced in first place. The report notes:

Currently, 98 per cent of global hydrogen production is from unabated fossil fuels, around three quarters stemming from natural gas. CO2 emissions from its production are approximately 830 Mtpa, equivalent to the annual emissions of the UK in 201894. … Low-carbon hydrogen has been produced through gas reforming and coal gasification with CCS, for almost two decades. For example, the Great Plains Synfuel Plant in North Dakota, US, commenced operation in 2000 and produces approximately 1,300 tonnes of hydrogen (in the form of hydrogen rich syngas) per day, from brown coal.  Hydrogen produced from coal or gas with CCS is the lowest cost clean hydrogen by a significant margin and requires less than one tenth of the electricity needed by electrolysis.

Finally, discussions of this topic inevitably veer into the possibility of \”bio-energy with carbon capture and storage,\” or BECCS. This notion here is to burn biomass of some kind for energy–like wood pellets–but then to capture and store the carbon. This would be a form of \”negative carbon\” energy. This approach might only make economic sense in a limited number of locations, but it\’s because it\’s an actual subtraction of carbon from the atmosphere, it\’s worth keeping in mind. 

I\’ll just add that focusing carbon capture and storage on the industrial sector does not exhaust the possibilities. For example, I\’ve noted some evidence that saving the whales could lead to increased ocean plankton and store additional carbon in that way.  As another approach, certain agricultural methods have the result of sequestering more carbon in the soil, as discussed by Greg Ip in the Wall Street Journal, \”How to Get Rid of Carbon Emissions: Pay Farmers to Bury Them,\” September 11, 2019).  For exampleA Boston-based company called Indigo Ag Inc. is setting up a market where those who want or need to reduce their carbon emissions can pay farmers $15 to follow practices that will have the effect of sequestering  one metric ton of carbon dioxide in the soil.

Perhaps the most aggressive and unproven possibilities for carbon capture and storage involve finding ways to extract carbon from the air directly. Of course, such methods only work if most of the energy going into them comes from non-carbon sources. For example, there\’s a geothermal power plant in Iceland which is drawing carbon out of the air–admittedly at modest scale–and then using a chemical process to turn the carbon into rock. If this technology advances and becomes more cost-effective, it will be interesting to calculate whether geothermal energy sites around the world might be used for this purpose.

Another technology that seems like a promising long-shot (if that\’s not a contradiction in terms) is being pushed by Project Vesta. Their website is full of position papers and background research arguing that if olivine rock was spread on beaches, it will undergo a chemical reaction as it mixes with seawater that absorbs CO2 from the atmosphere and turns it into rock. The project offers theoretical calculations that this approach could negate all of the current levels of atmospheric carbon emissions at a plausible cost–but they are just now working on a \”test beach\” experiment to get hard evidence.

Other than the enthusiasts at Project Vesta, none of the sources described here make any claim that carbon capture and storage can be a sufficient answer to holding down the rise of atmospheric carbon. But many of the sources here see it as a necessary and underappreciated part of the overall puzzle. Ultimately, the growth of a CCS industry is going to depend heavily on government. If the government provides clear incentives for carbon emissions to decline, like a carbon tax or regulations, then CCS will grow faster. If the government in addition makes it straightforward to site carbon storage areas without undue regulatory delays or legal risks, and add some financial incentives for such investments, then CCS will grow faster still.

Tyler Cowen conducts one of his rich and illuminating \”Conversations with Tyler\” in \”Daron Acemoglu on the Struggle Between State and Society\” (Medium.com, December 4, 2019, both audio and transcript available). Here are a few tidbits from Acemoglu, but there\’s much more at the link:

On interrelationships between democracy and growth 

The early work on democracy — such an important topic, and people were really excited about understanding what democracy does. … But you have to be careful. Of course, if you judge whether democracy is successful or not by comparing China to Switzerland, you’re going to get not very meaningful answers. That’s like a chief case of comparing apples and oranges. I have written a couple of papers on this, and the econometrics here really matters for a variety of reasons. …

You also want to be careful because it turns out that there’s one surefire predictor of when a country democratizes — it’s economic crisis. Dictatorships don’t go often because they decide, well, citizens should rule themselves. They collapse, and they collapse more likely in the midst of severe economic recessions.

So you really have to take care of these things. And when you do that, you find two things that are both amazingly robust. One is that democracies grow faster. So when a country democratizes, for another three or four years, it takes time for it to get out of the crisis. Then it starts a much faster growth process. It’s not going to make Nigeria turn into Switzerland, but a country that democratizes adds about 20 to 25 percent more to its GDP per capita.

When a country democratizes, for another three or four years, it takes time for it to get out of the crisis. Then it starts a much faster growth process. It’s not going to make Nigeria turn into Switzerland, but a country that democratizes adds about 20 to 25 percent more to its GDP per capita.

And then the second thing … one of the most important mechanisms for that seems to be that when you democratize, you tax more, so the taxation, the budgets go up. And you spend more, especially on education and health, so the health of the population improves. Child mortality is one of the things that improves very fast. Primary and secondary enrollment improves a little bit more slowly, but it improves very steadily.

It’s how do you make states and societies work together? If you look at most of human history, it doesn’t work. Either you have stateless societies, no centralized law, no third-party enforcement — so, lawlessness and lots of other costs — or you have despotic states that don’t listen to society and impose their will, often very repressively and otherwise, on societies. But the original part of the book is to say, actually, squeezed in between these two things, there is this Red Queen dynamics, the corridor where states and societies sort of support each other, and that supporting process is a contentious process. It’s not that they are happily cooperating. They are trying to race with each other. Each is trying to have the upper hand. But as long as that competition doesn’t become destructive, it can actually add to the capacity of both of them. ….

Why is it that certain representative institutions develop most strongly in Europe and certain aspects of liberty — they did not only develop in Europe; the demand certainly was there throughout the world — but they took strongest root in Europe.  … It’s actually the meeting of bottom-up political participation and the institutions of the Roman Empire, even after the Western Roman Empire had collapsed. So where does the bottom-up element come from?

Well, it comes from the Germanic tribes who were raiding and sometimes fighting with, sometimes fighting against the Romans. But after the Western Roman Empire collapsed, especially the Franks, sorry, amalgamation of several other Germanic tribes really took root throughout that area. The Franks did not have much human capital. They did not have any educational institutions. They didn’t know how to read and write. They learned that from the church after they sort of adopted Christianity. But what they had were these traditions of organizing their politics.

This is recognized by Julius Caesar and Tacitus during the times of the Roman empires and the early chroniclers of the Merovingians and the Carolingians. They had this view that the chiefs had to serve the people. So the chiefs were often temporarily appointed during wartime, and out of war, they held back. They had all these assemblies. Some historians call them the assembly politics of the German tribe. Everything had to be done through assemblies, and those traditions were the ones that they tried to fuse, and quite successfully in the hands of Clovis and Charlemagne, for example, together with the much more top-down Roman Empire’s institutions.